## _wp0471 — Selected Economic Indicators and Labor Market Analysis (excerpts)

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---

### Introduction: emerging labor market strains in GCC countries
- Local labor force growth: "average annual rate of 4–5 percent over the past decade" and "likely to continue to grow at this pace over the medium term".
- Demographic pressure: "more than one-third of the local population is below the age of 15 years."
- Public-employment strategy: "most GCC governments have been acting as employers of first and last resort," with nationals constituting "most of the workforce in the public sector."
- Fiscal constraint: "The wage bill now represents more than 10 percent of GDP in most countries."
- Policy tradeoff: balance "dealing with the pressures of a rapidly rising local labor force and maintaining a flexible policy toward the hiring of expatriate workers" to avoid rising unemployment among nationals or compromised competitiveness of the non-oil economy.

### Demographics and population pressures
- Fertility and population growth:
  - Fertility: "3.5 births per woman" (noted as high by international standards, particularly in Oman and Saudi Arabia).
  - GCC population growth: "continues to grow at over 3 percent a year."
  - Age structure: "a large proportion of the population is aged 0 to 14 years, with the average population age ranging between 26 and 30 years."
  - Dependency ratio: "reaching 96 percent in Saudi Arabia in 2000 compared with 72 percent in other Arab countries."
  - UN projection: population aged 0 to 14 rising "from nearly 9 million in 2000 to 14 million by 2010."
- Total population: "almost 32 million" in 2000.
- Country populations: "Saudi Arabia has the largest population, 22 million, while Bahrain and Qatar have the lowest."
- Expatriate shares: "about one-fourth of the total in Saudi Arabia" and "more than 70 percent of the total in the smaller countries."

### Key macroeconomic snapshot (selected figures, 2002)
- GCC aggregate:
  - Total GDP: "339,950" (millions of US dollars)
  - Per Capita: "12,026"
  - Overall Government Balance: "31.9"
- Country highlights (values preserved as in source table):
  - Bahrain: "8,506"; "11,619"; "0.7"; "0.8"; "30.3"; "15"
  - Kuwait: "33,215"; "15,098"; "2.2"; "20.6"; "32.9"; "134"
  - Oman: "20,761"; "7,752"; "2.7"; "8.9"; "17.0"; "16"
  - Qatar: "17,321"; "28,362"; "0.6"; "8.3"; "53.4"; "15"
  - Saudi Arabia: "188,960"; "8,567"; "22.1"; "-6.0"; "97.1"; "85"
  - U.A.E.: "71,187"; "19,613"; "3.6"; "-9.3"; "4.5"; "124"
- Table notes retained in source: "1/ Including expatriates. 2/ Includes investment income of government foreign assets. 3/ Based on current production. 4/ Weighted average."

### Labor market overview and structure
- Expatriate workforce trends:
  - Rose "fivefold from 1.1 million in 1970 to 5.2 million in 2000."
  - UN estimate for 2010: expatriates "about 5.5 million by 2010, of whom 3.7 million will reside in Saudi Arabia."
  - Expatriate shares in employed workers: "from 50 percent of employed workers in Saudi Arabia to 90 percent in the United Arab Emirates."
- Remittances: "in the second half of the 1990s, foreign workers transferred abroad, on average, between 6 and 11 percent of GDP (of host country) a year, or between $2,500-$4,500 per head."
- Segmented labor markets:
  - Nationals: large implicit guarantee of government employment, higher wages, job security, social allowances, generous retirement benefits; promotion based on seniority.
  - Expatriates: concentrated in non-oil private sector, "on average, for more than 85 percent of total employed workers in that sector."
- Public sector employment: "in most GCC countries, except Bahrain and Saudi Arabia, more than 60 percent of the national labor force is employed in the public sector."
- Education and skills mismatch:
  - GCC university graduates: "38 percent ... completed social or Islamic studies, and 34 percent studied education, but only 11 percent studied business administration, and 18 percent studied technical subjects."
  - Tertiary enrollment: "ranging between 8 percent in Oman and 26 percent in Bahrain and Qatar."
  - Secondary enrollment: "in most GCC countries remaining below 70 percent, except in Bahrain, where it reached 94 percent in 1998."

