misallocation. Full convertibility of the dirham is prevented by capital controls still in place for domestic agents for the purchase of foreign exchange, which impede the development of national firms. Furthermore, the fixed exchange rate regime encourages, in the case of an overvaluation, economic agents to invest in non-export oriented firms, generating negative market distortions on exportoriented firms (which are often more productive than the average), and contributing to the “anti-export bias” (World Bank, 2006).

On the labor front, more than half of the working age Moroccans (15-64 years of age) does not participate in the economic activity of the country, which makes it one of the countries with the lowest employment rates in the MENA region, and across the globe. As a result, in 2016, some 2.7 million youth aged 15-29 (or almost one in three young people) were neither in education, employment or training (NEET). Moreover, most (90 percent) of the private jobs are in the informal sector. Social mobility and the ability to move from a less productive job to a more productive job are limited and take time, particularly for young people and women.

Morocco has adopted labor legislation that is based on the conventions and recommendations of the International Labor Organization. The negotiation, adoption and implementation of this legislation on the basis of international conventions have, however, resulted in cumbersome and restrictive labor market regulations. According to the 2017 Doing Business indicator “Hiring and firing”, the Moroccan labor market is particularly heavily regulated. Moroccan law prohibits fixed-term contracts for permanent tasks and limits their duration to 12 months, after which they cannot be renewed. Although the Moroccan law allows a certain amount of flexibility in terms of the hours worked, overtime and premiums for night work are expensive compared to international practices. Moroccan legislation on leave (annual leave, statutory leave, maternity/paternity leave) is more generous than that in other emerging market countries that are Morocco’s competitors. The labor regulations governing private sector terminations are restrictive as only businesses with more than 10 employees may terminate jobs for economic, technical or structural reasons. Reducing staff for economic reasons is subject to a prior agreement with the regional authorities. As a result, the number of employees terminated by medium-sized businesses is very low and almost a quarter of the businesses contacted for the Investment Climate Assessment (ICA) survey in 2008 indicated that they would have reduced their staff if redundancy conditions were less restrictive.

The minimum wage in Morocco is high compared with the average national income or the average productivity of workers. In 2015, the minimum wage in urban areas was equal to approximately 100 percent of the national per capita income or more than 50 percent of the average wage in the formal private sector, rates that were extremely high not just in the region but also in comparison with international standards, including the OECD countries. Such high legal minimum wages deter the creation of jobs in the formal sector, particularly for young jobseekers with limited qualifications. Overall, the high cost of labor in the formal sector contributes to a lower demand for employees on the part of employers and 7