by Dr Steffen Hertog

This piece was originally published on The Washington Post’s Monkey Cage Blog on 31 July 2014.

Citizens of the Gulf monarchies are more dependent on state employment than anywhere else in the world (except perhaps North Korea). As working age populations grow, the implicit government job guarantee is increasingly becoming unsustainable, especially in relatively poorer countries such as Bahrain, Oman and Saudi Arabia. Gulf Cooperation Council (GCC) ruling elites recognize this, and have been pushing for increased private employment of Gulf nationals. These “Gulfization” policies are set to be the GCC’s prime social and economic challenge in coming decades. No one is close to resolving it: Private sectors continue to be dominated by migrant labor, with nationals holding a small or miniscule share of private jobs.

“Gulfization” policies have acquired additional urgency in the wake of the Arab uprisings. The costly wave of public job creation decreed by GCC rulers soon after regional turmoil spread in 2011 has further increased the long-term cost of the government payroll. GCC regimes have become even more sensitive to the economic demands of their young populations – who are for the most part not openly politicized, yet are concerned about their economic status and often expect their governments to cater to their needs. Public sectors in the poorer GCC countries already cannot absorb all new job seekers.

Figure 1: Distribution of employment by sector and nationality in the GCC

What makes Gulfization so difficult? In essence, it is the gap between nationals and migrant workers in both labor costs and labor rights. Nationals typically expect pay and work conditions similar to what is available in government, and can change employers at any time. Foreigners from low-wage countries are willing to put up with much lower salaries:

The ratio of national to foreign wages in the private sector is two to one or more across the GCC. Much of this cost gap persists even when controlling for educational background and types of jobs. They are also typically willing to work longer hours and are often tied to their employer through the “sponsorship” system, which prevents them from moving to a new employer without the consent of their current one. All this makes foreign workers more attractive as employees, especially in the low-skilled and mid-skilled segments of the market.

Some “Gulfization” policies are meant to directly tackle the cost and rights gap between locals and foreigners, while others try to impose higher national participation administratively. The main administrative intervention are nationalization quotas, formally adopted by all GCC governments but implemented by far the most vigorously in Saudi Arabia. The Saudi “Nitaqat” policy, introduced in 2011, places companies into four different levels of compliance depending on their Saudization ratios (with thresholds varying by size and sector). Companies in lower bands are subject to a variety of administrative sanctions.

The Saudi labor administration has much improved its capacity since the appointment of Minister of Labor Adel Faqieh in 2010. Evasion of quotas has become harder than under previous, less differentiated and less tightly supervised quota systems. Yet employers continue to prefer cheaper, more experienced and more easily controlled foreign workers. Firms still manage to game the Nitaqat system through various ways, including “phantom employment” of Saudis who do not actually perform any work – especially in the construction sector, which has seen the largest growth of Saudi employment since 2011.

For quotas to be effective, the labor cost and rights gap has to narrow. All GCC countries have taken some steps in this direction, but they remain tentative and controversial. First, sponsorship systems have been loosened at least on paper: In all countries bar Qatar, there are now at least some conditions under which foreigners are able to change employers. In practice, few expatriates have made use of these rights, which are often ill-understood and unevenly enforced, and which employers sometimes counteract by threatening to expel workers from the country or report them as absconding.

Some GCC governments have also tried to tackle the cost gap: On the one hand, Bahrain and Saudi Arabia have introduced modest fees on foreign workers to make them more expensive. At $27 per month in Bahrain and $53 in Saudi Arabia, they remain far below what would be required to close the wage gap, however.

More substantially, most GCC governments have introduced various subsidies for national employees. These reach hundreds or even thousands of dollars per month, but only Kuwait provides them on a permanent basis. They arguably explain why there are almost 60,000 Kuwaitis in private employment – still only 20 percent of all employed citizens, but almost three times as many as in the United Arab Emirates, which has similar oil income and an only slightly smaller national population. Subsidy systems are also prone to abuse however and are insufficient to fix the core problem: A limited supply of nationals willing to take up private work, and whose education seldom caters to private sector needs.

The core cause of these supply constraints, ironically, is that GCC regimes have not dared to touch their generous government employment policies. The prospect of a secure, low-effort and comparatively well-paid government job has created what labor economists call “waithood” – young job-seekers remaining in a waiting loop until a public job finally becomes available. In this situation, private employment is a gap-filler at best and often avoided altogether.

The prospect of a government job incentivizes citizens to acquire formal education that is often irrelevant on the private labor market. And while subsidies might help address nationals’ high wage expectations, job-seekers continue to harbor unrealistic demands on work conditions, inspired by what they see in government. A recent poll shows that most young Saudis prefer to work six hours or less a day; surveys across the region indicate a continued preference for government employment.

A social contract based on public employment might have made sense in the 1970s, when national populations were small and GCC countries needed to build a bureaucracy controlled by nationals. By now, however, the contract is becoming obsolete. Most nationals play no role in the productive circuits of their own economies, while over-staffing makes bureaucracies inefficient. In the poorer GCC countries, it is also becoming an ever more inequitable way to share the wealth as jobs are spread thinner among growing cohorts of job-seekers.

It is clear that downsizing the public sector, or even substantially reducing its intake, is a non-starter without some quid pro quo. The thinking about how to compensate for future public sector reform has barely started, however.

One simple alternative to government over-employment would be direct, unconditional cash grants to all adult GCC citizens, along the lines of the resource dividend paid to residents of Alaska. In the short run, such grants could be financed out of a reduction in energy subsidies – the other main channel of rent sharing in the Gulf – while in the long run savings in the public payroll could pay for them.

The grants could provide basic income security for all nationals and a potent political justification for more selective government recruitment. Being unconditional, they could be “topped up” with private sector wages, thereby allowing citizens to reach respectable incomes even with modestly paid jobs. If public employees – who already receive an implicit subsidy – are excluded from the grant, this would push nationals toward private employment (including some government workers who might decide to quit their jobs).

An unconditional basic income has been much discussed for advanced economies. The main arguments against such a scheme do not apply in the GCC context. In particular, no new taxes would need to be created to finance it, and the scheme would not create work disincentives relative to the status quo or create moral “free-rider” problems – it would in fact much improve nationals’ engagement with the private labor market. To really solve the national employment challenge, the GCC will have to think about more radical ideas such as these.

Steffen Hertog is Associate Professor in comparative politics in the Department of Government at the London School of Economics and Political Science.