### Employment dynamics and emerging strains (1996–2001)
- Job creation (annual average, 1996–2000):
  - U.A.E.: "more than 100,000 jobs a year."
  - Saudi Arabia: "created 130,000 jobs a year."
  - Kuwait and Oman: "created on average about the same number of jobs for their nationals (10,000 a year on average)."
  - Qatar: "seems to have created the lowest number of jobs in the GCC area (although information is incomplete)."
- Sectoral sources:
  - Bahrain, Oman, U.A.E.: majority of jobs in private sector.
  - Kuwait: public sector accounted for "more than three-fourths of employment growth."
  - Saudi Arabia: public sector about "one-half" of employment growth.
- Beneficiaries:
  - Nationals were main beneficiaries in Bahrain, Oman, and Saudi Arabia.
  - Non-nationals took a large proportion of new jobs in Kuwait and U.A.E.
- Nature of new jobs: primarily low-skill and low-wage sectors (trade, manufacturing, domestic services); finance limited (U.A.E. finance accounted "for only 1 percent of total jobs created in 1996–2000").
- Employment elasticity: "ranged between 0.5 and more than 1, compared with international averages of less than 0.7."
- Unemployment pressures: rising, "affecting, in particular, first-time job seekers with only a primary or secondary education."

### Policy responses and instruments deployed by GCC authorities
- Evolution of policy:
  - 1980s: priority to nationals in recruitment; rapid nationalization of public sector.
  - 1990s onward: shift to nationalization of the private sector workforce.
- Common instruments:
  - Mandatory measures: quantitative targets/quotas on proportion of nationals employed by private companies.
  - Administrative measures: regulating supply of work permits; fees or training taxes for employers hiring foreign workers.
  - Incentives: rewarding tenders that meet quota requirements; time-specific cash benefits to firms hiring nationals.
  - Market-based strategies: education and vocational training reforms; information dissemination; job search support; internships; national job databases.
  - Measures to equalize public/private attractiveness: extending retirement benefits and social allowances to nationals across sectors.
  - Support for self-employment: "providing soft loans to young nationals ... offering training in partnership with established companies."
- Cross-country variation:
  - Qatar: lenient implementation, relying mainly on training and education improvements.
  - U.A.E.: avoided broad quotas except in banking sector.
  - Bahrain, Oman, Saudi Arabia: "more forcefully applied quotas" reflecting larger indigenous populations.
- Limits and challenges:
  - Enforcement difficulties for firm-level quotas; continued access to cheap expatriate labor.
  - Nationalization by substitution likely "less than 30 percent of the expatriate workforce."
  - Non-oil growth alone unlikely to create jobs for nationals in near term (Saudi projections for 2000-04: labor force increase "817,000"; Saudiization expected to provide "about 60 percent of new job opportunities"; private sector real growth projected "to average about 5 percent per year").

### Matching model of national employment — structure and scenarios
- Model scope: employment of nationals by private non-oil sector; nationals either employed in private sector or "unemployed" (including those expecting public sector employment).
- Reservation wage and benefits:
  - Employed nationals: wage w and benefits bE (total compensation w + bE).
  - Unemployed nationals: benefits bu (public sector wages and benefits) — bu is the reservation wage.
- Firms and matching:
  - Each filled job generates output y and pays wage w; profit y–w.
  - Matching function: M(U,V) = A U^α V^(1-α).
  - Market tightness: θ ≡ V/U; vacancy filling probability q(θ) = M(U,V)/V.
- Unemployment steady state:
  - u_ss = [s + g_N] / [s + g_N + θ q(θ)].
- Two scenarios analyzed:
  - Case 1 — No wage bargaining (firms pay internationally competitive wage w*; nationals negligible bargaining power).
    - Comparative statics: unemployment negatively related to y and A; positively related to s, c, c_s, and w*.
    - Policy levers: increase y, raise A, reduce s, c, c_s, lower effective w* (or subsidize hiring nationals).
  - Case 2 — Expatriate labor restrictions and wage bargaining (restrictions increase national bargaining power φ; wages endogenous).
    - Nash bargaining: higher φ raises wages and can increase unemployment.
    - Policy implication: mandatory/administrative measures that raise φ may be counterproductive unless accompanied by productivity and matching-efficiency improvements.
    - Reducing reservation wage bU or raising bE can lower private-sector wages for nationals and reduce unemployment.

