How much was education paid in Arab labor markets in 2011?

This blog is written by Dr. Zafiris Tzannatos, Senior Consultant for Strategy and Policy

Not much! An extra year of education increases the wage of an otherwise average worker across the globe by 10 percent but in the Arab countries by only 5 percent.

This difference has been known for the last couple of decades but has been based on estimates for only a few Arab countries that have micro Dr.Tzannatosdata, typically Labor Force Surveys. These countries usually included Egypt, Jordan, Morocco, Tunisia and Yemen and, spasmodically, Djibouti, Iraq, Lebanon, Mauritania and Palestine.   But what about the other Arab countries?   And rather than comparing countries at different points in time (for example, Djibouti in 1996 vis-à-vis Palestine in 2008), where did Arab countries stood at the time of the recent Uprisings?

We estimate the impact of education on wages across all 22 Arab countries based on income information included in Gallup surveys. This impact, known as “rate of return to education”, was estimated effectively for 2010-11. Though it is common to refer to the average (male and female) rate of return to education in a particular country, we consider this to produce a freak statistic and prefer to report it separately for women and men. First, the valuation of women’s work is (often strikingly) different than that of men’s – and not only in the Arab world. Second, women’s share in total employment varies significantly across different countries. In other words, what is the average price of 100 oranges and 50 apples?

Our results suggest that the rate to return to education in the region is even lower than previous studies reported, and more so for women. Our regional average for men comes to 4.8 percent (compared to the previous 5.1 percent) and for women it is 5.3 percent (compared to the previous estimate of 8 percent – a difference of nearly one-third). These figures compare with global averages of 9.6 percent for men and 11.7 for women as reported by the World Bank. Unlike previous estimates, our data suggest that practically in no Arab country the rate of return exceeds 10 percent. The lowest returns are found in the GCC countries, notable Kuwait, Saudi and UAE where nationalization policies are followed with relatively more rigor than in their neighboring countries. Relatively higher returns are reported in North Africa with Morocco being at the top.

Our lower estimates compared to those from earlier studies, are not that unexpected. For example, the rates of return have a tendency to decline over time (as more people become educated), and we cover a very recent period compared to previous estimates from the 1990s and early 2000s. In addition, the inclusion of the GCC economies, which have low rates of return to education, pulls down the average.

Our results provide some food for thought. First, regional averages may mean little and each Arab country needs to be examined on its own right taking into account its specific characteristics (from its developmental stage and openness of the economy to the structure of production, labor regulations, the role of government employment and the position of women in the economy and public life).

Second, we need to understand better the impact of low learning outcomes of the education system on wages: Does the well documented underperformance of Arab students in international comparative exams (PISA, PIRLS and TIMSS) hold back productivity gains or is the economy locked at a low wage equilibrium because of lack of competition in the markets and weak accountability of government? In other words, is the low quality of education or lack of demand for skills that depresses the returns to education?

Though our work is still research in progress and the results are still tentative, we feel the problem lies more on the labor demand side: the educated Arab youth has higher unemployment rates than the less educated and, when employed the wage premium (return to education) is low. And many Arab states have extremely high rates of skilled emigration suggesting they are employable but not in their own countries. To an economist, all this is compatible with excess labor supply – or, in our case, overeducated youth for the conditions of production prevailing in their own countries.

Watch our interview with Dr. Zafiris Tzannatos

Dr. Zafiris Tzannatos’s paper co-authored with Dr. Ishac Diwan “Returns to Education and Civil Servants Pay” was presented at the ERF’s workshop “The Pulse of the Arab Streets” in Paris, October 2014.

One thought on “How much was education paid in Arab labor markets in 2011?

  1. Dear Dr. Zafiris Tzannatos,
    I find your blog very interesting and thought provoking. It is often argued in Economic courses that human capital, or education, is one of the most important building blocks of a prosperous economy. Your research indicates that this may not always be the case, and that high rates of education may not be enough to grow an economy. You offer two explanations for the low education premium in the Arab world, namely the low quality of education and the under-developed production level of the economy. If we take as an example Egypt and Dubai – two very different economies – and if we assume the level of education is satisfactory (ruling out the first explanation), we are left with only one explanation for the lack of education premium (the fact that the economies are under-developed). Taking into account the differences between the two economies, specifically the differences in production level, are there any additional models or explanations that account for these differences?

    Thanks,
    Leeor

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