Conference PaperPDF Available

Can We Saudize the Labor Market without Damaging the Private Sector?

Authors:
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Special Report
November, 2018
Steen Hertog
Can We Saudize
the Labor Market without
Damaging the Private Sector?
2
3
Special Report
Can We Saudize
the Labor Market without
Damaging the Private Sector?
4
Among all the economic challenges on the road to Vision 2030, job creation for Saudi citizens
is the politically most important one—and after an initial focus on other Vision-related policy
areas, it is increasingly taking center stage in the kingdom’s economic policy debate. However,
a formula to guarantee sufcient, sustainable jobs for Saudi citizens is still missing: The Nitaqat
employment-quota system has created signicant employment since its introduction in 2011,
but it has also imposed signicant costs on business, and many of the Nitaqat-induced jobs
appear to be unproductive or not even real. Relying on natural economic growth to put more
Saudi citizens into employment will be insufcient: Not only has growth been muted due to
ongoing scal adjustments, but whatever private jobs have been created have mostly gone to
foreign workers instead. Finally, creating new government jobs is scally unsustainable and
reduces incentives for Saudi citizens to seek more productive private employment.
Saudi Arabia, like other Gulf Cooperation Council (GCC) countries, faces a fundamental obstacle
in its attempts to create private jobs for citizens: a signicant difference in both labor rights and
labor costs between citizens and foreign workers that almost invariably leads employers to prefer
the latter. This report explores the roots and the consequences of this twofold gap and presents
new ideas on how to narrow or even close it. The report draws on publicly available labor market
data as well as original, as-yet unpublished employer and job-seeker survey data from Saudi
Arabia to explore the perceptions and priorities among private rms regarding the employment
of Saudi citizens. The employer perspective has often been missing from the Saudization debate,
and it must be seriously analyzed if we want to identify policies that work on the ground rather
than creating evasion through “phantom employment” and other manipulation techniques.
1. A Segmented Labor Market
Figure 1 shows the deep division of the Saudi labor market: Almost two thirds of citizens work
in the public sector, while the private sector remains dominated by foreign workers. Saudi
citizens’ reliance on government employment stands out in international comparison, as both
advanced and emerging economies generally accommodate fewer than one fth of their citizens
in the public sector (Figure 2).
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At the same time, the employment ratio of Saudi citizens is uniquely low: About 38% of Saudi
citizens of working age hold a job (fewer than 20% among Saudi females), compared to 60–
80% in advanced countries. Despite the government’s monumental job creation effort, most
Saudi citizens aged 15 to 64 do not hold a job.
The vast majority of foreigners in the private sector, in turn, are low-skilled and are employed
in sectors like construction, personal services, or retail. This is a key reason for stagnating
levels of private sector productivity in the kingdom since the 1980s, which stand in contrast to
continuous productivity improvements in almost all other countries of the world.
Figure 1: Distribution of employees by sector and nationality (2017)
Ofcial unemployment among Saudi citizens is close to 13%. If more of the currently inactive
Saudi women enter the labor force, this ratio is likely to creep up further, but even if that does
not happen, the number of Saudi citizens of working age will increase by more than 200,000
per year for at least the next decade as large birth cohorts will reach maturity. Private sector job
creation for Saudi citizens since 2015 has been signicantly below 100,000 per year, creating a
growing wedge between the jobs needed by Saudi citizens and the jobs created for them.
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Figure 2: Share of government employees in the economically active citizenry of select countries
What explains the concentration of citizens in the government sector and the dominance of
foreigners in the private sector? The key factor is a two-fold gap, in both wages and work
conditions, between public sector Saudi employment, private sector Saudi employment, and private
sector expatriate employment. In short, because of both better wages and more convenient work
conditions, public sector jobs remain by far the most attractive option for nationals, to the extent
that they either eschew private employment or develop unrealistic expectations about wages and
conditions in the private sector. Private employers in turn usually prefer expatriate workers, who
are willing to put up with much lower wages and have fewer rights in the Saudi labor market.
Figure 3 illustrates the labor cost gap in the Saudi labor market: Saudi citizens, on average,
make the most money in the public sector. However, the average wages for Saudi citizens in the
private sector are still twice as high as those of private sector foreign workers.
