Islamic Republic of Iran: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
27 Sep 2002
eISBN:
9781451818963
Language:
English
Keywords:
ISCR; CR; exchange rate; Iran; inflation equation; inflation dynamics; bank Markazi Jomhouri Islami Iran; labor intensity; growth result; labor force dynamics; elasticity of growth; Labor force; Labor markets; Unemployment; supply and demand
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Like many other countries in the Middle East and North Africa (MENA) region, Iran is faced with high and rising unemployment stemming from a rapid population growth and slow employment creation. Providing increased job opportunities to a labor force that is growing by more than a half million persons per year has become the most acute single issue facing the Iranian authorities. This note reviews the main features of the labor market in Iran and discusses some policy options. The first section analyzes the dynamics at work in the labor market on both the supply and demand sides. The second section examines the current policy response and discusses alternative options to ease the pressing unemployment problem.

Abstract

Like many other countries in the Middle East and North Africa (MENA) region, Iran is faced with high and rising unemployment stemming from a rapid population growth and slow employment creation. Providing increased job opportunities to a labor force that is growing by more than a half million persons per year has become the most acute single issue facing the Iranian authorities. This note reviews the main features of the labor market in Iran and discusses some policy options. The first section analyzes the dynamics at work in the labor market on both the supply and demand sides. The second section examines the current policy response and discusses alternative options to ease the pressing unemployment problem.

VI. Labor Market in Iran50

A. Key Features and Trends of the Labor Market in Iran

Labor force dynamics and unemployment

87. During the 1970s and 1980s, Iran recorded very high rates of population growth averaging 3—4 percent a year. This was attributable to high fertility rates (more than twice the world average), a drastic decline in infant mortality rates by a factor of 5 since 1970, and a rise in life expectancy by about 15 years since 1970 (Table VI-1). Although the population growth has decelerated to 1.6 percent a year on average since 1993, the population bulge created by the higher growth of the past decades has continued to put upward pressure on labor supply.

88. The participation rate of the working age population51 in Iran has declined over the last decade, somewhat mitigating the effects of the high population increase on the growth of the labor force. Indeed, the increased female participation (from 11.5 percent in 1990 to 13.6 percent in 2000) has been more than offset by a sharp decline in the male participation (from 90.6 percent in 1990 to 81.4 percent in 2000).52

Table VI-1.

Islamic Republic of Iran: Selected Social Indicators, 1970-99

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Sources: 2001 World Development Indicators CD-ROM; and World Bank.

Corresponds to the WEO country grouping.

Includes countries in which 1999 GFNI per capita was between US$755 and US$2,995.

89. Nevertheless, the labor force grew rapidly over the last decade, with a noticeable acceleration in the second half of the 1990s’, reflecting to a large extent the arrival into the labor market of the baby-boom generation of the early 1980s (Table VI-2).53

Table VI-2

Islamic Republic of Iran: Selected Employment Indicators, 1990-2000

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Sources: Bank Markazi Jomhouri Islami Iran; World Bank; and Fund staff estimates.

90. During the first half of the 1990s, the growth of employment slightly outpaced the growth of the labor force resulting in a decline in unemployment. However, this trend was reversed in the second half of the decade as growth of the labor force accelerated but job creation remained stable. As a result, after declining in the period 1990-95, unemployment has been increasing since the mid-1990s (Figures VI-1, VI-2, and VI-3). In fact, with the growth of employment broadly stable during the 1990s, the increase in unemployment in the second half of the decade can be entirely explained by the acceleration of the growth of the labor force (Table VI-3).

Table VI-3.

Islamic Republic of Iran: Contribution to Unemployment, 1990-2000

(In percent)

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Sources: Bank Markazi Jomhouri Islami Iran; World Bank; and Fund staff estimates.

