Major jobs market challenges persist for Saudi Arabia as end to driving ban boosts women's chance to work: Report

·       Allowing women to drive is a step in the right direction to raising women’s share of the workforce. But without stronger private-sector job creation, the government will find it difficult to reduce the chronically high unemployment rate among nationals to 7% in 2030.
·       With companies gradually trying to fill more jobs with Saudi nationals at the expense of foreign workers, economies that receive the latter’s remittances, such as Egypt, Jordan, Lebanon, Nepal and Sri Lanka, could see a negative impact on consumption.
 
Saudi Arabia’s lifting of its ban on women driving, which took effect on 24 June, is not only a major socio-cultural shift, but also a structural economic change. The end of the ban should help raise the share of women in the workforce. Our estimates from the Oxford Economics Global Economic Model indicate it will likely boost Saudi Arabia’s potential GDP growth by just 0.1 percentage points a year, however.
 
The labour participation rate among Saudi women stands at just over 22% (this measure strips out the gender imbalance from the total workforce). Although the rate has been slowly climbing, it remains the lowest globally and is almost 8 percentage points below that in Oman, which has the second-lowest rate in the Gulf region. For the Saudi female labour participation rate to converge close to Oman’s current level of 30% by 2030 would require a rise of about 0.6 percentage points over each of the next 12 years. This would modestly undershoot the targets enshrined in the country’s Vision 2030 economic plan.
 
Many Saudi women are keen to work and will seek jobs now that it is legal for them to drive. This is despite other major barriers to female employment that remain in place, including gender segregation and the strict guardianship system, which requires women’s male relatives or guardians to make many decisions on their behalf. The economic impact of the end of the driving ban will largely depend on how many of the new female entrants to the labour market actually find work, which is expected to be a big challenge.
 
The expansion of the female labour force will also reinforce an already-high unemployment rate among Saudi nationals, as more women compete for a limited number of jobs. The total number of jobless Saudis stands above 770,000, or 12.8% of the total domestic workforce. But the figures mask a gender gap, as women account for 55% of the total workforce. At over 425,000, this represents about one-third of working-age Saudi females, with the majority holding university degrees.
 
Reducing the unemployment rate to 7% over the next 12 years is a central aim of the government’s Vision 2030 economic reform plan. The target will likely be missed unless the government can persuade nationals to either work for more competitive wages or enrol in skills training programmes to enhance their employability. This will likely prove difficult, given that cost of living is often cited as one of the top concerns among Saudis for living independently, while unemployment benefits are generous (with a minimum of $533 and up to $2,400 monthly for the first three months under the Hafiz programme).
 
Limited scope for job creation
 
The main reason why unemployment is chronically high is because the economy does not create enough jobs for new entrants to the workforce. Job creation has averaged 430,000 positions annually over the past 10 years, while the labour force grew by an average of 475,000 per year over the same period. Secondly, new jobs that are not in the public sector are too few and have not been palatable to Saudis; almost a quarter of the new jobs have been in the construction and distribution sectors. Although Saudis have accounted for just over 40% of the growth in workforce, they have taken up fewer than 40% of the total new jobs.
 
The government is expecting about 150,000 new Saudi entrants to the labour force each year for the next 10 years. The public sector has accommodated the majority of Saudi labour market entrants in the past, but lower oil prices constrain its ability to sustain the pace of new job creation.
 
It is doubtful whether the private sector will be able to carry the burden. This is in spite of the fact that increasing the share of Saudi nationals in the total workforce has been a key policy objective, known as Saudisation. The government has introduced a variety of measures to achieve that, such as sector-specific targets for migrant labour and fees for expat workers. At the same time, the cost of living has risen amid cuts to energy subsidies and various tax rises, including the introduction of the 5% VAT. Yet nationals continue to favour working in the public sector, and private-sector companies that hire Saudis end up having to pay a meaningful premium for native-born employees, eroding profitability.
 
Still, the Saudisation programme, which was first rolled out in 2011, could have a positive effect on female employment as companies shed expatriate workers. In addition to company and sectoral quotas for employing nationals, companies are rewarded for having a higher share of females on their staff.
 
One of the fees for hiring migrant workers, the expat levy, will also encourage firms to hire Saudis, which should mainly benefit women. The levy on companies not meeting the quotas – which will rise to $160 per migrant worker per month in 2019 and $213 in 2020, up from $107 currently – will account 40-65% of average remuneration for lower-skilled female labour. This will significantly narrow the native-migrant wage gap, even when accounting for pension costs (at 12% for the employer out of the total 22% cost share), a benefit required for all nationals in Gulf Cooperation Council (GCC) countries.
 
Replacing migrant workers with nationals may make medium-term economic sense for another reason: Saudis are not bound by the restrictive sponsorship system (kafala), which should allow a more efficient use of resources, enhancing productivity.
 
Nationals’ high wage expectations
 
The Saudi economy is heavily dependent on imported labour, which accounts for over 50% of the total labour force. Like elsewhere in the region, the native-migrant wage pattern significantly discriminates against non-nationals – even for the same jobs. Although the wage gap has generally been narrower for women, it is still very wide, particularly at the bottom and middle areas of the pay scale - they earn between two-and-a-half and three times more than foreign female workers and double the amount earned by foreign male workers. It is primarily the lower-skilled Saudi women who have been locked out of the job market by the cost of having to hire a driver to take them to work.
 
Women have been more willing to choose jobs in the private sector over prestigious government positions, despite lower benefits and longer working hours. But to replace foreign labourers, Saudi women will have to compete for jobs at wages that are unlikely to match their expectations. Beyond pay, women will also need to consider factors such as welfare entitlement and childcare costs. The ability to secure childcare is considered a major obstacle to maternal employment and will slow the increase in the female labour participation rate.
 
Further details: The full research briefing is attached (PDF). Media may reproduce our charts with attribution to Oxford Economics.

© Press Release 2018