The Gulf countries face three key labour market challenges as they seek to diversify their economies away from oil dependency, highlights the latest report “Tradable Permits- a market driven approach to achieve national employment objectives in the GCC ”, by strategy consultancy firm, Oliver Wyman. The report comes at a time where regional governments rigorously introduce labour laws to bridge the skills gap in their respective countries.

Regional governments are advised to introduce tradable permits, according to the report. Tradable permits allow a party an exclusive right to explore a resource, fully to the advantage of an organization. Traditionally, GCC governments have relied on issuing labour permits based on quota systems to encourage national hiring and manage the supply of expatriate labour. Although, first seen as a success in Kuwait and Saudi Arabia, these quota systems have burdened the economies. Gulf countries in general should actively explore an alternative to the existing quota system that include the benefits of the existing quota system, namely the incentives to hire national labour, but also take into consideration the challenges the system holds.

Introducing permits will have three effects on the market:

1. As the number of permits in a market is fixed in the short run, they will restrict the aggregate supply of an activity
2. Because permits can be sold in an open market, they determine a value for the activity, expressed through a market price
3. The ability of parties to buy and sell permits on the open market result in the permits being allocated to where their value added is the highest

According to the report, at present, the first challenge across the GCC is low labour participation rates among nationals, (particularly among the youth and women) and the use of expatriate labour across all industries. Second, there is the need to bridge the gap between the skillset of the national labour force and the requirements of the private sector. Third, the abundance of low cost expat labour force has reduced incentives for firms to invest in automation, and technology. These factors pose challenges to the competiveness and long-term growth prospective of Gulf economies, particularly given that governments are weaning away from the current subsidies offered in the public sector.

The report outlines that a market approach that uses tradable permits to control the aggregate supply of expatriate labour could offer the benefits governments are seeking whilst mitigating the impact in terms of reducing competitiveness and increased regulatory burden. A strategy encouraging the use of tradable permits would allocate expat labour to the areas of the economy where it is most needed and minimize expatriate labour presence where alternatives can be applied.

“Tradable permits effectively give a party an exclusive right to exploit a resource, and currently it has been applied as taxi permits, or pollution permits to reduce greenhouse gas emissions. The concept of using tradable permits to manage labour markets is still in its initial stages but it is beginning to shape policies in countries such as the United States,” said Abhishek Sharma, Partner, Public Sector, Oliver Wyman.

“If implemented in the GCC countries, a tradable permit system for managing expatriate labour would offer similar benefits to the current quota systems present in the GCC. Specifically, a permit system would encourage domestic employment and would decrease firms relying on expatriate labour,” he added.

The demographic trends in the GCC are shifting drastically where trends suggest that between 1.2 million-1.6 million youth will enter GCC labour markets by 2019. With a growing youth population, the skills gap and challenges pertaining to productivity throughout the GCC, reforming the labour market is now crucial. Tradable permits offers a powerful policy choice for GCC countries transforming their labour markets and to lessen the burden of nationalization.

A permit system would directly address the challenges facing the GCC markets. Labour market reform is a complex system-wide issue that requires balancing a number of other issues such as education, public sector recruitment and private sector competiveness such as enhancing the ease of doing business. If implemented, tradable permits will encourage national hiring and enable expatriate labour to be allocated to where its value added is the highest.