A Labor Market Problem
An over-reliance on low-cost migrant labor
The populations of the six Gulf Co-operation Council member countries are unique in that their populations include extraordinary numbers of foreign migrants, primarily from South and East Asia, most of whom have no pathway to obtaining any type of permanent residency. Bahrain is no exception, with 53% of the country’s 1.48 million population comprised of foreign residents.
Most of these residents have been brought in to fulfill low-income or undesirable jobs in the private sector — 73% of the 475,000 non-Bahraini workers registered under the SIO earn less than BD 200 per month, with another 85,000+ domestic workers who likely earn similar amounts (although wage data are not publicly available). In comparison, the minimum wage for nationals is BD 270, and their median wage is BD 531 (as of Q2 2019). The total civilian Bahraini workforce totals around 140,000, with around two-thirds working in the private sector and the remaining third in (generally more lucrative) government jobs.
Not all expatriate workers earn such low wages, however. For instance, at the upper end of the income distribution, there are 19,500 foreigners earning over BD 1,000+ per month — even more than the 18,700 private sector Bahrainis in that same wage bracket. These span across a number of industries, including finance, accounting, information technology, manufacturing, hospitality and healthcare.
It’s beyond any doubt that migrant workers have built much of the wealth in the country, and have made the lifestyles we take for granted possible. There are more migrant workers earning below the minimum wage than there are Bahraini workers as a whole. Many services simply could not exist without them. Prices are much lower than they would otherwise would be for almost everything one can think of, from daily groceries to real estate.
Yet, the rapid growth in population in recent years has inevitably stressed the country’s infrastructure with increased traffic and congestion, and many older neighborhoods have become densely populated. As the population has grown and skewed to becoming more male-dominant, this may have contributed towards increased levels of crime and violence. Nationals — especially recent graduates — can find it difficult to compete with more experienced migrants willing to accept lower wages, driving up local unemployment. Many also send large percentages of their wages to their families back home, with 8.7% of GDP in 2018 drained out of the country — these flows could have recirculated within the economy, stimulating additional activity.
Over the years, this has led to persistent claims of how migrants are the direct cause of all nature of economic and social ills, accusations which have only increased in volume and intensity since COVID-19 entered onto the scene. At their worst, these are seeped in xenophobia and outright racism. Although there are both clear pros and cons of immigration, especially at its current scale, the presence of these workers in our country as a whole has been a net benefit, although reform is necessary.
The costs and benefits are not equally distributed
Anti-immigrant arguments tend to overlook the fact that our labor market is not a product of free movement. Foreign workers (largely) enter the country with appropriate visas from local employers, who actively sought to hire them over nationals, given their lower wages and legal protections, but also to fulfill roles that may be undesirable to locals. Under such conditions, it would be unreasonable to expect any possibility of competition between the two groups — migrants are willing to accept “replacement” wages based on costs in their home countries, significantly lower than for Bahrain.
We can view these hiring practices essentially as an income transfer from the local labor pool (both currently employed and prospective) to business owners, who, by hiring migrants, are able to lower their costs and widen profit margins. Once this practice is employed by large firms, smaller enterprises typically have no choice but to follow suit to compete. Lower prices for goods and services also constitute a transfer from workers to consumers, especially in more competitive sectors. In both of these cases, benefits tend to be disproportionately captured by the wealthy, who both own and spend more.
It’s worth mentioning the Flexible Work Permit (flexi-visa), launched in 2017, which allows workers to remain in the country at their own cost, without a sponsor. The policy was to combat growing numbers of undocumented or irregular migrant workers, with almost 30,000 workers registered under the policy by late 2019 (many did not register and remain undocumented). Some Bahraini MPs and businessmen have railed against the policy, insisting the presence of these workers was detrimental to the local market. However, in light of the above distinction, we can interpret this as primarily harming the interests of businessmen, who’d face lower-cost competition. Under either scenario, however, for the subset of occupations that overlap with those sought by locals, Bahraini jobseekers remain marginalized.
