The Threat to the Arab Spring

Handouts of food and fuel in lieu of jobs, and investments to raise the productivity of work to which only the privileged have access, would do nothing to enable outsiders to compete for good jobs, or to remove the barriers, such as licenses, to self-employment.

Edmund Phelps, economics Nobel prize winner:

The needed restructuring in Tunisia and Egypt must begin with two critical steps. The first is to end political control of the business sector by the privileged elite. In Tunisia, they are the relatives and friends of Leila Trabelsi, Ben Ali’s wife; in Egypt, they are the army’s upper echelons, appointed by former President Hosni Mubarak. The second step is to end bureaucratic control of self-employment through licenses and other barriers. Only then could modernization of the economic system proceed.

The system that would be most appropriate for Tunisia and Egypt is basic capitalism – capitalism 1.0 – such as Britain and America developed in the first half of the nineteenth century on their way to having highly successful economies. The bedrock of this system are civil liberties, property rights, secure contracts, courts empowered to uphold the rule of law, local banks linked with local entrepreneurs, financial firms that supply venture capital, ease of market entry by new companies, and so forth.

Unfortunately, Tunisia and Egypt will face serious hazards as they rely on democratic forces and mechanisms to mitigate the oppressive features of the rightist corporatism under which they suffered. One hazard is a leftist corporatism, in which labor unions and well-placed cronies replace the ruling families and army officials, but political control of the economy and bureaucratic control of entrepreneurship are maintained. After all, parts of Europe in the late 1960’s began to construct a leftist corporatism to replace the rightist corporatism that ruled, with some interruption, from the 1880’s to the 1940’s.

This hazard should trouble reformers. Under Ben Ali and Mubarak, a company run by insiders had to worry only that the president might someday demand a cut of their profits or assets. But, in a democracy lacking the safeguards of a strong culture of individual rights and a constitution to protect them, companies might be even more fearful of a predatory state. If so, business investment and job creation will remain quite weak.

Read it all.

And then there's Morocco. The reforms the ruler is offering are not the kind Phelps has in mind.

6,000 BBC interns have no rights

The BBC pays its interns less than the median income of expat workers in the Gulf. It pays them zero, and does not reimburse them for work related expenses.

Bryan Caplan asks,

1. If the minimum wage is a good idea, shouldn't unpaid internships be illegal as well? If not, why not?

2. Name the main arguments in favor of the legality of unpaid internships. Aren't all of them equally good arguments for allowing people to work for wages greater than zero and less than the minimum wage?

Meanwhile (NYT),

The Labor Department says it is cracking down on firms that fail to pay interns properly and expanding efforts to educate companies, colleges and students on the law regarding internships. “If you’re a for-profit employer or you want to pursue an internship with a for-profit employer, there aren’t going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law,” said Nancy J. Leppink, the acting director of the department’s wage and hour division. Ms. Leppink said many employers failed to pay even though their internships did not comply with the six federal legal criteria that must be satisfied for internships to be unpaid. Among those criteria are that the internship should be similar to the training given in a vocational school or academic institution, that the intern does not displace regular paid workers and that the employer “derives no immediate advantage” from the intern’s activities — in other words, it’s largely a benevolent contribution to the intern.

Human Rights Watch issues report

HRW on the UAE:

Throughout 2010, UAE authorities censored and harassed human rights defenders and lawyers, impeding independent reporting that could help curb abuses. At the same time, Human Rights Watch said, the announcement on January 15, 2011, of new labor regulations to curb exploitative recruiting agents who entrap foreign workers with recruiting fees and false contracts signals an extremely positive commitment to address one of the country's most glaring human rights problems - the abuse of migrant construction workers.

"The actions by UAE authorities against its human rights advocates are completely inconsistent with the government's message that this is an open and tolerant country," said Sarah Leah Whitson, Middle East director at Human Rights Watch. "The UAE government should recognize that Emiratis who promote peaceful political debate are as important for the country's development and progress as its bankers and builders."

