Tripartite Consultative Committee on Labour Fees

1

Tripartite Consultative Committee on Labour Fees

Bahrain labour market reform and labour fees

Discussion paper

Draft 1

Policy Directorate

Labour Market Regulatory Authority

• Overview of the labour market reform

On September 23, 2004, a workshop under the patronage of H.H. Sheikh Salman bin Hamad Al Khalifa, Crown Prince of the Kingdom of Bahrain, launched a national dialogue on the current status and future prospect of the labour market in Bahrain, marking a genuine belief in the power of social dialogue for addressing some of the challenges facing the nation today. A strong consensus has since been developed among the key stakeholders and segments of the society on the urgent need for reform of the labour market.

The workshop singled out the critical areas of labour market access, the relationship between employer and employee and labour market governance, and examined alternative policies for labour market reform and their link with the concurrent economic and education reforms. Two overarching objectives of the labour market reform were proclaimed:(a) to encourage the private sector to become the engine of economic growth in Bahrain; and (b) to make Bahrainis the employees of choice in the private sector.

Within this broad framework, a specific set of policy recommendations were laid out:

1. Impose a system of labour fees and quota ceilings for non-Bahraini workers to restrict the supply of labour across the entire economy;
2. Subsidise basic work readiness training for Bahrainis through revenues collected from labour fees and provide incentives for Bahrainis to work in the private sector;
3. Increase mobility of non-Bahraini workers by allowing those with a valid work visa to switch employers;
4. Raise working standards for all employees by adopting and enforcing regulations adhering to international ILO standards;
5. Eliminate Bahrainisation targets in the form of enforcing quotas;
6. Implement clear and predictable termination process for all employees and install efficient and effective arbitration panels and/or labour courts.

While it is not the objective of the present paper to describe in details the nature of these six policy recommendations,[1] it is important to stress that they were proposed as a package. This means that the desired impact on the labour market in terms of improving the competitiveness of Bahraini labour and changing the mode of job creation toward more productive and better paid jobs for citizens is subject to the implementation of the policies as a whole, in a gradual and coherent way.

The particular issue of the labour fees has occupied a wide space in the public debate after the September 2004 workshop, and reached its highest point at the Parliament and the Shoura Council during the deliberation of Law 19 of 2006 regarding the regulation of labour market.[2] Concerns were raised on the level of the fees and its uniform application on all sectors and all types of foreign labour. The approach toward Bahrainisation has also been an important concern both in term of its gradual “elimination” and its link with the fees. The lack of reliable data on the structure of labour cost has further contributed toward suspecting the need to raise the current labour fees.

As finally adopted, the labour market law stipulates in its Article 5 that LMRA should consultthe public and the concerned parties when attempting to issue any regulations affecting the labour market.

In Article 42 on fees, three types are distinguished (labour fees on foreign workers, fees on recruitment agencies and fees on foreign employers establishing businesses in Bahrain). The Article further entrusts LMRA to suggest to the Cabinet the level of the fees, the ratios of increase and decrease, and the circumstances under which they may be fully or partially reimbursed, taking into consideration the recommendations of the parties concerned, the guidelines of the national labour market plan, and the competitiveness of Bahraini workers.

It also states that any proposed increase of fees should be accompanied by gradual reductions in the Bahrainisation quota requirement, and no increase of fees is permitted before conducting research on its economic impact, particularly, on the inflation rates and CPI. The Article stipulates that LMRA should suggest a special system for home workers after three years of the implementation of the law.

The implementation of the other policy recommendations have found their legal framework in Article 25 on transfer of foreign employees to other employers and in Article 4/A4 on promotion and awareness of “rights, responsibilities, values, work ethic, work safety, and professional and environmental safety at work.” Finally, Law No xx of 2006 regarding the establishment of labour fund addresses the policy measures relating to enhancing the employability of Bahrainis.[3]

1. Employment prospects

The ultimate objective of the labour market reform is to provide productive and adequately remunerated employment to all Bahrainis in the work force. The proposed labour fees together with a series of other measures mentioned earlier (footnote 2, p. 2) are designed to serve this overarching objective.

Although the exact process by which these policies will result in more productive jobs and lower unemployment among Bahrainis is not clearly spelled out, it is important to assess the current employment situation in order to be able to study the effect of the policies when they are implemented in 2007.

The aim of this section is to measure the current rate of growth of employment and its prospect within the next twelve months on the basis of the information obtained from the March 2006 establishment survey.

Two types of data from the survey are helpful for this purpose: the data on employment flows into and out of establishments during the past twelve months; and the data on the recruitment plan of employers during the next twelve months.

