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    Foreign worker in Dubai: GCC countries should try to attract  more of the region’s nationals to private sector jobs, IMF says (photo: Ahmed Jadallah/Reuters)

    Foreign worker in Dubai: GCC countries should try to attract more of the region’s nationals to private sector jobs, IMF says (photo: Ahmed Jadallah/Reuters)

    GULF COOPERATION COUNCIL COUNTRIES

    Labor Market Reform Would Boost Jobs, Productivity in Gulf

    IMF Survey online

    November 20, 2013

    • More private sector jobs needed to address boom in young workers
    • Education, training can enhance workers’ skills and boost productivity
    • Set up incentives to encourage Gulf nationals to seek private sector jobs

    A new paper by IMF staff says that comprehensive labor market reforms are needed to reorient the Gulf Cooperation Council (GCC) economies toward greater employment of nationals in the private sector, improve productivity, and support progress toward economic diversification.

    With a rapidly growing youth population poised to enter the work force, more private sector job creation for GCC nationals will be essential if unemployment is to be contained, the report notes.

    The growth model in GCC countries has delivered substantial improvements in living standards over several decades. Access to foreign labor has supported rapid growth in the non-oil sector and low inflation. However, the costs of the current model—particularly the limited employment of nationals in the private sector, the relatively high public sector wage bill, and weak productivity growth—are becoming a concern.

    “Based on current projections, new private sector jobs will only cover a fraction of labor force entrants,” said Padamja Khandelwal, the lead author of the report. “Even if public sector hiring continues at its recent pace, without reforms, unemployment is likely to rise.”

    Improved living standards

    The GCC’s growth model has delivered substantial improvements in living standards in recent decades, the report says. Thanks to the large pool of foreign labor and government spending financed by oil revenue, the region’s non-oil sector growth has been strong and the quality of infrastructure has improved significantly. Employment in the region has risen faster than in other emerging economies.

    The public sector is the largest employer of GCC nationals, while the private sector attracts mostly foreign labor. The wage gap between public and private sector jobs is considerable, particularly for low-skilled workers, making nationals less willing to take private sector jobs and businesses less willing to employ them because they are not competitive with foreign labor. Unemployment among nationals has remained high in some countries, even during periods of strong non-oil growth.

    The report also highlights a number of differences between GCC countries and other oil-exporting and migrant-dependent countries. For example, evidence suggests that the GCC is more reliant on both migrant labor and oil exports. The number of government jobs created for nationals outpaces that in comparator countries. And while the labor market is relatively flexible in the GCC, education outcomes lag behind.

    But the authors also call attention to the considerable risk of rising unemployment among nationals in the coming years. According to their analysis, the region’s current projected economic growth cannot generate a sufficient number of jobs to absorb new labor market entrants resulting from rapidly growing youth population and rising labor force participation rates.

    Pros and cons

    The current labor market structure has benefited GCC economies in many ways, the report notes. Relative to comparator countries, the GCC has made considerable progress in strengthening social and economic development indicators—the availability of the large pool of migrant labor has contributed significantly to these positive outcomes. In addition, foreign labor has helped alleviate inflationary pressures at times of rising public spending.

    But the report also shines a light on the unfavorable consequences of the current labor market structure. Productivity growth has been disappointing, and GCC economies have made only limited progress in diversifying away from their dependence on oil. The authors also suggest that the increase in public sector employment may have crowded out opportunities in the private sector for nationals and that non-oil sector growth in the GCC does not quickly translate into jobs for nationals. Reforms are needed.

    Recommended reforms

    The report examines labor market reforms undertaken in recent years in GCC countries as well as internationally. GCC countries have made noticeable strides in improving education—but this achievement has not translated into higher labor productivity. (This phenomenon could reflect institutional constraints as well as skill mismatches between the education system and the workplace, the report says.) Governments have tried using employment quotas to raise the share of nationals in the private sector labor force, but the implementation has proved difficult.

    Other reforms could meet with greater success, the report says. Increasing the internal mobility of foreign workers, as has been done in Bahrain and Oman, would create a more competitive labor market and over time reduce the wage differential between foreign and national workers. Active labor market policies—such as job search assistance and training programs—could also help in reducing unemployment, and countries are stepping up their efforts in this area.

    The report recommends a series of measures to raise private sector employment for nationals:

    • reduce the availability and attractiveness of public sector jobs and provide incentives for nationals to seek private sector jobs;

    • improve educational and training systems to enhance the skills and productivity of GCC workers; and

    • liberalize the internal mobility of foreign workers and use wage subsidies to help reduce the wage differential between nationals and foreign workers.

    For the region’s labor market reforms to succeed, consistency between short- and medium-term policies is vital, the report stresses, noting that a reduction in the region’s reliance on foreign labor would require a more developed macroeconomic toolkit. Further, reforms need to be carefully implemented to avoid bottlenecks in key sectors, such as construction, if the availability of foreign labor declines.