Over the past year, UAE authorities imposed mounting restrictions on the Jurist Association, a nongovernmental organization established in 1980 to promote the rule of law and raise professional standards. The government did not permit association representatives to attend meetings abroad and cancelled symposiums in the UAE that it deemed controversial. Members also complained of official pressure to quit the association.

That's from today's press release on the UAE. For more see HRW's World Report 2011 chapter on the UAE. The report covers more than 90 countries.

It wouldn't be the first time the UAE said it was solving the same problems with new laws.

The result of 96% of HR positions being held by women

Forbes:

Attractive men were clearly favored, receiving a 19.9% response rate from employers–nearly 50% higher than the response rate for plain-looking men and twice the rate of the men not pictured.

Meanwhile, the opposite proved true for women. Female candidates who did not include a picture were most likely to receive a call from the employer, with a response rate 22% higher than plain-looking women and an incredible 30% higher than the attractive women. The authors said these findings contradict previous research that found attractiveness to be beneficial in terms of employment and salary levels for both genders.

Why are pretty women penalized? In almost every case (96% of the time), the resume screener was a woman between the ages of 23 and 34. This disparity is not nation specific either. Women are twice as likely as men to work in human resources positions in the U.S., according the Bureau of Labor Statistics. Therefore, the researchers conclude that female jealousy holds other women back from recruitment.

In other news, US authorities make a bust.

IMF Middle East Youth Dialog

صندوق النقد الدولي : حوار مع الشباب في الشرق الأوسط

The IMF has a website, IMF Middle East Youth Dialog, especially for Middle East young people near the point of entering the job market.

The IMF wants to hear first-hand from the youth of the region about their concerns and interests, and their suggestions about how the IMF can serve them better.

As Masood Ahmed, of the IMF notes,

[The global economic] downturn has heightened the core challenges that countries faced before the crisis took hold. Among these, one that stands out in the countries of the Middle East and North Africa is youth employment—or a lack of it.

Simply put, the region is facing unparalleled demographic pressures. Population growth over the past two generations has been among the fastest in the world: the region’s work force is projected to reach 185 million in 2020, 80 percent higher than in 2000. And the region is one of the most youthful in the world—with about 60 percent of the population less than 25 years old.

But employment growth has lagged far behind the demands of growing populations, even when the region was experiencing good economic growth. Now with growth rates likely to be more modest after the crisis, the task of generating enough jobs for young men and women is becoming more challenging.

Revisions in the Sponsorship Law

Seabee has a great post on employee sponsorship law in the UAE. Read it here.

He begins by noting a Gulf News reports that Dubai is thinking of revising its law. But what is more interesting to me is another article in The National about New York University and Abu Dhabi. NYU is demanding certain labor conditions for workers building its Saadiyat Island campus. NYU and Abu Dhabi have agreed to a charter of rights.

What Seabee notes is that these rights are no different from current law. In short, Abu Dhabi is agreeing that it will enforce its own laws on the companies building the campus. Abu Dhabi is funding the construction.

Follow the link to Seabee's post for links to the news articles, and to current law.

Wages and health insurance

Over at Marginal Revolution, Alex Tabarrok catches David Leonhardt in a fundamental error concerning wages and benefits:

David Leonhardt makes an interesting argument about why employers don't choose employee health insurance carefully. The argument is interesting because it is wrong but in a subtle way.

The bottom line: The cost of insurance comes mostly out of employees' paychecks. If insurance costs more, employees are generally paid less. If insurance costs less, employees are paid more. The cost of insurance does not have a big effect on employers’ overall compensation costs.

That’s why no one should be surprised that employers don’t make for good consumers of insurance. And it’s why insurers are not operating in a very competitive marketplace.