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The cost differential in the private sector is also reected in data from a 2014 YouGov survey in
which we asked Saudi employers to compare the cost of Saudi and foreign workers for the same
types of jobs. Foreign workers turned out to be considerably cheaper even if factors such as
skills, age, experience, and nonwage costs are controlled for, which gives employers an obvious
reason to prefer foreigners (Figure 4).
Figure 3: Average wages in the Saudi public and private sectors (SAR/month)
Figure 4: Reported costs of Saudi employment in the private sector
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At the same time, the public sector remains the most attractive employment option for most
Saudi citizens—not only in terms of wages but also in terms of job security, working hours,
holiday entitlements, and near-guaranteed promotions. While the most talented Saudi job-
seekers often have better opportunities in the private sector, the bulk of regular Saudi citizens
have strong incentives to prefer government employment.
This is reected in data from our survey in which we asked Saudi employers whether government is
the main competitor in recruitment. As Figure 5 shows, 61% of employers agreed at least somewhat
with this statement. The question was asked at a time when competition for Saudi employees
within the private sector was already strong due to Nitaqat quotas. While government hiring has
dropped considerably since 2015, many Saudi citizens still hold out for an eventual government job.
Interviews with private employers indicate that many rms are concerned that job applicants might
be on the waiting list for a government position and could leave them as soon as a public sector
position becomes available—one of many incentives for employers to prefer foreign workers.
The benchmark of public sector employment also seems to inuence work attitudes among
Saudi citizens. Figure 6 shows survey data on the desired number of working hours among
Saudi job-seekers. More than half of respondents expect six or fewer working hours per day,
which might be feasible in many government ofces but is not realistic in the private sector.
Figure 5: Employer survey: Is government the main competitor in recruitment for you?
Figure 6: Expected number of working hours
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Figure 7 shows how attractive different types of private sector occupations are to Saudi job-
seekers. Saudi citizens turn out to be quite selective, rejecting the majority of jobs that are
available in the private sector. This again is quite likely a result of the historic availability of
higher-status, white-collar jobs in the government sector.
The survey also showed that current Saudi employees in the private sector—who should, if
anything, be more in favor of private employment than their peers—would prefer a government
job by a large margin: 76% would prefer a government position with similar salary, higher job
security and working hours from 7:30 to 2:30, while 71% would prefer a government job even
with the same working hours as they currently have.
These data are from 2014, and anecdotal observations suggest that since that time, job-seekers
have become more exible in the types of jobs they are willing to accept. However, the shift has
been gradual, and many Saudi citizens retain a strong preference for white-collar, managerial
jobs, which are limited in number. Saudi job-seekers’ limited willingness to consider many
types of private jobs is an important obstacle to Saudization.
Figure 7: Job preferences of Saudi job-seekers
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Labor costs and competition with government as an attractive employer are not the only factor
making employing foreigners more attractive to the private sector. Foreigners are also often
willing to work particularly long hours, as they have no family in the country, and to put up with
more difcult working conditions. Equally important, the mobility of foreign employees on the
local labor market is restricted through the sponsorship system. As Figure 8 shows, this leads to
considerably higher turnover among Saudi employees than foreign employees.
Figure 8: Mobility gap—average turnover of Saudi private sector employees (%)
Turnover among Saudi citizens typically is a result of their decision to leave a job, while foreign
workers are usually tied to their current employer through sponsorship, which weakens their
negotiating position and makes them easier to control. If they leave a job, it is typically because
they are let go.
Figure 9 shows that the retention of national employees is an important concern among
employers. Given that recruitment in the age of Nitaqat-induced hiring competition is already
difcult, the similarly large worry about retention is signicant. At the same time, citizens also
tend to be harder to dismiss than foreigners, as reected in Figure 10.
In sum, nationals are more difcult to recruit, leave jobs more easily, and are harder to re
than foreigners (despite recent amendments to Article 77 of the Saudi labor law that have, in
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principle, made layoffs and redundancies easier to carry out). All these differences in labor
rights and practices provide more reasons for employers to prefer foreigners over citizens in the
private labor market. The end result is that the private employment of Saudi citizens is unlikely
to happen through organic economic growth. Instead, targeted policy interventions are needed.
Figure 9: Retention of citizens as concern for employers
Figure 10: How much of an issue has it been for you to dismiss Saudis as compared to foreigners?
