Nationalization of the private sector labor force, quotas, matching and public jobs, an illustration with Saudi Arabia

We analyze how quotas of foreign workers and subsidies on national labor can increase the private sector employment of nationals in an economy with a large proportion of expatriates and a large government wage bill. We use two alternative partial equilibrium models of the labor market: one has a market-clearing wage, and the other represents matching and job search directed towards either the public or the private sector. The models are calibrated on Saudi Arabia. We show that when the quotas of foreign workers are binding, they reduce the impact of labor subsidies on the employment of nationals. In addition, we find that in the matching model subsidies on the labor of nationals have a larger effect on employment than in the market-clearing wage model, because the highly attractive public sector flattens the wage curve. We also find that labor subsidies financed by expat levies or public job cuts have modest employment effects and require a very large fiscal adjustment. Finally, we show that a domestic energy price reform, where only a fraction of the fiscal proceeds are used for labor subsidies, can substantially reduce unemployment.