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Saudi Arabia: Selected Issues

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
July 2013
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Labor Market Policies For Addressing Saudi Unemployment1

A young and increasingly well-educated Saudi labor force provides a tremendous opportunity to boost growth and living standards. However, despite rapid economic growth in recent years, Saudi unemployment has remained high, especially among youth and women. Investments in education and labor market reforms are aimed at improving skills and raising private sector employment of Saudi workers. Improving the competitiveness of Saudi workers will require strengthening the quality of education and careful implementation of labor market policies. Additionally, efforts to expand employment opportunities for women can help raise the productive potential of the economy.

A. The Labor Market in Saudi Arabia

1. The Saudi economy— the largest in the MENA region— has been growing at a robust pace, and has been successful in generating jobs. However, most of the jobs go to foreign workers, resulting in high unemployment among the rapidly growing Saudi labor force. The overall unemployment rate is 5.8 percent and has remained broadly stable since end-2009. Among Saudis, unemployment rates have risen from 10.5 percent at end-2009 to 12.1 percent at end-2012, especially for youth and women (Figure 1). Despite total employment growth averaging near 8.5 percent, Saudi employment growth was only 4.6 percent in the years 2010–12. Saudi employment as a percent of total employment has declined since end-2009.

Figure 1.Saudi Arabia: Employment Trends

Sources: CDSI; Manpower Research Bulletin; and IMF staff calculations.

2. There are several key features of the labor market in Saudi Arabia. Saudi workers are better educated on average than non-Saudi workers, and are primarily employed (over 65 percent) in the public sector (Figure 2). Low-skilled non-Saudi workers dominate the private sector—Saudi workers constitute only 20 percent of private sector employment.2 Additionally, female labor force participation (FLFP) has risen from very low levels, but lags behind many other countries. There are four main reasons for the current structure of the labor market:3

Figure 2.Saudi Arabia: Labor Market Segmentation

Sources: Central Department of Statistics and Information; Manpower Research Bulletin (2012); Ministry of Labor; General Organization of Social Insurance; and IMF staff calculations.

1/ Assumes General administration and Education are government services, and Trade and Hospitality are growing at the same rates.

Figure 3.Factors Affecting Female Labor Force Participation In Muslim Majority Emerging Markets

Sources: World Bank; World Development Indicators; and IMF staff calculations.

  • Strong growth in sectors that typically rely on foreign labor. In recent years, growth in Saudi Arabia has been above trend, driven by public spending on large infrastructure projects. Easy access to low-wage low-skilled foreign labor has meant that sectors such as wholesale and retail trade, personal services, transport, and construction have been the main engines of private sector growth. These sectors have not contributed to increased Saudi employment.

  • Private sector wage differentials. For similar education levels, private sector wages for Saudi workers are higher than for non-Saudis.

  • Public sector employment and wage policies. The availability of government employment, with more generous compensation packages, has resulted in a reservation wage particularly for lower-skilled Saudis that is well above the wage of similarly qualified foreign workers in the private sector.4

  • Cultural factors that depress female labor force participation, notwithstanding falling fertility rates and rising education levels. The recent rise in FLFP in Saudi Arabia—from 12 percent in 2006 to 16 percent in 2012—is likely a result of falling fertility rates and rising education levels among women (Figure 3), as well as the announcement of the jobseekers allowance (Hafiz) in 2011. Despite this increase, FLFP in Saudi Arabia remains low in comparison with a group of emerging market countries with majority Muslim populations and OECD countries, and could be a consequence of already high unemployment rates and cultural factors, similar to other GCC countries (Box 1).

Box 1.What Explains Low Female Labor Force Participation in the GCC?1

Across the world, female labor force participation has increased as women have become more educated and have fewer children. This change can in part be explained as the result of labor supply decisions, where women choose how to allocate their time based on an evaluation of the relative costs and benefits, as in Becker’s (1965) time allocation framework. In this framework, women choose between leisure, supplying labor to home production (such as child rearing), and supplying labor to the market and earning a wage (i.e., being part of the labor force). The outcome will then depend on the return to market labor, which will tend to increase with education levels, and the costs and quantity of home production, which will tend to decrease with fewer children.

