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Enabling employment miracles

Caroline Freund's picture
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This blog has been co-authored by Caroline Freund and Bob Rijkers.

World Bank | Arne Hoel | 2011How can policymakers engineer enduring reductions in unemployment? Middle East and North Africa’s (MENA) Regional Economic Update confronts this question head on. It looks back historically to examine how countries have generated episodes of swift, significant, and sustained unemployment reductions. These we call employment miracles. And to make miracles happen the analysis unambiguously points towards prudent macroeconomic management, sound regulation and good governance as critical enablers of job creation.

More specifically, an employment miracle is a period of unemployment reduction in which unemployment falls by at least three percentage points and at least a quarter of its initial level over a four year period. Furthermore, this reduction in unemployment should persist for at least another three years.  We also have conditions to avoid events created by volatility or double counting.

Using these criteria, a total of 43 employment miracles were identified across the globe over the period 1980-2008. Each year, approximately 1 in every 20 countries embarks on an employment miracle; the frequency of these unemployment reduction episodes is encouraging, although they are less prevalent in MENA (see Figure B1). Moreover, the associated decline in unemployment is large: average unemployment approximately halves during the typical employment miracle, dropping 14.5% prior to onset to 7.1% seven years later.

When they happen, employment miracles tend to coincide with an overall improvement in macroeconomic conditions and improvements in the regulatory environment. Such improvements are most clearly manifested in a marked acceleration of growth of about 2 percentage points, but are also reflected in higher trade flows, higher investment and lower government spending (Figure B2).  These findings point towards the importance of prudent macroeconomic management.

(Click on image to enlarge)

Sound regulation and good governance are critical enablers of employment miracles, and correlated with a strongly increased likelihood of an employment miracle, all other things being equal. Business regulation and good governance (see figure B3) appear especially important. These findings shouldn’t perhaps come as a surprise, since sound regulation and good governance often go hand in hand. Moreover, they suggest that, by improving governance, one could be killing two birds with one stone, as it would benefit both inclusion and employment.

The report’s key policy recommendations – to improve macroeconomic management, governance and regulation – resonate with what MENA’s entrepreneurs consider to be priority reform areas. As demonstrated in Figure B4, entrepreneurs who took part in the World Bank’s Enterprise Surveys (2006-2010), think macroeconomic (and political) stability, consistent enforcement of regulation and control of corruption should be pressing policy priorities. For entrepreneurs, the absence of these is widely considered to be major impediments to doing business in MENA.

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