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Labour Shortages, Migration, and Segmentation:

The Case of Saudi Labour Market

Abstract

Since oil production started in the 1930s, Saudi Arabia has faced a labour force shortage of
skilled and unskilled labour. To tackle this problem, particularly over the 1970s and 1980s, the
labour policy was directed to import workers to satisfy labour demand of the new projects of
both the private and the public sectors. Foreign workers or non-Saudi workers, beside native
workers, became the main component of the labour force in the country.
This paper aims at examining changes in the migration polices in Saudi Arabia over the 1970s
and 1990s, and explaining sources of segmentation in the Saudi labour market.

1-Literature Review

Migration is a worldwide phenomenon that prevails in developed and developing countries.

Economists confirm government intervention to control free movement of workers to cross
borders. Borjas (1994) explains that workers can only legally migrate if the host country’s
government allows migration. He argued that the migration market is highly regulated, as most
countries have strict policies describing specific characteristics of persons who are allowed to
enter the country. These characteristics might include: skills, national origin, or family ties with
current residents in the host country. He contented that migration is determined by the host
country’s political and economic gains from migration. Economists differentiate between
permanent and temporary migration systems. Most of developed countries have adopted the two
systems with great chances for permanent residency. While some other countries where there
are chronic labour shortages, e.g., the Middle East oil rich countries, as in Saudi Arabia, have to
rely mainly on temporary mode of immigration ( Morales ,1991).
Migration is largely associated with dualism phenomenon, particularly among temporary
migrants. Such phenomenon segments the labour market into two parts. The primary sector is
with high wages, good working conditions, employment stability, chances of advancement,
equity, and due process in the administration of work rules. The other part is the secondary
sector, which has low wages, poor fringe benefits, poor working conditions, little chance for
advancement, and the sector is subject to arbitrary management practices (Deringer and
Piore,1979).
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Migrants are usually affected by labour market segmentation in the host countries where
primary labour markets allocate various work privileges to the native workers over migrants
who are found in the secondary labour market (Piore 1979; Müller, 1999).

2-Migration and Labour Market Segmentation in Saudi Arabia:

This section explains the main reasons that lead to existence of migration phenomenon in the
emancipated labour market of Saudi Arabia, and it discusses how government intervention
through regulations segments the labour market in the country.

2.1 Skill Shortages:

With the building of statehood and establishing of some public departments, over the
1920s-1930s,the number of employees in the Saudi government agencies has increased and
non-Saudi workers started to be recruited due to labour and skill shortages, which increased
with the launching of the ambitious development projects in the public and private sectors,
particularly over the 1970s and the 1980s(IPA, 1999). The main reasons for skills shortages in
the country are due to the little development in education and training before the discovery of
oil, irrelevance of education to labour demand, and segregation of women from both labour
market and education, as female formal education in Saudi Arabia is only started in the early
1960s. These aspects create a state of mismatch between the available skills among native
workers and the requirements of development that were based on modern technology (used in
manufacturing, construction, and services).
Many economists (Becker, 1975; Tachibanaki, 1998;Rima, 1981; among them) confirm
the impact of education on skills attainment. Therefore, many countries provide subsidies and
facilities for education and training programmes to improve the productivity and skills of their
population. Such a strategy was adopted in Saudi Arabia. As a result, many Saudis graduated
from different educational and training programmes to bridge the gap of different skills, their
number increased from 3.6% in 1980 to 19% of the total Saudi workers in 2000 (Central
Department of Statistics, 2000), but the gap is continued. This is because, still education
outcome does not response to the market demand, and most of the Saudi graduates prefer to join
managerial and administrative jobs rather than technical and vocational jobs that are largely
occupied by non-Saudi workers, because these jobs have low wages and they are socially
considered menial jobs. Mellahi (2000) argued that the wage differences between the white-
collar jobs and skilled manual jobs distorted the labour market and affected Saudi individuals’
incentives to invest in vocational training.
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2.2 Migration Policy in Saudi Arabia:

