Unemployment Is a Significant Issue

Unemployment is a significant issue for many economies around the world, and Saudi Arabia is no exception. While gifted with sufficient oil wealth to spur economic growth and prosperity, the country suffers from considerable structural issues that have led to a somewhat unusual combination of high unemployment, a large number of foreign workers in the country and a lack of economic diversification. The current unemployment rate in Saudi Arabia is 10.7%, down from 10.9% the year before (CIA World Factbook, 2013. One of the most critical issues is youth unemployment, which is around 40%, one of the worst rates in the world. Among women, jobless rates are around 30%, and three quarters of these are university-educated (Knickmeyer, 2011). Nearly three-quarters of all unemployed Saudis are in their 20s, and all told there are around 2-4 million Saudis living on less than $530 per month, which is the poverty line in Saudi Arabia (Sullivan, 2012).

These facts highlight some of the realities of the Saudi situation. The country has historically had birth rates and now has one of the youngest populations. The population has grown from 6 million people in 1970 to 28 million today, a growth of 366% in that span of time (Sullivan, 2013). To compare with a Western country of similar population, Canada has a population of around 33.4 million today and had 21.9 million in 1971, a change of 52% over that comparable period. Given this incredible growth, the Saudi economy would have had to grow at an incredible rate in order to maintain the unemployment rate. While growth has been strong, it has not been able to maintain full employment in the country.

Despite this, Saudi Arabia has around 5.5 foreign workers in the country (CIA World Factbook, 2013). While some are employed with oil companies in well-paying jobs, others have come to the country seeking -- and finding -- low-end jobs. These foreigners are frequently Muslims from India, Pakistan, Bangladesh and Southeast Asian countries. This situation is common in the countries of the Arabian Peninsula, but is unusual anywhere else and reflects the unique situation and the corresponding unique policy responses to address employment and opportunity in the country. As Al-Mulhim (2013) notes, the unemployment situation in Saudi Arabia goes beyond mere demographic or economic issues -- there are social issues as well that contribution to the present situation.

For its part, the Saudi government has taken a number of steps to promote full employment of Saudi nationals. The government provides education for nationals through university, to ensure that they are well-trained. Health care is also provided as a national right. These provisions, while creating the conditions for an innovative workforce that has high mobility, also create a sense of entitlement among Saudis. People with university educations, it stands to reason, prefer not to perform manual labor. This is true in any country, so the education policy has reduced the size of the working class in the country, with many youths feeling that they are educated and that should be reflected in their employment. If the jobs were available, this would not be a problem, but when the jobs are not available, it leads to the condition of high unemployment seen today.

The Saudi government has tried to address the problem for many years, though its efforts have been stifled in part by a rapid growth in the number of young people. In 1994, the Saudization plan was implemented to encourage the hiring of Saudi nationals. A more recent development has been the Nitaqat program, which is in effect a "stick" rather than "carrot" approach. Companies that do not hire enough nationals are punished, and the threat of a "yellow" or "red" status denoting punishment is intended as a means of promoting the hiring of Saudis (Kenawi, 2011).

Part of the problem lies with government, which still exerts heavy influence over the economy, through tightly-controlled state-owned companies. Saudi Arabia has lower economic freedom than many neighboring countries, but those countries have similar problems, so the solution does not just rely strictly on macroeconomic growth drivers. Indeed, the social element of Saudi's unemployment rates points to microeconomics as a means of understanding the individual decisions that go into the choice to be unemployed and hold out for a good job.

While social issues are a consideration, some of them can be traced to economic incentives. This paper is going to examine the different economic issues surrounding unemployment in Saudi Arabia. Clearly, this is not strictly a macroeconomic problem, since the government has money to create jobs. There are other issues at play, and those issues come down to individual choices. Utility and tradeoffs are important concepts in understanding the true nature of the Saudi unemployment problem, and in understanding what police prescriptions can be used to change the situation. This paper will therefore provide an overview of the macroeconomic issue, but will primarily focus on the microeconomics of unemployment in Saudi Arabia.

Macroeconomic Overview of the Problem

In many countries, the central bank and the government both work to provide the conditions in which unemployment is managed in the economy. There is considerable motivation for this as high rates of unemployment lead to social unrest that can destabilize a country. One only needs to look around the Arab world to see examples of this unrest in the face of challenging economic conditions. The Saudi government is well aware of the need to ensure social order still exists, and therefore utilizes both fiscal and monetary policy to drive down unemployment.

