labour markets in the Arab world

From The New Palgrave Dictionary of Economics, Online Edition, 2014
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This article reviews the various arguments that have been advanced to explain the defining features of Arab labour markets, which can be summarised as: high youth unemployment, especially among young women and educated youth; oversized public sectors and small and anaemic formal private sectors; rapidly growing but highly distorted and low-quality educational attainment; and low (and stagnant) female labour force participation. While acknowledging the validity of most of these arguments, I argue that these defining features are attributable in large part to the specific nature of the region’s political economy, and, in particular, to the legacy of the so-called ‘authoritarian bargain’ social contracts that have characterised state–society relations in the post-colonial era.
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The defining features of Arab labour markets have been well documented for some time. They include oversized public sectors; high youth unemployment – especially among young women and educated youth; small and anaemic formal private sectors; rapidly growing but highly distorted and low-quality educational attainment; and finally low (and stagnant) female labour force participation (Assaad, 2014). A number of arguments have been advanced to explain one or more of these features, including both supply-side and demand-side arguments, as well as arguments about the functioning of the labour market itself. Supply-side arguments include the demographic pressures resulting from the region’s pronounced ‘youth bulge’ (Assaad and Roudi-Fahimi, 2007), the educational mismatch hypothesis (Galal, 2002; World Bank, 2013a) and the region’s conservative social and religious norms, which limit women’s employment and, more generally, their engagement in the public sphere (World Bank, 2013b). Demand-side arguments include the distorting effects of natural resource rents on the structure of the economy (Assaad, 2006; Ross, 2008) and on macreconomic stability (World Bank, 2013a), misguided structural adjustment policies (El-Hamidi and Wahba, 2005; Chaaban, 2010; ILO/UNDP, 2012) and the non-competitive and rent-seeking nature of the region’s private sector (Malik and Awadallah, 2013; World Bank, 2013a). Arguments related to the functioning of the labour market have stressed the rigidities brought about by labour market regulations and institutions (Angel-Urdinola and Kuddo, 2010).
While most of these explanations have some degree of validity, I argue that the defining features of Arab labour markets are attributable in large part to the specific nature of the region’s political economy, and, in particular, to the legacy of the so-called ‘authoritarian bargain’ social contracts that have characterised state–society relations in the post-colonial era (Desai et al., 2009; Amin et al., 2012). These social contracts, which are supported by the rentier nature of many Arab regimes, were based, in part, on the extensive use of public sector employment as a tool of political appeasement, thereby distorting the essential role of labour markets in the production and allocation of human capital. I argue that the demand-side distortions in the deployment of human capital brought about by politically driven public sector hiring have resulted, over time, in even more durable distortions in the supply of human capital, thus causing the observed skill mismatch in the labour market.
The first and most obvious consequence of using public sector employment to bribe politically sensitive groups into political quiescence is an oversized public sector and a strong preference for public sector work among new entrants. This results in high numbers of educated youth remaining unemployed while queuing for public sector employment, followed by the trapping of much of this human capital into unproductive public sector jobs. Facing barriers to employment in the private sector, educated women are typically even more concentrated than their male counterparts in the public sector, and thus more vulnerable to a curtailment of public sector hiring. They thus tend to remain unemployed longer and often withdraw from the labour force rather than take jobs in the informal economy that could jeopardise their marriageability.
The segmented labour market structure that results from the need to appease politically sensitive groups, in turn acts to shape in important ways the region’s political economy. The fact that the vast majority of citizens in the Gulf monarchies, and the bulk of the middle class elsewhere, rely on the public sector for employment tends to foreclose the sort of class-based politics and class compromises that typically serve as the underpinning of capitalist democracies (Herb, 2009). These influential groups will tend to have little stake in the vitality of the private sector and, in turn, the private sector sees no reason to give in to demands for higher wages and better working conditions. This dynamic is also reflected in the anaemic role of organised labour in most countries of the region. Trade unions, if they exist at all, almost exclusively represent public sector workers and therefore see their role as protecting the interests of these insiders rather than working to improve wages and working conditions in the economy as whole.

