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Last week the UAE joined the growing list of global financial hubs which aspire to also become Islamic finance hubs. The list includes countries such as Thailand, UK, Singapore, Hong Kong, India, France, Canada, Japan, India, China, Nigeria, Malaysia, and Bahrain. Despite their aspirations, many of these countries lack the critical financial sector standards and human resources to offer substantial sharia compliant banking and financial services.

Our study of Islamic financial hubs reveals several common structural approaches pursued by Islamic banking leaders:

  • Dual Banking Systems: The most successful Islamic banking hubs operate a full-fledged Islamic banking system in parallel with a full-fledged conventional system complete with liberalization measures that also allow foreign banks to operate
  • A Step-by-step Approach: Successful Islamic banking hubs have an overall long term strategy to develop a large number of instruments; a large number of institutions; and an Islamic interbank market
  • Comprehensive Legislation: Successful Islamic banking hubs pass comprehensive Islamic banking legislation and typically have a common Sharia Supervising Council for all Islamic banks
  • A Practical, Open-minded Approach: To complement education and training of potential employees entering the Islamic financial services sector, Islamic banking hubs employ research-based approaches and product experimentation to serve local needs and ensure innovation
  • Participation in Forming International Standards: Several Islamic banking hubs have established bodies to internationalize Islamic banking standards which are  involved in regulating the global industry and establishing standards involved in furthering Islamic finance training and education

As shown in the figure below, these structural approaches to forming an world-class Islamic banking system are underpinned by sound financial systems rooted in internationally accepted economic, financial, and statistical standards.

Islamic banking and financial systems

Establishing a sound financial system and Islamic banking sector requires adoption of internationally accepted economic, financial, and statistical standards

Human Resources Frequently Limit Ambitions of Aspiring Islamic Finance Hubs

Based on our projections that a another $87 to $124 billion could potentially enter the Islamic banking system in the UAE by 2015, approximately 7,800 new jobs will be created at Islamic banks in the UAE assuming current asset concentration ratios remain similar. We also project another 500 jobs will be created by 2015 in other Islamic financial services segments. By 2015, the Islamic financial services sector will double in size from approximately 10,000 employees currently to 20,000.

Established 2011 Total Assets in $Current Number of EmployeesProjected Number of New Employees Needed by 2015
Dubai Islamic bank1975$24,683,505,1772,0002,522
Sharjah Islamic bank 1976$4,831,918,801412519
Abu Dhabi Islamic bank 1997$20,245,231,6081,2001,513
Emirates Islamic bank (merged with Dubai Bank)2004$5,853,895,0951,0971,383
Noor Islamic bank 2007$4,598,651,499650820
Al Hilal Islamic bank2008$7,697,841,417702885
Ajman Islamic bank2008$1,089,903,815
Number of employees in the Islamic banking sector in the UAE

By 2015, the Islamic financial services sector will double in size from approximately 10,000 employees currently to 20,000.

To meet this growing demand for employees trained in Islamic finance, the UAE will need to significantly broaden its education and training options to ensure availability of human capital does not stall the growth of the sector. While it has a number of current executive training institutions and higher education institutions that target mid-level employees in the Islamic finance sector, the UAE does not have any programs that target new entrants interested in the field or senior level leaders. The UAE also does not have institutions which provide research and analysis that advances the field. The experiences of Bahrain and Malaysia show that research capabilities and institutions have been key structural feature of Islamic banking systems that lead to product innovation and effective regulation. Furthermore, many of the masters programs in Islamic banking and finance in the UAE remain general MBAs or masters degrees with very few specialized courses related to practical aspects of Islamic banking that are required by employers. The exceptions are Zayed University and Hamdan Bin Mohammed e-University which have in-depth course offerings in Islamic finance and economics.

Tahseen Consulting’s Related Work

Read about Tahseen Consulting’s work on skills gaps and how they impact Arab businesses

Islamic Banking Training in the UAE

While it has a number of current executive training institutions and higher education institutions that target mid-level employees in the Islamic finance sector, the UAE does not have any programs that target new entrants interested in the field or senior level leaders.

Malaysia's Islamic Banking Education and Training System

Malaysia’s human capital development programs span all levels of the industry with a focus on internationalizing operational and product standards.

Towards a Islamic Finance Human Capital Development Strategy for the UAE

To solidify its position as an Islamic finance hub amongst the heavy competition, the UAE will need to significantly enhance its current education and training system. This includes human capital development and research programs to ensure:

  • Quantitative supply of Islamic banking graduates through expanded undergraduate offerings or financial sector bridge programs that target non finance graduates
  • High quality executive training focused on resolving likely skills gaps amongst current employees
  • Specific executive training and leadership development training for senior level bank leaders and regulators to create the necessary vision and Sharia knowledge to enable product innovation
  • High quality research and thought leadership that pushes the boundaries of the sector and allows the UAE to participate in the internationalization of operational and product standards which is currently being led by competing Islamic financial hubs
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In so far as a similar global economic development narrative based on the transition to knowledge-based economies and accompanying high wage, high skill jobs was perpetuated by the engagement of the World Bank and UN with the Arab World in the early Nineties, a similar opportunity bargain as that in the West emerged in the Arab countries. In addition to high skill, high wage job creation, however, the Arabization of the concept of knowledge-based economy infused economic development with a host of other development issues such as economic integration and diversification, innovation, entrepreneurship, education and training system reform, environmental sustainability, identity, language, gender equality, and political participation and democratic reform. With its association to human capital development, the concept of knowledge-based economy created a convincing economic development narrative that met the psychological needs of Arab citizens but, as evidenced by the Arab Spring, clearly missed the mark on delivering on physiological needs.

Broken Promises of the Arab Opportunity Bargain

Although there are few regional public opinion surveys that can provide an indicator of the effectiveness of Arab governments to deliver on the opportunity bargain that has become enmeshed with the Arab Dream, a recent survey of 16,000 citizens across 21 countries in the Arab World shows several sources of breakdown. Carried out in late 2010 and early 2011 before the Arab Spring reached it boiling point, the survey provides a baseline indicator of several seeds of discontent that point towards unfulfilled promises associated with the pursuit of knowledge-based economy in the Arab World and a broken Arab opportunity bargain. Particularly in the less wealthy Arab countries outside the Gulf, respondents described an Arab World that is not amenable to finding employment; lacks effective education systems; which offers few opportunities for youth to get ahead through hard work; faces a dismal outlook for economic growth; and offers a difficult path to reaching life milestones such as securing affordable housing (Silatech 2010). In many countries, citizens indicate that they would prefer to migrate to realize their dreams elsewhere.

Securing a Viable Arab Dream

How Arab governments respond to the broken regional opportunity bargain following the Arab Spring could make the difference between a lost generation of youth plagued by chronic unemployment and social marginalization as well as significantly impact future generations. Disaffected youth have the potential to become a perpetual thorn in the side of Arab nations as youth bulges experiencing economic hardship have been linked with political violence. Discontent amongst Arab youth based on an evolving opportunity bargain that no longer promises free education, a public sector job guarantee, and state support could severely compromise ambitious economic development plans.

