GCC unemployment 'needs policy change'

With unemployment levels of nationals in double digits across all Gulf Co-operation Council (GCC) countries despite rapid economic growth over the past decade, the region must make large-scale changes in order to reverse the employment problems of its indigenous workforce, according to a recent report.

Titled 'Meeting the employment challenge in the GCC: The need for a holistic strategy', the report by Booz & Company pointed out that all GCC countries faced similar hurdles when it came to their job markets. Lack of employment opportunities for GCC nationals, the need to substitute expatriates with qualified nationals, and populations that generally view vocational jobs as undesirable – all these are problems plaguing each country in the region.

The report said GCC countries need to shift towards more proactive social and economic policies to upgrade the skills and talents of their workforce. "That is the only way to ensure continued development of human capital in the GCC and meet the demand for employment among nationals."

One of the major challenges facing the region in the next decade is finding employment for the millions of people looking to enter the job market. Quoting World Bank figures, the report stated that the GCC's workforce would exceed 20.5 million by 2020. This marks an increase of almost 30 per cent from the current estimated 15.6 million. The region will have to generate hundreds of thousands of jobs to absorb the growing numbers.

According to the reports' authors, the employment picture comes into even better focus when broken into two population categories. "The first category consists of the economically active, which includes the working age unemployed and employed. The second consists of the economically inactive, which includes that portion of the population not actively seeking work."

Talking of the first category, the report said the unemployed among the "active population" is most at risk of paying a social cost for their unemployment, as they are young.

"Youngsters don't become productive members of society. Their long unemployment stints are another problem, increasing the amount of training and education needed to return them to the workforce. The fact that many of the unemployed are women with relatively high levels of education is an additional problem, or perhaps it is a symptom of the problem: an educational system that is not aligned with the needs of the business sector."

Effects of unemployment

The report mentioned that although the duration of unemployment has likely declined given the economic growth and increased government hiring in recent years, it may still pose a challenge in GCC job markets. "In particular, when a large number of people experience lengthy unemployment, it degrades the overall skill level and experience of the workforce, creating downward pressure on future earnings. People who are unemployed for long periods may also stop looking for work altogether and thus contribute to an increase in the inactive workforce," it added.

Then there are people who are economically active but underemployed. "Employed workers represent the other part of the active population. The majority works in the government sector, which accounts for more than 50 per cent of gross domestic product (GDP) in most GCC countries, while a small fraction works in the private sector. Yet, in many cases, employed nationals are underemployed, and because overstaffing and underutilisation of skills – both forms of underemployment – have similar economic implications as unemployment such as low economic productivity, they are really a form of masked unemployment."

The report underlined that some unemployment is masked by overstaffing. The authors said that oil revenues have resulted in the creation of a welfare system in which the government is the largest employer of nationals but this has led to overstaffing of the public sector.

"Indeed, this phenomenon can be seen in government-owned companies such as utility services, where overstaffing has resulted in sub-optimal deployment and utilisation of nationals. With such vital economic sectors increasingly facing international competition as a result of liberalisation, the comparatively high-cost structure of the current situation may not be sustainable, bringing to the fore the challenge of underemployment."

Private sector quotas

Some unemployment is masked by quotas, said the report. "The nationalisation of the labour force in the private sector through quotas, especially in small establishments, has often resulted in another form of masked unemployment: nationals who are added to payrolls but not deployed productively in their organisations."

Besides, the promise of well-paid government employment has encouraged waves of students to apply for public jobs with minimal skill requirements.

"As strategic government enterprises contend with the increasing pressures of privatisation and global competition which demand specialised and talented workers, the dearth of expertise has resulted in a mismatch in the supply and demand of skills. This hinders the potential for economic growth and higher national employment, and increases the dependency on foreign labour."

Those who are economically inactive – the second category addressed in the report – are another lurking problem. "Economically inactive" are defined as those among the working-age population who are not looking for work because they are ill, studying, looking after family or have taken early retirement.

Talking about this category of people, the authors said that there were two important economic implications for countries with high inactivity rates. "First, an inactive population represents an opportunity cost for the economy in terms of its potential GDP. Second, there is a strong likelihood that over time, inactive labour (that is, discouraged workers) will either add to the number of the unemployed or will require a significant investment in training to return them to the ranks of the economically active."

