The Labor Problem of Gulf Nations – 9/16/16

Citizens of Saudi Arabia, the Gulf nation leading the world’s oil production, have enjoyed the benefits of plentiful petrodollars and cheap foreign labor for decades as locals receive easy, well-paying public sector jobs and private firms hire foreigners to handle the real work.

The arrangement is common in countries of the Gulf Co-operation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). But as the price of oil stays low and the number of Gulf citizens entering the job market grows, the model is crumbling and Saudi Arabia will be the hardest hit. The nation already faces an unemployment rate of 11.6% and only 40% of adult citizens are in the labor force.

Part of the problem is that young Gulf citizens feel entitled to the same types of government jobs their parents had, ones with generous benefits and minimal duties. The other problem is weak demand from the private sector for Gulf nationals who demand higher wages and better treatment than laborers from abroad.

Some governments are trying harder to force private companies to hire locals by setting a minimum proportion of jobs to be filled by natives. Unfortunately, such quotas are wreak havoc on incentives. The work ethic of quota workers suffers – they know they likely won’t be fired since they weren’t hired for their skills in the first place – and employers, resenting being forced to hire those people, can end up cheating either by adding phantom citizens to payrolls, or by giving nationals low-wage, largely superficial jobs.

Of course, the drastic, boat-rocking reforms needed to correct the Gulf’s messed-up labor system are unlikely to appear when so much of the Middle East is still racked with conflict and leaders fear their country will be the next to descend into chaos. Still, cheap oil may make change unavoidable

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