The social categories of the unemployed

91. Labor surplus in the rural areas has contributed to urban unemployment. The demographic boom in the rural areas has led to a continuous rural emigration, which has fueled the growth of the labor force in the cities. 54 As a result unemployment rates in the rural areas have remained only slightly higher than in urban areas.55

Figure VI-1.
Figure VI-1.

Islamic Republic of Iran: Evolution of Unemployment Rates, 1990-2000

(In percent)

Citation: IMF Staff Country Reports 2002, 212; 10.5089/9781451818963.002.A006

Figure VI-2.
Figure VI-2.

Islamic Republic of Iran: Unemployment Rate by Age Group, 1997

(In percent)

Citation: IMF Staff Country Reports 2002, 212; 10.5089/9781451818963.002.A006

Source: Bank Markazi Jomhouri Islami Iran.
Figure VI-3.
Figure VI-3.

Islamic Republic of Iran: Unemployment Rate by Education Level, 1997

(In percent)

Citation: IMF Staff Country Reports 2002, 212; 10.5089/9781451818963.002.A006

92. The youth are the most severely affected, with first-time job seekers experiencing long delays in finding stable employment. Unemployment for the 15-30 age group appears to be as high as 26-27 percent, with the peak unemployment rate for teenagers in the 15-19 group (Figure VI-2).

93. The employment dynamics have been more favorable to women, with female employment growing by 6-7 percent annually over the 1990s compared to 1½-2 percent for male employment. This has gradually brought the initially high unemployment rate of women in line with the overall trend (Figure VI-1).

94. Also, unemployment is higher among workers with secondary and pre-university education levels. Low-skilled labor, including the illiterate, as well as high-educated workers enjoy higher rates of employment.

Employment creation

95. During the decade of the 1990s, job creation in Iran was slower than in many countries in the region. While real GDP growth was comparable to the performance of peer countries, the change in employment in response to non-oil output growth—that is the employment elasticity to growth—was relatively low in Iran (averaging 0.5 during the 1990s as compared with regional averages of 0.8 for non-GCC56 countries and 1.4 in the GCC countries). Also, in contrast to Iran, employment creation increased in most countries in the region in line with labor force growth mainly due to higher elasticity of employment to growth (Table VI-4).

Table VI-4

Islamic Republic of Iran: Employment Elasticity 1990-2000 1/

(Average annual percentage change; unless otherwise indicated)

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Sources: Bank Markazi Jomhouri Islami Iran; World Bank; WEO; and Fund staff estimates.

Elasticity is defined as the change in employment with respect to the change in non-oil real GDP relative to the labor force.

96. Under-employment was partly responsible for the low employment content of growth, especially in agriculture and large manufacturing.

  • Rural areas suffer from extensive under-employment.57 In this context, output growth in agriculture occurred with almost no job creation and the share of agriculture in total employment declined, a pattern that is common to other countries with comparable income level and economic structure.

  • Employment elasticity to growth in the manufacturing sector has been low compared to more competitive and opened economies (Tables VI-5 and VI-6). This may be explained by the fact that the manufacturing sector in Iran, which is dominated by state-owned enterprises, operates with excess capacity (estimated at about 40 percent on average in 1999/2000) and excess labor. Under these conditions, growth in the large manufacturing companies occurred with little employment creation.

  • In contrast, growth in the construction sector has been highly labor intensive. As a result, the share of the construction sector in total employment approached steadily that of the manufacturing sector. Also, reflecting the linkages with other sectors, about two-thirds of the employment creation in the industrial sector originated from the construction sector.58

  • The employment content of growth in the service sector was on average low but increased over the decade.

Table VI-5.

Islamic Republic of Iran: Employment Elasticity in Manufacturing, 1986-2000

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Source: International Labor Organization.
Table VI-6.

Islamic Republic of Iran: Employment Creation by Sector, 1990-2000

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Sources: Bank Markazi Jomhouri Islami Iran; and Fund staff estimates.

Defined as die change in sector’s employment with respect to the change in sector’s value-added.