2. Do Quotas Work?
The most important such policy intervention has been the implementation of employment
quotas for nationals in the private sector, organized since 2011 under the Nitaqat system, which
prevents companies with less than a minimum share of Saudi employees from conducting
vital transactions with the Ministry of Labor. Since the introduction of the Nitaqat system, the
number of Saudi employees in the private sector has tripled to close to 2 million, and it is likely
that Nitaqat accounts for the bulk of the newly created jobs.
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That said, there is evidence that signicant numbers of the new jobs are unproductive or do
not involve any actual work at all. The share of Saudi citizens earning 3,000 SAR/month,
the minimum qualifying wage for Nitaqat purposes, has increased substantially since the
introduction of the program (Figure 11). Interviews indicate that Saudi employment in the
construction sector—which has seen disproportionate Saudi job growth since 2011—seems to
often consist of “phantom employees” who receive the minimum qualifying wage but are not
expected to show up for work.
Nitaqat can also be manipulated by registering rms in different sectors than the one in which
they actually operate and by employing foreign workers who are formally under someone else’s
sponsorship. Finally, Nitaqat provides uneven incentives: Firms have no reason to exceed the
employment-quota thresholds that put them into the desired Nitaqat category. Saudization
policies should instead incentivize the hiring of Saudi citizens at any employment ratio, even
for rms that have already achieved the minimum requirements.
As rms have struggled to absorb the Nitaqat quotas, private job growth for Saudi citizens has
slowed drastically since 2014. Why do rms struggle to employ more Saudi citizens and instead
resort to phantom employment and other techniques to evade the Nitaqat regulations? The main
reason is that quotas per se do not address the persistent gap in labor costs and labor rights
between nationals and expatriates, as was outlined in this analysis. To remain competitive,
employers remain under pressure to predominantly employ cheaper and more easily controlled
foreign workers. Genuine market-driven Saudization will only come about in response to
closures of the gaps in wages and rights. What can be done about this requirement? We will
discuss the two gaps in turn.
Figure 12 provides strong evidence that reducing the gap in wages promotes the nationalization
of jobs: Jobs with equal average wages for Saudi citizens and foreigners are already largely
Saudized. Unfortunately the most frequent jobs in the private labor market, including in sales
and service, retain a fairly high ratio of Saudi to foreign wages and remain dominated by
foreigners.
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Figure 11: Increase in minimum wage jobs for Saudis since the introduction of the Nitaqat program
Figure 12: Saudization ratios versus wage ratios of different professions
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3. Can We Close the Gap in Labor Costs?
How could the gap be closed or at least narrowed? The introduction of new levies on foreign
worker, however unhappy businesses have been about them, is a step in the right direction as
they make employing foreigners relatively less affordable. That said, the average labor cost
differential is too large to be bridged simply by increasing the cost of employing foreigners as
on average, Saudi citizens earn almost 4,000 SAR/month more than foreigners in the private
labor market. Closing this gap through taxation alone would require prohibitively high fees,
which would drive many companies out of business and trigger signicant ination.
It would make more sense instead to close the gap from two directions; namely, to use fees to make
foreign workers more expensive for employers but also make the employment of Saudi citizens
cheaper through enacting permanent wage subsidies. Subsidies can be scally expensive, but
one attractive feature of using simultaneous revenue and expenditure tools in the labor market is
that they can be combined to be scally neutral: In other words, the government could use higher
foreign worker levies to directly nance subsidies for Saudi employment. Figure 13 shows how
this could affect net wages and costs for employers, assuming 6 million foreign and 2 million
national workers in the private sector and a monthly levy per foreign worker of 800 SAR.
It is difcult to predict to what extent (pre-tax) wages of foreigners and nationals will change as a
result of fees and subsidies. Economic theory predicts that Saudi workers will somewhat reduce
their pre-subsidy wage expectations as their combined (post-subsidy) income will increase—
which is, in fact, what happened among Kuwaiti employees when the Kuwaiti government
introduced its da‘m al-‘amala subsidy system in the early 2000s.
Conversely, employers are likely to pass some of the new fees on to foreign workers in the form
of (even) lower wages. However, unless foreign workers indirectly bear all the fees and Saudi
employees capture all the subsidies, the gap in employment costs between the two groups of
workers will shrink. Moreover, while employers would pay higher fees on foreign workers,
they would recoup these losses through lower employment costs for hiring Saudi citizens.
