Abstract
This Selected Issues Paper focuses on economic condition, energy subsidies, and oil prices in Jordan. Energy price subsidies pose a serious fiscal risk in the present context of increasing and volatile international prices. The macroeconomic situation in Jordan is closely tied to that of other countries in the Middle East. From a policy perspective, macroeconomic and structural policies in Jordan should be conducted in such a way that the vulnerability of the country to sudden stops or reversals of external income flows is reduced.
The Employment Challenge Facing Jordan1
Addressing high unemployment, particularly among the young, is a longstanding challenge for Jordan. To boost job creation and enhance the employability of young people, policymakers can in the short term bring forward labor-intensive infrastructure investments, provide tax incentives or credit guarantees to viable labor-intensive small- and medium-sized enterprises, and scale up promising training programs, or introduce new well-designed and effective ones. To have a lasting effect, however, such measures have to be combined with a comprehensive job strategy that fosters inclusive growth and transforms education systems.
1. Unemployment in Jordan is high, particularly among the young. In 2010, unemployment in Jordan registered 12.5 percent, higher than the average in the Middle East and North Africa (MENA) region of about 10 percent, which, in turn, was the highest regional rate worldwide (Figure 1). Unemployment in Jordan is largely a youth phenomenon. Young people, ages 15 to 24, account for about 50 percent of the unemployed, and at 28 percent, the youth unemployment rate is among the highest in the world. In contrast to most of the world, unemployment rates in Jordan tend to be highest among the educated, exceeding 15 percent among those with college degrees.
Unemployment Rates by Region
(20101)
Citation: IMF Staff Country Reports 2012, 120; 10.5089/9781475503845.002.A007
Sources: International Labor Organization, Global Employment Trends (2011), Global Employment Trends for Youth (2011); national authorities; and IMF staff estimates.1 2007 data for Lebanon, 2008 youth unemployment rate for Egypt.Unemployment Rates by Region
(20101)
Citation: IMF Staff Country Reports 2012, 120; 10.5089/9781475503845.002.A007
Sources: International Labor Organization, Global Employment Trends (2011), Global Employment Trends for Youth (2011); national authorities; and IMF staff estimates.1 2007 data for Lebanon, 2008 youth unemployment rate for Egypt.Unemployment Rates by Region
(20101)
Citation: IMF Staff Country Reports 2012, 120; 10.5089/9781475503845.002.A007
Sources: International Labor Organization, Global Employment Trends (2011), Global Employment Trends for Youth (2011); national authorities; and IMF staff estimates.1 2007 data for Lebanon, 2008 youth unemployment rate for Egypt.2. High unemployment in Jordan, together with a low labor force participation rate, has resulted in a very low ratio of employment to working-age population. At about 40 percent, the labor force participation rate in Jordan is low when compared to elsewhere. With about 35 percent of working-age people actually employed, this rate is also among the lowest worldwide (Figure 2).
Employment-to-Working-Age Population Ratios and Labor Force Participation Rates by Region
(2010)
Citation: IMF Staff Country Reports 2012, 120; 10.5089/9781475503845.002.A007
Sources: International Labor Organization, Key Indicators of the Labor Market (7th edition); national authorities; and IMF staff estimates.Employment-to-Working-Age Population Ratios and Labor Force Participation Rates by Region
(2010)
Citation: IMF Staff Country Reports 2012, 120; 10.5089/9781475503845.002.A007
Sources: International Labor Organization, Key Indicators of the Labor Market (7th edition); national authorities; and IMF staff estimates.Employment-to-Working-Age Population Ratios and Labor Force Participation Rates by Region
(2010)
Citation: IMF Staff Country Reports 2012, 120; 10.5089/9781475503845.002.A007
Sources: International Labor Organization, Key Indicators of the Labor Market (7th edition); national authorities; and IMF staff estimates.3.Looking ahead, Jordan faces a daunting employment challenge. To absorb the unemployed and new entrants to the labor force, Jordan will need to increase employment by an estimated 0.8 million full-time positions over the period 2010–20 (Table 1)—although even this would leave the employment to working-age population ratio in 2020 at 43 percent, lower than the average ratio currently observed in any region in the world (Figure 2). However, if the elasticity of employment with respect to output were to stay constant and the pace of output growth unchanged from the last decade, only 0.5 million new jobs would be created. Even this is optimistic given that current projections over the period 2010–17 point to an average annual GDP growth rate of 3.3 percent, about 2.9 percentage points lower than that achieved over the last decade. In fact, if the 3.3 percent average annual GDP growth were to materialize for the current decade (2010–20), then a mere 0.2 million new jobs would be created. Similarly, under the assumption of constant employment elasticity, creating 0.8 million new jobs would require annual real GDP growth of 9.3 percent—3.2 percentage points higher than that achieved by Jordan during the period 2000–2010, and 6 percentage points higher than current projections over the period 2010–17 point to—a tall order (Table 1).
