The Saudi working-age population is considered as the labor supply of the economy, while the immigrant working-age population depends on the DEL by the host economy. The native and immigrant workforce are two labor sources: complements or substitutes (Grossman 1982, Ortega-Peri 2009). The resulting outcome between these two effects is more an empirical issue. It depends on the macro-dynamic of the labor market, relying on the intensity of the economic activities and the management and technological skills into the productive sectors of the economy (Peterson 2017). The relationship between the
31 All data and empirical outputs are available upon request.
23
population growth, the current account, and economic growth depends on specific conditions prevailing in the countries and their economic areas and financial connection.
Figures B.1 (Appendix 2) show that in the short-run, a positive shock of international trade-income-transfers (TIT) leads to a decrease the CA-to-GDP, but this impact changes throughout the temporal horizon. In contrast, any negative shock will lead to speedy correction of the CA-to-GDP process. The dynamic mechanism behind this correction could be due to further exports, mostly when the negative shock comes from incomes and transfers. The agents of the economy would respond by smoothing their consumption in response to shocks, supporting such correction. Moreover, there is a no sufficiently hump-shaped function as the quick decreasing reactions of CA-to-GDP turn back, after three years, quickly enough to have an increasing path for only two years ahead and become stable for a long term. Such outcome can be due to a sticky behavior of the CAB to exogeneous shocks.
A positive shock in the domestic working-age population (SWP) shows interesting dynamics on the CA-to-GDP path. It leads to a decrease in this path during 3rd-to-8th horizon periods. But this shock increases the CA-to-GDP in the 2d period and gradually for long periods from the 9th year with a hump-shaped positive reaction. In other words, a positive shock in SWP, increasing the Saudi active-age, would improve the CAB in the long-term. During the first seventeen years, the effects of Saudi working-age population shocks and demand labor for immigrant shocks on the CA-to-GDP moved in opposite directions. But the combination of the two effects leads to improve the CA-to-GDP (Figures B.1) as the positive effects of DEL shocks dominate and cancel out the negative effects of SWP in the medium term.
As predicted theoretically in sub-section 4.1, there is a cumulative positive contribution of the immigrant working-age population on the CA-to-GDP ratio. Also, as predicted, the positive real domestic supply shocks largely and positively impact the CA-to-GDP, generating a hump-shaped reaction. This indicates that any positive shock in macro-supply would positively affect the current account growth in the short to medium term up to 25 years ahead. However, in the long-run, these effects decay very slowly (Figures B.1).
By considering the IRF of Saudi ADR, we find a negative hump-shaped reaction to immigration policy shocks during a generation, i.e., positive shocks in the DEL (Figures B.2). When the shocks emanate from immigrants’ working-age, there is a complex mechanism from complementarity process (part of the decreasing response curve) to the substitutability process (part of the increasing response
24
curve) between the immigrant and Saudi workforce.32 This means that, in short and medium terms, an increase in the immigrant working-age population drives a decrease in Saudi ADR (i.e. increase of Saudi working-age population); and in the long-term to its increases even though it remains negative for up to 25 years. The first complementarity process can be because the flow of immigrant workers can enlarge the labor market prospects of Saudi working-ages for some specific specialties and skills (Dustmann et al.
2005). Moreover, the rationale behind the second process of substitutability for a long period is that native employment has progressive adverse effects on the immigrant workforce in the Saudi labor market for a long period ahead. The cumulative negative effects dominate, meaning that the Saudi ADR reactions lead to its decrease; therefore, more Saudi workers will be in the labor market.
However, the immigrant inflows do not strongly affect the established native workers, but could affect potential native workers mainly during bad economic cycles. Nevertheless, the substitution mechanism between immigrants and Saudi workers would not be problematic as several immigrants have low skills in the long-run. According to our empirical results and as the immigration level is highly regulated by the Saudi government, the immigrants appear to be more complements than substitutes to Saudi workers. This finding is supported in the empirical work of Boubtane et al. (2013).
