Effectively utilizing the available factors of production — land, labor, and capital — is the key development challenge facing any economy. The more successfully these resources are mobilized, the higher the sustainable rate of growth.

However, regulatory and institutional design can have profound implications on a country's prospects in this regard. In the words of Jarmo T. Kotilaine, chief economist of the National Commercial Bank (NCB), “Institutional and policy design are critical for employment and growth alike. The international experience suggests that active labor market policies designed to boost the efficient operations of the market are likely to be particularly effective.”

In particular, proper mechanisms are needed to pool and disseminate information about jobseekers and vacancies alike. Labor exchanges, whether virtual or real, play an important marching function between the two. They should ideally also be used to identify areas where remedial action is needed in terms of retraining or other support.

Recent policy initiatives in the GCC have once again highlighted the fact that a significant proportion of the abundant and rapidly growing human capital of the regional economies remains underutilized. The pre-2008 boom failed to translate faster economic growth into a greater relative employment of nationals. For instance, the IMF recently estimated that, although the GCC countries created a total of 7 million new employment opportunities over the past decade, fewer than 2 million of them went to nationals. This was largely due to rapid growth in the traditionally expatriate dominated construction and service sectors.

The GCC countries are all to varying degrees characterized by idiosyncrasies that set their labor markets apart from much of the rest of the world. In particular, overall employment levels are internationally low. The UAE's total employment is 53 percent while the corresponding figure in Saudi Arabia has tended to be just below 50 percent.

Qatar, by contrast, boasts a much high rate of 75 percent, partly reflecting the numerical dominance of expatriate residing in the country on work visas. This state of affairs is partly the result of low labor force participation by women. Due to cultural reasons and the persistent norm of large families, female labor force participation by women tends to be significantly lower than that of men. According to official data, Saudi women make up 16.5 percent of the total national labor force. Similarly, while 62.5 percent of the UAE's male citizens were economically active in 2009, the corresponding figure for women was only 27.5 percent. These figures stand in an increasingly stark contrast to the dominance of women at institutions of tertiary education where they increasingly outnumber men.

There are dramatic differences in the sector-level labor market participation by nationals who tend to have a very strong bias in favor of public sector employment. In Saudi Arabia, 92 percent of public sector employment in 2011 was made up of nationals who occupied a total of 919,108 positions. By contrast, their share of the private sector labor force in 2010 was only 10.4 percent with nationals holding a total of 724,655 positions.

In the UAE, Emirati nationals occupy only 43,000 of the 2.2 million private sector jobs in the country whereas the public sector employs 495,000 Emiratis. The preference for public sector employment is in part due to more attractive compensation and working hours but in practice overstuffing has in many cases adversely affected job quality and human capital development.

On the other hand, the robust economic expansion in the oil-fueled 1970s resulted in rapidly growing demand for new skills and workers, which the national labor markets struggled to respond to. The consequence was a growing reliance on imported labor. This, in combination with the simultaneous dominance of nationals in the public sector, in turn engendered perceptions, attitudes, and organizational solution that have made this skewed labor market development extremely resistant to change. By and large, the more labor-intensive a private sector activity, the greater its dependence on expatriate labor tends to be. These are typically sectors where the average compensation and productivity levels alike are internationally low. In essence, the large-scale imports of low-cost manual labor have created a low-cost, low-efficiency equilibrium. Although boosting efficiency would be good for growth, doing so would potentially undermine the model and involve short-term disruptions, which are frequently taken as an argument against policy changes. For instance, following the launch of the Nitaqat program, the Ministry of Labor found that 50 percent of all companies in the Kingdom were in the red or yellow categories with an extremely heavy reliance of expatriates.

Given the current structure of the labor market, it is extremely unlikely that economic growth alone can generate sufficient employment opportunities for nationals to absorb the currently unemployed and the projected new jobseekers. Moreover, international precedents suggest that entrenched patterns in labor markets cannot be overcome without significant regulatory intervention. The key challenge for regional policy-makers is to reshape the regional labor markets in ways that are economically as undisruptive as possible.

The best-known of the recent new policy initiatives is Saudi Arabia's Nitaqat program, which creates rewards for companies with a strong history of employing nationals and imposes penalties on ones lagging behind. At the same time, efforts are under way to enhance the operations of the labor market. In particular, the challenge of unemployment is being tackled in part by compiling better information about jobseekers and vacancies while communicating both more widely. Additional interventions are being considered to better match market demand and supply.

One of the most important new initiatives in this regard is the unemployment support program Hafiz, which was introduced in Saudi Arabia last year. A major Hafiz goal is to turn the unemployed into active jobseekers. Job placement centers (Taqat) have been set up to register and counsel candidates so as to better equip them to meet the needs of the market. The Internet-based Virtual Labor Market provides automated search engines as well as online training. Beyond this, efforts are under way to develop better monitoring mechanisms for the labor market so as to better understand the prevailing needs and dynamics and to respond to them in a timely manner. At the same time, education remains a key priority area for government spending across the region.
But a successful sustainable change in the regional employment pattern will likely require much more than policy redesign. In the words of Kotilaine, “At a time when educational attainment levels and the quality of education are improving, there needs to be a cultural paradigm shift in the corporate sphere. Regional private companies must be encouraged and incentivized to change their default modus operandi from “import the employer you need” to “develop the talent you require.” Given the limited resources of many companies, not least in the area of human capital management, the government may need to facilitate the process where appropriate and reward companies that properly engage and develop their national employees.”

In view of widespread skill shortages in certain areas, the authorities — possibly with private sector participation — can offer more centralized training solution to many companies at the same time.