Unemployment Crisis in Iraq and Iran: A Chronic Dilemma for State and Society

Iran

Economy & Innovation

Iraq, Commentary

Dr. Amin Mohseni-Cheraghlou

Looking at pictures and video footage of last year’s protests in Iran and Iraq, one cannot help but notice that protestors are mainly comprised of youth; the same was true for the 2011 Arab Spring uprisings. There are widely different social, political, and economic factors that have contributed to these events from one country to the next. However, one thing is common among them all: disillusioned youth frustrated with lack of economic opportunities and prospects were at the center of these events.

While other political and social factors have certainly contributed to last year’s unrest in Iran and Iraq, the outsized role played by disillusioned youth within these protests is impossible to ignore. In addition to threatening the country’s current social and political stability, high levels of youth unemployment can create serious challenges for the wellbeing and prosperity of an economy over the long term. Persistent and high levels of youth unemployment have several implications, primarily reducing the likelihood of future employment, thereby delaying the acquisition of work experience and development of sustainable personal finance habits. Additionally, unemployment naturally postpones income generation and financial independence, thereby delaying marriage and family formation, which has serious social implications in the conservative and religiously oriented societies of Iran and Iraq. Lack of employment opportunities also depresses creativity and entrepreneurship, thus shortchanging the economy’s long-term productivity to the benefit of the informal economy’s expansion. Socially, this ennui creates serious challenges and can contribute to extremism, violent crime, illegal economic activity, mental illness, drug abuse, and other forms of destructive habits and unhealthy behaviors. Of course, these social and economic variables are linked, and poor performance of one depreciates the other. Finally, should these patterns continue for long enough, they force the discouraged and unemployed youth to exit the labor force altogether, hence decreasing future labor force participation.

Source: World Bank’s World Development Indicators (2019). Author’s Calculations.

Iran

In recent decades, Iran and Iraq are two countries in the Gulf in which youth have been facing harsh labor market conditions and deteriorating economic conditions. Among other factors, this has contributed to last year’s, occasionally violent protests. In Iran for example, around one in three youth looking for some form of work is unemployed (see figure above) and the situation has been getting worse over the past decade. One might assume that this trend is primarily impacting youth without a university education or an advanced degree, however, in reality higher educational attainment in Iran actually increases the likelihood of unemployment among the youth. In fact, currently, more than one-quarter of Iran’s youth have at least a bachelor’s degree or beyond and more than two-thirds of youth in the labor force have an advanced education or a university degree. Unemployment rates for those with advanced education are more than 20 percent. This figure jumps to higher than 30 percent among Iran’s female population. In contrast, unemployment rates for those with only basic education (high school or less) are around nine percent.

I have written elsewhere on Iran’s over-education crisis and the Iranian economy’s inability to absorb the large number of college graduates. One consequence of having such large numbers of unemployed graduates in Iran is a greater dissatisfaction with the country’s weak economic and labor market conditions. This is regardless of the quality of the degree-granting institutions, or the field of study. Psychologically, youth with a university degree have higher expectations than those with a high school education or less. When these higher expectations are not fully, or even partially met, it is only natural for the university educated youth to develop greater frustration and dissatisfaction with the government’s economic mismanagement and corruption. History shows that these frustrations are eventually channeled into protest and social unrest, peaceful or violent.

Iraq

In Iraq, the story is a bit different. While official figures for youth unemployment hover around 20 percent, the International Monetary Fund (IMF) argues that the figure is actually twice this amount. However, contrary to Iran, Iraq’s unemployment rate shows no significant difference between youth with only a basic education, and those with an advanced university degree. Nevertheless, facing persistently high rates of unemployment, Iraqi youth have been at the forefront of recent protests in Iraq, and similar to Iran, the government’s economic mismanagement and corruption have been central to their frustration and dissatisfaction.

Unequivocally, the stability and prosperity of Iran and Iraq depend largely on their ability to create jobs for the youth population. In the case of Iran, this especially applies to university educated youth. A World Bank report estimates that Iran and Iraq need to create around 1 million and 500,000 jobs per year respectively in order to properly meet the employment needs of their youth populations in the years to come. Facing evermore budgetary pressures, governments in Iran and Iraq are witnessing serious limitations to create in-demand public sector jobs, seen as highly sought after due to the long-term employment security they provide. This mismatch in supply and demand for public sector jobs is one of the primary reasons for the increasing frustration of the Iranian and Iraqi youth directed at their governments.

This conundrum’s solution rests primarily on the ability to create more private-sector jobs. However, the private sectors in Iran and Iraq face serious obstacles in their successful establishment and operation. Inefficient and opaque legal and regulatory environments, lengthy bureaucratic procedures, and financing difficulties are among the major hurdles facing the private sector in these economies. These challenges and more are reflected in the World Bank’s Doing Business 2020 report, in which Iran and Iraq rank 127 and 172 respectively in their ‘ease of doing business’ Index.

So, what should the Iranian and Iraqi governments do? A possible solution is to follow the first lesson in economics: specialization. Governments, by definition, should specialize in legal, regulatory, and supervisory issues. This allows businesses to focus on what they do best, namely creating economic output and jobs. It is therefore long over-due for governments in Iran and Iraq to shift their efforts and focus away from creating public sector jobs towards efforts to make the necessary improvements on the legal, regulatory, bureaucratic, and financing fronts. Only through this shift of focus is there hope for the private sector in Iran and Iraq to flourish and create the amount of jobs necessary for their long-term stability and prosperity.