UAE Labor Mobility Reforms Create Winners and Losers

In 2011, the UAE dramatically reformed its kafala system by allowing migrant workers with expiring contracts to change employers without the initial sponsor’s permission.

The government wisely worked with a team of experts to evaluate the results. Five years on, an interesting analogy with traditional labour union activity has emerged, in which the interests of “insiders” (migrant workers already in the UAE) clash with those of “outsiders” (prospective migrant workers). The research reinforces the need to exercise caution with labour market interventions, as they sometimes backfire.

International migration is a politically charged topic, which sometimes obscures the basic economic facts of UAE labour markets. The pre-oil UAE was as poor and sparsely populated as one would expect from a desert climate. Seizing the opportunities presented by oil (an achievement given the dysfunction of many oil-rich states) required importing large amounts of labour, and to this day migrant workers constitute about 85 per cent of the UAE labour force.

Because of its open labour markets, the UAE’s contribution to economic growth in developing countries packs a considerably greater punch than the average OECD country’s contribution: in 2010, total remittances per resident were US$1,900 in the UAE (eighth in the world), compared to $355 in the United States (36th) and $335 in the United Kingdom (39th).

As with all immigration destinations, racketeers sometimes abuse the UAE’s labour markets. However, the persistent flow of migrants to the UAE confirms what the remittance data suggests, which is that the average worker benefits tremendously from coming to the UAE.

Thus when the UAE embarked upon its reform, the goal was to work on the flaws of a generally good system, rather than to fix a terrible one.

Before 2011, upon the expiration of a migrant worker’s contract, the sponsor could veto any choice by the worker except the worker’s return home, making the sponsor a monopsonist (many sellers competing for one buyer’s demand). This was partially motivated by a desire to protect the sponsor’s investment, both in screening prospective workers and in building their skills during their two-year relationship.

However, in light of the essentially arbitrary nature of many details, the UAE considered affording the worker greater flexibility and in 2011 the government removed the sponsor’s veto on the worker switching to a different employer, weakening the monopsony.

A rudimentary analysis of the consequences would focus on two sets of stakeholders – UAE firms and citizens on the one hand, and migrant workers on the other hand. Fortunately, the Emirati government co-operated with a group of leading economists to produce a technically proficient evaluation.

In a paper titled “Monopsony power in migrant labour markets: Evidence from the UAE”, forthcoming in the Journal of Political Economy, Suresh Naidu (Columbia University), Yaw Nyarko (New York University Abu Dhabi) and Shing-yi Wang (University of Pennsylvania) were careful to distinguish between two sets of migrant workers – those already in the UAE (incumbents), and those seeking to enter (potentials).

The authors observed a 10 per cent increase in the earnings of incumbents resulting from the 2011 rule change, coupled with a significant rise in worker retention by original sponsors. The latter, counter-intuitive development reflected a combination of increased worker switching because of the rule change that was swamped by an even larger increase in the rate at which workers would stay in the UAE with their original sponsor. (What diminished is the proportion of workers who chose to leave the country. The exit rate fell to 3.3 per cent after the reform from 4.8 per cent before.)

Potential workers did not fare so well, experiencing a decline in hiring and in initial earnings upon being hired. The reason was that the change in employers’ market power when hiring was focused on incumbents, rather than potentials. Thus, from the perspective of migrant workers as a whole, it is unclear whether they benefited from the rule change.

Such ambivalence is typical of many labour market policies, and decades of OECD union activity provide similar examples. In particular, unions – which advance the interests of those who actually have jobs in certain industries, rather than those looking for jobs – often lobby for worker benefits such as minimum wages, bans on redundancy and generous pensions. While workers rejoice when union lobbying efforts bear fruit, some of the biggest losers are often unemployed workers, as hiring becomes much more expensive for firms. Several European countries such as Italy and Spain are characterised by high worker benefits and high unemployment.

Returning to the UAE’s experiment, assessing the impact on businesses and consumers is more challenging. While wages have nominally increased, the increased retention potentially means higher average skill levels, meaning more productive workers. The downstream consequences on prices and quality are very difficult to measure because so many goods are affected, but that should not dissuade the government from continuing to cooperate with top researchers on analysing the available data.

The authors’ study, as well as proposals for enhanced flexibility, was discussed in the May session of the Abu Dhabi Dialogue this year. Several groups representing the interests of migrant workers participated, including global human rights organisations and the ministries of labour of the source countries. Listening to their arguments, I was struck by how often they lobbied for a change that could potentially backfire. Most examples followed the European template of demanding greater worker benefits on moral grounds (despite the UAE’s exceptional engagement with the developing world), without any apparent acknowledgement of the fact that securing such benefits would undoubtedly diminish the number of migrant workers allowed entry into the UAE.

It may be that the trade-off is worthwhile and I am confident that those demanding greater benefits during the dialogue were actually trying to represent all workers, and not just the lucky incumbents. Ultimately, the fruitful discussions served to underscore the importance of careful research and data gathering. “The greatest enemy of knowledge is not ignorance,” remarked the American historian Daniel Boorstin. “It is the illusion of knowledge.”

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