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Defining features of Arab labour markets

Although Arab economies vary greatly in terms of income level, hydrocarbon wealth and degree of labour abundance or scarcity, their labour markets share certain common features. Perhaps the best-known feature of Arab labour markets is the high rate of youth unemployment and the concentration of this unemployment among educated new entrants, especially female new entrants (Chaaban, 2010; Assaad, 2014). As shown in Figure 1, youth unemployment rates in the Middle East and North Africa, as reported by the ILO, were by far the highest among all regions of the developing world, and this holds for both male and female youth. These two regions also have by far the highest ratio of female to male youth unemployment rates. The high youth rates are not simply because these two regions have high unemployment rates in general. The ratios of youth to adult unemployment rates are 3.8 and 3.4 in the Middle East and North Africa, respectively, which are significantly higher than the world average of 2.8, albeit lower than in South Asia and Southeast Asia and the Pacific, which have much lower youth and adult unemployment rates (ILO, 2013, p. 108).
There is substantial evidence that youth unemployment in the Arab world is essentially a phenomenon involving educated new entrants searching for formal jobs, mostly in the public sector. Less educated workers tend to have much lower unemployment rates and tend to be employed primarily in informal jobs. Unemployment rates generally tend to increase with education, with a few exceptions like Palestine, where less educated males have been hard hit by the closure of the Israeli labour market to Palestinian labourers (Chaaban, 2010; Assaad, 2014).
The second most important feature of Arab labour markets is the disproportionate size of the region’s public sectors, which continue to offer better compensation and working conditions than the private sector, leading to highly segmented labour markets. Nowhere is this segmentation as extreme as in the oil-rich Gulf countries, where most nationals are employed in the higher-paying public sector and where the private sector is almost entirely dependent on cheaper expatriate labour. The proportion of nationals employed in the public sector is as high as 92% in the UAE, 87% in Qatar, 86% in Kuwait and 72% in Saudi Arabia (Baldwin-Edwards, 2011). Elsewhere, the public sector share of employment is also very high, reaching 54% in Iraq, 34% in Jordan and 27% in Egypt (World Bank, 2013b).
The third dominant feature of Arab labour markets is the rapid increase in educational attainment, but the generally low quality of the education acquired. Of the 20 countries with the largest increase in average years of schooling from 1980 to 2010, eight were Arab countries (Campante and Chor, 2012). At the same time, of the bottom 20 countries of the 148 countries ranked according to quality of basic education in the Global Competitiveness Report 2013/14, five were Arab countries (Schwab, 2013). Fifty four per cent of students in the Middle East and North Africa (MENA) countries that participated in the Trends in International Science and Mathematical Study (TIMSS) 2007 scored below the ‘low threshold’ on the eighth grade mathematics tests, more than twice the international median of 25% scoring below that threshold (Mullis et al., 2008). (The worldwide average score is set at 500. The low threshold is set at 400.) The average score of eighth graders in both mathematics and science in all 15 Arab countries that participated in TIMSS 2007 was below the world average, and the average score in mathematics was below the low threshold in ten countries. The problem does not appear to be a question of limited resources, since some of the worst performing countries in both mathematics and sciences are among the oil-rich countries of the Gulf (Bouhlila, 2011).
The final distinctive feature of Arab labour markets is the very low and relatively stagnant female labour force participation rate, despite rapid increases in educational attainment among women. Of the 20 countries with the lowest participation rates in 2011, 15 are Arab countries (World Bank, 2014). Despite dramatic increases in women’s educational attainment in most Arab countries, participation rates have remained low. The average female labour force participation rate in the Arab World increased by only three percentage points, from 20% in 1991 to 23% in 2011, compared to a world average of about 50% in 2011. These are the figures reported as the average female labour force participation rates for ages 15+ in the World Development Indicators database as modelled by the ILO (World Bank, 2014). At this rate of increase, the World Bank estimates that it would take the region 150 years to attain the current world average (World Bank, 2013a).
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Common explanations for these defining features

A number of explanations have been advanced to explain one or more of the defining features of Arab labour markets. Some of these explanations have stressed factors that affect the size and composition of labour supply, others have stressed structural features of Arab economies that limit and distort labour demand, and others have emphasised the workings of the labour market itself and the institutions that regulate it. The features that have received the most attention in the literature are the high rates of youth unemployment and the low female participation rates, although there is also considerable discussion of the reasons behind the poor quality of educational human capital in the region.
