Saudi Arabia Labor Market Report

Transcription

1 Saudi Arabia Labor Market Report September 2014

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3 In the Name of Allah The Most Gracious The Most Merciful

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5 Custodian of the Two Holy Mosques King Abdullah bin Abdulaziz Al Saud His Royal Highness Prince Salman bin Abdulaziz Al Saud Crown Prince, Deputy Prime Minister and Minister of Defense His Royal Highness Prince Muqrin bin Abdulaziz Al Saud Deputy Crown Prince and Second Deputy Prime Minister

6 Contents 5 Foreword by Eng. Adel M. Fakeih, Minister of Labor 7 Executive Summary 11 Saudi Arabia: An Overview 15 The state of the labor market 25 Ministry of Labor actions 35 Impact & Case Studies 39 Interaction with International Organizations 4 Saudi Arabia Labor Market Report

7 Foreword by Adel M. Fakeih, Minister of Labor I t is with great pleasure that I introduce this report on the labor market in Saudi Arabia. Employment is one of the highest priorities for governments throughout the world. It is the basis for prosperous and successful nations. Yet unemployment is currently a global challenge one that has become stronger since the onset of the global financial crisis, especially for the young. It is a great privilege to share the tools and policies that have proved effective for addressing recent labor issues. This report sets out the vision we have for the labor market in Saudi Arabia, some of the actions we have taken, and our proposed way forward. Saudi Arabia s economy has expanded rapidly over the past decades and continues to experience an evolution in its social environment. In many ways, our employment challenges are unique. But there are also many areas where we share common issues and goals with countries across the globe: the transition of youth from education to employment, the upskilling of the labor force, and the provision of high-quality employment services to our citizens, to name but three. I strongly believe that the ability to succeed in all our efforts lies in collaboration. We welcome and value input from other countries and international organizations on how we can better proceed and address the prevailing challenges that many of our nations face today. As you read this report, we hope you will critically engage with our labor challenges and interventions. Where are policies addressing the global youth unemployment problem proving effective? Where have women-specific job creation efforts been successful? I look forward to your comments and suggestions in response to this report. Adel M. Fakeih, Minister of Labor, Kingdom of Saudi Arabia Ministry of Labor, Kingdom of Saudi Arabia 5

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9 Executive Summary S audi Arabia s status as a member of the G20 reflects the extent of its economic transformation over the past 50 years. It is firmly established as a prosperous Middle Eastern state, with some of the best education, health care, and housing services in the region, and an increasingly attractive business environment. The many benefits brought by the transformation of the Kingdom have also brought challenges. Meeting these challenges would not have been possible without foreign labor supplying skills not readily available locally. The growing non-oil private sector, a priority in the government s vision for the future, is still reliant on foreign workers. Temporary foreign workers have been a major source of economic advantage for Saudi Arabia, and will continue to be essential for the foreseeable future. At the same time, Saudi Arabia needs its ever-growing young population to achieve its full potential. At the moment, Saudi-national workers are heavily concentrated in the state sector, but in the future, the government hopes to see a buoyant private sector, predominantly staffed by Saudi nationals. This means that young Saudis must be encouraged to work in the private sector so that the reliance on foreign workers will reduce over time. With this in mind, the Ministry of Labor, in collaboration with other ministries, has moved during the last five years to address labor market challenges. Through significant investment, rigorous analysis, and collaboration with international bodies such as ILO and the World Bank, a portfolio of labor market programs has been developed and launched. Highlights include: Launching large-scale employment support programs, which have reached 2.3 million beneficiaries since 2011 Establishing the world s largest job nationalization program using quotas, banding, and incentives, which has contributed to an increase of 750,000 Saudis in the private sector in four years (a 100 percent increase) A ninefold increase in the number of women working in the private sector, from fewer than 50,000 in 2009, to around 450,000 in 2013 A significant expansion and upgrade of vocational training for high school graduates and jobseekers Establishing a nationwide network of multichannel Job Placement Centers, both physical and virtual Collaborating closely with the private sector to encourage job growth and sustainability Increasing support for foreign workers: bilateral agreements, wage protection, recruitment companies, enhanced mobility provision, and labor-law revision Ministry of Labor, Kingdom of Saudi Arabia 7

10 These programs are still in their early stages, but already there is evidence of their impact. Labor market participation has increased (notably among women and the young), unemployment has fallen, and the number of Saudis working in the private sector has increased. Indeed, the Ministry of Labor is committed to creating job opportunities and enhancing job settlement in the private sector, as well as ensuring better living standards for Saudi employees by protecting them in cases of layoff or injury. Concurrently with promoting the employment of national workers, the government is determined to improve labor market conditions for foreign workers. Measures have been introduced to increase their mobility, eradicate illegal practices that leave them vulnerable to exploitation, and better protect the rights of domestic workers. The government is also seeking to improve communication between leaders and people about the labor market through two participatory dialogue channels social and deliberative. The main building blocks of our labor market vision are now in place, but their objectives are still some way from being fully achieved. The scaling up and rolling out of labor market programs and longer-term institutional changes in thinking, will take time and commitment. The prize is a big one a stronger, more sustainable economy, less dependent on foreign labor and oil. The government is confident of the outcome but remains aware that there is much to be learned from the experience and knowledge of other countries, international organizations, and labor market experts. This report is an open invitation to you to give your feedback on our current and future plans and objectives. 8 Saudi Arabia Labor Market Report

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13 Saudi Arabia An Overview Introduction audi Arabia is the largest Middle Eastern Arab country, occupying 870,000 square miles of S the Arabian Peninsula. This is about two-thirds the size of India and nearly a quarter the size of continental Europe. Historically a center of Arab and Muslim culture and a place of pilgrimage (home to the holy cities of Medina and Mecca), the modern state was founded in King Abdullah, the fifth of state-founder King Abdulaziz s sons to have succeeded him, is the current Custodian of the Two Holy Mosques and governs a kingdom made up of 13 regions. Saudi Arabia is a member of the G20 and the world s nineteenth largest economy in terms of GDP. Its per capita GDP of $31,245 in 2013 ranks just behind South Korea and slightly ahead of New Zealand and Italy. It is rated high under the United Nations Human Development Index, ranked fifty-seventh alongside Bulgaria. (See Exhibits 1 and 2.) Exhibit 1: GDP per capita Exhibit 2: Human Development Index Country Country Global High 98,814 Global High Saudi Arabia 31,245 1st Quartle st Quartle 22,487 Saudi Arabia Average 15,129 Median Median 9,844 Average rd Quartle 3,088 3rd Quartle Global Low 542 Global Low , , ,000 GDP per capita (USD) Human Development Index (HDI) Source: International Monetary Fund 2013 Source: Human Development Report 2013 Population and Demographics Today Saudi Arabia has a population of 30 million people, compared to 6 million in 1970 and 20 million in It is not only a rapidly growing nation, but a young one. Its population has increased at an average annual rate of 3 percent since 2000 and there are 13 million Exhibit 3: KSA population, people below the age of 30. A significant proportion of the population, around 10 million, are not Saudi nationals (See Exhibit 3). Around 70 percent of these foreign residents are male. They are a strong pillar of Saudi Arabia s economy and account for a significant portion of the 11.2 million-strong labor force. This has enabled economic development unhindered by skill shortages, inflationary pressure, or significant currency appreciation. This growing number of foreign nationals up 4 percent per year since 2000 Population (M) % 70% 2008 Saudi 27 30% 70% 31% 69% Non-Saudi +3% p.a % 68% 29 32% 68% 29 32% 68% Source: Central Department of Statistics & Information (CDSI) Ministry of Labor, Kingdom of Saudi Arabia 11

