Fixing Saudi unemployment — more than creating jobs

This is a guest post by Nathan Field — a little break from Egypt, Gaza and all that.

Great Tuesday Washington Post piece by Kevin Sullivan on Saudi women and unemployment. The part at the end on Saudi labor policy and the two-tier labor force is critical.

What Sullivan doesn’t address in much detail though is how the presence of so many foreign workers has distorted wages in the private sector, and causes the unemployment problem to persist in a country where there are literally millions of jobs that Saudis could be working.

Importing foreign labor was necessary initially because for the first several decades of the Kingdom’s development the Saudi labor force was not nearly large enough. Harder to understand is why the situation has been allowed to persist through the present, when despite a reasonably qualified Saudi labor force, the ongoing option of easily hiring workers from countries such as the Philippines and India still exists.

With the option of hiring cheaper foreign workers so readily available, employers have become addicted, and a perverse situation exists where many firms can not afford to hire Saudis but most Saudi nationals can not make even a modest living wage in their own private sector.

The Saudi trucking sector perfectly illustrates this point. Until the 1970s, the overwhelming majority of truck drivers in the Kingdom were Saudi nationals, but over the ensuing decades they have been gradually replaced by workers from some of the poorer parts of the Indian subcontinent or often oftenthe Horn of Africa. $400 to $500 per month is far more than they can earn at home, so there is no shortage of those willing to work these jobs.

On the other hand, $500 is hardly enough to support even a modest lifestyle, much less a family, for a Saudi national living in Saudi Arabia where the cost of living is much higher. Not surprisingly, most don’t want to work in these companies.

This is why, Nitaqat, the new policy that Sullivan briefly mentions on page 3 is so important, because its an indirect attempt to implement a minimum wage that would undo some of these distortions to the labor market that cause the unemployment problem to be so persistent.

Previously, if there were two equal candidates for a job, an expatriate willing to work for $500 and a Saudi for $800, basic business logic suggests the employer will choose the least expensive option. Now, with the minimum wage that is gradually coming into place, there is no theoretical cost advantage of hiring the expatriate over the Saudi.

One of the really important and often overlooked points here is that Saudization and the minimum wage issue is to a large extent a zero-sum game between the interests of private sector firms (the employers) and citizens (the employees) as a whole. And the issue of imposing a minimum wage needs to be understood as an attempt by the government to secure full regulatory control of the labor market - which it hasn’t had due to the power of private sector employers.

A useful historical comparison here might be with US firms before the New Deal. Until the 1930s, the balance of power between employers and employees stood firmly in favor of the former (see The Jungle). Business was generally powerful enough to beat back any government attempt to increase regulation of work conditions.

Only with the crisis of the Great Depression was public opinion so strongly siding with the workers that FDR had the ability to increase the state’s control in this area with policies like a minimum wage, unemployment insurance and to ignore complaints from businessmen which were largely anti-New Deal.

Is Saudi Arabia in a similar situation today with the Arab Spring? Does this give the government enough cover to go after the interests of business, the way FDR did in the 1930s? ** **Maybe. But as we mentioned above, the government and the people in this situation, have different interests than employers, and not everyone can ultimately be happy with the Nitaqat policies.

In general, the costs of doing business for companies will inevitably rise. With higher wages, profits will decrease, and since many of the newly hired Saudi nationals will be younger and less experienced, managers will have to spend more time on training instead of running their businesses, and productivity will theoretically decrease. Ironically, one consequence of a government policy intended to increase employment is that some firms might be less likely to hire new workers in general or will try to get by with fewer.

There are, however, good business reasons why Saudi firms can and should adopt the minimum wage. One obvious benefit is that it would increase employee loyalty. And for big firms hoping to win government contracts (and who can more easily absorb the new costs), voluntarily adopting the minimum wage will likely give them a marketing edge compared to those who drag their feet. But most importantly, as the majority of business persons seem to understand, no one will make any money if the system collapses because of rRevolution due to long-term high unemployment.

Like the US private sector during the New Deal, many (although not all) Saudi private sector firms are complaining about Nitaqat, which they see as unwanted intrusion into their affairs, which will have negative economic consequences for their businesses, and maybe even force some to close their doors. It is probably true, as the government apparently acknowledges but that seems to be a goal if its it bankrupts companies who are only employing low-cost foreign labor.

From the government’s perspective, such a hard-line is necessary to show their resolve on Saudization. The country’s firms already enjoy a fairly significant advantage by not having to pay taxes, so the government sees it as reasonable - and essential for the Kingdom’s long-term stability - to take a stand against those who also refuse to hire Saudi nationals.

For Arabist readers, the implementation of Nitaqat should be viewed as more than just an isolated question of Saudi labor policy. It needs to be seen in the context of ongoing reforms throughout the region as a result of the Arab Spring. There might not be elections or drafting of new constitutions in the Kingdom like there is in Egypt, but the balance of power between workers and employers is shifting - at the government’s initiative - more in favor of the people, and this is an important reform trend that is no less meaningful.

Nathan Field is the co-founder of Industry Arabic. Contact him at Nathan@IndustryArabic.com.