Part II – The Employment System in GCC Countries
The previous section revealed that stakeholders have different perceptions, which are more or less related, of the main cause of youth unemployment. Exploring solutions to the youth employment challenge requires creating a holistic understanding of the employment system and its underlying dynamics, capturing the “big picture”.
Bearing in mind these postulations, this section provides a systemic analysis of the employment situation in GCC countries, developed using a systems thinking approach (see Box 2).
The objective of this analysis is to make the structural reasons underpinning youth unemployment and their interrelations explicit and thereby explore the solution options in a more comprehensive manner.
The structure and underlying patterns of the employment system, acknowledging its interplay within a broader environment, are analysed and synthesized in an integrated framework (see Figure 4 below).
Figure 4: Dynamics and vulnerabilities of the employment system in GCC countries – An integrated framework
Box 2: The Systems Thinking Approach
What is a system?
A system is an interconnected set of elements that produces its own pattern of behaviour over time and is coherently organized to achieve a purpose. While a system can be influenced by external forces – which can trigger, precipitate or constrict its dynamics – the source of its behaviour lies in its intrinsic structure.12
The purpose of systems thinking
Systems thinking is an approach that helps see and understand the structures that underlie complex situations, in order to identify impactful points of leverage for effectively and sustainably addressing complex issues.13
“The reason that structural explanations are so important is that only they address the underlying causes of behaviour at a level at which patterns of behaviour can be changed.”
Peter M. Senge, The Fifth Discipline
Key characteristics of the systems thinking approach
The systems thinking approach provides a holistic and dynamic perspective, which allows for grasping the “big picture” and identifying processes of change. While traditional analysis focuses on separating a particular phenomenon of interest – the whole – into its constituting elements (“analysis” being the process of “breaking into parts”), systems thinking focuses on the linkages and interactions among the elements that compose the whole. Over time, these interactions produce patterns of behaviour.
|Traditional Analysis||Systems Thinking|
|Focuses on isolated parts||Captures the interactions among the elements that compose the whole|
|Identifies linear causal relations||Identifies circular causal relations (every element is both a cause and an effect)|
|Focuses on particular events (i.e. “snapshots”)||Captures patterns of change|
|Focuses on exogenous explanations (events are seen as caused by external factors)||Focuses on endogenous explanations (the behaviour of the system is seen as generated by the system itself)|
Table based on: Peter M. Senge, The Fifth Discipline; Donella H. Meadows, Thinking in Systems
Box 3: The Integrated Framework of Stakeholders’ Perceptions of the Main Causes of Youth Unemployment
The integrated framework (see Figure 4 above) consolidates stakeholders’ views on what are perceived to be the main causes of youth unemployment, all of which can be traced to the protective relationship between the government and its citizens.
Young people’s reluctance to take on certain responsibilities, cultural resistances to certain jobs, rigid labour laws for nationals, a non-conducive business environment for entrepreneurship and SMEs, a lack of private sector consultation in public decision-making (perceptions 2, 3, 5, 6, 8) can all be attributed to the protective system, characterized by a dependency between nationals and the authorities.
The skills mismatch and lack of diversification (perceptions 1, 7) are an outcome of education dynamics. Public sector employment incentives (perception 4) are intrinsic to the social contract described above.
Finally, a private sector that is not investing enough in young nationals (perception 9) can be attributed to the fact that in past decades, there was no need for an interaction between the private sector and young nationals, who were employed in the public sector, since the two systems were functioning independently. With rising youth unemployment, aligning the private and public sectors has become a widely acknowledged necessity.
1. Dynamics of the Employment System
The employment system comprises the actors directly taking part in the labour market – labour supply and labour demand, as well as the intermediaries between supply and demand – and those who are indirectly related to it, such as parents, teachers and political leaders. The employment system also includes the institutions, rules and norms – formal and informal – which govern and shape individual actors’ behaviours.
The employment system in GCC countries serves two purposes: securing social stability and ensuring economic prosperity.