14 compared to a 2 percent annual increase in Saudi nationals reflects the strong growth of the Saudi Arabian economy. Economy This increasing demand for foreign workers reflects recent economic trends. In real terms, the Saudi economy has grown at 6 percent a year since Construction and infrastructure prospects have buoyed industries with a high traditional reliance on foreign labor. Exhibit 4: GDP growth by sector, % 11% 10% 10% 10% 8% 5% 6% 6% 5% 5% 4% 0% 0% 1% 5% 10% 8% Oil Sector Non-Oil Sector Source: CDSI (GDP at constant 1999 prices) Diversifying the economy away from its historic reliance on oil and strengthening the private sector has been reaffirmed as a priority under the current Ninth Economic Development Plan (2010 to 2014). As shown in Exhibit 4, the hydrocarbon sector remains the largest, and by far the most productive, sector generating 47 percent of GDP but other parts of the economy have kept pace in recent years. Between 2005 and 2013 growth in the non-oil sector (8 percent per year) actually outpaced oil (1 percent per year) at constant prices. Private business growth has further stimulated demand for foreign workers, who have historically formed the majority of the private sector workforce, often because they supply skills which have not been available locally. In turn, Saudis dominate the large public sector, accounting for over 90 percent of employment, while 85 percent of workers in the private sector are foreign workers. Labor force participation Since most foreign workers are in Saudi Arabia on work visas, their labor participation rate is close to 100 percent. In spite of this, and relative economic buoyancy, overall participation rates are low by international standards around 56 percent for the total population. One reason for this is the low participation rate for working-age women only 20 percent compared with 83 percent for men. The creative and economic potential of Saudi women is still largely untapped. Addressing this large imbalance compared to other G20 nations is a key policy area for the Ministry of Labor and the focus of a number of initiatives. Although participation remains low by international standards, it has been rising steadily in recent years. Unemployment While participation may be rising from a low base, Saudi Arabia s total unemployment rate (5.7 percent in 2013) is quite low by international standards. This reflects a very low rate for non-saudi nationals, almost all of whom enter the country through a work permit issued by a specific employer. For Saudi nationals, the underlying unemployment rate is 11.7 percent. Though this is high by international standards, government programs have driven a reduction in recent years (from 12.4 percent in 2011). As in many other G20 nations, the young and women have higher than average unemployment rates. Both groups are a priority for the government, which recognizes that invigorating and training youth, and increasing female participation, are essential to sustainable economic success for a young and rapidly growing nation. 12 Saudi Arabia Labor Market Report

15 Exhibit 5 shows that while male unemployment has fallen since 2008, female unemployment has risen. There are now many more working women than in 2008, and the growth in female work force participation has outpaced the number of jobs created for women. This has led to rising female unemployment, and consequently, addressing this is a high priority for the government and the focus of a number of initiatives. These initiatives and other labor market measures are described in Chapter 3, while Chapter 2 sets out in more detail the labor market challenges that they are intended to address. Exhibit 5: Unemployment Rates, Unemployment Rate (%) 25% 21% 21% 20% 16% 18% 19% 15% 14% 10% 5% 4% 4% 3% 3% 3% 3% 0% Men Women Source: CDSI Ministry of Labor, Kingdom of Saudi Arabia 13

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17 The State of the Labor Market E conomic growth breeds challenges and complexity. A growing economy needs an expanding labor force. Saudi Arabia s oil-driven expansion has rapidly outpaced the capacity of domestic labor in terms of both numbers and new skills needed. Development would have stalled if this gap had not been covered since the 1970s by increasing numbers of foreign workers. Of the approximately 10 million non-saudi nationals in Saudi Arabia, most have come from South and Southeast Asia with India, Pakistan, Bangladesh, and Indonesia the main contributors along with Arab nations, as shown in Exhibit 6. Exhibit 6: Non-Saudi nationals split by source country % of Total Non-Saudi Nationals India Pakistan Bangladesh Indonesia Egypt Syria Yemen Palestine Sudan Philippines Sri Lanka Other Source: Migration Policy Centre Gulf Labour Markets and Migration, 2013 estimate Making up one-third of the population and the majority of the workforce, foreign workers are an important element in Saudi Arabia s economy and society. The government recognizes the importance of foreign workers. Their continued presence and contribution to Saudi society is part of the long-term economic plan and vision. At the same time, the government wants to develop the immense potential skills and capabilities of its youthful native population. Its stated ambition is to increase the proportion of Saudis in the labor force and achieve a more balanced Saudi-/foreign-worker split, particularly in the expanding private sector. Linked to this, it has identified labor market imbalances, which must be addressed in a measured and interconnected way. The most fundamental of these is the public-private gap. Seventy percent of Saudi workers are employed in the public sector. By contrast, the private sector workforce is 85 percent foreign. As Exhibit 7 shows, government sectors education, government administration, defense, and mineral extraction are important employers for Saudis. Since the public sector will not be able to grow indefinitely, most of the jobs needed for the growing Saudi population will have to be created in the country s private sector, where there are currently comparatively few Saudi workers. Left unchecked, the public-private imbalance could engender several risks. Besides fiscal issues that could develop in the future, the economy could either become still more dependent on Ministry of Labor, Kingdom of Saudi Arabia 15

18 Exhibit 7: Employment by industry (Saudi Nationals), 2013 Workforce (000) 2,000 1,765 1,500 1,000 1, Public Sector Education Health care Saudi Workforce Size Wholesale and retail trade Agriculture Transportation Manufacturing Construction Hydrocarbons & Mining Financial Services Support Services Utilities Real Estate Information and communication Other Services Accommdation and food Water & Sewage Science & Technology Enterainment Household activities Extrateritorial Source: CDSI foreign workers or see growth restricted by skill shortages. A further risk is that large numbers of young Saudis will not fully benefit from the country s continued economic growth and knowledge transfer. It is generally accepted that the large number of foreign workers in the private sector is a shortterm trade-off for rapid development and economic diversification. The longer term vision of the government, though, has to be a more balanced public-private sector employment profile. Skills, Capabilities, and Education One reason for the current imbalance is the mismatch between the skills and experience of Saudi nationals and those required by the private sector. The economy has outgrown Saudi Arabia s capacity for technical training and skills development. Skills required by the private sector include critical thinking, English language, communications, and specific industry skills. Saudis also often have a cultural disinclination to work in some sectors and occupations. To find these skills, and workers willing to work in certain professions, companies were able to recruit across the globe, and so had little incentive to develop the local labor force. Lacking encouragement, many Saudis do not have the chance to pursue the skills and capabilities required by the private sector, and consequently tend to look to the public sector, where they find socially prestigious jobs,which do not require private-sector skills. Meanwhile, private enterprises look to foreign workers who either have the required skills or are willing to work in professions less attractive to Saudi nationals. In part, this skill mismatch and career motivation reflects the progress and attainment of Saudis in their formative years. At a basic level, there has been significant development, with consistent progress in the elimination of illiteracy. Only 1 percent of Saudis aged 15 to 24 are unable to read or write. The gender gap evident among older cohorts also has been eliminated. Nevertheless, as a consequence of rapid development, there remain small areas where Saudi Arabia lags slightly behind international peers. One of these is the number of Saudi students choosing not to pursue higher education. Just over one-third of Saudis aged 25 to 29 have an education beyond secondary level, which is below international benchmarks. While higher education participation is increasing, the subject choices made by those who do progress are not always a good fit with the demands of the job market or the economy. Private- 16 Saudi Arabia Labor Market Report

19 sector employers prefer graduates in math, science, and vocational disciplines such as engineering, law, and business. Saudi students are, by contrast, heavily oriented toward the humanities and arts. The World Bank estimates that Saudi Arabia has the world s highest proportion of humanities majors. Forty-five percent of university students opt for humanities, education, or health and welfare specialties versus 33 percent in the developed world and the rest of the GCC. However, there is evidence of rebalancing in this regard as well. The Saudi government has funded scholarships enabling just over 200,000 current students to take degree courses abroad. Of these, the overwhelming majority pursue scientific and technical subjects. The Ministry of Labor is also driving the expansion of technical education outside the university system. The International Labor Organisation found that only around 10 percent of the workforce had received any vocational training. Saudi Arabia s intention is to increase this proportion to 45 to 50 percent. This effort is being driven by subsidiaries of the Ministry of Labor: HRDF (Human Resources Development Fund), TVTC (Technical and Vocational Training Corporation), and Takamol (the Ministry of Labor s vehicle for public-private partnerships). Recently, TVTC institutions switched from semesters to trimesters and increased their working day from five to eight hours, doubling the number of hours of training offered annually. The variety of courses offered has increased through contracts with internationally known providers to manage several TVTC programs. The numbers of Saudis completing higher education is shown in Exhibit 8. While increasing the number of students undertaking vocational training courses is an important step toward correcting the skills mismatch, Saudi career paths are also affected by an important cultural mindset. Career choices are driven as much by the social status of the job as by the skills of the worker. One reason for this is that the status of some professions has been diminished by the ready availability of foreign workers willing to take these lower-paid jobs. Exhibit 8: Number of Saudis graduating from Higher Education (2012) 137,119 73, ,250 University graduates TVTC graduates Total Source: Ministry of Higher Education, TVTC Public and Private Sector Prospects Cultural attitudes and a lack of private-sector-friendly skills are not the only things pushing Saudis toward employment by the state. Public sector employment is attractive to Saudis because it sets high expectations, principally in terms of wages and working hours. One of the principal attractions of state employment is a minimum public sector wage, which is higher than the average wage in the private sector and is the effective reservation wage for Saudis seeking employment. Only the best-qualified graduates are likely to find better entrylevel pay in the private sector. For the rest, the public sector is usually more attractive. The advantages of state-sector employment do not stop at pay. Working conditions are usually less demanding than in the private sector, where employees tend to work six days a week as opposed to five. For example, working hours approach 60 in wholesale and retail and nearly 70 in hospitality and food service, whereas public administration is closer to international norms at about 40 hours per week. The private sector does not offer the same level of job security as the public sector, and many private companies do not provide sufficient opportunities for personal development through Ministry of Labor, Kingdom of Saudi Arabia 17

