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Labor Force and Development in Saudi Arabia
September 2002 Ishac Diwan and Maurice Girgis
Setting of Study
Saudi population rising at about 3 percent. Oil revenues expected to be constant => oil drag of 3% a year on pc income!! Where will growth come from? Need new sources, incl. Productivity
HD perspective to development essential: => must transform oil wealth into human capacity through education and increased labor productivity. The hidden source of growth
Speed of HD catch-up depends on how fast traditional society can be transformed and effective use of national labor and skills
3
Organization of the Presentation
Introduction 1. Public sector employment and social returns to
education 2. The domestic labor market from a global
perspective 3. The gender dimension 4. Conclusions Annex: labor market policy package
Potential role of education in boosting income growth in Saudi Arabia huge: average education level of LF rising very fast from 5.2 years in 1992 to 6.6 years in 1999.
Rise in average education in LF is 4 months per year with present trend: average education jumps to 11 years per person by 2020, converging to OECD levels.
Ed level is higher than in ME, LA, Africa and china in 1999.
1. Introduction
Projected Growth in Educational Level of Labor Force
0
2
4
6
8
10
12
14
16
1960 1970 1980 1990 1999 2010 2020Years
Ave
rag
e E
d.
Lev
el (
Yrs
.)
OECD ROW SA
Average years of schooling by region, 1999
0 1 2 3 4 5 6 7 8
East Asia and Pacif ic (excl. China)
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
China
Kingdom of Saudi Arabia
5
This has been fueled by high private returns to education
Returns to Education (ratio to unskilled wages)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Saudi Arabia Non Saudi-SaudiArabia
Turkey Jordan Morocco Egypt
%
Primary Secondary Higher
6
To harvest benefits of education/skills: Incentives to accumulate ‘right’ education Incentives for national LF to use their skills Increase participation rates of female LF
Mgt of human capital accumulation requires Free market force, and Regulations
Other countries’ experience in soviet union, Sri Lanka, Egypt, Syria, cote d’Ivoire
7
Causes of failure
Soviet union: too many scientists Sri Lanka: insufficient investments Cote d’Ivoire: expensive education system Egypt, Syria: education leading to ‘status’
in public sector jobs
Recent studies show that under “good conditions”, one extra year of schooling adds 10-12 percent to income, but under the wrong conditions, there will be none
‘Good’ conditions include: ‘Right’ education: meets private sector needs ‘Right’ incentives: nationals to compete in
workplace Globally competitive productivity levels Sufficient investment spending
9
Three Scenarios Best case: 2.5% per capita income growth [low population 1.5%, high
education 4%] Moderate case: 0% per capita income growth [population at 2%;
Education at 2%] Worst case: -2.5% [education misused (0 growth); High population 2.5
Three Scenarios
0
5000
10000
15000
20000
25000
30000
19851990
19951999
20052010
20152020
Oil Private Govt.
Low
High
Moderate
10
A Saudi worker faces 4 questions:
How much education? What type of education? When to join the LF, if at all? Where to locate a job? These decisions maybe biased:
Private versus social education Education to achieve ‘status’ in a govt. Job Delay entry: dependent longer, waiting for govt
job, rent-seeking activities
11
Two inter-related distortions:
1. High pay of government jobs, which attracts Saudis away from private sector
2. Relative freedom of labor importation, which depresses ‘market’ wages
12
3 key issues:
First: passage from state led employment path to market driven path => wages reflect productivity … unification
Second: actively & judiciously manage entry of foreign labor …open labor market …high unemployment of nationals …right level of protection
Third: the gender dimension
13
To realize the best case scenario:
1. Keep private returns to education high 2. Avoid perverse work and education incentives
due to public sector employment; Wrong investments in education by other leap-froggers such as Russia, Egypt, and Sri Lanka.
3. Manage foreign labor effectively for consumers welfare but not in conflict with the full use of national labor
4. Increase female participation rate in the labor force to foster growth and reduce fertility (and the population drag)
14
2. Public Sector Employment & Social Returns to Education
Public sector played two functions: 1. It distributed oil dividend to population in terms of
social services: health, educ., Infrastructure, etc. 2. Employed nationals: social contract: ed.& emp.
