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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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The analysis finds that the program succeeded in increasing Saudi employment, but did so at significant costs to firm growth and survival. Program compliance rates were significant, with firms adding Saudi workers and decreasing expatriate workers with their distance from the quota cuto↵.

Quota compliance was primarily accomplished by hiring Saudis, and the di↵erences-in-di↵erences results indicate that Nitaqat was responsible for the addition of roughly 73,000 Saudi workers to existing private sector firms over the 16 month period, a sizable share of the approximately 460,000 new Saudi workers employed at these firms over the period. New entrants also tended to have higher Saudi employment rates, implying an additional 23,000 positions for Saudi workers in these firms. At the same time, the program had a significant impact on exit rates, with the probability of exit increasing in a firm’s baseline percentage-point distance below the quota. The overall e↵ect of this is estimated to have caused almost 11,000 firms to shut down, raising exit rates from 19 percent to 28 percent. Surviving firms also tended to shrink in terms of the total number of employees, and the program decreased total private sector employment by 418,000 workers. There is also some evidence that a small number of firms were able to game the system by hiring Saudi workers on a temporary basis in order to avoid sanctions. General downsizing does not appear to have been strategic, however, and firms do not appear to have downsized below the size cuto↵s for Nitaqat inclusion as a way to escape regulation.

The rest of the paper proceeds as follows. Section 2 summarizes some previous work on labor market quota programs. Section 3 describes the structure of the Nitaqat program, and Section 4 describes the data used in this analysis. Section 5 outlines the RKD empirical strategy, its applicability to the analysis of the Nitaqat program, and reports the relevant identification checks.

Section 6 reports the main results and some extensions, and section 7 concludes.

2 Background: Previous Literature The analysis of the Nitaqat program relates to a large literature in labor economics on the e↵ects of a rmative action and employment quota programs. The most well-studied of these are a rmative action policies in the United States.14 Although most of this literature has focused on the e↵ects of a rmative action on employees,15 there are several studies that have attempted to estimate the e↵ects on firms. Gri n [1992], for example, estimates establishment-level translog cost functions for firms that were government contractors (and therefore subject to a rmative action regulations) and for firms that were not in the contracting sector. He finds that the labor costs of contracting firms were 6.5 percent higher than those of non-contracting firms. In the absence of exogenous variation in which firms were exposed to the regulation, however, it is di cult to know how much of these di↵erences are attributable to a rmative action alone. There are also several recent papers on employment quota programs outside of the United States. Recent studies by Howard & Prakash [2012], Chin & Prakash [2011], and Prakash [2009], for example, have examined the e↵ect of Indian minority hiring quotas on employment outcomes and occupational choice of favored groups. These studies find that these programs increased the probability of finding a salaried job for some types of favored groups, and that this improved employment outcome was associated with higher household consumption expenditures and higher-skilled occupational choice.

Another literature examines the e↵ects of the New Economic Policy regulations in Malaysia. Tran [2013] finds that Malaysian firms stay ine ciently small when subject to regulation above a size threshold.16 This study adds to this literature in several ways. First, the strict enforcement and clean colorband assignment cuto↵s provide quasi-experimental variation in the intensity of regulation that allow this study to estimate the causal e↵ect of the quota on firms. This type of evidence is rare in this literature, which must often rely on regulatory variation generated by changes in contractor status, industry mix, or This study is the first to examine a quota program of this magnitude, both in terms of the number of industries included in the program as well as its geographical extent.

The overall e↵ects of programs that target a particular industry or focus on a single area are likely to be small both because the small number of a↵ected workers as well as the fact that workers may easily be shifted from non-targeted industries or areas. Because of this, the modest e↵ects seen in these types of programs may not be relevant when scaled up to an economy-wide program like Nitaqat. This study will therefore be able to o↵er a more accurate picture of the e↵ects of a national-level quota policy. This study is also the first to examine the e↵ect of a nationalization policy rather than one targeting a historically disadvantaged minority. The di↵erences in the characteristics of the targeted labor force will also have an e↵ect on the interpretation of these results.

This study is also of particular interest given the popularity of nationalization as an employment For a detailed survey of this literature, see the comprehensive literature review in Holzer & Neumark [2000].

Chay [1998], for example, finds improvements in both employment and earnings for black men associated with the extension of the Equal Employment Opportunity Act to small firms. The largest increases occur in regions and industries most a↵ected by the policy change.

Interestingly, Fang & Norman [2006] show that NEP regulations barring Chinese workers from the public sector may have actually widened the Malay and Chinese wage gap.

Miller [2015] addresses this using an event study design to exploit variation in the timing of first and last federal contracts across establishments to estimate establishment-level employment e↵ects of U.S. federal a rmative action regulations. Kurtulus [2012] also uses within-employer changes in contractor status to estimate firm-level e↵ects.

stimulus program in other resource-rich countries, particularly those in the GCC. All six GCC countries (Saudi Arabia, Bahrain, Oman, Kuwait, Qatar and the UAE) already have some form of nationalization program in place [Randeree 2012].18 Among these, Nitaqat is unique in its broad scope and its enforcement, and therefore provides an important test case for countries looking to expand their e↵orts in this area. The UAE, for example, has announced a renewed focus on its Emiratization initiative to bring Emiratis into the private sector.19 This study adds important evidence to the debate about the e cacy of these programs by providing estimates of both the benefits in terms of the employment of nationals as well as the costs to private sector firms.

3 Background: Saudization and the Nitaqat Program Plans to enact a new nationalization policy were first announced by the Ministry of Labor in early

2011. Detailed information about the structure of the program, including specific quotas as well as the corresponding sanctions and benefits for compliance, was released to firms in June 2011.