20 training and mentoring. As one young Saudi put it, I want to see myself growing and developing my skills, but private companies do not always promise training. The importance of family and community role models is also a factor. Family traditions of working in the public sector, the higher social prestige of government jobs, and a decided preference for white-collar employment all reinforce the preference. The waiting list for public posts should in theory lead to younger workers seeking jobs in the private sector. But all of the factors mentioned above instead predispose many to wait for a public sector vacancy. The World Bank found in 2012 that young Saudis have a reasonable expectation of a public sector appointment in their late 20s or early 30s The government is seeking to gradually close the public-private gap in pay and conditions (see Chapter 3). This will require changes in both sectors. Saudi and Non-Saudi Cost Differential The private-public gap is also due to foreign workers outcompeting Saudis in the private sector. This is not just because of the skills advantage of foreign workers. If it were, improved training would solve many of the issues. It also reflects an open job market in which Saudi nationals are, in effect, in competition with the rest of the world for local jobs. In particular, it means they must compete with an abundance of foreign workers from lowwage economies. Because their expectations are driven by standards at home, these workers are also prepared to accept low wages for work in Saudi Arabia. Saudis have higher expectations, not least because of the chance of well-paid public sector posts, and are therefore costlier to hire. This has led to a significant wage gap between Saudis and foreign workers, even for the same type of job. In addition, Saudis usually hold less technical jobs than foreign workers. Expatriates occupy two-thirds of posts over 90 percent in the largest category, basic engineering defined as higher-skill, technical professions. By contrast, they are a minority in less technical professions and hold just over one in six clerical jobs. Foreign workers enjoy an edge in both skills and cost-competitiveness. This edge, though, decreases as one rises up the skills scale. The wage gap between Saudi nationals and foreign workers is the widest for low-skill jobs, but decreases for mid-skill posts and there is almost no disparity for high-skill jobs. This shows that when Saudis are highly skilled, the job market becomes a great deal more competitive. The World Bank argued in 2012 that, Any meaningful labor market reform will have to address the differentials in prices and labor mobility between nationals and non-nationals. Saudi Arabia is acting on these issues, both in terms of the wage gap and labor market mobility. The first measures to promote the saudization of the workforce date back to 1994, but the Nitaqat system of regulation introduced in 2011 represents a new level of commitment. Nitaqat is both more wide-ranging and subtler in its implementation than previous saudization measures. Companies other than micro-enterprises with fewer than ten employees, which are exempted are assigned workforce targets which vary according to their size and sector. They are assessed and placed in four categories of performance, either earning rewards or having sanctions imposed, according to these classifications. The targets are market-based and derived from the performance of companies in their sector. 18 Saudi Arabia Labor Market Report

21 The Ministry has also introduced a portfolio of wage subsidies, and in November 2012, created a system of penalties imposed on companies that employ more foreign than Saudi workers. Income from this measure is used to fund training and subsidies for Saudi workers. While the government is eager to ensure the correction of this imbalance, progress should not come at the expense of the rights and conditions of the foreign-worker population. It is the declared objective of the Ministry of Labor to make Saudi Arabia one of the best working environments for guest workers, attracting high quality labor to work here and to protect all employees irrespective of their nationalities. To do this, it acts to protect foreign workers and treat them equally with Saudi nationals in the workplace. One issue under examination is the extent to which current rules for visas, which are granted via sponsoring employers rather than directly to individuals, unfairly restrict the bargaining power and mobility of foreign workers. Another foreign-worker focus of the government has been to support, in particular, domestic workers. An example of this is the Domestic Labor Law introduced in This restricts working hours, guarantees time off, sick pay, and worker accommodation, and regulates means of payment. These Ministry of Labor initiatives are discussed in greater detail in Chapter 3. Exhibit 9: Summary of Saudi Labor Market Imbalances Outcomes and Focus Areas These imbalances strike particularly sharply in five ways identified as priorities. Two groups, youth and women, are particularly susceptible to labor market forces, which add to the wider challenges faced by both groups not just in Saudi Arabia, but across the globe. A third issue is regional variations in employment. This reflects the different levels of economic development and prosperity of Saudi Arabia s regions, which the government wishes to redress through sustainable Saudi/Foreign Worker Cost Differential Source: Ministry of Labor Skills & Capabilities Interdependent Causal Public/Private sector attractiveness levels of investment and development. Fourth, the proportion of the workforce employed in small and medium-sized enterprises (SMEs) is significantly below the international average. Finally, there is an issue of low labor productivity in some sectors, driven historically by the ubiquitous availability of low-cost foreign labor. Key focus areas are shown in Exhibit 10. Exhibit 10: Summary of Saudi Labor market key focus areas* Youth Employment Women Employment Regional Variation SMEs Productivity Source: Ministry of Labor * Each of these five focus areas, which are in addition to the causal imbalances outlined above, is addressed individually below. Ministry of Labor, Kingdom of Saudi Arabia 19

22 Youth Employment While the Saudi economy has performed robustly in the wake of the global financial crisis, maintaining strong levels of growth, it has not been completely immune to some of the problems which came with it. On a global level, according to the International Labor Organisation (ILO), The world is facing a worsening youth employment crisis: young people are three times more likely to be unemployed than adults and almost 73 million youth worldwide are looking for work. The ILO has warned of a scarred generation of young workers facing a dangerous mix of high unemployment, increased inactivity, and precarious work in developed countries, as well as persistently high working poverty in the developing world. Saudi Arabia is no exception, with the comparative youthfulness of the Saudi population making the challenge a high priority for the government. There are countries with higher youth unemployment rates, but the pattern of joblessness among Saudis points to structural issues. The unemployment rate for the 15 to 24 cohort was 28 percent in 2013, which is above the G20 average of 18 percent. There is also an unusually sharp disparity between this rate and the levels of joblessness among older workers. The problem is compounded by low labor-force participation, which is below the level of other GCC nations. A significant proportion of young Saudis 19 percent of 15- to 24-year-olds are classified as NEET (not in education, employment,or training). The extent of the issue becomes clear when NEET levels are compared for two cohorts 15- to 19-year-olds and those aged 20 to 24. There are very few NEETs in the younger group, but the category encompasses almost one in three of 20- to 24-year-olds, indicating problems with the transition from school to work. One element in this is the public-private divide. Most public sector jobs have a waiting list, which means that those in their early 20s are unlikely to win immediate appointments. The government would like to see these young people working in the private sector, but many lack the required skills. Another issue is that the emerging generation of Saudi youth has high expectations of employment. They are often selective when it comes to choosing jobs and often deem only a small number of jobs many of which are in the public sector acceptable and attractive. Managing these expectations and refining culture are critical success factors for the government s labor market measures. Polling of unemployed youth points out further difficulties. The most frequent obstacle cited by both men and women was not knowing the right people. This suggests an insufficiently informed market in which connections matter considerably. Men were likely to complain about low wages while women cited limited child care provision and a lack of jobs offering separate working areas for women. These issues are an urgent priority for Saudi Arabia and its government. Women s Employment Women too are subject both to underlying labor market challenges and historic and social factors which affect them in particular. Participation rates are historically low and the disparity between male and female participation rates a roughly four to one ratio is high relative to other G20 nations. Average female unemployment in 2013 was 20 percent, rising to 33 percent among Saudi nationals and accounting for more than half of total joblessness in spite of the relatively low proportion of women in the workforce. The bulk of this unemployment is in the 20 to 34 age cohort. 20 Saudi Arabia Labor Market Report

