Research Paper on "Creating Jobs Is a Way to Improve Public Welfare"

Research Paper 15 pages (4560 words) Sources: 1+ Style: APA

[EXCERPT] . . . .

Unemployment is a significant issue for many economies around the world, and Saudi Arabia is no exception. While gifted with sufficient oil wealth to spur economic growth and prosperity, the country suffers from considerable structural issues that have led to a somewhat unusual combination of high unemployment, a large number of foreign workers in the country and a lack of economic diversification. The current unemployment rate in Saudi Arabia is 10.7%, down from 10.9% the year before (CIA World Factbook, 2013. One of the most critical issues is youth unemployment, which is around 40%, one of the worst rates in the world. Among women, jobless rates are around 30%, and three quarters of these are university-educated (Knickmeyer, 2011). Nearly three-quarters of all unemployed Saudis are in their 20s, and all told there are around 2-4 million Saudis living on less than $530 per month, which is the poverty line in Saudi Arabia (Sullivan, 2012).

These facts highlight some of the realities of the Saudi situation. The country has historically had birth rates and now has one of the youngest populations. The population has grown from 6 million people in 1970 to 28 million today, a growth of 366% in that span of time (Sullivan, 2013). To compare with a Western country of similar population, Canada has a population of around 33.4 million today and had 21.9 million in 1971, a change of 52% over that comparable period. Given this incredible growth, the Saudi economy would have had to grow at an incredible rate in order to maintain the unemployment rate. While growth has been strong, it has not been able to maintain full employment in the country.

Despite this, Saudi Arabia has around 5.5 foreign workers in the country (CIA World Factbook, 2013). While some are employed with oil companies in well-paying jobs, others have come to the country seeking -- and finding -- low-end jobs. These foreigners are frequently Muslims from India, Pakistan, Bangladesh and Southeast Asian countries. This situation is common in the countries of the Arabian Peninsula, but is unusual anywhere else and reflects the unique situation and the corresponding unique policy responses to address employment and opportunity in the country. As Al-Mulhim (2013) notes, the unemployment situation in Saudi Arabia goes beyond mere demographic or economic issues -- there are social issues as well that contribution to the present situation.

For its part, the Saudi government has taken a number of steps to promote full employment of Saudi nationals. The government provides education for nationals through university, to ensure that they are well-trained. Health care is also provided as a national right. These provisions, while creating the conditions for an innovative workforce that has high mobility, also create a sense of entitlement among Saudis. People with university educations, it stands to reason, prefer not to perform manual labor. This is true in any country, so the education policy has reduced the size of the working class in the country, with many youths feeling that they are educated and that should be reflected in their employment. If the jobs were available, this would not be a problem, but when the jobs are not available, it leads to the condition of high unemployment seen today.

The Saudi government has tried to address the problem for many years, though its efforts have been stifled in part by a rapid growth in the number of young people. In 1994, the Saudization plan was implemented to encourage the hiring of Saudi nationals. A more recent development has been the Nitaqat program, which is in effect a "stick" rather than "carrot" approach. Companies that do not hire enough nationals are punished, and the threat of a "yellow" or "red" status denoting punishment is intended as a means of promoting the hiring of Saudis (Kenawi, 2011).

Part of the problem lies with government, which still exerts heavy influence over the economy, through tightly-controlled state-owned companies. Saudi Arabia has lower economic freedom than many neighboring countries, but those countries have similar problems, so the solution does not just rely strictly on macroeconomic growth drivers. Indeed, the social element of Saudi's unemployment rates points to microeconomics as a means of understanding the individual decisions that go into the choice to be unemployed and hold out for a good job.

While social issues are a consideration, some of them can be traced to economic incentives. This paper is going to examine the different economic issues surrounding unemployment in Saudi Arabia. Clearly, this is not strictly a macroeconomic problem, since the government has money to create jobs. There are other issues at play, and those issues come down to individual choices. Utility and tradeoffs are important concepts in understanding the true nature of the Saudi unemployment problem, and in understanding what police prescriptions can be used to change the situation. This paper will therefore provide an overview of the macroeconomic issue, but will primarily focus on the microeconomics of unemployment in Saudi Arabia.

Macroeconomic Overview of the Problem

In many countries, the central bank and the government both work to provide the conditions in which unemployment is managed in the economy. There is considerable motivation for this as high rates of unemployment lead to social unrest that can destabilize a country. One only needs to look around the Arab world to see examples of this unrest in the face of challenging economic conditions. The Saudi government is well aware of the need to ensure social order still exists, and therefore utilizes both fiscal and monetary policy to drive down unemployment.

In basic economics, the health of an economy relies on four factors -- consumer spending, government spending, business investment and net exports. Saudi Arabia's economy has long depended on exports as a key driver of growth, fueled by the oil industry. This is the one major, exportable natural resource of the country, and the harsh environment has long supported only small populations. The recent population boom requires foreign exchange in order to feed itself, since food needs to be imported due to the inability of the Saudi landscape to provide adequate food for 28 million people. Thus, there is a strong underlying imperative for the Saudi government to build a sustainable economy, not just for jobs but for the necessities of life.

The oil industry has given the Kingdom incredible wealth, but that wealth has traditionally been concentrated in a handful of powerful clans, in particular the royal family. Since the 1930s, the country's rulers have sought to spread that wealth to the people in order to create a better civilization, in accordance with Islamic principles of charitable giving (Sullivan, 2012). This charity is manifested today not only in the country's investment in education and health care, but also in its job creation infrastructure. The Saudi government has attempted to foster economic growth, in particular in the form of business investment and government spending. The nation's GDP still relies on the oil industry, but it is industry and government that generate jobs.

In most countries, there is a natural connection between GDP and employment, where an increase in one leads to an increase in the other. This has not traditionally been the case in Saudi Arabia, where the oil industry generates much of the wealthy but predominantly employs foreigners. Also, oil industry receipts today reflect fluctuations in the price of oil more than they reflect fluctuations in output, the latter of which is more closely related to employment. Thus, there is a disconnect between the GDP and the unemployment. The Saudi government has sought to use redistributive policies in order to close this gap. In part, this is necessity given the high level of government control in many industries. Regardless, the government-owned or regulated firms have worked to create better working conditions for Saudi nationals as part of the government's attempts to redistribute some of the wealth.

With limited non-oil natural resources, the country has turned to service industries as a means of growing its economy. Economic diversification is believed to be key to the country's future. The government financing of university education is one pillar in the strategy to build a thriving and diversified service economy. Under normal conditions, growth in business investment will drive growth in employment. There is no evidence to suggest that this is not the case in Saudi Arabia -- the connection does appear to exist -- but economic growth has not kept pace with growth in the population. This, however, is only part of the problem, as the presence of 5.5 million foreign workers indicates.

What this macroeconomic analysis tells us is that typical Keynesian prescriptions will not help address the issue of Saudi unemployment. Government spending to address the issue is already high. The government could undertake an overhaul of trade policy in order to increase foreign direct investment, or it could spend more on job creation initiatives, but ultimately the local workers need to accept the jobs that are available. If the jobs that are created are not filled… READ MORE

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