Saudi Arabia’s labor market challenge

Laura El-Katiri, JULY 06, 2016, https://hbr.org/2016/07/saudi-arabias-labor-market-challenge?utm_source=twitter&utm_medium=social&utm_campaign=harvardbiz

Saudi Arabia is in the middle of a major economic transformation, one whose scope and intensity may merit the label “unprecedented.”

The reform comes as part of a new long-term economic strategy, dubbed Vision 2030, and its national transformation plan aimed at weaning the Saudi economy off its addiction to oil, helping Saudi Arabia stay competitive in a low-oil-price world. The Kingdom’s ambitious strategic plans include more than tripling non-oil revenues by 2030 and creating more than 450,000 jobs, including jobs for women, in the private sector. Saudi Arabia hopes the public sector, which employs over two-thirds of Saudi nationals, will cut its wage bill — which today accounts for over 45% of total government spending.

It’s a tall order.

One of the most overlooked aspects of this challenge is the makeup of the Kingdom’s talent pool, and other domestic labor market realities. Reform in those areas will prove to be a key factor in whether Saudi Arabia can achieve its long-term economic goals.

Education is the starting point. While Saudi Arabia has consistently invested in its education system, money does not necessarily buy quality. Critical and innovative thinking, as well as societal expectations for individuals to work hard in return for their grades and wages, are not yet widely taught in schools or universities. In addition, Saudi Arabia’s education system relies overwhelmingly on teachers from other Arab countries — Syria, Egypt, Lebanon — whose training reflects educational values of their countries during the 1970s and 1980s.

Human resource recruitment and management in the private sector is another variable. And it’s a variable that is new and largely unknown in Saudi Arabia’s job markets, where seniority is typically a function of age, longevity of service, and other sources of influence, particularly in the public sector, where most Saudis work.

Once in a managerial position, individuals often cannot be criticised or even advised, which is a problem particularly in institutions where young employees are increasingly more qualified than their managers. “Leadership” in the real sense of the word is left to chance — happening to have the right people in place at the right time, ideally with the social links to ensure sensible proposals for decision making. Presenteeism in offices often is used as a critical measure of effort, and hence value to an organization, in place of output, qualification, or skill.

The result of these challenges is a staff composed of highly different capacities and motivations, in which promotion is seen as the consequence of years worked in the same job or foreign educational certificates collected — which is intensely demotivating to young Saudis. This creates a “brain drain” as talented young people choose to emigrate and look for work elsewhere.

What about recruiting educated foreigners to help address this talent shortage? The nitaqat program, which effectively puts Saudi labor first, often irrespective of qualification or skill, makes recruiting from other countries difficult. Even if recruiters can find a workaround, the Kingdom’s restrictive social norms present another problem when trying to attract the foreign talent on which plans to diversify the economy depend.

Related, of course, is the issue of women’s equality. Today many Saudi women are highly trained and motivated — more than many men, one could argue — but their access remains constrained by the rigid division of genders. This division entails major costs for institutions, from separate educational and training institutions to separate offices and entrance halls. Then there’s the endlessly debated question of whether women should be legally allowed to drive. That not only affects which jobs women would be able to do, obviously, but it also takes valuable attention away from topics like labor laws, ways of creating vibrant work spaces, and policies for getting more out of Saudi Arabia’s bright youth.

How likely is change?

Demographics, in addition to the harsh realities of dramatically falling oil revenues, are on the side of those arguing that Saudi Arabia has no realistic option but to abandon business as usual. Over 50% of Saudis are under the age of 25, having grown up during a period of perceived plenty, the windfall of the 2000s, when rising world oil prices provided the Saudi state with one record revenue year after another. Raised between the materialism of local youth culture and the expectations of entitlement passed down by previous generations of Saudis who benefited from their country’s oil wealth, this young generation has high expectations. To meet them, they will need jobs, ideally high-paying ones, since blue-collar jobs are socially inferior to white-collar office jobs. Unsurprisingly, labor-intensive sectors in Saudi Arabia, such as construction, manufacturing, and hospitality services, are almost exclusively staffed with foreigners.

Although the current time of tighter government budgets, after two years of lower oil prices, is what has created the urgency for change, it may well hinder the change itself. The public sector faces all of the talent challenges faced by the private sector, and then some. To address the human capital challenges faced by the Kingdom, the government desperately needs much more capacity for midlevel planning and reform oversight. Cuts to the public sector will further the brain drain in the public sector at precisely the wrong time. Reductions in pay packages and benefits may be rational to some degree, but they risk alienating highly qualified job seekers.

Without the systematic enforcement of meritocratic structures inside both public sector institutions and the private sector, the Saudi Arabia’s sensible economic reforms may end up struggling due to weak implementation. To put Vision 2030 into practice, Saudi Arabia will have to reform those labor laws that have created its particular, highly distorted labor market.