1

Faisal Alswied
The Effect of Free Education on Unemployment in Saudi Arabia
Spring 2016
Professor: Gabriella Bucci

Introduction
Education in general is the main component of the growth of any country. All the
developed countries have high level of education compared to the developing countries. Many of
the developing countries are trying to replicate the education systems of the developed countries.
Saudi Arabia is one of those countries that trying to improve its education system. The Saudi
government is providing a free primary education for all Saudi and non-Saudi students. Also, the
government provides a free higher education for all Saudi students who finished high school. In
2005 a new scholarships program started to send students to study abroad.
The number of Saudi students who enroll in universities is increasing. Students in Saudi
Arabia consider universities the next step after they finish high school. There are many factors
that incentivize students to purse higher education one of them is free education. Another reason
is that students receive a monthly stipend worth $200 where the goal of this stipend is to cover
the main expenses such as the expenses of the books and to help with the daily expenses. This
stipend works as an incentive to encourage students to go to school. Hence, both the free
education and stipend together would let students purse their higher education even if they dont
wan to do that.
The cost of education is free for all students, so many of the students would favor
bachelor degrees over vocational degrees because the price is the same, but the return might be
different. When we look at the data we used for this project we would find a boom in the number
of students who has a bachelor degree. However, there is a slow growth in the number of
students with vocational degrees. That might go back to how the students value each type of
education when there is no price paid.

3
In 2005 the abroad scholarships program started. At the beginning not many students
wanted to go and study abroad. Hence, the students who did not get accepted home, decided to
go and study aboard. However, in 2008 the number of students studying abroad increased. The
government provides the students with full scholarships including monthly stipend. Those two
factors would incentivize the students to go and study abroad.
As the number of students kept increasing, the schools requirements increased as well.
Hence, the government introduced two exams GAT: General Aptitude Test and SAAT:
Standardized Achievement Admission Test. Those two exams are out there to determine the level
of students for each major. However, some students might enroll in majors they dont like.
The education system might need some changes as well as the labor market to prepare for
the future and the new entrants to the market. The population in Saudi Arabia is growing, but
most of the population is really young. In 2010 the number of Saudi population is 18776510.
However, most of the Saudi population is really young where 71.82 percent of the population is
younger than the age 35. Also, 41.30 percent of the population is under the age 19.
The purpose of paper is to test if there is any association between free education and
unemployment rate. The high number of graduates would increase the supply in the labor
market. If the supply increases really high without a matched demand, unemployment would
exist. Free education exists in many countries like France, Germany and UK. Those countries
have a similar case to Saudi Arabia where the number of students enrolled in higher education
programs is increasing. Also, those countries have problems in their labor market. The problems
include a high number of workers who work in jobs that dont require a degree or higher
education. Also, free education in those countries showed some impact on unemployment rates.
The literature review below shows some of these cases.

Literature Review
The graduate unemployment is becoming a problem in Saudi Arabia. Al-dosary, Rahman
and Aina (2006) showed that there are two types of unemployment that exist in Saudi Arabia:
One is voluntary and the other one is involuntary unemployment. Also, There is a psychological
oriented type of unemployment that goes under the voluntary unemployment, which is common
in Saudi Arabia. In psychological oriented unemployment graduates refuse to work in certain
jobs that they consider degrading, where graduates would prefer unemployment to working in
such jobs. The psychological oriented type of unemployment might go back to what
Psacharopoulos (1977) suggested. He suggested that the demand for education comes from
sociological or economical needs. One sociological explanation of the demand for higher
education is that the students or his family are expecting a prestige job or success in life. The
economical explanation suggests that the student compares the costs of higher education to the
benefits. Along the same lines, the issue of unemployment goes back to the issue that the
graduates lack to the sufficient training to be ready for the job market. (Al-dosary et al., 2006)
Nigeria has a similar problem to Saudi Arabia where the students are not prepared well for the
labor market due to the lack of training and low quality of education. Also, when the economy is
not doing well the labor market would suffer more from the high number of graduates. (Dabalen,
Oni, & Adekola, 2001)
There are more ramifications of free education such as graduates underutilization, which
happens when workers enter jobs that dont require a four-year college degree. Mason (1993)
studied the impact of mass higher education on manufacturing and services where he used steel
industry and financial services. Mason conducted his study through case study visits to firms in
steel industry and financial services. He concluded that graduates appeared to be underutilized.
Underutilization also happened in other countries such as Finland. The number of students kept

