Industry Diversification and Job Growth in Saudi Arabia
Project Dates
2016
Supported By
Ministry of Economy and Planning
Saudi Arabia’s economy stands at a crossroads. The current economic model is driven by oil exports, which account for 84 percent of exports and 42 percent of GDP. A historic rise in oil prices starting in 2003 led to a doubling of Saudi Arabia’s GDP and created 1.7 million Saudi jobs in a decade. After the rise, however, came the fall, as by 2016 oil prices stood at 40 percent of their peak. The last time Saudi Arabia experienced a sharp decline in oil prices in 1981, there followed a deep, prolonged recession. Consumption per-capita only recovered to its 1980 level nearly three decades later in the midst of the most recent oil price boom. With 4.5 million young Saudis entering the workforce by 2030 and the continuous evolution of global energy markets, waiting another quarter century for the return of high oil prices is no longer a viable option.
In April 2016, Saudi officials announced Vision 2030, an ambitious plan to diversify the Saudi economy away from its dependence on oil. The scale and speed of reforms called for by Vision 2030 and the accompanying National Transformation Plan (NTP) require careful planning and sequencing of reforms to revamp the country’s economic model toward a diversified, knowledge-driven economy.
In mid-2016, the Growth Lab launched a policy engagement with the Ministry of Economy and Planning to advance research and policy development processes on how to spark economic diversification and job creation in Saudi Arabia. The Growth Lab has advanced global research on the understanding of how growth happens, placing diversification and complexity at the heart of the story. In pioneering a series of methodologies and visualization tools that map paths to diversification, the team applied these tools to better understand the Saudi industrial landscape. By mapping what capabilities exists, these tools can identify new, high-complexity industries that hold promise to create new jobs and income gains, while relying on capabilities that already exist locally. These tools offer a new approach to identify industries to drive growth and job creation, as a fundamental rethink of economic strategy to focus on Saudi Arabia’s most powerful resource: the skills of Saudi workers.
Another line of research aims to identify the constraints to the growth of non-oil sectors. In contrast to traditional approaches of economic strategies built on one-size-fits-all approaches, the team has applied a Growth Diagnostics approach that uses a distinct methodology—a differential diagnosis—to identify the binding constraint to growth in Saudi Arabia. The aim of this research is to identify the changes in labor, fiscal, and regulatory spheres required to enable economic diversification. This research includes macroeconomic modeling of the drivers of growth in the current economic model to understand the effects of necessary fiscal consolidation over medium-term to restore fiscal balance. In moving from a government-led economic model to build a knowledge-based economy driven by the private sector, this research also studies the labor market policies necessary to achieve economic transformation. Building a dynamic knowledge economy requires greater participation of Saudis in the private sector. Policy research has elaborated recommendations to expand the greater participation, voice, and ownership of Saudi women to transform their rising labor force participation into real job and income gains for Saudi households. The research also finds the need for a rethink of the role of foreign workers in a knowledge economy, to best maximize the complementary skill-sets required to attract and retain the knowledge to sustain competitiveness in new productive sectors.
The multi-year engagement looks to build core capabilities within Saudi ministerial units to generate their own modeling and research across a staircase of institutional capabilities to better achieve job creation outcomes. The project looks to train teams to attract new, high-potential industries and to address the key missing public inputs to ensure a functioning business ecosystem for new firms. In this way, the project aims to match a more effective diagnosis and localized identification of diversification opportunities with successful implementation by capable government teams to be able to achieve job creation goals.