In basic economics, the health of an economy relies on four factors -- consumer spending, government spending, business investment and net exports. Saudi Arabia's economy has long depended on exports as a key driver of growth, fueled by the oil industry. This is the one major, exportable natural resource of the country, and the harsh environment has long supported only small populations. The recent population boom requires foreign exchange in order to feed itself, since food needs to be imported due to the inability of the Saudi landscape to provide adequate food for 28 million people. Thus, there is a strong underlying imperative for the Saudi government to build a sustainable economy, not just for jobs but for the necessities of life.

The oil industry has given the Kingdom incredible wealth, but that wealth has traditionally been concentrated in a handful of powerful clans, in particular the royal family. Since the 1930s, the country's rulers have sought to spread that wealth to the people in order to create a better civilization, in accordance with Islamic principles of charitable giving (Sullivan, 2012). This charity is manifested today not only in the country's investment in education and health care, but also in its job creation infrastructure. The Saudi government has attempted to foster economic growth, in particular in the form of business investment and government spending. The nation's GDP still relies on the oil industry, but it is industry and government that generate jobs.

In most countries, there is a natural connection between GDP and employment, where an increase in one leads to an increase in the other. This has not traditionally been the case in Saudi Arabia, where the oil industry generates much of the wealthy but predominantly employs foreigners. Also, oil industry receipts today reflect fluctuations in the price of oil more than they reflect fluctuations in output, the latter of which is more closely related to employment. Thus, there is a disconnect between the GDP and the unemployment. The Saudi government has sought to use redistributive policies in order to close this gap. In part, this is necessity given the high level of government control in many industries. Regardless, the government-owned or regulated firms have worked to create better working conditions for Saudi nationals as part of the government's attempts to redistribute some of the wealth.

With limited non-oil natural resources, the country has turned to service industries as a means of growing its economy. Economic diversification is believed to be key to the country's future. The government financing of university education is one pillar in the strategy to build a thriving and diversified service economy. Under normal conditions, growth in business investment will drive growth in employment. There is no evidence to suggest that this is not the case in Saudi Arabia -- the connection does appear to exist -- but economic growth has not kept pace with growth in the population. This, however, is only part of the problem, as the presence of 5.5 million foreign workers indicates.

What this macroeconomic analysis tells us is that typical Keynesian prescriptions will not help address the issue of Saudi unemployment. Government spending to address the issue is already high. The government could undertake an overhaul of trade policy in order to increase foreign direct investment, or it could spend more on job creation initiatives, but ultimately the local workers need to accept the jobs that are available. If the jobs that are created are not filled with Saudis, the country will only need to import more foreign workers. This is what has led to so many foreigners working in the country already. The foreign workers are therefore a symptom of a greater problem. This problem is not macroeconomic failure -- the Saudi economy is robust and creates jobs -- but is simply does not recognize that macroeconomic principles alone will not address the issue of unemployment among Saudi nationals.

Consider the case of China as corollary. In both countries, there has been an increase in aggregate demand, and this has created more employment opportunities. An increase in aggregate demand leads to more jobs, and often better jobs than would have existed before. Often, the new jobs created are in low-wage sectors, either in manufacturing or the service industry. While Saudi Arabia has tried to create new jobs at the high end of the market, there is a natural multiplier effect. Each new high-wage job creates multiple new low-wage jobs that serve as support. This occurs because high-wage individuals have much higher demand for goods and services as their spending increases. Thus, if the Saudi government creates ten new high-wage jobs, several low-wage jobs will also be created to support those high wage jobs. The problem for Saudi Arabia, in contrast to China, is finding people to fill the jobs. In China, there is a large class of migrant laborers, peasants from villages and other poor who have no means of support other than their own labor. They are willing to accept low wage jobs because they have no other choice. Education standards are poor in China, especially in rural areas, and the country has no social safety net. The conditions of the Chinese labor market, incidentally, mirror those of the labor markets on the Indian subcontinent. Instead of migrating to Guangdong or the Yangtze Delta, workers on the subcontinent migrate to the Arab nations to take on low-wage jobs and acquire security for themselves.

In macroeconomic principle, these positions could be filled by Saudis. There is a gap in terms of willingness that exists, and microeconomics can explain it. The social safety net in Saudi Arabia plays a role, creating disincentive to accept low-wage work. The differential cost of living and wages between the subcontinental countries and the Arab countries is also a contributor. There is also an underlying sense of duty that Saudis have -- they see that they have a wealthy country, they want to support a large family, and these are not things that can be accomplished with low-wage work.