### Quantitative simulations and elasticities (preserving source calibration)
- Case 1 baseline parameterization (yields steady-state unemployment rate of "2.8 percent"):
  - s = "0.25"
  - g_N = "0.05"
  - A = "1"
  - α = "0.4"
  - c = "0.3"
  - y = "1"
  - w* = "0.5"
  - c_s = "0.3"
  - r = "0.05"
- Case 1 elasticities (10 percent shocks; new steady-state unemployment and elasticity):
  - y: new value "1.1" → new steady-state unemployment "2.1" → elasticity "-26.4"
  - A: new value "1.1" → new steady-state unemployment "2.2" → elasticity "-20.7"
  - s: new value "0.225" → new steady-state unemployment "2.2" → elasticity "-21.0"
  - c: new value "0.27" → new steady-state unemployment "2.4" → elasticity "-14.3"
  - c_s: new value "0.27" → new steady-state unemployment "2.7" → elasticity "-2.4"
  - w*: new value "0.45" → new steady-state unemployment "2.4" → elasticity "-14.9"
- Case 2 additional baseline parameters and outcomes:
  - φ = 0.25
  - bE = 0.2
  - bU = 0.5
  - Baseline steady-state unemployment: "11.3 percent"
- Case 2 elasticities (10 percent shocks; table entries):
  - y — 1.1 — 10.3 — -9.3
  - A — 1.1 — 10.2 — -10.0
  - s — 0.225 — 10.2 — -9.9
  - c — 0.27 — 10.5 — -6.8
  - c_s — 0.27 — 11.2 — -0.7
  - φ — 0.225 — 10.6 — -6.6
  - bE — 0.22 — 11.1 — -2.1
  - bU — 0.45 — 10.7 — -5.0
- Comparative observation: elasticities in Case 2 are lower than in Case 1; employment responses are dampened when restrictions increase bargaining power of nationals.

### Principal policy lessons and recommendations (from model and analysis)
- Overarching strategy:
  - Develop a vibrant non-oil private sector, invest in human capital, and enact labor-market institutional reforms to facilitate substitution of national workers for expatriates without harming competitiveness.
- Employment-cost and public-sector reforms:
  - Reduce relatively high public-sector wages to lower the reservation wage and encourage nationals to acquire private-sector–relevant skills.
  - Announce and enforce strict limits on public-sector hiring to reduce public-sector as employer of first and last resort.
  - Separate wages and social benefits in the public sector and extend benefits to all working nationals to reduce incentives to seek public employment.
  - Provide time-specific subsidies for employment of nationals to reduce private-sector employment costs (fiscal cost must be less than employment benefit; financing example noted: fees on skilled expatriate workers).
  - Reduce relatively high firing costs for nationals by establishing clear dismissal-appeal rules, fines/penalties for wrongful dismissals, and rapid appeal resolution mechanisms.
- Skill acquisition and labor-market matching:
  - Strengthen education and vocational training, reform curricula, encourage firm internships, award scholarships and targeted training vouchers, and foster self-employment to build skills valuable to private employers.
- Investment and market openness:
  - Facilitate adoption of new technologies and capital accumulation to raise productivity y and matching efficiency A, and to reduce s and c.
  - Continue outsourcing government services and extend 100 percent foreign ownership to all non-oil activities to promote competition, resource allocation, productivity, and investment.
- Policy-design principles:
  - Prefer price- and market-based interventions over quantity-based mandates to encourage substitution of nationals for expatriates and preserve labor-market flexibility.
  - Quantity-based interventions (quotas, mandatory substitution) have ambiguous impacts on employment generation for nationals and can increase bargaining power and unemployment.
- Additional recommendations:
  - Less reliance on mandatory measures and lower reservation wages reduce unemployment significantly.
  - Further data collection and model extensions (explicit expatriate hiring and skill complementarity/substitutability) are suggested for future research.