Social stability cannot be sustainably ensured without economic prosperity, and vice versa, so both systems must be well functioning for the whole employment system to be a success. For example, non-national doctors and teachers contribute to providing health and education services vital for facilitating the social contract, while social stability is crucial for the economy to flourish.
Social stability dynamics (see Box 4)
In GCC countries, social stability is achieved through implementing the social contract established between the government and its citizens, by means of state-financed wealth distribution enabled by large oil and gas revenues. The social contract rests on the government’s ability to secure its citizens’ well-being and is materialized by generous subsidies, free access to services such as health and education, and the provision of occupational and income security through government jobs. In exchange, the populace is willing to support this form of governance, which is characterized by a high level of dependence between citizens and authorities. These dynamics constitute the public labour market, defined as including both public administrations and state-owned enterprises, dominated by nationals.
Economic prosperity dynamics (see Box 5)
Economic prosperity in GCC countries, on the other hand, is reliant on non-national workers. This gives rise to an economic contract, which pictures the relationship between non-national workers, both skilled and unskilled, and their host countries. In this contract, non-national workers are provided economic benefits while their rights and integration into society remain limited. Non-national workers accept their legal and social situation in return for the economic benefits offered by their employers. These dynamics constitute the private sector, dominated by non-national labour.
Two separate labour markets (see Box 6)
The labour structures designed to deliver social stability and economic prosperity in GCC countries follow dynamics which ultimately create two separate labour markets – one public and one private. The two markets are disconnected from each other, relying almost exclusively on two distinctly different labour supplies – nationals and non-nationals – and there are high barriers for the labour forces to flow from one market to the other. In particular, the system poses significant barriers for young nationals to productively join the private sector. As the public sector has reached a limit in its capacity to absorb young nationals, the result is youth unemployment.
Box 4: Social Stability Dynamics
Copyright: World Economic Forum, 2014
The starting point of dynamics is the protective role that the government chooses to play. This leads to two dynamics, education dynamics and labour market incentives dynamics, which are initially independent, but ultimately meet and reinforce each other.
The protective government role forges institutions and serves as a role model for family education (as expressed in the bubble “protective governments, parents and teachers”). This relationship established between authorities – governments, parents and teachers – and young people is reflected in an educational system that does not stimulate enough independent and creative thinking, i.e. qualities needed in the private sector, and that is designed primarily to provide citizens with the skills needed to take up public sector positions. As noted by stakeholders, “Governments don’t encourage critical thinking at school. As a consequence, students just know how to memorize, which automatically forges public servants.” Protected by their parents and teachers, young people grow up in an environment where their current and future needs are provided for, perpetuating a culture of dependency on authorities.
Labour market incentives dynamics
The protective government role is reflected in the government’s commitment to providing secure, comfortable and well-remunerated public sector jobs (see Figure 5) to its citizens, making it hard for the private sector to compete for talent. The public sector attracts young people, elevating their expectations and limiting their appetite for risk, in a context in which entrepreneurship is still nascent. Additionally, low corporate taxation harms the private sector’s social recognition as a contributor to the welfare of society at large. This further strengthens the role of the government as the employer of choice. As noted by stakeholders, “Labour markets are distorted towards the public sector” and, “People do not identify with the private sector, as companies neither pay taxes nor offer jobs for nationals.”
Figure 5: The public sector offers attractive wages for relatively less working hours than the private sector
Source: United Arab Emirates National Bureau of Statistics
The results of both dynamics are protected, dependent young people who have learned to rely on the government because their education-shaped mindset confines their job prospects to the public sector and limits their overall willingness to participate in the labour market. Even young people who have not been influenced in this particular fashion still invariably become attracted to well-remunerated, comfortable public sector jobs, which similarly come to shape their mindset and their decision to economically rely on the government.
In turn, young people accept the protective authority of the government, closing the circle of social stability.
