A “catch-22”: self-inflicted failure of GCC nationalization policies

The purpose of this paper is to explain prevalent earnings differentials in Gulf Cooperation Council’s (GCC’s) private sectors between skilled local and migrant labor and provide estimates of potential price distortions to underlie future market-based corrective policies that increase participation of locals in private employment.

The paper uses an individual-level data set on workers’ earnings and productivity-related characteristics to decompose estimated earnings differentials at the mean level and at various percentiles of the earnings distribution via well-established decomposition approaches.

Results show that the real earnings differential between locals and Asians decreases at higher earnings, while that between locals and non-GCC Arabs are relatively stable. Both are characterized by overpayment of locals, that is, self-inflicted by current nationalization policies. Higher earnings of Westerners are due to their superior productivity-related characteristics.

Due to the lack of official individual-level data on workers’ productivity-related characteristics, this paper is compelled to utilize an open-source primary data set. Despite the data set’s ability to reproduce officially published aggregates and produce sound econometric results, findings are not entirely proof against sampling bias.

The paper demonstrates that the failure of GCC’s nationalization policies is self-inflicted by the current quota system and by the lack of legislative frameworks that ensure equal pay for equal work. Effective nationalization ought to be market based, rather than by fiat.

The paper is the first to analyze GCC’s private earnings differentials at the individual level and provides micro-econometric evidence on existing price distortions.