At current levels of expatriate employment, a labor fee on foreigners of 800 SAR/month could
nance a subsidy of 2,400 SAR/month for nationals, which could increase the desirability of
many jobs that currently pay too little for Saudi citizens. A labor fee of 1,600 SAR/month could
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nance a subsidy of 4,800 SAR/month, as a result of which foreigners in many cases would be
more expensive than Saudi employees. It would be important to make the subsidies permanent:
the currently available, time-limited Human Resources Development Fund (HRDF) subsidies
for rst-time employees still do not create sufcient incentives for rms to hire Saudi citizens
as the rms will become responsible for their full wages after two years or less.
In practice, fees and subsidies should lead to disemployment among foreign workers, and hence
to a relatively lower revenue basis—but also the availability of more jobs to Saudi citizens. Fees
and subsidies should be gradually increased over time, allowing the government to measure
their effect on employment and calibrate them so as to achieve full employment for Saudi
citizens, and also allowing the government to make them revenue-neutral. Even if the number
of foreign workers should drop to a level at which reasonable wage subsidies cannot be fully
nanced through fees on expatriates, the scal savings from not having to employ additional
Saudi citizens in the government apparatus would far outweigh the cost of subsidies.
The government should also consider a minimum wage for foreigners to prevent employers
from passing on new fees to the worst-paid and most vulnerable foreigners. Such minimum
wages already exist in Kuwait and Qatar and are being actively debated in other GCC
countries.
Subsidy systems can be subject to manipulation—and Kuwait’s otherwise successful da‘m al-
‘amala system has indeed been exploited by nationals who receive subsidies for phantom jobs,
in which they do no actual work. Such abuse needs to be minimized through tight monitoring
and sanctioning mechanisms. Nonetheless, even a subsidy system that is subject to some
“leakage” remains preferable over quota systems: Not only are quotas rigid, they also leave
little exibility to rms, while subsidies allow market forces to adjust the distribution of foreign
and Saudi employment across individual employers.
Unlike subsidies, quotas also give no real economic incentives for Saudi citizens to seek private
jobs. Subsidies are also far preferable to the old policy of using the public sector as the employer
of last resort, which is much more costly and strongly distorts general labor market incentives.
Given that subsidies would be nanced through fees on foreign workers, any “leaked” subsidies
would at worst function as a privately nanced, de facto unemployment benet.
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Figure 13: Potential impact of a combined fee-subsidy regime for private employment
(monthly wages in SAR)
4. Closing the Mobility Gap
There remains the second major gap in the eld of labor rights. The central issue here is mobility;
namely, the ability to switch employers, which greatly varies between nationals and foreigners.
As we have seen, restricted mobility makes foreigners more attractive as employees. The key
policy change required here is reform of the sponsorship system to give foreign workers more
freedom to move between employers. This would bring Saudi Arabia closer to labor market
regulations in advanced economies as well as neighbors like the UAE and Bahrain, which have
undertaken signicant reforms to their sponsorship regulations.
A relevant example can be found in the recent experience of the UAE, which partly liberalized
its sponsorship system from 2011 on, making it easier for foreigners to switch employers after
completing the rst two years of their work contract. As a result, the number of foreign workers
switching to a new employer has gone up signicantly—and as Figure 14 shows, this has led
to signicant increases in the wages they receive. These increases are both due to the improved
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productivity resulting from better matching between workers and rms and also to the better
bargaining position that labor mobility provides the foreign workers.
Wages resulting from a better bargaining position in turn help to decrease the gap in labor
costs between foreigners and nationals and make the latter relatively more attractive to employ.
Perhaps more important, closing the gap in mobility as compared to nationals takes away
the incentive for employers to hire foreigners because they are more easily controllable (and
sometimes exploitable).
Formal relaxation of the sponsorship system should be accompanied by policies that facilitate
expatriate worker mobility in practice, including the creation of a powerful central labor regulator
that controls and supervises mobility in place of the employers. Foreign workers should be
allowed temporary unemployment while remaining in the country in case of resignation or
dismissal, a provision that was recently introduced in the UAE.
