Keeping Up with Economic Cycles - Rethinking Labor Market Strategy in the GCC

The GCC needs to create a labor market that can meet the region’s growth mandate and is immune to economic fluctuations. Given the GCC’s heavy reliance on foreign labor, and rising unemployment among nationals, the mismatch between the needs of the market and the skills of nationals can no longer be ignored, says a new report by Booz & Company.

New labor policies that align supply and demand must be instituted to reflect economic liberalization and the gradual withdrawal of states from markets. They must create sustainable opportunities for nationals and protect the rights of non-nationals. Most important, they must provide security against economic fluctuations. “In this way, the region’s labor and economic policies can be brought in sync to create a solid foundation for long-term economic stability and growth,” explained Richard Shediac, a partner with Booz & Company.

Rethinking Labor Market Strategy in the GCC

Despite the global financial crisis, the long-term growth prospects for the Gulf remain solid: the region’s economies are less likely than those in much of the world to experience deep recession. As such, they will continue to have the same challenges as before the downturn in terms of labor demand: double-digit levels of unemployment among nationals and a need for foreign labor.

The Situation Today

Many GCC nationals work in the pubic sector’s well-paying but over staffed jobs, and will shy away from working in low-level fields such as construction and mining where demand is high. Moreover, there is a gap in filling high-skilled jobs where demand is growing. Unemployment is also high: in 2005 in Saudi Arabia the rate was 11 percent and 28 percent among males aged 20 to 24 years. In the UAE, 12 percent of nationals were unemployed, including 33 percent of the country’s youth.

The region’s education system has not kept pace with the needs of the GCC economies; high illiteracy rates, and low educational enrollment rates reign. “Additionally, there is a current trend among nationals in pursuing degrees in fields that not necessarily meet the needs of the job market and as such, students have little perspective on which areas of study will prove useful for their future career, and on graduation, are frustrated by a lack of appropriate job opportunities,” stated Samer Bohsali, a principal at Booz & Company.

As GCC governments try to downsize public sector employment to shift toward more market-driven policies, they look increasingly to the private sector to provide solutions. Some impose quotas on the private sector as part of their nationalization drive. In 2005, Saudi Arabia set a 75 percent quota for nationals in the private sector and Oman imposed nationals-only quotas in 24 employment sectors. Many employers protest these measures, complaining there are not enough national workers with the necessary skills and training.

The Roots of the Unemployment Dilemma

After the ’70s/ ’80s oil boom, oil revenues were used to subsidize public services and employ nationals in the public sector; typically paying twice as much as the private sector, alongside excellent benefits and shorter working hours. To satisfy the growing demands for labor in the private sector, GCC governments welcomed foreign workers to do the jobs nationals did not or could not do; resulting in an influx of workers from countries including India, the Philippines, and Indonesia.

“This led to a gulf between the needs of the marketplace and the skills of nationals, commonly referred to as “structural unemployment”—a pervasive problem throughout the region,” said Shediac.

The Only Way Forward

“The GCC needs new labor policies that will move the region away from a welfare orientation, create sustainable opportunities for nationals and protect the rights of non-nationals, while insulating labor markets against economic shocks,” explained Bohsali. Policymakers must assess market performance, set objectives, articulate policies, and select and design new programs to address these issues.

The Need to Gauge Market Performance

Wages, income distribution, and hourly compensation costs, the ratio of employment to population, labor productivity, working hours, unemployment duration and benefits, and the educational levels of the labor force are some indicators used to assess market performance. These are then mapped against the market’s key objectives to attain employment, create income security, and allow for wage and work flexibility.

Without adequate data, it is difficult to develop effective labor policies and many GCC countries lack reliable data collection mechanisms, creating a fundamental obstacle for governments to assess the needs of their markets and design programs accordingly. “GCC nations must gain statistical data to map out successful battle plans for their markets,” commented Shediac.

The Balance between Flexibility and Security Objectives

Setting objectives for the labor market is a balancing act between creating new jobs and infusing the market with a sense of energy and opportunity, while protecting those already employed.

Flexibility objectives focus on avoiding institutional wage arrangements, and security objectives involve protecting workers who choose to collectively organize, the establishment of health and safety regulations in the workplace, and providing benefits during periods of unemployment.

Historically, security objectives have taken precedence in the GCC to protect nationals and restrict the number of foreigners allowed to work in a specific field. “In setting quotas on the percentage of expatriates working in specific fields, governments free up jobs for nationals, but while this increases security, it does little to promote competitiveness,” said Bohsali.

