Islamic Republic of Iran: Selected Issues

Abstract

Islamic Republic of Iran: Selected Issues

Fostering Private Sector Job Creation in Iran1

  • Designing appropriate job creation policies is essential if Iran is to harness the potential of its large working age population to boost productivity, growth and incomes.

  • Fostering greater private sector job creation requires a comprehensive strategy that improves both demand and supply conditions in the labor market. A stable macroeconomic environment, policies that foster a level playing field among enterprises and reduce the role of the state in the economy, improved access to finance, and a lower regulatory burden would create space for private firms to grow and hire. Supply-side policies that help develop the skills needed in the private sector would make workers more productive and attractive to hire. Policies that facilitate workers mobility would help labor reallocation.

  • Designing policies that ensure equal opportunities for women will help bring into the labor market a large portion of the population, in which Iran has invested in the form of higher educational attainment, but which currently remains mostly outside the labor force. In the medium to long term, bringing them into the labor market would foster economic activity, innovation and job creation, and ultimately lead to higher economic growth.

A. The Opportunities and Challenges in the Iranian Labor Market

1. Iran has a large, well-educated, working age population. Iran benefits from relatively small age-dependency ratios through 2045, which could help boost productivity and economic growth.2 It has a well-educated workforce thanks to improvements in accessibility to education that led to important increases in educational enrollment and years of education over several decades. This has been accompanied by significant reductions in the gender gap in education; women and men are now completing the same number of years of total education.3 By enhancing the allocation of resources in the economy, having a larger, educated labor force, including women, can help increase productivity and incomes. Employers can draw from a more diverse labor force, and entrepreneurship is boosted as more small enterprises are created and expanded (Cuberes and Teignier 2015; Elborgh-Woytek and others 2013).

A05ufig1

Population by Age Group and Dependency Ratio

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: UN Population database
A05ufig2

Enrollment in Education

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: World Bank Edstat Database
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Average Years of Total Schooling, Age 25 +

(Years)

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: Barro-Lee database.

2. However, the formal private sector has not capitalized on this opportunity. Between 2000-11, increases in output per worker, and to a lesser extent the increase in the share of the working age population, drove non-oil growth. Despite average annual growth rate of real non-oil GDP of about 3.6 percent over the period 2005–2015, and the shrinking share of the oil sector in GDP, employment creation was not enough—while the working-age population increased by 15.8 million people between 2000 and 2011, employment increased by 3.3 million jobs. Previous analysis (Blotevogel, 2015) shows that the long-term elasticity of employment to growth, even using non-oil growth, is low by international standards. It also points to low total factor productivity (TFP) in the non-oil sector, especially after 2011. This means there are structural impediments to job creation and to the allocation of resources to their more productive use (Crivelli and others, 2012).

3. Labor market outcomes are weak. Unemployment has hovered around 11 percent over the past 30 years, with women’s rates on average 8 percentage points higher than men’s. Labor force participation (40 percent) is low by international standards due to very low female participation (17 percent). As could be expected given these high rates, youth unemployment is high at 30 percent, but a third of youth are not employed, in education, nor in training. Moreover, over a third of the unemployed have been out of work for over a year, and around 60 percent of unemployed women over 25 years old are long-term unemployed. There is a wide rural-urban gap. The agricultural sector constitutes about 50 percent of employment in rural areas, while services represent 60 percent of employment in urban areas. Under-employment rates are higher in rural areas than in urban areas, while unemployment rates are higher in the latter.

A05ufig4

Percent of Total Change in Per Capita Non -Oil Growth, 2000-2011

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: Authorities and IMF staff calculations
A05ufig5

Employment Elasticities, Non-Oil GDP

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: Statistial Center of Iran and IMF staff calculations

Yet there is evidence of skills mismatches. While Iran scores better than other countries in Middle East and North Africa (MENA) in international tests for mathematics and science, it is below other middle income countries such as Russia. In a labor market with oversupply of labor, employability becomes crucial, but graduates have high expectations and are not fully prepared for private sector employment. There is evidence that some types of jobs, such as manual work, experience labor shortages as most students prefer academic topics.