The Arab Spring was in part a result of people buying into the Arab Dream, investing their time and money in education, but then subsequently finding that their credentials and hard work does not allow them to  fulfill their dreams of gainful employment and achievement of accompanying social and economic advancement. The Arab Dream is grounded in a regional pursuit of knowledge-based economic development driven by policies that envision the emergence of high skill, high wage economies that will create jobs. However, the global availability and growth of low cost, high skill workers potentially threatens the viability and economic fundamentals of sophisticated, innovation-driven knowledge-based industries taking root in the region and devalues the credentials of skilled workers. If knowledge-based industries fail to take root and lead to employment, many of reforms and money spent on higher education expansion, education quality, R&D ecosystems, and entrepreneurial growth could be deemed inappropriately spent.

The Arab Spring was a very tangible reminder that securing a viable Arab Dream is a major issue of concern to regional governments. The Arab Dream must include a revised opportunity bargain which factors in how the marginalized whose voices came to a boil in the Arab Spring can have access to livelihoods. Creating this opportunity bargain requires not just benchmarking and replicating the economic development trajectories of  wealthy, developed countries but also being aware of the vulnerability Arab economies face in an era of globalization and the emergence of high skill, low wage knowledge workers that have changed the fundamentals of knowledge-based industries.

While some Arab countries are more suited to competing in a high skill, low wage global economy, other Arab countries which are unable to compete in high skill, high wage knowledge-based industries will need to adequately calibrate the expectations of their citizens regarding the types of jobs which will be available in the future and the likely instability of salaries due to wage compression from competing low wage, high skill workers. Efforts to privatize education attainment so that labor market success or failure passes the burden on to individuals are prone to market failure without sufficient demand for skills from the labor market. Short term, quick fix government payouts to solve the problems with the broken Arab opportunity bargain are also likely to fail. Arab governments will have to take a hard look at the economic counsel they have received over the last two decades to judge its worth in securing the economic interests of the region. Reforms to reinvigorate the Arab Dream must challenge the assumption that more education is always the answer, reconsider the full employment promise which hampers global competitiveness, reduce wage inequality to ensure equal distribution of wealth, and determine the Arab world’s position in an global economy with emerging low cost, high skill competitors that challenge knowledge-based economic development both in the developed and developing world.

Related Work

Rethinking Arab Knowledge-based Economies

Value for Money in Arab Educational Reform

How Skills Surveys Can More Effectively Identify Workforce Skills Gaps

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The Middle East’s youth unemployment rate of 25%, which is amongst the highest in the world, is partially attributable to  severe skills shortages in certain fields and a lack of opportunities for youth in others. Several empirical studies have shown a causal relationship between unequal distribution of qualified youth in different fields in the Arab World and high youth unemployment rates (Kapsos and Sparredom, 2011; Abdul latif et al., 2009; Tamkeen, 2010).

Causes of Unequal Distribution of Qualifications: Are Poor Career Decision Making Processes To Blame?

Arab youths have been found to show little recognition for the need to synchronize early career choices with aspirational values sought after in their careers over the long term. Consequently, the majority of youth in the Arab World when asked if they could ‘go back in time’ to make their career path decisions again respond that they would make a different choice (IFC, 2011). Such findings are indicative of low levels of early career decision satisfaction and high levels of regret in career choices made amongst Arab youth.

In terms of making career specialization decisions, youth in the Arab World rank the following values in order of importance

1. Job satisfaction

2. Good pay and opportunities for personal development

3. Broader contribution of employer

4. Opportunity to work with talented people

5. Opportunity to contribute to development of their country (Asdaa, 2009; Little, 2010).

The ranking of the desire to contribute to the development of their countries by Gulf Arab youth as one of the top values sought after in a career is of particular interest. Such findings suggest that an awareness of the positive economic contribution that efficiency in labor allocation could have on economic development in their countries during the career decision making process may encourage youth to consider career fields that face skills shortages or are otherwise overlooked (IFC, 2011). The ability to influence Arab youth to consider career specializations which face skills shortages early in their careers in the Gulf countries is of significant importance to regional governments in terms of limiting the number of expatriates required in certain fields and promoting private sector employment participation.

 Can ‘Prompting for Value-Ranking’ Influence Career Choices of Arab Youth?

Consumer behavior and decision sciences literature has shown that prompting respondents to rank their values prior to making decisions can yield positive results in terms of post-decision satisfaction and lower levels of regret. In a labor market context, asking youth in the Gulf Arab region to rank attribute values that they consider important when making career choices, prior to actually choosing a career path, could potentially influence the career choices they subsequently make. Commonly accepted theories in the West, such as the cobweb model, show that supply of particular labor market skills is highly related to the economics of a profession, such as expected salary, and other forces that signal ongoing job opportunities and the state of the market such as R&D, output levels, and competition from others with similar skills. However, forces signaling professional opportunity and market health can be more influential in motivating the supply of particular skillsets than salaries. From this perspective, Gulf Arab youth who are sufficiently aware of the contribution their career choice could have on the development of their countries can potentially be influenced to enter fields which they had previously not considered.

While behavioral interventions for better decisions have been found to be effective in Western societies (e.g.Thaler and Sunstein, 2008; Lenton et al., Volpp et al., 2008; Johnson and Goldstein, 2003; Kluger and DeNisi, 1998), including those involving the influence of values (e.g. Wooler, 1982; Ravlin and Meglino, 1987), such interventions have not been thoroughly tested in the  Gulf Arab region. Behavioral interventions affect career decision choice by prompting the decision maker to think through what they want out of a particular choice and the importance of considering values consistency when making an informed career choice. Given the low levels of career decision satisfaction amongst Arab youth, prompting for value ranking can potentially be used as a behavioral decision aid that would establish a mental link between values sought after and career choices, or at least an awareness of such a link (Wooler, 1982).

Our research specifically tests the effectiveness of behavioral interventions in motivating Gulf Arab youths to choose career disciplines which face skills shortages. We started with the working hypothesis that consideration of values in career choices would increase the number of high school and university students and recent graduates who chose or at least considered career paths with a labor supply need. This hypothesis was based on the assumption that respondents confronted with career choices in industries which face skills shortages would seek to align their value of contributing towards the development of their country with career choices that might lead to the resolution of labor market inefficiencies. We also tested more broadly whether better decisions, with regards to post-choice satisfaction, confidence, and fit with preferences, are made, as compared to when not prompted for ‘value-ranking.’ Based on international findings, youth in the Arab World would presumably be more satisfied with their career decisions when attribute value ranking is integrated into the career decision making process (Chernev, 2003).

The Unexpected Results of ‘Prompting for Value-Ranking’ in Career Choice

In contrast to predictions, our research shows that youth in the Gulf stick to more commonly chosen career disciplines rather than those which face skills shortages when prompted to rank career attribute values. Prompting for value ranking, therefore, seems to decrease the likelihood of Arab youths choosing career disciplines characterized by labor market gaps which are outside traditional career disciplines typically pursued by youth in the Gulf.  This reverse influence of the ‘prompting for value’ intervention on career choices emphasizes how unfamiliar youth in the Gulf Arab World are to considering values when making career choices. From a practical perspective, the low availability of information on labor market gaps and disciplines with higher labor demand suggests a low awareness of career disciplines that would satisfy the desire to contribute towards national development by entering fields with significant labor market demand. These findings highlight information asymmetries regarding potential career disciplines that have the potential to satisfy attribute values resulting in the unintended consequence of higher adherence to traditional career options due to high social regard and reputation (Al Omran, 2012).