97. During the 1970s and 1980s, a large share of employment took place in the public sector, resulting in many cases in overstaffing of government services and public enterprises.59 While this policy might have helped contain unemployment in periods of adverse external conditions, over time, it exacerbated inefficiency and limited future employment growth. During the 1990s, however, most of the job creation took place in the private sector, which accounted for about 85 percent of net employment growth (Table VI-7). This pattern reflects a combination of factors. First, the principal source of demand for labor seems to have occurred primarily in the sectors of the economy in which the private sector plays a leading role, such as services (trade, retail, and transportation) and construction. Second, with the easing of foreign exchange constraints and the gradual phasing-out of trade and exchange restrictions in recent years, the private sector seems to have been able to generate growth and employment that are higher than those generated by the public sector, in which growth occurred mainly through higher capacity utilization.

Table VI-7.

Islamic Republic of Iran: Employment Creation in the Public and Private Sectors, 1992-96

(In percent; unless otherwise indicated)

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Sources: Bank Markazi Jomhouri Islami Iran; and Fund staff estimates.

98. Discounting for under-employment, it appears that the relatively low employment growth results primarily from insufficient output growth. However, the fact that the employment elasticities are well below regional averages across a wide range of sectors, including in activities with high private sector participation, also indicates that other factors, such as labor market rigidities and the business environment, might have adversely affected the labor intensity of growth. Low employment creation in Iran can therefore be traced to a dual problem of insufficient output growth and low labor intensity of growth.

Reasons behind the weak output growth

99. Delineating the reasons behind the weak growth performance in Iran is beyond the scope of this note. However, a number of factors are likely to have contributed to the insufficient output growth, including the public sector dominance of economic activities, restrictive exchange rate and trade policies that were prevalent throughout the 1990s, and the lack of a competitive business environment. In particular, the various restrictions on market access and the pervasive rigidities entailed by the administrative allocation of resources and distorted price signals have restrained opportunities to expand the non-oil sector and increased the economy’s dependence on capital intensive activities in oil and petrochemicals. While state enterprises have generally had little incentive to improve efficiency, the extensive system of subsidies and protection has raised entry barriers for private investors, deterred competition, and encouraged monopolistic practices. As a result, the economy grew below its potential and employment creation remained modest.

Factors affecting the labor intensity of growth

Wages

100. Wages have been more flexible in some sectors (such as the construction sector and, more generally, the informal economy) than in the large public enterprises. While wage moderation in some sectors (for instance, construction) has been conducive to employment creation, real wage increases in the public enterprises have usually been in line with the increase in output per worker and do not seem to be the primary cause for the low employment intensity of growth either. It can be argued, however, that, since the increase in output per worker is likely to reflect capacity utilization rather than sustainable gains in productivity, the increases in real wages in the manufacturing sector might have been higher than desirable, which might have negatively affected employment growth. Moreover, while wage increases varied widely across subsectors, the lack of downward flexibility in real wages, including in subsectors that faced a decline in output, indicates that wage flexibility may not have been sufficient in large manufacturing companies (Table VI-8).

Table VI-8.

Islamic Republic of Iran: Growth in Employment and Real Wages, 1990-2000

(Average percentage change)

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Sources: Bank Markazi Jomhouri Islami Iran; and Fund staff estimates.
Subsidies

101. The high amounts of subsidies provided to imported capital and energy may have promoted capital labor-substitution in some industries. The large implicit subsidies provided through the energy sector and the multiple exchange rate system—averaging about 15 percent of GDP per annum from 1995-2000—may have induced a bias in favor of capital and energy-intensive production processes.

Labor market rigidities

102. Restrictive labor market regulations, including rigidities in hiring and firing may have deterred firms to hire, given the difficulty to dismiss labor even in the private sector. In some instances, private firms have tried to circumvent the restrictions by using temporary contracts or operating in the informal economy. But anecdotal evidence suggests that labor regulations have been overly protective of incumbent employees and have penalized job creation.