Some stakeholders’ quotes illustrating the social contract
Protective governments, parents and teachers
- “We create societies of consumers, not producers. You can buy schools, but not education.”
- “Governments spend too much on their people to keep them happy.”
- “Youth is not looked at as capable to do a job.”
- “Parents want kids to have a safe job in the public sector.”
- “The education system does not teach skills. Students just memorize.”
- “The education system does not teach people how to think independently, solve problems and process information.”
Protected young nationals relying on the government
- “Since the 1990s, the mentality is that ‘the government has to take care of me’. Young people today are not prepared to work hard.”
- “The sense of entitlement is a problem.”
- “People expect the government to do everything for them.”
- “Young people don’t learn to manage their finances and loans at an early age.”
- “We don’t know how to organize and prioritize our lives and our finances. We don’t know how to plan for the future.”
- “The youth expects to be well paid with little commitment.”
- “If young people get more money by staying home, they will not accept a job which pays less.”
Young nationals employed in guaranteed and comfortable public sector jobs
- “People work in the public sector for the pension system, job security and low working hours.”
- “There is much more accountability in the private sector. In the public sector, even if you don’t have a good review, you keep your job.”
- “A government job is the best option when a man wants to get married.”
- “There is a lack of performance management and competitiveness in the public sector.”
- “Our (private sector) best employees stay with us only temporarily and leave us once a government job becomes available.”
- “Young nationals are looking for public sector jobs, because their mindset is that government jobs are sustainable and working hours allow them to have another job on the side. It is very attractive, especially for women.”
Box 5: Economic Prosperity Dynamics
Copyright: World Economic Forum, 2014
The starting point of dynamics underlying the private sector is the entrance of a non-national labour force into the countries, which started after the discovery of oil and became massive in the 1970s, due to quantitative and qualitative shortages of national labour.
Non-nationals – both skilled and unskilled – are limited in the rights that they can claim (e.g. temporary residency, no opportunity to obtain citizenship, limited job security, no minimum wage, restriction of movement between jobs and no mandatory pension schemes) and in their social integration (e.g. limited availability of schools where nationals and non-nationals mix), hindering them from identifying with their host country and integrating into society (see Figure 6). Looking at social stability dynamics, the reason for these limitations might be found in the need of authorities to protect national citizens.
Figure 6: According to a recent survey by HSBC, GCC countries offer attractive earnings but rank poorly in terms of integration of expatriates
Source: HSBC, Expat Explorer Survey, 2013
The consequence of limited labour rights is that non-nationals have become more attractive hires for the private sector than nationals, in terms of cost and flexibility. Nationals are paid higher wages than non-nationals (see Figure 7).
Figure 7: Except in the oil industry, wage differentials in the private sector between Saudis and non-Saudis are large
Source: Saudi Arabia Ministry of Labour, 2009
Higher flexibility of non-nationals is based on their limited rights. Furthermore, the limited integration of non-nationals into society encourages non-national employers to hire their peers. As a result, non-nationals fill the majority of private sector positions (see Figure 8).
Figure 8: Between 2000 and 2010, almost 80% of jobs created in the private sector in the GCC have been filled by non-nationals
Note: Figures are estimates. Source: International Monetary Fund (IMF), Gulf Cooperation Council Countries: Enhancing Economic Outcomes in an Uncertain Global Economy, 2011
As the private sector’s competitiveness has been based on a non-national workforce, more non-nationals are allowed to enter the country to maintain the circle of economic prosperity.
Some stakeholders’ quotes illustrating the economic contract
Entrance of non-nationals in the country
- “GCC countries managed to escape the resource curse because they were open to non-national labour and in particular because of the low wages and the importation of skilled labour.”
- “GCC countries, with the exception of Saudi Arabia, need non-nationals because of the limited size of their workforce.”
- “Governments import Asian workers for lower skilled jobs and they will continue as long as this is possible, for half of the salary of nationals.”
Limited integration and rights of non-nationals
- “Nationals and non-nationals are very separate communities.”