Observed drivers of female labor force participation (FLFP) in other countries are also at play in the GCC. Based on analysis of detailed data for OECD countries covering 1960–2008, Steinberg and Nakane (2012) estimate the impact on FLFP from a series of explanatory variables. Applying their coefficients to GCC data indicates that increased schooling and the declining number of children per woman explain the bulk of the increase in FLFP seen in the GCC since 1990. The fit of the model is generally fairly good, with comparatively small unexplained residuals for most GCC countries. For Saudi Arabia, however, the actual increase in FLFP has been considerably smaller than predicted.

Explained Change in FLFP, 1990–2010

(Ages 25-54, percentage points)

Sources: ILO; KILM database; and IMF staff estimates.

The model also explains some—but not all—of the gap in FLFP between GCC countries and the OECD mean. This gap currently ranges between 19 percentage points in Qatar and 53 percentage points in Saudi Arabia. The part of the gap that is explained by differences in schooling and the number of children per woman ranges from 14 percentage points in the UAE to 24 percent in Saudi Arabia. In all countries, however, there remains an unexplained residual of the same sign. These results indicate that there are additional factors, such as different cultural norms, that stand behind the GCC’s low FLFP rates and that these factors have remained relevant over time.

Explained Difference between GCC and OECD FLFP, 1990–2010

(Ages 25-54, percentage points)

Sources: ILO; KILM database; and IMF staff estimates.

1 Prepared by Tobias Rasmussen.

Of course, other factors such as differences in skills and preferences between foreign and Saudi workers may also play a role.

B. Labor Market Policies and Their Impact

Education

3. The authorities have made significant investments in higher education to enable productive private sector employment for new Saudi labor force entrants. Large investments in higher education and training (domestically and abroad) are targeted towards improving the human capital and productivity of Saudi labor market entrants. Domestic enrollments in university education have nearly quadrupled between 1995/96 and 2010/11 (Figure 4). Female enrollment in university education has grown as a share of the total, from 47 percent in 1995/96 to 54 percent in 2010/11. Enrollment in technical and vocational training has doubled over the same period, and the authorities are currently providing scholarships to over 100,000 students to study abroad. These initiatives are aimed at promoting a knowledge-based economy with high productivity and private sector wages. Despite these efforts, to-date the Saudi education system lags that of many other countries in terms of the scores students achieve on internationally standardized tests in mathematics and science (see TIMMS, 2011) and large numbers of less-educated Saudis continue to remain out of the labor force (Figure 5).5 In addition, significant numbers of college educated women have also opted out of the labor force, due to factors mentioned above.

Figure 4.Domestic Enrollment in Tertiary Education by Gender, 1995/96 & 2010/11

(000s)

Sources: SAMA; and Central Department of Statistics and Information.

Figure 5.Saudi Population Out of the Labor Force by Education and Gender, 2012

(000s)

Sources: SAMA; and Central Department of Statistics and Information.

4. Continuing to improve the quality of education and reducing barriers to female employment could help support a knowledge-based economy. In 2012, significant numbers of men and women with tertiary education were unemployed, pointing to a potential skills mismatch between the education system and the labor market (Figure 6). In particular, women with university degrees accounted for over 70 percent of female unemployment. Going forward, addressing weaknesses in the education system and barriers faced by women in accessing employment could help support a knowledge-based economy. Options that could help increase FLFP include improving access to transportation, better childcare services, and flexible work arrangements such as teleworking.

Figure 6.Saudi Unemployment by Education and Gender, 2012

(000s)

Source: Central Department of Statistics and Information.

Active labor market policies

5. In 2011, labor market reforms were implemented to boost private sector employment of nationals, while providing a safety net for the unemployed. Key measures included:

  • The jobseekers allowance (Hafiz) program to provide young, unemployed Saudis with a monthly allowance of SAR 2000 for a maximum period of one year, conditional on their participation in job search and training activities. Job placement and training services have been expanded.

  • A revamped Saudization (Nitaqat) program with sector- and firm-size based employment quotas, to encourage firms to hire Saudis. Sanctions are imposed on non-compliant firms.

  • A minimum wage of SAR 3000 for Saudi workers in the public sector.

6. Since then, authorities have continued to develop labor market policies to improve the competitiveness of Saudi workers in the private sector. Recent additional measures that are in process are:

  • Fees imposed on companies with a majority of expatriate workers (SAR 200 per month per foreign worker) are being used to finance an expansion in the scope and duration of wage subsidies for Saudi workers in companies that are compliant with Nitaqat requirements.

  • A de facto minimum wage for Saudi workers is being required for firms to earn full Nitaqat credits.

