Middle East Economic Survey
VOL. XLVII
No 41
11
Iran’s Unemployment Crisis
By Jahangir Amuzegar
The following article was written for MEES by Jahangir Amuzegar, a distinguished economist and former member of the IMF Executive Board.
Stubborn, double-digit, unemployment is currently the Islamic Republic’s most acute single economic concern. Providing gainful, even if not equally productive, jobs for millions of job seekers now tops the list of the theocratic oligarchy's unrelenting headaches. The challenge is formidable not only because of unemployment’s debilitating impact on the economy, but also due to its dire political, social, and even cultural consequences for the regime's stability and staying power. While shortages of job opportunities have been a structural phenomenon in Iran for some time, the acceleration in the growth of labor force since the late 1990s has now reached a critical mass – defying all attempted solutions.
Despite the enormity of the challenge, statistics on Iran’s employment and unemployment are the flimsiest, least reliable and most contested of all basic indicators. The principal sources of data are either out of reach, limited, or largely conjectural. Iran’s total population itself – and thus the size of its labor force – is based on conflicting estimates. And estimated figures for any given year vary between those of the UN Secretariat, Iran’s Statistics Center, other local authorities, and foreign organizations – often with a 10% margin of difference. The size of the labor force is subject to even greater variety of guesswork. And the official estimate is highly misleading because it suffers from technical, conceptual, and methodological flaws.
Iran’s current working age population, ie, persons between the ages of 15 and 64, is broadly estimated to be about 37mn of which some 21mn (or less than 32% of the total population) constitute the active labor force This figure compares poorly with the 50-60% labor participation in other countries, partly because it leaves out some 5mn or so deprived job seekers ie women (not including housewives). The total also excludes children below 15 and older men above 64 who are still in the job market due to poverty or inadequate social security benefits. The estimated employed number is equally questionable because it includes seasonal workers, every one who works at least two days a week, and all those who have a job at the time of census taking regardless of their status shortly before or after.
Data collection and dissemination methods used by several competing organizations are defective because they lack a unified scientific basis. Labor market statistics are offered by at least five separate agencies: Iran’s Statistics Center; the Management and Plan Organization; the Ministry of Labor; the Central Bank of Iran; and the House of Labor – with notable differences among them. And since there is no requirement for authentication, and no penalty for unfounded statements, government officials, individual Majlis deputies, newspaper reporters and private analysts also often cite employment figures of their own on various occasions. For instance, the vice-president, the minister of economy and finance, and the head of the labor ministry each give a different rate of unemployment for the first quarter of the current Iranian year (2004-05) – ranging from 10.4% to 11.8%. On top of this all, the reliability of each agency’s aggregate data is subject to doubt since the politically sensitive nature of the subject invites slight-of-hand manipulations on the part of interested parties.
The Jobless Paradox
Disregarding differences between public and private unemployment estimates, and relying on the figures published by Iran’s Statistics Center (as the sole organization responsible by law for the collection and dissemination of national data) the jobless numbers remain confusing and questionable because of their inconsistencies. For example, while Iran’s economy has admittedly failed to absorb all the new entrants into the job market during the last four years, the Center’s data show a decline in annual unemployment.
According to the projections of the Third Economic Development Plan for 2000-05, in order to bring the unemployment rate from 15% in 2000 down to 11.5% in 2005 (and thus keep the total jobless number from rising further), a total of 3.8mn jobs (or 760,000 a year on average) had to be created. Now, the figures released by the High Employment Council chaired by the President show the number of jobs created each year during 2000-04 to have been 431,000, 493,000, 690,000, and 700,000 respectively. Citing these figures in his annual state-of-the economy reports to the Majlis, President Khatami acknowledged more than once that the 2.3mn jobs created during the first four years of the Plan have fallen considerably short of the Plan’s target. By his counts nearly one fourth of the new job seekers have failed to find gainful employment. Nevertheless, Iran’s Statistic Center shows the unemployment rate for the same four years as 14.3%, 14.2%, 12.8%, and 11.6% respectively – without any explanation. According to these numbers, the jobless rate – instead of increasing by at least 3.5% in the last four years – has actually declined by 2.6%!
