Interpreting Middle East Economic News and Analyzing Market Trends

Saudi Arabia establishes unemployment insurance to tackle persistent unemployment problem

Crown-Prince-UnemploymentPhoto courtesy of Arab News

In an attempt to start the new year running, Saudi Arabia decided to introduce unemployment insurance to help address the stubbornly high unemployment problem in the country.  The plan calls for both workers and employers to contribute to the scheme, which will payout a percentage of salary in the event workers become unemployed.  The plan has a lot of similarities to unemployment insurance in the US.  Proponents of the plan say that it will provide job security to over a million Saudis.  Opponents don’t see how this will solve the key issues of unemployment, which are structural.

The introduction of unemployment insurance is designed to make it more attractive for young Saudis to seek jobs in private companies, where the starting salary and other benefits are less generous than in government departments.

“The scheme will be applied on Saudis working in both public and private sectors and who lost their jobs for reasons beyond their control,” said Labor Minister Adel Fakeih, adding that it would be implemented after six months.

He said the scheme would provide job security to some 1.5 million Saudis working in the private sector. “It’s a quality scheme to ensure social security,” the minister said.

Suleiman Al-Quwaiz, governor of the General Organization for Social Insurance (GOSI), said the insurance scheme would be applicable to all Saudis who come under the pension scheme. It will be applied to all workers who have not surpassed the age of 59.

While the official unemployment rate is less than 12 percent, economists say only 30-40 percent of working age adults participate in the labor force. Most Saudis who do not have jobs are financially supported by relatives.

Most of those who work are employed by the state, but the government cannot support such a large wage bill in the long run, and the International Monetary Fund has warned that the private sector must meet future job demand.

“If there is a guarantee of income, particularly when that is connected to the level of previous earnings, it should make people more comfortable with taking up positions in the private sector,” Paul Gamble, director of the sovereign group, Fitch Earnings, told Reuters. (But how does this make employers want to hire Saudis?)

Under the new scheme, all Saudi workers will be charged one percent of their monthly salary as a subscription. Their employer will pay the same amount into the scheme.

Those who lose their jobs will be entitled to up to 12 months of compensation, set at 60 percent of the average salary they earned in the previous two years for the first three months and then 50 percent for the following nine months.

Benefits are capped at SR9,000 for the first three months and SR7,500 for the rest of the year. There is a minimum payment of SR2,000.

Workers who quit have an alternative source of employment or income from investments or have been paying into the scheme for less than a year are not eligible for compensation.

Read the full article from Arab News.

Last year Saudi Arabia embarked on several initiatives to tackle unemployed, none of which address the problem head on.  One of the initiatives was aimed at deporting illegal workers hoping the jobs they were doing could be filled by Saudis (seriously?  Can you imagine Saudis doing landscaping?).  Another initiative calls for setting aside certain jobs for Saudis only and tightening the quotas in other sectors.

Here’s more from Reuters:

The IMF and independent economists have long warned Riyadh it must rein in lavish government spending despite years of high budget surpluses and foreign currency reserves bigger than annual gross domestic product.

Last month it announced spending plans for 2014 that are 4.3 percent higher than it budgeted for 2013, although the increase is smaller than in previous years.

It is not yet clear if the payments Saudis will make into the scheme will cover the cost of insurance payments.

“It may not be the most cost effective solution in the near term but if it helps normalise the labour market it is a price worth paying,” said Gamble.

Besides the new unemployment insurance, Saudi Arabia has also introduced tough new quotas for companies to employ Saudi nationals as well as foreign workers, who are cheaper and easier to fire.

It has also introduced a fee that companies must pay for each expatriate they hire over the number of Saudi workers, and has cracked down on visa irregularities to reduce the number of foreigners looking for jobs inside the kingdom.

Read the full article from Reuters.

Saudi officials time and again fail to address the problem head on.  The unemployment problem is structural.  The issues they should address are education and worker expectations.  Private sector firms in Saudi Arabia prefer hiring foreigners because they have the skills for the job and work hard.  The Saudi education system does not prepare graduates for the needs of the local job market, thus rendering them unqualified for many of the jobs in the market… except for the government sector, which absorbs much of the Saudi workforce.

Another reason why hiring Saudis is so unattractive to private businesses is due to their high job expectations and high salary demands.  The bottom line is, who would want to hire someone with low skills, high salary demands and a lack of work ethic? (Besides the government!)

As it is right now, Saudi private companies do not want to hire Saudi workers. The quotas and fees are simply making foreign labor slightly more costly, yet foreigners still have the skill set needed, work hard and get paid less.  Saudi officials need to focus on making private companies want to hire Saudis instead of forcing them to hire them.  What they are doing with this unemployment insurance is making more Saudis apply for more private sector jobs…. but will companies want to hire them?!