103. Other rigidities in the labor market are likely to have contributed to structural unemployment in Iran. The government’s intervention in the functioning of the labor market seems to be excessive. Well-functioning labor markets require independent institutions representing the workers and the employers that play an important role in shaping labor regulations and wage settlements. In Iran, there are no independent labor organizations and no federation of employers. The absence of such institutions might have prevented the emergence of more balanced regulations and wage compensation.

104. Even though Iran has substantially improved its human capital over the past two decades, some mismatches in labor skills remain.60 The educational system does not seem to have been responsive to the needs of the private sector, a factor that contributed to some shortages in technical and managerial skills remain.61

105. Insufficient labor mobility might have also added to the structural unemployment. Unemployment rates vary widely across regions, ranging between 6.4 percent in Yazd to 25 percent in Kermanshah. Notwithstanding rural emigration, labor mobility remains low, probably because familial and other community relations provide a safety net to the unemployed making mobility less attractive.

106. Finally, imperfect information prevents a rapid matching of labor supply and demand. The absence of up-to-date and complete information on job seekers and potential employers in the private sector leads private sector employers to rely mostly on informal information networks. As a result, searching and matching processes are inefficient.

B. Labor Market Policies

The unemployment challenge

107. Looking ahead, unemployment will continue to be an acute problem for Iran and a difficult challenge for policymakers for several reasons. The labor force will continue to increase for some time at a rapid pace. It is estimated that the growth of the labor force will average 3.3 percent per year in the period 2002-2007. Moreover, the important pool of under employed workers, especially in the rural areas, is likely to fuel the growth of labor supply and could maintain an imbalance between supply and demand for labor, regardless of the rate of employment creation. Finally, in the early phases of the transition to a more open and efficiently managed economy, some reforms needed to unlock the growth potential of the economy could result in some loss of employment in the short run, further complicating the employment situation.

108. In such a context, it will be very difficult to curb unemployment. In fact, on current trends, unemployment could reach 21 percent in 2007.62 Moreover, an acceleration of growth would not likely suffice to reverse the rising unemployment trend. For instance, achieving an annual growth rate of 6 percent per year over the coming five years without improving the employment content of growth would still result in an increase of unemployment to about 17.2 percent by 2007. A decline in unemployment will therefore necessitate faster growth and a higher employment elasticity of growth.63

109. Addressing the unemployment problem, while avoiding significant social and macroeconomic instability, would therefore require a well-coordinated, carefully sequenced, and broad-based approach.

Current Policy Response

110. The authorities rightly recognize that containing unemployment requires higher growth that in turn can be facilitated by steadfast implementation of economic reforms. They also acknowledge that the policy response must be formulated within a broader framework, which fosters greater efficiency through private sector initiative and increased competition. In particular, the structural rigidities in the labor market would need to be addressed. In this regard, a tripartite Committee consisting of representatives of the government, labor organizations, and employers is examining possible improvements to the Labor Law.

111. Notwithstanding these efforts, the emphasis of labor market strategies has been so far primarily focused on active labor market policies. The policy response has been articulated around three main pillars:

  • Vocational training. In addition to the agencies managed by the Ministry of Labor, a number of private institutions have been licensed by the government to provide vocational training. Every year, more than one million workers benefit, with financial support of the government, from training that typically lasts one to three months.

  • Information bank on job seekers. The Ministry of Labor has already initiated through its regional Employment Service Centers (ESC) the development of a national databank that would contain up-to-date and complete information on job seekers and potential employers. One million unemployed, or about one-third of the total, have already registered in the databank. In 2001/02, more than 100,000 jobs were matched through the information bank.

  • Government subsidies. An array of schemes have been introduced to encourage job creation through: tax exemptions for new employees, subsidized credits to small enterprises and private firms that create employment, and direct support to priority sectors, vulnerable segments, and less-developed areas. The main schemes include:

    • Enterprises that employ new labor through the ESC would be exempted for a period of three years from the 23 percent tax for Social Security and the 3 percent tax for social insurance charged on the salary of the newly employed workers.

