Is Saudi Arabia training too many graduates?

The world’s largest oil exporter is trying to transform itself into a knowledge economy. This is the goal that the Kingdom of Saudi Arabia set for itself nearly a decade ago and the former Saudi leader, King Abdullah, allocated a large amount of financial resources to modernising the country’s higher education system for this purpose.

Under King Abdullah the fiscal budget for higher education grew steadily to nearly 10% of the total fiscal budget in 2012 and has not fallen below this share ever since.

Financial resources were devoted to both qualitative and quantitative improvement in higher education. This has resulted in a visible improvement in the quality of higher education and a sharp increase in university enrolment.

Both of these steps are essential for the industrial and scientific advancement of Saudi Arabia, but there are fears that the rapid increase in the quantity of university graduates is likely to exceed the professional employment opportunities that the Saudi economy can create in the coming years. As a result, the crisis of unemployment and underemployment among university-educated Saudi nationals may get worse.

While the Saudi universities still lag behind the top 200 best universities in the world, the quality ranking of Saudi universities in comparison to other Arab countries has improved significantly. Several Saudi universities are among the top 10 Arab universities.

Funding for academic research has increased and the government has paid special attention to a few elite research universities with a focus on science and engineering.

More significantly, large investments in higher education have led to a sharp increase in the number of universities and student enrolment.

The number of universities has increased from 15 in 2005 to 34 in the first quarter of 2015. Enrolment in institutions of higher education has also risen from 604,000 in 2005 to approximately one and a half million in 2014. Furthermore, the government has increased its financial support for Saudi citizens who are interested in studying abroad.

The King Abdullah Scholarship Program, or KASP, has offered full financial support to thousands of Saudi students to study in accredited universities in advanced countries. The number of Saudi students studying abroad increased to 130,000 in 2014 and nearly half of these students are studying in the US.

The cost of the KASP programme is currently estimated at US$3.5 billion. This large-scale government support for both domestic and overseas university students implies that a university education is practically within the reach of most young Saudi citizens.

Supply and demand

In the light of this massive investment in higher education, it is crucial to evaluate the costs and benefits of this initiative for the Saudi economy and society.

Assuming that the Saudi higher education institutions are able to train high quality graduates, this massive investment in the development of human capital can only be justified if the Saudi economy can create enough jobs and business opportunities for the large number of Saudi citizens that will earn university degrees in the next decade.

Recent trends in the Saudi labour market and reasonable projections about the job creation capacity of the economy in the coming years suggest that the rapid increase in the number of university graduates may result in a continued surplus of graduates and a lack of suitable jobs for many.

Job opportunities for university graduates

The Saudi government is relying on two policies to create employment opportunities for Saudi citizens.

The first policy is to maintain a high economic growth rate through strong government spending and business-oriented economic reforms. Sustained economic growth has created hundreds of thousands of new jobs and business opportunities in recent years.

Unfortunately, recent evaluations have revealed that only a small fraction of the new jobs are filled by Saudi nationals. Private employers have filled many of these new positions with foreign labour and the public sector remains the main source of jobs for Saudi nationals.

The second policy is the replacement of expatriate workers with Saudi nationals. The government is primarily targeting semi-skilled and skilled jobs in the private sector, which are currently occupied mostly by foreign workers.

Assuming that the Saudi government is successful on both fronts, will the Saudi economy generate enough employment and self-employment opportunities for the army of qualified university graduates that will enter the labour market in the next few years?

We can use the recent trends in employment of Saudi nationals to estimate the domestic labour market’s demand for university graduates in the coming years. In 2014, a total of 4.88 million Saudi citizens were active in the economy and accounted for 45% of total employment. Among these employed citizens 1.55 million (31.7%) had university degrees. The share of Saudi employees with university degrees has risen slowly from 30.1% in 2011 to 31.7%.

From this analysis we can assume that the ongoing policies for replacement of foreign workers with Saudi nationals will increase the share of Saudis in total employment from 45% in 2014 to 52% in 2022.

At the same time, we can also assume that the gradual transformation of the Saudi economy from a resource-based to a knowledge economy, plus the faster replacement of skilled expat workers with educated Saudis, will steadily increase the share of Saudi employees with university degrees – from 31.7% in 2014 to 35% in 2022. I believe these are both reasonable assumptions in light of the recent trends in the Saudi labour market.

Applying these assumptions to the most recent available data – from 2014 – I have been able to generate estimates for the employment capacity of the Saudi economy for university graduates during 2015-22. This simple model projects that the employment figures for college-educated Saudis with a four-year degree or more will increase by 125% from 1.55 million in 2014 to 3.29 million in 2022.

This is equivalent to an average annual growth of 8.5%. Based on these projections the net annual increase in professional jobs for Saudis, which represents employment opportunities for university graduates, will be 162,000 in 2015 and will grow to 280,000 in 2022.

Supply of university graduates

The above projections about the availability of professional jobs must be compared with the supply of Saudi university graduates in the coming years.

As mentioned earlier, Saudi Arabia has experienced a rapid increase in university enrolment in the past 10 years thanks to strong government support for higher education. University enrolment for bachelor, masters and PhD programmes in Saudi Arabia has increased from 432,000 in 2001 to 1.5 million in 2014.

