Meeting the Employment Challenge in the GCC
With unemployment levels of nationals reaching double digits in all GCC countries, despite rapid economic growth over the past decade, the region must effect wide-scale changes in order to reverse the problems of unemployment.
Unemployment is one of the Gulf Cooperation Council’s biggest challenges: It has the potential to depress per capita standards of GDP, jeopardise standards of living, and breed economic inequality. Underemployment (overstaffing or mismatching of skills) is also an issue, the result of governments being the primary employer of citizens who often do not have the qualifications to be competitive in the private sector; for this reason so many expatriates make up the GCC’s private sector workforce, according to a new study by Booz & Company’s Ideation Center—a Middle East think-tank.
The root causes of the GCC’s employment problems are many: an education system not well aligned with the needs of modern industry; citizens conditioned to expect that governments will always take care of them; and often-ineffective policies in areas such as immigration and retirement. Compounding the problem is pressure on the region to generate hundreds of thousands of jobs annually: according to recent World Bank projections, the GCC’s labour force will exceed 20.5 million by 2020—an increase of almost 30 percent from the current estimated labour force of 15.6 million. “The region must effect changes in the culture, in the government, and in private industry if its problems of unemployment are to be reversed,” stated Richard Shediac, a partner at Booz & Company.
Deconstructing the Problem
In 2008, national unemployment in Saudi Arabia and the United Arab Emirates (UAE) was estimated to be close to 13 and 14 percent, respectively, and 15 percent in both Bahrain and Oman, despite the rapid growth in those countries’ economies since 2003. Qatar, by contrast, experienced 3.2 percent unemployment in 2007 (down from 11.6 percent in 2001). “This unemployment decline in Qatar may point to a looming problem that is characteristic of the GCC, where governments serve as the employer of first and last resort,” noted Hatem Samman, Director and Lead Economist of the Booz & Company Ideation Center.
The State of Employment in the GCC
The unemployment picture comes into better focus when broken down into two population categories: the economically active, which includes the working-age unemployed and employed; and the economically inactive, which includes the portion of the population not actively seeking work.
Economically Active but Unemployed—The Most Obvious Problem
The following characteristics exist among the economically active but unemployed in the GCC:
Most are younger than 30: Forty-eight percent of Saudis between the ages of 20 and 24 are unemployed, as are 31 percent of Saudis ages 25 to 29. In Bahrain, 32 percent of those in the 20 to 24 age group are unemployed, as are 33 percent of those ages 25 to 29.
They have low education levels: A large number of the unemployed in GCC countries do not have university degrees.
The unemployed are disproportionately female: Women have it the worst in unemployment terms. In Saudi Arabia and the UAE, for example, the unemployment rate for women with first-stage tertiary education reached 30 and 24 percent, respectively, in 2008.
Their periods of unemployment tend to last a long time: Although data is scarce, the latest Bahraini census shows that 13 percent of unemployed nationals had not worked in eight years.
Economically Active but Underemployed: The Hidden Problem
Employed workers represent the other part of the active population. The majority work in government sectors, which account for more than 50 percent of GDP in most GCC countries, while a small fraction works in the private sector. In many cases, employed nationals are underemployed, which has similar economic implications as unemployment, such as the negative impact on the region’s economic productivity.
Some unemployment is masked by overstaffing: The public sector has become overstaffed, often resulting in the ineffectiveness of many government services.
Some unemployment is masked by quotas: The nationalisation of the labour force in the private sector through quotas has often resulted in nationals who are added to payrolls but not deployed productively.
Some unemployment is masked by the mismatch of skills: Oil windfalls and a pervasive government presence in GCC economies have resulted in the underdevelopment of human capital—a critical input for economic growth, which leads to job creation.
Government dominance of the economy has also resulted in a big gap between the skills required by the private sector and those actually available in the workforce, and has brought to the fore the challenges of substituting nationals for expatriates—and other related complications such as high remittance rates. These masked unemployment phenomena have manifested themselves in economic ills such as low labour productivity.
