With 65 percent of Kuwaiti population below the age of 30, the youthful consumer base and potential workforce gives Kuwait a nascent demographic dividend that could augur well for the economy in the years ahead. But, this future promise is conditional on the country implementing necessary employment reforms and initiating progressive policies and productive plans in a timely manner.
While the government has not been short on plans and policies aimed at leveraging the country’s youth potential for future growth, it is in implementing these strategies and introducing necessary reforms that the authorities have floundered in the past. Implementation phase has been challenging for a host of reasons, but largely due to opposition in parliament and outside to any measures that impinge on the State’s largesse to citizens, which over time many have come to regard as their entitlement.
But failing to implement required reforms expeditiously, or diluting them to appease lawmakers looking to mollify their voter base, will soon no longer be an option for the government. This is especially so, if oil prices continue to stagnate at current levels, persistent budget deficits drag down growth, and the General Reserve Fund is steadily depleted. Both government and legislators need to realize that it does not take very long for a country’s potential youth dividend to become an unsettling youth liability.
Government employment with its job security, higher remunerations and lower work demands have always been the preferred choice of young Kuwaitis. Figures from the Civil Service Commision (CSC) show that around 24,000 young nationals enter the labor pool every year and historically more than three-quarters of them were absorbed by the public sector. Over the years citizens were stuffed into public sector jobs, often created solely to absorb them, leading to a government sector that is bloated beyond belief today. The sector is now in no position to take-in the thousands of youth gravitating towards government jobs each year.
In mid-January, the new Minister of Finance and Acting Minister of State for Economic Affairs, Mariam Al-Aqeel, announced the budget for fiscal year 2020-2021 that begins in April. The budget envisions a revenue of KD14.8 billion, expenditure of KD22.5 billion, and a deficit of KD9.2 billion, after the mandatory 10 percent deductions from revenue are made to the Future Generations Fund (FGF). Over a third of expenditure in the budget, or nearly KD7.7 billion, is being set aside for public sector wages.
Meanwhile, employment figures from the Public Authority for Civil Information (PACI) show that of the total number of employees in the public sector, 72 percent are Kuwaitis and 28 percent are expatriates. On the other hand, among employees in the private sector, less than 5 percent are nationals and the remaining 95 percent are expatriates. Data correlated from Kuwait’s Central Statistical Bureau and the CSC shows that 82 percent of working Kuwaitis are employed in government jobs, while only 18 percent opt for private companies, with many of them being solely sponsors of companies.
With the public sector stretched to the seam, creating jobs for young nationals joining the workforce in coming decades will pivot on the government being able to encourage and support the emergence of a dynamic private sector, capable of and willing to absorb national manpower. In the past, the government has attempted coaxing and cajoling the private sector, as well as coercing them to employ young nationals, but the results have been less than satisfactory to all three stakeholders involved — the nationals seeking employment, the private businesses employing them, and for the government looking to maximize labor market benefits.
For instance, since 2001, Kuwait has been offering employment support subsidies to nationals working in the private sector.This policy attracted youngsters to private firms, as it increased their compensation package and aligned it to entry-level jobs in the public sector. The scheme also appealed to private businesses, as they did not have to bear the full cost of employing nationals. But soon, many young Kuwaitis and private employers apparently arrived at a mutually beneficial agreement at the expense of the government.
The employees and employers colluded to generate what came to be known as ‘ghost employment’, where a Kuwaiti would sign on to a company payroll and then not appear for work, but would still continue to draw the government’s salary subsidy. The employee was free to seek work elsewhere, or sit at home, while the business could claim it had employed nationals. Firms benefited, as they needed to show pay-slips only on paper and they did not have to actually pay the national for the ‘work’ that was not done in the first place.
Before the government became aware of this practice and began cracking down on it, nearly 20 percent of young nationals receiving employment support subsidies were estimated to have connived with their employers and become ‘ghost’ employees. The authorities have since instituted steps to thwart ‘ghost’ employment by attaching stringent conditions to employment subsidies, including mandatory training requirements and constant monitoring of firms.
In 2015, the government also tried enforcing a stricter and higher quota policy on private sector firms to compel them to employ nationals in place of expatriates. The ratio of Kuwaitis, as a total of the employees in an enterprise, ranged from as low as 3 percent in manufacturing industry and in agriculture sectors, to over 60 percent in banks and telecommunication companies.
Clauses in the quota rules also stipulated steep fines for companies that failed to comply with the quotas, while offering special privileges in accessing government services to firms that adhered or exceeded the percentage targets. To ratchet pressure, the government also raised the fees for expatriate residence permits that companies had to pay, thereby raising the cost of hiring foreigners.
The quota system increased opportunities for nationals and opened up more job sectors for them, but the constraints imposed by ratios were not welcomed by businesses. Private companies felt their profits were being eroded by hiring nationals at higher salaries, and that the threat of penalties were too draconian. Moreover, they said that hiring inexperienced citizens also limited their ability to match skills with jobs and affected their competitiveness and productivity. Companies were more willing to absorb the increased residence permit fees for expatriates, as it allowed them to bring in qualified foreign workers who were capable of covering the productivity slack caused by hiring nationals.
Failure of these policies to bring about expected outcomes have led the government to accept that there is no simple panacea for addressing the country’s labor market challenges. The authorities have also realized that short-term policies that inordinately benefits or disadvantages one stakeholder over the other is not only ineffective, but it also creates repercussions that hurt market equilibrium and economic development.
What is obviously needed is a proactive approach that combines short-term supportive measures with long-term structural changes aimed at maximizing benefits from the labor market. In the short-term, the government could continue to incentivize nationals to join the private sector and encourage private firms to hire them, through realistic quota ratios and employment support subsidies, while monitoring and penalizing those involved in ‘ghost’ employment. Policy-makers should also initiate human resource development plans, including matching skill-sets to jobs and introducing training programs aimed at making employing nationals appealing to private firms.
In the long-term, the authorities will have to confront opposition, both in parliament and among the citizenry, and push through unpalatable labor reforms. Reforming public sector wage-bill, reducing existing premia between public and private sector jobs, and linking compensation to performance, as well as introducing hiring limits and holding qualifying exams for aspirants to the public sector, are some of the initiatives to remove labor market distortions. Policy-makers should not just consider these initiatives, but work to implement them quickly, if the country is to reap its youth dividend in the years ahead.
Staff Report
