We Have Education, Where are the Jobs? Job Creation and Returns to Education in the Arab World Joanna Abdel Ahad and Zafiris Tzannatos 1 March 2016 Introduction In recent years, solutions to the youth unemployment challenge in the Arab region have focused largely on skills training to bridge the skills gap between, on the one hand, jobs seekers and workers and, on the other hand, the demands of private sector employers. While the Arab region needs education and training reforms to bolster learning outcomes for students on the labor supply side, the region’s continuing youth unemployment challenge has to do more with macroeconomic and structural constraints arising from lack of competitiveness and low productivity. These constraints imply that economic growth will not be able fast enough to reduce unemployment, even of the labor force is well qualified. Also employment creation will not be associated with decent, specifically high paying, jobs. 2 While education can enhance employability, jobs are created by firms, which make hiring decisions on the basis of the profits that the sale of their products and services are expected to realize in the market. Profits, in turn, are determined by the costs incurred by the firm. Wages constitute part of these costs, and the employment of young workers depends on their wages and productivity relative to other workers. In this context, youth have both an advantage and disadvantage compared to adults: They are more educated on average than the adult labor force, but they have less experience. In the end, what matters is not the productivity (and education) of young workers on its own, but their relative productivity and wages compared to adult workers. If a young worker were half as productive as an adult worker, he/she would still be employed if his/her wage were less than half of the more productive adult worker. This discussion makes clear that labor market outcomes depend on many things. However, an examination of how education relates to wages can provide some insights on how labor markets operate and thus guide both education and employment policies for the region’s youth. A common approach to examine this link is by estimating the rate of return to education that is usually expressed as a percentage: For example, a rate of 5 percent means that, on average, an additional year of education results in an increase in wages by that percentage compared to someone without that additional year of education. In other words, the rate of return is indicative of the profitability of investing in education as a way to increase future wages. This brief presents estimates for returns to education in the Arab world compared with other regions, uses them to analyze the link between education and job creation for the youth, and concludes with policy implications and recommendations. 1 Joanna Abdel Ahad is a Research Analyst and Zafiris Tzannatos is a Fellow with the Lebanese Center for Policy Studies. 2 ILO/UNDP 2012.