Our results also illustrate an indifference in subjective measures of decision quality (satisfaction, confidence and perceived fit with preferences) when a behavioral intervention was integrated and when not. This is a potential indicator of the inapplicability of behavioral interventions in the Gulf Arab World due to students being unaccustomed to considering values when making career decisions, a finding that has also been demonstrated in previous research in the Arab World (IFC, 2011).

Potential solutions: In whose hands?

Our results highlight the ineffectiveness of behavioral interventions due to an absence of consideration of values and solid information in career choices of youth in the Gulf Arab World. The use of behavioral interventions depends on the assumption that decision makers have a certain degree of knowledge or awareness that would enable decision makers to ‘spot’ the best choice outcome. This knowledge of what particular occupations will be in demand seems to be absent in the Gulf Arab region (Fasolo and Bonini, 2010).  Addressing the lack of research and statistical information on labor market gaps and attribute values and features of career disciplines with labor demands is critical for youth in the Gulf Arab World to make more informed career choices that would benefit the labor market (IFC, 2011).

Moreover, the effect of myths that some occupations are ‘better’ or ‘inferior’ than others seem to be overriding an interest or consideration of labor market gaps and labor demands of certain disciplines. Therefore, despite the need for better information on labor market gaps in the Gulf Arab region, the power of word of mouth in shaping reputations of career disciplines in Arab societies could potentially override the influence of prompting for value ranking even with higher availability of information in the Arab World (Yousef, 2004; IFC, 2011). Given our evidence, the Gulf Arab World should focus on better information and awareness of prerequisite conditions (i.e. attribute values of career disciplines and labor market gaps) to enable youth to make more informed career decisions consistent with economic development ambitions.

Khamael Al Safi Khamael Al Safi

Khamael Al Safi specializes in the analysis and design of innovative organizational practices, and the development of tools and approaches for the governance of organizations and markets. Khamael has worked for the people and knowledge development functions of several organizations specialized in financial services, non-profit education and media and publishing. She has a particular interest in the role of behavioral decision making in human and organizational development and has focused her recent research on career choices of youth in the Gulf Arab world. She is a recent graduate of the London School of Economics where she studied for a MSc in Organisations and Governance.

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الوصول إلى كفاءة عالية في العمل الحكومي

يحصل التداخل في العمل الحكومي عندما تكون الجهة التنظيمية هي نفسها الجهة المقدمة للخدمات. ويكون ذلك مصدرا لانعدام الكفاءة خاصة عندما تقوم جهة بتقديم خدمة ما، وفي الوقت ذاته تضع هذه الجهة المعايير المطلوبة لتقديمها وتراقب عملية التنفيذ ومدى الامتثال لتلك المعايير. وينجم عن هذا التداخل انخفاض في جودة الخدمات المقدمة إلى المواطنين وربما انخفاض معايير الخدمات أيضا.

توجهت بعض الدول المتقدمة وخاصة تلك التابعة لمنظمة دول التعاون والتنمية (OECD) نحو الفصل بين الوظائف الحكومية في مطلع التسعينيات من القرن الماضي. واقترن هذا الفصل بإيمان تلك الدول بأن عمليات التنظيم المستقلة بإمكانها تقديم معالجة أفضل للغايات التي تصبو الحكومات الوصول إليها وهي تقديم خدمات ذات جودة عالية للمواطن. وقامت تلك الدول بالفصل بين عمليات صنع السياسات والتنظيم وتقديم الخدمات. وبهذا وضعت عملية التنظيم بمرتبة أدنى هيكليا من مرتبة صنع السياسات وبمرتبة أعلى من تقديم الخدمات. في هذه الدول، تقوم الحكومة المركزية متمثلة برئاسة الوزراء برسم الاتجاه العام التي تعمل بموجبها الجهات التنظيمية والجهات التي تعنى بتقديم الخدمات، بينما تكون الأجهزة التنظيمية، والمتمثلة بالوزراء أو رؤساء الوكالات المتخصصة، مسؤولة أمام القيادة السياسية وتضع المعايير والتعرفات واللوائح التنظيمية لتضمن أن الخدمات تفي بالمعايير المطلوبة. وتقوم الجهات المسؤولة عن تقديم الخدمات في هذه المنظومة بمراعاة الاتجاه العام الموضوع من قبل الحكومة المركزية والقوانين واللوائح التنظيمية الموضوعة من قبل الجهة المنظمة.

الحد من ازدواجية الوظائف الحكومية من خلال إنشاء وكالات متخصصة

قامت بعض الدول مثل الولايات المتحدة الأمريكية وأستراليا وسنغافورة بفصل الوظائف الحكومية المتعلقة بالتنظيم وتقديم الخدمات من خلال إسنادها إلى وكالات حكومية متخصصة (Government Agencies) لضمان الشفافية وتعزيز الكفاءة الحكومية.

يتمخض عن هذه الأنظومة الحكومية الجديدة عدة إيجابيات أهمها: زيادة قدرة المؤسسات المقدّمة للخدمات على التركيز على كفاءة الإنتاج بدون تشتيت الموارد المالية والبشرية على المواضيع المتعلقة بعملية إعداد السياسات، تحديد المسؤوليات بشكل واضح للتسهيل من عملية الرقابة على مقدّم الخدمات وضمان الجودة مقابل التكلفة، الحد من احتكار المعلومات المتعلقة بتكاليف الخدمات وجودتها من قبل جهة واحدة للمساهمة في تحقيق التوازن بين وجهات النظر الأكاديمية والعملية، ووضع اللبنة الأساسية للتحول نحو خصخصة الوظائف الحكومية في المستقبل.

إلا أن فصل عملية إعداد السياسات عن التخطيط والتنظيم من جهة وتقديم الخدمات من جهة أخرى يؤثر على إمكانية تبادل المعلومات بين الهيئات الحكومية مما قد يؤدي إلى عدم اتساق السياسات والبرامج الخدمية. بالإضافة إلى ذلك يؤدي فصل المعلومات والخبرات بين الجهات على التأخير في اتخاذ القرارات والحد من القدرة على تحويل الموارد المالية بسهولة بين البرامج والقطاعات والتي قد تحتاج إلى موارد إضافية في وقت الأزمات. لذلك يتطلب هذا النموذج تخصيص موارد مالية وبشرية كبيرة لضمان النجاح في التطبيق.

أمن الضروري أن تتخذ الدول العربية قرارات بتوزيع الوظائف الحكومية لضمان جودة الخدمات المقدمة للمواطنين؟ وهل تعد الحكومات العربية جاهزة لفصل الوظائف الحكومية؟ وهل توجد خصوصيات تمنع الحكومات العربية من اتخاذ هذه الخطوة؟ ما هي المتطلبات التي يجب تواجدها لإنجاح هذه العملية؟ سنقوم في الأسابيع القادمة بمناقشة هذه المواضيع من خلال مدونتنا. لذلك ندعوكم لزيارة هذا الموقع والاطلاع على آراءنا بشأن ضمان كفاءة وفعالية الإدارة الحكومية في العالم العربي

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The Organisation for Economic Co-operation and Development’s Economic Commission for Latin America and the Caribbean cites Tahseen Consulting’s research while discussing the impact of workforce skills gaps on small and medium enterprise development in their 2013 Latin American Economic Outlook: SME Policies for Structural Change.

