Labor Markets in Asia: Issues and Perspectives (Asian Development Bank Books)

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Labor Markets in Asia Issues and Perspectives

Edited by

Jesus Felipe and Rana Hasan

Labor Markets in Asia

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Labor Markets in Asia Issues and Perspectives

Edited by

Jesus Felipe Asian Development Bank

and Rana Hasan Asian Development Bank

© Asian Development Bank 2006 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identiﬁed as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2006 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN–13: 978–0–230–00791–8 hardback ISBN–10: 0–230–00791–0 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. A catalogue record for this book is available from the Library of Congress. 10 15

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

A merchant may sell many things, but a worker usually has only one job, which supplies not only his livelihood but often much of his sense of identity. An unsold commodity is a nuisance, an unemployed worker a tragedy. —Paul Krugman (The Accidental Theorist. Penguin Books)

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Contents

Foreword Preface and Acknowledgments Contributors List of Tables List of Figures List of Boxes List of Appendixes Author Index Subject Index

xiii xix xxiii xxiv xxviii xxxii xxxiv 675 684

Chapter 1 Introduction: Overview of the Volume JESUS FELIPE AND RANA HASAN ..............................................................................1

References .................................................................................................... 17 Part I Labor Market Issues Chapter 2 Labor Market Outcomes in Asia JESUS FELIPE AND RANA HASAN ...........................................................................21

2.1 Labor Force ............................................................................................ 21 2.2 Poverty .................................................................................................. 31 2.3 Unemployment and Underemployment ................................................ 32 2.4 Urban Labor Markets and Dualism ....................................................... 41 2.5 Conclusion ............................................................................................ 49 Appendixes .................................................................................................. 50 References .................................................................................................... 59 Chapter 3 Labor Markets in a Globalizing World JESUS FELIPE AND RANA HASAN ...........................................................................63

3.1 The Economic Context in which Labor Markets Operate .................... 64 3.2 Functions of the Labor Market ............................................................. 68

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3.3 The Mainstream Argument for Labor Market Reforms ......................... 70 3.4 Keynesian and Marxian Theories of Unemployment............................. 80 3.5 Labor Market Policies in Practice .......................................................... 86 3.5.1 Overview of the International Experience ............................ 86 3.5.2 Labor Market Policies in Asia: An Overview ......................... 96 3.6 Growth, Productivity, Employment, and the Role of Technology ....... 110 3.7 Wage-Led Employment ....................................................................... 115 Appendixes ................................................................................................ 122 References ................................................................................................. 138 Chapter 4 The Employment Intensity of Growth: Trends and Macroeconomic Determinants STEVEN KAPSOS ........................................................................................... 143

4.1 Introduction ........................................................................................ 143 4.2 Methodological Background and Data Used ....................................... 145 4.2.1 Calculating Country Employment Elasticities .................... 145 4.2.2 Shortcomings of Employment Elasticities ........................... 148 4.2.3 Data Used ............................................................................ 149 4.3 World and Regional Trends in Employment Elasticities...................... 150 4.3.1 Previous Estimates ............................................................... 150 4.3.2 Global Results ..................................................................... 151 4.3.3 Developed Economies ......................................................... 154 4.3.4 Transition Economies ......................................................... 157 4.3.5 Asia and the Paciﬁc ............................................................. 160 4.3.6 Latin America and the Caribbean ....................................... 163 4.3.7 Africa and the Middle East .................................................. 165 4.4 Econometric Modeling of Employment Elasticities ............................ 168 4.4.1 Model Speciﬁcation and Data Used .................................... 169 4.4.2 Empirical Results ................................................................ 171 4.5 Concluding Remarks ........................................................................... 175 Appendixes ................................................................................................ 178 References ................................................................................................. 199 Part II Country Studies Chapter 5 Labor Markets in India: Issues and Perspectives T.C.A. ANANT, R. HASAN, P. MOHAPATRA, R. NAGARAJ, AND S.K. SASIKUMAR ... 205

5.1 Introduction ........................................................................................ 205 5.2 Indian Economic Policy and Economic Reforms ................................ 207 5.2.1 1950–1965 .......................................................................... 207 5.2.2 1965–1980 .......................................................................... 208

