Ask local policy makers in the Gulf region about their labor market, and they will likely mention the lack of skills and low motivation among nationals or their countries’ heavy reliance on cheap, foreign workers. Many, too, will also concede that fixing this labor-market imbalance will be no small feat. It is indeed one of the most daunting challenges their countries face as they invest hundreds of billions of dollars in efforts to recalibrate their economies before their main revenue generator — hydrocarbons — runs dry.
Time certainly isn’t on the region’s side. In Saudi Arabia, 38% of the population is under the age of 15; in Oman, it’s 43%; and 32% in Jordan. Soon enough, these and the region’s other youths will be entering the workforce.A 2007 study by consultants at McKinsey put unemployment among 16 to 24 year olds in Saudi Arabia, Bahrain and Oman at more than 35%. Many of them are waiting their turn for posts in the public sector, which offer generous benefits. Consider Kuwait, where public-sector wages are 14.7% of GDP compared with an average 3.2% for developed economies, according to the RAND-Qatar Policy Institute, a think tank in Doha, Qatar.
But growth in government jobs is slowing amid a big mismatch between supply and demand. McKinsey estimates that the private sector needs to create 4.2 million new jobs for Gulf nationals by 2015, a sharp increase from the half a million jobs created in the decade to 2005.
Consider Saudi Arabia. Almost 300,000 public-sector jobs were created for Saudi nationals between 1996 and 2006, which increased public-sector employment by 30%, according to the Conference Board, a think tank in New York City.
What’s the solution? “Labor market and economic reforms are needed to increase the role of the private sector, to diversify,” says Gabriella Gonzalez, associate social scientist at the RAND Qatar Policy Institute. This means fostering entrepreneurship, and encouraging small businesses; launching market-based mechanisms to encourage labor market flexibility; and investing in human capital and technology.
Could Do Better
Education is one area crying out for more attention. Traditionally, the quality of schooling has been poor, and in many cases, the focus has been on social, cultural and religious curriculum, rather than science, mathematics, engineering and technology. According to the U.S. Department of Education’s Institute of Education Statistics, the proportion of 15 year olds falling short of basic mathematics literacy in Qatar, for example, is 72%, compared with 10% in the U.S.
Meanwhile, enrollment in higher education is relatively low while vocational education has never taken off, with training schemes, company apprenticeships and the like woefully few and far between. “Because of limits in the quality of education that students in the Arab region receive, a large gap exists between the demand for human capital skills and the supply of those skills through the native workforces of the region,” says RAND’s Gonzalez.
Motivation among nationals is another issue. In the past, regional governments have typically offered public-sector jobs to nationals, with high salaries and generous benefits. Some Gulf Cooperation Council (GCC) governments now employ 90% of their national workforce this way. As such, few local workers see any reason to enter the private sector, where they would face stiff competition for jobs against skilled expatriates, less job security and lower wages. Besides, there’s also a stigma among locals attached to blue-collar work.
A third issue is the seemingly endless supply of cheap, foreign labor — workers who can take on unskilled, manual work, such as in construction, or skilled work, such as in finance or engineering. In some GCC states, foreigners account for up to 90% of the total workforce. Typically, expatriate manual workers are paid little, have few rights, and can easily be fired and deported. Against this backdrop, few local employers want to train staff or invest in technology to increase productivity.
But the jobs the expatriates are doing are a vital component of the Gulf states’ efforts to diversify their economies. The increasing number of foreign laborers — rather than an increasing productivity level — is driving the bulk of recent non-hydrocarbon economic growth in the Gulf. According to the Conference Board, labor productivity in the GCC grew an average 1% annually between 2000 and 2008, in contrast to India (4.9%), China (10.5%), the U.S. (1.4%) and Western Europe (0.8%).
As Jarmo Kotilaine, chief economist at NCB Capital, a Saudi investment company, notes: “The pool of human capital is both the biggest challenge and the biggest opportunity for the region.”
In the short term, according to Bart van Ark, chief economist at the Conference Board, there’s more challenge than opportunity. Notably, he says, “the structure of the labor market is holding back the region from further economic growth because labor is not allocated to the most productive uses.” This was magnified during the global economic downturn.
As the financial crisis spread to the Gulf states, many small- and mid-sized enterprises (SMEs) across the region have suffered. “The SMEs are the worst affected,” according to James Magee, a Dubai-based director at Global Events Management. “The result is they [have had to] downsize or go out of business altogether.”