The premise is correct, employee compensation comes out of wages. The subtle mistake is to forget that this is only true in equilibrium. Imagine that a single employer was able to buy for his employees equal quality health insurance at a lower price. Would wages at that firm rise? No, an employer only has to pay workers what they could earn in another job. If other firms aren't paying more then this firm need not raise wages even though its costs have fallen. Thus an employer that reduced health insurance costs while keeping real compensation the same could pocket the savings as profit. It's only when other firms follow suit--also in an attempt to cut costs and earn excess profits--that wages at all firms rise, eliminating the excess profit everywhere.

Tabarrok's argument really boils to down to this: we have an example of a cost saving opportunity. We know that profit-maximizing firms do not pass them up. So Leonhardt must be wrong.

Leonhardt distracts us with a red herring. It is true that, in or out of equilibrium, to attract a worker you need to pay him in wages and benefits (as valued by him) at least as much as he could get elsewhere. An employer can reduce the wage and increase the value of the benefit by the same amount without changing the package's attractiveness to the worker. That is, the "cost value of insurance comes {snip} out of employees' paychecks." I would characterize Leonhardt's error this way: he is suggesting a principal-agent problem exists; the one who chooses the insurance is not the one who pays. But he is forgetting why "cost value of insurance comes {snip} out of employees' paychecks." And he is not allowing for a difference in cost and value. If an employer can find an insurance plan at the same value for less he will buy it.

But that doesn't mean that profit-maximizing employers "make for good consumers of insurance." In a world where the employees you have today are not the employees you have tomorrow, you have no incentive to choose plans that create incentives for employees to engage in healthy behaviors. That begs the question of why there is employer-based health insurance provision, but that is answered by the favoritism towards them in the U.S. personal income tax code.

It's significant that healthy behaviors are where there actually is evidence for large health care savings.

Link-o-rama

1. Buckle up your safety belt, take good care of yourself, we pay yours bills. (Sung to the tune of Button Up Your Overcoat.)
2. “Researchers may be poorer teachers to low-ability students and thus better screeners,” the authors write.
3. I love you.
4. How men are doing.
5. How women are doing.
6. The efficiency gains from marriage are well known. It’s also true that for most couples they grow over time.

The global downturn and labor market opportunities in Middle East countries

The Middle East Youth Initiative is a joint project of the Wolfensohn Center for Development at The Brookings Institution and the Dubai School of Government. It has just released its report, Missed by the Boom, Hurt by the Bust: Making Markets Work for Young People in the Middle East. Its key findings (quoting):

• Recent high growth in the Middle East did not sufficiently resolve the region’s education and employment problems. Countries are entering the global slowdown with large pre-existing hurdles, including high rates of youth unemployment and deteriorating job quality.

• The global economic slowdown is hitting the Middle East at a time when the youth share of the total population is at a historic high, with nearly 32 percent of the population between the ages of 15 and 29. This means that a large number of new job seekers will continue to exert pressure on the region’s labor markets for years to come.

• Policies that increase public sector employment and job protection while delaying progress toward greater global integration are likely to be counterproductive. The path to economic recovery will require cultivating a skilled workforce, expanding the role of the private sector, and reducing the appeal of government employment.

• The report presents ten policy recommendations. Countries in the Middle East committing to fiscal stimulus should prioritize job creation for young people. Governments should engage in an open and transparent dialogue on the economic crisis with citizens, the private sector, and civil society. Additional recommendations include reforming public sector hiring practices and raising the value of informal jobs – which are serving as a refuge for an increasing number of young people – through investing in skills development.

My emphasis.

See also, Stalled Youth Transitions in the Middle East: A Framework for Policy Reform. From the abstract:

The root cause of youth exclusion lies in the institutions that mediate transitions from school to work and family formation. These institutions provide the signals that tell young people what skills to learn, tell firms whom to hire and how much to pay, tell credit agencies to whom to lend, and tell families how to evaluate the potential of a young person as a future spouse or parent. In the region, many of these signals and incentives are skewed, leading to adverse consequences for young people, including a mismatch between those skills obtained in the education system and those demanded for jobs in the growing private sector.