Shifting Structure of the Public Sector, 1983-1999
0
100
200
300
400
500
600
700
800
900
1000
1983 1992 1999
Years
Num
ber (
000)
G-Saudis G-NS
15
The government size expanded significantly
Civil service is up to 1 million from 300,000 in ‘83
200,000 expatriates have been replaced by Saudis since 1983
88% of govt employees are Saudis
16
Looking ahead, this system has reached its limits
Efficiency perspective Government Employment as % of Labor Force and of Population
0%
5%
10%
15%
20%
25%
30%
35%
OECD KSA OECD Argentina Mauritius Egypt Indonesia
Gov as % LF Gov % of Population
Saudi Only
KSA
17
Currently, the system is costly
Saudis in govt represent 27% of Saudi LF Govt empl in OECD is only 14% of LF In 1999, govt wage bill
23% of GDP 60% of govt budget 92% of oil revenue
Capital formation is down from 22.2% of govt expenditure in 1996 to 13.6% in ‘99
18
wage differentials create dualities
Civil Service & Private Sector Monthly Wages
0
5000
10000
15000
20000
25000
Illiter
ate R&W
Elemen
tary
Inter
med.
Secon
dary
Diplom
aUniv
+
Exec
utive
s
SR
Civil service Private sector
19
But also
Public Sector compensation package is higher than in private sector because
Higher entry salary and shorter working hours Better fringe benefits Unstressful job conditions Faster promotions plus job security Possibility of holding another PVS sector job Social acceptability
20
There are other financial costs:
Had foreign/national ratio stayed in 1999 as it was in 1983, estimate of
government savings : 29% of wage bill or 17% of government expenditures or 4.5% of GDP
This also bias oil dividend distribution
21
Other negative impacts:
Strong incentives to accumulate “wrong” skills
Reduces attractiveness of working in the private sector
Slow entry in the LF Lower participation rates (males and
females)
22
Composition of University Graduates, 1999
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
KSA Kuw ait Egypt USA Canada UK
Religion, humanities & soc Studies Natural sciences and engineering
Medical sciences
Increasing Share of saudis in LF
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Total LF Govt. Civil Service Private Sector Gvt Nat LF as % inNat. LF
1983 1992 1999
23
Participation in KSA Participation seemingly very low This is largely driven by:
Low participation among females High share of youth in population (and in schools)
0
10
20
30
40
50
60
70
80
90
100
Rate (%)
15-19 20-24 25-34 35-44 45-54 55-64Age Group
Participation Rates by Gender and Age Group, 1999
Male Female Total
24
Dis-incentive are more marked for medium levels of skills => low particip’n
Labor Participation Rates, 1999
0.0
20.0
40.0
60.0
80.0
100.0
120.0
< than Primary Primary Intermediate Secondary Under-grad University
Part
icip
atio
n R
ates
(%)
Male Female Total
25
Low male participation rates in KSA in general
Age Group 15-19 20-24 25-44 45-54 55-64 65+KSA, 1999 18.5 75 93 89.4 60 24.5Kuwait, 1985 13.7 66.4 91.4 54.5 35.3 NAKuwait, 1970 40.7 88.1 98.9 94.43 75.99 32.92Oman, 1993 14.6 76.9 94.9 86.25 63.95 NAYemen, 1999 41 74 95 92.4 79.05 NAJordan, 1987 29 79 95.3 93.25 73.55 NAOECD, 1970 49.8 86.7 97.2 95.53 82.94 22.13
26
3. Domestic labor market from a global perspective
The push factor: foreign LF makes jobs in PVS unattractive, why? Static: social cost <
private cost of FLF Dynamic: disincentives
are created by harsh competition
Government Expenditure Per Capita and Per Capita Real Subsidy Levels
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
1970
1974
1979
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Mil
l. S
R
Per capita sub Gov exp per capita
(Gov)
(per capita)
27
The education gap is narrowing down
Open labor import policy lowered consumption cost
Saudi reservation wage is higher than FLF, esp. at lower skills
Policy is no longer sustainable
Evolution of Excess Ed of Saudis over Non- Saudis, 1992-1999
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
Illitra
te
Read & Write
prim
ary
Interm
ediate
Seco
ndary
Post sec
onda
ry
Unive
rsity
Post G
radu
ate
1992 1999
28
Nationals will soon outnumber expats Emp ↑ from 5.24 mn in ‘80 to
7.2 mn in ‘99 FLF held 1.7 mn more jobs than
Saudis in ‘80; Now it is down to 0.8 mn.
There are about 4 mn. expats The gap between FLF and NLF
is clearly shrinking By 2005, the trend must be
reversed to ensure full employment of new entrants
Evolution of Total Jobs
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
5000000
1980 1990 1995 2000 2005
Non-Saudi
Saudi
29
Expect fewer expatriates in govt & more Saudis in private sector
Recent survey: Saudis are not hired because
Low wage FLF 51.7% Lack of interest NLF 50.7% Experienced FLF 35.1% Disqualification NLF 28.3% Unavailability of NLF
15.1%
New Entrants
-150 -100 -50 0 50 100 150 200 250 300
Saudi
Non-Saudi
Saudi
Non-Saudi
Saudi
Non-Saudi
Public Sector Private Sector Unemployed
83/92
92/99
2000/2004
30
A Central Problem is that Foreign workers work at much lower wages than Saudis
Controlling for education, hours worked, gender, experience (Kuwait, Jordan): premium ≈ +80%
Illite
rate
Prim
ary
Seco
ndar
y
Bach
elor d
egre
e
Over
all A
vera
ge
Non-SaudisSaudis-
5,000
10,000
15,000
20,000
25,000
Education LevelTot.
