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Sunday, December 04, 2022

Is Saudi Arabia Entering a ‘Great Reshuffle’?

In many high-income countries, the pandemic has caused seismic changes in labor markets. What began as a growing shortage of workers in some industries has turned into a “great resignation”, a record number of workers not returning to their jobs after the lockdown. Recently, it has become more apparent that these workers are not necessarily leaving the labor market altogether. Rather, they are reevaluating their career paths, switching sectors, looking for jobs with more responsibilities, starting a business, or freelancing. This leads to labor shortage as workers roam the labor market in search of better opportunities. What these high-income countries are seeing is not so much a resignation, but a “great reshuffle”.

For evidence of a major reshuffle, look no further than Saudi Arabia. The oil-rich country’s labor market is experiencing one of the fastest changes in the world. Saudi citizens—particularly Saudi women—are joining the labor market at unprecedented rates, a trend possibly exacerbated by recent reforms targeting female employment. Unlike most high-income countries, labor force participation in Saudi Arabia has actually increased during the pandemic. At the same time, foreign workers—who make up more than 70 percent of the workforce in the private sector—are leaving jobs in large numbers, leading to a sharper and faster contraction in total employment. Nearly 1 million jobs have disappeared since the start of the pandemic.

In Saudi Arabia, evidence is emerging of worker reallocations after a pandemic. Job churn in the last two quarters of 2021 – the existence of simultaneous hiring and separation – almost doubled compared to the previous year. The number of Saudi citizens leaving their jobs in the third quarter of 2021 is 95 percent higher than a year ago. There was a further increase in resignations in the third quarter of 2021, reaching 3 percent of total private sector employment. Roughly 270,000 workers—most of them Saudis—quit their jobs in Q3 2021, compared to 134,000 in Q3 2020 and 152,000 in Q3 2019. On the other hand, recruitment of new workers is increasing rapidly after last year’s pandemic-related slowdown. , The job churn rate in the Saudi private sector—defined as the sum of new employees and resignations—is 6.7 percent of employment in the Saudi private sector (Figure 1).

Figure 1

There is always churn in the labor market, but increased churn is usually a sign of strengthening labor markets. Churn refers to a business that is not concerned with job creation or destruction, so it is not a measure of net job creation but a measure of labor market liquidity. If churning workers move to more productive jobs, firms and sectors, it can be a productivity booster and therefore a positive development. The increased pace of re-allocation of workers can lead to more efficient matching between workers, skills and jobs.

In addition, labor mobility among foreign workers is increasing. In Q3 2020, job transfers grew by 23 percent compared to a year ago, but by Q3 2021, the annual growth rate increased to 93 percent. Recent changes to the Kafala sponsorship system have allowed foreign workers to change employers.

What is the reason for the big change?

The factors driving the major worldwide reshuffle are unclear. The most relevant experience comes from OECD countries. In the third quarter of 2021, the number of resignations in the United States reached 4 million, a record high of 3 percent of total non-farm employment. Resignations were highest in certain service sectors such as housing and food services (7 percent), leisure and hospitality, (6 percent) and retail (5 percent), suggesting that workers are looking for better opportunities in high productivity sectors . Workers have a greater advantage of bargaining for higher wages and better working conditions.

In Saudi Arabia, this reshuffle could also be fueled by improving economic conditions and a tightening of the labor market. Economic activity is resuming due to rising oil prices and a surprisingly strong growth in non-oil activities. As foreign employment continues to decline and unemployment among Saudis reaches a record low (11.3 percent), employers may face more difficulties finding qualified labor to produce output.

More favorable labor market conditions may also facilitate workers’ transition to higher paying, better jobs. The average wage for Saudi workers is rising (Figure 2), especially for highly educated Saudis. In fact, salaries for Saudis with college degrees are growing at 6 percent and 1 percent, respectively, compared to those pursuing secondary education. In addition, new jobs are increasingly concentrated in high-skilled occupations. Nearly half of all new Saudi employees (51 percent) joined employment in the professional or allied professional categories in the third quarter of 2021, compared to only 15 percent a year earlier. Higher wages and the availability of more suitable work opportunities may prompt Saudi workers to quit and look for better opportunities in new jobs.

Figure 2

There may be other factors at play. Studies are showing a strong preference for remote work or hybrid arrangements, as flexibility becomes more and more important to workers. This can happen in Saudi Arabia as well. According to Google Trends, searches for the term “jobs” along with “remote work” in Saudi Arabia have increased by 190 percent over the past two years. As always in Saudi Arabia, consideration should be given to the role of Nitaqat – a policy that forces firms to hire a certain number of Saudis. For example, private sector resignations among Saudi women have doubled in the past two years. It may also mark the end of the ‘ghost employment’ created by the Nitaqat. Now that more opportunities have opened up for women in the economy, those women who in the past were hired by companies only on paper to meet the Nitaqat quota, are resigning in search of real employment.

In any event, a more dynamic labor market could give Saudi workers the advantage of greater agency and leverage for higher wages and better working conditions. Whether these trends translate into productivity gains will ultimately depend on the extent to which workers are reallocated from low to high productivity firms.

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