  • Improvements to the internal mobility and bargaining power of expatriate workers. Expatriate workers in firms that do not meet their Nitaqat requirements are now allowed to change employers freely, while firms that are compliant are allowed to hire more expatriate workers. This is accompanied by stricter enforcement of work permits for foreign workers.

  • Increasing opportunities for female employment, with specific sectors (e.g. retail) being targeted.

  • An unemployment assistance scheme is under consideration to provide a broad social safety net, while also examining measures to improve the employment flexibility of Saudi workers.

7. Experience in other GCC countries with similar labor market policies indicates tradeoffs and a mixed record of success. Many GCC countries have implemented private sector employment quotas for nationals (see Table). While these quotas have helped boost employment of nationals, they have been implemented inconsistently over time, and may have contributed to ghost employment and higher bargaining power and salaries of nationals.6 In Bahrain and Oman, education and vocational training programs for nationals have been financed through levies on foreign workers and have helped strengthen private sector hiring of nationals. While these levies are likely to have helped reduce demand for expatriates, these are often inadequate to eliminate the wage differential on their own, and may result in an adverse impact on costs and potential output. On the other hand, wage subsidies that are unlimited in duration and differentiated by education and family status have been used successfully in Kuwait, although these require careful monitoring to ensure they are not captured by employers. Improvements in labor mobility and bargaining power of foreign workers appear to have contributed to narrowing the wage differential between nationals and foreign labor in Bahrain and Oman.

Employment QuotaEducation and TrainingFees on foreign workersWage subsidyInternal mobility
Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
UAE.

8. More generally, international experience indicates that a successful model for labor market policies is to “protect workers, not jobs” and to implement quotas gradually. Enhancing unemployment benefits can help protect workers, while reducing excessive employment protection can help efficient allocation of human resources, encourage greater hiring, and increase investment in human capital.7 Research also suggests a need for gradualism in the implementation of employment quotas, to preserve the incentives for qualified candidates to invest in skills (Fryer and Loury, 2005).

9. In the short-term, there has been considerable take-up of Hafiz. With data on employment outcomes in 2012, we can examine the early impact of Hafiz.8 The number of registered job-seekers increased over ten-fold between end-2010 and the 2012Q1, and over 80 percent of the registered job-seekers were women. Less-educated Saudi workers are not well paid—average monthly wages of this group in 2009 were around SAR 2000, and the generous jobseekers allowance may have created an incentive to join the ranks of the unemployed (Figure 7). Between end-2009 and end-2012, the number of less-educated and employed Saudi workers declined. In this regard, training and placement services associated with Hafiz are likely to have boosted employment for better educated Saudi workers (including women), while these efforts may have proved less fruitful for workers with less than secondary education. Among women, education and health and social services sectors accounted for over 85 percent of the total increase in employment.

Figure 7.Change in Saudi Employment by Gender, Education and Average Wages, Dec. 2009-Dec. 2012

(000s)

Sources: Manpower Research Bulletin; Ministry of Labor; and IMF staff calculations.

10. The largest increase in Saudi employment in 2012 has occurred in areas associated with the public sector, with a modest impact of Nitaqat in boosting private sector employment. In many sectors, expatriate employment has declined as Saudi employment has remained steady or increased slightly in 2012 (Figure 8). However, expatriate workers have not been fully replaced by Saudi workers. Instead, large increases in Saudi employment are concentrated in sectors that correspond largely to government services (i.e. general administration and education) with limited absorption of Saudi workers in high-wage private sector jobs. In construction—the sector with the largest increase in jobs—relatively few jobs have gone to Saudis.

Figure 8.Change in Employment by Sector and Nationality, Dec. 2011–Dec. 2012

(000s of workers)

Sources: Manpower Research Bulletin; Ministry of Labor; and IMF staff calculations.

11. The introduction of a minimum private sector wage for employers to earn full Nitaqat credits could further increase wage differentials between low-skilled Saudi and expatriate workers. Saudi workers already earn a much higher wage than non-Saudi workers (Figure 2). Employers are now required to pay a minimum wage of SAR 3000 a month to Saudi workers to earn a full Nitaqat credit.9 For private sector Saudi workers whose current wages are lower than the new Saudi minimum wage, this would further widen wage differentials and raise costs for employers that hire Saudi workers, although the increased costs could be offset by wage subsidies. Of course, in sectors where the minimum wage is not binding, (i.e. for more skilled Saudi workers) it will be less distortionary. In contrast, the fee of SAR 200 per expatriate worker would raise costs of foreign labor to employers, and would partially narrow the wage gap.