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5.2.3 1981–1991 ........................................................................... 209 5.2.4 Economic Reforms of 1991.................................................. 209 5.3 The Labor Market in India: Structure and Key Features ..................... 211 5.3.1 Population, Labor Force, and Employment ........................ 213 5.3.2 Migration ............................................................................. 216 5.3.3 Poverty ................................................................................. 218 5.3.4 Unemployment and Underemployment .............................. 220 5.3.5 Wages ................................................................................... 223 5.3.6 Quality of Employment and Labor in the Organized Sector ................................................................................... 227 5.3.7 Industrial Employment and Wages...................................... 234 5.4 Labor Laws in India.............................................................................. 239 5.4.1 Labor Legislation in Colonial India: A Brief Overview........ 240 5.4.2 Labor Laws Since Independence.......................................... 241 5.4.3 Trends in Industrial Relations and Industrial Conﬂict ........ 249 5.4.4 Labor Laws and the Labor Market Rigidity Debate ............. 252 5.4.5 Policy Debate on Labor Market Reforms ............................. 262 5.5 Social Protection in India ..................................................................... 267 5.5.1 Social Security: Legislative Provisions and Coverage .......... 268 5.5.2 Active Labor Market Policies ............................................... 272 5.6 Skills, Education, and the Labor Market.............................................. 277 5.7 Concluding Remarks............................................................................ 282 Appendix ................................................................................................... 285 References .................................................................................................. 296 Chapter 6 Labor Markets in Indonesia: Key Challenges and Policy Issues GUNTUR SUGIYARTO, MAYLING OEY-GARDINER, AND NINASAPTI TRIASWATI ......... 301

6.1 Introduction ......................................................................................... 301 6.2 Recent Developments in the Indonesian Economy.............................. 303 6.2.1 Macroeconomy..................................................................... 303 6.2.2 The Government’s Development Plan.................................. 304 6.3 Labor Market Policies .......................................................................... 306 6.3.1 Overview .............................................................................. 306 6.3.2 Decentralization................................................................... 311 6.3.3 Industrial Relations and Labor Unions ................................ 312 6.3.4 Minimum Wage and Severance Pay ..................................... 313 6.4 Labor Market Outcomes ...................................................................... 319 6.4.1 Labor Force: Basic Characteristics ....................................... 319 6.4.2 Unemployment and Underemployment .............................. 333 6.4.3 Employment......................................................................... 341 6.4.4 Wages ................................................................................... 352

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6.5 Labor Market and Poverty.................................................................... 357 6.6 Concluding Remarks............................................................................ 359 References .................................................................................................. 364 Chapter 7 Unemployment, Labor Laws, and Economic Policies in the Philippines JESUS FELIPE AND LEONARDO LANZONA, JR. ..................................................... 367

7.1 Introduction ......................................................................................... 367 7.2 Arguments for Labor Market Reforms ................................................. 370 7.3 Labor Market Outcomes and Economic Conditions............................ 374 7.3.1 Unemployment and Underemployment .............................. 375 7.3.2 Population, Labor Force, and Employment......................... 381 7.3.3 Employment Composition, the Informal Economy, Underemployment, and Overseas Workers ......................... 385 7.3.4 Wages and Salaries ............................................................... 391 7.3.5 Extent of Poverty and the Employment–Poverty Link ........ 396 7.4 Labor Market Policies in the Philippines ............................................. 401 7.4.1 Labor Relations (Articles 234, 253A, 260, 263, and 264) ... 403 7.4.2 Subcontracting Provisions (Article 106), Permanent Employment (Article 279), and Probationary Period (Article 281) ........................................................................ 409 7.4.3 Minimum Wage–Setting Process (Article 127).................... 412 7.4.4 Labor Laws in the Philippines in Relation to Those in Other Countries ............................................................................. 420 7.4.5 Social Security and Active Programs.................................... 423 7.4.6 Educational and Training Programs..................................... 426 7.5 Labor Market Policies and the Problem of Job Creation in the Context of Globalization ...................................................................... 433 7.5.1 Labor Migration Policies...................................................... 434 7.5.2 Effects of Persistent Trade Protectionism............................. 436 7.5.3 Decline of the Manufacturing Sector and Overconcentration of Ownership ........................................ 440 7.6 The Employment Challenge and the Objective of Full Employment: Making Employment Central to Macroeconomic Policy ..................... 448 7.6.1 Why Previous Employment Generation Programs Failed ... 452 7.6.2 The Medium Term Philippine Development Plan 2004–2010 ........................................................................... 454 7.7 Final Remarks and Future Research..................................................... 457 7.7.1 Future Research .................................................................. 460 Appendixes................................................................................................. 462 References .................................................................................................. 497

