As the Arabian Gulf countries look to generate private sector job opportunities for nationals, a common complaint among job seekers is that the wages in many occupations are unacceptably low.
Certainly, earnings from working as a fast-food server, a janitor, or a furniture salesperson do not meet the expectations set by decades of cushy public sector jobs, which is a primary reason why these low-skilled positions are almost exclusively staffed by migrant workers in the Gulf.
Similar to their western counterparts, many of the Gulf’s jobseekers go on to argue that the solution lies in restricting the intake of low-skilled foreign workers, invoking the law of supply and demand: less competition means higher wages.
But is it that simple? The US’ experience with Mexican guest workers suggests that making it harder to hire foreigners can have a negligible effect on the wages and employment levels of nationals.
Before we explore the reasons why, it is worth addressing misconceptions regarding the willingness of Gulf nationals to perform low-status jobs. Prior to the oil-fuelled migration booms of the latter half of the 20th Century, Gulf nationals would perform all jobs commonly found in a western economy – and even worse ones, such as the physically arduous occupation of pearl diving.
Rapidly increasing incomes allowed governments to offer their citizens a far more pleasant alternatives – public sector jobs. Any human would prefer a 7am to 2pm air-conditioned desk job to toiling in a field, especially if it pays multiple times the salary. New cultural norms appeared, reinforcing the desirability of white-collar jobs, but such norms are not fixed. In fact today, in Bahrain and Saudi Arabia in particular, simple economics has made ordinary citizens – and society – willing to perform jobs such as clothes retaiersl or telephone customer support. In all societies, for the most part, economic considerations swamp others, and cultural factors are ephemeral.
Therefore, in the present context, raising the wages of low-skilled jobs in the Gulf is likely to increase their uptake among nationals; can impeding competition from them help achieve that goal?
In a recent paper, Michael Clemens (Center for Global Development), Ethan Lewis (Dartmouth College) and Hannah Postel (Princeton University), seek to answer this question by analysing the US government’s 1964 decision to exclude half a million seasonally-employed Mexican guest workers from the labour force. It was a way to enhance both the wages and employment of US citizens who felt that their labour market earnings were being hurt by competition from foreign workers. The researchers gathered data on the wages and employment of nationals before and after the 1964 decision and examined how the evolution of these two outcome variables differed in two dimensions.
First, across counties, as some areas were heavily affected by the reduction in guest workers, while others were barely exposed. Second, across crops, as some, such as tomatoes, offered mechanisation alternatives to manual labour, while others, such as strawberries, were highly reliant upon human hands.
The researchers’ primary finding was that across all counties there was no discernible effect on the wages or employment of US citizens, contrary to the predictions derived from a rudimentary model of supply and demand. Therefore, if the goal was to improve the earnings of nationals who felt that foreigners were undermining their livelihoods, then the policy was a complete failure.
In particular, the study showed that in the crops where mechanisation was available, farms responded to the labour shortage not by raising wages, but by simply adopting capital-intensive technologies that economised the need for labour. And in the remaining crops, higher wages would have rendered the enterprise unprofitable, and so farmers responded to lower labour supply by simply lowering production.
While the US-Mexico 1964 ruling is only one example, a glance at the Gulf’s labour markets at present suggests that policymakers should be very wary of similar results if crude quotas are introduced for low-skilled migrant workers. Automation continues to reduce the need for human hands in many of the sectors dominated by foreign labour, such as retail or construction. Moreover, it would be unsurprising to see employers respond to decreased labour supply with parallel decreases in output, similar to their US counterparts.
It is natural to seek legislative shortcuts, such as immigration restrictions and minimum wages, for higher wages. However, decades of work by labour economists suggest that such interventions are typically ineffective. Instead, there is no substitute for improving the latent productivity of the workforce. Rather than trying to make it harder for Indians and Filippinos to compete with Gulf citizens, Gulf policymakers should focus on enhancing the education, training and experience of their nationals.