The Need for a Mix of Active, Passive and Protective Policies

Labor market policies must rest on three pillars: active, passive and protective. An ideal policy portfolio balances all threefor a country’s specific security and flexibility objectives.

Active policies work to create jobs and improve the quality of the labor market by providing the unemployed with work and creating a more robust and skilled labor pool, which in turn increases productivity and earnings. Few active policies are implemented in the GCC.

Passive policies are aimed at providing a safety net for workers during periods of unemployment and downturns. “Creating income security for those out of work helps counteract job seekers’ frustration and discouragement. GCC countries have tended to promote these policies, but if implemented on their own, passive policies can create fewer incentives for job seekers to find work,” Shediac commented.

Protective policies which set labor standards and conditions, typically take the form of legislation and regulations. These govern health and safety measures, wage setting, contract conditions, training requirements, and other issues that are essential to a fair and safe workplace.

Creating EmploymentDesigning Active Programs in the GCC

“The GCC needs more active labor policies to create positive incentives in the market, which can ultimately replace the current restrictive nationalization policies,” Bohsali explained. Active labor market policies include job creation programs, training and retraining initiatives, and public employment services.

Job creation programs increase the number of employment opportunities and are most valuable during cyclical economic downturns. They include creating job pools, to promote public sector positions for the unemployed; establish wage subsidies; and implement trial employment programs.

Training and retraining programs are also needed, which focus on equipping workers with the skills they need to compete in the marketplace and the global economy by addressing structural problems underlying unemployment. On-the-job training helps employers develop programs to update workers’ skills and apprenticeships train people on the job.

Public employment services are also necessary such as career guidance for resume writing, job applications, interview preparation, and job hunting. Internships can develop students’ interest in various professions by allowing them to sample careers they might want to pursue, while self-employment programs can be instituted to guide entrepreneurs and small business owners in their search for financing.

Passive Policies in the GCC

Passive policies in the form of financial assistance are aimed at providing a safety net for workers during periods of unemployment and potential downturns (similar to the latest financial crises). There are two types of passive programs: unemployment insurance and unemployment assistance. Insurance programs are mandatory in most countries in the world and tend to be jointly funded by employers and employees. With the exception of Bahrain, there are currently no unemployment insurance programs in the GCC, either mandatory or voluntary. Governments typically support such policies out of social responsibility, along with the desire to ease people’s financial distress during unemployment spells. “Unemployment assistance is more common in the GCC and is the basis of the region’s labor policies to date. Universal reliance on welfare will diminish as more active policies are put into place,” Shediac explained.

The Increasing Need for Policies that Protect Employees in the GCC

The heavy reliance on foreign labor creates a need for measures to protect the rights of non-nationals, keeping the GCC an attractive labor destination in coming years. Protective policies are divided into employment standards, employment protective legislation, and wage-setting mechanisms.

Employment standards regulate working hours, holidays, and maternal/ paternal leave; regulations that govern the termination of employees, and regulations on severance payments. Employment protective legislation ensures a healthy and safe working environment and measures that guarantee equal treatment in the workplace.

Wage-setting mechanisms determine remuneration that workers receive. A minimum wage is not an ideal option; a low minimum wage will not attract nationals and a higher one would be disadvantageous to local industries. “One solution is an occupation-specific minimum wage in labor-intensive sectors to protect foreign workers from the rising cost of living and from employer exploitation,” Bohsali said.

The Way Forward

As GCC countries seek a natural balance and alignment between the skills of their workforce and the opportunities available within their market, policymakers need to:

  • Clearly articulate high-level labor market objectives and establish a security-flexibility balance. GCC countries must build up their statistical data and the balance between the needs of economic growth and national social agendas must be aligned to ensure security of nationals in the workforce while maintaining flexibility for the recruitment of non-nationals wherever needed.

  • Determine an adequate mix of labor market policies to achieve labor market objectives. Policymakers can focus on achieving a security-flexibility balance through a blend of active, passive, and protective programs that are customized for their countries’ specific needs and challenges. “GCC countries must also weigh the benefits and costs associated with labor policies, testing a mix of several programs and evaluating and streamlining along the way,” commented Shediac.

As such, a clear articulation of objectives and adequate mix of labor policies will go a long way in addressing labor market inflexibilities, fragmentations, and mismatches.