Growth Required to Absorb New Labor Force Entrants and Currently Unemployed
Using historical data since the early 1990s, we estimate the elasticity of employment with respect to output starting with an Vector Autoregression (VAR) model involving the logarithms of employment and real GDP, and their lags. Using Johansen’s test, the VAR system is found to be cointegrated. The cointegration relationship suggests an estimate of the employment elasticity of about 0.5. The estimated employment elasticity is highly significant and stable over time.
Growth Required to Absorb New Labor Force Entrants and Currently Unemployed
| Jordan | ||
|---|---|---|
| 2010 | ||
| Labor force (millions) | 1.6 | |
| Unemployment rate (percent) | 12.5 | |
| Unemployed (millions) | 0.2 | |
| Employed (millions) | 1.4 | |
| 2020 | ||
| Labor force (millions) | 2.2 | |
| 2010–2020 | ||
| New entrants to the labor force (millions) | 0.6 | |
| Total number of currently unemployed and new entrants (millions) | 0.8 | |
| Change in employment required to achieve target (percent) | 58.1 | |
| Annual employment growth required to achieve target (percent) | 4.7 | |
| Employment elasticity (estimated)1 | 0.5 | |
| Required annual real GDP growth rate (percent) | 9.3 | |
| Real GDP growth rate, 2000–2010 (percent) | 6.1 | |
| Real GDP growth rate projections, 2010–2017 (percent) | 3.3 | |
Using historical data since the early 1990s, we estimate the elasticity of employment with respect to output starting with an Vector Autoregression (VAR) model involving the logarithms of employment and real GDP, and their lags. Using Johansen’s test, the VAR system is found to be cointegrated. The cointegration relationship suggests an estimate of the employment elasticity of about 0.5. The estimated employment elasticity is highly significant and stable over time.
Growth Required to Absorb New Labor Force Entrants and Currently Unemployed
| Jordan | ||
|---|---|---|
| 2010 | ||
| Labor force (millions) | 1.6 | |
| Unemployment rate (percent) | 12.5 | |
| Unemployed (millions) | 0.2 | |
| Employed (millions) | 1.4 | |
| 2020 | ||
| Labor force (millions) | 2.2 | |
| 2010–2020 | ||
| New entrants to the labor force (millions) | 0.6 | |
| Total number of currently unemployed and new entrants (millions) | 0.8 | |
| Change in employment required to achieve target (percent) | 58.1 | |
| Annual employment growth required to achieve target (percent) | 4.7 | |
| Employment elasticity (estimated)1 | 0.5 | |
| Required annual real GDP growth rate (percent) | 9.3 | |
| Real GDP growth rate, 2000–2010 (percent) | 6.1 | |
| Real GDP growth rate projections, 2010–2017 (percent) | 3.3 | |
Using historical data since the early 1990s, we estimate the elasticity of employment with respect to output starting with an Vector Autoregression (VAR) model involving the logarithms of employment and real GDP, and their lags. Using Johansen’s test, the VAR system is found to be cointegrated. The cointegration relationship suggests an estimate of the employment elasticity of about 0.5. The estimated employment elasticity is highly significant and stable over time.
4. Jordan can implement a number of immediate measures to step up job creation and enhance the employability of its young population. One opportunity, for example, is to bring forward viable labor-intensive smaller-scale infrastructure projects that are already in the pipeline. This strategy would not just provide employment for workers in the short term, but would also enhance Jordan’s long term growth through the benefits of improved infrastructure. Policymakers can also provide tax incentives or credit guarantees to viable labor-intensive small- and medium-sized enterprises, as implemented in many emerging markets and transition economies during the global financial crisis. Another option is to introduce well-designed youth-oriented training programs, or to scale up and replicate promising existing ones, such as the Education for Employment Foundation, which works with corporations and industries to assess demand for skills and to provide corresponding tailored training programs for young people. (For a discussion of these issues, see IMF, April 2011, Regional Economic Outlook: Middle East and Central Asia).
5.To have a lasting effect, however, short-term measures have to be combined with a comprehensive job strategy that fosters inclusive growth and transforms education systems. High economic growth remains a key pillar of generating jobs for new labor market entrants. For growth to have the maximum impact on job creation, it also needs to be inclusive, benefiting all segments of the population—not just a privileged few. Sustained growth will need to be driven by the private sector. The government can create an enabling environment, including by providing a level playing field and a healthy business climate. To enhance skill formation, primary, secondary, and tertiary curricula need to be better aligned with the needs of the private sector. In this context, reforming university admissions policies to test a broad range of skills—writing, critical thinking, and problem solving—would give incentives for students at the primary and secondary levels to acquire such skills. (For more details, see IMF, April 2011, Regional Economic Outlook: Middle East and Central Asia).
Prepared by Yasser Abdih.