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Chapter 8 The Labor Market in the People’s Republic of China: Development and Policy Challenges in Economic Transition RAN TAO ..................................................................................................... 503

8.1 Introduction ......................................................................................... 503 8.2 Economic Transition and Labor Market Development ........................ 505 8.2.1 Before 1978: Central Planning System and Absence of a Labor Market................................................................. 505 8.2.2 1978 to the Mid-1990s: Emergence of Rural and Urban Labor Markets .................................................... 506 8.2.3 Mid-1990s to the Present ..................................................... 510 8.3 Labor Market in the PRC: Trends and Outcomes ................................ 513 8.3.1 Population and Urban-Rural Distribution ........................... 513 8.3.2 Employment......................................................................... 515 8.3.3 Urban Unemployment ......................................................... 519 8.3.4 Migration ............................................................................. 522 8.3.5 Underemployment and Emerging Unemployment in Rural Areas ..................................................................... 525 8.3.6 Wages ................................................................................... 529 8.3.7 Labor Market Segmentation................................................. 532 8.4 Labor Market Policies .......................................................................... 534 8.4.1 Labor Law and Labor Protection.......................................... 534 8.4.2 Social Security...................................................................... 538 8.5 Key Research Issues.............................................................................. 544 8.5.1 Private Sector Growth and Policy Changes ......................... 545 8.5.2 Promoting Labor Mobility and Hukou Reform.................... 546 8.5.3 Improving Workers’ Skills.................................................... 546 8.5.4 Strengthening Social Security .............................................. 547 8.6 Conclusions.......................................................................................... 548 References .................................................................................................. 553 Chapter 9 A Stocktaking of Viet Nam’s Labor Market Policies BINH T. NGUYEN, CU CHI LOI, AND NGUYEN CHIEN THANG ................................ 559

9.1 Economic Background ......................................................................... 560 9.1.1 Economic Policy Reforms .................................................... 560 9.1.2 Population and Labor Force................................................. 561 9.2 Labor Market Outcomes ...................................................................... 566 9.2.1 Employment Composition................................................... 567 9.2.2 Unemployment .................................................................... 573 9.2.3 Wages ................................................................................... 575 9.2.4 Labor Productivity ............................................................... 577

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9.2.5 Labor Mobility ..................................................................... 579 9.2.6 Poverty ................................................................................. 582 9.2.7 Inequality ............................................................................. 584 9.3 Labor Market Policies and Government Programs .............................. 585 9.3.1 Labor Restructuring during 1986–1994 .............................. 586 9.3.2 Labor Code and Labor Market Regulations ......................... 588 9.3.3 Employment Generation Programs...................................... 607 9.4 Suggestions for Further Research......................................................... 610 9.4.1 Job Creation ......................................................................... 610 9.4.2 Labor Productivity ............................................................... 612 9.5 Conclusion ........................................................................................... 613 Appendixes................................................................................................. 615 References .................................................................................................. 625 Part III Policy Issues Chapter 10 Policies to Achieve Full, Productive, and Decent Employment in Asia JESUS FELIPE AND RANA HASAN ..................................................................... 633

10.1 Toward Full and Productive Employment ......................................... 635 10.2 Growth-Promoting Policies................................................................ 636 10.2.1 Policies to Improve Productivity and Incomes in the Rural Economy and Urban Informal Sector............ 637 10.2.2 Export Push ....................................................................... 645 10.2.3 Industrial Policies for Public-Private Coordination, Diversiﬁcation, and Restructuring .................................... 647 10.3 Human Capital Policies...................................................................... 652 10.4 Toward Decent Employment.............................................................. 663 10.4.1 Promoting Basic Rights for Workers in the Informal Sector........................................................ 663 10.4.2 Strengthening Social Protection......................................... 665 References .................................................................................................. 672