Theoretically, the only way this could have happened would have been with a situation where some disappointed job seekers gave up hope for finding work, and dropped out of the active work force. But Iran’s statistical apparatus is neither equipped, nor has ever tried, to measure this particular aberration. Nonetheless, in his August 2004 report to the Supreme Leader, detailing his administration’s latest “achievements,” President Khatami offers a novel clue to the unemployment enigma. In his words “the usual lack of accuracy in statistics” has this time worked in his government’s favor as merely 590,000-600,000 people have entered the job market each year. Consequently, he concluded, the average jobless rate in the last four-year period has been 13% – or 2% less than in 2000. These numbers, however, have been refuted by the Supreme Center of the Islamic Association of Labor, which gave the unemployed rate in August 2004 at more than 16%, and dismissed smaller figures as politically tainted. Iran Daily newspaper reports the rate to be 16-20%. Information based on the central bank’s data also shows a much larger figure than those of the Statistical Center.
Due to these ambiguities and discrepancies, the true number of current unemployed workers in Iran is subject to wide speculation. By the Statistics Center’s account the total is no more than 2.5mn, while other sources put the figure at more than 3mn, and private estimates by Iranian and foreign analysts run as high as 4-4.5mn depending on the size of disguised employment or virtual underemployment. Larger numbers are routinely cited by the opposition at home and abroad.
Unemployment Characteristics
While the lowest double-digit official figure for the early 2004 unemployment may not be unduly alarming on a comparative global scale, the number is still discomforting for its five specific undesirable features. First, unemployment is especially high at 34% among the 15-24 year olds who officially constitute 25% of the labor force; it is 22% for men and 41% for women.
A report commissioned by the Management and Plan Organization and released in early September 2004 puts the total national unemployment rate at 13.2%, and predicts that if this level holds up, then the jobless rate among the 15-29 age group will reach 52% within two years. Among these idle job seekers, more than 10% are classified as college graduates, and 30% high school diploma holders. Second, the duration of unemployment is not short for most of the people out of work. Some 70% of current jobless workers have been idle for more than two years; others have been looking for jobs much longer. Third, unemployment is highest among women of all ages. While women’s participation in the labor force is only slightly more than 13%, their unemployment rate is more than 40%. By some private estimates, only 15% of female university graduates are able to find suitable work. Fourth, more than 43% of the employed group is listed as illiterate or barely literate – with significant unfavorable implications for potential economic growth. Fifth, and by far the most worrisome aspect of the picture is that some 76% of the unemployed are technically classified as “unskilled” including thousands of high school and college graduates.
Principal Causes of Disequilibria
Iran’s protracted and intractable unemployment crisis may be traced to several separate factors. The first culprit is what a seasoned foreign reporter has called Iran’s “demographic juggernaut”, ie the 3.9% annual population growth during 1979-88 encouraged by the Islamic Republic’s desire to create a “20mn army” of Islamic revolutionaries. A left-leaning and anti-Western administration, which implemented this ultimately disastrous pro-natalist policy, unabashedly prided itself in the mid-1980s of having produced 10mn new “soldiers of Islam.” The 1980s baby-boom generation has now come of age facing a bleak job market and bedeviling the hapless Khatami government. The fateful irony is that a majority of these would-be Islamic soldiers have now turned out to be not only ardent secularists but also eager draft-dodgers by legal or extra-legal means (ie buying out their service obligation for cash, or emigrating abroad). The increased unemployment caused by the l980s population bulge has, in turn, been exacerbated by an enormous labor surplus in rural areas, as well as the unprecedented influx of more than 2.5mn refugees and workers from Afghanistan, Iraq, Pakistan and other neighboring countries. These poor, desperate, and often unregistered workers have effectively chased native unskilled laborers out of the strained job market by demanding lower wages, and willing to work in less pleasant or more hazardous occupations.
The second factor for the double-digit unemployment has to do with the inadequate pace of economic growth. By a consensus of Iranian and foreign economists, Iran’s gross domestic product must grow at a rate of at least 8% a year in real terms in order to absorb all the new job seekers, and by 9.5% to reduce unemployment below 10%. The Iranian economy’s 5.4% average yearly growth in the last four years, however, has not been vibrant enough to generate needed outlets for all the new entrants with the result that the demand for new labor has lagged behind its supply by some 30%.