*Source: Excerpt from IMF working paper _wp0471 (selected sections provided).*

### 1. Selected Economic Indicators, 2002...................................................................................

### _wp0471 - 1. Selected Economic Indicators, 2002...................................................................................

### Introduction: emerging labor market strains in GCC countries
- Local labor force growth: "average annual rate of 4–5 percent over the past decade" and "likely to continue to grow at this pace over the medium term".
- Demographic pressure: "more than one-third of the local population is below the age of 15 years."
- Historical public-employment strategy: "most GCC governments have been acting as employers of first and last resort," resulting in nationals constituting "most of the workforce in the public sector."
- Fiscal constraint on public employment: "The wage bill now represents more than 10 percent of GDP in most countries."
- Policy tradeoff: need to balance "dealing with the pressures of a rapidly rising local labor force and maintaining a flexible policy toward the hiring of expatriate workers" to avoid rising unemployment among nationals or compromised competitiveness of the non-oil economy.

### Key statistics and descriptive findings
- Total population (including expatriates) in 2000: "almost 32 million."
- Population by country example: "Saudi Arabia has the largest population, 22 million, while Bahrain and Qatar have the lowest."
- Expatriate share: "The expatriate population is about one-fourth of the total in Saudi Arabia but accounts for more than 70 percent of the total in the smaller countries."
- Fertility trend noted: "declined from 6.4 births per woman in 1980 to the current rate of" (text truncated at source).

### Wage bill and public sector employment
- Wage bill burden: average in the period 1997–2001 shown in Figure 1; narrative states wage bill "represents more than 10 percent of GDP in most countries."
- Fiscal implication: "the wage bill has become too large to keep rising at a time of pressing needs in order to satisfy the demand for government services of a young population."

### Labor market structure and dynamics
- Segmented labor markets: decades-long "liberal foreign labor policy" allowed the private non-oil sector to rely mainly on "relatively less expensive, better-trained, and more flexible foreign workers."
- Consequence: "segmented labor markets as well as a low elasticity of substitution between national and foreign workers."
- Responsibility for future job creation: "the private non-oil sector" will likely be relied upon to create jobs, since public employment expansion is fiscally constrained.
- Country variation in severity: "Bahrain, Oman, and Saudi Arabia face a more pressing challenge than the other countries, given their relatively large national workforce."

### Policy orientation and analytical approach of the paper
- Current policy instruments: "encouraging the replacement of foreign workers with local workers through a combination of mandatory and market-based mechanisms, and promotion of non-oil economic growth."
- Research contribution: the paper "uses a matching function framework" applied to GCC countries (noted as a novel application for this region).
- Paper structure (as stated): review of labor market characteristics; analysis of labor market dynamics and emerging strains; presentation of current policy responses and strategies; development of an analytical framework to assess policies; concluding policy lessons.

*Source: _wp0471 - 1. Selected Economic Indicators, 2002 (extracted content supplied).*

### 3.5 births per woman, they remain high by international standards, particularly in Oman and

### _wp0471 - 3.5 births per woman, they remain high by international standards, particularly in Oman and

### Demographics and population pressures
- Fertility: "3.5 births per woman" (noted as high by international standards, particularly in Oman and Saudi Arabia).
- Population growth: "the GCC population continues to grow at over 3 percent a year."
- Age structure: "a large proportion of the population is aged 0 to 14 years, with the average population age ranging between 26 and 30 years."
- Dependency ratio: "reaching 96 percent in Saudi Arabia in 2000 compared with 72 percent in other Arab countries."
- United Nations projection: "the GCC area a sharp increase in the population aged 0 to 14, from nearly 9 million in 2000 to 14 million by 2010."

