Restructure the labor market in a revolutionary way

The current state of the GCC labor market dynamics is not sustainable as the labor force is growing increasingly. However prior to any labor reform there has to be a vision about where policy makers want to drive these economies. Dependence on expatriate labor for private sector employment and the public sector acting as the employer of first and last resort for nationals is not viable. Unlike the oil importers of the Middle East, the GCC economies are creating jobs but they happen to foreigners not nationals. In Saudi Arabia alone, some 847,000 jobs were created in the private sector in 2009 of which all went to non-Saudis. At the core of the problem it’s not the businessmen, as businessmen the world over are profit maximizers when given the opportunity. The private sector in the GCC is taking advantage of the incentives structure. Cheap and abundant foreign labor that is supportive of any undertaking. The national whose trying to look for a job will not be able to compete as the wage entry point is far higher. In fact, the nationals are unsuccessfully competing with prevailing wages in India, Pakistan and the Philippines, is a battle lost from the outset. As long as expatriates exist in abundance there will always be a shift in the labor price curve that will remain unmatched by nationals. As the cost of labor is rising for some in the sub-continent the shift to cheaper labor providers in South East Asia is obvious. The easy access to such labor is one part of the problem. The current incentives in the private sector in the GCC is for low skills and basic education supported by low wages. The challenge is to move to high skills and university education. In this environment there is little competition taking place on productivity or technology usage level and more on who hires the cheapest foreign worker. Training is little and usage of technology becomes a subsidiary input as low wage expatriate labor supplants many other inputs. And there is another predicament created in this low skills-low wages environment: potential job seekers don’t invest in their education nor are employers. If the demand of skills is low so will the supply of skills will be low so will the level of education required and sought by job seekers will be low. It is also the case that the supply of adequate skills by the education system in the GCC is meeting the requirements of the private sector. There is a skills gap but that should be addressed as more are being educated abroad now but also as a result of the greater demand within for an educated cadre of nationals. Restructuring the labor market and creating high skilled/high paid jobs for nationals will lead to greater domestic consumption and multipliers. Higher incentives could lead to higher productivity and work ethics will increase.

Moreover, employers don’t invest in training, as expatriates are not perceived as a long term investment and nationals have a tendency to job-hop, so no incentive to train nationals.

Measures have to be taken to stop the constant inflow of foreign labor together with a phasing out policy of existing foreign labor in the GCC countries. Labor laws which tend to favor and protect nationals and much less so for foreigners have to change. Firing and hiring nationals has to become far easier so as to instill a higher work ethic amongst nationals and foster labor competition. The private sector will shout and complain about losing its competitive edge and they will alarm policy makers about the threat of inflation as higher wages are paid for nationals. Inflation will not necessarily rise due to the replacement factor of expatriates with nationals. Simply put, if one national is hired for every eight expatriates that will not create inflation. The private sector will see profit margins falling and they might want to raise prices to maintain their margins instead. Policy makers might be concerned about the reaction of the business community but hiring nationals is a greater goal than high profit margins. What if students are trained in universities in their respective countries or abroad if they cannot find employment back home. As long as open migration is the preferred policy a low wage economy based on low skills and low productivity will dominate. Nationals will neither have the desire nor the incentive to compete in such a low wage environment. The much touted SMEs will not take off as long as low wage incentives exist. The spirit of entrepreneurship is stifled in such an environment. Without labor reform the public sector will increasingly have to employee more nationals. There has to be a concerted effort to phase out expatriates over time so that the private sector prepares and the economy moves to a higher wage equilibrium. The GCC economies should focus on their people.

John Sfakianakis

John Sfakianakis

John Sfakianakis is chief economist at Banque Saudi Fransi in Riyadh, Saudia Arabia.

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