The recent moves by the countries of the GCC to increase the participation of their citizens in the private sector jobs market, notably Saudi Arabia's Nitaqat scheme, are not new. However, these moves are crucial to meeting the challenges of increasing employment and boosting growth.
Admittedly, there may be some downside risks for private-sector firms in the short term, including higher staff costs and restricted access to highly skilled foreign recruits. But employment localisation schemes could work. The crucial requirement is for other policies alongside, such as enhancing local skills and incentives.
The GCC's population is expected to grow on average by 2 per cent every year over the next 20 years, compared to over 4 per cent a year over the past two decades. That shift is mostly due to falling birth rates and increasing life expectancy. Accordingly, the number of entrants to the labour force will eventually recede, and the number of retirees increase. But over half the current GCC population is under the age of 25, and they will need jobs too.
Taking all this into account, we estimate that over half a million new jobs will be required every year just to prevent the unemployment rate from rising.
However, the oil-rich governments have committed to increasing labour force participation levels, particularly for females, and reducing the high unemployment rates among nationals. The challenge is therefore far bigger than the demographic pressures alone would suggest. We therefore expect that at least 700,000 jobs a year will need to be created over the next 20 years. And more importantly, most of these jobs need to be taken up by GCC nationals.
Fortunately, the experience of the past decade has been that the region's private sector can create many more jobs. The surge in commodity prices allowed the region's governments to embark on enormous fiscal spending programmes, and the private sector was the main beneficiary.
Between 2001 and 2010 private companies in the GCC added over six million jobs, while the public sector generated around a million. So, at first glance, if historic trends persist, then the GCC should be able to meet its need.
However, history is not always a good guide to future performance. Indeed, most of the economic growth over the past decade, and therefore job creation, could be attributed to the boom in hydrocarbon revenues, which may not be sustained.
So what's the solution?
One solution is greater economic diversification. This has been comprehensively debated, and achieving it would take many years. We will therefore focus here on the other issues, namely salary expectations, lack of skills, and the distortion of incentives. These are at least as important, and, if not addressed, they may undermine the strategy, at least as to employment creation for GCC nationals.
The first problem, then, is salary expectations, or the large difference between salaries in the public and private sectors.
GCC nationals expect to be paid very well by private companies. With the exception of Bahrain, there are no detailed data on salaries in the GCC. But Bahrain's figures, which show that the average salary for a Bahraini in the public sector is 40 per cent higher than that in the private sector, are probably a good guide. What's more, most GCC governments have recently raised salaries and benefits for civil servants. In Qatar, for example, salaries were hiked by up to 120 per cent. How can the private sector compete for local talent? To start with, it is important to distinguish between low-paid manual jobs, such as many of those in construction, and well-paid white-collar occupations, such as finance and business services.
Given that income levels in the GCC are on a par with those in advanced economies, most nationals would not be looking to compete with low-paid workers from other countries (as is equally so in developed economies). Instead, GCC governments must focus on generating highly paid private sector jobs for nationals.
The problem in this regard is that energy ‘rents' make it easy to create and sustain well-paid jobs in the public sector. By contrast, productivity growth in the private sector is pitifully weak. Most estimates suggest that private sector productivity in Saudi Arabia has been flat for the past two decades. Unless productivity increases, companies will struggle to offer similar salary prospects to those in the public sector.
One way to boost productivity is through enhancing education and skills. An increase in the size of the labour force should, other things being equal, lead to increases in output. So, in theory, unlike for many developed economies, the demographic characteristics of the GCC are favourable, since the labour force is expected to grow at a healthy rate.
But if most of the nationals entering the job market end up working in the public sector, the contribution of the increase in the labour force to output growth could be offset by the fall in productivity.
Saudi Arabia's data show that the productivity of government workers has fallen by an average of 1 per cent every year over the past two decades. Combined with flat labour productivity in the private sector, this has suppressed GDP growth by half a percentage point a year.
Skills and opportunities don't match
The GCC countries have already spent substantially on education, with some success. Literacy rates are now all above 85 per cent, compared to 57 per cent in Morocco and 66 per cent in Egypt. However, a bigger problem is the mismatch between the skills acquired by GCC nationals and those required by the private sector, particularly in the high-income brackets.
Over two-thirds of GCC graduates hold social sciences and humanities degrees, whereas less than a quarter study scientific and technical subjects, which are in greater demand by employers. (By contrast, nearly a third of Asian graduates have scientific and technical degrees.)
Of course, the degree choice of GCC students are related to employment prospects. Since a career in public administration could be more attractive than many technical fields, their choice is not surprising. Therefore, the key may be in the distortion of incentives.
Perhaps the most difficult policy to implement will be to enhance incentives for GCC nationals to opt for the education and skills development required in the labour market.
First, like education, changes in behaviour take time to bear fruit. Second, high public sector salaries and benefits are a cornerstone of the GCC's ‘social contract', which in turn helps to preserve the region's political structures.
Another pillar of the GCC's social contract is provision for the weaker members of society; hence the focus on generous unemployment benefits and pension provision in the recent rounds of fiscal stimulus. Inadvertently, and coupled with the safety net provided by strong family bonds, people have little incentive to seek less desirable jobs. Restoring this incentive could be part of the solution.
To sum up, we think the GCC's policymakers will face major obstacles in devising further employment nationalisation schemes - but such policies should still be pursued. The key to success would be to combine these schemes with other initiatives, such as measures to enhance the most sought-after skills, and improve incentives. Together these steps can help solve some of the employment challenges.
The writer is Middle East Economist, Capital Economics