However, dynamics at the mid- and upper-end of the income distribution differ, as these occupations include many service, technical and managerial positions that are sought after by nationals, who may in fact represent the lower-cost alternative here. Contracts with high-income foreign workers tend to include housing and schooling allowances, flight tickets home etc. which may not be offered to nationals, inflating their cost. Hiring considerations may therefore be shaped by additional factors here.
Local challenges also exist
The size of the immigrant workforce is only one of a number of labor market challenges we face. With government spending under sustained pressure since 2014, the public sector (now ~47,000 employees), which typically pays higher wages and provides more generous benefits, has cut back on hiring. As graduates continue entering the market and people remain in their jobs for longer due to higher retirement ages and other recent pension fund reforms, the supply of local labor available to the private sector will continue to expand, increasing downwards pressure on wages. The challenges facing women are particularly acute, due to cultural norms and perceptions, reflected in unemployment rates substantially higher (5–7x) than for men (sorry not sorry about the shameless self-citation).
The non-oil economies in the GCC are also not very productive, relying more on imports and consumption rather than exports and value-added production. An in-depth analysis (in Arabic) on the frameworks and sustainability of GCC markets can be found here. With unskilled jobs held by lower-cost migrant workers, and a private sector largely unable or unwilling to create higher-skilled opportunities for local talent, Bahrainis are funneled into competing for a narrow set of mid-wage careers. Over the past decade (2011–2019), employment grew fastest in jobs paying BD 300–350 per month. Anecdotally, I’ve witnessed unsuccessful jobseekers pursuing a higher education to become more competitive, but without corresponding growth in the labor market to absorb and utilize this additional human capital, this would only result in more overqualified — and therefore relatively underpaid — workers.
And then came covid
As we navigate this pandemic, with deflated oil prices, an economy currently held together by billion-dollar government stimulus packages, record-high public debt levels and an uncertain future, we need to consider — what next? What policies do we need to enact to reform our labor market to become more productive, equitable and sustainable in the long-term?
A well-known businessman recently remarked that “Bahrainization” (ensuring a minimum number of your employees are Bahraini) was a barrier to business, and that labor policies should create a level playing field for all workers. I somewhat agree, although suspect our conclusions part ways: I think worker protections for migrants should be strengthened, and the cost of hiring them should be increased. Introducing a levy — let’s say 10-20% — on foreign workers would incentivise a shift towards local hiring, thereby reducing the unemployment rate as well as alleviating over-density concerns.
This may not be as effective or possible in certain industries, such as construction, which can receive exemptions. An alternative could be to instead imposing a minimum wage for all workers, irregardless of nationality, but this would result in increased remittances, whereas a levy would route those funds towards the government for public use. A secondary benefit would be to spur innovation and automation, creating new technical and supervisory roles and occupations that pay better. There will be criticism that this would discourage profit-motivated investment (not wholly unlikely), so levy receipts should partially be directed towards other productive business supports (e.g. Tamkeen currently does provide a wage support scheme, which can be re-purposed using proceeds).
Worksharing policies may allow more flexibility in navigating and responding to continued economic challenges due to the pandemic. Allowing businesses to keep all of their workers with reduced hours or pay (after receiving MOLSD approval) would distribute the effects across the labor force, instead of laying off a small number — typically the most vulnerable — who’d be acutely harmed. The difference in pre- and post-wages would be covered (either partially or fully) through unemployment insurance. Worksharing would have the additional benefit of keeping workers tied to their jobs, rather than having to undergo lengthy job searches and re-training at new firms.
A wide range of other continued reforms are also necessary, regarding re-examining our education system, developing sector-based supports, increasing exports, fiscal considerations (I am all-in on progressive income and capital taxes) and others all tie into the health of our labor force. COVID-19 will prove to be a pivotal event in our country’s history for the next decade, if not longer. If the global economy is unable to quickly recover, demand for oil will remain sluggish, putting a drag on our own economy at a time when we are ill-equipped to handle it. The knock-on effects are difficult to anticipate. Bahrain’s response to-date however, both from a public health and an economic standpoint, have largely been laudable. Let us hope it continues for the best.