Bahrain allows labor mobility

Bravo Bahrain!

The Nation reports:

Bahrain will implement a new labour law that allows foreign workers to switch jobs without the consent of their employer, Majeed al Alawi, the minister of labour, said yesterday.
...
He said the law would help to bring an end to the trend in which Bahrainis sponsor several, sometimes hundreds of foreigners, and charge them a “visa fee” to work with another employer. The workers, mostly from the Indian subcontinent, are not allowed to change jobs without the permission of their sponsor.
...
“The end of the sponsor system is the most important aspect of this law because in my opinion that phenomena does not differ much from the system of slavery and it is not something suitable for a modernised country like Bahrain,” said Mr al Alawi, who is also chairman of the Labour Market Regulatory Authority.
...
“The new law will also help revitalise the labour market in the country, raise wages and improve the overall work atmosphere for everyone, including citizens,” Mr al Awari said.

As I have long argued at The Emirates Economist, the sponsorship system in the Gulf States has some large downsides. One is that it places the government in the impossible position of policing employer abuse of foreigner workers. It is far better to give workers job mobility; they can leave and find another job if they get taken advantage of by the current employer. To avoid this the employer keeps compensation in line with the competition.

Another big plus is that the sponsorship system works to the disadvantage of citizens seeking employment in the private sector. The reason goes back to mobility. Citizens were "protected" and could change jobs at will. From the perspective of employers that made them less desirable than foreigners. The reform levels the playing field.

I encourage all Gulf countries to monitor the Bahraini labor market, and implement similar reforms or improvements on them should the evidence warrant.

See last month's post on other reforms in the Bahraini labor market. Bahrain is implementing many of the sorts of reforms suggest in a report prepared c. 2005 for the Bahrain government by McKinsey & Company. At one time that report was posted at the Bahrain Economic Development Board.

Bahrain following through on labor market reforms

Bahrain is doing good things to rationalize its labor market, and put domestic workers at less of a disadvantage. The Financial Times reports:

The focus of the protesters’ anger is a BD10 ($26.6) monthly tax on every foreign worker, introduced last July. The funds are to be used by Tamkeen – “the enabler” – to train Bahraini nationals for work in the private sector, as part of wider reforms intended to cut unemployment, diversify the economy and reduce the public wage bill.
...
“I already pay BD200 to bring a worker into the country, and now they’re taxing me to keep him,” says Ibrahim Yousef of the Bahrain Contractors’ Society. Local fishermen, many of whom employ workers from India and Pakistan, went on strike in February in protest.
...
An independent regulator, the Labour Market Regulatory Authority, was hived off from the Labour Ministry in 2006. The LMRA is responsible for registering foreign employees and licensing new companies. It is one of the few such bodies in the Gulf to publish job market data.

The second task was job creation. Tamkeen has accumulated a BD66m war chest, to be spent over the next four years....
...
The source of Tamkeen’s finances also preserves its semi-independence – it answers to the Economic Development Board, brainchild of Bahrain’s reformist crown prince.

A populist parliament has attempted to derail the government’s reforms on several occasions. This week, Bahrain’s labour minister quashed a law drafted by deputies that would impose a BD500 fine on “runaway workers” who leave their jobs without permission.

One of the many advantages of foreign workers is that they can contract not to leave their jobs, whereas Bahrainis cannot. Imposing the fine would have only enhanced this contractual advantage.

Bad policy

Emiratis are already a tiny percentage of the private-sector workforce. Making it more difficult to terminate Emiratis will only make firms less likely to hire other Emiratis.

Addendum. The Financial Times has a franker report.

Kerala braces for return migration from the Gulf

The Indian state of Kerala is bracing for return migration due to the global slowdown that has hit the Gulf economies. So reports Free Exchange:

THE lush state of Kerala in the south of India generates most of its foreign exchange either by exporting people or importing them. It earned almost 20 billion rupees ($500m) from foreign tourists in 2006 (the latest year for which figures are available) and about 245 billion (in the same year) in remittances from Keralites working abroad, 89% of whom go to the Gulf.

