Saudi Arabia Introduces Unemployment Insurance

Saudi Arabia will introduce compulsory unemployment insurance this year for all citizens with jobs, the world’s top oil exporter said on Monday.

Saudi Arabia, an absolute monarchy that has no income tax, is trying to push more citizens into work to tackle long-term unemployment that officials see as unsustainable in light of high population growth and uncertainty over future oil revenue.

The introduction of unemployment insurance is designed to make it more attractive for young Saudis to seek jobs in private companies, where the starting salary and other benefits are less generous than in government jobs.

While the official unemployment rate is around 12 per cent, economists say only 30-40 per cent of working age adults participate in the labour force. Most Saudis who do not have jobs are financially supported by a relative.

Most of those who work are employed by the state, but the government cannot support such a large wage bill in the long term, and the International Monetary Fund has warned that the private sector must meet future job demand.

“If there is a guarantee of income, particularly when that is connected to the level of previous earnings, it should make people more comfortable with taking positions in the private sector,” said Paul Gamble, director, sovereign group, Fitch Earnings.

Under the new regulations, announced by the Labour Ministry after they were approved at a cabinet meeting on Monday, all Saudi workers in both the private and public sectors will be charged one percent of their monthly salary as a subscription.

Their employer will pay the same amount into the scheme, which will be operated by a new state insurance body to be set up within six months.

Those who lose their jobs will be entitled to up to 12 months of compensation, set at 60 percent of the average salary they earned in the previous three years for the first three months and then 50 per cent for the following nine months.

Benefits are capped at 9,000 riyals ($2,400) for the first three months and 7,000 riyals for the rest of the year. There is a minimum payment of 2,000 riyals.

Workers who resign from their jobs, have an alternative source of employment or income from investments, or have been paying into the scheme for less than a year are not eligible for compensation.

Riyadh has raised spending on social benefits in the past three years in response to the 2011 “Arab Spring” uprisings. While Saudi Arabia escaped mass protests, its leaders were uncomfortably aware that unemployment spurred demonstrations elsewhere.

Unlike those benefits, however, the new social insurance will be partly paid for by mandatory contributions from workers and employers. Although Saudis do not pay tax, they already make mandatory contributions to a social insurance fund to pay for their state pensions.

The IMF and independent economists have long warned Riyadh it must rein in lavish government spending despite years of high budget surpluses and foreign currency reserves bigger than annual gross domestic product.

Last month it announced spending plans for 2014 that are 4.3 per cent higher than it budgeted for 2013, although the increase is smaller than in previous years.

It is not yet clear if the payments Saudis will make into the scheme will cover the cost of insurance payments.

“It may not be the most cost effective solution in the near term but if it helps normalise the labour market it is a price worth paying,” said Gamble.

Besides the new unemployment insurance, Saudi Arabia has also introduced tough new quotas for companies to employ Saudi nationals as well as foreign workers, who are cheaper and easier to fire.

It has also introduced a fee that companies must pay for each expatriate they hire over the number of Saudi workers, and has cracked down on visa irregularities to reduce the number of foreigners looking for jobs inside the kingdom.