4. Private sector firms have little incentives to grow. Compared with other upper-middle income countries, the employment structure is more heavily tilted towards the agricultural, manufacturing, transportation and construction sectors, while to a lesser extent the service sector. Employment in the public sector is at the average at around 20 percent of total employment, but as in most MENA countries, when combined with semi-public sectors such employment dominates the economy. The private sector is relatively small, and private sector employment is disproportionately in self-employment, especially own-account workers (without employees). Informal employment has been rising in recent years, and women are more likely to work in the informal sector.

A05ufig6

Mean Performance on the Mathematics and Science Scale for Fourth Grade Students, 2015

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: Trends in International Mathematics and Science Study (TIMSS)
A05ufig7

Share of Self-Employment

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: ILO

B. Key Elements of a Strategy to Foster Private Sector Employment

5. Fostering private sector employment requires coordinating actions on several fronts. A comprehensive strategy for job creation encompasses macroeconomic policies that provide a stable environment, regulations that are transparent and adequate, supply-side policies that empower the workforce, and policies that protect workers and help them move between jobs. Implementing such a strategy requires coordination among ministries that do not usually interact. In order to obtain the buy-in and to ultimately ensure the success of the strategy, consultations have to be carried out with other stakeholders, especially unions and employer representatives, and Civil Society Organizations (CSOs). Although some policy changes have been made and consultations with stakeholders have been held by some ministries, the implementation has not been systematic and efficient and has so far not translated into significant improvements neither in private sector job creation nor in productivity. The sixth National Development Plan (NDP) lays principles for fostering job creation and should lead to such a strategy.

Implementing policies that bolster labor demand in Iran

6. Fostering job creation starts with addressing the lack of private sector labor demand. International surveys of business leaders and of de jure regulations (Global Competitiveness Report (GCR) 2016-17, and Doing Business (DB) 2017) suggest the following priority reform areas.

A05ufig8

Most Problematic Factors for Doing Business

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: Global Competitiveness Report 2016-17
A05ufig9

Global Competitiveness Twelve Pillars

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: Global Competitiveness Report 2016-17
  • Maintaining macroeconomic stability was deemed among the most important constraints by business leaders interviewed for the GCR and those that the Iran Article IV team met with. While Iran does not appear to have significantly worse macroeconomic issues than comparator countries according to GCR indicators,4 inflation, until recently was in double digits, the exchange rate was volatile and sanctions created uncertainty that discouraged investment.

  • Improving access to finance is the first priority for business leaders. Three of the four de-jure regulations indicators that are the furthest from the best performance are related to the financial sector—getting credit, protecting minority investors and resolving insolvency. In particular, Iran scores are weak in terms of the strength of legal rights, recovery rate during insolvency procedures and strength of insolvency framework. For example, investors’ recovery rate on the dollar is 17.9 cents (versus 32 cents in BRICS and 31 cents in Gulf Cooperation Countries (GCC) and Algeria); its takes 38 years to resolve insolvency against 23 years in BRICS, and 25 years in GCC and Algeria.

  • Inefficient government bureaucracy is the third area identified by business leaders closely followed by policy instability and corruption. This suggests a broad agenda for improving governance. This is consistent with the idea of reducing the role of the government to that of a facilitator of private sector activity rather than a direct actor, and of creating a level playing field that would help new entrants. In particular, the role of the government could include providing infrastructure investment, and removing excessive government-imposed constraints on the economy (e.g., red tape, liberalizing domestic prices). Leveling the playing field involves enhancing regulations as well as enforcement. Such steps include improving the commercial orientation of state-owned and quasi state firms; reviewing regulations to simplify and remove unnecessary exemptions; and increasing transparency of enforcement. The sixth NDP includes steps in this direction—for example, it makes it easier for the public sector to do business with the private sector.5

A05ufig10

Doing Business in Iran: Financial Market Indicators, 2016

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: Doing Business Database 2017

Designing regulations that accompany job creation

7. Reviewing labor regulations can help facilitate job creation and retain talent.6 Although labor regulations or an adequately educated labor force are not among the top constraints reported by business leaders, labor market efficiency—the country’s ability to allocate its resources efficiently—is weaker than in comparator countries. In particular, according to the GCR indicators, there is scope for Iran to better nurture and attract talent from within the country and from abroad. Moreover, the relation between pay and workers’ productivity is weaker than in comparator countries. DB indicators show that most Iranian labor market de jure regulations are within international averages, but dismissals are relatively difficult.

