UN charter and GCC labor rotation scheme

You might wonder why a country would want to limit the stay of "unskilled" guest workers who are doing a good job and have gained local knowledge that is valuable to their employers. I certainly have.

When economists see firms or households doing something odd we don't immediately discard our model of rational behavior. We look for constraints or incentives that are not immediately apparent to the observer. In the USA, for example, the answer often lies in government regulation or perverse incentives created by taxes.

The Gulf Coast Countries are considering a plan to limit the stay of unskilled guest workers. The Gulf News yesterday:

The 3+3 law proposes a residency cap of six years for unskilled labourers. If the law is passed, then unskilled workers will come to work in a GCC country with a three-year labour contract which can only be renewed once.
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However the law would only be applied separately to each country, which means that a labourer could continue to work in the GCC after completing six years but not in the same country.

The last paragraph explains why I've included "labor rotation scheme" in the title.

What rational explanation is there for this plan?

The explanation for this plan can be found a Gulf News article that appeared last month:

Bahraini Minister of Labour, Dr Majeed Al Alawi, told Gulf News ... the residency time ceiling proposed for foreign workers in the Gulf is meant to ensure that unskilled foreign manpower taking part in different development projects do not come to live here for long periods that might entitle them the rights of immigrant workers under the UN conventions.

So, once again, there is a straightforward explanation that comes from regulation -- in this case the UN conventions. The GCC rotation plan dodges the problem of the guest workers being classified as immigrants. Immigrants have rights under the UN conventions, particularly a route to citizenship.

There are other plausible explanations. One is that the longer workers stay the more likely they will be able to organize and achieve collective action -- strikes.

Demographic imbalance is often cited as a reason to limit the number of guest workers. The notion here is that the greater the proportion of the population that is foreign the more that local culture will erode. Limiting the stay would not address demographic imbalance. It would have some cultural effects. For example, consider the family that employs a foreign maid or nannie. They would not be able to keep her beyond six years.

The first article referenced above does also discuss a separate measure to limit the number of unskilled workers. The article states,

The growing number of expatriates in the region has become a matter of grave concern to local governments as unemployment levels have also risen proportionately.

It may be that in some of the poorer GCC countries nationals would take jobs in the unskilled sector. But not in the UAE.

70% pay raise for UAE federal employees

It was announced the other day that employees of the federal government would receive a 70% pay increase.

There's a problem. Pay increases this large, out of line with private sector wage increases, run entirely contrary to the government's expressed desire to see more Emiratis in the private sector. Very few are, and with good reason. Their time would be better spent hounding someone for a job in government. That's a waste from the social perspective. It's a waste because it's effort that just moves money from one pocket to another and produces nothing. It discourages Emiratis from becoming engaged with the private sector and the virtue of merit-based reward. And not least of all the country develops no institutions of its own to foster economic growth.

In short, the country is suffering the curse of resource abundance.

There are better ways to share the plenty of high oil prices with its citizens. Write them a check; unhitch payment from employment in the government sector. Make them owners of the oil that is currently owned by the government. Make it difficult to reverse course -- as happened in Saudi Arabia where so much of the oil revenue now goes to maintaining a large royal family.

The UAE welfare state

Bloomberg:

All 800,000 Emirati citizens get free education and health care, and subsidized utilities. Emirati men can claim free land and no-interest loans to build homes. Other benefits include a $19,000 payment toward wedding costs.

The handouts, based on traditions of royal patronage dating back centuries to Bedouin society, now discourage citizens from working, academics say. Expatriates outnumber Emiratis and dominate fields such as banking, law and technology. The quandary for Sheikh Mohammed is how to reduce the culture of dependence without alienating his people.

``The relationship between work and income is broken,'' says Kenneth Wilson, Dubai-based director of the Economic and Policy Research Unit at Zayed University, a school for Emirati women that opened in 1998. ``That's unlikely to change until the government starts trying to give incentives to work in the private or corporate sector.''

The phrase "culture of dependency" bothers me. Suppose I inherited stock and could live very comfortably off of the dividends if I chose. Would you say I was dependent on the stock? And does it create an incentive for me to stop working? No; Bill Gates is still working plenty hard.