Com
p. (S
R)
Saudi vs. Non-Saudi Monthly Wages, 1999
31
…FLF work in all skill levels
Distribution of Migrants by Skill Category, Selected Years
0
10
20
30
40
50
60
70
80
1983 1992 1999
High skill Medium skill Low skill
Share of Migrants in Overall Skill Categories, 1999
0
0.2
0.4
0.6
0.8
1
1.2
High skill Medium skill Low skill
Non-Saudi Saudi
• Mainly in low and high skill jobs!!
• But increasingly in medium skill jobs
32
Implications and challenges
Low skill LF ↓ from 65% to 57% (83-99) % Of high skill stayed constant FLF is moving towards medium skill
occupations: from 14.4% in 1992 to 30.7% in 1999
A rising % of Saudis LF is in medium skill jobs (62.6% in 1999)
Clearly, open labor import strategy has reached its limits
33
Different countries have protected their labor market … But, one should be aware of the impact on:
1. Costs to consumers and producers 2. Efficiency, incentives to work and demand for
education 3. Absence of national skills or unwillingness to
accept certain jobs by NLF
Next, we examine each segment of the labor market separately
34
Skilled Labor
Highly mobile, little disincentives to work Participation rates high (98 percent for university
graduates vs. 52.5 percent for secondary) Unemployment rates low (with exception of new
entrants) Wage differential small (S/NS: 2.1, technical and
1.09 managerial vs. 3.0 overall) No reason to protect or to subsidize much; Focus
on entrants
35
Unskilled workers Easy to find reasons to restrict entry, but cost is
high in terms of consumption and production Large benefits from availability of cheap labor
given levels of income and family size Low unskilled FLF wages ($500/yr) keep returns to
education high in Saudi Arabia Saudis unwilling to take on these jobs at the going
market wage rate These jobs may disappear at present reservation
wage
36
Unskilled workers
Participation rate among unskilled Saudis is 60 % only (for males)
Europe’s (min wage in equitable society) and the US experience (inequality=the price of lower cost)
Nationals tend to wait at home until govt job opens up
Solutions: minimum wage for Saudis+safety net (welfare for the old, training for the youth?)
Is this affordable or should their skills be raised? Group of < secondary makes 28.3% of the Saudi LF
37
Medium skills
Thick segment (>65% of NLF) Saudis’ reservation wage higher than
expatriates (participation rate is 60% among males)
Group expanding at fastest rate, should be at work to reap the benefits of education: this segment requires protection
What type of protection? 1. Extent of tax/subsidy? 2. Form: tax (on expatriates) or subsidy (tax
credit to Saudis)?
3. How to avoid loopholes?
38
4. The Gender Dimension
The oil drag is a function of population growth
L-T low participation rates will erode value added of education
If only males worker, growth potential of education is cut by 50%
When women are denied access to labor market, they tend to maximize family size
39
High education & improved health in KSA associated with high fertility
Improvement in health is not followed by demographic transition …poverty trap
Efforts to educate females in KSA have been impressive
However, fertility rates are high:5.5 children per woman vs. 1.7 high income; 2.2 middle income; 2.7 Kuwait and 3.2 UAE & Egypt
40
Female education gains have been strong but more modest than for males
Level of Education by Gender, Selected Years
0
0.05
0.1
0.15
0.2
0.25
No Education R&W Elm Int Sec Univ
Male 87 Male 92
Female 87 Female 92
41
Education increases participation
Labor Participation Rates, 1999
0.0
20.0
40.0
60.0
80.0
100.0
120.0
< than Primary Primary Intermediate Secondary Under-grad University
Part
icip
atio
n R
ates
(%)
Male Female Total
42
But participation rates remain very low
Female Participation Over Age, KSA and Comparators
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
Kuwait 1980 Kuwait 1985 KSA 1992 KSA 1997 Jordan 1987 Yemen 1999
43
The key to increase female participation
Higher pay Special legislation within existing social and
regulatory constraints to encourage increased participation
Proper financial compensation for employers in private sector
Migrant women may be a positive influence
44
5. A Market-based remedial approach
0
1,000
2,000
3,000
4,000
G-Saudi G-NS Pvt-Saudi Pvt-NS
Suadization Program, 1983-99
1983 1992 1999
Saudization has been quite effective
Number of Saudis in both private and public sectors increased
Number of NS decreased in govt but increased in private sector
45
But it is connected to rising inefficiencies
Labor Productivity, Public and Private Sector
0
50
100
150
200
250
1983 1992 1999
Public
Private
TFP-Total and Private Sector, KSA 1981-1999
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Year
TFP
TFP-Total TFP-Private
46
Must find ways to minimize cost of Saudization
There will be about 200,000 new entrants annually in the next few years
There are 4 mn. Expatriates, 95% in private sector
There is substantial room for substitution, but inappropriate policies would reduce global competitiveness, locally and abroad
47
A heterodox policy mix: Tax/subsidy regime …
A market-based strategy is to close the gap between Saudi reservation wage and expatriates’ wages, using taxes and/or subsidies
Private sector will make optimal choices based on net market cost
What is the magnitude of such a tax/subsidy?
