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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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where D(Green 5) is a dummy variable for the group of Green firms which began above the quota by more than five Saudi employees.

This method requires more assumptions about the e↵ects of Nitaqat on firms above the cuto↵ than the RKD. In particular, the quality of these estimates will depend on the assumption that firms just above the quota cuto↵ provide a good counterfactual for firms below and farther above the cuto↵s. If baseline Saudization rates are the results of di↵erent Saudi hiring propensities related In the di↵erences-in-di↵erences analysis, changes in Saudization percentage is calculated only for firms in the matched sample, while changes in employee counts (Saudis, expatriates, and total) are based on all firms in the baseline data. Firms that exit before October 2012 are assigned employment values of zero in the October data.

to firm characteriscis (including fixed hiring investments), Green and Platinum firms well-above the quota will tend to be a less useful comparison group than those just above the quota. Spillover e↵ects on Green and Platinum firms will also bias the results. For example, these estimates will be too small if Green firms just above the cuto↵ took additional steps to retain or hire Saudi workers because of the presence of the quota.38 The estimates will tend to be too large if Yellow and Red firms met their quotas by poaching employees from Green and Platinum firms. We may also be concerned about other types of market-level spillovers, such as wage e↵ects, competitive e↵ects on exits, or price e↵ects in goods markets. Even with these issues it is nonetheless helpful to get a sense of the magnitude of the overall e↵ects.39 To account for the e↵ects of Nitaqat on the workforce composition of new entrants, the analysis also estimate how firms that entered after Nitaqat began compare with firms that entered in the first month of the data. In particular, the sample of 40,620 firms that entered between July 31, 2011 and October 13, 2012 is compared with the 5,065 firms that entered in July 2011 in the same industry by size groups. For Saudization percentage, Saudi employees, expatriate employees, and

total employees, the specification is:

–  –  –

Of course, the quality of these estimates will depend on the relevance of the July 2011 entrants as a comparison group for July 2011-October 2012 entrants in October 2012.40 6 Results

6.1 Quota Compliance Firms could achieve the required increases in Saudization percentage both by downsizing expatriates and by hiring Saudis. Figures VIIa and VIIb show the RKD results for the Saudi and expatriate employment outcomes for the full set of firms in the baseline sample.41 There is a clear kink in the number of Saudi hires as a function of the firm’s initial distance from the quota in terms of Saudi employees. Yellow and Red firms close to the cuto↵ hired almost exactly as many Saudis as they needed to reach their Saudization quotas without changing their expatriate worker totals.

In contrast, Green firms just to the right of the cuto↵ experienced no change in their number of Saudi employees. The econometric results in Table VII confirm this, with the preferred procedure yielding an estimate of 0.32 and most other estimates ranging from 0.20 to 0.40 Saudi workers hired The RKD results show that these firms kept their Saudi hiring constant, which is somewhat reassuring.

To complement the RKD analysis, I also examine how this e↵ect changes with starting distance from the cuto↵.

See appendix A for empirical setup and results.

Nitaqat may have also a↵ected the number of new entrants in addition to the composition of those entrants.

Unfortunately it is not possible to estimate the e↵ect on entry rates due to the limited time horizon of the data. The estimates of the e↵ects on Saudi employment therefore assume that the number of entrants was not a↵ected but that their composition may have changed.

Firms that exit over the period are coded as losing all of their Saudi and expatriate employees, for a 100 percent reduction in size.

for each one needed to meet the quota. There is also some evidence that Green firms farther above the cuto↵ tended to reduce their numbers of Saudi employees.42 This may be because the program made experienced Saudi employees more valuable to Yellow and Red firms, so firms well-above the cuto↵ allowed their employees to be “poached” by other firms. This e↵ect will mitigate the overall impact of the program on Saudi employment by simply shu✏ing already-employed Saudis between firms. It is therefore important to allow this group of Green firms well-above the cuto↵ to be “treated” by the program in the analysis below estimating the overall program e↵ects.

Expatriate employment, on the other hand, shows less responsiveness to quota cuto↵s, though expatriate hiring increases in distance above the quota. This suggests that firms were not changing their expatriate sta ng in order to achieve the quotas. The visa restrictions placed on Yellow and Red firms (and the streamlined renewals o↵ered to Green firms) likely reduced expatriate hiring at Yellow and Red firms while encouraging an increase in hiring at Green firms. Yellow and Red firms far below the cuto↵ were the least likely to improve their color band assignment and become eligible for the enhanced recruitment services. Similarly, Green firms well-above the cuto↵ were both unconstrained by quotas and likely to maintain access to visa services over the period. The estimate for the linear estimator with the FG bandwidth is 0.10, indicating that firms downsized 0.10 expatriates for every one needed to meet the quota. The rest of the estimates for the kink in expatriate hiring are highly variable, however, and range from -0.05 to 0.50 for the linear specification and from -0.64 to 5.71 in the quadratic specification.

When the sample is restricted to surviving firms (Figure VIII and Table VIII), Saudi hiring rates for Yellow and Red firms farther below the quota are higher, reflecting the fact that the sample no longer accounts for Saudi positions lost at exiting firms. In this sample we are able to see the impact of the quotas on Saudi employment percentage in Figure VIIId. The estimates for the impact on Saudi percentage are very mixed, with the preferred point estimate of 0.28 not statistically significant.43

6.2 Program Costs On the cost side, the Nitaqat program also appears to have significantly increased firm exit.

Figure VIId shows the graphical results, plotting average exit rate against percentage point distance from the cuto↵. Firms above the cuto↵ experienced little e↵ect on exit rate, with the average exit rate for Green firms at around 15 percent regardless of cuto↵ distance.44 For Yellow and Red firms, exit rates are increasing in distance below the cuto↵; although estimates for exit rate are sensitive to the choice of bandwidth, and the main specification indicates a 7 percent increase in exit rates for every baseline percentage point below the cuto↵. The other estimates range from highs of above 50 percent for the smallest bandwidths to as low as 1.1 at larger bandwidths.45 These findings are supported by the results in appendix A.