A05ufig11

Severance Pay

(Weeks)

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: Doing Business Database 2017
A05ufig12

Labor Market Efficiency

(Index 0-7)

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: Global Com petitiveness Report 2016-17
  • Dismissal procedures are restrictive. Employers must obtain approval by a third-party in order to dismiss any worker—something that is done in only 20 percent of countries. Implementation maybe discretionary and therefore uneven, which, by increasing uncertainty, can create further costs for employers. Removing such an impediment to firing, especially in the case of small-scale dismissals, and ensuring there are transparent ways of dismissing unproductive or redundant workers would encourage the reallocation of labor.

  • The financial cost of dismissals is above world averages. Severance pay is about twice the world’s average for workers with 10-year tenure. In addition to its financial costs, severance pay linked to tenure provides little if any, benefits to workers with short employment spells. In reality because only a fraction of workers are covered by them—often the more educated ones—severance pay can be regressive. Weakening the link between severance pay and tenure, for instance, by imposing a maximum amount a worker can obtain, would reduce the bias that job security imposes against workers with less tenure. Iran could also consider reducing the generosity of payments to bring them more in line with international experience, and rely more on its unemployment benefits, which are the most efficient way to insure against the risk of unemployment (see Holzmann and Vodopivec 2012, on severance pay reforms).

  • Flexibility cannot come solely from temporary contracts. Temporary contracts are allowed, which is a strength of a well-functioning labor market. But in the context of stringent regulations on permanent contracts relying on fixed-term contracts alone to increase flexibility may lead to increases in precarious employment.7 The review of regulations on all types of contracts, which is currently underway, is crucial.

Empowering the labor force with adequate skills

8. Iran is seeking to make formal education more relevant to the private sector. The NDP allows more exchanges between the public and private education sectors. Moreover, the authorities are planning to equip school graduates with relevant skills, such as entrepreneurship skills. This is welcome, but there is a need to increase employability of graduates in general. Steps can be taken from organizing job market fairs to involving private sector professionals in curriculum design and teaching.

9. More generally, Iran can boost total factor productivity (TFP) in the non-oil sector by improving innovation and technology adoption. Iran has a relatively weak technological readiness—including technology adoption and Information and Communications Technology (ICT) use. Many countries have been adopting new technologies and taking advantage of technological advances at a greater speed in the past decade, while Iran came only recently to the technological revolution. In this context, the NDP aims to foster research and technological development.

A05ufig13

Internet Users

(per 100 people)

Citation: IMF Staff Country Reports 2017, 063; 10.5089/9781475583083.002.A005

Source: World Development Indicators

Protecting workers and facilitating matching

10. Increased flexibility must be accompanied by measures to help and protect workers.8 For this, Iran has a mix of passive and active policies that cater to the unemployed, the poor, and vulnerable groups. The social protection system includes programs that cover old age, sickness, and unemployment, as well as means-tested social assistance. It offers a number of targeted policies, that help training the unemployed and less developed regions, and gives incentives to employ more workers through temporary exemptions, for example of social security contributions. The extent to which these active and passive policies are monitored and evaluated in Iran is unclear, but this can help fine tune policies (Khandker et al., 2010).

  • Iran has a functioning unemployment benefit scheme, but coverage is low. Iran has an unemployment insurance program with eligibility criteria and allowances that are broadly in line with best practices.9 However, the system has not really been tested so far, given the difficulties in firing workers. It currently provides unemployment benefits to 200,000 unemployed, covering only a fraction of the nearly 3 million unemployed. Labor market reforms that improve the mobility of workers will mean that the unemployment benefit system will likely come under greater demand.

  • Training programs have been a key element of Iran’s activation strategy. Training schemes are popular across the world. Their effectiveness varies, but international evidence suggests that well-targeted programs that provide skills that are relevant to employers, including soft skills, can improve beneficiaries’ chances to find work. Iranian authorities have been looking into ways to improve the relevance of the skills provided through these schemes by increasing the involvement of the private sector in the design and provision of training, leaving the government the role of ensuring quality of providers.

  • Making the most of job intermediation services. By disseminating information, job intermediation can improve the match between job seekers and jobs. It can for example leverage advances in information technology to establish basic services relatively cheaply. To be effective, job intermediation has to provide quality services that will attract both employers and job seekers. Iran can better leverage its provincial public employment services centers and bring employers into the process through providing them services such as candidate screening or vacancy management, in order to in turn better garner information on vacancies.