In the long term, not addressing mismatches in the region’s labor markets is an unwise option. Already, social tensions across the GCC are mounting. In Bahrain, there have been violent attacks on foreign workers, who make up 50% of the kingdom’s total population; and expatriate manual workers in Dubai and Bahrain have held strikes to protest poor pay and working conditions.
Indeed, rapid population growth coupled with inadequate employment opportunities may present a threat to the GCC region’s stability and security as unemployment among youth remains high. “Those unemployed people at some point could get restive,” says Peter Cappelli, professor of management at Wharton. Widespread economic discontent may fuel anti-government sentiment and be a catalyst for social unrest. There’s the risk, even, that extremist militant groups may attract new recruits from the ranks of the disaffected youth.
It’s no surprise, then, that the Gulf’s policy makers are taking action. In Qatar, reforms include strengthening links between the education system and the private sector, enhancing the relevance of the curricula and developing a national qualification framework. Last year, the state also introduced vouchers for pupils to use at private schools, with the aim of making schools compete harder to attract and retain students
Many Gulf countries are opening up new technical and vocational colleges to help students develop skills relevant to the private sector. And more training facilities are being provided for women. Meanwhile, new universities are planned throughout the region, such as the Princess Noura University for women and a medical school at Riyadh’s King Saud University in Saudi Arabia. Furthermore, in 2008, Saudi Arabia’s King Abdullah announced a further 50% increase in funding for Saudi students studying abroad. The Saudi government has also made provision for the construction of 1,500 new elementary and high schools in addition to another 3,240 schools currently being built.
To be effective, progress in education must be matched by reform in the labor markets. Some states are starting to increase the price of foreign labor, for example, by introducing strict rules for workers from abroad or limiting their contracts to a few years. In Bahrain, the government has ramped up fees for work permits for foreigners, and sponsors must now pay a monthly fee for each foreign worker they employ.
To increase labor flexibility, the state scrapped rules last May that prevented workers from switching jobs without their existing employers’ blessing. “This is the end of the sponsorship system, which does not differ much from slavery,” Bahraini Minister of Labor Affairs Majeed Al Alawai told journalists. The introduction of a minimum wage in the private sector could be next, further leveling the playing field with the public sector.
Yet some labor reform has been misguided. One example is the widespread requirement that private-sector firms fill quotas for locally hired staff. In Qatar, the so-called nationalization quota is 20%; in Saudi Arabia, it’s 75%. Another example is the introduction of a regulation in the UAE last February making it harder for private-sector firms to fire nationals.
“The recession has stiffened some government resolve to ensure quotas are met, and perhaps increased,” explains James Mackenzie, founder and managing director of Mackenzie Executive Search in Dubai. Not surprisingly, many private-sector bosses resent the pressure to hire and retain nationals who they feel lack skills and drive. Some sidestep the quotas.
Indeed, private-sector employers present a big obstacle to labor market reform. They fear that rising costs of employing foreign labor, coupled with the expense of training staff and investing in technology, will hit profits. The key to winning over the private sector, say some experts, may be for policy makers to offer wage subsidies so that the private sector is more attractive to nationals. At the same time, they could offer financial incentives for training nationals, ultimately increasing productivity and creating more value-added jobs.
Another barrier to reform is the dearth of statistics on education and labor. Because there is little in-depth data on the labor market or how well the educational system is working, it’s also difficult to measure the effectiveness of reforms. “Reform requires transparency,” as van Ark of the Conference Board puts it. He says the difficulty in finding useful labor information in the region is an indicator of how rigid the market is. "It’s hard to understand what’s going on, let alone understand what needs to be changed."
In some states, simply pushing through reform may be difficult. One example is Saudi Arabia, where the King has to accommodate the interests of numerous senior family members, as well as senior clerics, when proposing changes to legislation. Often, the need for consensus building among all parties limits the pace and scope of reform. For some states, it may be tempting to maintain the status quo.
Whatever reforms regional leaders push through, change won’t materialize overnight. In a June 2009 report, the Economist Intelligence Unit predicted that the mismatches between the skills and the costs of nationals and expatriates will narrow — but that the gaps will not have closed by 2020. For his part, Kotilaine of NCB Capital sounds a note of caution: “The economies of the world and the region are changing at a faster pace than before,” he says. To solve the region’s fast-evolving economic needs, “there are no quick fixes and no lasting solutions.”