Firing workers costs local firms dearly

Dubai: The cost of firing a worker in the UAE is higher than that of Sub-Saharan Africa.

By all standards, this cost is very high for employers and may therefore be detrimental to job creation in the UAE, according to a report by the Dubai Chamber of Commerce and Industry.

Rigid employment regulations have undesirable side-effects on the UAE economy such as low job creation, smaller company size, less investment in research and development, and longer unemployment spells resulting in skills becoming obsolete.

"All these reduce productivity. Many economies err on the side of excessive employment regulation, to the detriment of both businesses and workers," the report said.

The report, which uses data from the World Bank's Doing Business 2008 report, discusses the UAE's employment regulations and compares them with those in Singapore and the North Africa/Middle East.

While employment is rigid, firing costs are high in the UAE relative to Singapore. Singapore ranks No 1 worldwide in terms of having flexible employment rules while the UAE ranks 65th out of 178 economies.

The UAE is underperforming its regional average when it comes to the firing cost of a redundant worker, and barely tracking the regional average on non-wage labour costs. It outperforms the regional average on rigidity of employment.

The report notes that Singapore and the UAE have the same non-wage labour costs amounting to 13 per cent of salaries.

A closer look at the employment regulations in Singapore and the UAE reveals that there are no significant differences between the two economies.

Out of 20 employment regulation indicators, the two economies differ only in four. But these differences put Singapore in No 1 position and the UAE 65th worldwide.

The one area of employment regulation that the UAE must revise is the severance pay for redundancy dismissals.

According to Doing Business 2008, the current severance payment for terminating a redundant worker, expressed in weekly salary, is 79.3 weeks.

This is equivalent to 18 months' salary, or a year and a half. The cost of advance notice is 4.3 weeks' salary. This brings the total cost of firing a redundant worker in the UAE to 84 weeks' salary.

Compare this to an average of 25.7 for the Organisation of Economic Cooperation and Development, 26.1 for Eastern Europe and Central Asia, 37.8 for East Asia and Pacific, 55.6 for Middle East and North Africa, 56.1 for Latin America and Caribbean, 66 for South Asia, and 68.3 for Sub-Saharan Africa.

As a first step, the Dubai Chamber suggests that the cost of firing a redundant worker in the UAE be brought down to the average of the Middle East and North Africa region.