The UAE is a very rich country and it is only natural that the wealth owned by the government/rulers is shared with the citizens. Where economists begin to worry is when the size of the transfers creates adverse incentives. For example, suppose you get more from the government if you earn less. This cuts your incentive to work. Or suppose underpricing of utilities causes you to waste water and electricity -- there are more efficient ways to make transfers. Or suppose that government jobs are require little effort and pay much more than the private sector -- where's the incentive to choose the private sector rather than engaging in rent-seeking activities (wasta) to get a government job? Or suppose you are guaranteed a government job as long as you have any college degree -- where is the incentive to excel in college?

It's not the size of the transfers. It's their design.

The Bloomberg article goes on to suggest that the transfers buy political allegiance. If that is true then the trick to solving the Emiratization problem will be to reform the welfare system without cutting the benefits to most citizens.

Spigot-like labor force

From Business Week

A North American economist at Merrill Lynch (MER), [David Rosenberg] is one of a number of economists who say the concerns about too few workers are vastly overblown. Rosenberg recently studied the issue and put out a report entitled Is There a Labor Shortage? If employers are having trouble filling jobs, "perhaps they're not looking hard enough," he says.

The issue may not be the number of workers, but rather the level of pay. Economists like Rosenberg argue that in a market economy, there's really no such thing as a true shortage. If you want more of something, you can pay more and have it. When employers say that there's a worker shortage, what they really mean is they can't get enough workers at the price they want to pay, the argument goes. "While it makes for nice cocktail conversation, the data aren't saying there is an acute labor shortage in this country," Rosenberg says.
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Rosenberg argues the simplest way to gauge whether there's a worker shortage is to look at the price of labor. According to the basic laws of economics, the tighter the supply of labor, the more it should cost. So if the economy were operating with full or near-full employment, we would be seeing an "explosion in labor compensation," he says.

The price of labor, however, is hardly surging....
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"Employers are very quick to raise the specter of a labor shortage, but often it's another way of saying they can't find the workers they want at the price they're paying," says Jared Bernstein, senior economist for the Economic Policy Institute, a left-leaning think tank in Washington. "They are unwilling to meet the price signal the market is sending, so they seek help in the form of a spigot like immigration."
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"I'm a trained economist," says Bernstein. "I can't sign on to the idea that there are jobs people won't do at any price."

Even more so than the US, the UAE has a spigot-like labor force (and a drain-like labor force!).

We hear claims that there are some jobs Emiratis simply will not do. But we don't really know that because wages have never risen to see whether there is a wage sufficient to draw them into those jobs. The spigot from abroad has remained open -- employers can easily obtain work visas and import laborers. Unemployment amongst Emiratis is not what economists would call unemployment; you are unemployed if you would take a job at the current wage but cannot find one.

We hear claims that western expats in the UAE are dissatisfied with their pay. But if they were in a meaningful sense they would be leaving in large numbers. They aren't. Wages have not climbed significantly because the wage being paid matches the alternatives foreign workers could get elsewhere.

We hear claims that there are shortages in critical areas like government teachers and nurses in government hospitals. But there is no shortage. Rather the government simply is not paying a market wage. (I hasten to add teacher and nurse "shortages" are chronic issues in the US as well. See here, for example.) It is in a perpetual position of replacing workers who move on as soon as they can find better pay and working conditions. Such as a job elsewhere in the region. Or even in the US.

The UAE labor force is spigot-like. But it is also drain-like as well.

Iran under pressure, self imposed, economically

From the Washington Post:

Rationing Fuels Discontent in Iran

A month after raising gasoline prices by 25 percent, the government began fuel rationing Wednesday, which sparked violence in Tehran. Angry Iranians smashed shop windows and set fire to a dozen gas stations.

With armed guards protecting gas stations Thursday, calm returned to the capital as motorists lined up to fill their tanks. But many were still seething. "Ahmadinejad promised paradise, but his government has made life hell for Iranians," Mohsen Nosrati said as he waited at a gas station in central Tehran.
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This month, about 60 economists wrote to Ahmadinejad blaming rising prices on his mismanagement and flawed economic policies.
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The international pressure has made it difficult to tackle one of the country's most significant economic problems -- gasoline subsidies that cost the government billions of dollars a year and encourage high demand. Iran is one of the world's biggest oil producers, but it does not have enough refineries, so it must import more than 50 percent of the gasoline consumed domestically. The rationing is part of a government attempt to reduce the $10 billion it spends each year to import fuel that is then sold at below cost to keep prices low.

The Iranian economy was mismanaged before Ahmadinejad came to power; he has only made it worse. International power (sanctions for Iran's nuclear program) have intensified the necessity of reform. While sanctions may have made reforms more difficult they also made them more likely.