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In response to several messages we received regarding the potential of Arab SMEs to meet the region’s youth employment challenge, we decided to also look at the other end of the employment spectrum to determine which entities across the region are the largest employers.

Related Blog Posts

In our post Company Sizes in the Arab World: Small and Medium-sized Enterprises Dominate Arab Economies we found that 92% of businesses in the Arab region are under 200 employees. The concentration of SMEs in Arab economies has a significant on employment creation and potential public sector responses the region’s youth employment challenge.

Below is a list of the Arab region’s largest employers segmented by country and industry gathered from press accounts, regulatory filings, and government sources. In several countries education, health, and defense ministries employ large segments of the population. We also observe much similarity across the region in terms of industries which are large employers (telecom, services, construction, diversified conglomerates, aviation, and financial services). What is less clear, however, is whether these industries have produced high skill and knowledge-content, high wage jobs.

Related Blog Posts

In our blog post Many Arab Countries Are Headed Towards Knowledge-based Economies.. But What are Knowledge-based Industries? we explore how the concept of Knowledge-based industries and economies lacks a clear definition. Defining the size and growth of knowledge-based industries is especially difficult in the Arab region.

In our blog post Knowledge-based Economy and Employment Generation in the Arab World we show that the emergence of knowledge-based industries has not necessarily led to meaning levels of job creation in the region. 

CountryEntitySectorNumber of Employees
Saudi Arabia Ministry of Education Education
Saudi ArabiaMinistry of Defense and Aviation
Saudi ArabiaMinistry of Health Healthcare
Saudi ArabiaSaudi Aramco
Oil & Gas51000
Saudi ArabiaSaudi Basic Industries Corporation
Saudi ArabiaSaudi Electricity Company
Utilities 28300
Saudi ArabiaSaudi Telecom Company
Saudi ArabiaThe Savola Group
Saudi ArabiaZamil Group
Saudi ArabiaAlmarai Co.Food Industries
Saudi ArabiaAl-Rajhi Banking & Investment Company
Financial services
Saudi ArabiaZamil Industrial Investment Co.
Financial services
Saudi ArabiaAbdullah Al Othaim Markets Co.Retail5097
Saudi ArabiaSaudi Public Transport Co.Transport
Saudi ArabiaRiyadh Bank
Financial services
United Arab EmiratesArabtec Construction
United Arab EmiratesMinistry of Defense
United Arab EmiratesAl Habtoor Group
United Arab EmiratesEmirates GroupAviation
United Arab EmiratesDP WorldTransport
United Arab EmiratesAl Jaber Group Conglomerate
United Arab EmiratesMinistry of EducationEducation
United Arab EmiratesAl Ghurair Group
United Arab EmiratesAl Futtaim Group Conglomerate20000
United Arab EmiratesAbu Dhabi National Hotels Company
United Arab EmiratesMajid Al Futtaim Group
United Arab EmiratesJumeirah Group
United Arab EmiratesEtisalat
United Arab EmiratesDepartment of Health & Medical ServicesHealthcare
United Arab EmiratesEmirates NBD
Financial services
United Arab EmiratesMinistry of HealthHealthcare7000
KuwaitAl-Kharafi Group Conglomerate
KuwaitMinistry of Health
KuwaitMinistry of Education
KuwaitKuwait Food Co. - Americana
Food Industries
KuwaitArabian Construction Company
KuwaitMinistry of Defense
KuwaitAl-Abraj Holding Co.Services15000
KuwaitZain GroupTelecoms
KuwaitSultan Center Food Products Co.Food Industries7000
KuwaitNational Cleaning Co.Services6022
KuwaitHeavy Engineering Ind. & Shipbuilding Co.Services5000
KuwaitKuwait & Gulf Link Transport Co.Services5000
KuwaitThe National Industries Group
KuwaitKout Food Group
Food Industries4000
KuwaitNational Mobile Telecommunications Co.Telecoms2923
KuwaitNational Bank Of Kuwait
Financial services
KuwaitCombined Group Contracting Co.
KuwaitAl Arabi Group Holding Co.Conglomerate2763
KuwaitKuwait Hotels Co.Hospitality2540
KuwaitKuwait Finance HouseFinancial services 2032
KuwaitACICO Industries Co.Construction2000
OmanMinistry of Defense
OmanOmzest Group
OmanMinistry of Education
OmanMinistry of Health
OmanSuhail Bahwan Group
OmanSaud Bahwan Group
OmanRenaissance Services Co.Services9000
OmanOman Aviation Services CoServices3360
OmanOman Telecommunications CompanyTelecoms2735
OmanOman National Engineering & Investment Co.Services2630
OmanShanfari Group
OmanBank Muscat
Financial services
OmanSalalah Port Services
OmanOman Holding International Co. Financial services 1600
OmanNational Bank Of Oman Ltd.Financial services 1155
BahrainMinistry of Defense
BahrainMinistry of Health
BahrainMinistry of Education
BahrainAlmoayyed Group
BahrainAhmed Mansour Al A'ali Group
BahrainNass CorporationServices
BahrainDadabhai GroupConglomerate3500
BahrainAhli United BankFinancial Services2800
BahrainBahrain Telecommunications Company (Batelco) Telecoms2579
BahrainFakhro Group
QatarSupreme Education Council
QatarMinistry of Defense
QatarQatar Shipping Company
QatarIndustries Qatar
QatarAamal Company
QatarQatar Navigation Company
QatarMannai Corporation
QatarQatar Telecom (Qtel)Telecoms2000
QatarSalam International Investment Co LtdServices2000
QatarQatar Electricity and WaterUtilities1500
QatarQatar National Bank
Financial services1400
QatarQatar National Health Authority
QatarBarwa Real Estate Company
QatarQatar National Cement CoServices1050
IraqMinistry of Interior
Civil Affairs
IraqMinistry of Defense
IraqMinistry of Education
Education 120000
IraqMinistry of Higher Education and Scientific Research
Education 100,000
IraqMinistry of Health
IraqMinistry of Electricity
IraqSouth Oil Co
Oil & Gas18000
IraqNorthern Oil Co
Oil & Gas13000
IraqKBR -IraqOil & Gas7000
IraqAl Elaf Group of Companies
IraqFalcon Group
IraqBaghdad Soft Drinks CoFood Industries3400
IraqBahrani Group
IraqZain Iraq
IraqIraqi Airways
IraqDanube Group
YemenMinistry of Education
YemenMinistry of Defense
YemenMinistry of Interior
Civil Affairs
YemenHayel Saeed Anam Group
YemenPublic Electricity Corporation
YemenMinistry of Health
YemenPublic Telecommunication Corporation
YemenYemen Company for Drug Manufacturing and Trading (Yedco)
YemenYemen Economic Corporation (YECO)
EgyptMinistry of Education
EgyptMinistry of Interior
Civil Affairs
EgyptMinistry of Health
EgyptMinistry of Defense
EgyptTelecom Egypt
EgyptOrascom Construction Industries
EgyptKuwait Food Company (Americana) in EgyptFood Industries45000
EgyptOrascom Development
Real estate18000
EgyptOrascom Telecom Holding
EgyptMansour Group
MoroccoMinistry of Defense
MoroccoMinistry of Interior
Civil Affairs
MoroccoMinistry of Health
MoroccoGroupe OCP
MoroccoChabbi Group
MoroccoMaroc Telecom
MoroccoYNNA Holding, Group Miloud Chaabi
MoroccoONA Group
MoroccoMinistry of National Education
MoroccoLesieur Cristal
Food Industries5000
MoroccoBanque Marocaine du Commerce Exterieur
Financial services4000
MoroccoCompagnie Generale Immobiliere
Real estate
MoroccoAttijariwafa Bank
Financial services
TunisiaMinistry of Education and Training
TunisiaMinistry of Health
TunisiaPoulina Holding Group
TunisiaTranscom Worldwide Tunisia
TunisiaCompagnie des Phosphates de Gafsa
TunisiaTunisie telecom
TunisiaLeoni Tunisie
TunisiaGroupe ChimiqueTunisien Services4500
TunisiaSystem De Cablerie Automobile De Sousse Services4300
TunisiaSte des Arts TextilesTextiles3300
TunisiaThe Banque Nationale Agricole
Financial services2700
TunisiaThe Societe Tunisienne de Banques
Financial services2600
TunisiaBanque Internationale Arabe the Tunisie
Financial services2200
LibyaGumhouria Bank
Financial services3500
LibyaGeneral Tobacco Company
LibyaTrucks and Bus Co
LibyaArab Union Contracting Company
LibyaCentral Bank of Libya
Financial services300
LibyaAkida Group
LibyaLibyan Tractor Company
AlgeriaMinistry of Education
Oil & Gas120000
AlgeriaNaftalOil & Gas30000
AlgeriaAlgerie Telecom
AlgeriaAir Algerie
AlgeriaGiplaitFood Industries
AlgeriaGroupe Saidal
AlgeriaMinistry of Health and Population
Heath care4400
SudanFederal Ministry of Health
Heath care54000
SudanMinistry of Education, Science and Technology
Education 18000
SudanSudan Railways Corporation
SudanChina National Petroleum Corporation (CNPC) in Sudan
Oil & Gas11000
SudanKenana Sugar Company
SudanDAL Group
SudanSudatel Telecommunications Group Ltd.Telecoms2500
SudanSudan Airways Company
LebanonSarkis Group International
LebanonMinistry of Health
LebanonZakhem Group
LebanonAverda Group ( Sukkar Engineering Group)
Conglomerate 3,500
LebanonMiddle East Airlines (MEA)
SyriaMinistry of Defense
SyriaMinistry of Health
Health care63354
SyriaMinistry of Petroleum and Mineral Resources
Oil & Gas47000
SyriaSyrian Telecommunication Establishment
SyriaSyrian Petroleum Company
Oil & Gas17500
SyriaGeneral Establishment of Syrian Railways
SyriaSyrian Arab Airlines
SyriaCham Holding
SyriaJoud Company
SyriaGeneral Company for Electrical and Communication Works
SyriaMTN Syria
SyriaAlfadel Group
SyriaND Group

