**4. The relationship between labor market efficiency and youth unemployment**

Several IMF working papers find that labor market flexibility reduces unemployment [6–8]. Labor market flexibility, in particular hiring and firing policies and hiring costs, was found to reduce over unemployment, youth unemployment and long-term unemployment [6]. It was also found to reduce unemployment in Algeria, a resource-rich, labor-abundant North African country [7]. Flexible labor markets were also found to help fending off financial crises [8].

Does labor market *efficiency*, measured by the pay-productivity link, influence the youth unemployment rate? And what is the nature of the relationship? To answer these two questions, I undertake in this chapter a graphical analysis of this relationship in 124 high-income, upper- and lower-middle income, and low-income

**Figure 1.** *Total youth unemployment rate and performance-pay: Large country sample evidence.*

#### **Figure 2.**

*Total youth unemployment rate and performance-pay in GCC countries.*

#### **Figure 3.**

*Male youth unemployment rate and performance-pay in GCC countries.*

countries as well as in the six high-income GCC countries. **Figure 1** suggests the presence of a negative relationship between the total youth unemployment rate and the pay-productivity link in a large sample of non-GCC countries.15 This relationship still holds if I instead examine the influence of lagged pay-productivity link on the total youth unemployment rate.

**Figures 2**–**4**, which are based on 2007–2017 period averages, also suggest the presence of a negative relationship in GCC countries for the total, male, and female youth unemployment rates.16

<sup>15</sup> Graphical analysis also shows the youth unemployment rate negatively influences the pay-productivity link. Figure is available from the author.

<sup>16</sup> The figures are based on 2007–2017 period averages.

*Youth Unemployment and Productivity-Pay in the GCC Countries DOI: http://dx.doi.org/10.5772/intechopen.99975*

#### **Figure 4.**

*Female youth unemployment rate and performance-pay in GCC countries.*

Labor economics theory explains this relationship in terms of the substitution effect of higher wages on labor supply. Higher wages associated with more productivity encourage workers to increase their work hours. Alternatively, higher wages encourage workers to reduce their leisure hours in response. At the macro level, when youth observe that work effort and productivity are rewarded, they search for jobs and take employment. This in turn reduces the youth unemployment rate.

Therefore, I conjecture that having a strong pay-productivity link in *both* the national and foreign labor segments can reduce the female and consequently the total youth unemployment rate. In explaining the different youth unemployment rates – total, male, and female, I will assume in the next section that the strength of pay-productivity link is equal in both labor market segments.
