JEDDAH – As local population multiplies rapidly while the economic expansion grows steadily, creating jobs for the citizens becomes a top priority. However, achieving the goal requires change in attitudes, the National Commercial Bank said in its "GCC Economic Review" for the month of July. "Attitudes will need to change at the corporate level, likely in part with government support. Successful nationalization is conditional on more regional private sector companies changing their default modus operandi from 'import the employer you need' to 'develop the talent you require.' Significant progress in this is dependent on a major change in attitudes. Given the limited resources of many companies, the government may need to facilitate the process where appropriate and reward companies that properly engage and develop their national employees," the report said. Recent labor market initiatives in the region have been characterized by redoubled efforts to boost the employment of nationals. The failure of the pre-2008 boom to meaningfully translate faster growth into greater relative employment of nationals has spawned new initiatives designed to incentivize companies to boost national employment. Education remains a key priority area for government spending, it added. The labor market is fundamentally like any other market - a pooling and clearing mechanism for the available supply and demand. Its efficiency depends on its ability to compile the relevant information and match the two sides with each other. Since labor is one of three factors of production (along with capital and land), the success with which the available potential labor resources are channeled into productive purposes has profound implications for economic development. An employed individual is a productive asset, all the more so if the qualifications, aptitudes, and skills of the person closely match a given employment opportunity. An unemployed person is an economic liability: a missed opportunity from the perspective of production and a cost, whether in terms of unemployment benefits or other claim on resources. The ability of an economy to grow sustainably is hence clearly linked to its ability to mobilize its human capital and minimize the underutilization of productive resources. The evolving labor market policies of the Gulf countries have generated considerable anxiety among expatriates. For instance, a recent Hay Group survey on attitudes toward Saudi Arabia's Nitaqat program found that 42 percent of respondents were nervous that knowledge transfer to nationals would result in them being pushed out of employment altogether. Nonetheless, labor market nationalization does not have to be a zero-sum game. The numbers alone suggest that nationalization need not involve substantial costs for expatriates, especially in growing economies. In Saudi Arabia, the total number of job-seekers, which is probably not much more than a million (if measured by the number of Hafiz participants), is relatively modest compared to the total number of expatriate employees which totals some 4.3 million. In many of the Gulf coast countries, the population base itself is predominantly composed of expatriates. The international experience suggests that all developed labor markets are to varying degrees open and the recruitment for many positions happens on an international scale. Ultimately, an efficient allocation of labor fuels growth and creates employment opportunities that can go far beyond the national resources. Most advanced economies have significant populations of expatriate professionals, craftsmen, and unskilled laborers alike. The track record of countries in implementing effective labor market policies varies a great deal and differentials in unemployment are not attributable to macroeconomic conditions alone. For instance Spain has a long history of double-digit unemployment whereas Sweden has successfully kept unemployment in the single digits. In practice, "good economic performance does not necessarily translate into improved employment situations," the study noted. As much as the emphasis of labor market policy must remain on the creation of new employment opportunities, such positions can seldom be permanent in a rapidly evolving market place. Any market economy naturally develops through - and indeed owes its creative energy to - a process that the Austrian-American economic Joseph Schumpeter once dubbed as "creative destruction." Innovation is critical to progress and new, superior ideas inevitably challenge and undermine older, less efficient solutions. At the most macro level the advanced economies have traveled through an evolutionary process from agricultural to industrial and eventually to service-based economies. Movements of labor between these sectors have invariably significantly boosted efficiency and growth. The international experience highlights the importance of labor market flexibility as a precondition for sustainable growth. Economic policy should hence not seek to prevent market dislocations but, rather, to manage their consequences. As a recent IMF study put it, policy solutions should seek to "protect the worker and not the job." Economic policy should seek to optimize the allocation of labor while enabling companies are able to adjust their organization without punitive costs. After all, when an employer is no longer needed, he risks becoming a burden for the company. In that situation, economic efficiency dictates that the company should be able dismiss the worker with relative speed and modest cost. The responsibility of labor market policy is to ensure that the laid-off employee is made aware of new opportunities and provided with additional skills if necessary. Social policy should be used to minimize the financial implications associated with job loss and new job search in a way that does not undermine the incentives to look for new employment. In general, countries with inflexible labor markets - ones characterized by high costs of hiring and firing - tend to struggle to adjust to economic change. Rigid institutions, even if they seek to protect workers, also prevent the market mechanism from working efficiently. Companies that anticipate significant cost of money and time in the event of lay-offs are likely to be more cautious about hiring in the first place, sometimes relying on more flexible solutions such as outsourcing, often outside their home jurisdictions. Another consequence of rigid labor markets can be the preponderance of informal employment. This creates its own set of challenges in terms of a lack of access to government social services and pensions. At the same time, it can deprive the government from revenue sources, whether licensing fees of tax receipts. – SG