SyriaByblos Bank
Financial services1150
SyriaSyrian Modern Cables
JordanMinistry of Health
JordanArab Bank
Financial services6500
JordanThe Royal Jordanian Airlines Company
JordanThe Royal Jordanian Airlines Company
Metals and mining4300
JordanJordan Telecom Group /Orange
JordanHikma Pharmaceuticals
JordanArab Potash Company
JordanHousing Bank for Trade & Finance
Financial services1900
PalestineMinistry of Education
PalestinePalestine Development & Investment Ltd. (PADICO)
PalestinePalestinian Security Forces
PalestineMinistry of Health
Health care13000
SomaliaSecurity Forces of Somaliland
SomaliaAmal Group of Companies (Amal Express)
SomaliaTelecom Somalia
MauritaniaSociété Nationale Industrielle et Minière--SNIM
Oil & Gas400
MauritaniaAir Mauritanie
DjiboutiDaallo Airlines
Aviation 250
DjiboutiDjibouti National Army
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In the Arab World, a society characterized by skilled, flexible, and innovative individuals nurtured through quality education, employment, and broadly accessible life-long learning opportunities is seen as a vital precursor to knowledge-based economic development (Kingdom of Saudi Arabia Ministry of Economy and Planning, 2010). To varying degrees, Arab countries are faced with similar human capital challenges that serve as obstacles to knowledge-based economic development:

Low Levels of Workforce Productivity

Across the region, labor productivity is low. Based on GDP per person employed data from 2008, Qatar, the richest Arab nation, is approximately two-thirds as productive as Organization for Economic Cooperation and Development (OECD) countries, despite the upward trending of oil and gas which forms the majority of Qatar’s domestic product receipts (World Bank, 2010a). Labor productivity data from 1991-2008 show a .7% compound annual growth rate for the Arab World while East Asia and the Pacific grew at 3.97%; Latin America grew at a rate of 1.19%; Sub Saharan Africa grew at 1.46%, and the OECD countries grew at 1.54%.

Preference for Public Sector Employment

Long standing social aspects of career specialization have led to some reluctance to pursue certain professions (United Nations Educational, Scientific, and Cultural Organization, 1960). The social aspects of career choice has slowed economic integration, led to the substitution of expatriate labor in certain industries, and decreased productivity in low value added industries for which low skill expatriate labor is imported from abroad to perform (Ministry of National Economy of the Sultanate of Oman, 2010). The social preference for public sector jobs has precipitated a crisis in which regional governments are unable to create suitable employment opportunities to absorb the youthful population entering the labor market.

Increasing Female Labor Market Participation

Despite significant gains in educational attainment, female labor market participation is estimated at 22% resulting in high levels of female unemployment (International Labor Organization, 2010). While more women have entered the labor market, many have found employment in part-time work, microenterprises, and the informal economy (Flynn and Oldham, 1999). Rapidly evolving cultural values and changing views on familial obligations continue to be influential in labor market participation and obtaining higher levels of education (Miles, 2002).

Poor Match Between Workforce Skills and Those Demanded by Public and Private Sector Employers

In surveying the public sector, Al-Yahya (2008) finds evidence of a low match between the skills of public sector employees and the work roles they perform particularly at lower administrative levels. Al-Yahya also finds evidence that formal educational qualifications are frequently not related to current jobs and a high number of public sector employees who believe their current jobs require low levels of their perceived skills and capabilities. Citing deficiencies in soft skills like communication, teamwork, analytical skills, and innovative thinking, a recent survey of the private sector also found that 46% of regional CEOs do not believe that education and training systems in the Arab World prepare students for the workplace (Mohammed bin Rashid Al Maktoum Foundation, 2008). These findings are indicative of a vast disconnect between current regional human capital levels and the skills demanded by private sector employers.

