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«June 2015 Abstract Since 2011, Saudi Arabia has dramatically extended its labor market policies to address youth unemployment and low Saudi ...»

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Can Hiring Quotas Work?

The E↵ect of the Nitaqat Program on the Saudi Private Sector⇤

Jennifer R. Peck†

June 2015

Abstract

Since 2011, Saudi Arabia has dramatically extended its labor market policies to address youth

unemployment and low Saudi participation in the private sector. This paper studies the Nitaqat

program, which imposed quotas for Saudi hiring at private firms. The policy provides a unique

setting to investigate the e↵ects of quota-based labor regulations on firms. The analysis uses a comprehensive firm-level administrative dataset and exploits kinks in hiring incentives generated by the quotas to estimate policy e↵ects. The findings indicate that the program increased native employment at substantial cost to firms, increasing exit and decreasing total employment at surviving firms.

⇤ I gratefully acknowledge the support of the Labor Market Decision Support System project at the Center for Complex Engineering Systems at the King Abdulaziz City for Science and Technology in Saudi Arabia and the Massachusetts Institute of Technology. I am extremely grateful to Michael Greenstone and David Autor for their extensive feedback and to Ahmed Fadol for his considerable assistance with this project. I also thank the rest of the LMDSS team for their support and advice. Miikka Rokkanen, Heidi Williams, and seminar participants at MIT contributed many helpful comments and suggestions.

† Swarthmore College Department of Economics, 500 College Avenue, Swarthmore, PA 19081.

(email: jpeck1@swarthmore.edu) 1 Introduction Many countries have used quotas and a rmative action policies to favor members of disadvantaged or underrepresented groups. These policies aim to increase the representation of these groups in a variety of areas, including elected positions, education, and employment [Fryer & Loury 2013, Sowell 2005]. Legislative gender quotas, for example, are quite common worldwide, and many universities either explicitly or implicitly consider race and gender as a factor in admissions. Government-mandated quotas and group preferences are also frequently applied in labor markets, both to civil service positions and to employment at private sector firms.1 One of the key issues regarding these types of quota-based labor policies is the tradeo↵s they impose between their benefits to targeted groups, the costs to other workers, and the impacts on firms. Theoretical models yield ambiguous predictions regarding the e ciency impacts of these policies, and the net e↵ects depend on both the type of discrimination being modeled and the particular labor market context [Holzer & Neumark 2000]. Empirical evidence on the e↵ects of these policies in various settings is therefore essential. This paper examines one of the world’s largest quota-based labor policies to estimate the e↵ect of hiring quotas on employment and firms.

The Nitaqat policy was enacted in Saudi Arabia in 2011, and requires Saudi private-sector firms to meet specific employment quotas for Saudi nationals. This policy is attractive to study for several reasons. First, the policy was applied to all private sector firms with more than ten employees, making it one of the most broadly applied such quota programs. The quotas were also rigorously enforced, with sanctions triggered automatically for non-compliant firms. Quota compliance was also carefully monitored through the government’s integrated social security and visa records. The policy was therefore both clearly-defined and well-enforced.

In addition to providing important evidence on the e↵ects of quota-based labor policies, Nitaqat also o↵ers a window into government e↵orts to combat the e↵ects of the “resource curse” on the labor market. Many resource-rich countries face a number of common economic problems, including the underdevelopment of the non-resource sector, high unemployment, weak institutions and corruption, and political instability. These challenges were particularly salient for Middle Eastern oil producers during the Arab Spring uprisings of 2011 and 2012, and protests occurred in almost all of the oil-exporting countries in the Middle East.2 While there were certainly a variety of reasons for the demonstrations, protestors often cited unemployment as a central concern, especially in places like the usually peaceful Oman. Indeed, high unemployment rates, particularly among young people, tend to be a crucial issue for governments worried about political instability.3 In addition to experiencing many of these general issues, Saudi Arabia is also part of a subset A rmative action in the United States, for example, applies to government jobs as well as to private firms with government contracts. New Economic Policy regulations in Malaysia and post-apartheid employment equity policies in South Africa apply to both public and private-sector jobs.