5
increasing rapidly over the years in Finland. As the number of students kept increasing the new
graduates started working in lower white collar or manual work. When the 1990s crisis
happened, most of the students with higher school diploma or lower suffered from
unemployment more. Even though there is a positive impact of education on growth and
employment, the public sector in Finland was not able to absorb the high number of graduates.
The growing number of graduates caused many problems in the labor market where it sat the
experience as a requirement for many jobs. Also, it increased the requirement for each job.
(Kivinen, Nurmi and Salminiitty, 2000)
Sweden and Germany have different experience with the high number of graduates.
Stenberg and Wikstrom (2004) studied the impact of education on employment among males in
Sweden for the ages 21-45. They found that there is a negative effect of education on
employment. However, the effect of education on employment is more significant when there is
a recession. The case in Germany is similar to Sweden where the number of students kept
increasing rapidly. Schomburg (2000) showed that the increase in higher education output
caused an increase in the unemployment for the group that has high school and below. Also, after
a while the increase in the number of graduates increased the unemployment among students
with vocational degrees. This problem goes back to the issue where the jobs requirements
increased and many higher education graduates started working in jobs that dont require a
diploma.

Economic Model
The aim of this paper is to find the association between the unemployment rate and the
number of graduates. Our model includes the total number of graduates from Saudi Arabia and
abroad for each academic level. There is a variable for each education level including bachelor,

6
higher diploma (vocational degree), masters and doctorate. We separated the male students data
from the data of female students to be able to see if there is a gender impact on unemployment.
Also, we included the GDP for Saudi Arabia to make sure that the unemployment is not
happening due to the slow in growth.
Unemploymenti = ai + B1,iGDP+B2,i Male BA+ B3,i Male Higher Diploma + B4,I Male
Master + B5,i Male Doctorate +B6,i Female BA + B7,i Female Higher Diploma +B8,i
Female Master+B9,i Female Doctorate
The model suffers from many omitted variables and limitations. The first limitation is due
to the limited number of observations. The number of data points is 15 and it is significantly low.
It is impossible to increase the number of observations because we would not be able to capture
the impact of graduates on unemployment rate because the boom in the number of graduates did
not happen until the year 2007. We can solve this problem by adding the years prior to 1999,
however we would be left with just few years with the boom in the number of graduates.
However, the public data for the unemployment rate starts from the year 1999. Another
limitation in the model goes back to the issue that we dont have the unemployment rate for each
educational group. If we have the unemployment rate for each group we would be able to see the
impact of the high number of graduates on the unemployment of each group.

Data.
The data is from the Saudi Ministry of Higher Education. The data shows the number of
graduates each year from the year 1999 to 2013. The data includes the number of male graduates
by education level from bachelor up to doctorate level. Also, it includes the number of graduates
from abroad. In addition, the data set includes the same data for the female graduates. Also, we

7
included the unemployment rate for Saudis and the GDP growth of the country from General
Authority of Statistics of Saudi Arabia.
Graph one below shows the number of graduates by degree and year. The graph shows
that both the number of male and female with a bachelor degree kept growing really fast over
time. However, the number of female graduates is greater than the male graduates even though
the number of male population is close to the number of female population 9575257 and
9201253 respectively. However, the number of male students with masters degree is higher for
male students than for female students. The number of students with a doctorate degree for both
genders is significantly low. Graph two below is only to show the differences between the other
degrees excluding the bachelor degree for both genders.
Number of Graduates by Degree(Graph1)

Male BA
Male Higher Diploma
Male Master
Male Doctorate
Female BA
Female Higher Diploma
Female Master
Female Doctorate

Number of Graduates by Degree(Graph2)

Male Higher Diploma

Male Master
Male Doctorate
Female Higher Diploma
Female Master
Female Doctorate

Variable
Unemployment
GDP
Male BA
Male Higher D
Male Master
Male Doctorate
Female BA
Female Higher D
Female Master
Female Doctorate

n
15
15
15
15
15
15
15
15
15
15

Mean
10.55
3.3e+06
26685.40
1318.73
1890.00
375.20
47050.00
646.87
1013.40
180.73

S.D.
1.46
8.5e+05
7465.89
1062.67
1996.67
226.73
12493.65
742.60
1153.66
121.58

Min
8.10
2.3e+06
18718.00
376.00
560.00
179.00
25038.00
104.00
255.00
73.00

.25
9.70
2.4e+06
22010.00
664.00
704.00
250.00
36102.00
187.00
329.00
89.00

Mdn
11.00
3.2e+06
23656.00
1010.00
1124.00
317.00
51476.00
337.00
509.00
126.00

.75
11.80
4.0e+06
29940.00
1483.00
1421.00
354.00
58596.00
861.00
925.00
269.00

Table one below shows a summary statistics of all the variables included in the model. The table
shows the mean, standard deviation, minimum, first quartile, median, third quartile and the
maximum value.
[Table1]