The Iranian government has little trust among the populace. The people have learned that the most likely way in which the oil wealth of the country is shared with them is through price subsidies. Subsidies are wasteful of resources, but in the Iranian context (appropriate distrust of government) they make sense.

Folk economics and evolutionary psychology

Emory University economist, Paul H. Rubin, writing in the Washington Post:

Our primitive ancestors lived in a world that was essentially static; there was little societal or technological change from one generation to the next. This meant that our ancestors lived in a world that was zero sum -- if a particular gain happened to one group of humans, it came at the expense of another.

This is the world our minds evolved to understand. To this day, we often see the gain of some people and assume it has come at the expense of others. Economists have argued for more than two centuries that voluntary trade, whether domestic or international, is positive sum: it benefits both parties, or else the exchange wouldn't occur.
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A useful analogy is between speech and reading. All humans growing up in a normal environment learn to speak, but reading must be taught because it does not come naturally. Folk economic beliefs are like speech -- we get them without trying. A deeper understanding of economics is like reading -- it must be taught.

America's success in lowering its barriers to outsiders shows that we can and do learn. But like reading, we must teach each generation anew.

One of the things that struck me when I came to the Middle East five years ago was the degree of effort that goes toward influencing rewards. The belief is prevalent that rewards are not based on merit, that rewards can be influenced through negotiation and badgering, and that if someone else in an organization gets a reward it comes at someone else's expense. The view is that effort is best directed towards getting a bigger share of a fixed pie. It is not believed that the pie can be made larger.

If others are expending effort on influence and are seeing results, then you too must expend effort on influence as well. To some degree the presumption that influence matters is self-fulfilling -- those in authority too often take the short-sighted way out and bow to the pressure to use their influence to make exceptions. So exceptions become the rule. I have seen, though, that organizations here that can avoid the short-sighted approach out-perform their rivals in the marketplace. A reputation for awarding on merit is hard won, and hard to maintain, but it can pay.

One of my firm beliefs is that people are fundamentally the same, and that differences in the wealth of nations has much to do with differences in societies' institutions. In particular, Rubin's evolutionary psychology argument that all people are biological programmed to think zero sum is compelling. And, yes, every generation needs to be taught to read that the world is not that way. But that teaching won't stick if society is so pervaded with influence that merit doesn't pay.

Surge of demolitions in Abu Dhabi

A commenter (Macthompson) wondered, "Do you have a mathematical model to share with your readers which can explain the business model behind decisions to knock down thirty year old buildings housing rent-capped tenants?"

Here's the story he's referring to: New law triggers demolition surge. Key extract:

[A] source at the municipality explained that many of these buildings do not need maintenance. "The problem is that since the rent cap law was issued, we receive many claims for general maintenance work, a permit that entitles the landlord to evacuate the building, hence avoiding the three-year term for leases... and offering the property without the seven per cent cap restriction," he said.

"The average number of monthly demolition applications was 5 to 10 [buildings] before, but in recent months it surged to 15, especially after the introduction of the new law," the source added. With an extreme shortage of affordable housing in the short-term, increasing the number of demolitions adds to an already compromising situation for residents. However, contractors insist the mechanism is based on a free market approach.

"Any landlord can put in a request ... if he has no financial commitment to the Shaikh Khalifa [rent control] Committee and given that he successfully evacuates the building from existing tenants," explained Mohammad Hussain, deputy general manager of Al Mansouri Contracting Company.

There's the answer to the question: if you own a rent controlled apartment you are allowed to demolish the building and replace it with a building that is not rent controlled. The difference in rents may be sufficient to induce owners to choose demolition and replacement. Based on the numbers above, it appears that this has increased the rate of demolition by about 100 percent over the rate prior to rent control. (It's not clear from the article, but it appears that "demolitions" includes knocking down buildings and substantial renovations short on knockdown.)

Why has government not controlled the rent on new apartments? Because it realizes that no new construction will be occur unless rents rise to a level adequate to yield a market rate of return on investment. And we know new construction is desirable because we know the demand for housing has grown.

Why has the government allowed knockdown-and-replacement? Perhaps because it realizes that one alternative to knockdown is for the owner is to stop maintaining his building.

(The story reveals that another way around the rent control is permitted: obtain a permit for general maintenance, and evict the tenants.)

A note to end on:

Rent control appears to be the most efficient technique presently known to destroy a city--except for bombing.