The state has an astonishing 24.5 emigrants per 100 households. Kerala’s per capita output is one of the lowest in India, but its per capita expenditure is one of the highest. (Gopinath Pillai, a Singaporean diplomat of Keralite descent, describes the situation like this: one poor fellow works three shifts in Dubai, saving every penny to send home, where there will be eight guys reading two newspapers a day and discussing politics.)
...
But the Gulf economies where most of these NRKs work are slowing. Some construction projects are on hold. As a result, Kerala may have to brace itself for a wave of reverse migration. At the recent Indian diaspora conference in Chennai, several speakers called on the government to set up a department for returnees.

If any place is a sweatshop, the Gulf is one. You'll notice the irony. Kerala loses when there are fewer opportunities in the sweatshop.

Carpe Diem has a recent roundup, "In Praise of Sweatshops." Don't forget this golden oldie also titled In Praise of Sweatshops. This, too.

This Christmas a man is more likely than a woman to receive a pink slip

From here. Also here.

Addendum. The Washington Post doesn't keep up with the facts.

Boltholes dry up in the Gulf

FT:

Until only a few months ago, many executives from developed economies viewed the Gulf as bolthole to ride out the global economic storm.

Now the axe is threatening to fall heavily on the staff of Dubai real estate companies as a six-year property bubble finally bursts, while similar cost-cutting measures are sweeping through the investment banking community.

Morgan Stanley, Credit Suisse and Goldman Sachs have already cut about 10 per cent of their regional staff as the prospects for next year's fees dim with the oil price slump.

Elsewhere, big real estate companies are slashing up to 15 per cent of their workforces.
...
And while investment banks are shedding staff, they also want to replace some dead wood with experienced regional experts to contribute to the restructuring and merger deals that will become their bread and butter over the next year.

"If you can find me a good Saudi investment banker, I will hire him now," a banker says.

Sentences to ponder

WSJ: "Expatriates are required to find new jobs within a month or leave the country. Dubai authorities are looking at options to extend the grace period for expatriate employees that lose their jobs before they're forced to leave, a senior government official told Zawya Dow Jones last week."

What about unemployment?

The American radio program, Morning Edition, wonders:

With some projects facing delays or even cancellation because of the current credit crunch, new questions are being raised. Are Gulf states prepared, for instance, to deal with mass layoffs and huge numbers of unemployed expatriate workers?
...
Analyst Mustapha Alani at the Gulf Research Center says he doesn't think people in the oil-producing states of the the Gulf Cooperation Council, or GCC, are prepared for a sharp downturn in development activity — neither the developers, the investors nor the migrant workers who could be hit first and hardest.

"We're talking about 6 million Indian workers employed in the GCC," Alani says. "Possibly 50 percent of this workforce — they're going to lose their jobs in the region. And either they have to stay as illegal immigrants or they have to go back to their country to seek employment."
...
Many economists argue that Gulf states have the cash and the incentive to soften the regional impact of the financial crisis, and they doubt that governments here would allow the streets to be flooded with unemployed South Asians if there is a sharp downturn.

But that raises another troubling question: Is Pakistan, already struggling with political unrest and terrorist attacks, ready to absorb millions of unemployed young men back into its population?

Listen or read it all.

From the UAE's point of view, the problem may not be as big as it seems; how much of any reduction in force would be achieved by simply letting contracts expire while slowing the stream of expat laborers into the country?

Laborers come to the UAE on a fixed term contract. I presume their expectation is that the contract is good for the full term. Whether they could enforce the contract is another matter. But it would not be good for the UAE's reputation to abrogate contracts.

It's worth noting the irony here: These workers are better off in the UAE, than back home. They would prefer to stay here. Yet the UAE takes criticism for the low pay and poor working conditions they receive.

