By : Ibrahim Rihani
Jordan Daily – In my previous piece on Jordan’s fiscal- monetary trap: Stability without solvency, I argued that we have built a macroeconomic system designed to import a low-inflation environment, protect the dinar and keep the banking system healthy, even when the fiscal base is strained. This follow-up applies the same logic to the labour market: when unemployment stays high for years, it stops being a seasonal issue or a simple “skills mismatch”. It is a necessary consequence of the macroeconomic dynamics that come to shape the Jordanian economy, where the labour market has reached equilibrium at that level of unemployment.
Jordan’s unemployment debate typically revolves around the following: bad education, weak work culture, and not enough entrepreneurship. Some of that matters at the margin. But it cannot explain persistence. Jordan has spent years with unemployment around the low-20s. A country does not stay stuck there because an entire generation collectively decided not to work, nor is it the case that firms collectively decided that the quality of labour is inadequate. Chronic joblessness occurs when the economy fails to generate enough expanding firms and investable projects.
Starting with the basic transmission mechanism: firms hire when they expect sales. They invest when they expect demand tomorrow. If demand is chronically weak, the economy can settle into a low-investment, low-employment equilibrium: businesses don’t expand, so jobs aren’t created; incomes stay low; spending stays cautious; and demand stays weak. The chain is simple: demand → sales → profits → investment → jobs.
This is why training programmes, by themselves, are not an unemployment strategy. Training improves the supply and quality of labour; it does not create demand for labour. If firms do not see customers and cannot finance expansion on reasonable terms, more certificates won’t produce more jobs. Jordan’s Economic Modernisation Vision, for example, is a step in the right direction precisely because it recognises this constraint, it focuses on expanding productive sectors, crowding in private investment and creating markets firms can actually sell into.
In a typical economy, monetary policy is the first stabiliser. When demand weakens and unemployment rises, the central bank cuts interest rates. Cheaper credit encourages borrowing and investment, households spend a little more, and hiring recovers. That monetary transmission channel is real.
Jordan, however, is not a typical economy, and the Central Bank of Jordan is not a typical central bank: its uninterrupted, credible and successful defence of the exchange-rate peg constrains its room for flexible monetary action. A credible peg is not just an exchange-rate policy; it is almost a policy constitution. It limits how far domestic interest rates and liquidity conditions can diverge from the United States, because sustained divergence invites capital outflows, pressure on reserves, and speculation against the currency.
That is one of the core constraints: to keep the peg credible, Jordan must broadly track the global monetary stance and maintain a risk premium that keeps dinar assets attractive. Under a peg, high unemployment (or inflation) is not enough to justify interest rate easing; defending the exchange rate comes first. So whenever global rates are high, Jordan is pulled into tighter financial conditions, even if the domestic economy is sluggish.
Now connect this to jobs. Unemployment is, in practice, a story about investment. Jobs are created when firms expand capacity, open new lines, and take risks. Those decisions depend on two things: (1) expected demand growth and (2) the cost and availability of finance. The peg regime can affect both.
First, by importing the Fed’s monetary stance, it tends to keep the cost of capital high during global tightening cycles. When the safe stance for defending the dinar translates into expensive borrowing for firms, the predictable result is weaker private investment, fewer expansions, and therefore fewer jobs.
Second, the peg systematically tilts expectations towards caution. Firms see that external shocks, Fed tightening, commodity swings, and geopolitical stress are routinely met with tighter domestic conditions to protect the dinar; they plan defensively. Expansion is delayed “just in case”; hiring is kept lean and low; and a wait-and-see culture becomes rational. Multiply that caution across thousands of firms, and the economy generates too few new jobs even in stable years.
The external account reinforces this spiral through a balance-of-payments constraint that operates mechanically, not episodically. Jordan’s production structure is highly import-intensive: incremental growth in domestic demand translates quickly into higher imports of fuel, capital goods, intermediate inputs, and consumer durables, most of which must be settled in foreign currency.
