Labour Demand, Firm Survival & Productivity in Dual Labour Markets

: The Case of the Nitaqat Policy in Saudi Arabia

Abstract

The private sector in Saudi Arabia has the features of a dual labour market – it relies heavily on foreign labour, comprising around 90% of its employment, with regulated pay differences between nationals and foreigners. In 2011, the Saudi Ministry of Labor introduced the ‘Nitaqat’ program, which imposes an industry quota of national employment on private firms. The policy’s main aim is to raise the employment levels of nationals in the private sector. With strict sanctions imposed on non-compliant firms, the policy has a high compliance rate, but imposes significant costs on firms.
Using a dataset from the Ministry of Labor covering the whole population of firms subject to Nitaqat, this thesis uses an econometric approach to study the impact of Nitaqat on Saudi employment, foreign employment and the exit rate of firms. This builds on existing literature by analysing the policy using a difference-in-differences approach. The results suggest that the policy has improved Saudization (the ratio of Saudis to total employment), but at a significant cost to firms, since it raised exit rates and reduced total employment in surviving firms. In addition, it undertakes a descriptive analysis of the economy before and after the policy implementation, using individual level data from 2009 to 2015. This studies the difference in earnings between Saudis and non-Saudis in relation to skill levels, industry of employment and region. However, there was not enough evidence to directly link the results to Nitaqat. Hence, a final analysis is based on a merge at industry level between the Nitaqat dataset and the Annual Establishment Survey to measure the impact of the policy on labour productivity. This uses both cross-sectional analysis and a fixed effects (FE) panel data approach to describe labour productivity before and after the Nitaqat policy over a ten-year period (2005-2015). The results suggest that the private sector has suffered from lower productivity in the short run; forcing the less productive firm to exit the market, while the more productive firms were surviving. Hence, raising labour productivity in the long run.

Date of Award	2018
Original language	English
Awarding Institution	King's College London
Supervisor	Mary O'Mahony (Supervisor) & Jo Lindley (Supervisor)