Max
12.40
4.8e+06
44088.00
4390.00
6488.00
942.00
61458.00
2543.00
3725.00
438.00

9
Table two below shows the collinearity between the variables. It shows that all the
variables are correlated with GDP, but we expected that. As the country grows the number of
graduates would go up. Also, as the country has more graduates, the GDP of the country would
go up, and thats why we say a correlation between the two. However, we see a moderate
correlation between unemployment rate and the graduates except for the female students with a
BA.
[Table2]
Male
Higher D

Male
Master

Male
Doctorate

1.0000
0.9450
0.9526
0.9115
0.7197

1.0000
0.9149
0.9187
0.6742

1.0000
0.9491
0.6239

1.0000
0.4739

1.0000

0.8623

0.9350

0.9481

0.9327

0.8875

0.6185

1.0000

0.5946

0.8550

0.9587

0.9339

0.9908

0.9474

0.6090

0.9469

1.0000

0.7185

0.7248

0.7552

0.8249

0.7635

0.7623

0.5972

0.7543

0.7783

Unemployment

GDP

Male BA

GDP
MaleBA
MaleHigherD
MaleMaster
MaleDoctorate
FemaleBA

1.0000
0.7566
0.5960
0.5868
0.5915
0.4092
0.8090

1.0000
0.9007
0.8543
0.8474
0.7178
0.8981

FemaleHigherD

0.5595

FemaleMaster
FemaleDoctorate

Unemployment

Female Female
BA
Higher D

Female
Master

Table three below shows the collinearity using VIF test. When the value of the VIF test is
greater than 10, this indicate that we have a sever multicollinearity. Hence, in this case we have a
sever multicollinearity in our model

[Table 3]
Variable

VIF

1/VIF

Female
Doctorate

1.0000

10

Female Master
Male Master
Female Higher D
GDP
Male Doctorate
Female BA
Female Higher D
Male BA
Female Doctorate

204.44
190.47
59.88
57.69
49.97
37.64
37.01
29.25
3.68

MeanVIF

74.45

0.004892
0.005250
0.016700
0.017333
0.020014
0.026565
0.027017
0.034186
0.271812

Conclusion
The main goal of this paper is to test the impact of the high number of graduates on
unemployment rate in Saudi Arabia. However, due to the high multicollinearity and low number
of observation we couldnt get clear results. The literature review showed that there is a
correlation between the high number of graduates and labor market. This impact happened
through the increase in unemployment rate or through the increase of graduates who are working
in jobs that dont require a diploma.
The population of Saudi Arabia is really young. 41 percent of the population is under 19
and they would get into universities soon. Hence, the upward trend in the number of graduates
would keep the same trend even though there is a decline in the number of female graduating
with a BA. Also, with the current decline in oil prices Saudi Arabia will suffer financially, which
will impact the labor market. In this case graduates might suffer from high unemployment.

References

11
Al-Dosary, A. S., Rahman, S. M., & Aina, Y. A. (January 01, 2006). A communicative planning
approach to combat graduate unemployment in Saudi Arabia. Human Resource Development
International, 9, 3, 397-414.
Dabalen, A., Oni, B., & Adekola, O. A. (May 31, 2001). Labor market prospects for university
graduates in Nigeria. Higher Education Policy, 14, 2, 141-159.
Kivinen, O., Nurmi, J., & Salminiitty, R. (June 01, 2000). Higher Education and Graduate
Employment in Finland. European Journal of Education, 35, 2.)
Mason, G. (May 01, 1996). Graduate utilisation in British industry: The initial impact of mass
higher education. National Institute Economic Review, 156, 93.
Schomburg, H. (June 01, 2000). Higher Education and Graduate Employment in Germany.
European Journal of Education, 35, 2.)
Stenberg, A., & Wikstrom, M. (April 01, 2004). Higher education and the determination of
aggregate male employment by age. Education Economics, 12, 1, 87-101.
Psacharopoulos, G. (February 01, 1977). The Perverse Effects of Public Subsidization of
Education or How Equitable Is Free Education?. Comparative Education Review, 21, 1, 6990.