12. Easing labor market regulations could help boost employment. The Global Competitiveness Report 2012 has highlighted labor market efficiency as a key weakness of the generally favorable business environment in Saudi Arabia, especially due to high redundancy costs and inefficient use of talent. The high employment protection afforded to workers is likely an important contributing factor as it reduces incentives for human capital formation and hinders labor mobility. In this regard, the unemployment benefit that is currently under consideration, which should be set at an appropriate level to not adversely affect employment incentives, and could be combined with an easing in employment protection to improve labor market flexibility.

13. Increased Saudization has the potential to address Saudi unemployment, but may result in higher inflation. For instance, if Saudi employment in high-wage sectors (manufacturing, real estate, other) reached 50 percent (15 percent currently), this could potentially create over 750,000 Saudi jobs, more than enough to address Saudi unemployment in the near-term. An important constraint on this policy would be the availability of the requisite skills and work experience among the Saudi labor force. Additionally, as wages of Saudi employees are significantly higher than those of non-Saudis, this could raise wage costs and prices, although at this time the wage bill is relatively low share of overall business costs.

C. Conclusion

14. Demographic trends point to a continuing need to generate large numbers of jobs for potential labor market entrants. Based on the demographics of a rapidly expanding youth population, staff estimates of non-oil GDP growth, and past trends in employment, it is projected that Saudi unemployment could increase by up to 1.4 million over the course of the next decade. The government has introduced a number of measures to boost Saudi employment. Early evidence suggests considerable take up of Hafiz, but a mixed impact of Nitaqat.

15. Improving Saudi employment prospects will require careful implementation of policies. A broad social consultation on key aspects of the labor markets strategy and key policies will be crucial to manage the macroeconomic impact and assure their success. Reducing the reliance on public sector employment will be essential to set expectations. Improving the competitiveness of Saudi workers could be accomplished through imposing fees for expatriate labor and/or granting wage subsidies for private sector Saudi workers, but these need careful monitoring to minimize capture by employers. Improvements to the internal mobility of foreign workers can also enhance their bargaining power and gradually narrow the wage differential. Unemployment assistance benefits for Saudi workers should be set at a level and duration to not discourage employment, and ought to be combined with an easing of employment protection to improve labor market flexibility.

16. Supporting a knowledge-based economy will require improvements in the quality of education and expanding opportunities for women. Expanding education and training is appropriate, but the focus should be on quality with the careful tracking of educational achievement and private sector requirements. With rising education levels amongst women, it will be important to consider additional ways of further expanding employment opportunities to utilize their human capital. Unemployment of highly educated women in Saudi Arabia is high by international standards, and this reduces the productive potential of the economy.

References

    Baldwin-Edwards, M.,2011, “Labor Immigration and Labor Markets in the GCC Countries: National Patterns and Trends”, Research Paper, Kuwait Program on Development, Governance and Globalization in the Gulf States (15).

    Blanchard, O., F.Jaumotte, and P.Loungani,2013, “Labor Market Policies and IMF Advice in Advanced Economies During the Great Recession,IMF Staff Discussion Note SDN/13/02 (Washington: International Monetary Fund).

    Fryer, R. G.Jr., and G. C.Loury,2005, “Affirmative Action and Its Mythology,Journal of Economic Perspectives, American Economic Association, Vol. 19(3), pp. 147162.

    Gonzalez, G., L. A.Karoly, L. C. H.Salem, and C. A.Goldman, (2011), “Facing Human Capital Challenges of the 21st Century: Education and Labor Market Initiatives in Lebanon, Oman, Qatar, and the United Arab Emirates”, Rand Qatar Policy Institute.

Prepared by Padamja Khandelwal.

We use labor force and employment data published by the Central Department of Statistics and Information, and wage data published by the Ministry of Labor and General Organization for Social Insurance.

Also see IMF Country Report 12/272.

The sectors of General Administration and Education have the highest Saudization rates (over 90 percent) and are not covered in the private sector wage data published by the Ministry of Labor. These sectors have traditionally been associated with the public sector.

Less-educated Saudis are considered as workers with less than secondary education. Highly-educated Saudis are considered as workers with more than secondary education.

We use end-2009 as the starting point for our analysis as detailed labor markets data are unavailable for end-2010.

Employers can count a Saudi employee as a “full employee” only if the wage is above the minimum wage. For employees earning less, they are considered only “half” a Saudi employee.

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