What determines the extent to which domestic consumers prefer (or are obliged to) import goods rather than go to domestic markets is governed by the concept of the elasticity of substitution between domestic and foreign goods. Under a fixed exchange-rate regime, this means that any acceleration in domestic activity immediately increases domestic demand for dollars. If the pace of import growth exceeds the economy’s capacity to generate foreign exchange through exports, remittances, tourism receipts, official transfers, or external borrowing, the gap must be financed through reserve depletion. Persistent reserve losses, in turn, undermine confidence in the peg and raise the risk of capital outflows. To prevent this dynamic, domestic demand must be restrained beforehand. As a result, adjustment occurs not through relative prices or exchange-rate depreciation, but through tighter financial conditions and slower growth. In effect, the peg converts external imbalances into an internal constraint on demand, investment, and ultimately employment.
Most countries address this ceiling by allowing the exchange rate to fluctuate. Depreciation makes imports more expensive and exports more competitive, gradually correcting the imbalance. Jordan can not use that adjustment channel. So when external deficits widen, the adjustment happens through the real economy and domestic demand instead: tighter credit, higher rates, or fiscal restraint, anything that cools spending and therefore reduces imports. The implication is that if the exchange rate won’t adjust, something else must, by definition, to restore equilibrium in the economy, and in Jordan, employment becomes one of the shock absorbers.
In theory, when demand is weak, the government can stimulate: spend more, invest, or cut taxes. In Jordan, fiscal policy is constrained by debt and financing dependence. High debt creates a chronic bias toward consolidation, raising revenue, containing spending, and postponing public investment. However, fiscal consolidation, too, has an employment cost. Freezing public hiring removes one of the few mass employers. Delaying infrastructure hits contractors and engineers. Higher taxes squeeze household spending and small business margins, weakening demand again.
Debt pressures also spill into the credit market. When the treasury borrows heavily at home, banks face an attractive option: government paper that is liquid, high-yielding, and treated as low-risk. Over time, that crowds out private credit. Every dinar absorbed by government paper/debt is a dinar not lent to a private firm that actually hires. The financial system gradually tilts toward financing or rolling over the state’s existing obligations rather than funding new private ventures, the very ventures that create net new jobs. This whole fiscal-monetary interaction story is explored in much more detail in my article titled “Jordan’s fiscal-monetary trap: Stability without solvency” for anyone interested to learn more about the issue.
Once you combine these constraints, peg-driven monetary discipline, an external ceiling, and fiscally crowded credit, unemployment becomes a natural consequence of macroeconomic dynamics. The private sector generates too few formal jobs for a young, educated population. People adapt rationally. Many wait, not because they are lazy, but because the distribution of “good jobs” is thin. The public sector still sets the benchmark for stability and benefits, raising reservation wages and creating a queue for the limited good jobs that do exist.
Weak investment means slow capital accumulation and limited productivity growth. Low productivity limits wage growth. Stagnant wages keep demand fragile. Fragile demand discourages investment. Repeat that loop long enough and unemployment stops looking cyclical and starts looking structural, something embedded in the economy.
Jordan’s unemployment problem is not grounded in laziness or a simple “skills mismatch”. Markets are usually quite good at pricing skills and reallocating labour when the macro environment gives firms room to expand. In Jordan, that room is structurally limited due to external factors. In the same way, the peg can deliver price stability while quietly tightening the real economy; the labour market becomes the adjustment margin: weak demand suppresses sales and profits, private investment stays cautious, and job creation remains too low to absorb new entrants. The result is not a temporary slack that disappears with time, but a persistent equilibrium.
That does not mean the macro environment is the whole story. There are other drivers of high unemployment I have not explored here, not because they are irrelevant, but because they sit outside my comparative advantage and deserve more specialised treatment than I can give them in a single article. These include rigidities that raise the cost and risk of hiring, the public–private expectations gap, a weak tradables base, distorted incentives across specific sectors, education-to-work frictions, barriers to female labour-force participation (and related social constraints), and a regulatory environment that can keep firms from scaling.
Each of these matters deserves to be analysed on its own terms. This article is deliberately not framed around solutions. Doing so would be dishonest. Jordan’s unemployment problem is not the result of a single policy failure that can be fixed with a neat reform package, and pretending otherwise only adds noise. Before solutions can even be debated, the problem itself must be understood, its constraints, its transmission mechanisms, and the trade-offs embedded in the current macroeconomic regime.
This piece is intended to begin that process of understanding, not to shortcut it with prescriptions that ignore the reality of how the system actually works.
Ibrahim Rihani studied economics with a focus on monetary and fiscal policy in Jordan and works at the IFC as a part of their investment analyst program. His interests lie in macro-financial policy trade-offs and their implications for growth, debt, and stability.
