Nationalisation of Labour: Permanent Solution or Quick Fix?

By Nadeen Alawadh

Oil has been the fundamental driving force of MENA economies since the 1970s. Its abundance and the resulting wealth generated within the region has served citizens of the Gulf tenfold, with benefits including various forms of subsidies and more importantly, a ‘silent agreement’ between nations and their constituents guaranteeing employment opportunities, specifically in the public sector.  

Readily available public sector employment opportunities have shaped GCC nationals’ expectations of considerably high wages and typically convenient working hours of questionable productivity, which is often higher in value and more lenient than what the private sector is able and willing to extend. This feature of the local labour force explains part of the reasoning of the private sector being more inclined to hire less costly foreign labour that is available in copious amounts in the region, that is easily exploitable due to lax labour right laws. As a result, a substantial gap in labour prices and labour rights between ex-pat workers and locals continues to undermine and prevent progress in the private employment of GCC nationals. The vast majority of Gulf countries display a disparity in the national workforce employed in the public sector versus the private sector. 

Undoing the damage of this silent agreement and encouraging the integration of nationals into the local labour markets remains a long-term obstacle to overcome to achieve fiscal sustainability. Taking into consideration the oil-price shocks that have exhausted government revenues, reduced GDP and led to budgetary deficits; both pre- and post-pandemic, a large public sector workforce constitutes a significant financial burden on MENA economies. Attaining a more balanced local labour market between the private and public sector has the potential to bring substantial economic benefits while preparing GCC nations and their citizens for the increasingly competitive international market. It would also provide governments with the opportunity to shift their revenues away from the burden of the excessive wage costs and towards reforms that achieve further economic diversification. 

In an effort to reduce dependence on the expatriate workforce and restore balance within the local labour markets, a widely implemented policy of labour nationalisation quotas has been adopted by a majority of MENA countries. These policies include mandates that require private sector companies to reach a minimum target percentage of citizens on their payroll. The goal percentage is dependent on the specific industry and capped by the number of nationals available for hire. Governments have been using a carrot-and-stick approach when enforcing these policies:  companies that fail to comply with the specified hiring quota incur steep fines while those who exceed the targets are given the benefit of accelerated regulatory administration service benefits. More recently, these policies have been extended to the public sector as well, with some countries aiming for an entirely local public sector workforce, in an attempt to solve the rampant unemployment, especially amongst fresh graduates. 

Nevertheless, policies that enforce hiring quotas fail to directly tackle the issues that are stopping GCC citizens from seeking out private sector opportunities while also neglecting to appropriately prepare its citizens with the right skills and training to be effective hires for private companies.  Furthermore, when the labour quotas are paired with policies that distribute subsidies to nationals who opt to pursue private employment, a further problem of ‘ghost employment‘ arises where employees who are enticed by the idea of ‘free money’ abuse the system in conjunction with employers who might be able to meet their local hiring quota, and thus are willing to create ghost employees. 

A possible policy correction could be to instead enforce a minimum wage for nationals employed in private sector companies that is at a rate competitive enough to stand up against pursuing public sector jobs. This would reduce the negative impacts of ghost unemployment as it would make it more difficult for employers and prospective employees to collude while also increasing the incentive for private sector work.

However, it is essential to note that any policy developed must include plans to provide adequate skill-training and on-the-job workshops to GCC nationals looking to gain private sector employment until governments put a full education reform into effect. A complete education reform is desperately needed in the GCC region to overcome the degree and skill-to-job mismatch that is contributing to the burgeoning unemployment issue and could possibly bolster labour productivity as a result as well. In the past, the prospect of gaining fast track employment in the public sector post-graduation has warped education incentives that result in a wider choice of degree programmes that are irrelevant to the private market. A positive is that schemes such as new graduate trainee programmes have been developed and are already in practice in partnership with large private companies in the region in an attempt to correct this. 

What GCC nations are slowly coming to realise is that nationalisation is not a reformative policy that can just be decreed. Rather, it should be induced by appropriate labour market mechanisms, most prominently by narrowing the wage gap between citizens and foreign workers and allowing for greater employment mobility for all those active in the labour force. While some recent policy improvements have shifted reforms in the right direction, unfortunately, none have been sufficiently effective.

The views expressed in this article are the author’s own and may not reflect the opinions of The St Andrews Economist.