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Figure IX plots the distribution of ﬁrms in terms of their distance from the quota (in terms of percent Saudization) for new entrants in July 2011 and in October 2012. A Kolmogorov-Smirnov test rejects the equality of these distributions, and the distribution of October entrants is shifted to the right: ﬁrms that entered after the policy took e↵ect tended to have higher Saudization rates than ﬁrms that entered before the quotas were enforced. The average e↵ects for all ﬁrms that entered between July 2011 and October 2012 are shown in Table X. Compared with the ﬁrms that entered in the ﬁrst month of data (July 2011), ﬁrm that entered afterward had a 3.76 percentage point higher Saudization rate, and employed 0.57 more Saudi employees. The ﬁrms were also larger, employing an additional 1.02 additional expatriates for a total increase of 1.59 employees.
Although existing ﬁrms appear to have met quotas by hiring additional Saudis, these ﬁrms also tended to get smaller overall due to Nitaqat penalties restricting their visa renewals. This loss of expatriate workers appears to be
Saudi employment by 96,000 workers.
6.4 Temporary Saudi Hiring In addition to the costs that were an expected consequence of the program, (increased turnover and downsizing), there are also potential unintended consequences from incentives created by the particular structure of the program. The extent to which ﬁrms are able to game the system may account for the less than full-compliance rates as well as suggest some ways in which the program e↵ects are mis-measured. Because most of the increase in compliance is achieved through increasing Saudi employment, one potential concern is that this hiring does not reﬂect a real, long-term increase in Saudization. One way that ﬁrms can avoid hiring restrictions on expatriate workers is to temporarily improve their color band assignment by hiring a large number of Saudi workers when they need to hire more expatriate workers or renew existing work visas. The program rules try to prevent this by assigning color bands based on the 12-week moving average of Saudi employees. Nonetheless, there are occasionally reports of ﬁrms hiring large numbers of low-wage Saudi workers for short periods. To get a sense of the magnitude of this e↵ect, I identify ﬁrms whose Saudi employment patterns follow a strong cyclical pattern, with temporary hiring booms followed by an increase in expatriate hiring and a sharp decrease in Saudi employment. I do this by ﬂagging ﬁrms that were non-compliant (i.e. in the Yellow or Red bands) for most of the period, but that had at one ﬁve-week or longer stretch of being included in the Platinum band. This would give the ﬁrm access to the expedited recruiting and visa renewal for su cient time to make use of these services. I restricted attention to ﬁrms that had at least one week-to-week increase and decrease in Saudi employment of more than 30 percent. Flagged ﬁrms also increased their expatriate workforce on average over the period and did not signiﬁcantly increase their Saudi workforce, (i.e. all ﬁrms had an average increase in Saudi employment of less than 0.5 workers). Of the 113 ﬁrms that met these criteria, 18 showed evidence of these strategic temporary hiring booms (Figure X), and 11 of these ﬁrms were in the construction industry. Altogether these ﬁrms created approximately 250 temporary jobs. This type of blatant manipulation does not appear to be common, although it is certainly possible that more subtle gaming of the system is more widespread. It is likely more common for ﬁrms to hire a small number of temporary Saudi workers to switch into the Green band for a longer period of time, for example. Because these changes are relatively small, they likely have little e↵ect on the estimates based on the July 2011 to October 2012 comparisons.
6.5 Downsizing to Avoid Quotas Another way that ﬁrms may avoid penalties is by reducing their size below the ten-employee cuto↵ for inclusion in the Nitaqat program.51 Because the Ministry re-codes ﬁrms when they leave the result of quota enforcement rather than Nitaqat incentives and is not related to baseline quota distance. New ﬁrms, which would not experience these penalties prior to formation, seem to have experienced only the incentive e↵ect of adding Saudis, causing them to be larger.
See Tran  for evidence on this from Malaysia.
