Understanding the Omani Labor Market

Oman

The collapse in oil prices has been difficult for the Middle East but especially for Oman. While the economic outlook might be a little dark, there is some positivity associated with it. The tight budget requires Oman, Businesses, and Omanis to evaluate their spending and hopefully begin to economize.

One area of scrutiny has been the private sector labor market and the dependency on foreign labor in upper management. This is a concern to Omanis for two reasons.

  1. Is foreign labor replacing local labor? Are we hiring expatriates at the expense of Omani labor? This question seems to be asked more often in todays world, see Trump and the United Kingdom.

  2. Foreign employees send most of their income to their home economies. This reduces consumption within the Omani economy and any benefits of Multipliers that are associated with it.

These are two very different problems and solving them requires careful economic analysis and an understanding on how people respond to policy. Some of the proposed policies so far are

  1. Force Firms to hire Omanis.

  2. Restrictions on remittances like Saudi Arabia is proposing.

Both these “solutions” add more restriction and in my opinion are horrible policies. These policies will lead to more black markets and create an incentive to hide economic activity.

Both these “solutions” add more restriction and in my opinion are horrible policies. These policies will lead to more black markets and create an incentive to hide economic activity.

Also, these polices do not ask the right question. As economist we put emphasis on identifying the problem before we prescribe solutions. The real problem here is that business are more likely to hire a foreign employee rather than an Omani. That is where we need to spend our time; identify why business make that choice.

To do that we have to better understand the goal of a business and the role of labor laws in how they operate. Business are in the business of making profits. That means maximizing their revenue and/or minimizing their costs. Since labor is part of costs then it implies that the Omani employee must be more expensive than the foreign employee.

The problem in defining costs here is that you can not only evaluate wages. Total costs include wages, in kind benefits, allowances (tickets, child care/private school tuition, housing). The truth is, the foreign employee is more expensive than the Omani. So why is it that the Omani employee is still passed up?

Some argue that the Omani employee is not as productive or is unskilled, a claim I don’t believe. I believe the problem is in our labor laws. In Oman, firing an Omani employee is near impossible. This is why the market fails, and Omanis are avoided as employees.

To understand why the market fails we need to understand Asymmetric Information and the Lemons Market .  In the labor market, one party (The employee) knows their true quality. The employee market has a distribution of qualities with really great employees and horrible employees that all look the same on paper. The employer does not have information on quality of an employee and must exert effort to identify the true quality. In a free market, an employer can test an employee out and then decide to keep them or not. If they are of good quality, they remain employed. If they are a bad employee then they are fired. However, when the market has restriction like in Oman, an employer that hires an employee is stuck with whatever quality type they hire. Therefore, since there is no experimental phase, or the ability to fire, it makes the decision to hire a very risky one. No business wants to hire a bad employee and therefore they avoid Omanis all together. Since foreign employees do not have the rigid laws to “help” them they can be fired with ease.

In a free market, an employer can test an employee out and then decide to keep them or not.

The law of unintended consequence is at play here. Policy makers wanted to help the Omani employee by nurturing them and making it harder for them to lose their job, unfortunately it makes it less likely for firms to hire Omanis. Want firms to hire Omani’s? Make it easier for them to identify the good employee from the bad, or let them take a chance on an employee and if it doesn’t work out they can go their separate ways. We will see more Omanis excel. Give the youth a chance.

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4 Comments

  1. What you describe is true however I would like to challenge this idea for firstly I wouldlike to model america, australia, singapore and Uk in the past. Here you had immigrant who came to these country andcontributed to the development of these countries.Looking purely on a myopic stand of money contribution needs callibration. I would have liked the Omani community to change and allow for others immigrants to allow better intrigration and expansion of opportinties for the young Omanis. These expatriate positions are opportunity and need to be seen in this form. They also provide contribute in the economy and do not always send all their money abroad.Some do spend in the rental area and buy things etc. What we do need to do is to encourage them to bring their families here, which unfortunately we have put restriction. by doing so, i.e. allowing them to have their family come to Oman, we increase monetary circulation to take place and effectively have a better economic engine. Alas I personally believe in increasing the number of expatriate in Oman and allowing more of them to start their business which will increase the economic prospect in our country.

    deletion of expatriates and putting Omanis is not a good solution for the mayhem we are in now but we need to increase opportunities while creating jobs within Oman. By the way I support in the diversification drive of the economy by not having all our effort in tourism which I feel is seasonal and is rather a risky sector. I believe we need to focus in increasing our effort in manufacturing and service economy equally for these will create work opportunities and enhance our drive to effectively educate our young Omanis in areas which other Gulf countries have not thought.

    1. I like your idea on lifting the restriction on families. If we allow expats to feel at home, they might spend more in Oman. Thanks for your input.

  2. I come from a background where advising on labour law is an important part of my job and i have been working with an organization that boasts around 600 professional staff, a third of them are Omanis.
    The points you try to make about the lacking in the current Omani Labour Law (Law) are invalid and are far from correct. There is a misconception in many people’s minds when it comes to a distinction in the Law between an Omani and an Expatriate employee.

    As a matter of fact, the ONLY distinction in the Law is one where Omanis are entitled to a 3% minimum, annual increment based on performance as well as the one where Omanis are entitled to take up part time jobs. Otherwise, the Law makes no distinction on the rights and obligations of an employee based on his/her gender, race and certainly not nationality.

    When it comes to termination of employment contracts, the Law is naturally protective of the employee and requires employers to establish grounds for such termination regardless of the type of contract and the nationality of the employee.

    These causes are limited to the prescribed provisions in the Law (Article 40(9)) but are certainly sufficient in our experience for any such termination whether that of an Omani or an Expatriate.

    Another topic you touched on was one you labelled “no experimental phase”. The Law provides for a probation capped at 3 months.

    Employers can put their employees on a probation period (also known as a probationary period) to assess if employees are suitable for the role and business.
    The employer decides on the length of the probation period. It can range from a few weeks to a few months at the start of employment provided it does not exceed the 3 months that the Law permits.

    While some employers argue that 3 months may not be sufficient to asses the quality of the work they could expect from the candidate, it certainly is, in my opinion, an effective tool for the employers to assess a candidate and ensure they are up to the rigours of a given role if managed effectively.

    If an employee doesn’t pass their probation, they are still entitled to receive a 7 days’ notice when employment ends

    With this clarified, it becomes obvious that some of the worries that many employers may have regarding the employment of Omanis are based on uninformed opinion of the local Law.

    The underlying problem here may be the lack of awareness on the employers’ part. What is missing could well be the lack of initiative from the relevant authority and/or the employers to spread a much needed awareness on this front.

    Please excuse the length of this comment. I felt it was important that I clarified this misunderstanding for you and your readers. The intention is to spread awareness and help focus on the real issue here.

    My best wishes,
    Aladdin Sidahmed

    1. Aladdin,
      Thank you for your comment and response. While there might not be a difference in the status of the law, there is indeed a difference in the application of the law. I am interested in knowing the open cases of labor violation or wrongful termination that are put into the court system based on nationality. You seem like you might have access to this information based on your expertise in the law, I am assuming.

      You suggest that your goal is to spread awareness and help focus on the real issue. Can you please elaborate on what is the real issue here?

      I appreciate the dialogue and the attempt to solve the problem. I think we all agree there is a problem, but we might view it differently. The outcome of laws is usually very different than what they initially suggest or how they are written.

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