23 Women are likelier to work in the public sector, which accounts for the majority of female employment. More than half a million Saudi women, nearly three-quarters of all those in employment, work in education. This tendency is reinforced by female Saudi university students being even likelier than men to choose majors, such as humanities and arts, with low private sector demand. The private sector is dominated by men, with women accounting for fewer than one in five of the Saudi nationals employed. This is, though, an area that has seen real progress albeit from a very low starting point in recent years. The number of women in private sector jobs has gone from fewer than 50,000 in 2009 to around 450,000 in This is the sort of trend that Saudi Arabia wishes to see continue as it encourages growth in female employment. Raising participation rates from the current 20 percent to the 43 percent average of GCC members would lead at current unemployment levels to the admission of 1.9 million more women into the workforce. Regional Variation The government is also keen to address regional variations in employment. Most relate to the way in which industry has been concentrated in particular regions of the country. The bulk of private sector jobs are to be found in three highly industrialized regions: Makkah, Al-Riyadh, and the Eastern Region. Unsurprisingly, these regions offer the highest wages and comparatively greater opportunities to Saudi workers. Indeed saudization rates are higher in these more industrialized regions. As highlighted in Exhibit 11, the unemployment rate for Saudi workers in the most developed regions is lower than the national average of 12 percent. The highest regional jobless rates are found in the north, in Al- Jouf, Tabuk, and Northern Frontiers where rates for women reach almost 40 percent and for men are greater than 5 percent. There is also an educational aspect, with significant variation in high school graduation rates and university attendance. In regions where this has been particularly marked, new universities have been established in the past decade, and a wider educational investment has been made, as the government pursues its priority of reducing regional imbalances. Exhibit 11: Regional Unemployment Rates (Male and Female), Q KSA average from CDSI ~5.6% (1Q2013) 2 Tabuk 1 Al-Jouf Ai Madinah 3 Al-Baha 13 Northern Frontier Hail 12 4 Makkah 5 11 Al-Qassim Asir 6 Al-Riyadh 10 Najran 8 Eastern Region Avg. 12% Male 7% Female 38% Avg. 13% Male 7% Female 40% Avg. 6% Male 3% Female 22% Avg. 4% Male 2% Female 16% Avg. 9% Male 3% Female 31% Avg. 4% Male 2% Female 12% Avg. 13% Male 7% Female 33% Avg. 9% Male 4% Female 32% Avg. 8% Male 3% Female 28% Avg. 5% Male 2% Female 20% Avg. 5% Male 2% Female 18% Avg. 4% Male 2% Female 17% Jizan 7 13 Avg. 8% Male 5% Female 26% Region with above avg. unemployment rate Region with below avg. unemployment rate Source: CDSI Ministry of Labor, Kingdom of Saudi Arabia 21

24 SMEs SMEs defined as companies with fewer than 500 employees play a critical role in job creation, providing the vast majority of new jobs in any economy. They account for 49 percent of total employment and 33 percent of total GDP in Saudi Arabia, but this is still significantly below the global average 63 percent for employment and 47 percent for GDP. They are also less likely to employ Saudi nationals than larger companies, employing fewer than 300,000 Saudis in total. Consequently, growth in SME employment, particularly of Saudis, is a high priority for the government. As noted above, one of the cultural challenges for Saudi nationals is finding socially acceptable types of employment. Employment with conglomerates has far greater prestige than working for a small company unknown to friends, family, or other influential people. This sometimes deters Saudis from seeking employment in SMEs, as can small companies needs for specific skills and their inability to provide the training and career development common in the largest companies and the public sector. The challenges they face in recruiting Saudis, combined with the increasing cost of skilled foreign workers, can make it tough for SMEs to grow. This further reduces their ability to attract local workers, creating a vicious circle of growth-restricting recruitment challenges. Another key driver of SME employment is entrepreneurship. While Gulf countries have a strong history of entrepreneurship grounded in trade and in the logistics and maritime industries, this has become less pronounced in recent decades. In part, this is because of the presence of foreign workers, but it is also because there are few role models capable of inspiring youth and improving the image of Saudi involvement in SMEs. Reasons for this include an education sector not geared toward entrepreneurship and the disincentive resulting from the strong role of the public sector in Saudi employment. Productivity A final significant concern is that the Saudi labor market, and in particular the ready supply of large numbers of low-paid foreign workers, appears to be holding back the productivity of the economy. The IMF has argued that sustained growth in income and employment hinges upon the expansion of the non-oil economy. Among the objectives declared in the Ninth Development Plan is to increase the non-oil share of GDP from its current level of 53 percent to 70 percent by Achieving these objectives will be difficult without a sharp improvement in productivity. Taken as a whole, the Saudi Arabian economy appears productive, with average levels ahead of Singapore and Japan. But when oil is taken out of the equation it drops closer to the level of developing countries, some 0f which are actually improving productivity more rapidly. China s productivity is growing three times as fast, India s twice as fast. Both China and India have colossal potential labor supplies, yet their growth is largely attributable to greater productivity. China has invested heavily in automation and infrastructure. Ninety-eight percent of its 10.4 percent a year GDP improvement between 2005 and 2012 came from productivity gains. Saudi Arabia s 6 percent annual GDP growth over the same period looks healthy it is, for instance, higher than India s average but less than a third of it is due to productivity. By contrast, India devoted significant human capital investment to key export sectors such as textiles and agriculture, with the result that more than 90 percent of its 7.3 percent annual growth was productivity-related. 22 Saudi Arabia Labor Market Report

25 The Saudi economy continues to be dominated by low-productivity sectors such as construction, wholesale and retail, and manufacturing. Consequently, correcting this has become a focus for the government. Low-productivity sectors employ a large majority of the workforce. These sectors tend to have a high proportion of foreign workers and have fueled expansion by further importing labor, rather than seeking to improve productivity. The clear implication is that the ready availability of foreign workers has been a significant contributing factor in Saudi Arabia s relatively poor track record of improving productivity. Saudi Arabia faces considerable labor market challenges. So what measures is it adopting in order to meet them? Ministry of Labor, Kingdom of Saudi Arabia 23

26 24 Saudi Arabia Labor Market Report

27 Ministry of Labor Actions S audi Arabia s responses to these labor challenges are mainly coordinated by the Ministry of Labor. The Ministry s overriding goal is fair and effective regulation of the labor market. It aims to do this by ensuring the existence of appropriate laws and policies, providing employment services, and managing and resolving conflict. Over the last five years, it has also launched numerous measures to combat the challenges outlined in Chapter 2. The commitment of the Ministry and the entire Saudi government is made clear by an annual expenditure on labor reform estimated at SAR 14.9 billion ($4 billion). The key initiative is the Saudi Employment Strategy, approved in 2009 by the Council of Ministers as a means of combating high unemployment in a sustainable and environmentally sensitive way. In pursuing this high priority, the Ministry of Labor has focused on three Active Labor Market (ALM) policy areas. These are: activating demand through saudization and job creation, activating and upskilling labor supply, and creating efficient market-matching mechanisms. Linked with, but not limited to, its key focus areas, the Ministry has also made a priority of certain target groups youth, women, the disabled, foreign workers, and SMEs (see Exhibit 12). All of these programs are underpinned by a commitment to ensuring that they are implemented fully across all 13 regions of Saudi Arabia. Exhibit 12: Active Labor Market Policy Areas and Specific Target Groups Activating Demand Activating Supply Creating efficient market-matching mechanisms Program Regionalization Youth Women Disabled Foreign Workers SMEs Source: Ministry of Labor The Ministry of Labor makes use of four sister organizations in pursuing its policies. These organizations are summarized in Exhibit 13. While much policy and program implementation is conducted by these entities in isolation or in cooperation with other ministries, as new programs are developed, a key aim of the government is to increase the role of public-private partnerships. Exhibit 13: Ministry of Labor organizational structure Ministry of Labor General Organization for Social Insurance (GOSI) Human Resources Development Fund (HRDF) Technical & Vocational Training Corporation (TVTC) Takamol Agency of the state concerned with social insurance Implements social insurance rules, collects contributions from employers, and pays benefits to entitled insured persons and their family members Source: Ministry of Labor Focused on Human Capital Development in Saudi Arabia Supporting the efforts to upskill the national workforce and providing employment support and unemployment assistance Serving both employees and employers Government entity that provides technical and vocational training for youth, preparatory training, vocational preparation, and on-the-job training Falls under jurisdiction of Ministry of Labor and Ministry of Social Affairs Joint venture between the Ministry of Labor and HRDF responsible for business services (primarily Public Private Partnerships) Ministry of Labor, Kingdom of Saudi Arabia 25