Education and Training System Misalignment With the Needs of Knowledge-based Economies

Many Arab countries are unable to meet the needs of all students who want to pursue education because of dramatic increases in student enrollment and insufficient resources (United Nations Development Program, 2002). Though there is a continued long-term trend towards increased budgets for education in the region, meeting the combined demands of increased access, assuring relevance, and improving quality in the face of finite resources is challenging (United Nations Educational, Scientific, and Cultural Organization, 2010b). Despite positive gains to promote educational opportunity and increased national spending on education, poor educational quality continues to hamper regional human capital development and the ability of Arab countries to compete in the global economy. At the higher education level, the region’s education systems are failing to produce the right quality and mix of human capital needed for knowledge-based development.

Barriers to Entrepreneurship

While some gains have been made in facilitating entrepreneurship in the region as evidenced by the increasing number of new business registrations, the procedures, time, costs, and minimum capital required to start a business remain much higher than OECD countries (Klapper, 2010, World Bank, 2010b). Though some Arab countries provide venture funding for entrepreneurial endeavors, startup and early-stage financing from banks, venture capitalists, and angel investors is very limited in the Arab World due to low liquidity conditions on exit markets. In terms of nurturing businesses, the Arab World has approximately 100 business incubators as compared to 1,600 in the United States to serve rather similar populations (National Business Incubation Association, 2011).

Weak Innovation Systems

R&D spending is significantly lower than in the developed world with very little private sector funding (United Nations Educational, Scientific, and Cultural Organization, 2010a). Regulatory frameworks do not protect intellectual property leading to low levels of patents and stifling private R&D expenditure. There is weak government policy making in research and innovation in spite of various studies which have shown that critical components necessary for innovation systems, research, market-oriented R&D, and entrepreneurship need to be concurrently fostered and linked in knowledge-based economies (Cooke, 2001, Pietrobelli, 2009). These components include educational systems, institutions conducting basic, applied, and interdisciplinary research, business incubators, funding institutions, and professional societies. Several of the institutions critical to the innovation system are weak in the Arab World (Mohammed bin Rashid Al Maktoum Foundation, 2009).

Managing Growth Sustainably

Underpinned by high fertility rates and increased life expectancy, the population of the Arab World nearly tripled to 359 million growing at an average annual rate of over 2% from 1970 to 2010 (Mirkin, 2010). This growth has increased the demand for basic services such as health, education, housing, water, and sewerage systems which has outpaced the growth rate of national income and government revenues (Rischard, 2009). The Arab World is experiencing rapid urbanization which has resulted in increased poverty, inadequate solid waste collection and disposal, toxic and hazardous waste problems, poor or non-existent sanitation facilities, and degradation of urban environment and coastal areas (United Nations Economic and Social Commission for Western Asia, 2009). Demographic trends are also having a number of societal implications related to marriage and the family, status of women, and care of older people (Mirkin, 2010).

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While employee count, sales, and assets have been used internationally to develop precise definitions of what constitutes a SME, lack of financial data on establishments operating in the Arab countries has resulted in many countries relying primarily on number of employees. In several countries, there is presently no definition of what defines a SME. The data we present below suggests that most firms in the region are under 200 employees. If the EU’s definition of what constitutes a small and medium-sized enterprise is applied (micro firms  <10 employees, small firms 10-49 employees, and medium-sized firms 50 – 250 employees), 92% of firms in the Arab World would be considered as small and medium-sized enterprises with 25% classified as micro businesses, 44% as small businesses, and 23% as medium-sized businesses.

Related Blog Posts

In our post Arab Corporate Social Responsibility Rapid Appraisal Diagnostic we suggest that lack of financial reporting standards in small firms in the region may also serve as a deterrent to social responsibility reporting

In our post How Skills Gaps are Generated by National Education and Skills Formation Systems we discuss how HR practices in small and medium sized firms may perpetuate the skills gap problem in the Arab World

The data presented below are proxied from World Bank firm-level surveys which draw on a representative sample of an economy’s private sector to shed light on a broad range of business environment topics. Enterprise Surveys are answered by business owners and top managers with input from finance and HR staff. The sampling frame for each country is stratified by business activity, firm size, and location and is confined to formal establishments excluding fully government owned firms. The primary focus sectors include manufacturing and service establishments corresponding to ISIC Revision 3.1 codes 15-37, 45, 50-52, 55, 60-64, and 72.

We analyzed data for 6,257 establishments in Algeria, Egypt, Iraq, Jordan, Lebanon, Mauritania, Morocco, Oman, Palestine, Saudi Arabia, Syria, and Yemen.  While the survey coding frames are very similar across countries, some countries made minor localization changes (such as aggregation of or more specificity for certain industries) as well as added additional questions to the standardized questionnaire in some cases, most notably some countries chose to also survey firm with less than 5  employees while others did not. This distribution reflects the high number of small and medium sized businesses that employ a significant percentage of the workforce in the Arab World. Across these countries, we found 72% of firms were from the manufacturing sector, 22% from the services sector, and the remaining 7% from the construction and transport sectors. Within the manufacturing sector, food and beverage, textiles and garments, and other manufacturing (primarily ISIC Rev. 31. codes 20-23, 30, 33-37) were the largest industries surveyed. Within the services sector, other services (primarily ISIC Rev. 3.1 code 50 and other unspecified services), hotels and restaurants, and retail were the largest industries surveyed.

Company SizeAlgeriaEgypt*IraqJordanLebanonMauritania
Company SizeMoroccoOman
Saudi Arabia
Syria Yemen
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Given the lack of an unambiguous definition of what constitutes a skills gap in previous surveys and imperfect measurement proxies, Figure 1 below shows that the present understanding of what causes skills gaps is similarly vague. If the intent of national skills surveys is to devise public policy interventions that might affect the behavior of firms in remediating skills gaps, the precision with which the causes of skills gaps are identified is of critical importance. Of the several skills surveys we reviewed, seven specifically ask respondents to identify the causes of skills gaps. From these surveys, four areas of thematic overlap emerge as potential causes of skills gaps: recruitment difficulties; HR practices related to employee development, motivation, and retention; strategic shifts in response to changing business environments; and transitional stages of employee orientation and integration. This section reflects briefly on these four thematic areas to advance a typology which takes into account the present understanding of the source of skills gaps.

Causes of skills gaps implied by survey questionnaires

We reviewed skills surveys from 14 countries and found an ambiguous definition of what constitutes a skills gap and how they are caused.
Sources: (Campbell, Baldwin et al. 2001; Learning 2004; Development 2006; Learning 2007; Office 2008; Zealand 2008; Shury, Vivian et al. 2009; Education Analytical Services 2010; Shury, Winterbotham et al. 2010)

Recruitment Difficulties: Recruitment difficulties can arise for a number of different reasons such as:  competition from other employers; not enough people are  interested in doing a particular job; long training times to develop skills; limited capacity of training organizations in relevant fields; poor terms and conditions offered for jobs such as unsociable hours, unattractive employment modalities, or low pay; poor prospects of career progression; location in a remote location with poor transportation; attitude, motivation, or personality mismatches etc. The multitude of reasons for recruitment difficulties requires the need to distinguish between situations where there are few people in the labor force who have the required skills, work experience, or qualifications to perform a job (a skills shortage) and situations where there are people in the labor market with the requisite skills, work experience, or qualifications but, due to some reason, are not attracted to a particular job (a recruitment difficulty).