-Swedish economist Assar Lindbeck

New Sri Lankan law to affect migrant workers :: Khaleej Times

Khaleej Times opens its story with this paragraph (my emphasis):

Sri Lanka’s new legislation restricting mothers with children below five years from taking up low-end jobs overseas, will adversely affect migrant workers in the UAE where a large number of Sri Lankan women are employed as housemaids and in garment factories.

Then it further reports:

Sri Lankan Ambassador to the UAE Nabawi Junaid said the legislation approved by the cabinet early this month and to be enforced soon will restrict the number of women, particularly mothers of young children, from seeking overseas employment.
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Further, he noted that “The new legislation is undoubtedly in the interest of mothers with little children and will eliminate the social problems facing the Sri Lankan society with large numbers of women taking low-end jobs as domestic maids and tailors in garment factories in the Middle East compelled to leave their children in the custody of husbands, parents or relatives.”

Statistics released by the Sri Lankan government show that children of many mothers who take up overseas jobs to support their families have in fact become helpless and vulnerable to abuses, and suffer from malnutrition and lack of proper healthcare.

How could the introduction of the legislation adversely affect workers who are already in the UAE (as claimed in the first paragraph of the KT)? It can't. It can only benefit them by constricting the supply of labor inflow and thereby driving up wages or improving working conditions (at the end of your contract in the UAE can negotiate better terms for staying).

Will the law benefit the women and families whom the government of Sri Lanka will now compel to stay home? What is driving the women to leave their children is the lack of economic opportunity in Sri Lanka. The opportunities in the Middle East are not compelling them to leave. What the government is suggesting is that the families are consistently underestimating the cost of leaving in terms of the consequences for children. That's an empirical question that has not been answered. Indeed, the government may have the cause and effect reversed -- in which case the children will be made worse off.

There are other possible unintended consequences of the legislation which would be adverse. First, fertility may increase, not decrease. Second, there will develop a black market -- women will still want to take up positions overseas but they have to do so out of sight of the government, including the protections provided by the Sri Lankan consulates. As a result, they will be more vulnerable to unscrupulous recruiters and employers.

Unemployment in the UAE

As reported in Gulf News, according to Frederic Sicre, executive director of Abraaj Capital,

"The GCC countries need to create 100 million jobs up to the year 2020 to sustain the current rate of unemployment of 15 per cent.

"Such rates have never been achieved before by any country."

Such definitions of unemployment have never been used to measure unemployment.

The fifteen percent includes those who are not actively looking for work because the wage is below the wage they are willing to accept. That group is not unemployed, they prefer not to work at the prevailing market wage. And the 15% also includes those who would not be looking for work except that the government pays more than it needs to to fill its requirements. The government could solve that part of the unemployment "problem" by reducing the wages it pays.

The evidence is right there in other news articles from the same day (today):

* Skills shortage threatens to stall oil and gas boom
* 25pc salary increase for UAE University national professors

That is, (1) there are jobs that are going begging and (2) the government pays more than market. Thus, natural questions to ask are: why don't young GCC residents train for work in the oil and gas sector, and should we be surprised that there are queues that form for government jobs (which distorts the unemployment numbers).

Government employees to receive 20% pay increase :: Gulf News

Link to GN.

I presume the pay increase is for two reasons: (1) to compensate for inflation which is running in the double digits, and (2) to share the windfall of higher oil prices.

A problem created is that this makes it ever more difficult to attract nationals into the private sector where wages currently are not keeping up with inflation.

The wage increase is retroactive to the start of 2007. The practice of giving retroactive pay increases poses a further barrier to attracting nationals to the private sector -- the private sector does not follow this practice.

The government has said it is concerned that so few nationals work in the private sector. Suggestion to the government: Allocate more welfare benefits through direct cash grants to nationals rather than through paying greater-than-market rates for working in the government sector.

Troop surge and oil prices :: WSJ blog

Link:

A “troop surge” in Iraq could trigger a surge in oil prices, too, says Joseph Quinlan of Bank of America.
. . .
Quinlan raised the specter of greater anti-American sentiment overseas, and a backlash against the dollar, “with petro-states like the United Arab Emirates, which just announced its intention to diversity out of the U.S. dollar, leading the way.”

The UAE is not an anti-American state, nor is it filled with a populace that is anti-American. Just to be clear, it has diversified its portfolio for purely economic reasons.

Quinlan also is quoted as saying such an oil price surge could knock the wind out of the global economy. I'd say most of the increase in oil prices that we have seen throughout the war has been demand driven - growing demand in India and China - and not due to troop levels. Why should that change now?