In spite of the Government'scommitment to social development, with employment resting atthe heart of Tunisia's Tenth Development Plan, therecent economic slowdown however, hampers expectations onmeeting the employment goals of the Plan. Output growthwould have to increase significantly in light of unchangedemployment elasticity, to create enough jobs to absorb theincreasing labor force. However, the Tunisian private sectorhas not played a dynamic role in terms of job creation:small and medium scale enterprises (SMEs), are mainlyconcentrated in the traditional manufacturing sectors, withlow value-added; enterprise restructuring has not occurred,mainly due to an economic growth that has not led to enoughreallocation of resources, despite the unexploitedproductivity gains in respect to reallocation of labor tohigh productivity sector; and, the high unemployment ratesamong educated youth, reflect gaps between skills in demandby employers, and skills offered by job seekers. Within thiscontext, this report proposes broad policy options to helpimprove the country's employment strategy over themedium term. Several reforms - liberalization of the productmarkets, improvement of investment climate, and reforms ineducation and vocational training - have been implemented toimprove labor market performance. The overall employmentstrategy needs to be based on the fundamentals of soundeconomic policies that promote competitive product markets,and private-sector-led growth, particularly in serviceindustries. This will require an investment climate, and afavorable business environment, particularly for SMEdevelopment, to promote both employment and productivitygrowth in high value-added sectors. Notwithstanding,investment policies should provide a better balance betweenutilization of capital and labor. And, regardless of itsengagement to investments in human resources, Tunisia shouldensure that ongoing reforms in education, and vocationaltraining focus on market needs. Finally, labor marketregulations and institutions need to be flexible, so as toadjust to changes in business conditions. This approachrequires a more effective social protection system, throughefficient active labor market programs and, perhaps, throughincome support for laid-off workers.