48
* Balanced budget approach * Tax/Subsidy magnitude depends on
+wage gap +number of new Saudi entrants +the number of foreign workers in same skill +the degree to which the gap is to be closed
* The data rely on 7th Development Plan * The results are preliminary
Unit Medium Skill Low Skill Tax rate % p.a. 27.8 18.5 Subsidy rate % p.a. 45.7 36.0 Ann. Size of tax/subsidy SR Billion 38.7 25.8
49
Gross tax rate is 27.8%
Dynamic analysis to find jobs for new entrants over a 5-year period:570,000 persons = 1.71 mn. Man-year
There are 2.1 mn. FLF to subsidize 143,000 Saudis => subsidy rate 18.5%. For medium skill: 802,000 FLF/427,000 NLF => subsidy rate 27.8%
But would nationals raise their particp rates?
50
Participation, education, and wages Regional experience confirms that work behavior
depends on levels of wage and non-labor income
Male Wage Elasticities, Selected Countries
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
5.525.93
6.036.393
4.554.75
5.255.95
6.393.72
4 4 4 4.9 3.6 3.723.85
4.1 4.85
Log of Wage
Elas
ticity
of P
artic
ipat
ion
Rat
e to
Wag
e
Highly-Skilled Kuwaiti Men
Medium Skilled Kuwaiti Men
Skilled Jordanian Men
Average-Skilled Jordanian Men
51
Raising wages to reservation levels will increase participation rates
The estimated elasticity is around 0.4 They are higher for medium than for high skills With a suggested subsidy rate of 45.6%, this
could increase participation by 0.4*0.45 or by about 18%; A reasonable achievement
Duration of subsidy should be limited and it depends on effects of experience on productivity
52
Wage return per yr of experience 2.75% to 5%; in 5 yrs => 20% rise in on-the-job productivity/wages
Wage Return Per Year of Experience From Wage Equations Based on Micro-Data
0 1 2 3 4 5 6
WB and Gaza
Jordan
Yemen
Abu Dhabi
%
53
Avoiding loopholes
Subsidy should be temporary Taxes/fees to cover new entrants only Part of subsidy to finance training, re-
tooling and OJT Subsidy to be tied to pension contribution Subsidy to be linked to individuals not jobs Subsidy/tax to be on employer not
employees
54
Other Short to Medium Term Recommendations
Private sector involvement in providing training opportunities
Labor market information network Civil service reforms Transferability/portability of fringe benefits Deregulation of the foreign labor market
55
Main conclusions, comparison with current framework The goal of reforms should be to improve the utilization of
national skills but wise protection also needed. Must accelerate integration of Saudi males and females in
labor force, but not in public sector Use market mechanisms … to attract them in right jobs in
the private sector And non-market interventions: mix of tax on foreigners
and (mostly) subsidies to nationals, especially the young mixed with safety net for low skills and older workers
Instruments exist: permit fees, migrant control system, training funds Missing: magnitudes Training vs clear subsidies Limitations of the fiscal system
56
The challenge: back to the three scenarios
Education effort could produce 3+ percent rise in per capita income/year if: Right type of education & incentives Jobs availability (protect from foreign labor) Women at work (encourage particpation)
Gains will come from improved labor productivity by new entrants in all sectors of the economy
57
Risks Pressure to absorb unemployed Saudis by
adopting “quick fixes” solutions Temptation to drag out subsidy program Opposition of business community to levying fees
on foreign workers Effect of fees on costs, prices & competitiveness Fiscal burden on budget outlays Ineffectiveness of training and retooling Uncertainty of reaction to new, untested ideas Fragmented implementation of reform package
