Saudi Arabia continues to diversify its economy away from oil and upstream crude production, with the non-oil sector now accounting for well over half of GDP. The government's ambitious Vision 2030 diversification program, announced in 2016, aims to grow the non-oil economy through investment in planned economic diversification projects, "Saudization" of the workforce (replacing expatriates with Saudis), increasing female participation in the workforce, improving the business environment, and broader socioeconomic liberalization.

Saudi Arabia's labor market reforms have led the country's female labor force participation rate for Saudi nationals to nearly double to almost 36% in 2022 from 19% in 2016. This, in turn, boosted the overall participation rate to a record high of 61.7% in March 2023, compared with a record low of 54.2% in June 2017.

If labor force participation continues to grow at the current pace for the next 10 years, S&P Global Ratings Economics estimates the Saudi economy could potentially be US$39 billion, or 3.5%, larger compared to a hypothetical scenario with historical (2000-2022) labor force participation rate growth.

While the biggest jump in Saudi Arabia's female labor force participation has clearly already happened, even smaller, steady increases would continue to benefit the world's 17th largest economy. We calculate that increases in overall participation rate of just 1 percentage point (ppt) per year over the next 10 years would boost the country's annual real GDP growth by an average of 0.3 ppt, to 2.4% per annum (versus 2.1%), assuming that labor force productivity growth for the next 10 years will look the same as the last 20 years.

The odds of real GDP growth averaging 5% or above (which has happened nine times since 2000) during the next 10 years are only 25%, which would essentially require the economy to repeat some of the fastest labor force productivity growth it has ever seen. That said, the broader reforms that have been put in place under the Vision 2030 plan could tip the balance of risks on our assessment to the upside--that is, productivity growth could indeed come in higher than the median experience of the last 22 years.

Higher Education And Lower Fertility Rates Drive Female Advancement

In almost all countries, men are still more likely than women to work outside the home, but the disparity has narrowed significantly in the past 50 years. Saudi Arabia is taking steps to close this gap but has a long way to go to catch up to other high-income countries.

Saudi Arabia's overall female labor force participation rate (nationals plus expatriates) jumped to 35% in 2022 from 17% in 1999, with most of the rise coming since 2016. For Saudi women, that number also rose to close to 36% from 19% in 2016 (see chart 1).

However, the kingdom's female labor force participation rate still lags on the global scale (see chart 2). This is, in part, due to differences in educational attainment and fertility rates (the number of births per woman), along with a still-conservative culture.

Chart 1

Chart 2

The increase in Saudi Arabia's share of working women can be attributed to improved female education, lower fertility rates, and cultural liberalization. In general, the fewer children a woman has, the more she's able to participate in the workforce. Fertility rates have declined to 2.4 children per woman in 2022, from nearly 4 in 2000. This decrease has brought the rate closer to (although still notably above) the level in other advanced economies (see chart 3).

Meanwhile, educational attainment has improved, as nearly 32% of women aged 25 and up in Saudi Arabia held at least a bachelor's degree in 2020, versus 26% in 2017. This is even higher than in some other developed or regional peers (see chart 4).

Furthermore, the female share of graduates from science, technology, engineering, and mathematics programs stood at 36.8% in 2018; on par with or above countries like the U.S. (38%), U.K. (34%), France (32%), and Germany (28%), while still below some regional peers like Oman (56%), Qatar (48%), the United Arab Emirates (41%), and Bahrain (41%).

Chart 3

Chart 4

At the same time, Saudi authorities have implemented measures to reduce some of the impediments to women joining the labor force, such as:

• Providing transportation and childcare subsidies;
• Increasing the availability of childcare;
• Allowing women to drive;
• Increasing remote and hybrid work arrangements;
• Dropping the need for a male guardian to consent to a woman starting a business; and
• Increasing the number of female jobs in the military.

While Saudi female labor force participation has improved, women still make up only 20% of the employed population (see chart 5). Although total unemployment sits at a fairly low 5.6%, women--particularly Saudi nationals--are the bulk of that, making up more than half of jobless nationals (see charts 6 and 7).

Chart 5

Chart 6

For Saudi nationals, women's employment is mainly in the public sector (60%), while nearly 67% of working expatriate women are employed in the "other" sectors such as nonprofit organizations, domestic work, and regional and international organizations (see chart 8). Sectoral trends can partly be explained by the amount of education and the types of degrees women generally attain in the country.

Only 16% of employed expatriate women in Saudi Arabia hold a bachelor's degree and 41% of them have only some level of secondary education. This, and the government reserving public sector jobs for Saudi nationals, could help explain why most non-Saudi women in the country work in "other" sectors and their concentration in public-sector jobs is exceptionally low. In contrast, Saudi women have better levels of education, with 55% of employed women having at least an undergraduate degree.

A plurality of Saudi women (35%) work as managers, followed by clerical jobs (21%). Among expatriate women workers, nearly 80% are engaged in sales/service roles (travel attendants, personal service workers, etc.) or elementary occupations (cleaning, domestic and office help) involving physical labor.