### Key macroeconomic snapshot (selected figures from Table 1, 2002)
- GCC aggregate: Total GDP "339,950" (in millions of US dollars); Per Capita "12,026"; Overall Government Balance "31.9" (note: table indicates weighted average and footnotes; sources: National authorities; IMF staff estimates).
- Country highlights (values preserved as in source table):
  - Bahrain: "8,506"; "11,619"; "0.7"; "0.8"; "30.3"; "15"
  - Kuwait: "33,215"; "15,098"; "2.2"; "20.6"; "32.9"; "134"
  - Oman: "20,761"; "7,752"; "2.7"; "8.9"; "17.0"; "16"
  - Qatar: "17,321"; "28,362"; "0.6"; "8.3"; "53.4"; "15"
  - Saudi Arabia: "188,960"; "8,567"; "22.1"; "-6.0"; "97.1"; "85"
  - U.A.E.: "71,187"; "19,613"; "3.6"; "-9.3"; "4.5"; "124"
- Notes in source: "1/ Including expatriates. 2/ Includes investment income of government foreign assets. 3/ Based on current production. 4/ Weighted average."

### Labor market overview and structure
- Expatriate workforce growth: rose "fivefold from 1.1 million in 1970 to 5.2 million in 2000."
- UN estimate for 2010: expatriates will rise "to about 5.5 million by 2010, of whom 3.7 million will reside in Saudi Arabia."
- Expatriate shares in employed workers: range "from 50 percent of employed workers in Saudi Arabia to 90 percent in the United Arab Emirates."
- Remittances: "in the second half of the 1990s, foreign workers transferred abroad, on average, between 6 and 11 percent of GDP (of host country) a year, or between $2,500-$4,500 per head."
- Labor market segmentation:
  - Nationals: large implicit guarantee of government employment, higher wages, job security, social allowances, generous retirement benefits; promotion based on seniority.
  - Expatriates: concentrated in non-oil private sector, account "on average, for more than 85 percent of total employed workers in that sector."
- Public sector employment: "in most GCC countries, except Bahrain and Saudi Arabia, more than 60 percent of the national labor force is employed in the public sector."
- Education and skills mismatch:
  - GCC university graduates: "38 percent ... completed social or Islamic studies, and 34 percent studied education, but only 11 percent studied business administration, and 18 percent studied technical subjects."
  - Tertiary enrollment: "ranging between 8 percent in Oman and 26 percent in Bahrain and Qatar."
  - Secondary enrollment: "in most GCC countries remaining below 70 percent, except in Bahrain, where it reached 94 percent in 1998."

### Employment dynamics and emerging strains (1996–2001)
- Job creation (annual average, 1996–2000):
  - U.A.E.: "more than 100,000 jobs a year."
  - Saudi Arabia: "created 130,000 jobs a year."
  - Kuwait and Oman: "created on average about the same number of jobs for their nationals (10,000 a year on average)."
  - Qatar: "seems to have created the lowest number of jobs in the GCC area (although information is incomplete)."
- Sectoral sources of job growth:
  - Bahrain, Oman, U.A.E.: majority of jobs in private sector.
  - Kuwait: public sector accounted for "more than three-fourths of employment growth."
  - Saudi Arabia: public sector about "one-half" of employment growth.
- Beneficiaries of job creation:
  - Nationals were main beneficiaries in Bahrain, Oman, and Saudi Arabia.
  - Non-nationals took a large proportion of new jobs in Kuwait and U.A.E.
- Nature of new jobs: "primarily created in the relatively low-skill and low-wage sectors of the private non-oil economy" — trade, manufacturing, domestic services; limited creation in finance (e.g., U.A.E. finance accounted "for only 1 percent of total jobs created in 1996–2000").
- Employment elasticity: "ranged between 0.5 and more than 1, compared with international averages of less than 0.7" — consistent with expansion in low-skill, low-wage sectors.
- Unemployment pressures: increased, "affecting, in particular, first-time job seekers with only a primary or secondary education."

