Middle East: Oil, Institutions, and the Informality Gap

The Middle East presents one of the most counterintuitive informality puzzles on the global landscape. The region includes some of the world's wealthiest economies, Gulf exporters with sovereign wealth funds measured in trillions of U.S. dollars and per capita incomes that rival Western Europe. Yet, according to the International Labour Organization, informal employment in the Arab States region stood at 64.9 percent for men and 62.4 percent for women in 2022, a marginal decline from 67.2 percent and 64.6 percent respectively in 2019. Within the wider Middle East and North Africa grouping, published World Bank and IMF estimates place the share of workers outside formal protection at roughly 45 to 65 percent depending on country coverage, with between 80 and 110 million workers affected.

The headline rate is not an accident of measurement. It is the product of three interlocking structures: the kafala sponsorship system that governs foreign workers across the Gulf Cooperation Council, the institutional fragility of non-oil economies in the Levant and North Africa, and a youth unemployment crisis that the International Labour Organization has ranked among the most severe globally for more than a decade.

This episode maps the region's informality landscape, evaluates the gender dimension in a context where female labor force participation remains the lowest in the world (19 percent in MENA in 2023, per World Bank data), dissects the structural drivers from resource dependence to kafala to conflict, and reviews reform experiments from Saudi Arabia's Vision 2030 and Nitaqat programs to the United Arab Emirates' Wage Protection System and the Jordan Compact on Syrian refugee employment.

The Middle East sits in a distinctive position on the global informality spectrum. The regional rate is moderate by developing-world standards but high relative to the region's wealth and state capacity. The regional average conceals enormous variation across four country clusters: the Gulf Cooperation Council (Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Bahrain, Oman), the Levant (Jordan, Lebanon, Syria, Iraq), North Africa (Egypt, Tunisia, Morocco, Algeria, Libya), and the conflict-affected economies (Syria, Yemen, and portions of Iraq and Libya).

Within the Gulf, public-sector employment for nationals is near-universal and formal, driven by Saudization, Emiratization, Omanization, and Kuwaitization quotas. The private sector, by contrast, is staffed largely by foreign workers under kafala sponsorship, which produces documented but substantively unprotected employment. Beyond the Gulf, the picture changes dramatically: Iraq, Yemen, and Syria have been devastated by prolonged conflict, Jordan and Lebanon host the world's largest refugee populations per capita, and Egypt and Tunisia grapple with structural youth unemployment that the International Labour Organization consistently reports above 25 percent.

The gender dimension in the Middle East operates through a sequential filter that is distinctive within the global informality map. Women first face a participation barrier that is steeper than in any other region, and only then do they encounter the formal-to-informal divide inside the labor market.

World Bank data place female labor force participation in MENA at 19 percent in 2023, compared with a global average of 47 percent. For the women who do enter the workforce, formal public-sector employment is the dominant protected pathway, while private-sector employment is often mediated through non-standard arrangements, family enterprises, or informal micro-entrepreneurship. Migrant women, particularly domestic workers in Gulf households, constitute one of the most vulnerable segments of the global informal workforce, isolated inside private residences and legally dependent on their sponsor for residency status.

Saudi Arabia's Vision 2030 and Nitaqat (Saudization). Launched in 2016 (Vision 2030) and 2011 (Nitaqat), this framework imposes quotas for Saudi nationals in private-sector firms and sets a medium-term pivot away from oil dependence.

United Arab Emirates Wage Protection System (WPS, 2009). Mandates electronic salary payment into documented bank accounts and links payment compliance to visa issuance.

Jordan Compact on Syrian Refugee Employment (2016). Negotiated between the Government of Jordan, the European Union, and international donors, this framework traded enhanced trade access for refugee work permits.

Listen to the 7-minute Director's Cut podcast where Mathieu K. Gouanou examines how the kafala system functions as a form of institutionalized informality. He explores why reforming this system serves as a critical test case for whether entrenched labor market institutions can be fundamentally restructured to support sustainable economic growth.

Refer 3 colleagues to unlock exclusive executive bonus content and secure early access to Episode 6: "Eastern Europe: The Transition Residual".

Does the kafala system possess the capacity for gradual reform, or must policymakers completely replace it to achieve meaningful formalization? Can a framework originally built on rigid employer control successfully transform into an institution that actively safeguards worker rights?

Your opinion matters!