Sanctions were phased in starting in September 2011. This section discusses some of the potential reasons for low baseline Saudization rates at private sector firms and then presents details on the construction and enforcement of the Nitaqat quotas.

3.1 Baseline Saudization Rates Before the program began, most firms had relatively low baseline Saudization rates, with overall Saudization of 8.7 percent in the 1.1 million firms in the sample in July 2011. This was likely due to a variety of factors, including higher reservation wages for Saudis and lower employment protections for expatriates. In addition, qualified Saudi workers tended to be more di cult to hire than expatriates. This is likely the consequence of limited experience on both the supply and demand side: because of their low engagement with the private sector, Saudi workers may have been less likely to have the required skills, including related work experience and education in relevant fields. Low Saudi employment also meant that many firms had little experience recruiting Saudis and limited access to referral networks.20 There can also be substantial fixed costs involved in hiring Saudi workers. Saudi women, for example, make up a large fraction of unemployed workers, particularly at higher education levels. However, Saudi law requires that women have physically separate work spaces from their male colleagues as well as separate building entrances. All together, these factors tend to make the predominantly male expatriate labor force more attractive for most firms.

Although the average Saudization rate was low, there was also quite a bit of heterogeneity in Saudi employment across industries. The share of Saudi workers is highest in industries with jobs that are considered culturally (and legally) acceptable for women and in clerical occupations where Hertog [2014] provides a comprehensive assessment of these and other nationalization e↵orts in the GCC.

R. Kasolowsky, “UAE mulls new labor law to attract Emiratis to private sector,” Reuters. February 16, 2013.

There is evidence that these hiring networks are important for recruiting under-represented workers [Miller 2015].

Of the 116,873 firms in the baseline sample, 85,925 had zero Saudi workers at the start of the program.

the skills are similar to those needed in the public sector. Financial institutions and petroleum and gas extraction, for example, both began with Saudization rates above 75 percent. Industries requiring manual work or specialized skills tended to have the lowest Saudization rates. These included construction, farming, maintenence, transportation, and real estate.

In addition to the substantial variation in Saudization across industries, di↵erent firms also have very di↵erent rates of Saudi employment within industry groups. This is likely due to a mixture of structural and transitory issues. Because employing Saudis requires significant fixed costs, firms that have already made these investments likely find it easier to hire Saudis. These investments may include workspace, developing e↵ective Saudi hiring practices, HR quality, and physical capital to accommodate workers with di↵erent types of skills.

3.2 Firm Categories Under Nitaqat, the Saudization quotas that firms face vary by industry and size. All private sector firms are allocated into these industry by size categories based on their economic activity type and number of employees. There are currently 52 di↵erent industry categories based on the 3,127 economic activities registered with the Ministry of Commerce. Since June 2011, the program has added 10 new industry classifications, increasing the number of industries from 41 to 52.21 Of these original 41 industries, 37 had firms subject to Nitaqat regulations in the June 2011 data.

Within each category, entities are classified into size groups according to the total number of employees in a single industry category across all branches of the firm. The five size categories are: very small ( 10 employees), small (10-49 employees), medium (50-499 employees), large (500employees) and giant (3000+ employees). These entity sizes are calculated by the Ministry using data on the number of foreign workers visas held from the Ministry and National Information Center (NIC) records and the number of Saudi employees from the General Organization for Social Insurance (GOSI). The number of Saudi employees is entered as a moving average over thirteen weeks to prevent sharp changes in size category or Saudization percentage.

Firms are therefore assigned to industry and size categories according to the economic activity of their branches (as registered with the Ministry of Commerce) and their numbers of employees as calculated by the Ministry of Labor from NIC and GOSI data. For example, a firm with three bakeries with 30 employees at each branch would be counted as a single entity with 90 employees, putting it in the Medium size category. A firm with a jewelry store with 12 employees and a clothing store with 60 employees would be classified as two entities, one Small entity in the Jewelry sector and another Medium entity in the Retail sector. If the firm decided to list as one entity, it would be considered Medium sized with 72 employees, and it would have to achieve Saudization targets for the most stringent sector in which it had any economic activity, in this case the jewelry sector These new sectors were split o↵ from the existing categories in response to complaints that dissimilar business groups were being held to the same targets. Road cargo transport, for example, was split into long-haul and intra-city trucking. Firms were allowed to change their classification up to one time by appealing to the Ministry of Commerce.

Administrators at the Ministry believe that larger firms are seen as more desirable places to work, and therefore have an easier time recruiting Saudi employees. As such, the targets are almost all weakly increasing in firm size.

with 20 percent nationalization rather than the retail sector target of 17 percent nationalization.

Firms may also be listed as a conglomerate, in which case their business lines are classified as a single entity and coded in the “multiple economic activities” category. Overall, there are 1.8 million branches and 1.2 million private-sector entities monitored by the Ministry under Nitaqat.

3.3 Nitaqat Color Bands Within each cell of the industry by size classification, firms are assigned to a color group based on their Saudization percentage relative to the Ministry’s color group cuto↵s for that cell. For a

medium-sized construction entity, for example, the color band ranges were:

–  –  –

A construction firm with 5 Saudi employees and 95 foreign workers would therefore be classified as Yellow with a Saudization rate of 5 percent. Firms with fewer than 10 employees were classified as “White” and were not included in the program.23 Industry and size group cuto↵s were designed based on pre-Nitaqat Saudization rates so that slightly less than half of firms would be coded as Green or Platinum and the rest as Red or Yellow.

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