Saudi Arabia tackles unemployment

Saudi Arabia’s latest scheme, Nitaqat, to tackle unemployment in the kingdom has achieved some early successes, but sustaining it for the long-term will be the bigger challenge. Published in MEED, 10 October 2012

When an engineering firm in Jeddah staged a recruitment fair last year, it made 30 job offers to local candidates. Just five of the offers were taken up. In a country with persistently high unemployment, it might seem strange that an employer would struggle to fill vacancies, but Chance Wilson, an independent consultant based in Riyadh, says the real reason became clear soon afterwards.

“When the company started tracking where the individuals had gone, it turned out that most of them had secured employment in the public sector or at least had job interviews in the public sector,” he says.

Saudi Arabia faces a severe challenge when it comes to finding work for its citizens. The labour force participation rate is just 55 per cent and yet the country’s overall unemployment rate is still around 10.5 per cent.

Some groups are faring far worse than that. Almost half of 20- to 24-year-olds and a third of 25- to 29-year-olds are jobless, while the figure for women is 28 per cent, according to a recent joint report by Saudi Basic Industries Corporation (Sabic), the Word Economic Forum and international consultant Booz & Company.

Cultural barriers to employment in Saudi Arabia

There are many reasons for the high levels of unemployment and, as the experience of the Jeddah company shows, it is not simply about the willingness of businesses to hire locals.

“The Saudi labour market is very complex and very bureaucratic,” says Wilson. “There are cultural barriers to work, there are issues over the job readiness of nationals, the education system is still evolving and there are barriers to the role of women in the workplace.

“And the public sector is a very attractive proposition for Saudi nationals, not only in terms of pay, but also in terms of some of the other benefits like long holidays, shorter working hours and a perception that you can never get fired from the public sector.”

The government has been making concerted efforts to deal with the problem since the 1990s and there have been at least three major initiatives in the past decade alone. But their impact on unemployment levels has been muted. Over the past decade, the proportion of Saudis out of work has stubbornly stayed in the range of 8 to 12 per cent.

The latest scheme to tackle unemployment, known as Nitaqat, was launched in September last year. Through a mixture of incentives and penalties, it aims to encourage more private sector companies to hire Saudi nationals.

Under the programme, companies are graded in four categories, with ‘premium’ firms at the top and others placed on a sliding scale of traffic light colours, from green to yellow to red, depending on what proportion of jobs are filled by locals. Firms that make it into the premium or green categories are given more leeway when it comes to employing expatriates, while those in the yellow or red grades face restrictions or outright bans on hiring new recruits from overseas, or renewing the visas of their existing staff. The precise Saudisation percentage that a company has to meet varies according to their size.

All this makes Nitaqat a more nuanced system than its predecessors, which simply set absolute targets across the board. So far, this carrot and stick approach appears to have had some success. On 22 September, the Minister for Labour, Adel Fakeih, announced that more than 300,000 jobs had been created by the Nitaqat programme to date.

“What the Labour Ministry has done is rebooted the Saudisation efforts that already existed. They’ve made them much more sophisticated,” says Samer Bohsali, vice-president at Booz & Co. “It’s a very good start. It’s a step in the right direction, but nobody is claiming it has fixed all the problems.”

Unemployment benefit in Saudi Arabia

Indeed, Fakeih acknowledged the other side of the situation on 22 September with another statistic. According to the minister, more than 1.3 million Saudis are currently receiving unemployment benefits, up from 563,000 in January. The benefits package, known as Hafiz, was also launched last year and grants SR2,000 ($533) a month to claimants for up to a year, while they look for a job.

For employers, meanwhile, there are some significant challenges in trying to meet the government’s employment targets and, as might be expected, the reaction to the Nitaqat programme has been mixed. When the programme was being introduced last year, one local economist said that “companies are worried about the cost effects and disruption”. Since then, some of these fears appear to have been realised, with construction and transport companies in particular complaining that it is impossible for them to meet the quotas set by the ministry.

Among the most serious issues for employers is the poor skill set of many Saudis. There is often a mismatch between what the education system teaches and the skills that companies need, which effectively keeps some candidates locked out of the job market.

The government has recognised the need for improvements to the education system. According to the local Banque Saudi Fransi, government investment on education has more than doubled since 2005 and budget allocations for education and training programmes in 2011 alone amounted to SR150bn, or 26 per cent of the country’s record SR580bn budget.

Higher wages

The nature of the problem means that it is not something that can be resolved in a year or two, no matter how much money is thrown at it. For now, the areas suffering the most in terms of skills shortages include human resources, finance, information technology and engineering.

The second big issue facing companies is the high wages that nationals have come to expect. A report published in May by UK-based management consulting firm Hay Group, found that Saudi nationals were commanding significantly higher salaries than expatriate workers.

Hay Group surveyed businesses inside the kingdom between August 2011 and January 2012 for the report. It found that salaries paid to Saudis were 17 per cent higher than the market average, while expatriate workers received 4 per cent below the market average. A year earlier, the premium enjoyed by Saudis was 13 per cent above the market rate, indicating that Nitaqat might have helped to drive up wages for locals.

If this is true, it is because companies are facing increased competition to attract the most talented and able locals. Indeed, the wage discrepancy is even greater for new starters to a company. On average, new Saudi joiners are paid a 19 per cent premium above the market rate, according to the Hay Group survey, while non-nationals are paid 5 per cent below the market average on joining an organisation.

If this trend continues, the Nitaqat programme will be encouraging firms to hire more locals, while at the same time creating a disincentive for businesses to employ those same people because of the increased wage burden.

At the other end of the jobs market, a separate issue for some employers is that, no matter how well trained local Saudis become, some positions will be all but impossible to fill given their lowly status.

“If you’re a garbage disposal company in Jeddah, for example, you’re not going to be able to hire enough locals to meet the quota because Saudis won’t do those sorts of jobs – at least not in the current work conditions,” says Bohsali.

The issue of unemployment is not a new one for Saudi Arabia, but it has been given added impetus by the Arab spring uprisings, a revolutionary movement that gained much of its momentum from the lack of employment opportunities in North African countries.

Like other Gulf states, Saudi Arabia has a young population. In 1999, 66 per cent of the population was under 30 years of age, according to Banque Saudi Fransi. But compared to the rest of the GCC, Saudi Arabia has a large population, which means the nature of the unemployment challenge it is facing is different.

Job creation in Saudi Arabia

“Where Saudi Arabian authorities face a particular and heightened challenge is that they have such enormous numbers, both in terms of the expanding population which is growing by around 500,000 a year and a very large youth population yet to enter the workforce,” says Wilson. “That puts it into a league of its own.”

While 300,000 new jobs a year might sound a lot, many more are needed each year. The authorities have set a target of creating 3 million jobs for nationals by 2015 and another 6 million by 2030. Large companies are probably in a better position than small- or  medium-sized firms to help address the problem, and they could play a key influencing role in helping the government to get closer to its targets.

“Big companies can leverage their economic power to have an impact on the wider ecosystem,” says Bohsali. “They can require their suppliers to move some of their activities to the kingdom and hire more locals as a condition of doing business with them. And they can create institutions to train the local labour force.”

After a promising first year for Nitaqat, the challenge remains substantial and it is not something the country’s Ministry of Labour will be able to solve alone.