The problem, then, is not that Saudi Arabia needs to create jobs. It needs to create high-wage jobs. These are the jobs for which nationals are qualified, given the university education, and these are the jobs that they will accept. Creating high-wage jobs, however, is not as simple as wanting to. Macroeconomic models are not based around the idea that growth should be specified. A certain degree of distribution is assumed -- if the economy grows there will be growth in all categories. In reality, growth never happens evenly. Some sectors grow rapidly while others stagnate. To understand the dynamics of differential growth among sectors, we need to turn to microeconomics.

Basic Microeconomic Principles

Microeconomics focuses on the economics of individual decisions. Macroeconomic outcomes, including unemployment rates, are built on the foundation of individual decisions. A manager chooses to hire a Saudi; a Saudi chooses to accept an available position. Understanding how these dynamics work is critical to understanding the nature of the unemployment problem, and more importantly how to deal with that problem.

At the heart of microeconomic decision-making models is the idea of opportunity cost. Every decision involves tradeoffs, and there is a core assumption that individual actors will be rational in making those decisions. To account for the reality that rational decision making is not always about money, the idea of utility is substituted for money. Utility refers to the total benefit that someone receives for their decision. When applied to the concept of rational decision making, the simple maxim is that people will make decisions that increase their utility. They will undertake decisions that maximize their utility. In basic principle, a person will accept a job only if he thinks that his life will be better.

When comparing Saudi Arabia to a country like China, the role of the social safety net becomes important. The Saudi government provides benefits to its nationals, including unemployment benefits, housing allowances and other social programs (Sullivan, 2012). While these programs are believed by some observers to be a means by which the government quells the natural unrest that comes from conditions of poverty, such programs also create a baseline utility against which employment must compete. An unemployed Saudi national might not live a great life -- there are an estimated 16 million Saudis whose lives are solidly middle class -- but existence is comfortable. . When provided with housing and income for performing no work at all, it can be difficult to convince somebody to take on low-wage work.

This is explained with fundamental microeconomic principles. The low wage work is likely to pay more than social assistance. If it does not, then clearly no Saudi would take low wage work, as it would involve greater effort but a lower standard of living. But even if the low wage work paid more than social assistance, there is a tradeoff in terms of the rigors of life, especially given the manual nature of much low-wage work. The marginal gain in utility from having slightly more money is offset by the marginal decline in utility from having ample free time. It costs little, it should be remembered, to sit and drink coffee all day, or to watch football. If one's life is worsened by the decision to take a low wage job, then one will not take that job. If we contrast this with China, or the Subcontinental countries, where social assistance programs are minimal if they exist at all, Saudi faces a much different situation because of the marginal utility associated with low wage work. For Chinese or Indians, there is a high marginal utility associated with low wage work, so they accept that work. For Saudis, the marginal utility is insufficient to compel them to engage in low-wage work.

An additional complicating factor is the prevailing labor market conditions. Under normal conditions, an educated worker is more valuable than an uneducated worker. This is universal, and applies to any economy. Knowledge is more productive than muscle, and therefore is costs more. Thus, educated workers all over the world seldom wish to seek out menial, low-wage work. They have the ability to earn more, and see spending time in low wage jobs as needless reducing their value on the job market. Moreover, education tends to make one more aware of international job markets. If university-educated people in America or Europe are working as managers, then most Saudis would surely feel that they should be doing the same. The problem, of course, comes with supply and demand.

In most other countries, the university education has high value because the aggregate demand for educated workers outstrips supply. As we know from the standard as-AD curve, as demand grows relative to supply, the price of the good increases. In the West, as more people graduate from university, the value of university graduates is declining. In those countries, however, the number of university graduates is constrained by barriers to entry to university, especially cost. In Saudi Arabia, the barriers to entry to higher education are lower, and therefore there are more graduates. This pushes the equilibrium point down the as-AD curve, lowering the value of such an education in the marketplace. With limited labor market flexibility -- Saudis cannot readily go to other countries to seek employment -- most Saudis are forced into a job market where their skills are undervalued compared with what value those skills might have in most countries. Further, the economy has simply not created enough jobs for all university graduates to fill, unless low-wage labor is taken into consideration.