Furthermore, and from Figures B.3, during a generation, i.e., a horizon of the first twenty-five years, the positive shocks in SWP growth generate a positive hump-shaped reaction of the immigrant ADR growth. This means that when the shocks emanate from Saudi working-age population, there is a complex mechanism from the substitutability process to the complementarity process between Saudi and immigrant working-age population. Regarding shocks, this outcome indicates that the cumulative positive effects dominate, meaning that the immigrant ADR reactions lead to its increase. Consequently, there will be fewer immigrant workers in the Saudi labor market as most immigrants lives alone in the host country.
Overall, the hump-shaped IRF of the immigrant ADR reflects the magnitude in the dynamic interaction between immigrant and domestic populations. However, during the first fifteen years ahead, the positive responses of immigrant ADR decrease monotonically to the DEL shocks. Such IRF becomes negative, by a small magnitude, during the next twenty-five years ahead and converges to zero. The explanation of such effects is simply because such shocks increase the overall number of the immigrant workforce.
Consequently, this reduces the immigrant ADR continuously as they keep their family members in their native countries. By combining both DEL shocks on Saudi ADR and SWP shocks on immigrant ADR,
32 By considering the OECD countries, Ortega and Peri (2009) emphasize that there is no evidence of crowding-out of natives by the immigrants.
25
the effects of their respective IRF show that the complementarity process between immigrant and the native population dominates in the short and medium terms. However, in the long term, the effects indicate that the substitutability process prevails. This means that the human capital of immigrants can positively adjust the disequilibrium, in the short and medium term, between native and immigrant workforce in the domestic labor market and negatively in the long term. The first adjustment process is due to complementarity and the second process is due to substitutability.
A positive shock of Saudi ADR leads to a volatile GDP growth (Figures B.4). In the short-run, a positive shock of DEL generates volatile impacts on GDP growth; but in the long-run horizon, the effect is positive. Such an empirical outcome establishes some previous empirical assertions as in Ortega and Peri (2009) and Peri (2016) differently. In the short and medium-term, the reactions of GDP growth to both shocks of native and immigrant working-age populations move unsteadily in opposite directions.
Still, in the long-run both effects become moderately positive. This result could mean that the increased qualification and learning-by-doing mechanism among immigrants and natives contribute to improving the GDP. Summing up, the IRF of GDP growth cannot produce hump-shaped responses since the adjustments are oscillatory; the mechanisms behind these behaviors that amplify their propagation are from many channels such as the learning-by-doing, labor adjustment costs, and redistribution.
Table 4. Structural variance decomposition analysis
TIT SWP DEL DOS
h=10 h=25 h=50 h=10 h=25 h=50 h=10 h=25 h=50 h=10 h=25 h=50
∆CAY 61.40 49.40 48.74 3.40 7.62 7.91 32.45 38.01 38.35 2.75 4.97 5.00
∆s_ADR 0.03 0.04 0.04 23.05 22.67 22.96 72.65 69.41 69.15 4.27 7.88 7.85
∆ns_ADR 2.69 2.37 2.32 15.05 21.22 21.19 69.15 63.73 63.80 13.11 12.68 12.69
∆g_GDP 13.43 13.32 13.31 2.35 2.49 2.51 5.24 5.73 5.76 78.98 78.46 78.42 Note: Variations in the row variables are explained by structural shocks in column variables. The numbers are in percent for 10, 25 (one generation) and 50 periods (two generations) ahead.
Using structural VAR factors, the variance decomposition measures the contribution of each structural shock source to the forecast error variance in predicting each endogenous variable over a temporal horizon. The variance decomposition (Table 4) displays that, during the horizon of the two next generations, the structural disturbance in DEL explains approximately 69% and nearby 38% of the variations in the native ADR and CA-to-GDP, respectively. In the long-term horizon, the shock in SWP explains merely 21% of the changes in the immigrant ADR, much weaker than the explanation level of Saudi ADR variation by the shock in the DEL. Furthermore, the shock in SWP explains only around 7%
of the fluctuations in CA-to-GDP. In comparison, the shock in the DEL elucidates around 38% of the
26
variation in CA-to-GDP. Parallelly, these respective shocks of native and immigrant workforce explicate nearby 2.5% and 6% of the GDP growth fluctuations, respectively. In the ten years ahead, we can also detect that the structural shock of real domestic supply to the forecast error variance explains approximately 13% of immigrant ADR changes, but only approximately 4% of the variation in Saudi ADR. Furthermore, the shocks in TIT explain about 2.3% and only 0.04%, respectively, of the forecast error variance in immigrant and native ADRs. Additionally, these shocks explain almost 13% of the changes in GDP growth. Overall, the CA-to-GDP variations and the Saudi ADR changes are mostly due to the DEL shocks.
