This research studies the labour and human capital dimensions of diversification and structural change in oil economies, with a focus on the case of the UAE and the Arab Gulf States. It examines how oil‐driven development in the Gulf has resulted in entrenched patterns of employment and migration, which have forestalled efforts by these countries to transition into more sustainable, post‐oil economies. Utilising a mixed methods approach based on secondary data analysis and a survey conducted with 300 firms, it studies how these distortions have evolved as the region has embarked on a number of major diversification efforts over the past four decades. Oil wealth has provided Gulf economies with the capital to create competitive new sources of economic growth, but the challenge remains sustainability: reproducing the labour force in non‐oil industries locally.