Labor Market Issues and Unemployment in Algeria

This Selected Issues paper for Algeria analyzes the growth prospects of the Algerian economy. Drawing on the findings of the empirical growth literature, the paper combines growth accounting and cross-country growth regressions to examine the role of macroeconomic and institutional factors in driving economic growth. It reviews the past growth performance in Algeria and explores the reasons underpinning the recent pickup in nonhydrocarbon GDP growth. The paper also analyzes labor market developments and assesses the factors that may hinder employment creation in Algeria.

Abstract

This Selected Issues paper for Algeria analyzes the growth prospects of the Algerian economy. Drawing on the findings of the empirical growth literature, the paper combines growth accounting and cross-country growth regressions to examine the role of macroeconomic and institutional factors in driving economic growth. It reviews the past growth performance in Algeria and explores the reasons underpinning the recent pickup in nonhydrocarbon GDP growth. The paper also analyzes labor market developments and assesses the factors that may hinder employment creation in Algeria.

II. Labor Market Issues and Unemployment in Algeria9

A. Introduction

1. Algeria has experienced encouraging economic growth in recent years, but the unemployment rate has remained high. While the growth performance was accompanied by a decline in the unemployment rate, the latter is still high compared with other Middle East and North Africa (MENA) countries and former transition countries.10

2. This chapter aims to analyze labor market developments and to assess the factors that may hinder employment creation in Algeria. In doing so, it studies some key labor market variables and compares Algeria’s performance with that of other countries. The main results suggest that although recent economic growth has likely contributed to the fall in the unemployment rate, the degree to which the 2004–05 reduction in unemployment is permanent is questionable given that a significant share of new jobs is related with work at home. In addition, Algeria’s growth is labor intensive reflecting somewhat low labor productivity. However, labor market regulations and labor taxation appear not to be major issues in Algeria compared with other countries.

3. The chapter is organized as follows. Section B investigates the reasons underlying the recent sharp drop in the unemployment rate. Section C looks at the employment elasticity of growth and also examines labor productivity, labor market regulations, and labor taxation, in order to determine whether these factors account for the current high rate of unemployment in Algeria. Section D concludes with some policy recommendations.

B. Why did the Unemployment Rate Decrease so Much in 2004–05?

4. According to official data, the total unemployment rate and the youth unemployment rate alike have decreased markedly since 2000 (Figure II.1). Total unemployment was cut in half over five years from 30 percent (the highest rate since the late 1980s) to 15.3 percent in 2005. The youth unemployment rate has also dropped significantly, falling from 48 percent in 2001 to 31 percent in 2005. Figure II.1 also shows that Algeria’s unemployment rate has been higher than the average for MENA countries and that of former transition countries during 1990–2004, although the gap has been reduced significantly during the last five years.

Figure II.1.
Figure II.1.

MENA and Transition Countries: Total and Youth Unemployment Rates, 1990–2005

(In percent)

Citation: IMF Staff Country Reports 2007, 061; 10.5089/9781451811520.002.A002

Sources: Algerian authorities (2005), World Bank (2006) and Fund staff estimates.

5. Recent economic growth has likely contributed to the fall in unemployment rates (Figure II.2). Unemployment rose rapidly until 1995 (a period during which the economy had declined), stabilized in the second half of the 1990s, and has declined since 2001 (a period of high economic growth).

Figure II.2.
Figure II.2.

Unemployment and Growth, 1990–2005

(In percent)

Citation: IMF Staff Country Reports 2007, 061; 10.5089/9781451811520.002.A002

Sources: Algerian authorities (2005), World Bank (2006) and Fund staff estimates (2006).

6. However, the degree to which the 2004–05 reduction in unemployment is permanent is questionable since a significant share of new jobs is related with work at home and is also of a temporary nature. Work at home, which includes the military draft and irregular employment, has increased dramatically, especially in 2004 when it increased by 34 percent (Figure II.3), in part due to the occurrence of Ramadan shortly after the annual household survey was conducted and possible measurement issues.11 Without the rise in work at home in 2004 and 2005, the unemployment rate would have been about 22 percent in 2004 and 21 percent in 2005 (Figure II.2). In addition, permanent jobs are falling while temporary jobs are rising, probably reflecting a greater role for the private sector in job creation. In 2004, almost 90 percent of public sector jobs were permanent contracts compared with 11 percent in the private sector.

Figure II.3.
Figure II.3.

Employment Growth by Sector, 1995–2005

(In percent)

Citation: IMF Staff Country Reports 2007, 061; 10.5089/9781451811520.002.A002

Source: Fund staff estimates (2006).