On the supply side, the severe demographic pressures resulting from the ‘youth bulge’ phenomenon are often cited as an explanation for the labour market insertion difficulties of Arab youth (Assaad and Roudi-Fahimi, 2007; Chabaan, 2010; El-Hamidi and Wahba, 2004; World Bank, 2004). While the effect of the youth bulge on swelling the ranks of new entrants to the labour market in the recent past is undeniable, it now clear that the youth bulge phenomenon will have peaked by 2015 in much of the region and that the share of youth in the population is either already falling or will begin to fall soon in the majority of Arab countries (Assaad and Roudi-Fahimi, 2007). Exceptions include Iraq, West Bank and Gaza, Somalia and Yemen. The ‘youth bulge’ phenomenon is a feature that the region shares with other developing regions, such as South Asia and Sub-Saharan Africa, but it has had very different labour market manifestations in these regions, which generally do not suffer from high levels of youth unemployment (Assaad and Levison, 2013). In fact, the experience of East Asia with the youth bulge showed that, as child dependency ratios decline as a result of a fall in fertility, the increasing proportion of youth of working age in the population can potentially generate a demographic dividend if the additional human resources can be put to productive use (Bloom and Williamson, 1998).
Another supply-side explanation for high levels of youth unemployment is the mismatch between the output of the education system and the needs of the labour market, leading to the low employability of graduates (World Bank, 2013a). The mismatch is generally attributed to rigidities and inefficiencies within education systems that leave them unable to respond flexibly to signals from the labour market (Galal, 2002; Muysken and Nour, 2006; Salehi-Isfahani, 2012; World Bank, 2013a). Educations systems have traditionally been oriented toward the production of credentials suited for employment in the public sector rather than the skills demanded in an increasingly market-led economy, in what has been termed the ‘credentialist equilibrium’ (Salehi-Isfahani, 2012).
The supply-side constraint on female labour supply resulting from conservative gender norms is perhaps the most common explanation brought up in the literature for the unusually low rates of female labour force participation in the Arab world (Sidani, 2005; Spierings et al., 2010). Some scholars blame women’s limited participation in the public sphere directly on ‘Islamic culture’ (Clark et al., 1991; Inglehart and Norris, 2003), but such a position does not account for the wide variation in participation observed across the Islamic world. Others have attributed low female participation rates to social structures that emphasise women’s modesty and reputational safety, and the primacy of the family and the domestic sphere in women’s lives – what has been referred to as the ‘gender system’ (Miles, 2002) or the ‘traditional gender paradigm’ (World Bank, 2004; see also Youssef, 1971, for an early elaboration of this perspective). Some authors blame the perpetuation of these patriarchal family structures and gender norms on the role of oil and oil-related revenues, which typically flow into male hands and allow them to perpetuate the traditional male breadwinner/female homemaker model (Karshenas and Moghadam, 2001; Moghadam, 2004a; Ross, 2008). Yet others have explained the perpetuation of patriarchal family structures through the emergence of ‘neopatriarchal’ state institutions that resulted from the interaction between modernity and patriarchy in a context of dependent capitalism and state dominance, fuelled by oil-related revenues (Sharabi, 1988; Moghadam, 2004b; Haghighat, 2005; Olmsted, 2005; Charrad, 2009). Given the very high rates of unemployment among young Arab women and the large wage penalties they incur in the private sector, a pure supply constraint argument is not tenable, at least for unmarried women. However, it could very well be that gender norms shape the kind of employment that is deemed socially acceptable for women, because of real or perceived risk of harassment or unrequited contact with men. This would lead to overcrowding of female labour into the few segments of employment that are deemed acceptable for women, such as health, education and the bureaucracy, leading to queuing for these jobs and a drop in wages in these feminised jobs (Assaad and El-Hamidi, 2009; Assaad et al., 2014).
The role of oil and oil-related revenues, such as remittances, is also invoked to explain limited demand for female labour in Arab economies. One of the ways in which oil restricts demand for women’s labour is through the ‘Dutch Disease’ phenomenon, whereby oil revenues appreciate a country’s real exchange rate and thus alter the structure of the economy away from non-oil traded sectors, such as agriculture and manufacturing, and toward non-traded sectors, such as construction and services (Corden and Neary, 1982). Since demand for women’s labour tends to be more concentrated in these traded sectors, the Dutch Disease ends up reducing demand for female labour (Assaad, 2006; Ross, 2008). Ross (2008) makes the additional argument that oil resources reinforce neopatriarchal states. Ross’s claims have generated a heated debate in the literature by proponents of the cultural values argument (Norris, 2009; Groh and Rothschild, 2012) and the social and kinship structures argument (Charrad, 2009).