Full employment can only be achieved if there is a match between the skills of the workers and the jobs available in the marketplace. General economic growth is not enough, even when the growth in GDP is matched by growth in employment (which is Saudi Arabia is not usually the case). The reason for this mismatch is that there is a high level of government intervention in the market. In particular, the policy of free university education creates a situation where the price of education does not align with its value in the economy. If there were opportunity costs to consider, fewer Saudis would pursue university education. Without opportunity costs, more Saudis study than otherwise would. The result is market failure in the Saudi labor market, where there are simply not enough high-wage jobs for the number of people who are qualified to hold them.

There are ways to resolve this issue even if the government does not wish to abandon its policies with respect to education. The creation of more high-wage jobs would bring the market to equilibrium. However, there are barriers that constrain the creation of high wage jobs in Saudi Arabia. In part, therefore, the problem with unemployment has to come down to the size and structure of the Saudi economy.

In international trade, nations compete on those attribute at which they are best, or at least very good. This is the basic theory of comparative advantage, though in a globalized world it helps to have absolute advantage in order to win business. Individual purchasers do not, after all, purchase from the second-best supplier out of a desire to fulfill Ricardo's dream of perfectly efficient economies. If Saudi Arabia wants to attract investment to create high-growth jobs, it needs to outcompete the other countries of the world and in the region as well.

Countries, like firms, must compete either on cost or quality. Saudi Arabia might compete on cost using foreign workers, but it cannot do so with educated Saudi workers. Educated workers tend to be most useful for high-wage work. Yet, the structure of the Saudi economy is vastly different than that of countries who successfully compete on high-value platforms that emphasize an educated workforce. There are several issues here. The first is economic freedom. Saudi Arabia is not well-regarded for economic freedom. The government has strong control of many industries, even relative to some of its neighbors. In part, this is because the government is the primary source of capital, using its oil money. However, such a situation does not encourage investment. Foreign investors have little interest in competing against domestic firms with legal advantages and limitless access to capital. The same is true for local entrepreneurs. There is only growth opportunity in sectors where one would not compete against the government. Even then, however, there remain critical cultural issues that discourage entrepreneurship. Saudi bureaucracy is thicker than in most Western nations. The country still has issues with corruption, and ranks well below Western governments for corruption prevention. Further, Saudi culture has not traditionally emphasized entrepreneurship, which typically relies on a more individualistic mindset, whereas Arab culture is more collectivist in nature. Lastly, there is the point that Al-Mulhim (2013) makes about work ethic, though as noted work ethic might well be related to the marginal utility associated with hard work.

Recommendations for Action

This analysis leads us to several courses of action that the Saudi government can undertake in order to remedy the issue of unemployment. The labor market's unique characteristics -- high youth unemployment and a large contingent of foreign workers simultaneously -- is ample evidence of market failure. Macro- and microeconomic analysis points to several sources of this market failure. The first is the country's social welfare policies. The provision of free university education, while well-meaning, has dramatically distorted the market for higher education in the country, resulting in more graduates than there are jobs for graduates. Yes, the policy is intended to give the country the foundation of an educated populace on which to build successful knowledge industries, but structural barriers such as bureaucracy, corruption and cultural issues have thus far prevented those industries from being able to supply enough new jobs to soak up all of the new graduates. It is a given that broad-based economic growth is going to create a wide range of jobs, not just high-paying ones. In a perfect world, the Saudi government can imagine only Saudis in high-paying jobs, so that foreign workers would be necessary for the low-paying ones. The reality today is that while Saudis are indeed disinterested in low-paying jobs, there are not enough high-paying ones to keep them employed. Given the demographics of the country, this situation is not expected to be resolved any time soon -- it will get worse before it gets better.

By reducing the availability of university education, either by increasing its cost or by implementing other barriers to restrict enrollment, the country would increase the number of young people who would be accepting of low-wage positions. It is not enough to limit the number of foreign workers -- there needs to be specific incentive for young Saudis to take these jobs. Eliminating some foreign workers, however, would serve to increase the wages of low-wage jobs, thereby creating more marginal utility for Saudis to take these positions. The current approach to this problem -- compelling the companies to hire Saudis -- only forces those companies to pay Saudis more, creating wage disparity among workers in the same company. This can lead to unrest and resentment and is therefore a poor policy from a social perspective. The better approach is to gradually reduce dependence on foreign workers for low-wage jobs while increasing the number of Saudis who would take these jobs. As wages at the low end escalate, an increasing number of young Saudis would see the marginal benefit and take these positions.