### Policy responses and strategies deployed by GCC authorities
- Evolution:
  - 1980s: priority to nationals in recruitment; rapid nationalization of public sector.
  - 1990s onward: shift to nationalization of the private sector workforce.
- Common instruments:
  - Mandatory measures: quantitative targets/quotas on proportion of nationals employed by private companies in specific professions or sectors.
  - Administrative measures: regulating supply of work permits; fees or training taxes for employers hiring foreign workers.
  - Incentives: rewarding tenders that meet quota requirements; time-specific cash benefits to firms hiring nationals.
  - Market-based strategies: education and vocational training reforms; improving training in line with private sector requirements; information dissemination; job search support; internships; national job databases.
  - Measures to equalize public/private attractiveness: extending retirement benefits and social allowances to nationals across sectors.
  - Support for self-employment: "providing soft loans to young nationals ... offering training in partnership with established companies."
- Cross-country variation:
  - Qatar: lenient implementation, relying mainly on training and education improvements.
  - U.A.E.: avoided broad quotas except in banking sector.
  - Bahrain, Oman, Saudi Arabia: "more forcefully applied quotas" reflecting larger indigenous populations.
- Limits and challenges:
  - Enforcement difficulties for firm-level quotas; continued access to cheap expatriate labor.
  - Nationalization by substitution limited, "probably less than 30 percent of the expatriate workforce."
  - Robust non-oil growth unlikely to be sufficient alone to create jobs for nationals in the near term (example: Saudi projections for 2000-04: labor force increase "817,000"; Saudiization expected to provide "about 60 percent of new job opportunities" with private sector real growth projected "to average about 5 percent per year").

### Matching model of national employment — structure and policy implications
- Model focus: employment of nationals by private non-oil sector; nationals either employed in private sector or "unemployed" (including those expecting public sector employment).
- Reservation wage and benefits:
  - Employed nationals receive wage w and benefits bE (total compensation w + bE).
  - Unemployed nationals receive benefits bu (public sector wages and benefits) — bu is the reservation wage.
- Firms:
  - Each filled job generates output y and pays wage w; profit y–w.
  - Vacancy filling probability q(θ) from matching function M(U,V) = A U^α V^(1-α).
  - Market tightness θ ≡ V/U.
- Unemployment dynamics (steady state):
  - Steady-state unemployment u_ss satisfies u_ss = [s + g_N] / [s + g_N + θ q(θ)] (presented in the source derivation).
  - Higher labor force growth g_N raises u_ss for given θ q(θ).
- Two scenarios analyzed:
  - Case 1 — No wage bargaining (firms pay internationally competitive wage w* for expatriates; nationals have negligible bargaining power).
    - Closed-form steady-state unemployment (as given): u_ss = [expression in source].
    - Comparative statics: unemployment negatively related to y and A; positively related to s, c, c_s, and w*.
    - Policy levers: increase y (investment in physical/human capital), raise matching efficiency A (information dissemination, job search support), reduce separation rate s and search costs c, reduce separation costs c_s, lower effective w* (or subsidize hiring nationals).
  - Case 2 — Expatriate labor restrictions and wage bargaining (restrictions increase national bargaining power φ; wages endogenously determined).
    - System of equations (as given) determines θ and u_ss; comparative statics include φ, bE, bU.
    - Key insight: higher bargaining power φ raises wages and can increase unemployment; mandatory/administrative measures that raise φ may be counterproductive unless accompanied by productivity and matching-efficiency improvements.
    - Reducing reservation wage bU or raising bE (benefits to employed nationals) can lower private-sector wages for nationals and reduce unemployment.
- Quantitative simulation (Case 1 baseline and elasticities):
  - Baseline parameterization (yields steady-state unemployment rate of "2.8 percent"):
    - s = "0.25"
    - g_N = "0.05"
    - A = "1"
    - α = "0.4"
    - c = "0.3"
    - y = "1"
    - w* = "0.5"
    - c_s = "0.3"
    - r = "0.05"
  - Elasticities computed by 10 percent shocks:
    - y: new value "1.1" → new steady-state unemployment "2.1" → elasticity "-26.4" (percent)
    - A: new value "1.1" → new steady-state unemployment "2.2" → elasticity "-20.7"
    - s: new value "0.225" → new steady-state unemployment "2.2" → elasticity "-21.0"
    - c: new value "0.27" → new steady-state unemployment "2.4" → elasticity "-14.3"
    - c_s: new value "0.27" → new steady-state unemployment "2.7" → elasticity "-2.4"
    - w*: new value "0.45" → new steady-state unemployment "2.4" → elasticity "-14.9"