Demand-side arguments have also been invoked to explain the inadequacy of job creation in the formal private sectors of Arab economies and the resultant high youth unemployment rates. These arguments range from the effects of structural distortions and macroeconomic instability brought about by high levels of dependence on mineral resources (World Bank, 2013a), to the effects of misguided liberalisation and structural adjustment policies (El-Hamidi and Wahba, 2005; Chaaban, 2010; ILO/UNDP, 2012), to slow-growing and uncompetitive private sectors characterised by cronyism, rent-seeking and insider privilege (World Bank, 2013a; Amin et al., 2012; Malik and Awadallah, 2013; Diwan et al., 2014). In effect these authors argue that Arab economies have simply lacked the necessary dynamism to create sufficient employment for the large and growing number of new entrants seeking employment. This lack of dynamism has been manifested in low rates of firm entry and exit as well as in low rates of growth for incumbent firms (World Bank, 2013a). Because of regulatory barriers to growth in the firm space, private firms tend to be sub-optimally small and tend to stay that way. A number of reasons have been advanced for this lack of dynamism, but the most important of these has been the crony nature of capitalism in these countries, which determines the ability to make deals to avoid onerous regulations, privileged access to credit, and preferential access to government contracts and services (World Bank, 2013a; Malik and Awadallah, 2013; Diwan et al., 2014). In cases where employment creation has been adequate, as in Jordan and many of the Gulf countries, powerful private sector lobbies have ensured that access to cheap foreign labour was plentiful, so that most of the new jobs have gone to expatriate workers willing to work at much lower levels of compensation than nationals with similar skill levels.
A final set of explanations has focused on the functioning of the labour markets themselves and the nature of the institutions that govern them. A recent review of labour regulations in MENA carried out by the World Bank concluded that ‘labour regulations, among other factors, introduces restrictions to employability in MENA’ (Angel-Urdinola and Kuddo, 2010). The assessment is based on employer responses in the World Bank Investment Climate Assessment (ICA) surveys, where firms in Egypt, Lebanon, Oman and Syria perceived labour regulations to be a major constraint on expanding hiring. The assessment also concludes that although hiring regulations are in line with international standards, firing regulations in non-GCC countries are quite strict compared to international benchmarks. The cost of realising terminations due to redundancy include the need to pursue complex administrative procedures, stipulations relating to reassigning and retraining workers, notice requirements, severance pay and other penalties (ibid.). A series of simulations based on Computable General Equilibrium models have concluded that reductions in payroll taxation on unskilled labour is a powerful instrument in promoting long-term unskilled employment (Agénor et al., 2007).
However, given the high levels of employment informality, even among formal firms, it is not clear that labour regulations are in fact a constraint on overall employment or simply on the degree of formalisation. Angel-Urdinola and Kuddo (2010) do in fact concede that enforcement of labour regulations remains weak in most countries and that compliance with firing regulations is limited outside the public sector. Achieving flexibility by not enforcing labour regulations is not optimal, as it leads to uncertainty, high degrees of informality and segmentation of the labour market between insiders (those with protected jobs) and outsiders (those on fixed-term contracts or hired informally) (ibid.). Nevertheless, as I argue below, the greatest distortion introduced by government in the operation of labour markets in Arab countries is most likely due to their role as employer rather than as regulator. By offering conditions of employment that significantly exceed what is available in the private sector and by being a significant employer, the government segments the labour market, encourages queuing for public sector jobs, and raises the ‘reservation working conditions’ of new labour market entrants. Because public sector wages, at least for men, are often comparable to those in the private sector, public wage setting itself is not the source of segmentation, but rather the other employment conditions associated with public jobs, such as job security, level of effort required and other employment benefits. These generally far exceed those offered in much of the private sector, leading to raised expectations about minimum working conditions among job seekers, a notion that could be termed ‘reservation working conditions’ (Dougherty, 2014).