28 Activating Demand and Job Creation Demand activation has been the most active of the three ALM policy areas so far. It was a particular priority because Saudi nationals played a small part in the private sector, until recently forming less than 10 percent of the private sector workforce. The initial response to this policy led to the launch, in 2011, of the Nitaqat saudization program. This innovative and successful program sets each private sector company a quota for the proportion of Saudis in its workforce. Within three years, the program has doubled the number of Saudis in private sector jobs, raising their share of the sector workforce to 15 percent. As the work of the Ministry evolves, a key focus is working more closely with those in the private sector in order to understand their needs, involve them when making policy decisions, and do more to promote Saudi Arabia as an easier place to do business. Existing programs already support this objective, but the Ministry remains exceptionally open to greater collaboration between government and employers as a means of promoting demand and job creation in Saudi Arabia. The existing program portfolio ranges from the direct saudization measures of Nitaqat to wage subsidies and support for SMEs. The main interventions administered by the Ministry of Labor are as follows: Nitaqat Nitaqat classifies each private sector company in one of four bands based on the proportion of Saudis in its workforce (saudization rate). The bands range from platinum for the best performers through green and yellow to red for the worst. Requirements vary from sector to sector and by company size. The quota for attaining green-band status ranges from over 6 percent in construction to 30 percent for oil and gas extraction and 50 percent for medium-sized banks and financial institutions. For large banks and financial institutions, the requirement is 65 percent. These bands are shown in Exhibit 14. Exhibit 14: Nitaqat Rewards and Penalties for Private Sector Companies by Band Green Can apply for one visa every two months Can change profession, except to Saudi-restricted jobs Can renew visas Condition-free visa transfer Six-month respite after zakat or revenue certificate expiration Yellow No new visas One visa per departure of two expatriates No transfer or profession change No control on employee transfer to premium/green companies Red No new visas No transfer or professions change Not allowed to open new branches Source: Ministry of Labor Platinum No visa issuance restrictions Easier visa processing Condition-free visa transfer Condition-free profession change for employees One-year grace periods for municipal and professional license or business registration expirations Restrictions on visa requests/renewals force companies to hire Saudis, driving them out of yellow and red zones Companies are penalized and rewarded according to their classification. Green and platinum companies can apply for work and residence permits for new foreign workers and renew residence permits for existing foreign workers. They can also hire employees from red and yellow companies without them having to obtain their employer s consent. Red and yellow companies face sanctions. Red companies are not allowed to renew visas, while those in the yellow zone can only renew a visa when two foreign workers depart. Nitaqat also goes beyond simple numbers to address the quality of jobs. It encourages companies to pay Saudi workers a minimum monthly salary of SAR 3,000 ($800). Those receiving between SAR 1,500 and SAR 3,000 count only as half workers 26 Saudi Arabia Labor Market Report

29 toward quotas, while those paid less than SAR 1,500 are not counted at all. While not a statutory minimum, the Nitaqat norm encourages wage standardization. Since the launch of the program, the number of Saudis in private sector jobs has doubled, raising their share of the sector workforce from 10 to 15 percent. Of the 750,000 Saudis who have found work in the private sector, close to 400,000 are women. Foreign Worker Tariff The Nitaqat program was supplemented in 2013 by a levy on companies whose workforces are less than 50 percent Saudi nationals. They pay a tax of SAR 200 ($50) per month for every foreign worker above the 50 percent threshold. By increasing the cost of foreign workers, the wage gap between them and Saudi workers is reduced. In addition to making national labor more competitive, taxing foreign labor in this way encourages private companies to improve productivity through automation, new technology, and enhanced processes. In energy-intensive sectors, these improvements can have the added advantage of leading to the environmental benefits of cleaner, more efficient technology. Wage Subsidies Further measures to reduce the wage gap, encourage the employment of Saudis, and create jobs, include wage and training subsidies for selected sectors such as tourism and retail. Subsidy programs have also been created for priority groups such as women, the disabled, and recently released prisoners, and there has been wide support for human resources development across the private sector. In 2014, an innovative countrywide subsidy program was introduced to encourage private companies to increase the proportion of payroll spent on Saudi labor. The plan subsidizes a proportion of any increase in the total compensation paid to Saudis, with the subsidy level dependent on Nitaqat band. Job Creation The Ministry also works with the private sector to create new jobs, either in existing enterprises or startups. Through the Human Resources Development Fund (HRDF), the Ministry conducts an annual market scan that aims to identify the sectors with the highest potential for jobcreation growth. To follow up, the Ministry engages with public and private sectors as well as other stakeholders in key sectors to assess their current state and challenges, and to identify future needs. This process is used to create a case for change containing initiatives designed to strategically intervene in the sector and support job creation growth and increased saudization rates. The initiatives are jointly developed and validated with stakeholders to ensure buy-in and ownership and to improve chances of implementation success. This strategic intervention improves saudization and ensures sustainable growth in the job market. Promoting innovation, entrepreneurship, and SME development While the Ministry works with all levels of private companies to identify where government assistance can help create jobs, a particular focus is on SMEs. SMEs play a critical role in job creation, particularly in the less populous of Saudi Arabia s 13 regions, where large companies may be hindered by smaller potential markets. While SMEs represent more than 90 percent of Saudi enterprises and account for 49 percent of employment, they receive only about 2 percent of bank loans. Recognizing this deficiency, the Ministry of Labor is currently developing a mechanism to provide capital to SMEs through a venture capital fund. By providing seed capital for startup businesses as well as capital for existing business expansion, the fund will encourage entrepreneurship and innovation in Saudi Arabia. Entrepreneurs are also eligible for training support through dedicated initiatives such as the Entrepreneur Development Program. This three-week program aims to train entrepreneurs to Ministry of Labor, Kingdom of Saudi Arabia 27

30 support the development of SMEs in Saudi Arabia and to create role models. It focuses on helping business owners develop key business management and planning skills before starting a new enterprise. The Venture Capital Fund and the Entrepreneur Development Program are open to both Saudi nationals and foreign workers, acknowledging the important role foreign workers play in expanding and training the Saudi labor force. Another SME initiative being developed with the support of the Ministry of Labor is a taxi service staffed exclusively by Saudi drivers. This is a significant intervention in a sector historically staffed by foreign workers, and in its initial phase aims to have a fleet of 500 cars and 600 drivers. The service an example of cross-ministry cooperation is overseen by a new joint company comprising Ministries of Transport, Labor, Interior, and HRDF. Activating and Upskilling Worker Supply; Supporting Youth Employment Activating and upskilling Saudi workers are the primary supply-side goals of the Ministry of Labor to resolve the mismatch between Saudi workers skills and private sector needs. While the focus here is working with individuals youth and the unemployed a key element is close collaboration with the private sector to ensure the skills developed are matched to companies needs. Activation Employment Support A crucial step toward activating the labor supply was taken in November 2011 with the launch of Hafiz, an employment support program. Targeted initially at Saudis between the ages of 20 and 35, it provides a range of employment support measures including financial assistance, training courses, and job matching services. Its success in supporting job seekers and preparing them for work led to the extension of the program in February 2014 to job-seekers between 35 and 60 years old. Upskilling Overview Building on the existing achievements of the Saudi education system in preparing students for work in the private sector while meeting spiritual, social, and economic needs is a key component of the government s actions. While this is dedicated to the entire Saudi labor force, young people are a particular priority because of their vulnerability to employment challenges and suitability for training. General education in the Kingdom of Saudi Arabia consists of kindergarten, primary school, intermediate school, and high school. After elementary and intermediate school, students can choose whether to attend a high school with programs in commerce or the arts and sciences, or a vocational school. Post-high school attendance at universities or vocational colleges is optional, but a majority of Saudis continue their studies. The curriculum is diverse, with overall standards set by the Ministries of Education and Higher Education, which also oversee education for people with special needs. The government continues to improve teacher training, student evaluation, blended learning, and the use of modern technology in education and training (such as virtual classrooms). Its efforts have been rewarded by sharp increases in both the number of schools and the quality of education offered. While the government has historically encouraged university education achieving an increase in the number of universities in Saudi Arabia and strong promotion of privatesector-friendly courses such as math, science, and engineering it also recognizes that the university infrastructure needs to be balanced with higher quality, more attractive, vocational training. 28 Saudi Arabia Labor Market Report

31 The Ministry of Labor plays an important role in improving the quality, relevance, and accessibility of vocational training. A guiding principle over the next ten years is the need to deliver high-quality training in the right disciplines and in the right locations to meet the future demands of the private sector across the country. To achieve this, the Ministry aims to engage more closely with the private sector to understand its needs and design a skilldevelopment system that not only meets current needs, but is also flexible enough to evolve along with the economy. One example of this has been the introduction of Saudi Skills Standards. This program works with companies and experts to define detailed job descriptions and skill requirements, and prepare an activity listing for each occupation. This creates an understanding of the skills required for different occupations, ensures consistent outcomes from vocational programs across the public and private sectors, and provides transparency to employers on what they can expect from the vocational system. Another linked initiative is the Arab Standard Occupational Classification (ASOC), currently being developed by the Ministry of Labor. It is a consolidated dictionary of occupations to be used in Arab countries, classified into clearly defined categories according to the tasks and duties performed on the job and the skill level required to perform them. In 2014, the government reached an agreement with the International Labour Organisation and Arab Labor Organization to endorse and promote ASOC as the new official classification standard for Arab countries. While upskilling through vocational training is a priority, the Ministry of Labor also provides career-related advice and training throughout the student s schooling and online job-readiness courses and supports and facilitates training on the job. These programs along with the vocational programs are set out in Exhibit 15. Exhibit 15: Key Ministry of Labor upskilling programs Career education Career Education is a lifelong service to help citizens learn about potential careers and to match their skills and interests with jobs, in order to make the best possible use of human resources. Current provisions incorporate both online and offline support for learning. Job preparation Recognizing the significant role online channels play in the development of Saudi youth, the Ministry of Labor is eager to provide Massive Online Open Courses (MOOCs), in particular, job-readiness courses to be offered during school and training, and on the job.these courses aim to provide both general employability skills and skills tailored to specific types of work. The courses will lead to a career-readiness certificate that is valued by employers. Vocational Education The Ministry of Labor provides technically focused education through its subsidiary, the Technical and Vocational Training Corporation (TVTC). It complements the work of schools and universities through three main channels: Industrial Institutes, Technical Colleges, and Colleges of Excellence. Industrial Institutes provide vocational education to high school students. Their training packages are based on national standards developed to meet the needs of the labor market in technical specialties. They aim to supply all sections of the labor market with technically competent recruits and to upgrade trainee skills. Technical Colleges offer school-leavers a vocationally focused higher education alternative to university. Colleges of Excellence are a newly established flagship program for Saudi students that provide higher courses designed in consultation with private-sector employees. A key element of the courses is combining classroom training with workplace placement.the mix of skills and workplace experience makes graduates attractive prospective employees. Another important element of the Colleges of Excellence is that a part of each college s funding is dependent on the number of graduates who find employment (payment by results). (Continued on next page) Ministry of Labor, Kingdom of Saudi Arabia 29