An important consideration, however, is whether skills shortages are a symptom of greater problems involving market and institutional failures in the skills formation system rather than a direct cause of skill gaps. Effective government institutions that prevent underinvestment in skills, provide adequate regulation, and coordinate stakeholders are key elements of effective national skills formation systems. These institutions exist to link economic development with the evolution of education and training systems; ensure qualitative and quantitative supply-demand match between outgoing students and the needs of the labor market; facilitate regular, on-the-job  training provision and  participation in skills formation by the business community; and address policy, informational, or financial sources of individual underinvestment in national workforce skills formation (Schwalje 2011). As governments attempt to influence the technological and industry structure of their countries, the absence or weakness of government mechanisms to coordinate and align skills formation institutions can create a need for skills that cannot be predicted by free market mechanisms which can result in skills shortages.

The effectiveness of formal education and training systems is increasingly measured by production of human capital in the quantity and quality required by the labor market and whether outgoing students meet the expectations of employers (Development 2010). Accessibility to education and training  institutions, quality, and the degree to which education and training systems produce employable students influence the preparation of individuals with the skills, work experience, and qualifications to meet labor market needs.  In this respect, education and training institutions can impact allocative efficiency in labor markets which can result in skills shortages.

Private rates of return explain the motivation of individuals to pursue different levels and types of education to augment natural abilities with skills subsequently sold in the labor market. Individuals engage in an investment optimization process in which they participate in education and training as long as the value stream of future earnings is more than foregone earnings, training, and equipment expenses. However, empirical studies have shown that wage differentials relative to less skilled workers can be affected by sectoral shifts requiring higher skill intensity (Schultz 1975); when expansion of educated labor outpaces expansion in employment (Pritchett 2001); and where technological progress is rapid and government policy is conducive to technological progress and skill intensive development (Rosenzweig 2010). Since the impacts of government industrialization policy may be unknown to individuals, information gaps about the future trajectory of industries and emergent skills needs, the returns to investing in particular skills sets, and projecting the future returns of education and training investments can result in market failure. Skilling investments may also be subject to short-termism in which individuals are unwilling to invest in skills with uncertain and longer-term return horizons. The motivation of the labor force to engage in lifelong learning to ensure continued relevancy of skills may similarly be impacted by return uncertainties. Capital market weaknesses in terms of a lack of funding to finance education and training investments can lead to underinvestment. Externalities and labor market rigidities may also alter the incentives and returns to skilling resulting in sub optimal investment in skills formation. The many factors which can alter the expected return to particular skills or which signal sectoral growth or promise affect individual skilling decisions which may result in skills shortages.

Returning to the proposition that recruitment difficulties due to skills shortages are a symptom of greater problems in the skills formation system, it seems probable that skill shortages can result from market and institutional failures in the governance and institutional quality of skills formation systems, the employability of outgoing students from the education and training system, and  informational or policy-related sources of uncertainty which motivate individual investment in skills development. Market and institutional failures may influence firms to engage in substitution behavior where they hire employees which they know require additional skills to meet firm needs in the face of skills shortages. Similarly, market failures and institutional quality can result in a situation where new entrants to the labor force appear to be qualified but are subsequently found to lack skills. Both of these scenarios can result in skills gaps as firms absorb employees from the external labor market who do not have the required skills, work experience, or qualifications when facing recruitment difficulties attributed to skills shortages.

HR practices related to employee development, motivation, and retention: Firms provide training to increase and maintain workforce skills levels to support core competencies in addition to developing new skills that can form the basis of future firm competencies. The willingness and ability of firms to provide training and development depends on a number of factors. Managerial calculations of the returns to training may be complicated by informational gaps surrounding technology, future skill requirements, and benefits of training (Lall 1999). In situations of market or institutional failure, staff development may require training to retain competitiveness in addition to remediating inadequate pre-employment skills formation. Employee poaching, the tendency of firms to recruit employees with transferrable skills from other firms, and turnover may serve to limit firm-based training since training firms incur the cost of employee training only to lose the employee and resulting benefits of the training to another firm. Depressed levels of training and development due to a variety of factors can lead to skills gaps that erode creation and production of firm competencies jeopardizing the application of workforce skills toward market-oriented business objectives.

As mentioned in the discussion on the competence-based view of the firm, it is not enough for a firm to have a highly skilled workforce to achieve competitive advantage. A firm’s human resources pool must also be motivated to act in the interests of the firm. In England (30%), Scotland (7%), Northern Ireland (19%), and New Zealand (16%) many firms cite employee motivation as a cause of skills gaps (Zealand 2008; Shury, Vivian et al. 2009; Education Analytical Services 2010; Shury, Winterbotham et al. 2010). HR practices are both a way to develop workforce skills as well as to ensure alignment between workforce behavior and firm-level goals. HR practices, through their influence on employee motivation, induce productive employee behavior to apply their skills. Similarly, HR practices can affect employee turnover levels. For example, HR systems which promote employee involvement, participation, training in group problem solving, socializing, high concentrations of skilled employees, and higher average wages have been shown to reduce turnover (Arthur 1994; Delaney and Huselid 1996).

Numerous theories and metatheories of workforce motivation exist which propose various sources of motivation leading to individual behavior. By understanding the sources of motivation, firms can design HR policies to encourage productive employee behavior which enables full deployment of workforce skills. The most commonly researched HR policy areas which impact motivation include rewards (such as compensation and promotional systems); task (aspects of job and task design); management style; and social inducement systems (Leonard, Beauvais et al. 1999). Several studies have found that task complexity and whether a task is considered interesting or not may be more suited to certain types of motivational inducement systems (Gagne and Deci 2005). These findings suggest HR practices require tailoring to specific firm, job, and industry contexts to induce productive employee behavior. The consequence of misalignment of HR practices with sources of workforce motivation can affect employees’ choices regarding the direction, level of effort, and persistence of behavior which can lead to skills gaps.

Strategic shifts in response to changing business environments: The competence-based view of the firm stresses the criticality of consolidating human and other resources into market-oriented competencies that allow firms to adapt to changing environments. The ongoing renewal of competencies has implications on business processes, market positions, and expansion paths (Teece, Pisano et al. 1997). Competency renewal may involve changes in company strategy, goals, markets, business models, products and services, working practices, or technology. Evolving business strategies in response to the competency renewal process may require specialized skills that current employees lack resulting in skills gaps. Similarly, changing job requirements due, for example, to technology adoption or job promotion, might mean that once proficient employees now lack skills to perform new or evolving roles. Increasing and maintaining workforce skills in light of competency building and renewal in response to changing opportunities implies that skills gaps can emerge as firms struggle to respond to internal and external forces that threaten firm competitiveness.

Transitional stages of employee orientation and integration: A large percentage of employers in several countries highlight recent recruitment, post-merger employee integration, and lack of experience as a cause of skills gaps (Development 2006; Zealand 2008; Shury, Vivian et al. 2009; Education Analytical Services 2010; Shury, Winterbotham et al. 2010). However, it is unclear to what extent temporary, transitional phases associated with the beginning of the employee-employer relationship can be considered a cause of skills gaps since presumably such transitory skill gaps are likely to decrease as employees complete induction training and gain confidence in their roles. Generally induction training is firm specific and focused on acquainting new employees with the company structure, specific job requirements, and organization policies (Bijnens and Vanbuel 2007). A more appropriate indicator of causality would be whether an employee exhibits post-induction training persistence of a lack of skills to perform a job which results in the compromised ability of a firm to meet business objectives. Such an output indicator would then point toward an insufficient induction and integration program, rather than state of completion of the induction or integration program, as a potential source of skills gaps. Nevertheless, firms appear to view transitional stages in the employee induction process as a significant source of skills gaps.