Affiliated Publications
Working Papers
Women at Work: A Systematic Diagnostic of Female Saudi Employment Gains in Saudi Arabia
Saudi Arabia has witnessed a paradox where high demand for labor did not translate into high labor force participation for Saudi women. Despite possessing higher educational attainment than men, Saudi […]
Saudi Arabia has witnessed a paradox where high demand for labor did not translate into high labor force participation for Saudi women. Despite possessing higher educational attainment than men, Saudi women historically faced lower participation rates, higher unemployment, and concentration in lower-paying sectors. This paper examines the paradoxical surge in Saudi women’s employment during a period of economic weakness following the 2014 oil price shock and 2020 pandemic. The study documents unprecedented employment gains driven primarily by new labor market entrants, particularly women with high school education or less, who diversified beyond traditional education and health sectors into retail, construction, manufacturing, and food services. Through empirical analysis of policy reforms implemented between 2016-2022, the paper identifies three key drivers of Saudi women’s employment gains: the removal of legal and social barriers (including workspace requirements and driving restrictions), wage subsidies during COVID-19, and increases in the Nitaqat de facto minimum wage for Saudi workers. While these gains represent historic progress, the analysis reveals concerning trends, including a widening gender wage gap and questions regarding the sustainability of subsidy-dependent employment growth. The paper highlights the need to balance short-term policy interventions to increase women’s entry into the workforce with long-term diversification efforts that align women’s skills and wage expectations with market demands to ensure sustainable and equitable employment outcomes.
Working Papers
The Quest for Increased Saudization: Labor Market Outcomes and the Shadow Price of Workforce Nationalization Policies
Few countries have embraced active labor market policies to the same extent as Saudi Arabia. In the aftermath of the Arab Spring, the imperative of increasing Saudi employment became paramount. […]Few countries have embraced active labor market policies to the same extent as Saudi Arabia. In the aftermath of the Arab Spring, the imperative of increasing Saudi employment became paramount. The country faced one of the highest youth unemployment rates in the world while over 80 percent of its private sector consisted of foreign labor. Since 2011, a wave of employment nationalization efforts has been mainly implemented through a comprehensive and strictly enforced industry and firm specific quota system known as Nitaqat. This paper assesses the employment gains as well as the costs and unintended consequences resulting from Nitaqat and related policies between 2011 and 2017. We find that while job nationalization policies generated significant initial gains in Saudi employment and labor force participation, the effects were heterogeneous across workers, firms and sectors. Moreover, our analysis suggests that the resulting unintended consequences far outweighed the benefits over time generating a less cost-effective and productivity inhibiting labor market composition.
Working Papers
Understanding Saudi Private Sector Employment and Unemployment
This paper analyzes the changes in Saudi employment and unemployment between 2009 and 2018 and argues that a supply-demand skill mismatch exacerbated by insufficient job creation, and prevalent Saudi preferences […]This paper analyzes the changes in Saudi employment and unemployment between 2009 and 2018 and argues that a supply-demand skill mismatch exacerbated by insufficient job creation, and prevalent Saudi preferences and beliefs about employment underpin the high unemployment problem that coexists with low Saudi employment in the private sector in the country.
Working Papers
Labor Market Nationalization Policies and Firm Outcomes: Evidence from Saudi Arabia
Saudi Arabia is home to the world’s third largest migrant population. Under mounting pressure to increase the private sector employment of Saudis during the last decade, a series of nationalization […]Saudi Arabia is home to the world’s third largest migrant population. Under mounting pressure to increase the private sector employment of Saudis during the last decade, a series of nationalization policies on the labor force have been imposed since late 2011. In this paper, we study how the first nationalization policy, Nitaqat, affected the overall labor market and non-oil firms in the private sector, especially exporting firms. Our rich and novel data allow us to assess the effect of the policy on a wide set of outcomes: employment decisions by composition and size, the output and productivity of exporting firms, labor costs, and exit from the market. Using a difference-in-difference analysis, we compare the 2011 to 2012 change in outcomes between firms above and firms below the threshold required for the minimum share of Saudi workers in a firm. Our results suggest that the policy succeeded in encouraging firms to increase the share of Saudis in private firms. It also increased the share of Saudi women in the workforce, suggesting that the policy had a positive effect on increasing female labor force participation. However, these gains came at a very high cost to firms: our findings suggest that the policy led to a reduced firm size, reduced productivity and output of exporting firms, increased wage bill, increased share of low-skilled Saudi workers, and higher firm exit rates.