Aldubayan, Fahad Abdullah A. (2021) The Impacts of Micro Stores on Labor Market Duality and Employability in Saudi Arabia: 1970−2020. PhD thesis, Victoria University.

Abstract

In response to various economic challenges in the Saudi economy such as persistent unemployment, low labor participation, and poor performance of the private sector, both policymakers and researchers have endeavored to find ways of mitigating these problems. Researchers have focused their attention on three main theories: human capital theory, institutional theory, and socioeconomic theory. The first theory—human capital theory—is primarily concerned with labor supply. Researchers have used this theory to determine whether the Saudi labor force has sufficient skills as required by the private sector. The skill mismatch hypothesis has been used to explain the continuous high unemployment rates among Saudis; however, this may not be a convincing argument for several reasons discussed in this thesis. The second theory—institutional theory—focuses on localization policies. The broad argument is that although enforcing localization policies may succeed in integrating national labor into the private sector in the short term, this could lead to negative consequences in the long term. The final theory—socioeconomic theory—focuses on economic and social factors affecting the labor decisions of individuals (employers and employees). This thesis shows that these factors may not be the ultimate causes of high unemployment and low employability of Saudi labor in the private sector. What seems to be overlooked by these theories is the investigation of Saudi labor demand, and whether the private sector is capable of playing a significant role in creating meaningful jobs for the increasing labor force. This thesis argues that three primary market-distorting factors have undermined the efficiency of the Saudi labor market, leading to a segmented labor market and ultimately, persistent unemployment. These factors stem from three policies, namely, (i) the rapid expansion of the public sector and attraction of Saudi labor, (ii) the rapid expansion of micro stores, and (iii) the sponsorship (Kafala) system. Together, these market-distorting factors have led to a structural shift, leading toward an inefficient labor market. In other words, the three policies have unintentional consequences that distort the market mechanism of labor demand and supply, thereby undermining economic efficiency. Overall, while the sponsorship system has distorted the total labor supply, micro stores have distorted the product markets by adopting a low capital-intensive model and shifting the labor demand toward low-skilled foreign workers. The public sector, for its part, with its appealing employment policies compared to the private sector, has resulted in a sectoral preference against the private sector. Consequently, it can be considered that the Saudi labor market is segmented into primary (big-industry) and secondary (micro-industry) labor markets. Thus, by using the nested CES production function, this thesis estimates the direct and partial elasticities of substitution to examine Saudi and non-Saudi labor substitutability in these two labor markets. The main findings can be summarized as follows. The range estimates of direct elasticity in micro and big industries are (-7.1; 16) and (-0.18; 0.55), respectively. The range estimates of partial elasticity in micro and big industries are (0.33; 0.77) and (0.51; 0.6), respectively. In both industries, the estimates of the direct elasticity of substitution have interval estimates containing zero; hence, it cannot be ruled out that the relationship between Saudi labor and capital is a perfect complementary relationship, which indicates the important role of capital investment in Saudi employment growth. In both industries, the estimates of the partial elasticity of substitution also have interval estimates between zero and one, providing evidence in favor of a complementary relationship between composite inputs (Saudi labor and capital) and foreign labor (i.e., they have a very low degree of substitution). These findings corroborate prior research that cautions against the counterproductive effects of localization (Saudization) policies. Two corrective measures are proposed in the thesis. First, it is suggested that the sponsorship system be replaced by a central recruitment agency. Second, it is suggested that micro stores be re-zoned or restricted within self-contained centers, and consortiums between the government and private investors be created to establish “transformative development companies” for developing certain industries and product markets while recruiting and training national labor.

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