*Source: IMF staff analysis and data as presented in the provided chapter (selected excerpts).*

### 26.4 percent. Similarly, a reduction in the separation rate, s, by 10 percent reduces the

### _wp0471 - 26.4 percent. Similarly, a reduction in the separation rate, s, by 10 percent reduces the

### Major quantitative findings and elasticities (Case 2 calibration)
- Baseline parameter assumptions (additional to prior parameterization):
  - φ = 0.25
  - bE = 0.2
  - bU = 0.5
- Baseline steady-state unemployment rate under these assumptions: 11.3 percent (substantially higher than Case 1 steady-state rate of 2.8 percent).
- Elasticity table (response to a 10 percent change in each variable; shown as: Variable shocked — New value of variable — New steady-state unemployment rate (in percent) — Elasticity of unemployment with respect to 10 percent change in variable (in percent)):
  - y — 1.1 — 10.3 — -9.3
  - A — 1.1 — 10.2 — -10.0
  - s — 0.225 — 10.2 — -9.9
  - c — 0.27 — 10.5 — -6.8
  - c_s — 0.27 — 11.2 — -0.7
  - φ — 0.225 — 10.6 — -6.6
  - bE — 0.22 — 11.1 — -2.1
  - bU — 0.45 — 10.7 — -5.0
- Comparative observation: The elasticity of unemployment to changes in each variable is lower in Case 2 than in Case 1 (i.e., employment responses are dampened when restrictions increase bargaining power of nationals).

### Key model mechanisms and comparative statics
- Agents and production:
  - Two agent types: national workers and private sector firms.
  - Each employed worker produces y units of output.
  - Employed national receives wage w and government-provided benefits bE ≥ 0; unemployed worker receives reservation wage bU.
- Job flows and matching:
  - Matches formed by M(U,V) = A U^α V^(1-α), with α ∈ (0,1) and A = matching efficiency.
  - Probability of filling a vacancy q(θ) = M(U,V)/V; labor-market tightness θ = V/U.
  - Jobs destroyed with probability s; separation cost to firm c_s.
- Steady-state unemployment (general form):
  - u_ss = [s + g_N] / [s + g_N + θ_ss q(θ_ss)]  (where g_N is labor force growth)
- Comparative statics (Case 1: wages given at w*):
  - Unemployment increases with: s, c, w*, c_s.
  - Unemployment decreases with: y, A.
  - Policy levers to lower unemployment include raising y and A; lowering c, c_s, and s via investment and reforms.
- Case 2 (ex-patriate restrictions → wage bargaining):
  - Nash bargaining with worker share φ ∈ [0,1]; (V_E − V_U) = φ S and V_J = (1−φ) S.
  - Endogenous wage w rises with φ; φ > 0 implies w > w*.
  - Comparative statics under bargaining:
    - Unemployment increases with: s, c, c_s, bU, φ, g_N, w (through bargaining).
    - Unemployment decreases with: y, A, bE.
  - Key insight: greater bargaining power for nationals (higher φ) raises private-sector wages and increases unemployment; higher government benefits to unemployed (bU) also raise unemployment; benefits to employed nationals (bE) lower unemployment.