32 The first wave of public-private partnership vocational Colleges of Excellence, with five world-class international training providers operating ten new colleges, was launched in September The intention is to expand capacity to provide up to 400,000 places over the next decade, with Colleges of Excellence benefitting from the Ministry s Capacity-Building Project that helps training facilities raise operational efficiency and improve the level of graduates. This is a flagship program and as it develops in scale, the Ministry is particularly eager to ensure project leaders learn from international expertise and that the program continues to work hand-in-hand with the private sector. Apprenticeships and On-the-job training On-the-job training takes place through two main apprenticeship programs. Joint training programs last from two month to two years, with trainees spending 75 percent of the time in the workplace and the rest in class or theoretical training. On-the-job private-sector training for youth and other new employees occurs in the workplace under a contract between the employer and trainee. Instruction is provided by a professional trainer or experienced employee. Creating Efficient Market-Matching Mechanisms An efficient labor market needs effective tools to assist job seekers and private-sector employers, and to facilitate matching supply and demand. A range of channels has been created that aim to place job seekers in private-sector vacancies. A particular priority is assigning job seekers from the Hafiz program, especially Saudi youth, to the right channel. The main employment channels are branded as Taqat. These channels offer assistance ranging from intense interventions such as job placement centers and job schools, to light-touch interventions such as an online job-matching engine and employment portals. Taqat Online, an online job-matching portal, stores CVs for all Hafiz employment support applicants. Employers who post vacancies are shown the best matching CVs by the search engine, and make their choices for interviewing. All of these initiatives require a significant IT infrastructure. An integrated IT platform is currently being developed to work across the Ministry and its sister organizations. This will help manage and track the impact of Ministry of Labor initiatives and interventions, as well as provide seamless connections between programs and with user interfaces. The Ministry of Labor has also been active in involving third parties in the creation of efficient market-matching mechanisms. A number of private sector enterprises provide support to job seekers, ranging from career fairs to career discovery workshops and online psychometric tests. The public sector also has a matching mechanism. Applicants register their CVs with the Ministry of Civil Service electronic portal, which builds lists of Saudi job seekers. When vacancies occur, the Ministry nominates the most suitable candidates from the electronic lists. Supporting Women: Securing Access to the Labor Market Women in Saudi Arabia have enormous potential to enrich and support the expanding economy. A variety of measures have been introduced to support women in the workplace, as well as increase their employment opportunities. Because of the historically low participation of women in the workforce, identifying and creating opportunities for them is a key activity. Several current initiatives are devoted to analyzing individual sectors and engaging companies to identify appropriate jobs. Guidelines and legislation supporting the employment of women in the private sector have also been created. This legislation emphasizes sensitivity to religious and social customs, including segregated working areas, where required. Other active interventions include the flagship Female Employment in Retail program, a key employment channel for women (Exhibit 16). 30 Saudi Arabia Labor Market Report

33 Exhibit 16: Female Employment in Retail The Female Employment in Retail initiative, implemented in 2011, requires shops which sell lingerie, cosmetics, and women s products to replace male with female staff within 12 months. In 2014, it was extended to other retail sectors. The initiative also sets a salary for Saudi women working in these shops, and provides training for jobs in sales and customer service, and as cashiers. Another program for women has focused on developing a mechanism and support channels for remote working, enabling women to take private-sector jobs such as translation and e-marketing. This allows employers to acquire skilled female staff without needing to create women-only sections in offices. The program also assists people with special needs, as well as those living in remote areas. Other programs address practical barriers to female participation. Projects under development include daycare centers to provide child care for working mothers and a transportation program for travel to and from work. There has also been active intervention in the public sector, particularly in education, a field where women have traditionally flourished. Of 52,000 public education jobs created by a royal decree in the first half of 2011, three-quarters (39,000) were reserved for women. Support for persons with disabilities Private employers have been encouraged to employ physically challenged people. A powerful incentive offered under the Nitaqat program is the weighting of each disabled Saudi recruited as equivalent to four non-disabled workers in calculating company quotas. The Ministry has also launched a program to support the employment of disabled people. Saudi Arabia s legislation to guarantee employment rights for disabled people is currently under review and jobs are being identified through different employment channels. This effort to support disabled workers and create suitable conditions is supported by other ministries the Ministry of Social Affairs provides specialized free cars to the disabled. Supporting Foreign Workers The Ministry of Labor wants to attract skilled and productive labor by making Saudi Arabia one of the best working environments for foreign workers. To do this, it is focusing on increasing mobility, protecting wages, establishing bilateral committees and agreements, and creating staff leasing companies. Increasing Mobility of Foreign Workers The Ministry of Labor aims to increase the mobility of foreign labor within the country and between employers. This requires close collaboration with the private sector to ensure that the transition from the current sponsorship system is gradual and manageable for companies. Currently, employees of companies classified in the low red and yellow categories under the Nitaqat program are allowed to move to higher-ranked companies without seeking permission from their current employer. In time, mobility initiatives like this will be extended. The abolishingof the sponsorship system has been publicly discussed. Mobility is authorized through an online portal, an important mechanism in the Ministry s support of foreign workers. Ministry of Labor, Kingdom of Saudi Arabia 31

34 Protecting Wages A Wage Protection System (WPS) was introduced by the Ministry of Labor in 2013 to better regulate and enforce the labor practices of the private sector and prevent illegal practices. The system currently covers companies employing more than 500 workers, but will eventually cover the entire private sector. It monitors the payment of wages to both Saudi and non-saudi workers employed in the private sector using bank-certified salary payment files verified through comparison with an employee tax database, while still protecting the privacy of the individual. Companies which do not submit punctual or correct salary files can lose the right to use Ministry of Labor services. WPS demands that all private sector workers, including foreign staff, are remunerated as per their contracts. By enabling the Ministry of Labor s inspection department to identify companies that do not honor their contractual obligations with employees or seek to evade Nitaqat through fake contracts, the policy should, in time, root out or reform bad employers. An overview of WPS is shown in Exhibit 17. Exhibit 17: Wage Protection System process overview Wages file Another benefit is that it enables the Ministry to build a comprehensive database of both Saudi and non-saudi employee salary data for statistical analysis. Bank Wages file, digitally signed, including wire transfer details Source: Ministry of Labor Customers (businesses) Wages file, digitally signed, including wire transfer details WPS Establishing bilateral committees and agreements for domestic workers Many foreign workers work as domestic help in Saudi households. To regulate their employment, the Ministry has established bilateral committees and concluded bilateral agreements with a number of source countries. Bilateral committees aim to strengthen Saudi ties with these countries, as well as to understand their experience and best practices. Agreements ensure standards of employment, and by mitigating illegal immigration, also help to reduce levels of human trafficking. Bilateral agreements have recently been signed with Indonesia, the Philippines, and Sri Lanka. Others are planned for the next two to three years. The Ministry has also revised the Domestic Labor Law. This legislation limits working hours to ten hours per day including prayer, rest, and food breaks and to five hours consecutively. Other features include stipulated vacation, sick leave, worker accommodation provision, and end-of-service benefit. A recently launched online portal provides employment protection information, informing employees and employers about rights and obligations, dispute resolution, and recruitment offices. Staff leasing companies The Ministry of Labor reviews the recruitment process for domestic and other foreign workers to make sure that it is transparent for source countries, recruitment agencies, and employers. One recent development has been the establishment of formal labor-pooling arrangements via staff leasing companies. These support the Ministry of Labor s drive for a more efficient labor market by pooling workers of similar skills and qualifications in independent entities. Leasing companies provide the private sector with workers having skills specific to a particular trade (such as plumbing or computer programming). As well as reducing company fixed costs, leasing companies save private-sector entities from having to apply for visas on 32 Saudi Arabia Labor Market Report