7. Although public sector employment is falling, government spending remains the main engine of employment creation. Figure II.4 shows that government employment as a share of total employment is shrinking as the country is moving to a marked-based economy. Although the share of construction and public works in employment is stable, employment in that sector has grown steadily since 2000, with the increase ranging from 3 percent in 2001 to 8 percent in 2004, mainly because of the increase in government capital spending thanks to the rise in hydrocarbon revenue.

Figure II.4.
Figure II.4.

Share of Employment by Sector in Percent of Total Employment, 1994–2005

(In percent)

Citation: IMF Staff Country Reports 2007, 061; 10.5089/9781451811520.002.A002

8. The evidence that public employment programs have contributed to falling unemployment is still unclear and further information is needed. According to the latest estimates, public employment programs12 created 1. 4 million jobs over the period 1997–2001 (Ait Youness and Annane, 2004), but most of these are temporary jobs. Moreover, in 2001 the government launched an Economic Recovery Program (ERP) for 2001–04 to boost aggregate demand and generate jobs through public investment in infrastructure and support to agricultural production and to small and medium enterprises. The ERP aimed at creating nearly 850,000 jobs over the period 2001–04. The Algerian authorities estimated that the ERP actually generated 728,000 jobs.13 However, a study from the Organization for Economic Cooperation and Development (OECD, 2004) suggests that the ERP’s results have been mixed because its long-term impact on growth and employment is not clear.

C. Why is Unemployment Still so High in Algeria?

9. This section examines the factors that could account for the current high rate of unemployment in Algeria. These include the employment elasticity of growth, labor productivity, labor market regulations, labor taxation, business environment, dominance of the public sector, and skills mismatch.

Growth-related factors

10. Algeria’s growth has been labor intensive. Table II.1 shows the employment elasticity of growth in Algeria using Ordinary Least Square estimates. The results suggest that a one percent increase in nonhydrocarbon GDP would lead to a 0.9 percent increase in total employment (excluding work at home). Nongovernment services and construction and public works are the most labor intensive sectors. Employment in the industrial sector was not correlated with industrial output, probably because of the significant downsizing the sector has experienced.

11. With ambitious macroeconomic and structural reforms, Algeria could bring its unemployment rate below 10 percent over the medium term. In the preceding chapter, it was estimated that Algeria could achieve real GDP growth of 5 percent, provided ongoing reforms are implemented decisively. On this basis, the unemployment rate could drop below 10 percent by 2015, assuming that productivity growth picks up with structural reforms and the labor force grows on average by 2.5 percent.14 However, this could happen earlier if reforms that lead to higher growth are implemented.

Table II.1.

Output Elasticity of Employment, 1989–2005

article image

Labor productivity and real wage

12. Overall, Algeria’s labor productivity is low. Figure II.5 shows that labor productivity in Algeria remains below the average of MENA and former transition countries, and has declined over time. Low labor productivity explains the relatively high employment elasticity of growth that has helped Algeria substantially reduce the unemployment rate over the past few years. To ensure a durable reduction in unemployment, private sector-led growth and investment should be the main engine of job creation and this is unlikely to occur in a low labor productivity environment (Box II.1). Productivity improvement would lead to a reduction in the unit labor cost that would foster employment creation in the private sector.

Figure II.5.
Figure II.5.

MENA and Transition Countries: Labor Productivity, 1989–2004

Citation: IMF Staff Country Reports 2007, 061; 10.5089/9781451811520.002.A002

Source: Groningen Growth and Development Centre (www.ggdc.net).

Labor Productivity and Job Creation in Algeria

Overall, job creation has taken place in sectors with negligible or negative growth in labor productivity and could be of an informal nature. To put it differently, in sectors where employment has been growing rapidly, output growth has lagged. For instance, during the 1990s, the more dynamic sectors in terms of employment creation were the government and services sectors where labor productivity growth was nil or negative. During the last five years, employment grew faster in the agricultural and services sectors, where labor productivity growth was also negative.

In general, there might be a trade-off between low employment growth elasticities and economic growth. Indeed, the gains in productivity necessary to sustain growth are the same that tend to bring down employment growth elasticities. Nonetheless, faster growth also implies a more rapid creation of new jobs. If economic resources move toward high value added/high productivity sectors and branches where employment growth elasticities are likely to be lower, the aggregate employment growth elasticity could fall. In fact, this is the process that is generally observed as economies develop. This process, however, can also imply more investment and faster economic growth and therefore more employment creation than in the absence of changes to the productive structure of the economy. More favorable prospects for job creation would imply changes in the productive structure of the economy that gradually reduce the employment growth elasticity but also boost and diversify economic growth.

