Labour pains in the Middle East

Economist Intelligence Unit ViewsWire

Inflation and skills shortages threaten the Gulf

Inflation is widely considered to be the most serious problem facing the Gulf today, yet the region also faces a concern of similar magnitude: a shortage of labour and skills. The two problems are not unrelated.

The surge in liquidity in the Gulf over the past few years, on the back of sustained high oil prices, has pushed up consumer prices considerably. Inflation has been further fuelled by the weakening dollar, to which most of the Gulf currencies are pegged, as well as unprecedented rises in international commodity prices.

But additional price pressures are now also being felt, as local demand for the resource inputs—both human and material—needed to supply the US$1.9trn worth of planned or active capital projects in the region, has resulted in resource shortages and inflated costs. Building materials, for example, as well as skilled labour, are in increasingly short supply within the construction industry and consequently construction costs in the Gulf have risen by around 30% in the past 12 months alone. To counter this, in mid-March, the UAE government moved to lift cement and steel duties in order to relieve upward price pressures.

Inflation has also had an impact on wages, which in real terms, have fallen. This has resulted in a vicious spiral; there are signs that lower real wages are starting to deter job-seekers in the countries which have traditionally supplied the bulk of the Gulf’s labour needs. Their hesitancy is further exacerbated by the declining relative values of the Gulf Co-operation Council (GCC) currencies, which are weakening against the Indian rupee and the Philippine peso, for example, because of their peg to the US dollar.

So therefore not only is inflation cutting the value of Gulf wages, reducing the proportion of expatriate workers’ income that they can remit home, but, crucially, the dollar peg is also reducing the purchasing power of those remittances back in their home countries. This is a significant disincentive to the expatriate labour force already in the Gulf or contemplating working there. Whereas Indian construction workers would expect to earn four times as much as they would in India if they moved to Dubai five years ago, the pay differential has now been reduced to 40%. Workers from the Indian sub-continent and elsewhere in Asia typically remit a significant proportion of their salary back to their home country; indeed, it is one of the reasons many of them take overseas jobs, so that they are better able to support their large family networks back home. Furthermore, the countries’ economies from which the migrant workers stem rely heavily on these inflows--in 2007, for instance, non-resident Indians around the globe sent some US$30bn back to India, more than double the country’s inflow of foreign direct investment.

A further disincentive for Asian labour to head to the Gulf is the fact that the main labour-exporting nations--especially India--are experiencing their own economic boom and their own demand for labour has also risen considerably. The Indian government forecasts expenditure of US$500bn on infrastructure projects within the next five years. This increasing demand for labour will push up wages in their own countries, making it more attractive for Asian workers to remain at home.

Added to these woes for Gulf contractors, is the growing clamour by governments of traditional labour supply countries, primarily those on the sub-continent, over fair wages for their nationals in the Gulf. The issue has been mooted for many months, but has only recently gained greater prominence since inflation has placed undue pressure on wages, particularly for those at the lower end of the pay scale. Late last year, the Indian government imposed a minimum wage for its unskilled workers in the Gulf, prohibiting its nationals from migrating to the Gulf unless they were guaranteed a certain rate of pay. The Philippine and the Bangladeshi governments have since followed suit and contractors in Bahrain have already complained of fewer workers entering the country as well as higher wage costs. Abdul Majeed, manager of Power Construct in the UAE, anticipates a similar impact there, opining that “the minimum wage system will have its ripples in the market and the cost of construction will shoot up”.

The minimum wage debate has also been fuelled by an increasing number of strikes by workers across the Gulf, long dispirited by their pay and conditions, yet recently emboldened by an awareness of the growing labour scarcity, as well as by their respective governments’ more vocal support. A particular concern is the discrepancy in pay between that offered to workers from the sub-continent and to indigenous labour. This inequity was highlighted by a recent strike in Bahrain, with unions complaining that semi-skilled Indian workers received a basic salary of US$184 a month, while a Bahraini, with similar skillsets, received almost three times that amount. Increasingly, contractors are acceding to workers’ demands; in late 2007, the UAE’s largest contractor, Arabtec Construction, agreed to raise wages by 20% to halt a strike and get the workers back on site.

In a quandary, Gulf governments are seeking a short-term fix. Already Bahrain and Qatar are reportedly in discussion with other Asian and even African governments in an effort to plug the gap. Jameel Humadan, Assistant Undersecretary in Bahrain’s Ministry of Labour, stated that his ministry was “exploring new [labour] markets such as Vietnam and Nepal” in order to meet the country’s manpower needs “at a reasonable cost”.

But of course, these short-term measures do little to address the root cause of the problem; the lack of skills within the indigenous Gulf workforce combined with their unwillingness to undertake lower-skilled tasks. Gulf governments have long cosseted and protected their local workers, most of whom opt to work in the public sector, where the pay and benefits are good and the environment not nearly as challenging as the private sector. But the GCC states are increasingly aware that the traditional structure of their economies is unsustainable; the state can no longer afford to employ the growing numbers of indigenous jobseekers, while the private sector cannot rely on expatriate labour forever. If GCC governments are serious about diversifying their economies away from oil, it will only happen if it is done on the back of indigenous labour.