35 an individual basis and encourage labor-sharing as well as skills specialization. The success of these companies has led to the creation of similar staff-leasing companies for Saudi workers. Regionalization of Programs An important aim of the Ministry of Labor is to ensure that support is effective across all 13 regions of Saudi Arabia. Consequently, the Ministry adjusts its programs to regional variations and local needs. For instance, there exist multiple Taqat employment channels in order to offer people in rural areas access to job services. Taqat Online automatically matches local supply and demand, while the developing network of training programs and job placement centers is tailored to specific regional requirements (see Exhibit 18). Exhibit 18: Taqat Job Placement Centers 27 branches in 16 locations Al Quryat Arar JPC Tabuk Al-Jouf Northern Frontier Km radius Tabuk Ai Madinah Hail Al-Qassim Dammam Al Khobar Medina Riyadh Hofouf Jeddah Makkah Makkah Al-Riyadh Eastern Region Taif Al-Baha Abha Asir Jizan Najran Najran Source: Ministry of Labor Jizan These are the programs with which the Saudi government attempts to meet labor market challenges. The natural question which follows is: How far along are they in achieving the objectives set for them? The answers to this question are in Chapter 4. Ministry of Labor, Kingdom of Saudi Arabia 33

36 34 Saudi Arabia Labor Market Report

37 Impact of Labor Market Programs W hile some important initiatives are still in the comparatively early stages of implementation, there is clear evidence that actions taken by the Ministry of Labor, alongside other ministries such as Higher Education and Commerce, have already had a significant impact on key labor market indicators. First, as shown in Exhibit 19, despite extensive population growth, between 2008 and 2013 there was an increase in percentage of overall labor-force participation, from 51.0 to 55.7 percent, including an increase among women, from 17.8 to 20.1 percent. This has been partly due to employment support programs such as Hafiz. These will further help participation among both men and women as programs mature and the requirements for receiving support are increased. More than 2.3 million individuals have benefitted from support programs launched since Exhibit 19: Labor force participation rates Labor force participation rate (%) 90% 80% 76.7% 78.9% 79.0% 79.1% 79.1% 82.6% 70% 60% 50% 51.0% 51.5% 52.9% 54.4% 54.3% 55.7% 40% 30% 20% 17.8% 17.4% 18.6% 19.8% 20.1% 20.1% 10% 0% Male Source: CDSI Female Total Contained within this increase in overall participation was a significant uplift in the number of Saudis, particularly women, employed. Recent years have also seen considerable numbers of Saudis finding jobs in the previously overwhelmingly foreign-worker-dominated private sector. The number of Saudis with private-sector jobs rose from around 700,000 in 2010 to just under 1.5 million in This helped to reduce male unemployment from 3.6 percent in 2008 to 2.9 percent in The Nitaqat saudization program has helped drive this increase in private sector employment. Since its launch, the proportion of Saudis in the private sector workforce has increased from 10 percent to 15 percent, and demand remains robust. While not all of this growth is solely attributable to Nitaqat 6 percent annual growth over the past decade in the national economy has helped create a buoyant, job-creating private sector the program has been a powerful driver in increasing Saudi employment in the sector (Exhibit 20). Ministry of Labor, Kingdom of Saudi Arabia 35

38 Exhibit 20: Number of new jobs taken by Saudis , , , , , ,000 50, ,818 Source: CDSI. 1 Estimate. 81, , , , , Employment measures focused on women have also helped increase the number of Saudis working in the private sector. The number of women employed in the private sector has risen more than ninefold, from fewer than 50,000 in 2009 to 450,000 in Female unemployment continues to be a challenge, rising from 13.8 percent in 2008 to 21.4 percent by the end of 2013, not least because of increasing participation largely driven by the Hafiz program. But unemployment is expected to fall as programs for women scale up and job opportunities continue to expand. Longer-term benefits are also in sight for young Saudis. Youth unemployment rates have been high in recent years due to the combined impact of a growing population and the time that it takes for changes in education and mindset to take full effect. However, the number of young Saudis going onto higher education, especially into newly established vocational training courses, has significantly increased in the last decade. The proportion of those enrolling at more technically focused institutions rather than universities has also grown. Exhibit 21: NEET rate, % of Saudi Youth not in Education, Employment, or Training 22% 21.4% 20.9% 21% 20% 19.8% 19.1% 19% 18.6% 18.8% One important result of this growth (seen in Exhibit 21) in the numbers continuing into higher education has been a reduction in the proportion categorized as NEET (those aged 15 to 24 not in education, employment, or training). 18% 17% It should be noted that many of the programs and reforms designed to Source: CDSI. enhance the employment prospects and opportunities of young Saudis have been launched only recently, and more are still being developed. In the longer term, the gradual increase in the number of young Saudis benefitting from education and training should lead to many more securing employment in the private sector, and so, reduce the dependence of the national economy, and private business in particular, on foreign workers. Wage subsidy programs have also been used to assist private employers in the hiring of Saudis once they become available for work. These subsidy programs are increasingly linked to other programs run by the Ministry (such as on the job training) as well as targeted to specific groups such as graduates. There is also evidence of progress in one of the prime objectives of Saudi Arabia s labor market reforms to reduce dependency on hydrocarbons by raising the productivity of the non-oil sector and encouraging a more environmentally friendly economy. There has been an increase in labor productivity equivalent to over 2 percent annually. The impact of labor reforms has been felt across Saudi Arabia, with the Ministry seeking to open up its actions and new policies to review and critique, not only by conventional media, but also through social media (an important channel for Saudis, whose rate of watching YouTube clips, for example, is one of the highest in the world). In addition, the Ministry actively 36 Saudi Arabia Labor Market Report

39 encourages social dialogue in various tripartite forums organized in the Kingdom (these are discussed in Chapter 5), and includes citizens in discussions about future policies through a dedicated online portal see Exhibit 22. Exhibit 22: Ma an Portal Ma an is a web portal designed to engage people in improving the Ministry of Labor s strategic decisions on labor market regulation. It has five main objectives: To involve people with the decisions and products that affect them To learn from the capabilities of the people in order to implement or provide solutions To strengthen transparency and engagement with the public To amplify the power of collective knowledge and expertise in developing solutions To create a culture of open government and open dialogue The general public is able to access proposed labor market policies and background information through an online portal. Users are able to rate and comment on the different sections of the draft regulation. Feedback reports are created for the policy designers, and top contributors are recognized. This has proved a very effective way to gather citizen input and enhance social dialogue. In summary, while there has been positive change in many labor market indicators over the last few years, the main benefits of the labor market measures introduced are yet to come. They can be expected in the mid-term, once cultural change has supplemented institutional change. What has been seen so far is good, but is only a beginning. See Exhibit 23 for two examples of positive change. Exhibit 23: Case studies of Saudi job seekers Two young Saudis provide examples of how the recently established mechanisms and processes are offering a better, smoother transition from education to employment and chances for women that did not previously exist. Ibrahim, 22, graduated from Jeddah Technical College in He graduated with a diploma in Hotel and Tourism and Technology, but also took courses in administrative finance during two years of study, each made up of three 14-week trimesters. He immediately signed up to Hafiz and received support from the Employment Support program. He was able to attend a career fair and to apply for jobs online via the Taqat program. He found a job working in the head office of a Saudi hotel chain. The post offered a three-month apprenticeship program, which was subsidized by the Ministry of Labor. The Ministry of Labor also subsidizes half of his salary for the first 24 months. Ibrahim had strong incentives to leave the Hafiz program rather than take up his full entitlement of 12 months unemployment support. It was not just a matter of getting the job. He also receives the total remaining employment support payments he would have been paid over the 12 months had he not taken the job. Majd, a 25-year-old woman, is married with two children. She joined the Hafiz program after graduating in Islamic Studies from Princess Nora University, Riyadh, in Initially she struggled to find jobs open to women, but following the launch of the Females in Retail program, she applied and was hired for a job in a makeup shop at a shopping mall in Riyadh. The owner is eager to employ women, having noticed they are more effective than men at selling to other women. Majd works at the shop three days a week and is also attending a short course (one class a week for three months) in financial management, basic IT, career planning, and understanding concepts such as performance pay (most female employees are completely new to the workforce). Next year she hopes to be able to send her children to the daycare center that is likely to open in the shopping mall where she works. This will allow her to increase her working hours. She hopes to eventually work five days a week. Ministry of Labor, Kingdom of Saudi Arabia 37

