Meshal Abdulaziz Al-Khowaiter, a PhD student in the Department of Government at the London School of Economics (LSE), is focusing on Bahrain as a case study, investigating how equalizing labor market mobility can reduce the wage gap between local and migrant workers.
Earlier this month, I wrote that imposing a universal minimum wage on all private sector workers in Saudi Arabia, regardless of nationality, would be an important policy measure to close the cost gap between nationals and foreign workers. In this article, I argue that equalizing labor market mobility for all workers would indirectly reduce the large wage gap between nationals and foreign workers. I further argue that such labor reforms would make nationals more “employable” in the private sector because workers compete on the basis of merit rather than cost and each group is given different labor protections. Specifically, I use empirical evidence from Bahrain, which introduced several labor market reforms in 2008 and 2009, respectively.1 While all Arab countries share the same job market peculiarities in which nationals receive greater labor protections than foreign workers, I focus here specifically on Saudi Arabia, which boasts both the region’s largest labor force and the largest unemployment rate for nationals. Finally, I describe Bahrain’s effective experiment with labor reforms and argue that the results can be generalized to the Saudi labor market.
In an effort to address national unemployment and make the labor market more attractive to skilled foreign workers, Saudi Arabia passed several policies in March 2021 that increase flexibility in the foreign labor force and reduce the power private employers have had in the past. For example, foreign workers can now travel and leave the country without company permission as they did before. A recent IMF paper applauded these reforms and argued that such policies will make Saudi Arabia’s labor market more competitive and better able to attract skilled foreign workers to the country. I strongly believe that these labor reforms are a step in the right direction, but that many adjustments are needed to truly equalize labor mobility and reduce national unemployment.
More specifically, even with the current reforms, there are two major limitations that make it more attractive from a private company’s perspective to hire a foreign worker over a similarly qualified national. First, a foreign worker can still only leave his job for 12 months before he can leave and move to another private company. Second, although foreign workers can now apply to leave before the end of their contract, once they leave, it will be difficult or impossible for them to re-enter Saudi Arabia as a foreign worker. This latter provision in particular prevents foreign workers from leaving their employer before the end of their contract, making them “less mobile” compared to Saudi Arabian workers. As a result, even if the labor cost and educational qualifications of the two candidates are the same, a private employer will likely choose the candidate who cannot leave their job for the next 12 months (i.e., the foreign worker in Saudi Arabia).
The case of Bahrain
In the introduction, I argued that Bahrain’s experience of removing all work restrictions on foreign workers from 2009 to 2011 provides an empirical example of the economic benefits of such reforms for both nationals and foreigners. By 2007, Bahrain’s national unemployment rate had reached 7%, a fairly high rate given the size of the country’s population. Moreover, about 81% of Bahrain’s private sector workers were foreigners. It was therefore puzzling to Bahraini policymakers that most employers preferred to hire foreign workers over nationals, despite the private sector’s continued ability to create jobs.
To address this issue, Bahrain passed two major labor policies. To my knowledge, this is the most forceful attempt among Arab countries to eliminate the wage gap between nationals and foreign workers. First, in July 2008, Bahrain increased the fees paid by private companies to hire foreign employees from approximately $22 to $49 per month. This was intended to discourage companies from hiring foreign workers because of their lower cost compared to nationals. By the second quarter of 2009, Bahrain had introduced further significant reforms, allowing all workers, regardless of nationality, to quit their jobs or quit and work for another employer at any time. This decision was implemented despite constant opposition from private companies that have historically relied on cheap foreign labor.
To show the plausible impact of the two labor reforms, we calculated the wage gap between domestic and foreign workers in the private sector from the first quarter of 2002 to the first quarter of 2021.2 The graph highlights three major labor policies: 1. Raising monthly fees for companies that hire foreign workers (green line), 2. Giving all workers the right to quit their jobs and change employers (red line), and 3. Reintroducing labor restrictions on foreign employees due to business pressures (purple line).3
The graph shows that the labor cost gap decreased immediately after the first policy (i.e., taxing companies for hiring foreign workers). The wage gap rose slightly but stabilized again after the introduction of the policy to equalize labor mobility (red line). However, two years later, Bahrain introduced a labor policy (purple line) that again restricted the mobility of foreign workers in the labor force. For example, since 2011, foreign workers were required to work for their current employer for 12 months before being allowed to work for another company in Bahrain, thereby making it attractive again for companies to hire foreign workers. Intuitively, one obvious consequence of this policy adjustment is that the wage gap between nationals and foreign workers has rapidly increased since 2011. Moreover, this policy change had adverse effects on nationals as well as foreign workers, indirectly exacerbating the labor cost disadvantage since 2011. Finally, one may also wonder what happened to the unemployment rate of Bahraini nationals before and after the labor reforms were implemented. The national unemployment rate has significantly decreased from about 7% in 2007 to 3.6% in 2010. As a result, I further argue that when labour mobility becomes equal for all workers, private companies no longer have an incentive to hire foreign workers in jobs that Bahraini workers can fill.
In conclusion, although the size of the private sector in Saudi Arabia and Bahrain differs, the composition of the labor markets in both countries is similar. The private sector in both countries is characterized by a large wage gap between nationals and foreigners, a strong desire to hire foreign workers, and more than 75% of the workers being expatriates. Therefore, I believe Saudi Arabia could benefit from the experience of Bahrain from 2008 to 2011 by equalizing labor mobility. This would benefit all workers regardless of nationality. This would not only increase the income of foreign workers, but also reduce unemployment rates for nationals, resulting in economic benefits for all workers in the private sector.
1All data for Bahrain is publicly available through the Labour Market Regulatory Authority.
2 It is calculated as the difference between the average monthly wages of nationals and foreign workers. The higher the amount, the greater the wage gap between the two groups.
3 Labor market data for Bahrain is quarterly from 2002 to 2010, but from 2011 onwards only annual data are available.
The views expressed in this post are those of the author and do not necessarily reflect the views of International Development LSE Blog or the London School of Economics and Political Science.
Photo: Streets of Manama, Bahrain. Courtesy of Francisco Anzola, Wikimedia Commons.