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Foreword

This volume addresses the question: How can Asia help its poor climb out of poverty? Despite the fact that some Asian countries did very well in past decades and lifted millions out of poverty, the reality is that Asia is still home to most of the world’s poor: in 2003, it was home to about 621 million people living on less than $1-a-day, more than two thirds of the poor on this planet. And if the poverty line is raised to the $2-a-day benchmark, Asia has about 1.9 billion poor people, more than three quarters of the world’s poor. Even in countries often dubbed as successful examples to be emulated by others, poverty is still widespread. Indeed, in Indonesia, where $1-a-day poverty has been estimated to afﬂict 6.5% of the population in 2003, 50.5% of the population still lived on under $2-a-day. The ﬁgures are also striking for richer Thailand: while only about 0.7% of the population lived on under $1-a-day in 2003, 27.8% of the population lived on under $2-a-day. The volume argues forcibly that “poverty reduction requires helping people as workers.” Thus, Asia’s challenge consists in creating jobs for the unemployed and for new entrants to the labor force, as well as improving the productivity and earnings of the jobs available. However, can Asia provide employment to its huge and increasing labor force? While, as a factor of production, the growth of labor contributes positively to output growth, if countries in the region cannot provide employment to their workers, an employment crisis may arise. The labor force of Asia’s developing countries comprises about 1.7 billion workers. Of these, at least 500 million are unemployed or underemployed, which implies that labor is considerably underutilized. Among these in turn, the number of unemployed in 2004 was 74 million, which indicates that Asia’s biggest problem on the employment front is underemployment. This is the result of low productivity. Moreover, it is expected that another 245 million workers will join the labor force between now and 2015, and another 175 million between 2015 and 2030. Although in absolute numbers most of these workers will come from the People’s Republic of China (PRC) and India, the percentage increase in the labor force of countries like Afghanistan, Cambodia, Lao People’s Democratic Republic, Maldives, Pakistan, Solomon Islands, or Tajikistan will require serious action by policy makers. Moreover, while output has grown at a high rate in a number of countries, employment growth rates have been disappointing, especially in the formal (or modern) sector of the

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economy. In that sector, production is capital intensive, productivity is high, and workers have well-deﬁned wage and employment contracts, which provide decent working conditions and job security, among other beneﬁts. The slow growth of employment, especially in the formal sector, is surprising, given the rapid growth of aggregate output in developing Asia. If the labor markets cannot provide these workers with employment that is both productive and decent, Asia’s success will, sooner or later, be eclipsed by the pressures of a huge “reserve army” of unemployed and underemployed workers who are constantly driven to seek out employment at substandard wages in order to survive. Apart from these labor market outcomes (poverty, unemployment, and underemployment, as well as slow growth of employment), Asia’s labor markets are characterized by several other disappointing facets. First, unemployment affects mostly young men and women in the 15–24 age group. While young people made up about 21% of Asia’s labor force in 2004, unemployed youth constituted almost half of the region’s total jobless population. Second, the informal economy represents a major challenge. Informal employment in developing Asia accounts for about 65% of nonagricultural employment. Informal employment (nonagricultural self-employment) as a share of total nonagricultural employment for 1990–2000 was 50% in South Asia, 18% in East Asia, and 33% in Southeast Asia. Self-employment represents an estimated 59% of nonagricultural informal employment in Asia. Third, there is great concern about the quality of many of the jobs created. Many of them are in the services sector and in the informal economy, and are not necessarily better (in the sense that they pay higher wages and make use of higher skills) than jobs in other sectors. Fourth, the region is unlikely to achieve the Millennium Development Goal on gender equality. Despite some progress in terms of closing the gender gap, women workers still remain disadvantaged and discriminated against. The situation is especially acute in South Asia, where women hold only about 20% of the paying jobs outside agriculture. Fifth, real wages in manufacturing have increased signiﬁcantly in some countries (e.g., more than doubling in the PRC since 1990). However, working hours remain long. In countries like Bangladesh, Cambodia, Mongolia, Pakistan, Singapore, and Thailand, more than 30% of employed people report working more than 50 hours a week. Finally, there has been an uneven decline in child labor across the region. Asia has the world’s largest number of child workers in the 5–14 age group—127 million, or 60% of the working children in the world. What underlies these poor outcomes? The volume argues that they are the result of two forces: the individual domestic context and the international context. With regard to the former, indeed domestic policies in many countries are not conducive to employment creation. These are policies in the labor market sphere (both from the supply and demand point of view), but also