In the region, the authors added, this population of people is larger than international benchmarks. The data in the report showed that the inactive population in recent years in the GCC has averaged well over 40 per cent of the total active population in each country. In contrast, the inactive population in European countries is much lower – in the UK, for instance, it was just 19.2 per cent in 2003.

"The demographic make-up of the GCC, with a large inactive youth population (eg, students) may help to somewhat explain this large disparity (as well as signal increasing pressure on the GCC economies as students enter the job market)," said the report, adding that three other factors are responsible for the large share of economic inactivity among the working-age populations in the GCC.

First, women's participation in the workforce is low. "Although the region has witnessed an increase in the number of female workers since 2000, the percentage remains low by international standards. For example, the GCC's average workforce participation rate for women was 33 per cent in 2005 and ranged from 18 per cent in Saudi Arabia to 50 per cent in Kuwait. Worldwide, in contrast, women's participation rate in the workforce was almost 56 per cent," the report said.

Secondly, a significant portion of nationals are unwilling to participate, said the report. "A second reason for economic inactivity is the hesitation – especially on the part of the young – to participate in the workforce. Nationals are willing to forgo the 'going wage' in the private sector and become inactive or voluntarily unemployed."

Third, one of the main reasons for the large share of inactivity in the formal job market is the burgeoning informal sector. "Data constraints do not allow for a comprehensive analysis, but the basic structure of the informal job market is well known."

The report also highlights that public policy played a critical role in the development and shaping of job markets. "Effective policies can push job markets to develop in ways that support socio-economic goals."

Impact of policies

The authors said education, labour, immigration, and social policies have a substantial impact on employment. As far as education policy is concerned, it is not aligned with economic goals. "The misalignment of higher education policy and job market requirements has produced a quantitative and qualitative skill gap. The private sector hasn't proposed reforms that would make higher education more relevant to its needs," it said.

Other problems such as limited capacity, limited funding, low quality and ineffective governance in the higher education system add to the woes. Secondly, labour and immigration policies are in need of reform, it said. "The influx of expatriates to the region since the 1970s has helped keep some critical industries running, but it has also created problems that cannot be resolved easily, such as threats to cultural identity and heritage."

Thirdly, "given the promise of lifelong government employment in the GCC, there has been little incentive for these countries to establish social safety nets, including wide-ranging unemployment benefits for those who are out of work.

"The social safety benefits that exist (mostly cash handouts) are hampered by a mind-set that social welfare is most important as a form of sustenance for the disadvantaged, rather than as a way of getting them to return to the workforce. With no real incentive for the unemployed to return to work, the demand for cash assistance grows. Yet the assistance that is available has not kept pace with the rise in the cost of living or with the increasing number of unemployed. The approach to social welfare, therefore, is unsustainable."

"Unemployment is a complicated problem in the GCC, and there is no single solution to it. There are structural problems with the economy, with education, and with labour and immigration, and all must be addressed as part of a holistic strategy," it concluded.

ECONOMIC IMPERATIVES

Each nation's strategy must incorporate three critical steps to identify and develop the economic sectors that are likely to maximise value-added jobs for nationals.

These are developing competitive sectors; promoting the private sector; and promoting the GCC as a hub for investment.

LABOUR IMPERATIVES

More effective labour and immigration policies are essential to improving the GCC's unemployment problems. There are three critical areas of need as per the report – make immigration policies more focused; increase focus on labour participation; and revisit the idea of the Kafalah.

GCC officials may wish to follow Bahrain's example and discontinue this system, resuming the role of directly enforcing and monitoring expatriates' stay in their countries. Amending the current sponsorship system would not only decrease the risk of abuse, it could also increase labour market mobility.

When government control takes the place of private sponsorship, employees will no longer be required to get 'no-objection' letters from their previous employers in order to change jobs. Foreign employees would be freer to go where their skills take them. That mobility would remove a characteristic that has so far prompted some employers to prefer foreign workers over nationals.

"With such tools, the GCC will be better able to face the challenges of unemployment that lie ahead," the report said.

EDUCATIONAL IMPERATIVES

Five critical areas that must be addressed to make educational reform successful are setting education strategies based on carefully considered socio-economic goals; enhancing public and private school performance; upgrading vocational education; strengthening scientific research in higher education; and streamlining and clarifying the government's role and capabilities.

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