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Can Hiring Quotas Work? the Effect of the Nitaqat Program on the Saudi

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Can Hiring Quotas Work? the Effect of the Nitaqat Program on the Saudi Can Hiring Quotas Work? The Effect of the Nitaqat Program on the Saudi Private Sector∗ Jennifer R. Pecky April 2014 Abstract In the past three years, Saudi Arabia has dramatically extended its active labor market policies in order to address the issue of growing youth unemployment and low Saudi participation in the private-sector workforce. This paper studies the 2011 introduction of the Nitaqat program, which imposed a quota system for Saudi hiring at private firms. This policy is unprecedented in its size and scope, and applied to all firms in the private sector with ten or more employees, affecting 6.3 million Saudi and expatriate workers. The institution of this policy provides a unique setting to investigate the effects of quota-based labor policies on firms. The analysis uses a unique dataset from the Saudi Ministry of Labor on the full universe of Saudi private-sector firms and exploits kinks in firm incentives generated by the program to examine the effects of the policy on nationalization, firm size, and firm exit. I complement the regression kink results with a differences-in-differences approach to estimate the overall effects of the program. The analysis finds that the program succeeded in increasing native employment but also had significant negative effects on firms. Program compliance rates were high, with firms hiring an additional 96,000 Saudi workers over the initial 16 month period. There were also significant costs, however, and the program caused approximately 11,000 firms to shut down, raising exit rates by nearly 50 percent. The program also decreased total employment among surviving firms, and overall private sector employment decreased by 418,000 workers. ∗I gratefully acknowledge the support of the Labor Market Decision Support System project at the Center for Complex Engineering Systems at the King Abdulaziz City for Science and Technology in Saudi Arabia and the Massachusetts Institute of Technology. I am extremely grateful to Michael Greenstone and David Autor for their extensive feedback and to Ahmed Fadol for his considerable assistance with this project. I also thank the rest of the LMDSS team for their support and advice. Miikka Rokkanen, Heidi Williams, and seminar participants at MIT contributed many helpful comments and suggestions. yMassachusetts Institute of Technology Email: [email protected]. 1 Introduction Many countries have used quotas and affirmative action policies to favor members of disadvan- taged or underrepresented groups. These policies are designed to increase the representation of these groups in a variety of areas, including elected positions, education, and employment [Fryer & Loury 2013, Sowell 2005]. Legislative gender quotas, for example, are quite common worldwide, and many universities either explicitly or implicitly consider race and gender as a factor in admissions. Government-mandated quotas and group preferences are also frequently applied in labor markets, both to civil service positions and to employment at private sector firms.1 One of the key issues regarding these types of quota-based labor policies is the tradeoffs they impose between their benefits to targeted groups, the costs to other workers, and the impacts on firms. Theoretical models yield ambiguous predictions regarding the efficiency impacts of these policies, and the net effects depend on both the type of discrimination being modeled and the particular labor market context [Holzer & Neumark 2000]. Empirical evidence on the effects of these policies in various settings is therefore critical. This paper examines one of the world's largest quota-based labor policies to estimate the effect of hiring quotas on employment and firms. The Nitaqat policy was enacted in Saudi Arabia in 2011, and requires Saudi private-sector firms to meet specific employment quotas for Saudi nationals. This policy is attractive to study for several reasons. First, the policy was applied to all private sector firms with more than ten employees, making it one of the most broadly applied such quota programs. The quotas were also rigorously enforced, with sanctions triggered automatically for non-compliant firms. Quota compliance was also carefully monitored through the governments integrated social security and visa records. The policy was therefore clearly-defined and well-enforced. In addition to providing important evidence on the effects of quota-based labor policies, the Nitaqat program also provides a window into government efforts to combat the effects of the \re- source curse" on the labor market. Many resource-rich countries face a number of common economic problems, including the underdevelopment of the non-resource sector, high