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in areas such as regulations that create barriers to the development of new companies and the expansion of existing ones, or issues such as population pressure, lack of investment, or the structure of the economy (e.g., degree of monopolization). With regard to the international context, the interaction between the forces of globalization, technical progress, and severe competition in the labor market is having a great impact at many levels. It is worth noting that the huge global oversupply of labor of the last decade, when countries like the PRC (and India and Russia) embraced the global labor market has not been accompanied by a concomitant increase in capital for investment. Since the 1980s, the heralded normative goal of “competitiveness,” often pursued with an ideological zeal, has put enormous pressure on workers. The consequence is that jitters are being felt all over the world because the situation is possibly leading to a “race to the bottom,” according to which globalization is forcing workers to compete to attract capital by accepting lower wages. This way, the concept of competitiveness seems to be driving economic policy in many countries, hence the emphasis on costs, productivity, and labor market reform toward achieving greater ﬂexibility. Wage restraint and limitations of social expenditures, e.g., reduction and even elimination of workers’ beneﬁts, such as unemployment subsidies, are seen as necessary conditions for adequate economic performance. The volume argues that improving labor market outcomes —more speciﬁcally, achieving full, productive, and decent employment—is today Asia’s most pressing challenge. In this context, the labor market matters for three main reasons. First, it is one of the main channels through which globalization affects developing counties (e.g., the distribution of income). Second, in developing countries, labor is often the only asset that poor people have. And ﬁnally, a labor market that facilitates job creation and leads to increases in labor productivity is a key ingredient of a business climate where new ﬁrms are created and private agents ﬁnd the proper incentives to invest and innovate. What countries really need to develop is a labor market that achieves the two main objectives of efﬁciency and fairness—only then will it be well functioning. If a labor market meets these two objectives, then it will adequately perform three major functions: (i) resource allocation, i.e., it will be efﬁcient in the sense that it will match workers with jobs; (ii) income allocation, i.e., workers will be paid a fair wage; and (iii) risk allocation, i.e., it will protect workers against the risk of income loss. As a result, the authors insist that governments in the region must make the three objectives of full, productive, and decent employment important components of their macroeconomic agendas. What policies are proposed to achieve full and productive employment? The volume argues that while labor market policies are not the culprit of Asia’s poor labor market outcomes, some elements of labor market policies may be problematic; reforms must concentrate on these elements. But this differs from

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across-the-board labor market reforms that some quarters espouse. Indeed, the simple “ﬂexibility story” does not explain the good or bad performance of the labor market. Neoclassical explanations of unemployment share the idea that the latter is a consequence of setting wages above market-clearing levels. These theories presume that a market economy, if left undisturbed, has the mechanisms to produce a wage rate that clears the labor market. In these circumstances, the level of employment in equilibrium represents full employment, that is, all those members of the labor force who desire to work at the equilibrium real wage can do so. This full employment equilibrium is, therefore, compatible with the existence of voluntary unemployment, but does not admit involuntary unemployment. The most important policy prescription of this paradigm is that unemployment can be eliminated by letting the forces of supply and demand operate undisturbed in the labor market and allowing real wages to fall. Adherents to this explanation are against labor market regulations. They argue that the welfare state and union policies in the form of high minimum wages and widespread collective bargaining raise wages and compress the wage structure, pricing less skilled workers out of the labor market. Indeed, regulations constrain downward wage adjustments leading to employers responding with fewer jobs. Hence, labor reforms, in their view, must aim to eliminate these inﬂexibilities. In contrast, proponents of labor market regulations argue that the right to join a union and bargain collectively can increase workers’ voice, encourage stability in industrial relations, promote on-the-job training, and reduce the pressure on taxpayers to maintain acceptable standards of living by placing the responsibility for decent income and beneﬁts on ﬁrms (and consumers). On balance, the authors of this volume defend this more positive view of the role of labor market regulations. Given that increased ﬂexibility of the labor market is not the panacea that proponents of across-the-board reforms propose, and that this approach will not will deliver the appropriate labor market outcomes, the authors propose to concentrate efforts on growth and human capital policies. Under the ﬁrst group, they discuss policies to improve productivity and incomes in the rural and in the urban informal sectors; an export push; and industrial policies for public-private coordination, diversiﬁcation, and restructuring. The objective of human capital policies is to increase the quality of the supply of labor in order to overcome the “low skills, bad job trap,” i.e., the vicious circle that ﬁrms do not invest in new machines because of the low quality of their workers; and workers do not invest in human capital because ﬁrms do not upgrade. The result is that many countries in the region suffer from a problem of low supply of skills and low demand for skills. Consequently, countries tend to specialize in the production of nontradable goods and services. The implication is that countries must invest in human capital. However, this volume argues that