Uprisings or protests were documented in Libya, Yemen, Tunisia, Egypt, Bahrain, Algeria, Syria, Iraq, Kuwait, Morocco, Oman and Saudi Arabia.

Because the governments in the Middle East also control between a half and one third of world oil reserves, their political stability is often of great international interest as well.

of oil exporters that share several specific labor market features. All of the countries of the Gulf Cooperation Council (GCC) – Saudi Arabia, Bahrain, Oman, Kuwait, Qatar and the UAE – have economies that are characterized by several common core issues. In particular, all six countries have a very heavy reliance on oil and gas, with fuel exports ranging from 30 to 85 percent of total GDP.4 The GCC countries also tend to have dramatically segmented labor markets, with large populations of low-skilled migrant workers. These guest workers form between 20 and 80 percent of the total workforce in these countries, and non-citizens make up nearly a third of the total GCC population. Correspondingly, there is also a low participation of nationals in the private sector, with most citizens working in the public sector or in the oil and gas industry.5 At the same time, these economies tend to su↵er from high and rising unemployment, especially among young people.





Saudi Arabia is a clear example of this pattern, with a large number of guest workers, high native unemployment, and sluggish growth in the non-oil private sector. Saudi nationals form about half of the labor force, with four million Saudis employed in 2011. Of these, sixty percent worked in the public sector, and only about 600,000 worked in the non-oil private sector. Foreign, or “expatriate” guest workers make up ninety percent of the non-oil private sector workforce.67 Unemployment is also very high among new labor market entrants, and o cial figures from the Central Department of Statistics and Information (CDSI) report 40 percent unemployment in the 20-25 age group.

The reliance on migrant labor in the face of rising national unemployment has become a critical issue for Saudi Arabia and the rest of the GCC. Many firms prefer to hire low-cost foreign labor rather than Saudi workers, who are usually more expensive and less flexible.8 In comparison to nationals, who often have access to generous government benefits and services, expatriates tend to accept lower wages and to work longer hours in poorer conditions. The de facto minimum wage for a Saudi worker, for example, is around 3000 SR (about 800 USD) per month. In contrast, expatriate workers can be paid about 1500 SR per month, or 400 USD. Although expatriates must be recruited from overseas, their employment terms are also much more flexible than those of Saudi employees, who are more di cult to fire under Saudi labor laws. Foreign workers usually come to the GCC without their families and are not o↵ered a path to citizenship; their ties to their host countries remain very loose, and many send their wages back to their home countries as remittances.

Throughout the GCC, governments have become increasingly concerned about both rising citizen unemployment and continued dependence on foreign labor. In addition to political concerns about the potential for radicalization among unemployed youth, large expatriate populations themIn comparison, Venezuela derives only 18 percent of GDP from oil and gas.

Until recently, the GCC states used public sector employment as a way to combat unemployment and redistribute oil wealth. This strategy has become unsustainable as population growth has rapidly outpaced growth in oil revenues [Forstenlechner & Rutledge 2010, Forstenlechner, Madi, Selim & Rutledge 2012, El-Katiri, Fattouh & Segal 2011].

I follow the convention of referring to these migrant workers as “expatriates”. This terminology is used to indicate both the broad skill spectrum of these guest workers as well as their temporary residence in the country.

These expatriate workers form one of the world’s largest migrant populations: in 2010 Saudi Arabia was the fourth largest destination for migrants after the United States, Russia, and Germany, with, with 7.3 million immigrants forming a striking 28 percent of its population (World Bank 2011).