Figure 14: Wage gains of foreign workers who changed employers in 2013,
by wage bracket (dirhams/month)
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The government should also consider advancing its plans for a green card that would give
deserving foreigners a residency status not tied to a specic employer or employment status.
Labor ombudsmen and case ofcers should be created to help foreign workers in the case
of conicts with employers, and sanctions for abuse by employers (e.g., false reporting of
absconding workers) should be strengthened. In addition, recruitment agencies and databases
should be set up to facilitate the local recruitment of expatriate workers rather than conducting
it outside the kingdom, as is done currently.
Outlook
The policies outlined in this report could contribute signicantly to closing the existing gaps in
labor costs and workers’ rights gaps, thereby giving Saudi citizens powerful incentives to seek
private jobs while providing employers with economic reasons to recruit Saudi workers. That
said, even with the best policy package, the transition to a scenario in which the majority of Saudi
employees work in the private sector will not be easy: Abandoning the government job guarantee
historically provided to male citizens will be politically challenging. The policies to facilitate
such a transition might have to go beyond labor fees and subsidies and reshape the Saudi wealth
distribution system on a more fundamental level, for example through a universal basic income.1
Creating sufcient private jobs for new cohorts of Saudi job-seekers is the key socioeconomic
challenge that the kingdom will face into 2030 and beyond. While it has experimented with new
policies in many economic areas, labor market regulation has been left largely untouched since
the introduction of Vision 2030; in fact, other GCC countries have in many respects overtaken
Saudi Arabia as laboratories of labor reform. Given the government’s newfound willingness to
experiment and break taboos, the kingdom should accord higher priority to modernizing its labor
regulations to address the root causes that keep Saudi citizens out of private employment. Only
if these causes are addressed will Saudi workers come to play a major role in their country’s
economic diversication, as they deserve to do.
(1) Steffen Hertog, “Making Wealth Sharing More Efcient in High-Rent Countries: The Citizens’ Income,” Energy Transitions, Vol. 1, No.
2, 2017, https://link.springer.com/article/10.1007%2Fs41825-017-0007-2 .
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... The literature that addresses the employment of Saudi nationals in the construction industry focuses on legislation without considering the inherent uniqueness of the construction industry [1,2,4,5,6,7]. The construction industry has many characteristics, which make it unique in more than one aspect compared to other industries. ...
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The construction industry in Saudi Arabia represented around 5.5% of the gross domestic product (GDP) in 2019 and employed around 26.4% of the total workforce in the Saudi private sector; however, only 12.5% of the construction workers are locals. In 2020, unemployment has reached 15.4% among Saudi nationals. Concurrently, approximately 6.7 million workers in the Saudi private sector are non-locals. This paper investigates the challenges and opportunities of employing locals in the construction industry. A quantitative analysis of the public statistics is conducted to determine the genuine challenges and potential opportunities in replacing non-locals with locals in the construction industry. The analysis reveals that although most of the Saudi construction industry workforce (87.5%) are non-local, the construction industry practically can accommodate around 9.5% of unemployed Saudis annually based on the current distribution of unemployed Saudis and the construction labor market. The analysis, also reveals that most unemployed Saudis are college graduates with majors that do not fit to find, suitable jobs in the construction industry. Among the findings that the Saudi construction industry will continue to need a non-Saudi workforce. Furthermore, though most unemployed Saudis are college graduates, there is a shortage of Saudis with appropriate training and academic majors.
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We analyze how quotas of foreign workers and subsidies on national labor can increase the private sector employment of nationals in an economy with a large proportion of expatriates and a large government wage bill. We use two alternative partial equilibrium models of the labor market: one has a market-clearing wage, and the other represents matching and job search directed towards either the public or the private sector. The models are calibrated on Saudi Arabia. We show that when the quotas of foreign workers are binding, they reduce the impact of labor subsidies on the employment of nationals. In addition, we find that in the matching model subsidies on the labor of nationals have a larger effect on employment than in the market-clearing wage model, because the highly attractive public sector flattens the wage curve. We also find that labor subsidies financed by expat levies or public job cuts have modest employment effects and require a very large fiscal adjustment. Finally, we show that a domestic energy price reform, where only a fraction of the fiscal proceeds are used for labor subsidies, can substantially reduce unemployment.
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