Can we Saudize the labor market without damaging the private sector?

Among all the economic challenges on the road to Vision 2030, job creation for Saudi citizens is the politically most important one—and after an initial focus on other Vision-related policy areas, it is increasingly taking center stage in the kingdom’s economic policy debate. However, a formula to guarantee sufficient, sustainable jobs for Saudi citizens is still missing: The Nitaqat employment-quota system has created significant employment since its introduction in 2011, but it has also imposed significant costs on business, and many of the Nitaqat-induced jobs appear to be unproductive or not even real. Relying on natural economic growth to put more Saudi citizens into employment will be insufficient: Not only has growth been muted due to ongoing fiscal adjustments, but whatever private jobs have been created have mostly gone to foreign workers instead. Finally, creating new government jobs is fiscally unsustainable and reduces incentives for Saudi citizens to seek more productive private employment. Saudi Arabia, like other Gulf Cooperation Council (GCC) countries, faces a fundamental obstacle in its attempts to create private jobs for citizens: a significant difference in both labor rights and labor costs between citizens and foreign workers that almost invariably leads employers to prefer the latter. This report explores the roots and the consequences of this twofold gap and presents new ideas on how to narrow or even close it. The report draws on publicly available labor market data as well as original, as-yet unpublished employer and job-seeker survey data from Saudi Arabia to explore the perceptions and priorities among private firms regarding the employment of Saudi citizens. The employer perspective has often been missing from the Saudization debate, and it must be seriously analyzed if we want to identify policies that work on the ground rather than creating evasion through “phantom employment” and other manipulation techniques.