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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 lower bound for the Green band was therefore set so that each cell’s median Saudization percentage would fall in the Yellow band for cells where median Saudi percentage was above zero.

Cuto↵s for the Red and Platinum bands were at the discretion of Ministry sta↵. A firm’s Saudization rate is calculated using as a thirteen-week moving average of the number of Saudi workers registered with GOSI. This smooths shocks and encourages firms to improve their color band status through long-term employment of Saudis rather than through temporary positions.24

3.4 Enforcement: Sanctions and Benefits The main services that the Ministry of Labor provides to firms are foreign recruitment and the issuance and renewal of work visas for foreign workers. The introduction of the Nitaqat program coincided with a streamlining of Ministry visa applications in which firms could renew and change their visas online. Firms in the Green and Platinum bands were o↵ered these new expedited visa services, while firms in the Yellow and Red bands faced increasing restrictions over time in their ability to renew existing visas and to recruit foreign workers. In addition to becoming eligible for expedited and more flexible visas for their foreign workers as well as enhanced recruitment services from the ministry, firms in the Green and Platinum bands were also given the ability to o↵er jobs to foreign workers from the Red or Yellow color band categories. Firms in the Yellow band faced There are some exceptions where larger companies are categorized as White in cases where Saudization was not considered feasible. International schools, for example have no Saudi employment quotas.

There are several types of non-Saudis that can be counted toward the firm’s Saudi total, as well as bonuses for hiring disadvantaged groups. The formula is presented in more detail in the data section.

some restrictions on their visa renewals, and were not eligible for the electronic visas or recruitment services. Entities in the Red band could not renew any of their existing visas and were not issued any new visas. Their existing visas were very inflexible, and they were not allowed to open any new facilities or branches. According to the Ministry, the sanctions were designed so that firms that remained in the Red band would find it prohibitively di cult to remain in business. The sanctions and benefits are summarized in Table I along with the timing of their implementation.

All sanctions and benefits were being enforced by the end of the first year of the program.

3.5 Program Results Between July 2011 and October 2012, the number of Saudis employed in the private sector increased by 462,000, and the Ministry has claimed that the program was responsible for the creation of 250,000 jobs for Saudi nationals in its first year.25 Figure I shows the time series of Saudi and expatriate workers in the private sector. While the number of expatriates in the sector increased by almost the same amount, 467,000, the Saudi workforce grew by 72 percent while the expatriate workforce increased by only 7 percent. There was also a large improvement in firm color-band assignments, with most Red and Yellow firms moving into the Green or Platinum bands by October 2012. Table II shows the matrix of firm color band movements, depicted graphically in Figure II. Approximately 50 percent of Red firms improved their status, ending the period in the Yellow, Green or Platinum bands. Approximately 70 percent of Yellow firms improved their status, and relatively few Green and Platinum firms moved into lower color bands.26 Table III shows that the number of employees at firms in each color band reflects these changes in firm Nitaqat status, with substantial increases in the number of workers in Green and Platinum firms at endline and large drops in the numbers of employees at Yellow and Red firms.

As expected, the reaction from Green and Platinum firms has been quite positive: an HR representative from a telecommunications company categorized as Green under Nitaqat reports that visa applications are now much quicker and that work visas are easier to obtain. Representatives from companies categorized as yellow and red complained about the prohibitive cost of recruiting and hiring Saudis and the negative e↵ects of visa restrictions driving their business to other GCC countries. A recent article also reports that investors in the Saudi trucking industry complain that Nitaqat has hurt their business, claiming that the restrictions cause them to lose SR 250 million a year for failing to hire enough Saudi truck drivers to meet their 10 percent benchmark.27 4 Data The primary data for this analysis is the administrative Nitaqat program data collected by the Ministry of Labor. This dataset contains weekly entity-level observations of the employment http://www.arabnews.com/nitaqat-expanded

4.4 percent of surviving Platinum firms and 17 percent of surviving Green firms appeared in the Red or Yellow bands in October 2012.

http://www.arabnews.com/saudis-find-salary-truckers-low measures and corresponding color band assignments used by the Ministry to determine program compliance and trigger enforcement measures. The dataset contains firm identifiers including geographic location, industry, size category, and a unique firm identifier. Collected employment measures include counts of Saudi and expatriate employees as well as counts of employees in important groups, such as disabled Saudis, ex-convicts, citizens of other GCC countries, women28, non-Saudi spouses of Saudi citizens, non-Saudis with Saudi mothers (“special foreigners), part-time workers, students, and members of displaced tribes from the Rub’ al Khali with a Saudi passport but no national identity card. For Nitaqat purposes, the Ministry counts non-Saudis with Saudi spouses or Saudi mothers, and members of displaced tribes toward the total Saudi employee count.

Former Saudi prisoners are equivalent to two Saudi employees, disabled Saudis equivalent to four Saudi employees, and students working part time as half of a full-time Saudi worker.29 The total

number of Saudi workers for Nitaqat Saudization calculations is therefore:

Nitaqat Saudis = Saudis + Spouses + Special Foreigners + Gulf Citizens + Displaced Tribes + 2 · Ex-Convicts + 4 · Disabled Saudis +.5 · Students +.5 · Part-Time The Nitaqat Saudization rate is calculated as the ratio between this total and the total number of employees. Color band assignments are based on a 13-week moving average of this rate to avoid sudden reclassifications due to temporary sta ng shocks. All of these employment measures are updated by the Ministry on a weekly basis using Ministry data on visa issuance for foreign workers and GOSI data on Saudi employment rolls. Data collection began on June 11, 2011, and entities were fully represented and reporting all employees by July 9, 2011. Therefore, although data exists for June, all comparisons in this paper are based on a starting date of July 9th. The dataset contains observation up through October 13, 2012.

