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Gulf states tackle labor market strains

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 2004
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IMF Survey:How would you characterize the GCC’s labor markets at present?

Fasano: Although labor market statistics are scant in GCC countries, there are signs that unemployment pressures among nationals have started to emerge, particularly among first-time job seekers. Search periods after graduation, for instance, have become longer. However, the extent of those pressures differs across the countries. Bahrain, Oman, and Saudi Arabia, which already have relatively high percentages of nationals in their respective workforces, face more pressing challenges than do Kuwait, Qatar, or the United Arab Emirates. In addition, structural problems in the labor markets, such as mismatches in the skills supplied by national workers and those demanded by the private sector, are hindering adjustment.

IMF Survey:What is driving the emerging strains in GCC labor markets?

Goyal: Three main developments. First, an increasing number of young nationals are entering the labor force as a result of high fertility rates in recent decades. It is estimated that the local labor force has been growing, on average, by more than 4 percent a year for the past several years in most GCC countries. With a substantial fraction of the population under the age of 14 in all GCC countries and an increasing number of women entering the labor market, high labor force growth rates are expected to continue over the medium term.

Second, the governments’ role as employers of first and last resort for their nationals has almost reached its limits. In most of the countries, the wage bill now exceeds 10 percent of GDP and cannot keep rising without jeopardizing priority spending in areas such as education and health care—areas that need to increase, given the demographic changes taking place—and without further weakening budgets’ capacity to withstand oil price shocks. Governments have also started to narrow their demand for nationals to professionals who are specialized in these priority areas.

Third, growth of the non-oil sector has not accelerated in line with the rapid growth in the local labor force. In addition, most new jobs are becoming available in sectors such as trade, construction, manufacturing, and domestic services, which require relatively low skills and offer relatively low wages and have little appeal for local workers. Meanwhile, the private sector has continued to have access to an elastic supply of expatriate workers at internationally competitive wages.

IMF Survey:You also mentioned that structural weaknesses have exacerbated the problems.

Fasano: The segmentation of the labor market—in terms of wages, skills, and sectors of employment—will not make adjustment easy. Underlying this segmentation has been the implicit guarantee of employment for nationals in the government sector and the relatively more flexible hiring and firing practices that apply to expatriate workers. Nationals prefer to work in the government sector because of its relatively high wages, social allowances, retirement benefits, job security, and shorter working hours. This implicit guarantee for nationals has meant that the lowest acceptable wage for new entrants into the local labor force is high.

In addition, as I mentioned earlier, the skills national workers have do not match the skills demanded by the private sector. The anticipation of guaranteed public sector employment offers nationals little incentive to acquire the skills and training that the private sector values. And this is so even though education is essentially free. It is also surprising that enrollment in colleges and universities has remained low compared with countries with similar levels of per capita income—although enrollment has risen over time.

IMF Survey:What have governments in the region done thus far to address this problem?

Goyal: Today, the percentage of GCC nationals working for the public sector ranges from a low of 35 percent in Bahrain to over 90 percent in the United Arab Emirates. Bahrain began to diversify its economy earlier than other GCC countries and now has a much larger number of nationals working in the private sector. Endowed with smaller oil reserves, the Bahraini economy is the most diversified in the GCC area, with the non-oil sector accounting for over 80 percent of real GDP and a financial sector that is the single most important activity in the country.

Elsewhere in the GCC, the focus has shifted during the past decade to increasing job opportunities for nationals in the private sector. To this end, the authorities have relied on a combination of mandatory and administrative measures, complemented more recently by market-based strategies. Mandatory measures have included quantitative targets or quotas on the proportion of nationals employed by private companies in specific professions or sectors. Administrative measures have increased the relative cost of hiring expatriates through regulation of the supply of work permits for foreigners or fees and taxes on employers who hire foreign workers. The authorities have also provided incentives to private employers to hire nationals by rewarding tenders that meet quota requirements.

These mandatory and administrative measures have become part of a broader effort to expand the skills of national workers by improving training and education in line with private sector requirements. The authorities are intensifying efforts to eliminate the gap between the output of the local educational systems and the requirements of the market, and are encouraging self-employment opportunities by supporting the development of small enterprises through financing and training.

IMF Survey:How successful have their efforts been? What lessons have been learned?

Goyal: The results have been mixed, with the sources of employment generation and its beneficiaries differing across the countries. During the second half of the 1990s, the private sector created the majority of jobs in Bahrain, Oman, and the United Arab Emirates. In contrast, the public sector accounted for more than three-fourths of employment creation in Kuwait and about one-half in Saudi Arabia. During the same period, nationals were the main beneficiaries of job creation in Bahrain, Oman, and Saudi Arabia, while expatriate workers reaped a large proportion of the new jobs created in Kuwait and the United Arab Emirates.

The absorption of national workers by the private sector therefore remains a challenge. Mandatory quantitative measures are difficult to enforce in practice, particularly at the firm level. Besides, as most new job opportunities require relatively low levels of education and pay relatively low wages, nationals appear unwilling to accept these positions, and, as a result, the private sector has continued to offer most of these jobs to foreign workers.

Quotas should be applied with flexibility and pragmatism, taking into account labor market conditions and regularly assessing the impact of quotas on long-term job creation. Closing the labor market to expatriate workers will in itself not diminish unemployment pressures in GCC countries. Education and training systems are insufficiently compatible with local labor market requirements, and this has hindered the replacement of expatriates in skilled positions. In addition, wage expectations of the new entrants remain high and rigid, reflecting, in part, continued expectations of public sector employment. There is preliminary evidence, however, that nationals may have started to accept lower entry salaries in the past few years.

IMF Survey:What more can these countries do to mount an effective labor market strategy?

Fasano: An effective labor market strategy should focus on promoting a vibrant non-oil economy, strengthening investment in human capital, and adopting labor market institutional reforms. Robust non-oil economic growth is not expected to be sufficient to create new jobs for nationals in the period ahead, as the authorities in the region have recognized. Thus, efforts are particularly needed to further integrate the labor markets by addressing the causes behind their segmentation.

An important component of such efforts is to narrow the wage differential, including benefits, between the public and the private sectors, by making, for instance, social benefits available to all working nationals irrespective of sector of employment and by announcing and enforcing strict limits on public sector employment.

The GCC countries will also need to strengthen educational and vocational training to encourage skill acquisition by nationals and eliminate, over time, the mismatch between skills supplied by national workers and those demanded by the private sector. Reforming school curricula, encouraging firms to establish internships, and awarding targeted training vouchers could help prospective national workers build their skills and expertise.

Finally, the authorities should rely mainly on price-and market-based interventions—rather than quantitative ones—to encourage the substitution of national for expatriate workers. The imposition of targets or quotas may produce short-term positive results, but this practice has, at best, ambiguous effects on long-term employment generation for nationals and could hinder productivity growth and competitiveness.

Simulations that we conducted show that such a strategy could help alleviate unemployment pressures while striking a balance between maintaining a liberal foreign labor policy and a reasonable level of competitiveness of the non-oil sector. It is encouraging that the labor market strategy across GCC countries presents elements of this overall strategy.

Copies of IMF Working Paper No. 04/71, “Emerging Strains in GCC Labor Markets,” by Ugo Fasano and Rishi Goyal, are available for $15.00 each. Please see page 184 for ordering details. The full text is also available on the IMF’s website (www.imf.org).

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