  • Iran relies on social security exemptions to foster employment in small firms. Employment subsidies can help groups that may be priced out of the labor market, such as the long-term unemployed or the youth. Such subsidies should be temporary since they are meant to cover the initial cost of training new workers and making them fully productive. They need careful targeting since they suffer from deadweight losses—whereby beneficiaries would have found a job anyway—and substitution effects—whereby subsidized individuals are employed instead of unsubsidized ones. Iran has some of these subsidies—the government initially pays the social security contribution for new hires for small firms as long as they add to the total employment of the firm. Given that employer contributions (23 percent) are slightly above the average contributions among middle-income countries (20 percent) with similar social programs, such subsidies may indeed help employment, but the authorities could investigate their net impact and consider international evidence on key success criteria (Brown 2015). The NDP specifically provides a two-year exemption of the employer’s share and unemployment insurance for employers who recruit young university graduates with at least BA/BS degree for internship programs.

Creating opportunities for all

11. Creating job opportunities for all benefits economic growth. It is crucial to look not only at headline GDP numbers, but also at how the benefits of growth are distributed and how growth affects people’s lives. Improving opportunities, including enlarging the pool of talents available to employers by fostering participation, can also bring further economic development. For example, (Aguirre and others 2012) estimate that bringing the female employment rate to male levels could raise GDP in Japan by 9 percent, the United Arab Emirates by 12 percent, and Egypt by 34 percent. Under similar assumptions, we estimate the GDP boost in Iran would be around 40 percent.

12. Accounting for the impact of regulations on vulnerable groups can make policy design more inclusive. Some regulations create direct hurdles for vulnerable groups. There is evidence of gender discrimination in hiring and unequal remuneration for work of equal value (as in about 60 percent of countries); women do not get full wages while on maternity leave (while they do in 68 percent of countries). A few other indicators point to other hurdles—workers do not get five days of sick leave per year (70 percent of countries provide these days); and although night and overtime work are allowed, the associated wage premium is high. Improving the flexibility of work hours, or providing leave benefits, for all workers, can improve female labor force participation, work-life balance, and job quality for all, as well as help employers face seasonal variations in production.

13. Designing economic and social policies that help vulnerable groups. Beyond the policies discussed so far, economic and social policies can also be used. For example, issues such as the availability of child or elderly care, explicit nondiscrimination laws, and greater flexibility on working arrangements and hours are of particular importance for Iranian women’s participation in the labor market. Similarly, fiscal policies can be designed in order to minimize gender biases r—for example through individual income taxation, tax credits or other benefits for low-wage earners. Social assistance policies, such as family allowances, can help parents reconcile work and family care; or pension reforms that address retirement age gaps between men and women can provide greater incentives for women to participate, and improve their income in old age.

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1

By Gaëlle Pierre

3

Despite some restrictions on certain fields of study, women represent 60 percent of university entrants, and about 70 percent of students in engineering and science, amounting to the largest cohort of female engineering and science students in the world.

4

The GCR identifies twelve pillars: four basic pillars (institutions, infrastructure, macroeconomic environment, and health and primary education); six pillars relevant for efficiency enhancers (higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness and market size); and two pillars for innovation and sophistication (business sophistication, R&D innovation). Given its level of development, Iran is classified as an efficiency-driven economy.

5

The NDP includes targeted measures, such as allowing public firms in social cultural or service sector to purchase goods and services from private firms, and Departments of Port and Shipping to give contracts to private companies.

7

For example, Spain saw a dramatic increase in the share of temporary employment to 33 percent when it liberalized those while keeping regulations the same on other contracts in the mid-1980s. Workers with temporary contracts are less likely to be employed in firms that provide training, and to receive firm-provided training (Albert et al. 2005).

8

See Kuddo and others (2016) for guidelines on how to implement regulation that promote job creation; Card and others (2010, 2012) on international evidence on the impacts of ALMPs.

9

It is available to workers who become involuntarily unemployed and have contributed to social security for at least six months. The maximum duration of benefits is 50 months. The allowance is 55 percent of the insured’s average earnings in the 90 days before unemployment began is paid plus 10 percent for each of the first four dependents—the minimum benefit is equal to the minimum wage of an unskilled laborer.

Islamic Republic of Iran: Selected Issues
Author: International Monetary Fund. Middle East and Central Asia Dept.