Aggravating inadequate output growth has been the third factor: absence of labor-intensive investment schemes. With the bulk of the national economy in the state’s hands, and with the bulk of public sector investments earmarked for large capital-intensive projects in such heavy industries as oil, petrochemicals, iron and steel, base metals, and military hardware, even a respectable 5.4% annual GDP growth has failed to accommodate new job seekers. Directly resulting from this investment bias has been the low labor intensity of growth. According to an IMF report, while Iran’s annual output growth has been comparable to the performance of “peer” countries in Asia, Africa, and Latin America, its employment elasticity (ie change in employment as a percentage of the labor force with respect to change in real non-oil GDP) has been relatively low at 0.5. This figure compares unfavorably with 0.7 in Pakistan, 0.9 in Jordan, and 1.4 in Algeria. Still other factors such as substantial state subsidies on energy and other productive factors, negative or low interest rates offered by state banks to favored clients, and certain other rent-based amenities have induced the private sector to substitute capital for labor.
The fourth factor for the mushrooming of young job applicants has been the mismatching of Iran’s education system with the country’s occupational needs. The large number of unemployed college graduates classified as “unskilled” suggests that their formal training is not suitable for the market place’s requirements. Government officials often boast about the number of university students having increased five-fold in the last 10 years. But for one thing, they neglect to realize that a real impetus for the increased enrollment has been the absence of gainful employment outlets – making the opportunity cost of attending a tuition-free public university next to zero. College attendance has thus been simply a means of postponing the day of reckoning. For another, they tend to overlook the students’ choice of academic studies and their relevance to the economy’s requirements. Statistics cited in an IMF report show that Iran’s university graduates in humanities and Islamic studies outpace those in social sciences, commerce, and business administration by a factor of 4 to 1. This glaring imbalance between the kind of skills needed for sustained growth and the purely abstract knowledge acquired through a poorly designed academic curriculum lies at the roots of Iran’s “educated” jobless.
Thus while most government departments complain about their need for technical and professional staff, thousands of college graduates in medicine, health care, law, engineering, agriculture, and social sciences reportedly drive taxis, or engage in low-paying clerical or sales jobs. The key to the dilemma is that many degree holders across the land are just that – holders of college certificates – but in reality are certified unemployables. Of these job seekers 80% are reportedly the products of Iran’s Islamic Free University – a multi-branched, private, tuition-based, diploma mill without a qualified faculty, and with no standard laboratory, library, or research facilities.
Fifth, the early job havens, ie government agencies and state-owned economic enterprises, have now run out of steam. These vast outlets that in the first post-revolution decade absorbed the bulk of job seekers as employers of first resort, are now hugely overstaffed and deeply in debt. By accommodating almost indiscriminately most of the newcomers to the job market, government employees have grown four times from 550,000 in 1979 to more than 3.2mn in 2003 while the total population has merely doubled. Generous hiring policies of state enterprises and their mushrooming subsidiaries have resulted in some of their manufacturing units employing seven times as many workers as a similar factory in the West. Public sector employees increased from 19% of the employed population in 1976 to 32% in 1986. Now, the government perennial budget deficits no longer allow bureaucratic agencies to expand their politically accommodating work force. Nor can state enterprises, operating largely in the red and kept on life support by fiscal subsidies or bank loans, easily add to their job roster.
Sporadic and largely unsuccessful privatization efforts in the last few years have also aggravated the jobless situation as the new private owners have fired redundant workers. Alarming bankruptcies of an estimated 1,400 inefficient private firms in the textiles and similarly vulnerable industries during the last four years have had their share of the increased unemployment – with resulting frequent “illegal” labor strikes in major cities.
Sixth, and by some accounts, the strongest deterrent to high employment has been labor-market rigidities caused in part by the country’s anti-business labor code, passed by a previous left-leaning Majlis. The law, which is now fiercely defended by workers and their friends in high places, imposes onerous burdens on small and mid-size firms that serve as the largest job providers. The code requires employers to pay no less than a minimum wage; observe limited number of hours of work; provide compensation for over-time; give regular annual bonuses regardless of their financial position; pay two-thirds of the 30% workers’ social security, health and unemployment insurance costs; and provide free training, housing and transportation expenses for their employees. Workers are also entitled to annual holidays and sick leaves with pay, and receive a hefty severance pay if fired, even for cause – thus reducing annual employee turnovers to a minimum. By one private estimate, non-wage expenses often amount to 1.5-2 times the wage bill for an average employer. For these reasons, in the last few years, entrepreneurs have remained reluctant to hire full-time workers on a “permanent” basis, and chosen to fill their vacancies with fixed-term contract employees, in order to escape most of those obligations.
Finally, responsible for inadequate job creation have been such other structural market deficiencies as insufficient wage flexibility, absence of independent labor unions, low labor mobility, lack of collective bargaining, and imperfect information needed to match labor’s supply and demand.