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since the impact of formal education on the quality of the labor force will take many years to materialize, perhaps countries should concentrate their efforts on increasing the trainability of their workers, deﬁned as workers’ capacity to understand a given technology. Finally, on the question of decent employment, the authors argue that efforts must be made toward increasing workers’ basic rights and the level of social protection. Without these, it will be impossible to achieve the necessary social consensus to implement labor market reforms. The serious concerns in this area are the following: (i) how to bring informal enterprises within the legal framework; and (ii) how to ﬁnance the development of safety nets. I sincerely believe that the contents of this volume will help the development community acquire a better understanding and handling of the ultimate causes of poverty in Asia. It therefore warrants serious attention from policy makers, for the authors have made an effort at treating the issues with the pragmatism of the practical economist. I hope that it will contribute to a better understanding of the biggest challenge that developing Asia will face in the next two or three decades. The volume is also intended for scholars of economic development and labor, as the chapters are written with theoretical rigor. Finally, the volume is a tool to assist the Asian Development Bank in making more informed decisions at both the strategic and operational levels. As a multilateral development bank whose overarching goal is poverty reduction, the Asian Development Bank must not only do things right, but it has to do the right things. This means that the Asian Development Bank has the responsibility of pointing out the obstacles—political, social, and economic—which prevent or retard the achievement of economic development. The views and opinions expressed in this volume are those of the authors and do not necessarily reﬂect those of the Asian Development Bank or of its Board of Directors.

Ifzal Ali, Chief Economist Asian Development Bank April 2006

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Preface and Acknowledgments

In early 2004, the Economics and Research Department (ERD) of the Asian Development Bank (ADB) started a research project on labor markets in developing Asia as part of ERD’s research agenda on long-term growth in the region. This decision followed discussions in ERD regarding the observation that, in a number of countries, unemployment and/or underemployment, as well as informality, were on the rise across a number of Asian countries. Hence, the problem of job creation became evident. Given the belief held in many quarters that labor market rigidities are an important impediment to the creation of employment in Asia, the question of how strong the case is for across-the-board labor market reform in the region seemed important to research. With this background, we initiated a labor market research program with three objectives. First, to foster an empirically based view of how labor market policies and institutions can reduce the incidence and duration of poverty; promote long term sustainable growth (job creation, productivity growth); and contribute to an equitable distribution of the beneﬁts of growth. Second, to strengthen ADB’s understanding of labor markets in the rapidly growing literature on how labor markets—including policies, programs, and institutions—interact with product markets and how such interactions affect ﬁrm creation and destruction, investment in physical and human capital, adoption of new technologies, and foreign direct investment. This analysis also includes investigation of whether, depending on initial conditions, there is an optimal sequencing of reforms in different markets and whether acting on one front (e.g., product and ﬁnancial markets) but not on the other (e.g., the labor market) may jeopardize the ultimate results of the reform effort. And third, to place discussions on the labor market in the context of globalization, as all developing Asian countries are facing major technological and structural changes. In such a context, much of the adjustment to change (both economic and human) as well as the tools to beneﬁt from the opportunities of globalization will reside in the labor market. The ﬁrst step of this research program has consisted of a stocktaking. This volume is the main output. It is the result of a collaborative effort among various scholars and policy makers from Asia. It was written with three aims. The ﬁrst is to signal to policy makers in the region the importance of the problem in labor