The dataset includes observations for over one million firms, 116,873 were large enough to be included in the Nitaqat program at its start in July 2011. Of these, 83,568 also appear in the data for October 2012, reflecting exit by 33,305 from the sample.30 45,685 new firms entered over the intervening 16 months. These 83,568 firms form the sample for the empirical analysis of the e↵ects of the program on employment, size, and firm value among surviving firms. The estimates of the overall e↵ects use the full set of 116,873 baseline firms, with all employment figures set to zero in October 2012 for exiting firms. Analysis of firm exit is also done using the full set of 116,873 baseline firms. These firms are distributed across 37 industries and four size categories at baseline (Table IV). These firms appear in 109 of the corresponding Nitaqat industry by size categories. Just over one third of these entities were in the construction industry, with most of these in the smallest size Because employee gender was not used to calculate Nitaqat compliance, this particular series does not appear in the weekly Nitaqat data until January 2012.

The Nitaqat bonus for former prisoners and disabled workers is applied to up to four employees in each group;

subsequent employees in these groups count as one additional employee for Nitaqat purposes.

It should be noted that exit from the Nitaqat sample does not necessarily reflect exit from the market, and these exit rates may overestimate overall rates of firm shutdown. Entities may exit the sample by falling below the 10-employee inclusion threshold or by creating a new registration with the Ministry of Labor following a merger, split, or other change in firm structure.

category. Construction firms were also responsible for nearly half of private-sector employment and almost a quarter of Saudi private sector employment (Table V). In addition to being the largest private sector industry, construction also had one of the lowest Saudization rates, with an industry average of 5.8 percent Saudi workers. After construction, the next largest industries were retail and manufacturing, with 20 and 11 percent of the Saudi private sector workforce, respectively. The industry category for conglomerates (“multiple economic activities”) contains a large number of entities, all which have less than 50 employees and which employ less than one percent of the Saudi private sector workforce. Although a large number of firms are exempt from Nitaqat due to the ten-employee inclusion cuto↵, the firms included in the program employed over 95 percent of the Saudis and 68 percent of the expatriates in the private sector workforce at baseline.31 Also of note is the large variation in Saudization rates across industries and within di↵erent size groups. In July 2011, Saudis made up less than five percent of the workforce in farming, maintenance, and private labor recruitment services. Financial institutions had the highest starting Saudization rate at 80 percent; petroleum and gas followed at 76 percent, and petrochemicals at 45 percent. Though the total workforce share of firms was roughly declining in firm size, Saudi employment was greater for larger firms (Table VI). Tiny firms accounted for only 3 percent of Saudi employment, small firms for 12 percent, medium firms for 29 percent, and large firms for 37 percent. The 58 giant firms with over 3,000 employees employed only 11 percent of the total workforce and 19 percent of the Saudi workforce. Correspondingly, Saudization rates are higher for larger firms: small firms were only 4 percent Saudi, with less than one Saudi employee per firm in this category on average, and large firms had the highest average Saudization rate of 17 percent.

5 Empirical Strategy The purpose of the empirical analysis is to identify the causal e↵ects of imposing a Saudization percentage quota on firms. In particular, the analysis seeks to estimate how the required increases in Saudization a↵ected (1) actual changes in Saudization (did the program have any e↵ect?), (2) hiring of Saudis and downsizing of expatriates (how did firms achieve their Saudization targets?), and (3) firm size and exit (what costs did these requirements impose on firms?). The policy variable of interest is therefore the compliance requirements that the Nitaqat program imposed on firms, i.e. the amount by which firms were required to increase their Saudization rates to meet their quotas. If these required changes were randomly assigned, the analysis could directly estimate the e↵ect of these requirements on these outcome variables. In this case, however, the policy variable was mechanically determined by the firm’s baseline Saudization percentage and the quota for the corresponding industry by size cell. These baseline Saudization rates are potentially endogenous to all of the outcomes of interest; unobserved determinants of baseline Saudization are almost certainly correlated with future changes in the employment of Saudis and expatriates as well as other measures of firm performance. Because of this, the analysis uses the variation in the policy Recent updates to Nitaqat have extended the program to include more of these firms, but the current analysis does not include this time period.

rule generated by the placement of the quotas to identify the causal e↵ects of the program on firms. In particular, the estimation relies on the variation in the incentive to increase Saudization rates created by the quota cuto↵s. The Yellow/Green color band cuto↵s in particular generated an incentive for firms below the quota (in the Yellow or Red bands) to increase their Saudization rates while imposing no new constraints on Green and Platinum firms with Saudization rates above the cuto↵. As discussed below, the quotas generate a kinked assignment function from baseline Saudization percentages to the increase required for program compliance. Because of this, the main analysis uses an RKD to estimate the e↵ects of the program on sta ng, firm value, size, and exit.

Overall program e↵ects are also estimated using a di↵erences in di↵erences approach comparing the relative changes of Yellow, Red and Green firms within industry and size cells.

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