Why Saudi Arabia should consider increasing some public sector salaries

Saudi Arabia’s Vision 2030 is predicated upon making the private sector more attractive to citizens, and decreasing the economy’s dependence upon expatriates, especially in high-skilled jobs. In the long-run these goals are compatible, but in the short-run they are slightly conflicting. The government should prioritize intelligent decreases in the role of skilled foreigners who are specially brought in to fill public sector managerial positions, by boosting public sector wages for citizens.

Most advanced economies place severe restrictions on employing foreigners in the public sector, with the hiring organization being required to demonstrate that the local labor pool is unable to provide someone capable of doing the advertised job. In the Gulf countries, widespread distortions in the salaries paid to citizens and foreigners mean that human resources directors in government organizations have a really hard time getting citizens to fill certain high-skilled positions. In particular, citizens face a hard ceiling on their salaries due to rigid civil service wage structures, while foreigners do not. As a result, a Saudi human resources director who is unable to attract a suitably qualified Saudi citizen at the permitted wage has no option but to increase the wage offered to foreigners until one accepts the job. This is why we see so many expatriates in the Gulf occupying elite jobs in the public sector – regulations forbid the same organizations from paying citizens equal wages.

Recent government directives in all of the Gulf countries requiring public sector organizations to cut back the hiring of foreigners are ineffective at the high-skilled positions, because without complementary reforms to the compensation structure, the qualified citizens will remain uninterested in the jobs.

Why not just loosen the restrictions on wages for citizens?

Usually, all government sectors, including those in advanced economies such as the US, employ salary structures that involve compressed compensation compared to the private sector: Lower positions get higher salaries than in the private sector, and vice versa. For example, the president of the US gets a salary of around $400,000, which in the case of competent lawyers such as Barack Obama or Bill Clinton, is far below what they could earn in the private sector. This is good practice because it helps limit corruption in public sector hiring and wage determination: Unlike with many private sector positions, such as salesperson or tennis player, it is very difficult to measure productivity in public sector positions, such as judge or emissions inspector, making it difficult to justify a certain salary on economic grounds. Consequently, officials are prone to abusing any discretion that they are afforded, and a rigid pay structure is designed to prevent that.

In advanced economies such as the US, this is not a major issue. The contribution of the public sector to employment of citizens is not very large, equaling around 20 percent. In addition, there are enough citizens who enjoy public service or who value the job security that the public sector provides, to fill in most of the highly-skilled public sector jobs, despite the low wages compared to the private sector.

In the Gulf countries, including Saudi Arabia, the opposite is true: The public sector dominates the employment of nationals, and highly-skilled professionals are in short supply among the citizenry, creating a huge gap that can only be filled by foreigners.

This doesn’t apply to executive positions in the Saudi civil service, such as undersecretary or minister. There are plenty of citizens willing to accept the salary restrictions of such positions because of the prestige of holding them. The same is not true, however, of a position such as senior consultant or technical expert.

Saudi Arabia’s Vision 2030 is designed to remedy the roots of this problem, both by shrinking the public sector and by improving the quality of local human capital. Thus, in the long-run, should the Vision be successfully implemented, the problem will be solved automatically.

In the short- to medium-term, however, there are some intermediate goals that conflict with the long-term plan. Saudi Arabia needs competent citizens contributing to the high-skilled, non-executive jobs in the government.

One of the best ways to build skills is to get experience, so exposing Saudis to these jobs is an important part of the development of local talent.

Also, despite their excellent skills, foreigners lack knowledge of local customs and norms that prevent readily available solutions imported from advanced economies from working. Only a Saudi citizen possesses that subtle knowledge.

Implementing Vision 2030 is an issue of national security, moreover, and so from a security perspective, the most important jobs need to be performed by citizens.

Therefore, for the duration of this critical transformation in the public sector, the Saudi government should consider allowing higher salaries for citizens in high-skilled positions in the public sector.

There is one caveat: This should be distinguished from increasing public sector hiring of citizens in general. At present, many of the Gulf countries are witnessing temporary increases in public sector employment of citizens, as foreigners are not having their contracts renewed upon expiry, especially in the middle- and low-skilled category. When compared to private sector salaries, public sector salaries are on average higher in the Gulf countries than in advanced economies such as the US. This damages the economy as it starves the private sector of human resources, and contributes to red tape.

In contrast, an increase in public sector salaries should be in a very narrow range, and should be applied in a carefully selected group of jobs. It should also be a temporary measure as the Kingdom continues on its transformational voyage.

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Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.