Migration in Saudi Arabia goes back to the 1920s, when some migrants came from
Muslim and Arab countries (Al-Khouli, 1986). It continued after the commercial oil
production in the 1930s and significantly increased since the 1970s. Though, there is no
a comprehensive migration policy in the country. But the main features of such a policy
can be derived from the Iqama regulations, (literally, the Residency Act), and the related
administrative instructions issued by the Ministry of the Interior or Labour department.
Foreign or non-Saudi* workers cannot enter the country unless they have a sponsorship of an
eligible employer, or a permitted Saudi household in the case of domestic workers. When a
foreign worker enters the country, he or she has to get a residency card, Iqama, and a work
permit.
Once the worker gets the Iqama card, he/she has to give his/her passport to the Kafeel (the
sponsor) and only gets it back when leaves the country, as the Iqama card comes instead of the
passport. A non-Saudi cannot change his/her sponsor or job unless gets a release from the
sponsor, finds another employer to offer him/her sponsorship, and obtains approval from the
Passport and labour authorities to change his/her sponsor. However, the sponso has the right to
refuse to give a release, to deport the worker and to ask the authority to ban the worker from
coming back to the country for two years. These regulations apply to non-Saudi workers in both
the private and public sectors. In this way the residency regulation distorts the labour market
and eliminates the non-Saudi workers from the labour demand and supply to match their
opportunity in the labour market, while their Saudi counterparts can move freely in this market.
Foreign workers in professional, technical and managerial occupations with post-secondary
education have the right to bring their families with them to Saudi Arabia. While, relatives of
workers with lower education have the right for only a short visit that might be extended to
three months or another duration. Thus, this policy creates a sub-segment among workers in the
secondary labour markets (in terms of the internal labour market theory), as it allocates to some
non-Saudis a pecuniary benefit not offered to other disadvantages group of workers only
because they are not in specific jobs or they lack certain educational qualifications. In addition,
a foreign worker is prohibited to check the Passport Department for any official arrangements
concern his residency or to get visas. He/she has to do this by his sponsor who gives the
worker’s passport to an authorised person (called Muaqib) to settle arranagements.

*
The Saudi Nationality Law defines migrants as foreigners or non-Saudi who comprise migrant workers and their dependants, and foreign
investors who usually make a minor part of the total migrants. In Saudi Arabia temporary migration is the only form that allows foreign workers
of non-Gulf Co-operation Council (GCC) countries to enter for employment.
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2-3 Labour Law

It applies to workers in the private sector and commercial government corporations. The
labour law bases employment in these firms to personal contract between the employer
and the worker. This creates different separate work relations and conditions of work
among workers in the same jobs and the same workplace. The labour law does not
guarantee collective negotiations about contracts and conditions of work. Moreover, it
entitles the employer to punish or even to fire the worker for many reasons without any
administrative investigation or explanation about his/her faults and mistakes, while the
regulations of the Civil Service protect workers against any punishment without
investigation by the relevant authority. The only way that the worker has to complaint
against the employer’s decision to the Labour Settlement Dispute Committee, that
affiliate the respective labour bureau as there are no specific labour courts in the
country. This is another factor offering the private sector a characteristic that affects
employment security in this sector.
Concerning wage compensation, this law does not provide adequate measures that determine
the wage rate, such as salary scale or any other form of personal or productivity characteristics
such as experience, education or any other, which is in contrast to the public sector in Saudi
Arabia, where such characteristics are considered. This creates wage differentials among
workers in the same workplace and even in the same occupation. However, the phenomenon
prevails in the country, as the aggregate earnings gap between Saudi and non-Saudi male
workers, is calculated at 2.4 in 2001, for the benefit of Saudi workers, compared to the rate of
2.1 in 1994 (SAMA,2005).

2-4 Civil Service Regulations

The civil service regulations comprehensively apply to workers in government departments.
These regulations provide a different conditions of work for both Saudi and non-Saudi workers.
They allocate Saudi workers to good working privileges over their non-Saudi colleagues in the
same jobs. But these regulations provide both workers with a large employment protection and
allow them to access better working conditions than their colleagues in the private sector. These
characteristics make the public sector more attractive for Saudi workers rather than the private
sector, where the majority of workers are among non-Saudis.