6. Conclusion
By distinguishing the immigrant age dependency rate (ADR), we highlight the dynamic effects of the immigrant working-age population on CA-to-GDP processes, native active age population, and GDP growth. By specifying a structural vector autoregressive (SVAR) framework, we evaluated the impacts of domestic and international shocks on the underlying variables of the VAR model. During a long-term period of less than a generation, the effects of the SWP and DEL shocks on the CA-to-GDP moved in opposite directions. But, in the medium term, the cumulative positive effects of DEL shocks dominate and cancels out the cumulative negative effects of SWP. Also, the positive real domestic supply shocks have large positive impacts on the CA-to-GDP, generating a hump-shaped reaction. These responses decay very slowly in the long-run.
We find a negative hump-shaped reaction of Saudi ADR to immigration policy shocks during a generation. When the shocks emanate from immigrants’ working-age, there is a complex mechanism from the complementarity process to the substitutability process between the immigrant and Saudi workforce.
The first complementarity process can be because the flow of immigrant workers can enlarge the labor market prospects of Saudi working-ages for some specific specialties and skills. The second substitutability process can be because native employment has progressive adverse effects on the immigrant workforce in the Saudi labor market. However, the immigrant inflows do not strongly affect the established native workers but could affect potential native workers mainly during bad economic cycles. According to our empirical results and as the immigration level is highly regulated by the Saudi government, the immigrants appear to be more complements than substitutes to Saudi workers.
Conversely, the positive shocks in domestic working-age population growth generate a positive hump-shaped reaction of immigrant ADR growth. When the shocks emanate from Saudi working-age
27
population, there is a complex substitutability process to the complementarity between Saudi and immigrant working-age population. Consequently, there will be fewer immigrant workers in the Saudi labor market since the majority of immigrants lives alone in the host country.
By combining both the DEL shocks on Saudi ADR and SWP shocks on immigrant ADR, the effects of their respective IRF show that the complementarity process between the immigrant and the native population dominates in the short and medium terms. However, in the long term, the effects indicate that the substitutability process prevails. This means that the immigrant human capital can positively adjust the disequilibrium in the short and medium term, through a complementary process, between native and immigrant workforce in the domestic labor market, and adjust negatively, through a substitutability process in the long term.
In short and medium-term, the reactions of GDP growth to shocks of native and immigrant working-age populations move unsteadily in opposite directions. However, in the long-run, both effects become moderately positive. This outcome could mean that the increased qualification and learning-by-doing mechanisms among immigrants and natives contribute to improving the GDP. Moreover, the variance decomposition displays that overall, during the horizon of the two next generations, the CA-to-GDP variations and the changes in Saudi ADR are mostly due to the structural shocks in the DEL.
An important implication of our findings is that the policymakers and government institutions could improve job opportunities for the native workforce by considering the dynamic processes of complementarity/substitution of the immigrant to native workers. Additionally, the labor strategies of the private sector have to restructure the labor market conditions by matching the skills by age-groups between immigrants and natives and focusing on more productive labor factor than the cheap workforce. The success of such strategies depends on the complementarity or substitution intensities between natives and immigrant workers. Furthermore, the Saudi economy will gain more by institutionalizing familial grouping for immigrants as in Western or European countries. Such a policy would reduce the remittance outflows, but it requires adjusting and regulating immigrant wages to the Saudi wages in private and public sectors. Overall, the Saudi government, in collaboration with the relevant stakeholders, has to find an equilibrium between Saudi and immigrant laborers by breaking down the duality of the labor market through the progressive elimination of the sponsorship system, and by increasing the productivity of labor and enhancing the quality of life for all members of the society.
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