The current situation might not be sustainable and in this case unemployment rates would rise again. As discussed above, high employment growth elasticities across the board also reflect low levels of productivity and the lack of diversification. So even if the situation could continue there are concerns about the quality of the jobs which are being created. What is more worrisome is that if growth were to slow to levels prior to 2000, unemployment rates could rapidly increase.

13. Productivity has been declining (Figure II.6). Labor productivity measured by the nonhydrocarbon output per worker decreased by 2.3 percent between 1997 and 2004, while the real average wage increased by 14 percent during the same period,15 suggesting that wages have been growing too fast relative to labor productivity, slowing down the demand for labor. A significant part of the decline in productivity stems from the nongovernment service sector, mainly due to rising work at home. Productivity in the agricultural sector is relatively volatile as the production of this sector is highly dependent on weather conditions. As regards the industrial and government service sectors, labor productivity has increased, reflecting stagnant or declining employment.16

Figure II.6.
Figure II.6.

Trend in Labor Productivity, 1990–2005

Citation: IMF Staff Country Reports 2007, 061; 10.5089/9781451811520.002.A002

Sources: Algerian authorities and Fund staff estimates.

14. The minimum wage in Algeria is relatively high given the level of labor productivity (Figure II.7). In accordance with the Law concerning labor relations, the government sets the National Guaranteed Minimum Wage (Salaire National Minimum Garanti—SNMG) that applies to all sectors and both genders, following consultation with social partners. Its current level (DA 10,000) is one of the lowest among MENA and transition countries. However, when the minimum wage is adjusted for productivity, Algeria has the second highest level after Morocco as the annual minimum wage represented 26 percent of the output per worker in 2005 compared with 31 percent for Morocco and an average of 15 percent for the sample. This may weaken competitiveness at a time when the economy is opening up with the Association Agreement with the European Union (AAEU) and the forthcoming WTO accession.

Figure II.7.
Figure II.7.

MENA and Transition Countries: Annual Minimum Wage as a Percent of Labor Productivity, 2005

Citation: IMF Staff Country Reports 2007, 061; 10.5089/9781451811520.002.A002

Notes: Nonhydrocarbon output per worker is reported for Algeria (hundred of US$)Source: IFS (2006) and ILO (2006).

Labor market regulation

15. Algeria ranks relatively high in terms of the standard indicators of labor market rigidities used by the World Bank in international comparisons (Figure II.8). Algeria’s Rigidity of Employment Index, an indicator that takes into account the difficulty of hiring and firing, is one of the highest in the MENA region, although it is lower than those of Morocco, Tunisia, and Egypt. In addition, labor market regulations in Algeria are stricter than in most former transition countries. Stricter regulatory intervention in the labor market has many undesirable effects such as high unemployment rates and longer unemployment spells.

Figure II.8.
Figure II.8.

MENA and Transition Countries: Rigidity of Employment Index, 2006

Citation: IMF Staff Country Reports 2007, 061; 10.5089/9781451811520.002.A002

Source: World Bank (2006)

16. Algeria’s severance pay requirements are relatively modest (Table II.2). Since 1994, severance payments are set at a minimum of one monthly wage for each year of tenure, up to a maximum of six months of salary. Recent data suggest that employers pay laid-off workers on average three months of salary. Dyer, (2005) points out that Algeria has a more modest scheme compared with Morocco and Tunisia, reflecting the use of an unemployment insurance scheme. Indeed, within the MENA region, only Algeria has a functioning unemployment insurance system in which formal workers and employers participate through a mandatory payroll tax.17

17. Despite the fact that there is no clear evidence that severance pay legislation in Algeria is stricter than in other countries, some nonprice restrictions may be costly for firms wanting to adjust their labor force. These include the need for prior authorization, the notification period, and an appeal procedure that can account for a large cost in time and money that may be larger than the transfer itself. For example, it takes an average of 6 months to lay off a worker and in the case of collective dismissals, the employer has to negotiate with the unions which workers will be laid off. In the specific case of a privatized firm, the employer is not allowed to lay any worker off right after the takeover. In addition, to allow a laid-off worker to receive unemployment benefits, the employer is subject to pay 80 percent of the worker’s monthly wage for each year of tenure, up to 12 months of salary, to the unemployment insurance system.

Table II.2.

