A Taxing Problem

[caption id="attachment_55248228" align="alignnone" width="620"]Heavy clouds are seen over the center of Riyadh, on November 17, 2013. (FAYEZ NURELDINE/AFP/Getty Images) Heavy clouds are seen over the center of Riyadh, on November 17, 2013. (FAYEZ NURELDINE/AFP/Getty Images)[/caption]Saudi Arabia has struggled for decades to resolve the chronic problems in its labor market: high unemployment, dependence on foreign labor, and a mismatch between the demands of the job market and the skills young Saudis bring to it.

Over the past few months, most attention has been focused on the mass deportations of foreign workers said to be in the kingdom illegally and on the inevitable disruption of services that ensued. Arabian Business magazine, for example, reported that “the construction industry, which relies almost solely on cheap foreign labor, is arguably the hardest hit by Saudi Arabia’s seven-month amnesty program that ended on 3 November and saw the number of foreigners in the kingdom fall from 9 million to 8 million.” Around 100 billion Saudi riyals’ (26.66bn US dollars) worth of infrastructure projects, it says, are estimated to have been disrupted, with industrialists warning of major building delays.

Equally interesting, however, was the creation in early January of a nationwide system of unemployment insurance, covering all workers aged 59 and younger, financed by a one percent tax on wages and an equal contribution from employers. 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 three years for the first three months and at 50 percent after that.

The program itself is a first for Saudi Arabia, but the financing mechanism—a new tax—represents another potentially important innovation because the people of Saudi Arabia have lived essentially free of taxation for 40 years. There is no sales tax or Value Added Tax (VAT). Individuals are subject to a 9 percent social security levy, and are required to pay the religious tax known as zakat, but other income and excise taxes were abolished in 1973, when the country grew seriously rich from the worldwide surge in oil prices. Saudis pay nominal amounts for electricity, gasoline and water, but for the most part they live at state expense.

Charles Freeman, a former US ambassador to Saudi Arabia, has often joked that the few Saudis who did agitate for political reform wanted “representation without taxation.” How Saudi citizens will respond to seeing the government take more money out of their pay remains to be seen.

The other aspect of the unemployment program that will be subject to scrutiny is its applying only to workers who have jobs and lose them—not to the hundreds of thousands, perhaps even millions, who have never held salaried jobs at all. According to a recent assessment by John Sfakianakis, a veteran analyst of the Saudi economy, “The Saudi participation rate in the labor force rose from 36 percent in 2009 to 40 percent in 2013, which is still low compared to about 52 percent in Qatar and 47 percent in Bahrain.” The workforce participation rate is far lower among women, even though women now constitute more than half the university graduates.

One reason for that low participation rate was the easy availability of cheap foreign labor. The mass expulsions of foreign workers may have opened some jobs to Saudis, but most of those sent home held low wage jobs in construction or in restaurant kitchens, for which the salaries are too low to support a Saudi household. The deeper reason for the low workforce participation is that vast numbers of young Saudis are essentially unemployable in the modern economy.

According to Mona Mourshed, head of the global education practice at McKinsey and Company, a major problem not just in Saudi Arabia but throughout the region is that governments emphasize university education over practical, job-focused vocational training. At a roundtable in December at the Center for Strategic and International Studies in Washington, she noted the persistence of a long-standing problem: Gulf countries measure educational progress by the number of doctoral degrees awarded, rather than by the number of citizens trained for real-life productive work. Across the Middle East, she said, 76 percent of instruction in traditional educational institutions is “theoretical.” Many other analysts have reported similar findings over the past two decades.

According to Mourshed, Saudi Arabia has undertaken an overhaul of its vocational education system to make it more relevant to employers’ needs. That is a positive development, she said, but job-seeking Saudis are still reluctant to take jobs in services or manufacturing that often do not come with any prospect of advancement or visible career path.

Mourshed, like other analysts, noted that the emphasis on university education has created a social stigma around jobs in industry and services. Jobs in air-conditioned offices, preferably government offices, make those who do them more suitable candidates for marriage than jobs requiring the operation of machinery or work outdoors. One possible solution to this problem has been proposed in the past but never adopted because of employer resistance: the establishment of a nationwide minimum wage for all jobs, set at a level sufficient to maintain a household at an acceptable standard of living. That proposal has been resisted by influential private-sector employers, whose bottom lines benefit from keeping wages low.