- “Non-nationals should be integrated. For instance, schools are segregated. Nationals should get out of their shell.”
- “Expatriates have their own schools but in the past years, things have opened up. Also on television, you now have more and more English programmes. But there is still a gap in terms of socializing.”
- “For the skilled labour, it is hard to attract talent, because insurance and permanent residency are not offered to non-nationals.”
Non-nationals filling the majority of private sector jobs
- “From a pure profitability perspective, it does not make sense for me to hire nationals. They are more expensive and less qualified.”
- “Employers believe that non-nationals are more dedicated and efficient; employers focus on the bottom line.”
- “Non-national workers have the advantage to be highly motivated. There is a diverse pool of expatriates to choose from; they have more experience in other economies, they have no relatives who can ask for favours, and they have pressure to be successful when returning home.”
Box 6: Two Separate Labour Markets
Copyright: World Economic Forum, 2014
The dynamics of the economic contract – limited rights and limited integration of non-nationals – reinforce dynamics of the social contract, namely young people’s reliance on the government. The limited integration of non-nationals provides few opportunities for trust-building with national citizens, making it harder for nationals to feel comfortable in the private sector that is mainly filled with non-national labour. Additionally, both the limited rights and on average lower relative salaries of non-nationals limit the social recognition of private sector employment among nationals. Moreover, the ease of access to inexpensive labour can hinder investment in more technology-intensive industries or SMEs (e.g. creating taxi companies instead of hiring drivers) that might be more attractive to nationals. As a consequence, the attractiveness and accessibility of the private sector for nationals is weakened, reinforcing their dependency on public sector employment.
The dynamics of the social contract – protective authorities and dependent young people – reinforce the dynamics of the economic contract, namely the reliance on a non-national workforce. The education system and public employment incentive schemes do not prepare national young people for a private sector driven by competition and flexibility. In addition, they tend to have little contact with private sector activities and role models growing up, and are often unaware of opportunities offered by private companies. As a consequence, the relative availability and attractiveness of non-national workers for private employers is further strengthened.
As a result of the reinforcement between the dynamics of the social and economic contracts, the private and public labour markets are disconnected from each other, relying almost exclusively on two different labour supplies – non-nationals and nationals (see Figure 9).
Figure 9: GCC labour markets are segmented
The public sector is dominated by nationals (2008)
The private sector is dominated by non-nationals (2008)
Source: The Cooperation Council for the Arab States of the Gulf, Secretariat General, Statistical Bulletin, 2012
Some stakeholders’ quotes illustrating the separation between the two labour markets
The dynamics of the economic contract reinforce those of the social contract. The attractiveness and accessibility of the private sector for nationals is weakened, reinforcing their dependency on public sector employment.
- “The whole business model has been created around expats. Nationals won’t feel comfortable there and managers are more comfortable bringing their own people.”
- “There is mistrust of young nationals in private sector people and a fear of (job) insecurity.”
- “Nationals also prefer to work in the public sector to be among themselves.”
- “Social status and social reward of private sector employment is lacking.”
- “There is a social stigma around construction and blue collar jobs, and wages are too low, because of the low cost of non-national labour.”
- “It’s a matter of compensation and getting the critical mass of nationals to do certain jobs (that have been filled by non-nationals).”
- “A job becomes respectable if it is well paid.”
- “Private sector salaries have contributed to its recognition in (other) advanced economies.”
- “The availability of a cheap non-national workforce also prevents the development of certain service industries, for instance if nannies are cheap, childcare centres are not needed, or if drivers are cheap, taxi companies cannot exist.”
- “The construction sector is the second contributor to GDP after the oil sector, but employs mostly low-skilled non-nationals.”
The dynamics of the social contract reinforce those of the economic contract. The relative availability and attractiveness of non-national workers for private employers is further strengthened.
- “There is a motivational gap among nationals.”
- “There is a deficit regarding education. If you hire people from good national universities, they cannot compete with non-nationals.”