In light of the large commitment of the Saudi government to higher education in the past 10 years and the continuation of their support in the coming years, it is anticipated that enrolment will grow by an average of 9% per year during 2015-17.

It is also expected that the growth rate will slow down gradually during 2018-22 from 8% to 5% due to slower population growth and a smaller number of cohorts graduating from high school. Based on these growth projections it is anticipated that university enrolment will gradually increase to 2.537 million students by 2022.

These enrolment projections allow us to predict the expected number of university graduates who will enter the labour market annually between 2015 and 2022. Since a higher education degree will take an average of four to six years for most students to acquire, it is assumed that the number of graduates in each year will be approximately one fifth of the average enrolment four, five and six years earlier.

Applying this formula to the projected university enrolment figures for 2009-18, it is estimated that the number of graduates in 2014 and 2015 will be 158,000 and 179,000 respectively. It is projected that the number of graduates per year will grow to 386,000 by 2022.

These figures are compatible with an average annual growth rate of 11.7%. The growth rate is larger during the 2015-18 period, but declines gradually to 8% in 2022.

Surplus or deficit of university graduates?

When we compare the projected number of university graduates with the projected demand for university graduates in 2015-22 the results show an annual surplus of graduates in every year of this period.

This projection is consistent with an observed surplus of university graduates in 2012 and 2013. The graduate surplus will initially decline to a low level of 16,000 in 2015, but will rise steadily to more than 100,000 by 2022.

These surplus graduates will either join the ranks of unemployed workers or will have to accept low-skilled jobs that do not require college degrees.

Saudi Arabia is already experiencing a high unemployment rate among its university graduates and this analysis indicates that conditions might not improve. In 2014, the unemployment rate for Saudi nationals with high school or lesser educational levels was 9.5%, but for those with university degrees it was 15.5%.

This figure, however, masks a large gender gap that deserves notice: the unemployment rate for male university graduates in 2014 was only 3.9%, whereas females with university degrees suffered a 32% unemployment rate. This gender gap is likely to continue in the coming years.

Another factor that is likely to make the graduate surplus crisis even worse in the coming years is the large number of Saudi students who will finish their university education abroad and then return home in search of work opportunities.

If the Saudi government maintains the KASP (study abroad) programme at current levels of 130,000 to 150,000 students per year, we can expect an additional 20,000 to 30,000 university graduates with masters and PhD degrees to join the pool of domestic graduates every year.

These graduates enjoy better employment prospects than domestic graduates and they are more likely to capture some of the positions that would otherwise have been available to domestic university graduates.

Overall, the commitment of the Saudi government to all levels of education, and particularly higher education, deserves praise. However, the focus on mass higher education and the generation of a large number of university graduates must be carefully examined.

Training too many university graduates over a short time-span may result in unemployment and disappointment for many of them. Even advanced industrial and post-industrial countries such as the United States and the United Kingdom are struggling with the growing number of unemployed and underemployed university graduates. This crisis of over-education is even worse in some developing countries such as China and South Korea.

Up until now, the Saudi government has been the main employer of Saudi nationals with university degrees. Further expansion of the public sector for the sole purpose of creating additional skilled jobs is not a prudent policy and might not even be sustainable in periods of low oil revenues.

The Saudi policy-makers must plan their higher education admission and enrolment policies in accordance with the economy’s need for different types of skilled labour to avoid falling into an over-education trap in the coming years.

Limiting annual enrolment to institutions of higher education in accordance with realistic projections for the economy’s capacity to absorb university graduates will have several benefits.

First, an adequate supply management policy will prevent the erosion of the status and benefits of the university degrees. Second, Saudi Arabia spends a large amount of resources per student on higher education, which will go to waste when a graduate cannot find a job that uses his or her skills. Preventing excess enrolment will reduce the costs of higher education.

The Saudi government can then use the savings to improve the pay and benefits for semi-skilled and unskilled jobs so that Saudi nationals find these jobs more attractive.

One of the reasons that many nationals currently shy away from these jobs and employers prefer to fill them with foreign workers is that the wages and benefits are very low in comparison with the public sector jobs that are available to university graduates.

Third, limiting enrolment numbers leaves more resources available to focus on the quality of education and research. Transforming universities from knowledge recipients to knowledge producers has been an ideal of Saudi Arabia and other Arab countries for several decades. By focusing on qualitative rather than quantitative growth, Saudi institutions of higher education will have a better chance for realising this dream.

The large enrolment capacity of Saudi universities does not have to suffer if domestic enrolments are cut back; Saudi Arabia can admit talented students and scholars from other Arab countries to use this excess capacity. This will not only enrich the academic environment of Saudi universities, but will also benefit other Arab countries with limited academic resources.

Nader Habibi is professor of Middle East economics in the Crown Center for Middle East Studies at Brandeis University, USA. He is also the founder of Overeducation International. A more detailed version of this article, with footnotes and citations, is available here. The statistics and forecast figures that are presented in this article are available in an EXCEL file here.