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JOBS FOR SHARED PROSPERITY
characterize labor markets in MENA, many of which are linked to segmentations: different segments—young men, young women, prime-age men, prime-age women—emerge as separate pools of workers whose mobility is limited and who may be excluded from the labor market altogether. This chapter identifies the mechanisms that place some groups “inside” and others “outside” MENA’s labor markets. It investigates why this segmentation—and source of aggregate inefficiency—has persisted for a relatively long time in MENA, discusses why it may no longer be sustainable, and reflects on alternatives that might remedy the situation.
How does segmentation between insiders and outsiders arise? Theory To understand how segmentation arises, we must understand the theory of how employment is generated when labor markets are not segmented. 2 In such markets, firms continuously demand labor and skills, either because of normal staff turnover or because of new investments. Firms try to hire the best people they can get, as long as the new employees’ productivity is above or equal to the market wage. In a competitive market, the market wage is fi xed for the individual fi rm and cannot be influenced by it. Thus to make a profi t, a fi rm tries to hire people who produce more than they cost (the wage). Labor and skills are supplied by people who have acquired skills in their former jobs or through education. They seek a work-life mix in line with their acquired skills and inclinations. In their decisions, they trade the “cost” of giving up an additional hour of leisure against the reward from the wage earned for that hour of work. They give up leisure as long as the marginal utility lost is below the marginal utility gained from the wage. The wage is fi xed in a competitive market, and the individual cannot influence it.
In the labor market, fi rms’ quantitative and qualitative demands and people’s quantitative and qualitative supply meet. People enter employment, which is defined by a contract (specifying the terms of hire, dismissal, and hours) and a wage. If no further institutional or market failures interfere, the wage resulting from that interaction clears the market: in other words, exactly everyone who wants a job at that market wage gets one.
Practice In practice, the market can experience failures. People naturally know more about their own skills and effort than an employer does when fi rst meeting them. This “information asymmetry” makes it hard for an employer to estimate the productivity of a prospective employee. “Quality signals” like a good education or (better) previous similar work experience with good references can help bridge the information gap. Obviously, the gap is harder to bridge for young people without work experience. Various institutions can intervene in markets. Some are needed to reduce the risk to individuals participating in the market. Social insurance, for example, protects individuals against the risks of poverty, unemployment, poor health, and old age, leaving them free to take more and more productive risks. Other institutions, like taxes, are vital to financing the goods that the private sector will not supply sufficiently (like roads and schools). Social insurance and taxes are often financed through the payroll (wages), which effectively drives a wedge between the market-clearing wage and the prevalent wage, creating a gap between labor supply and demand. Something similar happens if labor demand is restricted through rigid regulation on contracts. Regulations affecting contracts and the wage that is effectively paid will always affect the employment outcome of the labor market. W hen i nst it ut ions a f fec t d i f ferent groups of the population differently, segmentation arises. Segmentation can occur