    • Newly employed wage earners are exempted from income tax for a period of three years. In fact, most new salaried workers fall below the taxable income threshold.

    • A total amount of Rls 9 trillion (1.1 percent of GDP) has been allocated by the central bank to selected commercial banks to be extended in the form of credit to small-scale enterprises of less than five employees that hire an unemployed worker registered at the ESC. The credit will not exceed Rls 30 million per company and will be extended over five years with a subsidized interest rate of 4 percent. The enterprise will commit to maintain the employment over the duration of the loan, with the possibility to dismiss the initial recruit and hire a new employee if needed.

    • Similarly, to encourage self-employment, credit facilities (with loans limited to Rls 30 million per individual at 4 percent interest rate) are made available to individuals who present a viable project that show that they could successfully become self-employed.

    • Lending in foreign exchange from the Oil Stabilization Fund (OSF) has been made available to private companies that generate non-oil exports and create jobs. The amount made available is determined annually. The allocation for 2001/02 amounted to US$1 billion.

    • Additional funds from the OSF have been allocated to the manufacturing and mining sectors with the aim of increasing investment in these sectors to maintain existing employment.

    • Three percent of the banks’ required reserves with the Central Bank are entrusted to the Agricultural Bank, the Housing Bank, and the Industry and Mining Bank to finance projects in non-public employment-generating projects.

    • Part of the oil revenue in excess of the budgeted amount is allocated to job creation in less-developed areas. In 2001/02, an amount of Rls 2.4 trillion was extended to provinces with high unemployment, and an additional Rls 2.1 trillion to special projects in the Teheran province.

    • The banking system is required to extend a minimum of 70 percent of the interest-free Gharzol-Hassanah saving accounts64 (after deducting the required and prudential reserves) to individual borrowers in the form of interest-free micro-credit to help them acquire tools and equipment for their work.

Other Labor Market Policy Options

112. Formulating detailed policy recommendations for a comprehensive labor market reform in Iran is beyond the scope of this note. The following thoughts, however, could serve as general guidance for such a reform, which would need to be integrated with other reforms that are under way or planned.

113. As noted earlier, public sector dominance of the economy is not conducive to bringing about the high growth rates necessary to provide employment to the rapidly growing labor force. With mounting unemployment pressures, it becomes tempting to resort to public sector employment, or to subsidize higher employment creation by the private sector. While such policies might help contain unemployment in the short run, they could have adverse fiscal implications and would run counter the long-term objective of empowering the private sector as the principal source of growth and employment creation.

114. An effective labor market policy would therefore need to rely on a long-term strategy to foster growth and put emphasis on:

(i) Promoting the private sector as the main engine of growth and employment creation. A sustained increase in employment opportunities should emanate from an increase in private sector investment in a more hospitable and enabling environment. Thus, the growth strategy must aim to create a competitive environment, unlock the potential of the private sector and reduce the role of the government in activities that can be carried out more efficiently by the private sector. Such policies must go hand in hand with efforts to preserve macroeconomic stability.

(ii) Removing existing rigidities in the labor market. Rigidities in the hiring and retrenchment of workers would need to be minimized in order to enhance the flexibility of the labor market and increase the employment content of growth. Liberalizing the labor regime would also ensure an orderly reallocation from the reforming state enterprise sector to private sector activities. In addition, the authorities should encourage the emergence of independent organizations representing the employers and the workers.

(iii) Strengthening and restructuring the educational and vocational training systems. In addition to expanding education opportunities for all citizens, Iran would need to reorient its education system. The educational system needs to shift its emphasis toward the acquisition of critical thinking and problem solving skills and take into account market needs. Moreover, training programs require closer coordination between the government and the employers in the private sector, with respect to the goals, management, and the financing of vocational training.

