Migrant earnings gaps in Gulf Cooperation Council countries: Employers' perceptions or opportunity costs?

• DOI: http://doi.org/10.1111/ilr.12140
• Published date: 01 June 2019
• Author: Usamah F. ALFARHAN,Samir AL‐BUSAIDI
• Date: 01 June 2019

International Labour Review, Vol. 158 (2019), No. 2

Copyright © The authors 2019

Journal compilation © International Labour Organization 2019

Migrant earnings gaps

in Gulf Cooperation Council

countries: Employers’ perceptions

or opportunity costs?

Usamah F. ALFARHAN* and Samir AL-BUSAIDI*

Abstract. This article discusses earnings differentials among skilled Western, Arab

and Asian migrants, who constitute most of the private sector labour force in Gulf

Cooperation Council (GCC) countries, during the period 2012–14. Using two

standard decomposition methodologies, it investigates the view that Westerners

are paid premium rates due to the unobserved perceptions of private employers.

The results indicate that while one-third to three-quarters of real hourly earnings

differentials are attributable to differing observed levels of productivity-related

characteristics, the remainder are due to the incorporation of higher opportunity

costs for Westerners into the bargaining process. The potential effect of unobserved

perceptions is found to be irrelevant to observed earnings differentials.

The study of earnings gaps in the labour markets of Gulf Cooperation

Council (GCC) countries has been largely overlooked in the labour eco-

nomics literature. According to World Bank statistics from 2015, migrants con-

stitute over 50 per cent of the population of the GCC countries.1 Additionally,

the consolidated statistics of the Gulf Labour Market and Migration (GLMM)

programme from 2014 indicate that migrant labour – predominantly employed

on time-limited contracts under various forms of sponsorship – accounts for

over 70 per cent of the overall workforce, and 90 per cent of the private sector

labour force in the GCC countries (Alfarhan and Al-Busaidi, 2 018).2 Further-

more, sizeable and persistent earnings differentials exist among the three major

* Department of Economics and Finance, Sultan Qaboos University, emails: ualfarhan@

squ.edu.om; samir.albusaidi@squ.edu.om.

Responsibility for opinions expressed in signed articles rests solely with their authors,

and publication does not constitute an endorsement by the ILO.

1 See the World Bank’s World Development Indicators, 20 15 .

2 Available at: http://gulfmigration.eu/percentage-of-nationals-and-non-nationals-in-em

ployed-population-in-gcc-countries-national-statistics-latest-year-or-period-available/ [accessed

18 February 2019].

International Labour Review274

demographic groups of migrant workers employed in GCC countries, namely:

nationals from Europe, North and Central America and Oceania (Western-

ers); Arab nationals from countries not members of the GCC (Arabs); and

migrants from the Indian subcontinent and South-East Asia (Asians). Such

differentials may be detrimental to migrants’ productivity and have yet to be

formally explained.3

Westerners in GCC countries earn by far the highest wages in compari-

son with Arabs and Asians. The view that the differential is based on employ-

ers’ perceptions that Westerners are simply more capable is reected in articles

published in the mainstream press during the period to which the data used

in this investigation refer. In 2012, for example, The Telegraph reported the

view that “[Westerners] are … perceived as more advanced and savvy due to

their cultural background, history of technological innovations and out-of-

the-box thinking”.4 In 2013, Gulf Business reported that, according to experts,

“[l]ocal companies are still willing to pay a premium for Western expatriates

from outside the region, due to the perception that they possess a particular

skill set not locally available”.5

The existence of such ex ante perceptions in respect of migrant work-

ers among employers may constitute statistical discrimination, where observ-

able characteristics are used by employers as a proxy for unobservable, but

productivity-related, attributes of workers (Fang and Moro, 2010). As Phelps

(1972) observes in his seminal article, rational employers treat otherwise iden-

tical workers differently if they believe that those who belong to a particular

group perform on average better or worse than another group. In the case of

migrants in GCC countries, if private employers believe Westerners to be more

productive than the other two groups, such an unobserved exogenous differ-

ence, combined with incomplete information regarding the actual productiv-

ity of those groups, may be a signicant source of the observed differentials

in private earnings among them.

The purpose of this article is therefore to study these differentials and

provide estimates of the size of the component that is not justied by dif-

ferentials in observed productivity-related characteristics and, consequently,

is likely to be due to unobserved factors such as employers’ perceptions.

A major reason for the lack of research on earnings structures in GCC coun-

tries is the unavailability of ofcial and harmonized micro-level data on work-

ers’ skills, employment and earnings. In order to overcome this problem, we use

an open source data set, where workers voluntarily and anonymously provide

relevant information on their actual productivity-related attributes, employ-

ment and earnings, with the objective of benchmarking themselves against

3 See Lloyd-Ellis (2003) for a survey on the impact of inequality on productivity.

4 Available at: http://www.telegraph.co.uk/nance/personalnance/expat-money/9598599/

Western-expats-in-Middle-East-earn-the-most.html [accessed 22 January 2019].

5

Available at: http://gulfbusiness.com/revealed-gcc-asian-expats-earn-26-less-than-western-

peers/ [accessed 22 January 2019].