The Costs of Using Quotas to Nationalize the Labor Force: Evidence from Saudi Arabia

By Patricia Cortés

A decade ago, unemployment in Saudi Arabia reached unprecedented levels – 33 percent of young adults or women who wanted to work could not find a job. Threatened by the social and political consequences of this phenomenon, the government implemented a series of aggressive policies to reform the country’s labor market and, in particular, to address the strong reliance on foreign workers by the private sector economy. 

One of the main policies was Nitaqat, a strict nationalization policy that introduced quotas for the minimum share of Saudis in a firm’s labor force. Firms below the quota faced significant constraints in foreign hiring, as well as in opening new locations, whereas firms above the quota received benefits in terms of expedited visas and could hire expatriate workers from the firms below.

At that point in time, the median salary for Saudis in the private sector was 3.3 times the median salary for immigrants. Even when comparing workers in the same occupation, the average foreign worker earned just 11 percent of what a Saudi earned. Despite opposition from the private sector, the policy was implemented in mid-2011.

Was Nitaqat successful in increasing the number of Saudis working in the private sector? And at what cost to firms?

In a new National Bureau of Economic Research working paper, coauthored with Semiray Kasoolu and Carolina Pan, we examine the effects of the Nitaqat policy on the performance of non-oil exporting firms. We find that the policy led to an increase in the number of Saudis working in those firms. However, the policy also adversely impacted productivity in the non-oil exporting sector. Specifically, the policy led some firms to exit the market and reduced the probability of exporting for surviving firms. Additionally, for those firms that continued to export, the value of their exports declined by around 14 percent. 

In our working paper, we also find that the negative effects on surviving firms persisted for at least four years, suggesting that the short-term effects were not just adjusting costs. Additionally, our results indicate firms relied on low-productivity, low-wage and perhaps even “ghost Saudis” (individuals on payroll, but not actually working) to fulfill the quota, and would likely replace them again with lower cost, higher productivity foreign workers if given the opportunity. 

The pervasive effects of the policy were not restricted to exporting firms. Consistent with our findings, Jennifer Peck, in a 2017 study of the overall private sector found that the policy increased the share of firms exiting the market, and those firms that survived experienced a reduction in the size of the labor force. In sum, Peck’s study found that the policy led to close to 900,000 fewer workers in private firms, or a striking 15 percent of private sector employment.

These studies together suggest that nationalization policies can be an extremely costly way to increase the participation of native workers in the private sector. Moreover, it is not clear whether the policy fundamentally changed the labor market for Saudis, that is, if the higher share of Saudis in the private sector would persist if quotas were abolished. 

What then can be done to improve the participation of Saudis in the private sector? A better way might be to invest in developing workers’ skills to be matched to the demands of the private sector through, for example, incentives for inside-firm and outside-firm training. Additional reforms, such as the creation of new programs in tertiary education institutions, could also increase the number of skilled and better trained Saudis in the labor market, which in turn would likely also advance other stated Saudi government priorities, such as expanding new sectors of the economy.