The Implementation of Labour Quotas in the Gulf Cooperation Council

Transcription

1 The Implementation of Labour Quotas in the Gulf Cooperation Council September Introduction Nations of the Gulf Cooperation Council (GCC) have struggled with the social, economic and political consequences of relying on large expatriate workforces (see Table 1). The trajectory of growth and economic development sustained thus far has resulted in rising unemployment among nationals, underdeveloped educational systems and low levels of citizen participation in the private sector. All countries in the GCC have implemented labour nationalisation programmes. The push to nationalise the workforce reflects the desire to reduce reliance on foreign expatriates and preserve national identity. It also acknowledges the fact that long-term development cannot be seconded to foreign expatriates indefinitely. 1 Research shows that expatriates have a fundamentally different relationship with foreign employers than with those in their home countries, as manifested by lower long-term commitment abroad. 2 Thus, having too many expatriate workers negatively affects a country s stock of human capital over the long term. A cornerstone of GCC nationalisation programmes is the implementation of administrative measures, which are usually quotas. In these programs, the state requires employers to hire some minimum percentage of nationals and implements a host of carrots and sticks (incentives and penalties) to ensure that the quota is met. This research builds a new theoretical model to trace the effects of quotas, which in our model are the minimum percentages of nationals that should be employed. This is unique: Other models in the literature study quotas on the number of 1 See Kasim Randeree, Workforce Nationalization in the Gulf Cooperation Council States (Qatar: CIRS, 2012), www12.georgetown.edu/sfs/qatar/ cirs/kasimrandereecirsoccasionalpaper9.pdf (accessed Feb. 20, 2013) 2 See J. Richardson and S. McKenna, Exploring Relationships with Home and Host Countries: A Study of Self-Directed Expatriates, Cross Cultural Management: An International Journal 13 no. 1 (2006): 6-22.

2 Table 1 Demographic imbalances Country 2010 population (m) Workforce Nationals Expatriates Nationals Expatriates Bahrain % 63.9% Kuwait % 83.1% Oman % 71.3% Qatar % 94.3% Kingdom of Saudi Arabia % 49.5% United Arab Emirates % 95.8% GCC % 61.7% Source: Forstenlechner and Rutledge (2011) 3 immigrants allowed into the country. Our focus on the quota of natives that firms must hire reflects the reality of nationalisation policies in the GCC labour markets. We also study the effects of quotas targeted to different skill levels (high and low) on the employment of nationals and immigrants. 3 Our results have substantive policy implications. A successful quota system should go hand in hand with improvements in education, as our results show the importance of enhancing the skill level and productivity of native workers. The results also highlight how different ways of implementing a quota system affect overall and native employment levels. For example, a quota system that gives employers the flexibility to choose low-skill or high-skill workers to fill the quota yields better employment results than when the quota applies separately to each skill level. 2. State of employment in the GCC The large pool of cheap labour has limited the uptake of modern and productive technologies in the GCC region, 4,5 which has held countries back from rebalancing their economies away from oil and gas. Governments have tried various measures to calm social and political unrest in the region (especially pronounced around the Arab Spring), such as raising salaries and improving benefits for public-sector workers. The aim has been to appease the national population, especially the youth who have shouldered the brunt of unemployment. Why do so many firms in GCC countries prefer to hire immigrants? There are many answers, some of which arise from employer and employee perceptions, while others relate to the policies in 3 See I. Forstenlechner and E. J. Rutledge, The GCC s Demographic Imbalance : Perceptions, Realities and Policy Options, Middle East Policy 18 no. 4 (2011): See footnote 3 5 See footnote 1 place and the realities of the labour markets both locally and abroad. Perceptions play an important role in the jobs nationals are willing to accept. Some commentators argue that nationals see themselves as a natural middle class and thus will accept only white-collar and managerial positions, whether or not they possess the required skill set. 6 Nationals prefer public-sector positions, which offer higher salaries and better working conditions than private-sector opportunities, which are typically not attractive enough to lure nationals. 7 Many employers perceive nationals as less productive and more expensive than expatriates, as well as less skilled and less motivated. Even some local employers have reservations about nationals. 8 Nationals are more expensive because minimum wage requirements, mandatory pension contributions and payroll taxes do not apply to expatriates. 9 In Saudi Arabia, the need for nationalisation is dire, with unemployment at record highs and many citizens (an estimated 2 million to 4 million) living below the Saudi poverty line. 10 Nitaqat, the latest government policy aiming to nationalise the workforce, codes businesses into four bands: Red or Yellow for firms that employ too many expatriates (do not meet a specified quota), and Green or Premium for those whose workforces are sufficiently nationalised. The quotas vary by size 6 See N. Mashood, H. Verhoeven and B. Chansarkar, Emiratisation, Omanisation and Saudisation Common Causes: Common Solutions?. Paper presented at The 10th International Business Research Conference, Dubai, UAE, April 16-17, See Wes Harry, Employment Creation and Localization: The Crucial Human Resource Issues for he GCC, The International Journal of Human Resource Management 18, no. 1 (2007): See I. Forstenlechner, M. T. Madi, H. M. Selim and E. J. Rutledge, Emiratisation: Determining the Factors that Influence the Recruitment Decisions of Employers in the UAE, The International Journal of Human Resource Management 23, no. 2 (2012): See footnote 5 10 See Kevin Sullivan, Saudi Arabia s Riches Conceal a Growing Problem of Poverty, The Guardian, Jan. 1, world/2013/jan/01/saudi-arabia-riyadh-poverty-inequality (accessed Aug. 21, 2013). 2 towerswatson.com