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The role of politically driven public sector hiring

While I do not discount the validity of most of the explanations outlined above, I argue that a number of the defining features of Arab labour markets are ultimately attributable to the specific nature of the region’s political economy and, in particular, to the dominant, albeit eroded, social contract that has defined this political economy in the post-colonial era. Termed the ‘authoritarian bargain’ the basic tenets of the dominant social contract are that citizens are to accept political exclusion and disenfranchisement in exchange for employment in the public sector, free education, subsidised housing and health care, food subsidies and other benefits proffered by mostly rentier states (Desai et al., 2009). The most important of these benefits is an implicit promise of employment in the public sector for politically significant groups at relatively high wages, generous non-wage benefits and lifetime job security guarantees (Amin et al., 2012). These politically significant groups include secondary school and university graduates in countries such as Algeria, Egypt and Tunisia, specific sects, tribes and clans that are critical to the political survival of the regime in countries such as Iraq, Jordan, Syria and Yemen, and virtually the entire citizenry in the oil-rich Gulf monarchies, whose private economies rely almost entirely on cheap expatriate labour.
Oil revenues and other sources of rent, such as foreign aid flowing to the respective regimes, were critical in financing these authoritarian bargains and the politically driven public sector hiring that accompanies them (Ali and Elbadawi, 2012). With the decline in oil prices and other sources of rent in the mid-1980s, fiscal pressures forced many of the region’s regimes to move toward a more market-oriented model, but this did not necessarily signify a wholesale renegotiation of the authoritarian bargain. Many of the regimes simply resorted to an erosion of the regime’s side of the bargain by limiting their provision of subsidised public services and curtailing their public sector hiring, while making sure to protect the entitlements of incumbents (Amin et al., 2012). This resulted in a system increasingly characterised by segmentation and an insider–outsider structure, whereby those who had already obtained an advantage, such as lifetime public sector employment, got to keep it, while eligible newcomers find it increasingly difficult to obtain the same. In time, the burden of adjustment was accumulating on the backs of an increasingly restless younger generation. With the recovery of oil prices in the 2000s, many oil-rich regimes, such as the Gulf monarchies and Algeria, revived the authoritarian bargain and resumed wholesale public sector hiring.
The liberalisation episodes were undoubtedly accompanied by a reduction of the role of the state in the economy in many instances, but rather than creating open, competitive market systems, partial reforms gave rise to the emergence of a crony capitalist class that could capitalise on their close relations with authoritarian rulers to engage in rent-seeking activities and concentrate economic gains into a few hands (Amin et al., 2012, Malik and Awadallah, 2013). As a result, the formal private sectors in most Arab economies are weak and dependent, contributing little to employment growth. Sheltered from competitive pressures and faced with poor labour market information they can afford to indulge in preferential hiring practices that rely on social connections and personal networks rather than meritocratic principles (World Bank, 2013a).
The combined effect of politically driven hiring practices in the public sector and non-meritocratic hiring in uncompetitive formal private sectors was the perpetuation of a highly dualistic labour market structure, characterised by a group of insiders with access to good jobs and a growing group of outsiders relegated to low-quality employment in the informal economy (for men) or to non-participation (for women). Using a simple Harris–Todaro model, it can be easily shown that when labour markets are dualistic there is an incentive for those with a positive probability to obtain jobs in the favoured sector to queue for such jobs by remaining unemployed (Assaad, 2014). This could potentially explain the high rates of unemployment among those with the threshold level of education to be eligible for government employment (typically secondary education or above), and the low level of unemployment for the lesser educated, who simply have no chance to obtain formal work and therefore do not search for it.
The significant advantages that come along with a public sector job and the closed nature of formal private employment has fed a continued strong preference for public sector employment on the part of job seekers, despite the declining probability of obtaining such employment in many contexts. This preference for public employment, in turn, drives human capital investments toward credentials that are deemed necessary to qualify for a public sector job, irrespective of the quality of education these credentials represent or the skills they impart (the so-called credentialist equilibrium). Thus, the demand-side distortion brought about by excessive public sector hiring at higher than market-clearing conditions of employment, when applied long enough, ends up introducing distortions in the supply side of human capital. This dynamic would explain the observed combination in the Arab world of rapid increases in educational attainment, poor educational quality and the skills mismatch.