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markets. Given the magnitude of the unemployment and underemployment problems and the wide range of questions asked, it is beyond the scope of this volume to provide deﬁnite answers. However, we hope the volume serves to raise a serious debate among policy makers across Asia. The second, as noted above, is to discuss the role of labor market policies as a hindrance to the creation of employment in Asia. And the third is to discuss policies to achieve what the volume refers to as full, productive, and decent employment. The volume is divided into an introduction (Chapter 1) followed by three parts. Chapter 1, written jointly by us, provides an overview of the volume. We argue that policy makers in the region must make the achievement of full, productive, and decent employment a key aspect of their macroeconomic agenda, and devise implementation strategies that are time-bound, feasible, credible, and measurable. If this is not done, Asia may continue being the most dynamic region of the world in the next 25 years, and yet unemployment and underemployment could continue increasing. The chapter proposes a unifying framework to understand the relationship between labor market outcomes, the objectives of full, productive, and decent employment, and the policies to achieve them. Part I, entitled Labor Market Issues, contains three chapters. Chapter 2, also written by us, provides a detailed discussion of labor market outcomes in Asia, namely, labor force, unemployment, underemployment, dualism, etc. Chapter 3, again written by us, provides an in-depth discussion of the broader context in which labor markets operate, with references to the roles of globalization, technical progress, and competitiveness. The four main points of this chapter are as follows. First, proponents of globalization and market-oriented reforms have argued that the solution to the unemployment/underemployment problem is labor market reform, essentially geared toward fostering greater labor market ﬂexibility. Moreover, as “competitiveness” has taken center stage in policy discussions, developing countries have been advised to dismantle trade barriers, privatize state-owned enterprises, and contain increases in unit labor costs. The chapter lays out the arguments and theoretical rationale for and against labor market reforms, and argues that the evidence is not so clear. Second, most modern technologies being adopted by developing countries have been developed by the industrial countries. Since they are very capital intensive, their adoption does not lead to signiﬁcant increases in employment. Third, a possible explanation for why unemployment is on the rise is that developing countries operate in a wage-led regime. Contrary to standard neoclassical models, in wageled economies, an increase in the wage rate leads to increases in employment. However, these are economies that cannot cope well with technological progress in the form of productivity increases, for they lead to unemployment. The challenge for these countries is how to translate productivity increases into higher real wages and aggregate demand. The fourth and ﬁnal main point of

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this chapter is that the elasticity of employment growth with respect to output growth has declined across developing Asia. The last chapter of Part I, Chapter 4, was prepared by Steven Kapsos. It provides regional and global estimates of the employment intensity of economic growth over the period 1991–2003. The global employment elasticity ﬁgures presented in the chapter reveal a recent decline in the employment intensity of growth, a reﬂection of poor employment performance. Part II of the volume, Country Studies, contains ﬁve country studies, for People’s Republic of China (PRC), India, Indonesia, Philippines, and Viet Nam. It offers in-depth discussions of the role of labor market policies. These ﬁve developing Asian economies were selected because they represent a large share of developing Asia, and because they provide a broad variety of labor market outcomes and labor market experiences. The country studies were carried out by four ERD economists in conjunction with local researchers, except in the case of the PRC. The country studies were written between summer 2004 and summer 2005 (except the PRC study, which was written between late 2005 and early 2006). The data covered in most cases do not extend beyond 2003. Rana Hasan led the India team, composed of T.C.A. Anant, Rayaprolu Nagaraj, Prabhu Mohapatra, and S.K. Sasikumar. Guntur Sugiyarto led the Indonesian team, composed of Mayling Oey-Gardiner and Ninasapti Triaswati. Jesus Felipe and Leonardo Lanzona, Jr. prepared the Philippine country chapter. Ran Tao prepared the PRC country study. Binh Nguyen led the Viet Nam team, composed of Cu Chi Loi and Nguyen Chien Thang. The country studies were designed to follow a similar structure. First, they contain a discussion of labor market outcomes; second, they discuss the relevant labor market policy issues in the country; and third, they propose a future research agenda. Although there is considerable variation in policies and experiences across the ﬁve countries covered, a conclusion emerges, namely, that the case for across-the-board reforms of the labor market based on the supposed inﬂexibility of labor regulations and policies is weaker than proponents of market-oriented reforms argue. Instead, reform should focus on those elements of the labor code that cause this supposed inﬂexibility; these elements should be determined on a case-by-case basis. Moreover, labor market reform should go beyond the question of inﬂexibility. Indeed, at a minimum, it should also address issues of basic workers’ rights and social protection. Overall, labor market policies are not the only factors leading to poor labor market outcomes. Indeed, most factors behind weak labor market outcomes are to be found outside the realm of labor market policies. Part III of the volume, Policy Issues, contains one chapter prepared by us. In this chapter we propose a number of policies in the areas of growth and human capital that can have an important impact on job creation. Although we designed, supervised and coordinated the various activities

