UAE Labour Policy and the Health of the Economy: Ying & Yang

The phrase “UAE dependence on foreign labour” is a mainstay of any discussion about the UAE’s economy. It sounds self-evident, doesn’t it? I, however, refuse to believe an opinion that is stated as fact, regardless of how authoritative the statement might sound.

The implication in the statement is that if foreign labour were to leave the UAE then the economy of the UAE would be negatively impacted. This misses the point that the factors affecting an economy are many, and are dynamic. For example, the statement does not address how easy to it is to replace labour. But that is for another article.

In this article I’ll look at what the relationship between foreign labour and the economy are, which of these leads and which of them follows and what this means to the UAE.

So how should we investigate this? I have heard it said that a picture is worth a thousand word. Let me present three.

Source: The World Bank
Source: The World Bank

The baseline that we wish to look at is the UAE economy and more importantly economic growth in percentage terms.

The period 2002 – 2012 provides a complete cycle, with a boom starting in 2003, peaking in 2006 before turning into a bust, and then returning to normality.

What has this done to population growth?

We see that population growth lags economic growth by a year in the boom years, peaking in 2007, before dropping quickly to near 0%.

So the first thing that we learn is not that the economy depends on labour growth, but that labour growth depends on the economy. As the economy expands, it attracts foreign labour, as it contracts, that reverses to some extent.

So what does that mean to the citizens and long term residents of the UAE?

The GDP per capita, in current US dollar terms, behaves as you might expect, expanding in the boom years. However, after dropping 40% in the aftermath of the global financial collapse, the UAE’s GRP per capita rebounds to 2004 levels!

What we have here, ladies and gentlemen, is a self correcting quality of life mechanism that the UAE labour policy brings to the economy.

As the economy in the UAE grows, the liberal foreign labour transfer policy allows for manpower to quickly ramp up and support this growth. More restrictive labour policies, where a long internal search is mandated, stifles economic growth by interrupting the supply of labour. This is especially perilous for the knowledge based sectors of the economy.

The flip side is that in a contraction, or even a recession, the labour force self-corrects to stabilise GDP per capita. Foreign labour who have generated a higher than average savings rate during the economic expansionary cycle, and with the massive tax savings in a personal income tax free country, have a cushion that they can and do use during a contraction. Foreign labour remains incentivised to emigrate until the GDP per capita stabilises. Everybody’s happy.

That is on the revenue side. On the expenses side, public services that usually will see budgets cut, a normal result of a contraction, will nonetheless be able to maintain their quality of service due to the reduced overall population.

This rebalancing of supply and demand continues in the private sector. Lower consumer demand is matched by lower supply. If there are a 100 dentists and people spend less on their dental needs, normally there is a problem. But if 40 of those dentists up and leave, then the remaining dentists will be able to maintain their businesses.

This symbiosis is one of the foundations of a sustainable quality of life available in the UAE.

This article was originally published in The National.