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41 Interaction with International Organizations and Other Countries S audi Arabia and in particular, the Ministry of Labor sees learning from other countries and international organizations as a priority. Understanding how other countries respond to their labor market challenges can only strengthen the Ministry s ability to deal with its own. Likewise, allowing others to study the Saudi experience, draw conclusions, and document learning, helps support the global fight against unemployment. So it welcomes, and is grateful for, input and advice from expert sources, which range from other countries, international organizations, and NGOs, to labor market experts and private sector consultancies. Collaboration with other countries is conducted via the bilateral committees that have been developed as outlined in Chapter 3 and in more detail below and also through working group visits to observe and understand best practices in more detail. Two major international organizations with which Saudi Arabia works are the International Labour Organisation (ILO) and the World Bank. These collaborations are explained in detail below. The Ministry of Labor has also developed fruitful relationships with two leading American universities. In partnership with the Massachusetts Institute of Technology (MIT), it is developing a highly sophisticated labor-market policy impact simulator capable of modeling the impact of proposed policies on key indicators such as employment, GDP, and participation. A research collaboration with Harvard University s Kennedy School of Government has underpinned evidence-based policy design. Another forum for expert input has been the establishment of Global Advisory Board for the Ministry of Labor. This group of international experts in the labor market, both academics and government officials, meets several times each year to provide input to policy direction and programs. The Ministry also regularly engages business consultancies to advise and support policy and program design, development, and implementation. It will remain open to all of these types of input as it continues to implement its aggressive action plan over the next five years. The sections below highlight the work with ILO and World Bank, two major organizations with which the Ministry of Labor works particularly closely. A final section outlines in more detail the work of bilateral committees Saudi Arabia has formed with other countries. ILO Saudi Arabia is an active participant in the ILO events. It is a regular attendee at the annual International Labour Conference (ILC) in Geneva, each year sending a tripartite delegation of government, employer, and employee representatives and holding bilateral meetings with other countries. Ad-hoc engagements and joint projects take place throughout the year. Ministry of Labor, Kingdom of Saudi Arabia 39

42 The Ministry of Labor also commissioned from ILO a report, delivered in April 2013, reviewing its current labor market policies and recommending actions (Exhibit 24). Exhibit 24: The ILO view of the Saudi Labor Market, April 2013 Saudi Arabia needs to find employment for a young population seeking to enter the labor market, while already suffering from high unemployment and low participation among Saudi nationals. These problems are rooted in private sector reliance on low-paid foreign workers, a culture of entitlement among Saudi nationals, and a mismatch between education and the needs of the economy. Labor market entrants are caught between undercutting in the private sector by low-paid foreign workers and a private sector which often recruits on criteria other than skills and competencies. These issues help explain why Saudi Arabia s rapid economic growth and heavy investment in human development has, while generating social, economic, and educational benefits, not translated into a more productive society or substantial increases in per capita income. The Ministry of Labor supports many of the ILO s conclusions. It has used them to refine existing policies and develop new ones. In particular, since the report s publication, it has launched several new programs in line with the report s recommendations. Four of these are: i) Improve Wages: Measures include a revised wage subsidy program notably subsidizing any increase in the proportion of a company s payroll spent on Saudi labor. ii) Reduce reliance on foreign workers: These include refining the Nitaqat saudization program by charging employers a foreign-worker tariff of SAR 200 per worker per month and introducing, beginning in 2015, a new visa-check program called Program B aimed at ensuring employers consider local talent before seeking foreign workers. In addition, as noted previously, the Ministry of Labor has established staff leasing companies for both Saudis and foreign workers, aiding saudization through the flexibility offered to employers by staff leasing. iii) Promote economic diversification and reduce reliance on low value-add sectors: Several measures have been designed to promote economic diversification and reduce reliance on low value-added sectors. Wage subsidies have been targeted toward higher value-add sectors like retail and tourism, while these sectors have been prioritized in the creation of private sectororiented training courses at Colleges of Excellence. As discussed in Chapter 3, the Ministry is also coordinating numerous upskilling measures. One measure developed since the ILO report is Zadak. This initiative offers an online pretest, e-learning modules, e-coaching during employment, and on-the-job training, supporting higher productivity through a more skilled workforce. The Ministry also plans to reform government procurement processes by incorporating productivity criteria. iv) Promote an environment that improves communication between leaders and the people: The Ministry is seeking to improve communication between leaders and people through two participatory dialogue channels social and deliberative. Social dialogue is led by the Ministry and involves government, employers, and workers in two-day forums on labor issues moderated by a member of the King Abdul Aziz Centre for National Dialogue. Proceedings are documented and recommendations forwarded to the Royal Court. Deliberative dialogue enhances public understanding of labor market issues and informs policymakers of public opinion by combining small group discussions with scientific random polling. Opinion polls are conducted on a specific labor market issue, then a random selection of respondents is provided with briefing material on the subject. The respondents are then invited to a one- or two-day session where they quiz experts 40 Saudi Arabia Labor Market Report

43 including Ministry officials, and finally, an exit poll is conducted and compared to the earlier result. The proceedings are publicly circulated. World Bank The Ministry also works closely with the World Bank, using its expertise in policy development and design to critically assess its own plans, and incorporating best practices from elsewhere. Current joint projects include: Supply Side Intervention Supporting Saudization. This aims to develop active labor market policies and programs to support saudization, notably a system of Job Schools providing real or simulated work experience for job seekers, particularly the long-term unemployed. Interconnected Labor Market Surveys. This aims to support saudization and increased productivity through three studies examining supply (Saudis and foreign workers) and demand (companies and intermediaries) in the Saudi labor market. Behavioral Economics. This looks into non-rational market drivers with the aim of finding ways to nudge employers into investing in Saudi workers and Saudis into seeking private posts and acquiring skills that will increase their employability in the sector. Nitaqat Advisory. This participates in the continuous update of the Nitaqat program, emphasizing progress toward higher productivity and value. Third-Party Review Engagement. This offers third-party input into a restructuring of the technical and vocational educational training sector. Public Private Partnership (PPP). This aims to develop understanding of PPPs and examine their possible application to employment channels for Hafiz recipients. Bilateral Committees Saudi Arabia has formed bilateral committees with 35 countries. Set up when trade agreements are concluded, they provide regular meetings between the ministries of each country to discuss mutual issues and means of furthering cooperation. Labor and employment are often key discussion points, helpingsaudi Arabiato understand achievements and practices potentially relevant to its own situation. Committees can also help resolve matters related to foreign workers. Examples include: The Saudi-Australia Committee: The Saudi-Australia committee has discussed the Australian experience of labor market challenges and job creation mechanisms. It has also reviewed human resources qualifications and employment-visa regulation. The Saudi-Bangladesh Committee: In 2013, discussions focused on Bangladeshis in Saudi Arabia. This led to the creation of a digital database for job seekers looking for work in Saudi Arabia, along with security screening at three levels and discussion of how to reduce immigration costs for foreign workers. The Saudi Indonesia Committee: Discussions have focused on providing more opportunities in Saudi Arabia for skilled Indonesian workers, while dialogue over workforce issues continues through existing bilateral mechanisms. The Saudi-South Africa Committee: The focus of this committee has been occupational health and safety, with Saudi Arabia learning from South African practices. Ministry of Labor, Kingdom of Saudi Arabia 41

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45 S audi Arabia is now in a position to benefit from the building blocks put in place in recent years for a more effective labor market. The Ministry of Labor has made a significant investment in demand, supply, and matching measures whose impact should grow as programs are rolled out, expanded, and increasingly regionalized to ensure that all job seekers and private sectors benefit. Additionally, improved labor regulation should create better working conditions, reducing illegal employment and the vulnerability of employees to exploitation. If these plans are achieved and delivered, Saudi Arabia can look forward to a bright future. Students will graduate well prepared for a job market offering many more opportunities. The number of women employed will continue to increase, and unemployment numbers will fall for Saudi nationals. A more skilled and productive workforce will drive GDP growth as well as fuller employment. But none of this will happen without sustained and concerted effort from the private sector, the Ministry of Labor, its subsidiaries and sister organizations, many other government entities, and the workers themselves. There is still much to do in the short term since many measures will only take full effect in the medium or long term. In particular, the mass upskilling of a growing number of Saudi youth will take time, and the benefits will not be fully realized until the next generation of graduates emerges from higher education, ready to meet the needs of the private sector. However, these graduates will be much more aware, much better prepared, and significantly more qualified than their predecessors. This ready, willing, and able Saudi labor force will enable a more productive economy, much less dependent on foreign workers, with the added benefit of having a smaller carbon footprint. Managing the balance between supply- and demand-side policies over the next few years will be critical to ensuring a smooth transition to this state. The long-term aim of the Ministry is a shift from regulation-induced change to market-driven change through a focus on incentives and upskilling, rather than penalties. The key to the success of this shift is full and continued engagement and cooperation with the private sector, something that remains at the heart of the Ministry of Labor s efforts. We are confident that with sufficient engagement, continued energy, and resolute focus we can realize our goals of ensuring employment opportunities for Saudi labor and realizing competitive advantages for the national economy. Ministry of Labor, Kingdom of Saudi Arabia 43

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