A typology of skills gaps that considers this discussion and captures the present understanding of the source of skills gaps is shown in Figure 2 and explained below:

A typology of the causes of skills gaps

In this figure, we advanced a typology of skills gaps that considers this discussion and captures the present understanding of the source of skills gaps from several national skills surveys.

Market and Institutional Failure Induced Skills Gaps: These are skills gaps which stem from market and institutional failures in the skills formation system. When facing difficulty in recruiting employees from the external labor market under current market conditions due to lack of required skills, work experience, or qualifications a company demands, firms engage in substitution behavior by hiring staff who require further training. Firms may also hire new entrants to the labor market who are apparently trained and qualified for occupations but who are subsequently found to still lack a variety of the skills required. Market and Institutional Failure Induced Skills Gaps are caused by

•Poor Skills Formation Policy: Government coordination of the skills formation system fails to link economic development with the evolution of education and training systems; ensure qualitative and quantitative supply-demand match between outgoing students and the needs of the labor market; facilitate regular, on-the-job training provision and  participation in skills formation by the business community; and address policy, informational, or financial sources of individual underinvestment in skills development or

•Education and Training System Misalignment: Accessibility, quality, and the degree to which education and training systems produce employable students are insufficient to prepare individuals with the skills, work experience, and qualifications to meet labor market needs or

•Insufficient Individual Investment: The many factors which can alter the expected return to particular skills or which signal sectoral growth or promise negatively impact individual skilling decisions.

Human Resources Management Related Skills Gaps: These are skills gaps which are a result of inadequate HR practices related to employee development, motivation, and retention. Human Resources Management Related Skills Gaps are caused by

•Insufficient Staff Development: Depressed levels or inadequately planned training and development that erode creation and production of firm competencies jeopardizing the application of workforce skills toward market-oriented business objectives or

•Poor Retention and Motivation Practices: HR practices that inadequately address employee retention or a misalignment of HR practices with sources of workforce motivation.

Structural Skills Gaps: These are skills gaps which are a result of strategic shifts in response to changing business environments that lead to a mismatch between current workforce skills and the requirements of employers. Structural Skills Gaps are caused by

•Strategic Shifts in Response to Changing Business Environments: Failure to increase and maintain workforce skills to build and renew firm competencies in response to changing business opportunities that may involve adjustments in company strategy, goals, markets, business models, products and services, working practices, or technology. Structural skills gaps can be viewed as a strategy-skills lag in which current workforce skills lag new or expanded skills required by alternative strategic directions associated with competency renewal. Causal ambiguity and environmental complexity makes it difficult for managers to determine the sufficiency of the current human resources pool relative to desired states of the human resources pool to achieve adapted or future business outcomes.

Transitional Skills Gaps: These are skills gaps attributable to the beginning of the employee-employer relationship whether due to recent recruitment or post-merger employee integration. Presumably transitory skill gaps are likely to decrease as employees complete induction training and gain confidence in their roles.

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With increasing attention on a growing “skills gap” in many countries, it is important to ensure that there is conceptual clarity surrounding the term. The term “skills gap” is often incorrectly used as a catchall term describing both quantitative shortages in external labor markets as well as qualitative skills deficiencies internal to the firm.

A multicountry, practice-based review of employer surveys reveals a distinction between skills deficiencies found in the external labor market (‘skills shortages’) and those applicable to a firm’s existing workforce (‘skills gaps’). Previous employer surveys conducted primarily in the UK define a skills shortage as an expressed difficulty in recruiting individuals from the external labor market under current market conditions with a particular skill set due a low number of applicants caused by least one of the following reasons: lack of required skills; lack of work experience a company demands; or lack of qualifications a company demands (Shah and Burke 2003; Paterson, Visser et al. 2008; Education Analytical Services 2010; Shury, Winterbotham et al. 2010). Because skills shortages apply to the external labor market while skills gaps apply internally to the firm, these survey approaches imply the two concepts of a skills shortage and a skills gap are separate and distinct phenomena.

The Inadequacy of the Pricing Mechanism in Solving Skills Deficiencies

The view that skills deficiencies are ephemeral and disappear as labor markets adjust is widely held (See for example Hay, Faruq et al. 2011). Underpinning this view is a belief that the pricing mechanism, exercised through expected wage returns and premia that motivate individual investment in particular types of skills and the ability of firms to increase extrinsic pay to obtain particular skills, leads to allocative efficiency within labor markets. However, persistent skills deficiencies over the last decade reported in several countries that began instituting national skills surveys in the early 2000s challenge the assumption that skill deficiencies are short lived and the effectiveness of the pricing mechanism in reducing the occurrence of deficiencies (Shah and Burke 2003; Paterson, Visser et al. 2008; Education Analytical Services 2010; Shury, Winterbotham et al. 2010).

The cobweb theory explains how labor market adjustments related to professions requiring training that delays labor market entry might mitigate the effect of the pricing mechanism on skills supply and complicate reaching market equilibrium. Shifts in the underlying supply of and demand for skills require time to reestablish market equilibrium due to the lag in time it takes to develop particular skills. For example, in analyzing the markets for lawyers and engineers, Freeman (1975; 1976) finds that the duration of the training period to obtain particular labor market skills and accompanying lag in labor market entry due to the training period can result in cyclical shortage-surplus cycles in professional labor markets. Freeman employs the cobweb model to show that supply of particular labor market skills is highly related to the economics of a profession, such as expected salary, and other forces that signal ongoing job opportunities and the state of the market such as R&D, output levels, and competition from others with similar skills. An important finding of Freeman’s model is that forces signaling professional opportunity and market health are more influential in motivating the supply of particular skillsets than salaries. Various factors are at play that signal increasing demand for a particular skillset, but the supply of individuals with those skills is delayed by the amount of time training to acquire a particular skills set takes. The time lag between the duration of the training period and labor market entry may potentially explain how labor market adjustment caused by adaptive expectations could potentially lead to endogenous cyclical cycles of skills shortages. While there is no similar theory regarding skills gaps, empirical studies also cast doubt on the pricing mechanism as a corrective measure to eliminate internal skills deficiencies. In skills surveys across a number of countries, firms consistently rank increasing pay or relying on the market mechanism amongst the least used measures to overcome skills gaps (Young and Morrell 2006; Management 2009; Shury, Vivian et al. 2009; Education Analytical Services 2010; Shury, Winterbotham et al. 2010).

Given the questionable role of price adjustment in remedying immediate labor market skills deficiencies, such as skills gaps, ensuring conceptual clarity, understanding the causes and consequences, and considering potential solutions is critical. Rather than an ephemeral shock, skills gaps have been a persistent issue immune to corrective market forces that affect the workforce of firms in many countries.

Tahseen Consulting’s Related Work on Education and Skills Formation

Creating National Skills Formation for Knowledge-based Development

How Skills Gaps Impact Firm Performance in the Arab World

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