The Economically Inactive: Another Lurking Problem
“Economically inactive” refers to those members of the working-age population who are not looking for work because they are ill, studying, looking after family, or have taken early retirement. “An inactive population represents an opportunity cost for the economy in terms of its potential GDP and, over time, will either add to the number of the unemployed or will require a significant investment in training to bring them back within the ranks of the economically active,” explained Shediac.
In several GCC countries, the inactive populations in recent years have averaged well over 40 percent of the total active population in each country. Large inactive youth populations may help somewhat explain this large disparity, along with three other factors:
Women’s participation in the workforce is low: The GCC’s average workforce participation rate for women was 33 percent in 2005—a year of torrid economic growth—and ranged from 18 percent in Saudi Arabia to 50 percent in Kuwait.
A significant portion of nationals are unwilling to participate: Many nationals are willing to avoid working in the private sector and become inactive or voluntarily unemployed, because some jobs are perceived as menial and the effective wage is relatively low compared to government jobs.
Some people have jobs but aren’t part of the official workforce: The substantial presence of foreign household labour constitutes a significant part of the GCC’s informal economy. These labourers tend to send money back home to their families—a form of economic leakage that depletes the GCC’s GDP. On the national side, because governments are having difficulty absorbing newcomers, job-market entrants, especially women, are increasingly seeking informal means of work, including self-employment.
“Another potential challenge facing the labour market in the GCC is the fragmentation of the labour market into formal and informal, which can lower the average wage, especially during economic slowdowns, thus exacerbating the unemployment problem,” Samman said.
The Effectiveness of Employment Policies in GCC Countries Have Been Limited
Effective public policies can push labour markets to develop in ways that support socioeconomic goals. The effectiveness of these policies also depends on the nature and efficiency of institutions set up to implement them. Cultural values and attitudes that foster consensus and cooperation among stakeholders can likewise spur economic growth and help the labour market. There are four kinds of policies that have a substantial impact on employment: education, labour, immigration, and social.
Education Policy: Not Aligned with Economic Goals
GCC education policy has yielded disappointing results especially in science and mathematics. The Trends in International Mathematics and Science Study (TIMSS) scores for participating countries in the GCC region in 2007 are low compared to the rest of the world, underscoring the lack of adequate analytical and science-related skills among future job entrants.
Vocational education has fared little better for three reasons. “First, vocational education policy has not been in harmony with economic development in the region. Second, the public perception of vocational occupations is that it is a second-class choice and third, the private sector, including many family enterprises, has tended to prefer cheaper and more dedicated foreign workers and has sometimes discouraged nationals from pursuing vocational training,” Shediac commented.
The misalignment of higher education policy and labour market requirements has produced a quantitative and qualitative skill gap. The private sector hasn’t proposed reforms that would make higher education more relevant to its needs. There have been other problems as well:
Limited capacity: While enrollment levels for tertiary education have grown, many GCC schools are close to capacity.
Limited funding: Long-term education funding has tended to be contingent on income from oil, which creates disruptions in education policy. The contribution of the private sector to higher education funding continues to be limited.
Low quality: The numerous elements that create a poor academic environment for professors limit the quality of higher education in the GCC. The region also lacks the accreditation capacity that exists in other geographies.
Ineffective governance: The higher education system is bureaucratic and rigid, and has thus been unable to evolve and develop.
Labour and Immigration Policies: In Need of Reform
“The influx of expatriates to the region since the 1970s has helped keep some critical industries running, but it has also created problems that cannot be resolved easily, such as threats to cultural identity and heritage,” noted Samman. GCC countries have responded with a barrage of initiatives to reduce the number of foreign workers, where possible, and support labour nationalisation:
Maintain employment of nationals by implementing wage supports—financial incentives for the private sector to hire nationals, and to provide benefits equal to those available in the public sector.
Apply legal restrictions on foreign workers through various quota measures.
Increase employment opportunities for nationals through such measures as worker visas, work permit fees..
Impose ad-hoc measures such as labour mobility restrictions on expatriate labour and their dependants.
