Saudi Labor Market Outlook Positive Despite Challenges

by shariff mohammed | Dec 09, 2015

The Saudi labor market is segmented in several aspects, be it in wages, work hours, or skills, with unique challenges facing the employment of Saudis in the private sector. In this report, we look into data for the period 2005 - H1 2015 and analyze the dynamic trends in the Saudi labor market, according to Jadwa Investment's Saudi labor market outlook report.

The Saudi unemployment rate fell slightly to 11.6 percent during the first half of 2015, despite year-on-year growth in total Saudi employment continuing to fall to 1.1 percent. The slower growth in total saudi employment was mainly due to slower hiring levels in the public sector, while Saudi employment growth in the private sector remained healthy. In 2014 full year data showed that the increase in Saudi employment and Saudization in the private sector was associated with positive growth in labor productivity in the sector. Education and private sector investment remains, two key enablers of employment growth and labor productivity.

Developments in the Saudi labor market

Data released by the Central Department of Statistics and Information (CDSI) showed that the overall unemployment rate (for both Saudis and non-Saudis) in Saudi Arabia was healthy by international standards at 5.7 percent during the first half (H1) of 2015. This reflected the positive general employment stance of the non-oil economy and the private sector in particular. However, the challenge to the Saudi labor market is rooted in the overreliance on non-Saudis occupying private sector jobs. This has meant a structurally high unemployment rate for Saudis, which stood at 11.6 percent in H1 2015. Initiatives implemented by the authorities over the last couple of years have mainly been aimed at narrowing the skills and wage gap between Saudis and non-Saudis. Initiatives were also aimed to address Saudi labor supply challenges, and traditional preference for public sector jobs by Saudis. Since 2011, these initiatives began to have a positive impact on overall trends in employment by sector and nationality. In this report, we look into data for the period 2005 - H1 2015 and analyze the dynamic trends in the Saudi labor market. We then introduce three different scenarios as part of our forecast for the Saudi labor market for the period 2015 to 2025.

According to data released by CDSI, the unemployment rate for Saudis fell slightly to 11.6 percent during H1 2015; down from 11.7 percent in H2 2014. The fall in the Saudi unemployment rate occurred despite a continuation of slower growth in employment of Saudis. We view this as mostly associated with slower hiring in the public sector.

Based on our analysis of the annual data, and according to the Saudi Economic Report (SECOR) published by the Ministry of Economy and Planning (MEP), the Saudization ratio in the private sector improved from 21.2 percent in 2013, to 22.1 percent in 2014. Employment growth of Saudis in the private sector fell slightly in 2014 to 6.8 percent year-on-year, down from 7.3 percent in 2013, but continued to outpace the growth in employment of non-Saudis for the third consecutive year. We believe that labor market reforms, including the continued implementation of the wage protection system, the Nitaqaat program, and the correction of status to foreign workers played a notable role in this improvement.
In addition to the higher employment of Saudis, labor productivity in the private sector, including both Saudis and non-Saudis, showed an improvement as well. In fact, the productivity in the sector increased for the third consecutive year, as measured by real output per employee. Also, when measured in terms of real output per hour, productivity in the private sector yielded similar results. We see this as evidence that the ongoing initiatives to increase the hiring of Saudis has not hurt the Kingdom’s private sector competitiveness, from a cost standpoint. The ongoing efforts to squeeze the wage differentials between Saudis and non-Saudis, as well as the gradual implementation of the wage protection system, was effective enough for the private sector to employ more Saudis, without a net decline in productivity.

2014 data from the General Organization for Social Insurance (GOSI) showed a narrowing gap in wage differentials between Saudis and non-Saudis in the private sector (Figure 2). However, the differential remains sub-standard. According to the data, average monthly wages for Saudis in the private sector increased from SR5,171 in 2013 to SR5,519 in 2014 (6.7 percent, year-on-year), while wages for non-Saudis increased from SR1,489 to SR1,636 (12.2 percent, year-on-year) during the same period. Data from the Ministry of Labor (MOL) shows a similar trend.

Declining portion of public sector employment

Official data shows that while private sector employment growth of Saudis slowed slightly from 7.3 percent in 2013 to 6.8 percent in 2014, growth in public sector employment of Saudis fell from 7.2 percent to 3.3 percent during the same period, its lowest in six years. The number of Saudi workers in the public sector reached 3.3 million in 2014, up from 3.2 million in 2013. However, the slower employment growth relative to the private sector has led to a falling proportion in public sector employment of Saudis (Figure 3). This slower growth has also meant that the sector’s contribution towards overall employment growth of Saudis was now lower than that of the private sector .

Efforts to curb growth in public sector employment are likely to intensify in the future, particularly since a significant portion of the annual budget goes to current spending (66 percent, 2009-2014 average), of which 52 percent is spent on wages. The difficulty in reducing wages makes it a more likely scenario for the government to curb future public sector employment growth. Another problem with a large public sector workforce is that productivity tends to be lower, with less working hours; promotions based on period served rather than merit; and difficulty in laying off public sector employees; which reduces the productive potential of many. Also, according to a paper published by the IMF, it has been empirically proven that expanding public sector employment does not solve the issue of unemployment, but rather crowds out private sector employment. Many Saudis tend to prefer a well-paid and safe public sector job than risk the time and effort of working in a more challenging, and evenly-paid private sector job. The rigidity in reducing pay to public sector workers means that alternatives are needed, including privatization of public enterprises, increasing working hours, and promotions based on merit.

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