115. Considerations could also be given to specific sectoral policies to encourage job creation, in particular in labor-intensive sectors like construction or services. Such policies would need to rely primarily on supply-side policies, including deregulation and privatization. For instance, the construction sector has a strong potential for job creation, because of its high labor intensity, high potential for growth and extensive backward and forward linkages. As much as 30 percent of the total jobs created in the period of the Third Five Year Development Plan could come from the construction sector. Similarly, services (in particular tourism and new technologies) are likely to generate a large number of jobs provided that a favorable environment is created to private sector participation.

References

  • Tabatabai, Hamid and D. Salebi-Isfahani, 2001, Population, Labor, and the Employment Problem in Iran, in Labor and Human Capital in the Middle East, Ithaca, 2001.

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  • Saltani, 1994, “Labor productivity, Underemployment and Rural Migration in Iran, Economic Research Forum for the Arab Countries, Iran, and Turkey,” Working Paper No. 9418, pp. 1–11.

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STATISTICAL APPENDIX

Table 1.

Islamic Republic of Iran: Key Economic Indicators, 1997/98-2001/021/

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Sources: Data provided by the Iranian authorities; and Fund staff estimates.

Iranian fiscal years ending March 20.

Based on central bank data.

Using TSE rate and 1999/2000-100.

Table 2.

Islamic Republic of Iran: Aggregate Output and Expenditure Trends, 1997/98-2001/021/

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Source: Bank Markazi Jomhouri Islami Iran.

Iranian years ending March 20.

Data provided by the authorities may differ from numbers in Table 1 and the SM/02/279, which are based on staff estimates.

Includes oil and gas production, refining, and distribution.

In percent of GDP at factor cost, current prices.

In percent of GDP at current market prices.

Table 3.

Islamic Republic of Iran: Central Government Fiscal Operations, 1997/1998-2001/02 1/

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Sources: Bank Markazi Jomhouri Islami Iran; Plan and Budget Organization; and Fund staff estimates and projections.

Iranian fiscal years ending March 20.

Includes OSF domestic lending facility.

Mostly revenue of the Social Security Organization and medical services provided by universities.

Counterpart of earmarked revenue.

Budget outlays to cover the foreign exchange losses of the central bank, inclusive of contingent liabilities due to exchange rate unification.

Table 4.

Islamic Republic of Iran: Balance of Payments, 1997/98-2001/021/

(In millions of U.S. dollars; unless otherwise indicated)

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Source: Data provided by the Iranian authorities; and Fund staff estimates.

Iranian fiscal years ending March 20.

Includes World Bank lending.

Some letters of credit (LC) have maturities in excess of one year.

Reflecting borrowing of the Bank Markazi from the commercial banks and some deferred trade payments of banks.

Represents the part of OSF that will be kept in foreign exchange.

Excluding short-term debt.

Table 5.

Islamic Republic of Iran: Monetary Survey, 1997/98-2001/021/

(In billions of Iranian rials; unless otherwise indicated)

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Sources: Bank Markazai Jomhouri Islami Iran; and Fund staff estimates and projections.

Iranian fiscal years ending March 20.

End-2001/02 were revalued at the unified exchange rate of March 23, 2002.

Data on foreign currency deposits before 2000/01 are reported under foreign liabilities.

Table 6.

Islamic Republic of Iran: Gross Domestic Product by Industrial Origin at Constant Prices, 1997/98-2001/021/

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Source: Bank Markazi Jomhouri Island Iran.

Iranian fiscal years ending March 20.

Includes oil and gas production, refining, and distribution.

Table 7.

Islamic Republic of Iran: Gross Domestic Product by Industrial Origin at Current Prices, 1997/98-2001/021/

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Source: Bank Markazi Jomhouri Islami Iran.

Iranian fiscal years ending March 20,

Includes oil and gas production, refining, and distribution.