unemployment, weak institutions and corruption, and political instability. These challenges were particularly salient for Middle Eastern oil producers during the Arab Spring uprisings of 2011 and 2012, and protests oc- curred in almost all of the oil-exporting countries in the Middle East.2 While there were certainly a variety of reasons for the demonstrations, protestors often cited unemployment as a central concern, especially in places like the usually peaceful Oman. Indeed, high unemployment rates, particularly among young people, tend to be a crucial issue for governments worried about political instability.3 In addition to experiencing some of these general issues, Saudi Arabia is also part a subset 1Affirmative action in the United States, for example, applies to government jobs as well as to private firms with government contracts. New Economic Policy regulations in Malaysia and post-apartheid employment equity policies in South Africa apply to both public and private-sector jobs. 2Uprisings or protests were documented in Libya, Yemen, Tunisia, Egypt, Bahrain, Algeria, Syria, Iraq, Kuwait, Morocco, Oman and Saudi Arabia. 3Because the governments in the Middle East also control between a half and one third of world oil reserves, their political stability is often of great international interest as well. 2 of oil exporters that share several peculiar labor market issues. All of the countries of the Gulf Cooperation Council (GCC) { Saudi Arabia, Bahrain, Oman, Kuwait, Qatar and the UAE { have economies that are characterized by several common core features. In particular, all six of the GCC countries have a very heavy reliance on oil and gas, with fuel exports ranging from 30 to 85 percent of total GDP.4 The GCC countries also tend to have dramatically segmented labor markets, with large populations of low-skilled migrant workers. These guest workers form between 20 and 80 percent of the total workforce in these countries, and non-citizens make up nearly a third of the total GCC population. Correspondingly, there is also a low participation of nationals in the private sector, with most citizens working in the public sector or in the oil and gas industry.5 At the same time, these economies tend to suffer from high and rising unemployment, especially among young people. Saudi Arabia is a clear example of this pattern, with a large number of guest workers, high native unemployment, and sluggish growth in the non-oil private sector. Saudi nationals form about half of the labor force, with four million Saudis employed in 2011. Of these, sixty percent worked in the public sector, and only about 600,000 worked in the non-oil private sector. Foreign, or \expatriate" guest workers make up ninety percent of the non-oil private sector workforce.67 Unemployment is also very high among new labor market entrants, and official figures from the Central Department of Statistics and Information (CDSI) report 40 percent unemployment in the 20-25 age group. The reliance on migrant labor in the face of rising national unemployment has become a critical issue for Saudi Arabia and the rest of the GCC. Many firms prefer to hire low-cost foreign labor rather than Saudi workers, who are usually more expensive and less flexible. While high-skill workers are also brought in from the West for their technical expertise, the majority of expatriate workers are hired for low-skill work. In comparison to nationals, who often have access to generous government benefits and other forms of rent redistribution, expatriates tend to accept lower wages and to work longer hours in poorer conditions. The de facto minimum wage for a Saudi worker, for example, is around 3000 SR per month, around 800 USD. In contrast, expatriate workers can be paid about 1500 SR per month, or 400 USD. Although expatriates must be recruited from overseas, their employment terms are also much more flexible than those of Saudi employees, who are more difficult to fire under Saudi labor laws. Foreign workers usually come to the GCC without their families, and are not offered a path to citizenship; their ties to their host countries remain very loose, and many send their wages back to their home countries as remittances. 4In comparison, Venezuela derives only 18 percent of GDP from oil and gas. 5Until recently, the GCC states used public sector employment as a way to combat unemployment and redistribute oil wealth. This strategy has lately become unsustainable, however, as population growth has rapidly outpaced growth in oil revenues [Forstenlechner & Rutledge 2010, Forstenlechner, Madi, Selim & Rutledge 2012, El-Katiri, Fattouh & Segal 2011]. 6In this paper I follow the convention of referring to these migrant workers as \expatriates". This terminology is used to indicate both the broad skill spectrum of these guest workers as well as their temporary residence in the country. 7These expatriate workers form
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