MENA and Transition Countries: Severance Legislation

article image
n.a. Not applicableSources: World Bank (2004) and Dyer, (2005) for MENA countries, Cazes and Nesporova (2003) for transition countries.

Labor taxation

18. A common measure of the tax burden on labor is the tax wedge. The tax wedge is the difference between workers’ take-home pay and the costs of employing them, including income taxes and social security contributions (OECD, 2006). It is calculated as follows:

Taxwedge=100*(Centralgovermmentincometax+Employeessocialseeuritycontributions+Employerssocialseeuritycontributions+Payrolltax)(Grossearnings+Employerssocialsecuritycontributions+Payrolltax)

In Algeria, social contributions account for 34 percent of the gross wage, 9 percent of which is paid by the employee. The one percent payroll tax was waived in 2006.

19. Currently the tax wedge for a single person with average earnings accounts for 41 percent of total labor costs in Algeria, relatively close to transition economies’ levels (Table II.3). In addition, estimates of the family tax wedge suggest that labor taxation tends to be lower in Algeria than in former transition countries, suggesting that unemployment in the country may not be a taxation issue. However, as productivity is low, firms may not benefit from lower labor taxation (Sensenbrenner, 2006).

Table II.3.

Algeria and Selected Economies: Tax Wedge in Percent of Labor Cost, 2005

article image
*Data from 2001**Data from 2003(1) Single persons without children at the income level of the average worker.(2) Average single worker without children and one-earner married couple with two children.Sources: OCDE (2006), World Bank (2005) and author’s calculations.

Other factors

Business environment

20. Despite some improvements, Algeria’s business climate ranks below that of most MENA and former transition countries. According to the World Bank’s Doing Business indicators, Algeria’s overall ease of doing business rank has improved by 7 points from 2005 (ranked 123) to 2006 (ranked 116),18 mainly reflecting the improvements in credit information (Figure II.9). However, Algeria remains behind countries such as Tunisia (ranked 80) and Poland (ranked 75). Improvements in the business environment would enable private firms to become more productive, and in turn improve their ability to create more jobs.

Figure II.9.
Figure II.9.

Overall Ease of Doing Business Index Rank, 2005–06

Citation: IMF Staff Country Reports 2007, 061; 10.5089/9781451811520.002.A002

Source: World Bank (2006).
Dominance of the public sector

21. Although significant downsizing has occurred since 1995, the public sector still plays a substantial role in certain production activities, limiting private sector development. The public sector represented 20 percent of gross nonhydrocarbon value added (excluding government services) in 2004, compared to 32 percent in 1995. Significant divestments by the public sector have occurred since 1995 in construction, industry, and transportation. However, the public sector’s share of gross nonhydrocarbon value added in industry was still 63 percent in 2004, mainly in construction materials, chemicals, metallurgy, and paper. The public sector also owns 90 percent of financial institutions by assets, with most of the remainder controlled by foreign banks. In addition, government intervention in the labor market has traditionally been substantial. The public sector, the largest employer after the agricultural sector, accounted for 18 percent of total employment and almost 50 percent of the wage bill in 2004.

D. Conclusion and Policy Recommendations

22. Algeria’s unemployment rate is one of the highest among MENA and former transition countries. To address this issue, the following actions could be considered in order to improve Algeria’s employment performance:

  • The government should pursue growth enhancing policies that will create conditions for long-term employment sufficient enough to absorb the growing work force and reduce unemployment.

  • Structural reforms aimed at increasing productivity are critical to ensure a durable reduction in the unemployment rate. Private sector-led growth and investment should be the main engine of job creation and this is unlikely to occur in a low labor productivity environment. Productivity improvements coupled with moderate wage increases are key factors contributing to faster employment growth.

  • The tax burden on labor in Algeria is quite close to that of former transition countries, but given Algeria’s high unemployment rate, the fiscal space provided by higher oil revenues could be used to lessen the tax burden on labor-intensive activities. The authorities’ intention to lower employers’ social contributions is appropriate, but this measure should not be limited to some sectors and/or regions.

  • Also, labor market regulations seem to not be a major issue. However, lowering hiring and firing restrictions would increase labor market flexibility in Algeria and help to reduce the high unemployment rate. Specifically, shortening the notification period and the length of the procedure for dismissal, lowering employer contributions intended to allow laid-off workers to receive unemployment benefits, removing the employer’s obligation to maintain the employment and activity of privatized firms, and allowing the employer to choose which workers to lay off without constraints, could make the labor market more flexible and ease employment creation.

