Unemployment in Kuwait

Through the eyes of a layman, or an uninitiated economist like this author, the concept of unemployment carries a common interesting response. On the very simple personal level, employment is “having a job”, which technically translates to “trading your services for money”, which in turn will cover one’s subsistence and some savings, if any. For most people, whether they live in a developed or a struggling country, living with a job is a bare essential. Living without a job can mean damnation, hardship and minimal access to the needed resources.

Unemployment strikes a very strong tone among most people due to the higher number of the world’s adults being salarymen rather entrepreneurs (www. ilo. org). These are the people who, dependent on a salary, feel the usual effects of being laid-off from a job thus suffering economic hardship. Unemployment Defined But beyond the eyes of massive emotions from a striking, laid-off crowd of workers from a factory, the unemployment concept has a much more complicated meaning, especially in the eyes of analytical economics. It is a concept intertwined in the web of factors that form economic output.

To cite Rudiger Dornbusch’s book Macroeconomics, output is basically a function of labor and capital (y=(KN)). In a simple free market economy, it is logical that a “capitalist” throws in some seed money for machines and labor wages, orders the workers to produce an item(s) as efficiently as possible then produce output. Provided this output can sell, the “capitalist” can recover the initial costs of the machine and labor wages, then eventually will profit. In this scenario, provided that the production is in optimum level and products sell, the laborers are safe to keep their jobs and receive regular compensation.

Using this formula, it will be easy to visualize an expansion scenario. If the capitalist wants to make more money, he would then order the increase in output, which means an increase in production cost and labor. If you get a bigger production line, this is what economists call “larger economies of scale” (Wee, 1991). The capitalist needs to get more profit so s/he should sell more items produced. The good news here is, s/he needs more equipment and more manpower (labor) so the capitalist eventually gets more people to help out producing the items.

At the end of the day, there will be more people employed in a specific geographic unit, like a country perhaps. Analyzing the economic strategy of some developing countries will give positive insights on employment as well. According to the World Bank, some countries are encouraged to raise the capital (K) in the output formula by inviting foreign investors, which in turn will provide a large pool of money to pay production machines and a larger labor force, thus employing more people and increasing output. Kuwait

With the interest of analyzing a particular country economy, this author chose to study unemployment that is specific to a small Middle Eastern nation: Kuwait. Even with a tiny mass of land, Kuwait has made economic news for its active and vibrant commerce. The Economist Magazine once stated that Kuwait was “once the most progressive country in the middle east”, owing much to its proportionally large civil service and active oil economy. Yet what seems a promising small Arab state is plagued by economic problems that are now usually found in third world countries.

The anchor article of this analysis is one created by Mary Ann Tetreault for the Britannica Encyclopedia Online about the Kuwaiti economy. This article is macroeconomic in its views and rightfully discusses the overall state economy. It seems that discussions on Kuwaiti employment state that the its government has a “bloated civil service” (Tetreault), which means the bureaucracy has a large labor force and provides significant employment. The article’s statement on “rising unemployment” may well refer to the private (non-government) sector, which is fuelled by a significant oil industrial sector.

Population? The easiest way to rationalize the existence of unemployment in Kuwait is a discussion of overpopulation. The case of rising number of laborers is common in countries with tiny land areas. Population density affects the use of capital in our output formula. Larger numbers of readily available labor can be accommodated to help out in production, but it will dilute the quantity of expenditures, which mathematically means employing more labor to achieve the same output from same capital will give lesser wage per worker.

If it is not sensible to keep more people in the payroll, then the capitalist will lay off the extra hands. One case in point is the steady production of oil from a steady source: the oil fields of Kuwait. Unless there will be more oil fields discovered, venture capitalists will not need extra hands because there are no extra raw materials that would potentially be turned into extra output. This economic logic will prevail regardless of the increasing Kuwaitis born each year. Violence The article cites some violence from neighboring Iraq, which resulted to “damage of its oil industry”.

A damage in the industry may mean a loss of equipment (capital), therefore less money for wages, resulting in less employment. Apparently, the Kuwaiti government is awaiting a $15 billion compensation for these damages (Tetreault). This is living proof of the statement that “violence hurts the macro economy”, thus hurting employment. Retirement Money Regarding government policy on social security, the article cites a faulty retirement measure for mothers. It seems that they can avail full retirement benefits after 15 years of service.

In the parlance of budget planning, there is an unequal allocation of capital in this case. Retirees may be receiving too much money; some of it should be prioritized for job generation through increasing production, resulting in making its new wages. A little change in policy must contain reallocation of retirement money to job generation. Supply and Demand And since oil is the lifeblood of this small nation, it may well be the hope of its unemployment problem. Apparently, most Kuwaitis are employed in the oil sector and the solution can be found in the economic concept of supply demand, and cost.

Dornbusch, economist at MIT, discusses this in depth within the context of the “aggregate supply and demand curve”. According to him, aggregate supply refers to the overall money supply of the maroeconomy. It could well be the value of their currency or its purchasing power. High levels of money supply can result to higher demand from citizens to buy goods. If there is a high demand for goods/items, then the capitalist will be motivated to increase output, therefore production. Increasing the output is an expansionary measure, thus employing more people.

But what accounts for the increasing price of oil? Time Magazine has just reported that the price per barrel had hit the $100 mark in the past week. The reason for the increase in cost is in the demand. It seems that the rapidly growing Chinese Economy is a “dragon gulping more oil” to fuel its industries (Time). This increase in demand happens in the face of a steady source, or rather supply, of oil. Curiously, Tetreault’s article foresees better days for the Kuwaitis, that unemployment should go down with an increasing demand for their domestic product.

But why do Kuwaitis still suffer? Dornbusch has provided a very commendable analysis in his book. Inflation and Unemployment Rudiger Dornbusch dedicated a whole chapter in his book to discuss the nature of aggregate supply and thus explaining unemployment. In an analysis of the Phillips Curve, he emphasizes that “lowering unemployment leads to inflation; yet unemployment depends not on the level of inflation but on the excess of anticipated inflation” (Dornbusch). Speculation on how this applies to Kuwait brings us back to China.

It seems that the $100 price of oil per barrel is an anticipated inflation, or just projection of its price in the following months, based on the history of price movements, maybe in China (ibid. ). How does this affect Kuwaitis? If oil firms are anticipating higher inflation on oil price than the real inflation, they could be anticipating a wage increase as well. To sustain a wage increase, with higher retirement benefits, oil capitalists may well stick to a stagnant labor force, meaning no job generation for an increasing population.

Besides, a stagnant labor force is just what they need, considering they have the same amount of oil supply in Kuwaiti land even though there is increasing demand. The Britannica article presents a hinting solution to the problem: more venture capital. The Kuwaiti Government should encourage more oil capitalists to invest in exploration. Finding more oil sources may well be the key to curb unemployment, because more capital (and more successful explorations) will need more labor to refine more oil to feed the hungry dragon.

Reference:

The Economist. Kuwait’s Encouraging Election.Retrieved January 15, 2008. <http://www. economist. com/research/articlesBySubject/displaystory. cfm? subjectid=9499701&story_id=E1_NNDGRG> Dornbusch, Rudiger. Macroeconomics. 8th ed. Boston : McGraw-Hill, 2001. International Labor Organization. World Employment Report. Retrieved January 15, 2008. <http://www. ilo. org/public/english/region/arpro/beirut/employment/>. Tetreault, Mary Ann. Kuwait. Encyclopedia Brittanica Online Retrieved January 15, 2008. < http://www. britannica. com/eb/article-9344126/Kuwait > Wee Chou How. War and Management. Singapore : Addison-Wesley, 1991.