### Principal policy lessons and recommendations
- Overarching strategy:
  - Develop a vibrant non-oil private sector, invest in human capital, and enact labor-market institutional reforms to facilitate substitution of national workers for expatriates without harming competitiveness.
- Employment cost measures:
  - Reduce relatively high public-sector wages to lower the reservation wage and encourage nationals to acquire private-sector–relevant skills.
  - Announce and enforce strict limits on public-sector hiring to reduce public-sector as employer of first and last resort.
  - Separate wages and social benefits in the public sector and extend benefits to all working nationals to reduce incentives to seek public employment.
  - Provide time-specific subsidies for employment of nationals to reduce private-sector employment costs (fiscal cost must be less than employment benefit; financing example noted: fees on skilled expatriate workers).
  - Reduce relatively high firing costs for nationals by establishing clear dismissal-appeal rules, fines/penalties for wrongful dismissals, and rapid appeal resolution mechanisms.
- Skill acquisition:
  - Strengthen education and vocational training, reform curricula, encourage firm internships, award scholarships and targeted training vouchers, and foster self-employment to build skills valuable to private employers.
- Investment in capital and knowledge:
  - Facilitate adoption of new technologies and capital accumulation to raise productivity y and matching efficiency A, and to reduce s and c.
  - Continue outsourcing government services and extend 100 percent foreign ownership to all non-oil activities to promote competition, resource allocation, productivity, and investment.
- Policy design principles:
  - Use price- and market-based interventions rather than quantity-based mandates to encourage substitution of nationals for expatriates and preserve labor-market flexibility.
  - Quantity-based interventions (quotas, mandatory substitution) have ambiguous impacts on employment generation for nationals and can increase bargaining power and unemployment.
- Additional points:
  - Less reliance on mandatory measures and lower reservation wages reduce unemployment significantly.
  - Future research should gather more data to better calibrate the model and could extend the model to explicitly include expatriate hiring and complementarity/substitutability of skills between expatriates and nationals.

*Source: Excerpt from IMF working paper _wp0471 (Appendix II and policy section).*

### References

### _wp0471 - References

### References

- Al Lamki, Salma M., 2002, “A Three Tier Strategic Framework for Human Resource Management and Training in the Sultanate of Oman,” Journal of Comparative International Management, Vol. 24, (No. 1) (May), pp.75-86.

- Central Statistical Organization, State of Qatar, 1998, Annual Statistical Abstract.

- Gardner, Edward, 2003, “Wanted: More Jobs,” Finance and Development, Vol. 40, (No. 1), pp. 18–21.

- Goyal, Rishi, 2003, “Non-Oil Growth, Competitiveness, and the Labor Market,” in United Arab Emirates—Selected Issues and Statistical Appendix (Washington: International Monetary Fund), pp. 41–58.

- Ljungqvist, Lars, and Thomas J. Sargent, 2000, Recursive Macroeconomic Theory (Cambridge, Mass.: MIT Press).

- Megarbane, Patrick, 2001, “Labor Market Issues in the GCC Countries,” in The Cooperation Council of the Arab States of the Gulf (GCC): Strategy for Sustainable Growth with Macroeconomic Stability (unpublished; Washington: International Monetary Fund).

- Ministry of Planning, State of Kuwait, 2001, Annual Statistical Abstract.

- Ministry of Planning, Kingdom of Saudi Arabia, Seventh Development Plan, 2000–04.

- Ministry of Labor and Social Affairs, State of Bahrain, 1997, Bahrain: Maximizing Human Resources.

- United Nations Development Program, 1998, Human Development Report State of Bahrain: Achievements and Challenges of Human Development. (Manama, Bahrain: University of Bahrain Press).

- United Nations, 2002, Arab Human Development Report (New York: United Nations Publications).

*Source: _wp0471 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2004/_wp0471.pdf_