It seems the best investment young Arabs can make depends on whether they plan to work locally or emigrate. If they eye a job abroad, more and better education would open doors for them. If they stay home, investing in education may have lower payoff than investing in connections (wasta).
This tongue-in-cheek proposition may be valid in strict economic terms. Education has many nonpecuniary benefits for individuals and families and many social benefits for countries. Its importance for public policy cannot be overstated. However, more and better education may not always solve the problem of unemployment and may accelerate skilled emigration and brain drain.
To put this in perspective, one needs to examine how much an educated person is paid compared to a less-educated one. For example, the wage of a secondary school graduate should be higher than that of a person with only primary education, and the salary of a university graduate should be higher than that of a diploma holder.
Economists examine the wage premium that the labour market pays to educated workers through the concept and measurement of “the rate of return to education”. In other words, investments in human capital are likened to other forms of investments that result in future rewards. The relevant question is framed as “how much would pay increase if one had an additional year of education?”
From global analyses undertaken by the World Bank, an extra year of education increases pay on average by about 10 per cent globally. The corresponding figure in the Arab region is only 5 per cent. The lowest returns are found in the GCC countries, notably Kuwait, Saudi Arabia and the UAE. Higher returns are reported in North Africa.
A commonly cited explanation for these low returns to investments in education is low quality of education. Arab students underperform in international comparative exams in sciences, maths and literacy compared to students in other regions. Still, the critical question is: if Arab students had more and better education, would their additional qualifications be in demand and at higher wages?
Another common explanation is skills mismatch – that is, the misalignment of the school curricula with the needs of the labour market. This is a relevant explanation when wages are not determined by the market but are, for example, affected by public-sector employment or regulations. This is so because when workers can perform only half the tasks required by an employer, they will be paid only half the wage of the ideal worker. This is like the car industry, where price differences reflect differences in the characteristics and usefulness of different marques.
However, two relatively neglected explanations are the lack of competitiveness in the private sector and emigration. With regard to competitiveness, much is said about the segmentation between employment in the public sector and that in the private sector, the former offering higher pay (and other advantages such as better working conditions and greater job security). Most Arab countries, with the exception of some GCC countries, have taken measures to reduce this differential.
What is more important today is how competitive the private sector is. To put it bluntly, Arab markets tend to be less competitive and less globalised than those in other world regions. Private firms often invest more in gaining privileges than in new technology. Under such clubby and crony arrangements, productivity, and accordingly pay for higher skills, remains low.
With regard to migration, skilled emigration rates in the Arab region are among the highest in the world (with the exception of GCC countries). Arab countries that report the most serious skills shortages are precisely those that have the relatively best education outcomes – Lebanon, Tunisia and Jordan being the leading ones. Even in these countries there is no demand for skills, as firms are not prepared to pay more to those who have more and better education and are therefore more productive.
The low rates of return to education can be the result of labour supply (quality and relevance of education and willingness of the educated to work outside the public sector) or labour demand factors (competitive markets striving for higher productivity that requires more education). What is sure is that both are relevant, and the question is which of the two is more important than the other. The answer can only be based on empirical investigation.
For now, given that the educated Arab youth have higher unemployment rates than the less educated, and when they are employed the wage premium (return to education) is low and many are able to emigrate to more technologically advanced economies, one is inclined to conclude that the Arab youth are overeducated compared to what the labour market demands.
All in all, the problem is probably less with the education system and the job seekers and more with economic policies and firms.
Professor Zafiris Tzannatos is an economist living in Beirut. He is a former adviser to many international organisations and regional governments, as well as the chair of the economics department at the American University of Beirut