- “The private sector looks for workers who are able to think critically.”
- “The private sector is not interested in diplomas, but in experience.”
- “Curricula in public education are not adequate for 21st century students. They end up with certificates, not knowledge.”
- “For the private sector, employing nationals is costly due to training costs, higher wage expectations and loyalty issues.”
- “There is no awareness of private sector opportunities. Nationals believe that the private sector is for expatriates, as they account for 90% of private sector workers.”
- “Students hear from parents that government jobs are the way to go.”
- “Currently, a lot of kids’ ambition is to work in the education sector, because they have no contact with the private sector during their studies.”
2. Vulnerabilities of the Employment System
The systemic understanding of the employment system in GCC countries reveals a set of internal dynamics and external changes that might undermine social stability and economic prosperity, the system’s very objectives (See Boxes 7 and 8).
The employment model has worked relatively well over the past decades, but high population growth, which can be linked to particularly low labour force participation for women (see Box 1), has exposed a number of vulnerabilities. Budgetary and public productivity constraints already prevent most governments from providing the entire national workforce with public sector jobs, which some nationals have come to expect as one pillar of the social contract.
Despite having become destabilized by rapid population growth, the employment system still operates, but is fragile and susceptible to potential pressures, some of which are already materializing:
- The ability of the employment system to secure social stability may be threatened if it becomes increasingly unaffordable for welfare states to provide for the unprecedented “youth bulge”.
- The demands and expectations of a well-informed and politically aware national citizenry might require a rethinking of the social contract.
- The economic system is highly reliant on a large non-national workforce whose availability and socially stable integration is uncertain.
- Easy access to and heavy reliance on generally cheap, low-skilled, non-national labour could continue to disincentivize investment in technology and enforce a stagnant low productivity in the private sector over the long term.
Hence, the employment system not only creates high internal dependencies of young people on authorities, but is in itself highly dependent on factors beyond control, notably high oil and gas prices and the availability of a large non-national workforce.
Box 7: Vulnerabilities of the Social Contract
Copyright: World Economic Forum, 2014
The social contract is subject to various pressures, such as (1) budget constraints, (2) public productivity constraints, and (3) potential political pressures, as shown in the red arrows in the figure above (dark red indicating that the pressure has started materializing).
Figure 10: Fiscal break-even oil prices – i.e. for each country, the average oil price at which the public budget is balanced in a given year – have increased significantly over the past years
*Prices for 2013 are projections
Note: The World Economic Outlook (WEO) oil price is the simple average of three spot prices (crude oil): Dated Brent, West Texas Intermediate, and the Dubai Fateh. Source: International Monetary Fund (IMF), Regional Economic Outlook Update, Middle East and Central Asia, Statistical Appendix, November 2013; International Monetary Fund (IMF), World Economic Outlook Database, April 2014
The social contract might be further destabilized if it becomes increasingly unaffordable for the public budget that relies on high oil and gas prices. Figure 10 shows that fiscal break-even oil prices have increased significantly over the past years. Long-term structural devaluation of oil and gas prices would call into question the government’s capacity to deliver on the expectations of its people. Moreover, if the public sector keeps growing and reaches a stage at which public productivity significantly drops – a situation for which there is a precedent within the region (see Figure 11 for stagnating public productivity after a sharp decline in the 1980s) – the efficient delivery of public services might be hindered. In addition, the stability of the social contract might be threatened if demands and expectations of well-informed and aware national citizens change. The latter might be triggered by economic constraints due to inflation, particularly for the middle class, as well as by the emergence of virtual leadership structures, notably a broadening range of influencers, accelerated by social media.
Figure 11: Labour productivity in Saudi Arabia’s public sector sharply declined in the 1980s and has been stagnating since then
Note: Labour productivity is estimated as the government services GDP (at 1999 constant prices) per government employee. Figures for 2013 are provisional. Source: Saudi Arabian Monetary Agency, Annual Statistics, 2014; Steffen Hertog, A comparative assessment of labor market nationalization policies in the GCC, 2012; World Economic Forum calculations
Some stakeholders’ quotes illustrating the vulnerabilities of the social contract
- “The current system is not sustainable due to the oil price. Even if the oil price stays the same, the population is growing.”