While high-skill workers are also brought in from the West for their technical expertise, the majority of expatriate workers are hired for low-skill work.

selves are seen by elites as potentially politically destabilizing, making nationalization e↵orts highly politically desirable [Randeree 2012, Al-Dosary 2004, Al-Lamki 1998]. Over the past thirty years, all six countries have instituted some form of private-sector workforce nationalization program to address these two issues.9 These initiatives are the core government strategies to both increase national employment and to reduce dependence on a foreign workforce. Until recently, however, these programs have been relatively narrow in scope and largely unenforced [Randeree 2009].

From 1995 to 2010, Saudi Arabia’s nationalization e↵orts were similar to others in the region, with extremely ambitious Saudization targets that were not enforced on a broad scale, but which had achieved some success in the oil and gas industry and in financial services.10 In 2011, the Saudi Ministry of Labor began enforcing an updated version of the old nationalization program that had previously been on the books but non-binding. This new program, called Nitaqat, or “bands”, was designed to give firms more attainable targets and to introduce incentives to achieve nationalization quotas. The program developed nationalization targets based on firm size and industry and imposed visa restrictions based on how firms performed relative to these targets. These incentives have been strictly enforced, and non-compliers have faced restrictions on their work visas for foreign workers, while firms that perform well are given expedited access to Ministry services such as recruiting assistance and visa approvals. This employment quota program is unprecedented in the breadth of its scope as well as its rigorous enforcement and close monitoring.1112 Because of this, the Nitaqat program is a key test case to measure the potential of these programs to combat unemployment.

As with quota-based policies around the world, however, one of the main concerns about these programs is that they will overburden an already-fragile private sector [Looney 2004, Ramady 2013, Hertog 2014]. These regulations are expected to raise costs for private sector firms, which could significantly handicap growth even as these countries rely more heavily on this sector to diversify their economies away from oil and gas.13 The Nitaqat program is also an important case study for how the costs imposed by such a quota program can restrict the growth of the targeted firms.

This paper focuses on two main questions: was Nitaqat successful in increasing the number of Saudis in the private sector, and what were the costs to firms? To answer these questions, the analysis employs a comprehensive dataset on the full universe of Saudi private-sector firms used by the Ministry of Labor to administer the program. The data is particularly notable for its wide coverage and high quality, as employment submissions from firms were automatically checked These programs are summarized in Randeree [2012]. These programs are known as Saudization in Saudi Arabia, Bahrainization in Bahrain, Kuwaitization in Kuwait, Omanization in Oman, Qatarization in Qatar, and Emiratization in the UAE.

Under the old Saudization law, companies in nine sectors were required to achieve 30 percent nationalization targets, and construction companies were assigned a 10 percent Saudization target. This law was not enforced, however, and companies in most sectors fell well short of these quotas.

Quota compliance was automatically checked on a weekly basis using the government’s integrated social security and visa records.

Although compliance was monitored using administrative records, there is of course no guarantee that registered workers were employed in meaningful work. There are reports that some firms elected to pay locals a minimum wage simply to register their national ID number with the company [Sadi 2013].

The likely economic costs for private sector firms are carefully discussed in Ramady [2013]. The paper also discusses potential interactions of Nitaqat with other proposed government labor market policies.

against government social security and visa records. The establishment-level data contains weekly totals of Saudi and non-Saudi employees as well as basic firm characteristics such as industry and size category as well as the level of quota compliance. This is the first time that such establishmentlevel data has been made available to researchers, and this access provides a unique opportunity to study the firm-level e↵ects of this program. The main empirical strategy exploits a kink in the incentive to increase Saudization generated by industry-level Nitaqat quotas. This kink in the policy rule yields an identification strategy based on discontinuities in the derivatives of the outcome variables. I use this regression kink design (RKD) to estimate the e↵ect of the Nitaqat program on firms near the quota cuto↵s in terms of program “benefits” (Saudization, Saudi hiring, and expatriate downsizing) as well as program “costs” in terms of firm size and exit. I also use a di↵erences-in-di↵erences approach to provide an approximate estimate of the overall e↵ects.



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