The same is true in the US for the low wage workers (legal and otherwise) who come to the US, primarily from Mexico and southward. They are better off in the US even though they are doing jobs Americans will not do. The difference is they are not under contract, and as their jobs go away or pay falls, they are going back to their home countries voluntarily.

Public opinion in the Muslim world about globalization

Bryan Caplan draws attention to a just released public opinion survey conducted in seven Muslim countries by WorldPublicOpinion.org. From the WPO press release:

The poll finds that most respondents also view international trade as good for their countries and themselves. At the same time, many are concerned about trade's effects on workers and the environment. However most express interest in addressing these effects, not through protectionism but through an international, cooperative effort integrating labor and environmental standards into agreements on international trade.

Caplan nails it:

When economists look at anti-globalization protestors demanding "labor standards," they often see them as thinly-veiled attempts by First World unions to make Third World firms uncompetitive. But this self-interest story just doesn't fly. Not only do large majorities of Western citizens want labor standards; so do the people of the Third World.

Let's hope that unresponsive elites ignore these benighted supermajorities long enough to allow economic growth to raise "labor standards" the one way that really works: Making workers more productive.

As I've said before, be careful what you ask for: rights have costs for those who get them.

Bahrain labor market reforms

The Financial Times reports:

When it comes to labour issues, Gulf governments have a habit of talking about reform but producing little in the way of action.

But two years after a law was passed – and in the face of opposition from the business community – Bahrain has pushed through a series of increases in the price that sponsors of foreign employees must pay for their work permits.

The increases, which came into force this week, form part of a package of reforms designed to make employing Bahrainis more attractive to employers.

A permit for a non-Bahraini worker has risen to BD200 ($533), payable every two years. Sponsors must pay a further BD10 monthly fee on every expatriate worker and BD90 for each family member of expatriate workers.

The additional revenues are being recycled into training schemes for Bahrainis.

Reformers say the old system of fees and quotas created disincentives to employing Bahrainis. Expatriates were cheaper.

The article doesn't say, but if there has been a thorough reform, then employers would be able to fire Bahrainis as easily as expats, and expats would be able to change jobs within Bahrain as easily as Bahrainis. See my discussion here.

Prayer and productivity

In a well known paper on religion and economic growth, Barro and McCleary find

economic growth responds positively to the extent of religious beliefs, notably those in hell and heaven, but negatively to church attendance. That is, growth depends on the extent of believing relative to belonging. These results accord with a perspective in which religious beliefs influence individual traits that enhance economic performance. The beliefs are, in turn, the principal output of the religion sector, and church attendance measures the inputs to this sector. Hence, for given beliefs, more church attendance signifies more resources used up by the religion sector.

A major Islamic cleric has issued a fatwa that echoes these conclusions.

Arab Times

'Praying is a good thing ... 10 minutes should be enough,' Al-Jazeera television personality Qaradawi says in a religious edict, or fatwa, published on his website.

Praying five times a day is one of the five pillars of Islam, along with the well-known requirements of making a pilgrimage to Mecca and of giving alms to the poor.

Two of each day's five sessions -- the dhuhr (noon) prayer and asr (afternoon) prayer -- fall within working hours, bringing work to a standstill at least twice a day in many places.

A prayer generally takes an average of 10 minutes, but it can be extended if a worshipper chooses to recite one of the longer verses of the Koran.

And before the prayers themselves, there is also a mandatory ablution during which worshippers must wash their faces, hands and arms, feet and heads. In large office buildings, the trips to the bathroom can also eat away at valuable work time.

Qaradawi's plea to reconcile faith and productivity may hit some hurdles as it risks upsetting the deeply entrenched custom of 'prayer breaks' at work.

Society's increased Islamisation over the past 30 years has already silenced some critics of long prayer sessions.

According to an official study, Egypt's six million government employees are estimated to spend an average of only 27 minutes per day actually working, reflecting a real problem with productivity.

Qaradawi's fatwa is aimed at removing prayer as a pretext for not producing.

Read the whole thing, which is interesting throughout.