Traditionally the public sector has provided employment for nationals in the Gulf countries - but the sector is now too bloated to accommodate the large numbers of new labour market entrants. Since the 1970s oil boom, governments have responded to a shortage of local skilled labour, and a culture that shunned manual labour, by encouraging immigration to fill the jobs in the construction sector.
This created a dependence on cheap foreign labour, which has sewed the seeds of economic problems by failing to nurture a skilled indigenous labour force. The GCC economies will have to institute painful reforms to fix the problem. Immigration will have to be tightened in order to raise the cost of foreign labour while national labour markets will have to be liberalised and vocational training programmes introduced to help nationals compete with foreign workers.
The problems have worsened in recent years as increasing numbers of women join the workforce, causing public sector pay rolls to balloon. Even if oil revenues do not fall, they are not sufficient to pay for state employment for the rising numbers of unemployed 16 to 24 year olds. The result has been declining real wages over the last decade - falling by 24% in Saudi Arabia.
While infrastructure and health costs are borne by the government, foreign workers and local employers are exempt from income tax and remittances to home countries amount to $35 billion a year.
One response of governments has been to use minimum quotas for the proportion of nationals that companies must employ - up to 75% in Saudi Arabia since 2005. Oman recently increased to 24 the number of employment sectors for nationals only, mainly in unskilled sectors such as taxi driving and shops. Employers, however, resist these measures, complaining that there are not enough skilled workers, that education is poor and vocational training lacking.
Absenteeism is rife and some employers even pay local employees not to turn up to work. According to McKinsey, between 25 and 30% of GCC's expat workforce is actually working for ghost companies in sectors with low national employee quotas. These workers are then released illegally to sectors with more restrictive quotas.
The report proposes a number of measures the GCC economies can take to reform their labour markets. For example, quotas should be replaced by taxes on immigrant labour or fees to raise the costs of employing foreigners. The system of semi-indentured labour whereby workers are tied to one employer should be ended so that workers can move to other better paid jobs. This would discourage mistreatment and exploitation and also raise wages and help create a level playing field for nationals and expatriates. Bahrain has led the way with a tax on foreign workers that is set to rise until the cost of employing expatriates and locals is levelled out.
Governments need to address the demographic pressures now, to stave off potential unrest and enable their economies to become sustainable in the future.
Getting labour policy to work in the Gulf
Gassan Al-Kibsi, Claus Benkert, Jorg Schubert
The McKinsey Quarterly
Review by Joe Gill