Labor market nationalization may raise labor costs: Report



Gulf Cooperation Council (GCC) countries’ labor market nationalization policies aim to provide more jobs for a rapidly growing population, but they are also likely to raise labor costs and hamper diversification, Moody’s Investors Service said in a report released Wednesday.

The report, “Sovereigns – GCC, Labor Market Nationalization” aims to curb unemployment but may raise labor costs and hamper diversification.”

Rapid GCC population growth is leading to increased demand for jobs as new entrants join the market and only modest numbers of workers retire. Social changes will compound higher employment demand, particularly if more women enter the workforce, the report noted.

Relative to the current size of the job market, the number of new jobs for nationals needed in the next two decades to meet labor market and social objectives is highest in Saudi Arabia (A1 stable), Oman (Baa3 negative) and to a lesser extent Kuwait (Aa2 stable).

“The size of the challenge is greatest where nationals comprise a relatively large share of their total populations, unemployment is relatively high, and there is less capacity to absorb new entrants into the public sector. Among the GCC these conditions apply to Saudi Arabia and Oman in particular”, said Thaddeus Best, a Moody’s analyst and co-author of the report.

By contrast, despite their young demographics, pressures are less marked in the UAE (Aa2 stable) and Qatar (Aa3 stable), where expatriate numbers are higher relative to nationals which indicates greater scope to create jobs for nationals as long as skills requirements are met.

Nationalization strategies can have both credit positive and negative implications for sovereigns. It will be credit positive if these strategies are effective in providing wider job opportunities for nationals, while preventing a rise in unemployment and as a result maintain social and political stability.

However, large increases in public sector wage bills for the government to accommodate an increasing number of nationals in the administration would reduce fiscal flexibility and in some cases weaken fiscal strength.

Bans and quotas could increase labor shortages, while a rise in labor costs as the private sector at least partially closes the wage gaps with the public sector in order to employ nationals would hamper competitiveness, the report further revealed.

Tensions could rise if the nationalization plans fail to increase employment sufficiently. Nonetheless, the authorities will find it challenging to create sufficient private sector opportunities to halt rising unemployment, at least over the near-term, the report added. — SG