• Flows into employment

Employees covered by the survey were asked to report on the number of years they have been engaged in the establishment in which they are currently working. The distribution of employees by length of tenure in the establishment is shown below for Bahraini and non-Bahraini workers separately.

As most duration data, the distributions of length of tenure survey presented in the two graphs follow closely an exponential distribution. Several humps may be noted at multiple of ten years 10, 20, 30 Bahraini and 10, 20 non-Bahrainis, due to the rounding effect in reporting durations.The distribution shows that average number of years of tenure was about 9½ among Bahrainis and 5¾ among non-Bahrainis.[4]

Employees with one year or less work experience in the establishment constitute part of the new entrants into employment. According to the survey results, the numbers were 17’800 among Bahrainis and 34’900 among non-Bahrainis. These data indicate that some 18% of the Bahraini employees entered the establishment workforce within the last twelve months. The percentage among non-Bahrainis was just slightly higher at 19%.

The following tables show the distribution of new entrants by level of education and age group.

Among the Bahraini employees with one year or less work experience in the establishment, there were 2’500 who entered employment as part of the newly created establishments. The survey indicates that about 1’960 new establishments started operation during the year, representing nearly 10% of the operating establishments in March 2006. Counting for each new establishment at least one employer or own-account worker, this result indicates that the count of the flow into employment should be increased by at least 1’960.

In addition to the new entrant employees and the new employers or own-account workers, the total flow into employment in the past twelve months includes those who have entered and left employment during the year. Because most of these persons are not currently employed in the establishment, they are not covered by the survey. However, an estimate of their numbers can be calculated by making steady-state assumptions on the transition probabilities between employment and n on-employment statuses during the year. According to the calculations, there were 5’500 Bahrainis and 3’800 non-Bahrainis who entered and left employment within the year. Given that the total number of non-Bahraini workers is much higher than that of Bahraini workers, these results indicate a considerably higher turnover of Bahraini workers in comparison with non-Bahrainis.

• Flows out of employment

The survey inquires on the number of employees who left employment during the preceding calendar year, with distinguishing between male and female, and Bahraini and non-Bahraini workers. The following table presents the results in terms of the reason for leaving employment, with distinction by private and public sector establishments.

Note: Flows out of employment due to sickness have been deleted from these tables due to reporting errors on this item in the survey.

• Employment growth in 2006

Combining the estimates of flows into and out of employment provide the basis for calculating the net change in the level of employment during the last 12 months. The results for Bahrainis are shown schematically in the diagram below. The details results including those for non-Bahrainis are presented in a separate annex.

According to the data in the graph above, the new increase in Bahraini employment in 2005-2006 was 8,500, corresponding to a 12% annual growth rate of employment. During the period from 2002 to 2005, the average annual growth rate of employment of Bahraini was 9.3%. Thus, the survey data show a significant acceleration in the employment of Bahrainis in the last year.

This result is corroborated with other results. In particular, the data on recruitment plans of employers show also an increase in the prospects for employment in the next 12 months. Furthermore, recent data on national accounts indicate that GDP has been growing at annual rate of about 7% in 2005, a significant increase from the previous year. Finally, commercial registration (CR) data from the Ministry of Industry and Commerce shows that rate increase in new establishments in the first quarter of 2006 was at 5%, an increase from the 4% rate in 2005.

It should be noted that non-Bahraini employment has been accelerating at an even faster in the year 12 months, implying that the Bahrainisation rate continues to decrease despite the improvement of employment of Bahrainis.

2. Differential labour cost

Bahrain is embarking on an ambitious labour market reform as part of a broader set of economic and education reforms with the double objective of making:the private sector the engine for growth in the economy; and the Bahrainis the preferredchoice of employees in the private sector.[5] The core of the labour reform is a system of labour fees applicable to non-Bahraini workers, designed to improve the competitiveness of Bahraini workers by eliminating or reducing the existing gap between the labour cost of Bahraini and that of non-Bahraini workers. The introduction of the labour fees together with a series of other measures[6] is intended to provide the necessary incentives for employers to increase their employment of Bahrainis in the private sector.

To update some of the data used for the design of the labour reform, the Labour Market Regulatory Authority (LMRA) funded the execution of a survey of establishments on wage structure and distribution in Bahrain. This survey was conducted by the Central Informatics Organisation (CIO) in March 2006 and the preliminary results made available in August 2006.

The purpose of the present chapter is to briefly describe the survey design and contents and then to analyse the results of the survey, in particularto measure the differential labour cost between Bahraini and non-Bahraini workers in different branches of economic activity and compare the resulting estimates with those used in the calculation of labour fees in the design of the labour market reform by McKinsey & Company.