3 of firm and sector: 6% in the construction industry, 19% for media and 49% for banking. 11 Earlier nationalisation (Saudization) efforts in Saudi Arabia are widely considered to have been disappointing. Many businesses relocated outside the kingdom to avoid having to hire more expensive yet less qualified talent and because they feared further restrictions ahead. 12 It is also reported that many businesses in the kingdom are unhappy about the fines imposed under the quota system. 13 The United Arab Emirates (UAE) implemented a voluntary quota system in the late 1990s, in addition to providing wage subsidies for locals and imposing wage controls in the public sector. Under the quota system, all secretaries and personnel managers were to be Emiratis by the mid-2000s. But the quota policy had little effect until the government introduced a penalty system, after which the percentage of Emiratis employed in the trade sector rose from 0.019% in 2005 to 2% in 2006, as employers realised the benefits of tapping into local networks. 14 It is unclear whether this effect also extended to other sectors of the economy. Under a soft quota system (without penalties), the percentage of Emiratis in the banking sector rose to 26% by 2003, albeit mostly in HR roles. Many researchers and commentators on nationalisation policies in the GCC point out that a quota system cannot succeed without reforms and improvements to the educational system, as well as effective training after graduation. 15,16,17 The evidence suggests that quotas backed up by penalties will not be effective over the long term Use of quotas as a policy tool to increase local employment The following results are based on certain model assumptions. We assume an open and competitive labour market, where firms are free to hire national or foreign workers. Our model sets the wage for foreign workers by wages in the international 11 See footnote 1 12 See I. Bremmer, The Saudi Paradox, World Policy Journal 21, no. 3 (Fall 2004): See A. Haddad, Foreign Worker Fees Anger Saudi Business Owners, Nuqudy, Dec. 10, Worker_Fees-4077 (accessed Jan. 30, 2013). 14 See footnote 1 15 See A. Al Dosary and S. Rahman, Saudization (Localization) A Critical Review, Human Resource Development International 8, no. 4 (2005): See I. Forstenlechner, Workforce Nationalization in the UAE: Image Versus Integration, Education, Business and Society: Contemporary Middle Eastern Issues 1, no. 2 (2008): See I. Forstenlechner and E. Rutledge, Unemployment in the Gulf: Time to Update the Social Contract, Middle East Policy 17, no. 2 (2010): See footnote 1 labour market. Nationals have a reservation wage (the lowest wage a worker will accept) as set by the public sector, which is typically higher than private-sector wages. We categorize nationals and immigrants as low skilled or high skilled. Specifically, we compare the employment levels of nationals and immigrants with and without quotas, which the model defines as the minimum percentage of nationals that should be employed in the labour market. Our model reveals a number of interesting findings, which we describe below. 19 Impact of imposing a quota Result 1: Imposing a quota on the percentage of natives employed reduces the number of immigrants employed and the total (natives plus immigrants) number of employees. In our model, the reservation wage for nationals is given by the wage set by the government in public-sector jobs, which typically pay more than private-sector jobs. Assuming natives receive higher wages but are no more productive than immigrants, having to divert additional resources to employ more expensive natives has the effect of reducing total employment. Impact of increasing the level of an existing quota Result 2: Increasing the level of the quota leads to a decrease in both total employees and number of immigrants employed, whereas the effect on natives is ambiguous. Any increase in the quota requirement has an ambiguous effect on the employment of natives. The quota reduces the number of immigrants employed and, more importantly, the total number of employees. This drives the firm s production down. Thus, firms face a trade-off, in which they must balance higher employment levels for natives against a reduction in total production. Perhaps foregone production should be weighed against the savings in wage or benefit payments from the government or against the outflow of remittances. Impact of imposing separate quotas on low-skill and high-skill workers Result 3: After imposing quotas on both low-skill and high-skill workers, more natives are employed to fulfil the quota, fewer immigrants are employed and fewer workers are employed overall. 19 See Zaki Zahran, Labour Nationalisation in the Gulf Cooperation Council: The Implementation of Labour Quotas, (unpublished article, Towers Watson, 2013). The Implementation of Labour Quotas in the Gulf Cooperation Council 3