Collateral Implications
Economic costs of unemployment as a drag on the economy are highly transparent and calculable. Labor is the most perishable of all productive factors, and a non-retrievable asset when lost. But socio-political and other non-material consequences of idleness – while equally deplorable human tragedies – are usually hidden and often not easily measurable. In Iran, as elsewhere, widespread joblessness as a straight road to poverty has been a destabilizing social force. According to the latest claim by a high welfare organization official, some 12% of Iran’s total population, or about 9mn, live below the poverty line, and as many as another 17%, or 11mn are considered “needy.” Private estimates show as high as 40% of the population under absolute or relative poverty lines – with unemployment often cited as a major contributing factor. Jobless-related poverty, in turn, has been frequently found to be as the main cause of countless “social ills” including suicides, dysfunctional families, high divorce rates, drug addiction, illegal underground activities, violent crimes, prostitution, graft and corruption. Some 60% of nationwide suicides in Iran are directly traced to the absence of paying jobs.
Unemployment has also had its significant cultural backlash. Lack of suitable work for more than 300,000 college graduates each year has been a crucial factor in the “intellectual hollowing out” of the country. Estimates of Iran’s technical and professional cadres leaving the motherland each year have ranged from l00,000 to 225,000 young men and women. Poor prospects for finding satisfying work have led thousands of Iranians studying abroad – including some 4,000 recipients of government scholarship – to choose not to return home even at the cost of forfeiting their “return pledge” bonds.
A shortage of adequate jobs is also an alarming threat to political stability. No matter which metaphor one wishes to accept or reject regarding the Islamic Republic‘s current unemployment malaise – the Achilles’ heels of the regime, a time-bomb ticking to go off, or the last straw on the clerics’ back – there could be no denying that the government’s inability to meet this challenge is the most acute single issue. State officials – from the president on down to local police chiefs – regularly express their concerns regarding the eerie potentials of a protracted unemployment slump. Apart from clear prospects of street demonstrations, sit-ins, clandestine sabotage, and open riots, the unemployed youth are prone to fall prey to pernicious appeal of fanatical elements, anti-social cults, and outright terror groups. Potentials for political mischief are embedded in stressful idleness.
A Challenging Decade Ahead
Concerted government measures to put people to work – vocational training, establishment of an information data base, tax holidays, subsidized credits, and direct budgetary support to high unemployment sectors and depressed areas – have so far produced scant results. Efforts to send idle workers to Europe, Southeast Asia and other countries in the region have hardly made a dent – a total of few thousands from a pool of millions. Iranian unskilled workers have been unable to compete with lowest wage laborers from India and Bangladesh, and the “skilled” contingent have not been professionally up to par with those from Eastern Europe and other developed countries. A much-heralded supplemental emergency fund of IR9 trillion (around $1bn), earmarked in 2002 for lending to small private firms at a minimal interest rate in order to create 300,000 new jobs has failed to reach its goal, and has been fraught with a number of unintended consequences. A memorandum of understanding signed with the UN in August 2004 to resolve the problem of youth unemployment remains to be tested.
Official desperation has reached such a low level that incumbent officials as well as aspiring politicians now actually welcome the brain drain. President Khatami has called it a natural phenomenon. The speaker of the new Majlis believes that Iran needs only half of its highly educated elite. And a presidential contender argues that if some 250,000 young university graduates leave the country voluntarily each year, this decade’s unemployment problem will be solved!
Harmful and self-defeating as this culturally humiliating and economically damaging remedy may be, the diagnosed duration of the problem is not off the mark. Thanks largely to the successful national family planning followed by the government since 1989 – in a 180-degree reversal of an earlier stand – the fertility rate among women of childbearing age has dropped from seven to three. As a result, annual population growth has fallen from 3.9% in the l980s to an estimated 1.4% now. Under these circumstances, the baby-boomers’ pressure on the job supply is expected to end by the end of this decade, and the natural rate of employment restored. In fact, if economic growth during 2010-20 should match the pre-revolution peaks, Iran might again become a labor importer, as was the case in the 1970s.
The critical period is thus here and now. Generating nearly 1mn jobs a year up to 2010 is a Herculean task, which requires a series of resolute and painful measures ranging from some short-term emergency measures of the American WPA variety to the long-term restructuring of the economy. Such a fundamental overhaul needed to replace the oil-based growth of the last three years by a labor-based development model in the next seven, would need due diligence on the part of the current 7th Majlis, and the next year winner of the presidential race.