A year into the pandemic: Who has been impacted the most in Saudi Arabia’s Labor Market?
In November 2020, the Ministry of Human Resources and Social Development announced that starting on April 18th, 2021, firms need to pay national workers a minimum wage of 4000 Riyals up from 3000 Riyals per month, in order for a worker to be counted as a “full” worker for the purposes of the nationalization quotas (Nitaqat) set by the ministry. This is the first minimum wage increase for Saudi workers in 8 years. Furthermore, the ministry stated that workers who continue earning 3,000 Riyals after April 18th, 2021 will now count as a “half” worker. As of Q4, 2020, there were approximately 596,000 Saudis who earned exactly the previous minimum wage of 3000 Riyals, which represents one in every three national workers in the private sector. Finally, nationals earning below 3000 Riyals will no longer be counted in terms of nationalization thresholds. In Q4, 2020, 54,000 Saudis earned below 3000 Riyals, and I believe the number of workers in this group will decline drastically in the upcoming months given that they will not count at all in Nitaqat.
In the following descriptive analyses and graphs, I will focus on the change in the number of jobs at the wage-category level between Q4 2020 and Q1 2021, for both national and foreign labor. I will further explore whether there is evidence of an anticipation effect amongst firms, and how firms have reacted to the minimum wage spike announced in November 2020.
Covid Impact on nationals in the private sector
As a result of raising the minimum wage for national labor from 3000 to 4000 Riyals per month, effective April 18th, 2021, the number of workers categorized as earning exactly 3000 declined significantly between Q4 2020 and Q1 2021, by 24% or 144,500 workers. At the same time, the number of workers in the wage-category of (3001 to 4999 Riyals) increased by 29% or 128,000 workers, which provides plausible evidence of an anticipation effect. However, due to the recent minimum wage policy changes and the current GOSI data structure, it is difficult to tell if the job increases/decreases in each wage-category represent:
1. Actual jobs created/lost, or
2. A reclassification of the same workers from one wage group to another, to satisfy the new nationalization quotas.
I think the change in the numbers in this context reflects the latter, with the difference reflecting job losses. More specifically, I estimate the net change in the two wage groups that occurred during the period as follows:
(144,500 less jobs in the 3000 Riyals wage-category) + 128,000 more jobs in the 3001 to 4999 Riyals wage-category = (16,500) actual jobs lost. However, absence more granular data from GOSI, it is not possible to make any conclusive statements on what these figures imply.
In addition, the number of jobs for Saudis earning below 3000 Riyals decreased by 8% or 4,400 jobs between Q4 2020 and Q1 2021. Again, this is due to those workers no longer being counted for Nitaqat quotas and may either reflect: 1- the reclassification of those workers into higher wage-categories that count in terms of nationalization or 2-the termination of those workers.
In addition, the number of jobs for Saudis earning below 3000 Riyals decreased by 8% or 4,400 jobs between Q4 2020 and Q1 2021. Again, this is due to those workers no longer being counted for Nitaqat quotas and may either reflect: 1- the reclassification of those workers into higher wage-categories that count in terms of nationalization or 2-the termination of those workers.
A major positive news is that the number of jobs in the two higher wage-categories for Saudis (i.e. those earning between 5000 and 9999 Riyals, and those earning 10,000 or more Riyals) has increased by 113,500 jobs during the same period. Again, due to data limitations, it is not possible to know how many of those jobs were actual new jobs created versus a reclassification of workers by firms from one wage-category to another. However, regardless of why this sizable change occurred (i.e. whether its driven by newly created jobs or a reclassification of employees from one wage-category to another), I believe both are encouraging news to policymakers. This is because the second change suggests that firms boosted the earnings of existing workers, thus resulting in their reclassification to a higher wage category (See figure 1 in the appendix for detailed figures).
Covid Impact on foreign labor in the private sector
The Q1, 2021 GOSI administrative data confirms the same pattern observed in prior periods throughout 2020, where the pandemic’s economic burden fell primarily on low-income foreign workers. Based on GOSI’s administrative quarterly records, there are 387,657 less migrant workers earning below 1500 Riyals today in Saudi Arabia, compared to Q1, 2020, which represents an 8% decline. The departure of such low-income migrant labor is unlikely to translate to employment gains for Saudis, as the majority if not all workers in this group hold highly manual and low-skill jobs, and thus do not compete with unemployed natives, who are more likely to be college-graduates, according to figures in the LFS Q4, 2020.
There was a considerable increase in the number of jobs held by foreign workers who earn wages competitive with nationals (i.e. 3001 or more Riyals per month). Specifically, there are 36,500 more jobs today held by foreign labor earning above 3001 Riyals, relative to Q4, 2020. Unfortunately, with the existing data, we can’t know whether those workers replaced national labor who were fired between Q4, 2020 and Q1, 2021 or if they are filling newly created jobs. However, both are considered undesirable outcomes from a policymaker’s perspective in Saudi Arabia. This is because the latter in particular is indicative of a long-term structural labor market problem, where the economy is creating well-paying jobs but firms are not finding local talent to fill those jobs, and thus continuously relying on expat labor.
In conclusion, I believe that while the recent minimum wage spike for national labor may ostensibly appear as helpful to nationals, it indirectly makes foreign labor cheaper by further increasing the cost of hiring Saudis (by approximately 33%). I believe a more effective policy adjustment would be introducing a universal minimum wage for all workers regardless of their nationality. This policy adjustment in turn reduces the cost advantage for expat labor, and it would cause firms to hire workers based on merit, rather than cost.
Appendix
Data Description:
· The Saudi Arabian General Organization for Social Insurance (GOSI) categorizes workers in its administrative dataset based on six income bracket groups. This makes it difficult to analyze the data as these groups are abstract and are unrelated to income percentiles, but it is still the best measure available for the private sector’s health.
· The Y axis in the graphs below shows the following income bracket groups:
1. Workers earning <= 1.5 thousand Riyals per month
2. Workers earning 1.5–2.9 thousand Riyals per month
3. Workers earning 3 thousand Riyals per month
4. Workers earning 3.01–4.9 thousand Riyals per month
5. Workers earning 5–9.9 thousand Riyals per month
6. Workers earning >= 10 thousand Riyals per month
