Abstract

Full employment and maximization of the productivity of the labour force are Bahrain’s two key labour market objectives. However, some of the policies it has undertaken might represent serious challenges in the way to achieving these objectives. Current labour market policies have facilitated the creation of a large public sector which employs a large number of Bahraini nationals and pays them wages which are considerably above private sector levels. This has created a high reservation wage for Bahraini nationals and has weakened their incentives to work in the private sector. At the same time, Bahrain has opened its labour market to foreigners and has encouraged the private sector to hire the cheapest labour it can find, rather than invest in the development of the national labour force. The main result of this policy has been the segmentation of the labour market in two distinct parts – the public sector dominated by nationals and the private sector dominated by foreign workers. While in the short run these imbalances have had a number of positive economic, social and political effects, in the long run they represent a significant risk for Bahrain because a considerable share of the labour force is not engaged in employment and uncompetitive, and therefore largely dependent on the state. This has had a detrimental effect on labour productivity, making Bahrain one of the countries with the lowest productivity scores. Until it addresses its labour market imbalances, Bahrain will struggle to build a competitive and diversified economy.

Bahrain’s labour market model has been largely enabled by considerable oil revenues which have allowed the government to maintain a large public sector wage bill. However, in the long run this model is not sustainable. This is becoming obvious now that the effects of the lower oil prices which started in the second half of 2014 have begun to put considerable downward pressure on government expenditure. Although the sustainability risks of the existing labour market model have been recognized by the government for over a decade now and a number of reform initiatives have been undertaken, the situation remains precarious. The main reason for the lack of significant change in the last decade is the fact that the root cause of the imbalances – the large and generous public sector – has not been sufficiently addressed. With the current fiscal constraints forcing the authorities to limit the size of the government and the public sector wage bill, there is now an opportunity for Bahrain to reassess its labour market reform agenda and develop a package of measures that have the capacity to further transform the labour market.