4 Applying quotas to each skill type separately reduces overall employment (and thus also lowers production), but both low-skill and high-skill natives are employed up to the stipulated quotas. Impact of increasing the level of an existing quota on workers of one skill type Result 4: Increasing the quota requirement for one skill level reduces employment for natives of the other skill level. It is interesting that increasing the quota for natives of one skill type decreases employment for both natives and immigrants of the other skill type. This occurs because firms need a proportionate number of both skill levels in the production process. As the quota increases for one skill type and given that natives wages are higher than those in the competitive market firms must divert additional resources to the skill level with the higher quota, leaving fewer resources for employment of the other skill level. Impact of improvement in productivity of natives Result 5: Improving the productivity of natives boosts employment levels. Result 6: Increasing the productivity of natives of one skill level boosts employment of natives of the other skill level. Our model attempts to reflect market realities, where natives are deemed to be less productive than their immigrant counterparts at both skill levels. If the productivity level of natives approaches that of immigrants, however, the firm employs more immigrants and more natives, and thus more workers overall. This suggests that improving the content and delivery of education creates a better educated and more skilful workforce (of either low- or high-skilled workers), thus achieving the higher employment of natives sought by the government. Clearly, governments that decide to impose quotas should also take steps to improve education and training for natives, thereby increasing their productivity. Impact of an indiscriminate quota Result 7: When a quota is imposed indiscriminately regardless of skill type, total employment is higher than when the quota is applied to each skill level. Overall employment is higher where quotas are imposed indiscriminately compared with when the quota applies separately to each skill level. This outcome should not be surprising, given that an indiscriminate quota gives employers a freer hand in allocating resources more efficiently. Result 8: Following the imposition of indiscriminate quotas, natives of the skill type with a lower wage premium are employed to fulfil the quota, whereas natives of the other skill type remain unemployed. Applying a quota to all natives regardless of skill type results in higher employment levels overall. When firms are free to fill the quota with whomever they choose, they can hire natives who demand a lower premium (i.e., high-skilled workers for the higher-skilled jobs), while still retaining more immigrant workers. The caveat, however, is that the low-skilled workers who demand a higher premium relative to immigrants remain unemployed. In the real world, of course, not all low-skilled native workers are unemployed, but using Saudi data from the Central Department of Statistics and Information we find that high-skill Saudis comprise 58% of the high-skill workforce, whereas low-skill Saudis constitute 37% of the low-skill workforce Implications of results for policymakers and business leaders Influencing the employment levels of natives through labour costs has significant policy implications. Overall employment and the employment of natives are both influenced by the wage rates of immigrant and natives. Policies that aim to close the wage gap between immigrants and natives must be approached with care. While reducing the reservation wage for natives will boost their employment under the quota system, increasing the cost of hiring immigrants can inadvertently lead to lower hiring of natives! This result reflects the way firms choose their workers. In this model, the choice is a binary one based on who is deemed cheaper. Even as the cost of hiring immigrants rises, if natives remain more expensive, firms will continue to hire immigrants. These dynamics will change once this wage differential is resolved. The challenge for GCC countries is arriving at the right balance between fostering the growth of the national workforce while maintaining flexibility towards hiring foreign workers. As Chemingui and Roe said, An exodus of these workers would surely cause a rise in the real prices of services and a decline in service quality and quantity Skill levels are determined by educational attainment, where we use the diploma level as the cut-off between low and high skill individual. See Central Department of Statistics and Information CDSI, Employed (15 Years and Over) By Main Economic Activity Groups and Education Status and Saudi Employed (15 Years and Over) By Main Economic Activity Groups and Education Status, Manpower Research Bulletin 2013 Round 1 view&gid=233&itemid=162 (accessed June 10, 2013). 21 See M. A. Chemingui T. Roe, Petroleum Revenues in Gulf Cooperation Council, Countries and Their Labor Market Paradox, Journal of Policy Modeling 30, no. 3 (2008): towerswatson.com