The Middle East stands at a critical juncture regarding its macroeconomic future. As detailed in this episode, 48% of the regional workforce operates within the informal economy. This persistence of informality alongside vast resource wealth requires a fundamental reassessment of institutional labor market coverage.

We are launching a comprehensive global consultation to gather strategic insights from policymakers, corporate executives, and development practitioners. Your professional expertise is vital to understanding how we can effectively accelerate formalization velocity across the Middle East and North Africa.

We invite you to share your authoritative perspective on the three structural challenges currently defining the Middle Eastern labor market:

The Trajectory of the Kafala System: Millions of migrant workers currently exist in a state of institutional informality where they are officially documented but remain severely unprotected. What are the most viable regulatory pathways to decouple legal residency status from individual employers while maintaining regional economic stability?

Youth Unemployment and Human Capital Allocation: High youth unemployment consistently forces educated graduates into informal coping strategies and precarious digital gig work. How can targeted public policy and private sector investments successfully channel this emerging demographic dividend into formal and productive employment?

Institutional Diversification Beyond Oil: The traditional rentier state model frequently lacks the structural incentive to build robust formal labor market institutions. What specific policy mechanisms will most effectively stimulate formal private sector growth as these economies transition away from petroleum dependence?

Your strategic input will directly shape the global policy recommendations featured in the upcoming BASE1 Season 1 Summary Report.

Subscribe to BASE1 for weekly analytical deep dives into the world's largest economic reality.

A1: Despite possessing immense resource wealth and sovereign wealth funds measured in trillions of dollars, the Middle East maintains a 48% informality rate. This regional rate leaves between 80 and 110 million workers operating without formal employment protections. The paradox lies in the fact that robust fiscal capacity and ambitious modernization programs have not translated into comprehensive institutional labor market coverage.

A2: The kafala system ties a foreign worker's legal residency directly to a specific employer, creating a severe power asymmetry. Consequently, millions of migrant workers possess formal visa documentation but experience working conditions that are functionally informal. These workers are highly visible to the state but remain largely invisible to standard labor protections.

A3: The region experiences exceptionally high youth unemployment, which forces university graduates into informal gig work or casual labor not by choice but out of necessity. When formal employment fails to absorb new entrants, educated youth adopt informal coping strategies. This dynamic represents a profound misallocation of human capital that directly fuels regional political instability.

A4: Rentier states derive government revenue primarily from resource rents rather than citizen taxation. Because these states do not rely on tax receipts, they lack the institutional motivation to build the complex administrative infrastructure required for formal labor markets, such as enterprise registration and income documentation systems. This dynamic creates a severe institutional convenience gap.

A5: The informality rate in the Middle East is highly sensitive to the oil price cycle. During periods of high oil prices, Gulf states rapidly expand public sector employment and construction activity. Conversely, when oil prices fall, fiscal contraction pushes workers into informal survival strategies, creating a ratchet effect where each economic downturn permanently increases structural informality.

A6: Women in the Middle East face a double filter: they must first overcome cultural and legal barriers to labor force participation, and then they encounter the formal versus informal divide. Because female labor force participation rates are among the lowest globally, the women who do work are disproportionately concentrated either in protected public sector roles or in highly precarious informal domestic work.

A7: Armed conflict acts as a powerful informality accelerator by systematically destroying formal institutional frameworks. In fragile states like Iraq, Syria, and Yemen, conflict drives informality rates toward 100 percent. Furthermore, this conflict driven informality generates severe regional spillover effects through massive refugee flows and cross border workforce displacement.

A8: Programs like Saudi Arabia's Saudization initiative aim to shift nationals from public sector dependence into private sector employment through mandatory hiring quotas. While these quotas create formal jobs for citizens, they often generate severe market friction. Enterprises frequently struggle to meet these mandates and continue to rely heavily on foreign workers managed under informal kafala conditions, thereby shifting rather than solving the core structural issue.

A9: The region's 48% informality rate places it below Latin America (52.6%) and Africa (85.8%), but substantially above Eastern Europe (25%) and the OECD (15%). This moderate ranking by developing world standards is actually quite alarming when adjusted for the region's immense wealth and advanced state capacity.

A10: Accelerating formalization requires fundamentally decoupling migrant legal status from individual employers. Policymakers must also invest heavily in non oil economic diversification to create formal private sector jobs. Additionally, governments should leverage the high regional penetration of mobile digital infrastructure to establish digital financial identities for all workers.