• Establishment survey

The establishment survey on wage structure and distribution, March 2006, is the first survey of its kind conducted in Bahrain[7]. Its main objectives are to provide data on

• Wage rates, earnings and hours of work

-by branch of economic activity

-by size of establishment

-by occupation and other job characteristic of employees

• Certain components of wages, earnings and labour cost
• Current employment as well as employment plans in the next twelve months

• Scope

The survey has been conducted on a sample of private establishments covering all economic activities except agriculture and allied activities, and mining, community services and international organisations, individual employers, own-account workers and households hiring domestic servants. An establishment is defined to be any unit registered under a single CR number and branch number in General Organisation for Social Insurance (GOSI) records.

The survey also covered public administration and semi-public institutions excluding military institutions and workers registered at the Civil Service Bureau (CSB) but not in Pension Fund Commission (PFC). An institution is defined to be any unit under a single organisation code in PFC records.

• Contents

The survey consisted of two parts with separate questionnaires, one concerning the establishment and other concerning the employees. The establishment questionnaire covered 18 items as follows

–Year of obtaining CR

–Year of starting business

–Main economic activity

–Address

–Ownership

–Normal daily hours

–Actual days of work

–Persons engaged

–Paid employees

–Wages, allowances, overtime, in-kind earnings and other

–Non-wage labour cost

–Departures and termination pay

–Recruitment

–Stoppage of operations

The employee questionnaire covered 29 items:

–Sex

–Year of birth

–Nationality

–Location of residence

–Marital status

–Educational level

–Specialization

–Occupation

–Usual hours and days of work

–Overtime hours

–Mode of receipt of payment

–Wages, allowances, overtime, bonuses and deductions

–Total work experience

–Work experience in the establishment

–Shift pattern

–Nature of contract

–Training, location and type

• Sample

The private sector establishments within the scope of the survey were stratified by branch of economic activity and size of establishments in terms of number of persons engaged for sampling purposes. All large establishments with 100 persons engaged and more were selected with certainty in the sample. Mid-size establishments with 10 to 99 persons engaged were sampled with a ratio of 50% and small establishments with less than 9 persons engaged were sampled with a ratio of 10%.

The survey covered both establishments and employees. In small establishments, all paid employees were covered, but in mid and large establishments, a sub-sample of the employees was drawn to limit the cost and improve the efficiency of the survey.

The public sector sample consisted of 10 government institutions selected on the basis of their activity and representative ness. Within each selected government institution, a sub-sample of 50 employees was drawn for the employee survey.

The target sample consisted of 1’164 private establishments (from a total 28’721) and 4’578 employees (from a total of 299’931). Some 111 could not be found,[8] 101 establishments had closed down and 164 refused to provide information. Among the remaining, 747 responded to both the establishment and employee questionnaires, and 726 to only the establishment questionnaire, giving a total of 4’181 filled questionnaires for employees.

The response rates (82% among establishments and 91% among employees) can be considered as relatively high in comparison with response rates for such surveys in other countries.

• Labour cost

Labour cost is the cost incurred by the employer in the employment of labour. It is the broadest definition of wages. In general, wages can be regarded in different ways. As the price of a unit of labour, it is called wage rate; as an income to employees, it is called earnings; and as a cost to the employer, it is called labour cost. The diagram below illustrates these three distinct ways of looking at wages.

Labour cost includesdirect wages and salaries, remuneration for time paid for but not worked, bonuses and gratuities, the cost of food, drink and other payments in kind, cost of workers' housing borne by employers, employers' social security expenditures, cost to the employer for vocational training, welfare services and miscellaneous items, such as transport of workers, work clothes and recruitment, together with taxes regarded as labour cost. The detailed components of labour cost are given in the international standard classification of labour cost.[9]

Where labour cost is measured by a specially designed survey, the preferred unit of data collection is, where possible, the establishment rather than the enterprise or firm, so far as the accounting system used enables a multi-establishment enterprise to supply data for each establishment. The observation period covers in principle the 12 months of the calendar year, whenever possible, otherwise the usual accounting year, to take account of expenditures which occur only annually or irregularly.

• Calculation

Labour cost may be calculated in at least three ways, depending on the choice of the unit of measurement. Labour cost is often calculated per month for a typical worker, but it can also be calculated per hour, in which case it is generally called hourly labour cost. The third way of calculating labour cost is per unit of output, in which case it is called unit labour cost. In this report, the first choice is adopted and labour cost is measured per worker and per month.

The establishment survey on wage structure and distribution was not specifically designed to measure labour cost, but its results provide data on most of its components.

The following diagram lists the components of labour cost measured from the survey and the estimated average monthly values for Bahraini and non-Bahraini workers in the scope of the survey.