At the same time, technical skills between genders differ considerably, with women largely focused on humanities/education--a requirement for many public sector jobs (see chart 8). However, these skills aren't in high demand in the private sector, as noted by the IMF's 2018 report "The Economic Impact Of Policies To Boost The Employment Of Saudi Nationals," which pointed out the large share of unemployed Saudi women with degrees in education, humanities, and the arts.

Chart 7

Chart 8

And Higher Labor Force Participation Propels Growth…

Long-term economic expansion is essentially determined by the growth (not level) in total hours worked (labor quantity) and output per hour worked (labor productivity). Changes in these factors can bring about a range of plausible outcomes for growth in the next decade, especially past 2025, when our short-term forecast has the Saudi economy converging toward its long-run potential.

To see how labor force participation affects economic expansion, we split real GDP growth into growth in:

• Labor force participation;
• Real GDP per labor force participant; and
• The working-age population (those aged 16 and up).

Of the three sources of potential economic development, growth in labor quantity is straightforward: we more or less know what the working-age population will be (based on fertility and mortality rates, with immigration the only factor varying with policy).

Combine this with growth in labor force participation--that is, the fraction of the population working or looking for work (a somewhat greater unknown but a smaller contributor)--and we get the contribution to growth from labor quantity (see "Modified Growth Accounting Framework" below).

The other source of economic progress--growth in labor productivity--is trickier to project and can have an outsize effect on forecasts. Growth in labor productivity comes from three broad factors:

• Increases in the amount of capital per hour worked (also known as capital deepening or capital intensity);
• Improvements in the quality of labor (human capital, often derived through higher educational attainment); and
• Technological progress (growth in multifactor productivity, also called total factor productivity, which captures improvements in the way companies use their capital and labor but also embeds any errors in the estimated contributions from capital deepening and labor quality).

To model labor productivity, we randomly drew from the history of labor force productivity growth rates (2000-2022). By drawing on history, we effectively include not only a range of policy outcomes but also embedded uncertainty about the economy.

What do 1 million simulations tell us about Saudi's growth next 10 years?

To forecast Saudi Arabia's growth over the next 10 years, we applied what is known as a Monte Carlo simulation to generate a probability distribution of a range of outcomes. We estimated the likely range of future potential GDP growth by randomly drawing labor force productivity rates from 2000-2022, assuming 10% growth in working-age labor force participation over the next 10 years (similar to the 2016-2022 pace) and using U.N. population growth estimates.

In 1 million simulations, Saudi Arabia's estimated median annual real GDP growth rate over the next 10 years is 2.4%, with an interquartile range (25%-75% central estimate) of -0.2% to 5.0% (see scenario A in Table 1). 2.4% growth would still be a step slower than the 3.2% average of the recent past (2000-2022), due to lower population growth in the next 10 years compared with 2000-2022.

Table 1

In a scenario where labor force participation growth follows the longer historical average (2000-2022), combined with projected population growth of 2%, growth would likely average 2.1% with about the same interquartile range (see scenario B in Table 1).

Furthermore, following the same assumptions for population growth as above, we estimate that, in a scenario where growth in labor force participation is solely driven by that of female Saudi nationals, the median annual growth rate over the next 10 years would be 1.7% (see scenario C in table 1).

As a matter of "adding up," any softening from the working-age population and participation rate to supply-side growth must be offset by increasing labor force productivity growth to maintain the same level of GDP growth over time. As such, it's hard to foresee average annual growth changing by more than a few tenths of a percentage point in either direction in the coming decade.

…But Not As Much As Higher Productivity

According to this framework, improved labor productivity will be key to economic growth for Saudi Arabia over the next decade. Compared to the historical performance of East Asian growth champions such as Hong Kong, Singapore, South Korea, and Taiwan, Saudi Arabia's median growth path looks set to lag in terms of labor productivity growth. Therefore, to replicate East Asia's success, Saudi Arabia must improve its labor productivity by increasing capital investments and human capital.

Alternative scenarios that come with higher labor productivity growth would result in drastically different economic prospects. If the Vision 2030 policy reforms succeed, growth could sustainably hit 4%-5%, rather than the 2%-3% based on historical productivity outcomes.

Increasing private-sector dynamism may also help wind down "ghost employment" created by the ever-evolving Nitaqat--a quota policy that forces firms to hire a certain number of Saudis--and instead open real opportunities for women to seek genuine productive employment.

Writer: Joe Maguire.

Related Research

• Saudi Arabia 'A/A-1' Ratings Affirmed; Outlook Stable, RatingsDirect, Sept. 15, 2023
• The Economic Impact Of Policies To Boost The Employment Of Saudi Nationals, IMF, Aug. 24, 2018
• Back To Work In A New Economy: Background Paper On The Saudi Labor Market; Evidence for Policy Design, Harvard Kennedy School, Harvard University; April 2015

Appendix

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