UAE wage hike implications - SCB Economic Update

UAE President Sheikh Khalifa bin Zayed al-Nahayan ordered a 25% salary hike for UAE nationals and 15% for expatriates working in the Federal and Abu Dhabi governments. This is the third statutory salary rise since 1971. Dubai and Sharjah, the other two large emirates in the UAE, have announced that they will match the proposed pay rises for their staff. We estimate that the total cost could run as large as AED 3.4bn, equivalent to USD 900m or 1.1% of GDP. This is a significant sum but is affordable in the current environment of high oil prices. [But it] will be much harder for the less oil endowed Emirates, such as Dubai and Sharjah to match Abu Dhabi's example. Wages account for less than 10% of Abu Dhabi's revenues compared to 30% of Dubai's.
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Key will be to what extent private companies, who account for 90% of civilian employment, respond to the move. Wage pressures are already evident and many companies are complaining about the difficulty, and increasing cost, of recruiting and retaining skilled staff. This is particularly true of Emirati staff.
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That said, wage demands are likely to be partially contained by the country's relatively liberal employment laws and access to competitive imported labour.

Emirates Economist analysis: Emiratis in the government sector already earn more than their nonnational counterparts in the same jobs. The difference in the wage hikes will widen that wage differential in absolute terms and as a percentage. Private sector employers are already finding it very difficult to hire Emiratis without paying them a premium over equally qualified foreigners.

Implication for Emiratization goals: These wage hikes will make it more difficult and costly to hire Emiratis (whose opportunity wage is in government service) over nonnationals (who compete in a worldwide market and whose opportunity wage has not changed).

Government employment: These conclusions do not hold as strongly if the government also cuts the number of jobs, resulting in an excess supply of nationals labor in the government sector. In that case, Emirati job seekers do not forego the government wage (you can't forego something you can't get) if they accept a private sector job. What they forego are the somewhat improved odds of landing a government job if they remain unemployed and looking for work. Of course private employers are right to be concerned that nationals in private-sector jobs will be looking for a government jobs, and this adds to the cost of hiring nationals.

Recommendation: As I have advocated in this space before, the government should consider revamping its approach to Emiratization. Suggested reforms include: (1) subsidizing private-sector employment of Emiratis, and (2) liberalizing the job change rules for nonnationals. Use the Technorati box in the sidebar to search past postings of The Emirates Economist for more.

UPDATE. In other seemingly related news, we read:

Privatising services puts workers out of jobs
Abu Dhabi: All janitors and maintenance workers at the Department of Social Services and Commercial Buildings will be dismissed after the privatisation of certain sections, Gulf News has learnt. Yesterday, more than 60 office staff at the department were given a month's notice for their termination. A private company has already signed a contract with the department to provide the services rendered by the office staff. The staff were given the choice to join the new company, but only if they accepted a salary that was more than 50 per cent less than their current wages.

UPDATE 2: Ajman follows suit. Fujairah also.