5 5. Conclusion: The need for a holistic strategy Unemployment, underemployment (underutilization of skills) and public-sector overstaffing are the biggest challenges facing the GCC countries. Immigrant workers constitute a very large share of the private-sector workforce, reflecting the region s limited success in improving the quality of local talent. These countries need policies that upgrade the skills of nationals and reduce dependence on the government as the primary provider of jobs and benefits. In this paper, we shed light on the use and implications of quotas as a policy tool to increase the employment of nationals in the GCC workforce. Our results confirm that quota systems should go hand in hand with improvements in education, as enhancing the skills and productivity of the citizenry will increase its employability. The results also highlight how different implementation approaches to quotas have different employment results, both overall and for nationals. A system that allows employers to fill the quota with whatever combination of low- and highskill workers best serves their business needs yields better overall employment results. These results, however, must be weighed against the government s specific employment goals for its citizens. without quotas. Thus, quotas may be viewed as a burden that makes firms less competitive and increases the probability that they will relocate. 22 Competition between neighbouring states will play an important role in the effectiveness of quotas and how strict enforcement should be. These results rely on strict enforcement of the quotas. If firms find a way around them, the leakage would result in lower employment of natives and less reduction in the expatriate labour force. There are also externalities to consider. For example, quotas could damage the region s business-friendly reputation, and the quota may indeed be viewed as a form of taxation in an otherwise tax-free haven. 23 Thus, decision makers need to take a holistic approach in designing effective policies to increase national labour participation in the private sector. Imposing effective quotas, developing additional jobs in strategic sectors other than oil and gas, and upgrading the education system can help these countries tackle the labour market challenges that lie ahead. 22 See footnote Ibid. Quotas reduce production, rendering firms subject to quotas less efficient than those in jurisdictions The Implementation of Labour Quotas in the Gulf Cooperation Council 5

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