- “Governments can no longer absorb graduates, given population growth and decreasing finances.”
- “Now the youth share has increased to the extent that government can’t absorb people anymore.”
- “In five to 10 years, we will be unable to continue this transfer system as the amount of people entering the labour market rises.”
- “Subsidies can’t be afforded any longer.”
Public productivity constraints
- “Government has reached saturation. It is overstaffed and this has decreased its productivity.”
- “Creating government jobs leads to low efficiency and to employees who don’t add much value.”
- “Government is not reforming due to fear of social unrest. Their pressure point is the productivity problem.”
- “Public productivity is low because of large employment, protected jobs and high wages.”
- “You cannot meaningfully employ an unlimited number of people in the government.”
- “Money creates expectations and is not enough to fulfil people or hinder radicalism.”
- “The government is from a generation that doesn’t understand young people.”
- “There is a risk of internal conflicts between traditionalists and some young people.”
- “Unmet expectations create frustration.”
- “There are many ‘shepherds’ in today’s world. Leadership structures are changing.”
- “The shrinking middle-class and rising uneven wealth distribution could create animosity against the private sector that doesn’t contribute enough to job creation for nationals.”
Box 8: Vulnerabilities of the Economic Contract
Copyright: World Economic Forum, 2014
The economic contract suffers from three pressures and might be destabilized if any one of them becomes apparent. Potential pressures are (1) a stagnant low productivity in the private sector, (2) rising tensions between national and non-national workforces, and (3) a net outflow of non-nationals, who might decide to leave the country or to not enter anymore, as shown in the red arrows in the figure above.
Firstly, as easy access to and heavy reliance on generally cheap, low-skilled, non-national labour impacts incentives to innovate and invest in technology, it could over time enforce a stagnant low productivity in the private sector. Figure 12 demonstrates that productivity dropped precipitously in the early 1980s (this can be partly linked to the import of low-skilled labour, which replaced mid-skilled labour) and has stagnated since then.14 Secondly, the large presence of non-nationals coupled with limited integration and income inequalities may create and/or exacerbate existing tensions between nationals and non-nationals. Thirdly, the non-national workforce could unexpectedly and massively emigrate or not enter the country in the first place – for instance, as a result of geopolitical tensions, rising labour demand from other regions, or increasing relative attractiveness of other countries for workers – which would leave the national workforce unprepared to take over.
Figure 12: Overall labour productivity in GCC countries dropped in the early 1980s and has stagnated since then
Note: For the list of countries included in aggregates, see Endnote 1515. Source: International Labour Organization (ILO), Key Indicators of the Labour Market; World Economic Forum calculations
Some stakeholders’ quotes illustrating the vulnerabilities of the economic contract
Stagnant low productivity in the private sector
- “Due to unlimited availability of cheap non-national labour, productivity has gone down everywhere, except in the oil and gas sector where automation is high.”
Rising tensions between nationals and non-nationals
- “Crime rates and instability have increased and the social gap between nationals and expats will have a long-term impact.”
- “On discussion forums, there is a sense of xenophobia as a by-product of youth unemployment.”
- “The situation with this share of non-national employees is unsustainable over the long term due to rising social tensions, such as the loss of national identity, and financial constraints.”
Net outflow of non-nationals
- “You can’t treat retention of knowledge in a transient way. The dependency on non-national technicians for desalinated water is a national security threat.”
- “These countries are hostages of non-nationals and will have to give them residency to gain their loyalty and keep them in the country, particularly those in higher-end jobs.”
- “Many SMEs fail when cheap non-national labour is expelled, because SMEs rely on them.”
- “The sustainability of nations is based on nationals.”