Economics of foreign labor

To prove the positive outcomes of the campaign on employment of Saudis, Adel Faqeeh, the Minister of Labor affirmed that 250 thousands took advantage of the employment services during the campaign._250000_2013 In May 2015, Mufrij Al-Haqbani, Deputy Minister of Labor, announced that the correction period increased the employment from 35 thousands to 65 thousands monthly, and the number of Saudis in the private sector increased from 700 thousands to 1.5 million after the correction period.Al-Haqbani 2014 Then, Ministry of Labor implies that the presence of this foreign labor is harmful to the interests of Saudi citizens and aggravates the problem of unemployment, and deporting them -through these campaigns- will result in substituting them with local labor. But how accurate are these claims/expectations from an economic point of view?

The argument that states deported foreign labor will be replaced by local labor ignores the slopes of supply and demand. For the sake of simplicity, we can assume that, without foreign labor, the supply of local labor will be weak with high wages (“Local demand” in the graph). However, with the presence of foreign labor, the supply curve will shift to the right with a change in its slope (“Total Demand including Foreign Labor” in the graph), as the number of workers will increase substantially (Column N2) -taken into consideration the difference in wages and the number of willing citizens to take on these jobs- with a big decrease in wages (Line W2). When all foreign labor is deported, the number of workers will be limited to the local demand with higher wages as the slope of the curve of local supply is higher (Point B) Then, in the most extreme case, deporting all foreign labor will not result in replacing them with local labor, but rather will the number of local workers will increase with a lesser number, with an increase in wages in elimination of many jobs occupied by the foreign labor.

Thus the claim that deporting irregular foreign labor with result in replacing it with local labor seem far-fetched under current market circumstances. But what is the effect of foreign labor on the general level of wages in the local economy?

Theoretically, on the short-term, immigration or foreign labor decreases the wages of workers they are in competition with and increases the wages of complementary workers.Borjas 2013  Low-wages foreign labor increase competition on low-skilled jobs. In the same time, high-wages local labor are benefited because they will pay less in return of services that low-wages foreign labor provide, which enable them to specialize in the jobs that suits their skills and educational levels.Borjas 2013

For instance, the immigration of one million elementary-school-educated workers might result in a severe competition with the elementary-school-educated local workers. In the United States of America, for example, wages of high-school dropouts are negatively affected by immigration as their wages decreased by 6.2%, while it would have been 1.7% at the abscence of immigrants because most of immigrants -especially illegal immigrants- occupy jobs that are competed over by American high-school dropouts. However, since the jobs occupied by the irregular workers almost entirely do not require high skills, the logical outcome of deporting them will be an increase in prices and elimination of many jobs._according_2013Even if there is partiality for local workers in foreign-labor-intensive sectors, the new laws such as the minimum wages for nationals will make the former safe from such negative effects of completion and the wage decrease it causes.

The unintended consequences such as increase in prices and the elimination of numerous jobs, were evident in the construction and contracting sector, where newspaper reports talked about a 150% increase in wages with the start of inspections that followed the end of the grace period.Al-Mani 2013 The food sector witnessed a similar result as the prices of food commodities increased by 20% in the same period._rtifa_2013 General analysis shows that the effects of the irregular workers correction campaign had a negative effect on consumer of goods and services provided by the foreign labor, as wages increased and operations decreased. While the employers were negatively affected as the return on capital and investment decreased which might drive many of them out of the market, which explains the complaints expressed by many employers in sectors as non-foreign-labor-intensive as the healthcare sector.

Albeit the results above, the Ministry of Labor shows sign of being in preparation of renewal of the correction campaign, as Adel Faqeeh, Minister of Labor, has stated that at the end of 2014, “the correction campaign will return strongly because there is no justification for any violator of this country’s laws to stay, and only those who obey its laws and regulations should stay.Al-Qarni 2014 Enterprises that are working regularly can satisfy its needs according the regulations of Ministry of Labor, and we should not let any talk about negative consequences of the campaign to serve as a justification for allowing violators to work under any circumstances.” Okaz newspaper published a report on a plan by the Ministry of Labor to relaunch the campaign, that includes interviews with some of the foreign labor and a director of a recruitment office, unanimously agreeing on the positive results of the campaign, and emphasized the need to abide by the Laws of Residency and Law of Workmen and Work.Al-Jasir 2015 It the genuinity of this report cannot be independently verified, the statement of Minister of Labor and the published interviews all point to the “necessity to abide by the laws” to work in the Kingdom, not to the alleged positive effects on the economy particularly or its alleged positive effect on unemployment rate, especially with the promises made by the ministry officials before the start of the first campaign, highlighting again the security footprint that shaped the campaign. It can be observed that ABdulrahman Al-Zamil, the Director of Saudi Chambers of Commerce, also focused on this security side in his statement to the media, where he said that “enforcing the regulations is a must on all levels, whether it’s against irregular foreign labor, businessmen or Saudi individuals,” adding that the campaign is beneficial to the private sector.al-Kahfi 2015

Conclusion

After more than year of the end of comprehensive campaign carried by the Ministry of Labor and Ministry of Interior to correct the status of irregular workers, and deporting more than a million, numbers do not show an improvement in unemployment rate, as it has been hovering slightly below 12% despite the many promises officials made. On the contrary, the campaign has resulted in the increase of prices of many goods and services and negatively affected the ordinary Saudi citizen - the primary consumer of such goods and services, in the first place. The direct economic outcomes have not differed from the compulsory Saudization policies adopted by the government since the 90s, which indicates the unlikeliness of finding a solution for unemployment without reducing the dependence on oil as an engine for economic growth. Indeed, if the goal of the campaign is finding a solution for the Saudi national having troubles getting a job -despite having high educational qualifications-, it has failed to achieve that until the writing of this paper in April 2015. This is unexpected to change since the answer of this dilemma requires creating new job opportunities that suits the education levels of nationals through a comprehensive economic strategy that works on finding projects that exploit the human resources of the young generation of thee Saudis and the economic peculiarities of the regions.Al-Khalifa 2013 A sustainable developmental policy in light of a durable knowledge-based economy is the only way to guarantee a solution for the problem of unemployment, in contrary to the security campaigns that portray foreign labor as the source of troubles and that deporting violators will be the fast solution for a long-term deep-rooted problem.