“Since their introduction, these measures have done little to curb unemployment in the region,” said Shediac.
Social Welfare Policy: In Need of Revamping
Given the promise of lifelong government employment in the GCC, there has been little incentive for these countries to establish social safety nets, including wide-ranging unemployment benefits, for those who are out of work.
The social safety benefits that exist (mostly cash handouts) are hampered by a mind-set that social welfare is most important as a form of sustenance for the disadvantaged, rather than as a way of getting them to return to the workforce. With no real incentive for the unemployed to return to work, the demand for cash assistance grows. Yet the assistance that is available has not kept pace with the rise in the cost of living or with the increasing number of unemployed. The approach to social welfare therefore is unsustainable.
Imperatives for Developing the GCC Workforce
“Unemployment is a complicated problem in the GCC, and there is no single solution to it. There are structural problems with the economy, with education, and with labour and immigration, and all must be addressed as part of a holistic strategy,” said Samman. Following are some key ideas to help in each area:
Each nation’s strategy must incorporate three critical steps to identify and develop the economic sectors that are likely to maximise value-added jobs for nationals:
Develop competitive sectors: The GCC needs to formulate a clear economic development strategy and figure out ways to make it work.
Promote the private sector: GCC countries need to foster entrepreneurship, engender a culture of corporate governance and disclosure, and build up an infrastructure for private business.
Promote the GCC as a hub for investment: Gulf countries must strengthen their business and economic environments to attract investment from outside their individual borders.
Five critical areas must be addressed to make educational reform successful:
Set education strategies based on carefully considered socioeconomic goals: There needs to be a much stronger link between the education system and the market. This means more communication and coordination between stakeholders—the business community, local community groups, human capital development organisations, private and public universities, and government agencies.
Enhance public and private school performance: Continued support for education infrastructure in the GCC will be paramount in achieving quality education and better performance results. This starts with fostering skills at the teacher and administrator levels and developing a diversified curriculum and a wider and more flexible learning environment.
Upgrade vocational education: Students need to be exposed at an early stage to vocational and technical skills; vocational schools are one of the best ways to do this.
Strengthen scientific research in higher education: There is not enough university-level research and innovation going on in the GCC. This work needs to be done, and at a level that is comparable to elsewhere in the world.
Streamline and clarify the government’s role, capabilities, and responsibilities: The role of governments in education is indisputable, but government agencies can sometimes be highly bureaucratic. There is also a need to reform the roles of the GCC’s Ministries of Education and Higher Education to limit operational involvement and focus on setting national standards and education polices, coordinate stakeholders, and monitor performance.
Labour and Immigration Imperatives
More effective labour and immigration policies are essential to improving the GCC’s unemployment problems. There are three critical areas of need:
Make immigration policies more focused: There is nothing wrong with using foreign labour, as long as it is used selectively.
Revisit the idea of kafalah by following the example of Bahrain to discontinue this system, resuming the role of directly enforcing and monitoring expatriates’ time in their respective countries.
Increase focus on labour participation: Quotas are an imperfect solution to the GCC’s unemployment problems. An alternative is to offer incentives on the employee side. Increased flexibility in employment approaches is a way to address low participation rates.
Another way to increase labour participation is to remove the negative attitudes many nationals have towards working in certain sectors and entry-level positions. “Finally, delaying the retirement age or making retirement laws more flexible can help increase the participation rate for nationals, increase overall economic productivity, and provide young nationals with much-needed mentors in the workplace,” said Shediac.
The scale and scope of the unemployment challenge facing the GCC countries is well understood by regional leadership and these challenges will require attention sooner rather than later.
Addressing these challenges requires a holistic approach comprising three fronts. The first is expanding the economic base and creating additional jobs in strategic sectors in which GCC countries have a competitive advantage and can provide sufficient income for nationals. The second is developing the workforce by reforming the education system and upgrading labour skills to create a generation of skilled nationals to match economic requirements. The third is putting in place effective labour and immigration policies by remaking the system and increasing national labour participation.
With such tools, the GCC will be better able to face the challenges of unemployment that lie ahead.