Unemployment and Skills Shortages: Can the United States Learn from Saudi Arabia?

Evan as unemployment in the United States stubbornly remains above nine percent, many companies struggle to find qualified workers. In its 2011 Talent Shortage Survey, Manpower, Inc., the staffing agency, reports that 52% of U.S. companies are having trouble recruiting essential employees, up from 14% in 2010. On the one hand, this could be a sign of a real recovery – economic growth and renewed confidence creating a surge in employer demand – but on the other hand, it could be a sign that the United States is losing its competitive edge, failing to produce graduates and school leavers who possess the attributes employers need: chiefly, literacy, numeracy, and a work ethic.  The United States is hardly the only country to face such problems. Saudi Arabia, which differs from the United States in just about every way that matters, is trying to resolve its twin problems of unemployment and a lack of skills in ways that could be instructive for U.S. policy makers.

Saudi Arabia has just introduced an ambitious new “Saudization” drive aimed at replacing expatriate workers with Saudi citizens. This is not a new idea; similar programs have been tried for over 30 years. Saudi Arabia, like other countries in the Gulf region, depends on foreigners to do the work that citizens can't or won't do.

Many of Saudi Arabia's neighbors have hired so many foreigners that citizens are a minority in their own countries. In Kuwait, expatriates make up 69% of the population, while in Qatar and the United Arab Emirates, they account for nearly 90%. These countries don't even pretend that expatriates can be replaced. Instead, they offer their citizens such a cushy life that few would want to work, even if jobs were available, but the cracks in that model can appear with frightening speed. Bahrain, with an expatriate population of 54%, experienced mass demonstrations and a violent, Saudi-backed crackdown earlier this year as the Shiites, two-thirds of the citizenry but long deprived of the jobs and perks the Sunni ruling family lavishes on the minority Sunni population, started protesting their exclusion.

In Saudi Arabia, which has a much bigger population than its neighbors, foreigners make up only one-fourth of the total, but the government recognizes that even this is unsustainable. The employment situation now is different from 30 years ago, and far more acute. In 1981, 85% of the population of 5.5 million was illiterate and largely unemployable. Oil revenues supported a comprehensive welfare state that included free health care, education, and housing, and make-work public sector jobs. That is no longer the case. Apart from a few years of buoyant oil prices, budget deficits have been the rule for the past quarter century.

Saudi Arabia now has 24 million people, and population growth continues. 86% of adults are now literate, and hundreds of thousands of young Saudis have gone abroad to attend university. Most of them will be forced to return home after their studies, and they will expect jobs. The Saudi authorities know that many of the people taking to the streets in Arab countries over the past six months have been graduates who, in spite of robust economic growth – Egypt's economy has grown at an average rate of 4.6% for the past 10 years and Tunisia's at 4.1% – cannot find work. The official Saudi unemployment rate is 10.8%, but unofficial estimates put it as high as 25%, and even these estimates ignore the exclusion of most women from the work force.

The new Saudization program, “Nitaqat,” which came into effect on June 11, places companies in one of three categories – green, yellow or red – based on their success in meeting targets for replacement of foreigners with Saudi citizens. Those in the yellow and red bands face punitive action, which will include non-renewal of expatriate visas and work permits. The Saudi Labor Minister reckons this could force as many as 40% of private firms out of business, and admits the burden will be highest on smaller firms.

At the same time, the Saudi government is spending mind-boggling sums to create new economic opportunities. Its “Economic Cities” program to create economic development poles away from the main urban areas has a price tag likely to top $200 billion, at least half of which will come from government borrowing. But the Governor of the Saudi Arabian General Investment Authority (SAGIA), which is responsible for the program, recently admitted that the authorities may not have picked the right locations.

“Build it and they will come” has failed as a development strategy in countless countries, and there is no reason to think Saudi Arabia's attempts to create investment and jobs in remote parts of the country will prove otherwise. Regardless of location, the expenditure of hundreds of billions of dollars, including subsidies of up to 50% of the cost of employing and training Saudi citizens, cannot make up for the wage and productivity gap between Saudis and foreigners.  Employing more Saudis in private business is essential, but Saudis still constitute only 10% of private sector employment. Raising that figure is a huge challenge. Companies can hire and lay off expatriates as business conditions change, but it is almost impossible to fire a Saudi for any reason.

One concern with Nitaqat is that replacing expatriates with Saudis will drive up labor costs. Another is the lack of a work ethic. I have met many intelligent and hard-working Saudi industrialists who say that even educated young Saudis have few skills, expect high salaries, and don't work hard. In most Saudi companies, management and technical staff are Lebanese, Egyptian, or Jordanian, and the lower-level workers from South Asia. Getting qualified Saudis into management and technical roles in companies will be a struggle as long as government jobs pay more and demand less work. Getting less-skilled Saudis into menial jobs, now the province of ill-paid Baluchis and Bengalis, will be even harder.

Much of this sounds disturbingly like the conundrum facing the U.S. We depend on foreigners to fill critical jobs at both the top and bottom of the employment ladder. American employers hire illegal immigrants from Latin America, not so much because they cost less than Americans, but because they are eager to do jobs most Americans disdain, and they tend to work harder. Many industries, especially technology, medicine, and finance, rely on immigrants, many of them from India, to provide the skills that are in increasingly short supply in the native population. The United States, like Saudi Arabia, has a bloated public sector, which now offers better salaries and benefits than most companies in the private sector. Cuba can announce plans to fire 500,000 public sector employees with hardly a peep of protest, but any attempt to rein in public sector benefits in the U.S., however slightly, meets with bitter, and sometimes violent, opposition. True, the Cuban government tends to treat protesters somewhat more harshly than we do in this country.

The so-called solutions offered by U.S. Federal and state governments also resemble those of the Saudi government. U.S. immigration policy restricts the number of visas available for skilled foreigners, and each year deports tens of thousands of foreign graduates of U.S. colleges and universities once their student visas expire. State laws in places like Arizona compound the problem by imposing draconian penalties on employers who, knowingly or not, hire illegals. The U.S. now has far less appetite than Saudi Arabia for huge public spending projects, but the 2009 stimulus package contained $45 billion in spending and subsidies on green energy projects, including wind and solar power, while the U.S. Department of Energy hands out billions of dollars in grants each year, many of them to private companies whose technologies are considered promising. Government funding for basic research is both necessary and appropriate, but backdoor industrial policy, which consists of trying to pick winning early-stage companies or technologies, is an area in which few, if any, governments, have ever succeeded. Venture capitalists reckon that if they have one huge success for every nine failed investments they are doing pretty well. Why would we expect government to do any better? At the same time, the cost of compliance with business regulations, especially for small businesses, becomes increasingly onerous.

Let's be clear: the United States is not Saudi Arabia. Two generations of the soft life have created a sense of entitlement among many Saudis and sapped their motivation and drive. We in the United States have never reached that point, even if the signs point in that direction. The solution may not be to impose restrictions and penalties on companies struggling to compete or to spend billions on projects and incentives of dubious value, but instead to get rid of the entitlement mentality and the policies that reinforce it. Neither the French nor the Americans nor the Greeks have yet figured out how to do this, but who knows? The Saudis, less encumbered by democratic niceties, may succeed where others have failed.