the program, this will be indistinguishable from exit in the data. If ﬁrms in the Yellow and Red bands are more likely to downsize in this way, the above analysis will over-estimate the e↵ect of the program on exit (and under-estimate the e↵ect on ﬁrm size). If this is the case, we would expect Yellow and Red ﬁrms with just over ten employees to exit at a much higher rate than Green ﬁrms with the same number of employees. To get a sense of the magnitude of this potential bias, Figure XI panel (a) compares the distribution of ﬁrm sizes of all Nitaqat ﬁrms in July 2011 and in October
2012. There appears to be little change in the distribution of ﬁrm sizes, and there is no apparent decrease in the number of ﬁrms near the ten-employee cuto↵ for inclusion in the program. Panel (b) compares the changes in these distributions by starting color, restricting the sample to ﬁrms that appeared in the sample at baseline. For both initially compliant (Green or Platinum) and initially non-compliant (Red or Yellow) ﬁrms there is a large decrease in the number of ﬁrms with between ten and twenty employees. Because this ﬁgure categorizes ﬁrms based on their July 2011 color band assignment, new entrants are not included; these dips, therefore, may simply reﬂect a higher failure rate for smaller ﬁrms.52 Indeed, the pattern is similar for both compliant and non-compliant ﬁrms, suggesting that the exit of small, non-compliant ﬁrms from the data is not driven by downsizing below the size cuto↵. This interpretation is supported by panel (c); exit rates follow the same pattern for ﬁrms above and below the Yellow/Green cuto↵, and there appears to be no disproportionate increase in exit rate by Yellow ﬁrms. Interestingly, the increase in exit rates appears to be relatively homogeneous across ﬁrm sizes.53
7 ConclusionAs growing unemployment has led to political pressure, national employment quota policies have become an increasingly attractive potential solution. While these programs promise a quick and visible remedy to citizen unemployment, however, these new labor market regulations are potentially quite costly for ﬁrms. The short-term beneﬁts of increasing employment may come at signiﬁcant cost to long-term economic growth. Recently, political events in many countries in the Middle East have tipped the political economy toward prioritizing short-term stability, and it is likely that these types of quota policies will become more widely enforced in the region. However, there is almost no empirical evidence to suggest what the magnitudes of the costs and beneﬁts of such a program might be, even in the short term. There is a large literature on the e↵ects of a rmative action policies in the United States, but these results have limited applicability to a broad nationalization policy. In particular, a rmative action policies have been applied on a relatively narrower set of ﬁrms, and have targeted traditionally disadvantaged groups. Nationalization policies di↵er from these policies on both counts, and both features are likely to have signiﬁcant The di↵erent distribution in the October 2012 data from panel (a) to panel (b) reﬂects the fact that smaller ﬁrms tended to have a higher turnover rate. This is consistent with previous observations of larger turnover among small ﬁrms, e.g. Dunne, Roberts & Samuelson .
It is still likely that ﬁrms reacted to the ten-employee threshhold even if larger ﬁrms did not shrink in order to avoid the policy. Smaller ﬁrms, for example, may have avoided growing beyond the ten-employee cuto↵. Without data on these small ﬁrms it is not possible to estimate the size of this e↵ect.
implications for the program e↵ects. Further, very little of the work on a rmative action has studied its e↵ects on ﬁrms, and identiﬁcation has been particularly challenging in this subset of the literature. For a large-scale nationalization policy, the e↵ect on ﬁrms is critical, with serious consequences for the growth of the often fragile private sector.
This paper examines the short-term e↵ects of a nationalization quota policy in Saudi Arabia using quasi-experimental variation generated by the program structure. On the one hand this context is quite speciﬁc: Saudi Arabia is unique in many ways, and the Nitaqat program is the ﬁrst to be implemented on such a wide scale. However, there are many countries with similar labor market features to Saudi Arabia, and there are several features of this policy which make it a good case study. First, the Saudi government devoted signiﬁcant resources to the program, and it was implemented quickly and uniformly applied to all private sector ﬁrms. Enforcement was strict, and the quality of the administrative data is very high. In contrast to many previously-studied quota policies, both in the United States and elsewhere, it was an economy-wide program, so the results are more relevant to other national-scale programs. The program was also designed with sharp quota cuto↵s, which yields identifying variation in nationalization incentives across ﬁrms.
This paper ﬁnds that although the Nitaqat program did increase native employment it had a signiﬁcant negative e↵ect on ﬁrms. The main results indicate that ﬁrms increased Saudi employment to meet Nitaqat quotas, though ﬁrms further below the quota cuto↵s also experienced higher rates of exit and overall downsizing. Supplementary results indicate that the policy’s overall e↵ects increased the growth in Saudi employment in existing ﬁrms by approximately 13 percent over a 16 month period, adding 73,000 positions for Saudis to the private sector labor force in these ﬁrms, and 23,000 positions at new ﬁrms. The program also prevented some of the growth in the expatriate workforce, which grew by 496,000 less than it would have in the absence of the quotas.
At the same time, the analysis suggests that the costs of constraining the labor market in this way were substantial; the program decreased total employment in the private sector by 418,000 workers and caused nearly 11,000 ﬁrms to exit. These costs were not borne equally across sectors, however, and there is some evidence that the increased costs were most damaging to industries in the secondary sector, including construction and manufacturing. This is particularly interesting given that sluggish growth in this sector is one of the typical symptoms of the resource curse.
Taken together, the results indicate that the program’s quick results in reducing Saudi unemployment have been created at signiﬁcant costs to ﬁrms. However, the program is likely to have important long-term e↵ects as well, which will mitigate some of the short-run costs. In the medium term, ﬁrms can adjust their capital investments to decrease the costs associated with employing more high-skilled Saudi labor. More experience and on the job training will also make Saudi workers more valuable to private-sector ﬁrms, decreasing the costs associated with employing Saudis instead of expatriates. Over the long-term, the presence of opportunities to work in the private sector will also likely a↵ect the human capital investments of Saudi nationals. Until recently, the primary purpose of post-secondary education was to qualify Saudis for work in the public sector.
Increased national participation in the private sector is likely to align education and other human capital investments with the demands of the private sector. The dynamic e↵ects of the program will therefore be at least as important as the short-run impact, and this will be a critical area for future study.
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