While public sector hiring may not explain the low rates of female participation in the Arab world, it does explain the relative stagnation in these rates despite rapidly closing gender gaps in education and a traditionally strong gradient between educational attainment and labour force participation for women. This strong gradient between educational attainment and participation for women can be easily shown to result from the availability of government employment for educated women (Assaad, 2014). With the slowdown in government hiring in recent years in countries such as Egypt, Jordan and Tunisia, educated women are increasingly faced with the option of either joining the informal economy or staying at home, with many opting to do the latter. Even unmarried women, who may not face a daunting domestic work burden, may find that jobs in the informal economy do not meet their reservation working conditions and may therefore prefer to remain unemployed. Such jobs may pose reputational risks that could potentially threaten a woman’s marriageability. After marriage, women generally find informal wage work even less desirable, as it could potentially conflict with their significantly expanded domestic burdens (Hendy, 2010; Assaad and Hendy, 2013).
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I have argued that Arab labour markets are characterised by certain well-established features, such as high unemployment, especially among educated new entrants, oversized public sector employment, rapid rates of educational attainment, but with low educational quality, and low and stagnant female labour force participation rates. I have reviewed a large number of explanations that have been brought forth in the literature to explain these common features. These include supply-side explanations, such as the youth bulge, rigid education systems and patriarchal gender norms and institutions; demand-side explanations, such as the distorting effects of resource-based rents and non-competitive crony-based private sectors; and ones that attribute these features to regulatory and institutional features of Arab labour markets. While accepting many of these explanations as valid, I argued that many of the characteristic features of Arab labour markets are consequences of the use of public sector employment as a tool of political appeasement in the context of the dominant authoritarian bargain social contract. In making this argument, I do not discount the role of natural resource rents, but simply propose a different mechanism through which they might operate. The mechanisms highlighted in the literature include the role of natural resource rents in reducing labour supply, either by supporting private patriarchal norms or by allowing the perpetuation of neopatriarchal state institutions and their role in distorting labour demand through the Dutch Disease phenomenon. Here I am emphasising, instead, their role in financing the fiscal costs of authoritarian bargains for what are essentially rentier states. I am also highlighting the uncompetitive and rent-seeking nature of the region’s private sectors, which can also be linked to natural resource rents. These weak and dependent private sectors have been unable to exhibit the necessary dynamism to assume the mantle of job creation from public sectors increasingly unable to fulfil their part of the bargain due to rising fiscal pressures. These specific aspects of the region’s political economy contribute directly to a highly segmented labour market structure that not only misallocates human capital in unproductive government jobs and produces unemployment queues, but also encourages investment in the wrong kind of human capital.
While I argued that the segmented nature of Arab labour markets is a product of specific aspects of the region’s political economy, namely its reliance on authoritarian bargains funded by natural resource rents, it is also important to note the political economy consequences of this segmentation. As Michael Herb (2009) has argued, the almost exclusive reliance of Gulf citizens on the public sector for employment, and the similarly universal reliance of private sector employers on cheap foreign workers with no political rights, creates a peculiar kind of class conflict in which the basic compromises that underlie class politics in democratic societies can simply be avoided. Rather than fight for their share in capitalist profits, citizens in these countries have an incentive to mobilise to obtain a higher share of the oil rent in the form of higher government salaries, subsidised services and other forms of public welfare. Private employers, among whom ruling families are usually well represented, also have an incentive to engage in rent-seeking, but also to ensure that they retain access to a steady stream of cheap foreign workers with whom there is no need to strike any sort of social bargain. A similar argument can be extended to countries where public sector jobs have traditionally been used to appease the middle class rather than the entire citizenry. These middle class interests would not see their future welfare as tied to a dynamic private sector economy, but rather to a continued expansion of the state sector and to the jobs it engenders. With their membership almost exclusively made up of public sector workers, trade unions in these countries do not perceive their role as negotiating on behalf of the entire working class, but rather as defenders of the interests and entitlements of public sector insiders. Thus, the segmented nature of Arab labour markets tends to foreclose avenues for a class-based politics that is supported by a diversified and dynamic private economy.
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How to cite this article

Assaad, Ragui. "labour markets in the Arab world." The New Palgrave Dictionary of Economics. Online Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2014. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 03 March 2015 <> doi:10.1057/9780230226203.3933

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