2-5 Pensions and Insurance

Pension programmes in different countries represent a main component of the social
security system of the respective country. In Saudi Arabia, there are two main forms of
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social security programmes, including the civil pension fund for government employees,
and pension and insurance for private sector employees.
i)Civil Pension Fund - Employees in government departments are entitled to a pension
from the Civil Pension Fund (CPF) that covers only permanent full-time Saudi workers basing
on labour tenure or a worker’s age. While the programme exempted non-Saudis in this sector,
as they are only entitled to a one-off compensation based on their job tenure regardless of their
age.
ii)Pension and Social Insurance - Workers in the private sector are covered by the
pension and work injuries insurance programme, which is run by the General Organisation for
Social Insurance (GOSI), a government institution. According to the GOSI's law, pension and
work injuries insurance cover only Saudi workers, while non-Saudi workers are only covered
by work injuries insurance and they are entitled to only a one-off compensation based on their
job tenure.
Thus the pension and social insurance regulations contribute to the labour market
segmentation in the country, as they discriminate in provision of non-wage benefits that
contribute to the social security of the workers. These regulations, clearly, deprive non-Saudi
workers of enjoying employment protection in the labour market.

3- Migrants Substitution Policy:

Many empirical studies on migration, confirm that migrants are largely not competing with
natives in the labour market, as long as the skill composition of the migrants differs from that of
native workers. And such complementary status exists due to labour shortages that caused by
skills gap or due to refusal of nationals to take up certain jobs (Piore 1979,Borjas, 1994).
In Saudi Arabia situation goes on the inverse. Although there are no adequate
studies about impacts of the migrants on the native workers, the government decided,
since 1990, to eliminate non-Saudi workers from the labour market and substituting them
by Saudi natives across occupations. While in the 1970s and 1980s, the labour policy was
directed to increase the supply of skilled Saudi workers in different occupations, and
provided them better remuneration, generous work privileges, and facilities superior to
the private sector (Al-Towaijri, 1992). It goes oppositely since the 1990s, when
recruitment with the government was restricted to only education and health-care jobs and
employment in other jobs was frozen. Consequently, unemployment among Saudi
workers started to appear clearly since the mid-1990s, as the rate jumped to 13.4% in
1992 for the first time after the oil discovery in the 1930s (Wood and Mellahi, 2002).
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Meanwhile, the government sought to force firms in the private sector to recruit among Saudi
nationals, by adapting ‘Saudisation’ policy. Which was first applied in the commercial
government corporations during the 1980s, as it aimed to replace high ranking foreign workers in
these institutions by Saudi nationals (Woodward,1988).
The second wave of Saudisation in the labour market started in the 1990s, aims at replacing
non-Saudi workers across occupations by Saudi nationals and reducing the numbers of
foreigners in the country. In 1994, a ministerial decree, declared specific steps towards
Saudisation, and compelled firms to increase their number of Saudi employees by 5% a year.
Non-compliant firms would incur punishments without any chance to appeal against the
decision. Because of this decree, many occupations were listed by the High Council of
Manpower (HCM) to phase out foreign workers.
The policy of substituting foreign workers by natives has become a common policy
across the Gulf Co-operation Council (GCC) countries.
However, despite the concerted Saudisation efforts, labour shortages still existed and
many foreign workers were brought into the country to supply labour. On the other hand Saudi
Arabia accession to WTO and application the GATS agreement might add some other
dimensions to the appearance of foreign workers in the Saudi labour market. Jan Niessen (2000
) argued that the GATS framework for the international mobility of workers is based on the
right of the private companies to select, recruit and move workers in response to market
demands, and Saudi Arabia accept entrance of mangers, executives ,and technical staff of
foreign companies affiliates in the country with a limit of 25% of the workforce of the affiliate.
While, the managerial and executive jobs under Saudisation policy are completely restricted to
Saudi nationals. It is clear trade liberalisation and globalisation might have their impact on the
international labour mobility and will reduce government intervention in the labour market.

Conclusions:
Since oil production started in the 1930s, Saudi Arabia has faced skills shortage, but severe
shortages of skills arose in the 1970s across occupations. This mainly was due to the little
development in education and training in the country before the discovery of oil, prevalence of
irrelevant education to labour demand, and segregation of women from both labour market and
education.
To tackle the problem foreign workers were allowed to cross border son specific restriction
based on migration and labour regulations. These regulations segment the labour market as
they state various and distinct conditions of work for Saudi and non-Saudi workers in both the
private and public sectors, and restrict migrants mobility across the borders and within Saudi
labour market and contribute to wage differentials between the two groups of workers.
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The new labour policy of Saudisation reflects a significant government intervention in the
labour market and workers mobility. It tends to reduce number of migrants and eliminate them
from the labour market.

References

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