See appendix B for sector and industry-level RKD results.

About 10-12 percent of businesses in the U.S. and the U.K. close each year.

A similar analysis was done for the e↵ect on Nitaqat on the market value of publicly-listed firms. Unfortunately the small sample size makes it impossible either to detect a kink in market value changes or to find a su ciently The e↵ects of the program on firm size are shown for the full sample in Figure VIIc and Table VII and for the matched sample in Figure VIIIc and Table VIII. These figures plot the percentage point change in firm size relative to the initial percentage point distance from the Nitaqat cuto↵.

Firms that remained in the sample over the whole period grew on average, and the intercept indicates a growth of about 25 percent among firms just at the cuto↵. On average, firms above the cuto↵ appear to have grown at about this rate. For Yellow and Red firms below the cuto↵, however, the e↵ect on firm size is dramatic, with the growth of these firms dropping o↵ sharply in cuto↵ distance. The main estimate in Table VII shows a 12.6 percentage point decrease in firm growth for every percentage point below the cuto↵. Much of this large decrease appears to be driven by firm exit: when the sample is restricted to surviving firms (Table VIII) the main estimate is not statistically significant and the other significant estimates mostly suggest a size decrease of 1-2 percent.46 Overall, the evidence suggests that the increase in Saudi employees was not the only e↵ect of the program, and that Nitaqat imposed serious constraints on firm growth over the 16-month period. Although these firms tended to increase their Saudi workforce in response to the program, this result indicates that these firms tended to lose workers overall as their visas were restricted. While firms do not appear to have reduced their expatriate workforce in order to comply with Nitaqat as a function of their quota distance in terms of expatriates (panel (b)), firms that started further from the quota in percentage terms experienced a larger overall reduction in firm size (panel (c)).

6.3 Overall E↵ects Estimates for the overall e↵ects of the program are displayed in Table IX. These estimates are based on cell-level di↵erence-in-di↵erence estimates calculating the average e↵ects by initial color band assignment.47 Odd-numbered columns show comparisons against all firms in the Green band;

even-numbered columns allow for “poaching”, or changes in Green firms that were more than five employees above the cuto↵, by using only Green firms near the cuto↵ as the comparison group.

This e↵ect appears to be important, and the conclusions focus on these results. The last two rows of the table show the total estimated e↵ect of the program based on these estimates as well as the relevant full-compliance benchmark.48 The table shows that Yellow and Red firms increased their Saudization percentages by 3.5 percentage points on average, with Green firms reducing their Saudization rates by 5.45 percentage points. Overall, the program is estimated to have increased Saudization by 2.73 percentage points, precise zero. This is also the case for other balance sheet measures available in the Tadawul stock market data for these firms. More information on the data and this analysis is presented in appendix C.

The small bandwidths chosen by both of the data-driven bandwidth selectors yield highly variable estimates of the kink in firm size depending on the estimation technique chosen.

As discussed above, these estimates are valid only under strong assumptions about the validity of the firms in the Green band as a control group.

In odd columns this benchmark is the change in the outcome variable associated with all firms moving up to the relevant Nitaqat quota, with no change in Green and Platinum firms. In even columns, the benchmark includes the e↵ect of all firms above the quota adjusting down to the quota as well.

compared to an estimated full-compliance benchmark of 4.49. On the Saudi employment side, Red and Yellow firms increased their Saudi employment by around one employee on average, while Green firms reduced their employment of Saudis by around nine employees. Because there are many more Red and Yellow firms, however, the overall e↵ect is to increase Saudi employment by 73,000 – over half of the benchmark of 138,000 but well short of the no-poaching benchmark of 307,000. This implies that Nitaqat was responsible for 16 percent of the total increase in Saudi employment over the period. There is also evidence that Nitaqat reduced the overall size of the expatriate workforce, with Red firms hiring 6.72 fewer expatriates than firms in the comparison group. Expatriate hiring in Green firms increased for firms farther above the cuto↵, however, and these increased expatriate employment by 60.62 on average. Overall, the estimated e↵ect was a reduction in expatriate employment of 496,000, a decrease of just over 50 percent relative to the implied counterfactual increase in expatriate employment in the Kingdom.

These e↵ects on Saudi and expatriate employment are reflected in the estimates for the changes in total firm size, implying a reduction in total private sector employment of 418,000 workers. The e↵ects on exit rates were largest for Red firms, with these firms 11.67 percent more likely to exit than the comparison group. Yellow firms had an average exit rate 4.31 percent higher as a result of the program. Unlike with the other outcomes, Green firms with more than five “excess” Saudi employees did not experience a di↵erential e↵ect on their exit rates. Overall, the e↵ect of the program was to increase exit by 10,665 firms. This is a significant proportion of the 33,305 firms that exited during the period, implying that the program increased exit rates from 19 to 28 percent.

In addition to the e↵ects on firms that already existed when the policy was enacted, Nitaqat quotas also a↵ected the composition of new firms that entered the private sector after July 2011.

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