Skills shortages and inflation are making labour the top issue for business and government. The immediate challenge is in the building industry which employs low-paid foreign workers in large numbers. But every Gulf business depending upon expatriates has a problem that will grow with time.

The scale of foreign worker migration to the Gulf is enormous. Speaking at MEED’s Abu Dhabi 2007 conference on 18 November, chief executive of Abu Dhabi’s Higher Corporation for Specialised Economic Zones (Zonescorp) Jaber al-Khaili said his organisation will build accommodation for 400,000 workers.

He said that about 700,000 foreigners are employed in Abu Dhabi projects alone. The GCC total is probably at least four times that number. In some Gulf states, the construction workforce is bigger than the national population.

Importing workers has solved the GCC’s labour shortage for decades. Paid substantially more than in their home countries, foreigners flocked to the Gulf. The arrangement was mutually beneficial, but the balance of labour market power has now shifted against the region’s employers.

The strikes in Dubai were mainly due to economics. Wages have risen in Asian economies supplying most GCC building workers while relative earnings in the region have been decimated by the slump in currencies pegged to the dollar. A third blow has been dealt by double digit cost of living increases in some Gulf economies.

The issue can be illustrated by an example cited by a construction industry analyst earlier in November.

In 2005, an Indian worker paid Rs 3,000-5,000 ($40-125, at November 2007 exchange rates) could expect to earn twice as much in the GCC by signing up to a standard three-year contract. The same worker can now make Rs 10,000 ($250) a month in India while their Gulf wages have been frozen at the originally-contracted levels.

Feelings have been further inflamed by instances of late wage payments and overcrowding in some UAE work camps.

Conscious that the international media is watching, some building workers are acting in ways their predecessors would never have risked. As MEED reported on 16 November, striking has paid. Some aggrieved workers have been given a 20 per cent pay hike.

But Gulf labour problems are not confined to the building site. In the service sector, skill shortages are intensifying. GCC office staff turnover is being aggravated by the impact of inflation on their workers’ pay. Trying to catch up with price rises, one international bank operating in the UAE has increased salaries three times so far in 2007.

Allowing real pay to decline during a boom is counterproductive. That is why some construction companies are privately agreeing common pay floors. To offset the impact of higher wage costs, they plan to hire fewer but more productive workers.

In the service sector, enlightened employers are adopting practices considered normal in advanced economies. Instead of relying on official labour codes to define relations with their workers, some have created career structures for their expatriate employees, many of whom are long-term Gulf residents. It is a slow revolution. But it is happening.

For GCC governments, the choices are more challenging. A minimum wage will probably have to be conceded to prevent the extreme cases of exploitation that are damaging the region’s reputation. Legalising free trade unions could follow, but in due course. Those are comparatively painless steps.

The logical next one is not. Giving long-term foreign residents political rights seems an impossible prospect, but there are compelling international precedents which show allocating passports selectively to skilled migrants is good for an economy. By allowing foreigners to buy property, some GCC states are already more than half-way there.

The Gulf, nevertheless, is still many years away from having a normal labour market. But there is way to ease the immediate pay pressures. Revaluing GCC currencies by about 10 per cent would at a stroke make every worker feel instantly richer at no apparent cost to their employers. It is another reason, and a potentially decisive one, why the present parities probably won’t last much more than a couple of months inGulf stateswhere inflation is the highest.