9

Prepared by Kangni Kpodar. This paper is based on Algeria’s official data and reflects ongoing collaborative efforts between the Fund and the World Bank. The author acknowledges extensive comments provided by Andras Bodor, Jose R. Lopez-Calix and David Robalino.

10

The sample includes: Albania, Bulgaria, Croatia, Czech Republic, Egypt, Estonia, Hungary, Jordan, Latvia, Lebanon, Lithuania, Macedonia, Morocco, Pakistan, Poland, Qatar, Romania, Saudi Arabia, Slovak Republic, Slovenia, Syria, Tunisia, Turkey, Ukraine, United Arab Emirates, and Yemen.

11

Algeria’s household employment survey appears to be in line with International Labor Organization methodology.

12

These include: (a) the programme for local employment (Emplois salariés d’initiative locale—ESIL); (b) the programme for public works requiring intensive labor (Travaux d’utilité publique à haute intensité de main- d’oeuvre—TUP-HIMO); (c) the pre-employment contract (Contrat pré-emploi—CPE); and (d) the plan regarding general interest activities (Activité d’intérêt général—AIG).

13

See the report on the ERP available on http://www.cg.gov.dz/psre/bilan-psre.htm.

14

The unemployment rate in 2005 is adjusted for the 2004 increase in work at home since the latter is likely to be of a temporary nature.

15

National Office of Statistics (www.ons.dz).

16

The data on productivity by sector should be interpreted with caution due to statistical issues. Employment data are derived from the household survey while output data stem from firm surveys and national accounts.

17

Ruppert, (1999) discussed unemployment insurance in Algeria.

18

Country ranking from 1 (best) to 175 (worst).

References

  • Ait Younes, A., and Annane, S. 2004 “La question de l’emploi et de l’intermédiation sur le marchédu travail” (Algiers: International Labor Organization).

    • Search Google Scholar
    • Export Citation
  • Assaad, R., and F. El-Hamidi, 2001 “Is All Work the Same? A Comparison of the Determinants of Female Participation and Hours of Work in Various Employment States in Egypt,” in The Economics of Women and Work in the Middle East and North Africa, ed. by E. Mine Cinar (Amsterdam: JAI Press)

    • Crossref
    • Search Google Scholar
    • Export Citation
  • Dyer, P., 2005, “Labor Supply, Unemployment and the Challenge of Job Creation in the Maghreb,” unpublished.

  • Organization for Economic Cooperation and Development, 2004, African Economic Outlook 2003/2004 (Paris).

  • Organization for Economic Cooperation and Development, 2006, Taxing Wages, Special Feature: Part-Time Work and Taxing Wages 2004–05 (Paris).

    • Search Google Scholar
    • Export Citation
  • Ruppert, E., 1999. “The Algerian Retrenchment System: A Financial and Economic Evaluation,” World Bank Economic Review, Vol. 13, No. 1, pp. 155 –83.

    • Crossref
    • Search Google Scholar
    • Export Citation
  • Sensenbrenner, G., 2006, “Algeria’s Business Climate: Tax Reforms for Faster Job Creation,” Algeria: Selected Issues, (Washington: International Monetary Fund).

    • Search Google Scholar
    • Export Citation
  • World Bank, 2004, MENA Development Report: Unlocking the Employment Potential in the MENA.

  • World Bank, 2005, Special Topic: Labor Taxes and Employment in the Eu8.

  • World Bank, 2006, People’s Democratic Republic of Algeria: Making Best Use of the Oil Windfall with High Standards for Public Investment, A Public Expenditure Review, Vol. I and II.

    • Search Google Scholar
    • Export Citation
Algeria: Growth Prospects in Algeria: Algeria: Growth Prospects in Algeria
Author: International Monetary Fund
  • View in gallery

    MENA and Transition Countries: Total and Youth Unemployment Rates, 1990–2005

    (In percent)

  • View in gallery

    Unemployment and Growth, 1990–2005

    (In percent)

  • View in gallery

    Employment Growth by Sector, 1995–2005

    (In percent)

  • View in gallery

    Share of Employment by Sector in Percent of Total Employment, 1994–2005

    (In percent)

  • View in gallery

    MENA and Transition Countries: Labor Productivity, 1989–2004

  • View in gallery

    Trend in Labor Productivity, 1990–2005

  • View in gallery

    MENA and Transition Countries: Annual Minimum Wage as a Percent of Labor Productivity, 2005

  • View in gallery

    MENA and Transition Countries: Rigidity of Employment Index, 2006

  • View in gallery

    Overall Ease of Doing Business Index Rank, 2005–06