Algeria | Unemployment and Labor Market Issues

Davide Furceri analyzes unemployment and labor market developments in Algeria and assess the factors that may hamper employment creation in Unemployment and Labor Market Issues in Algeria published by imf.org.(adapted excerpts by Job Market Monitor)

He suggests that the relative low output-employment elasticities and rigid labor market are the main factors behind the still high level of unemployment, particularly among the youth. Simulation analyses, based on the results on the relation between labor market institutions and unemployment, show that improvement in labor market conditions in Algeria would be key in reducing unemployment both in the short- and mediumterm.

Despite several years of sustained growth, the unemployment rate in Algeria remains high compared to other emerging economies. In addition, while growth performance in the last ten years was accompanied by a significant reduction in the overall unemployment rate, youth unemployment has proven more difficult to tackle as evidenced by the fact that the ratio of youth unemployment to overall unemployment has steadily increased over the recent period.

Algeria’s labor market is rigid both in absolute and relative terms (compared to other emerging counties), and therefore tends to favor insider versus outsider workers. The results of the empirical analysis suggest that reforms aimed at improving labor market flexibility may have important effects in reducing unemployment both in the short and in the medium term. In this context, reforms aimed at reducing search and hiring costs are particularly important to integrate young outsider workers into the labor market.

However, while labor market flexibility has an important role, the high level of unemployment among young graduates is also the result of mismatches between labor market demand and supply: on the one hand, the private sector has not been able to create sufficient demand for skilled workers; on the other hand, the distribution of Algerian students is highly unbalanced towards disciplines (such as humanities, social sciences, law and education) that generate an undersupply of the skills most needed by the private sector. In this context, properly designed active labor market policies can reduce unemployment by improving the efficiency of the job matching process and by enhancing the skills of the unemployed.

Reforms aimed at removing these labor market imperfections will also have an important effect in reducing the very long length of unemployment spells in the Algeria’s labor market, as relative rigid labor markets and labor-market mismatches tend to reduce job turnover and increase the incidence of long-term unemployment. In fact, as evidenced by the results of the medium-term scenario analysis, in the absence of reforms aimed at improving the responsiveness of labor market conditions to changes in economic activity, unemployment is likely to remain high over the medium-term.

Finally, reforms aimed at improving the business climate and foster product market
competition are key to increase labor demand over the medium-term. In particular, lower barriers to entry curb market power and incumbents’ rents and tend to reduce wage claims and close the gap between productivity and real wages. Moreover, stronger competition may reduce bargaining positions of employer and increase employment costs for higher wage.

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