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of the project, we would not have been able to complete it without the help of our patient and excellent assistants Jewelwayne Cain and Gemma Estrada. Typesetting was very competently carried out by Mercedita Cabaneros, Fatima de Ramos-Blanco, Rhommell Rico, and Cherry Lynn Zafaralla. Lynette Mallery, Cecilia Caparas, and Carolyn Dedolph coordinated with Palgrave Macmillan on the production process. Duncan Campbell (ILO), Gary Fields (Cornell University), Richard Freeman (Harvard University), and a number of ADB colleagues and ILO (Geneva) staff provided invaluable comments and suggestions on the initial drafts. All remaining errors are ours. Last, we would like to thank Ifzal Ali, whose careful reading and detailed comments proved to be extremely helpful. More importantly, we are grateful to him for his continuous encouragement and support, and because he believed in the importance of this project since its inception, and allowed us to carry it out with absolute freedom. He shares with us both the conviction that unemployment and underemployment are the root causes of poverty and the belief that unemployment is more than the result of wage rates being above market-clearing levels. As he once remarked: “Employment is freedom.”

Jesus Felipe and Rana Hasan Asian Development Bank April 2006

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Contributors

T.C.A. Anant Department of Economics University of Delhi New Delhi, India

Binh T. Nguyen Economics and Research Department Asian Development Bank Manila, Philippines

Jesus Felipe Economics and Research Department Asian Development Bank Manila, Philippines

Mayling Oey-Gardiner Insan Hitawasana Sejahtera Jakarta, Indonesia

Rana Hasan Economics and Research Department Asian Development Bank Manila, Philippines Steven Kapsos Employment Strategy Department International Labour Organization Geneva, Switzerland Leonardo Lanzona, Jr. Economics Department Ateneo de Manila University Manila, Philippines Cu Chi Loi Vietnam Institute of Economics Hanoi, Viet Nam Prabhu Mohapatra Department of History University of Delhi New Delhi, India Rayaprolu Nagaraj Indira Gandhi Institute of Development Research Mumbai, India

S.K. Sasikumar V.V. Giri National Labour Institute Noida, India Guntur Sugiyarto Economics and Research Department Asian Development Bank Manila, Philippines Ran Tao Institute for Chinese Studies University of Oxford, and Chinese Academy of Sciences Beijing, People’s Republic of China Nguyen Chien Thang Vietnam Institute of Economics Hanoi, Viet Nam Ninasapti Triaswati Insan Hitawasana Sejahtera Jakarta, Indonesia

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List of Tables

Table 2.1: Labor Force Participation Rates and Labor Force Estimates/ Projections ............................................................................................ 24 Table 2.2: Education Statistics for Population Aged 25 and Over, 2000 ..... 28 Table 2.3: $1-a-Day and $2-a-Day Poverty, 1990 and 2003 ........................ 32 Table 2.4: Unemployment Rate and Number of Unemployed, 2003 .......... 33 Table 2.5: Time-Based Underemployment Rates (%) .................................. 36 Table 2.6: Value Added per Worker by Sector (constant 2000 US$) .......... 38 Table 2.7: Wages and Earnings .................................................................... 39 Table 2.8: Poverty Estimates Based on National Poverty Lines, Urban and Rural, Various Years (%) ................................................................ 39 Table 3.1: Minimum Wage Levels ............................................................... 89 Table 3.2: Philippines: Minimum Wages by Region, 2003–2004 ................ 91 Table 3.3: Regional Scores ........................................................................... 98 Table 3.4: Worker Protection, Selected East Asian and Southeast Asian Economies .......................................................................................... 106 Table 3.5: Worker Protection, Selected South Asian and Transition Economies .......................................................................................... 108 Table 3.6: Employment Elasticities ........................................................... 114 Table 3.7: Growth in Real GDP, Real GDP per Worker, and Employment ................................................................................ 116 Table 4.1: Interpreting Employment Elasticities ....................................... 147 Table 4.2: Global Employment Elasticities by Age Group and Gender, 1991–2003 ........................................................................................... 151 Table 4.3: Global Employment Elasticities and Value-Added Growth Rates by Economic Sector, 1991–2003 ............................................... 153 Table 4.4: Employment Elasticities by Age Group and Gender and Average Annual GDP Growth, 1991–2003—Developed Economies .. 155 Table 4.5: Employment Elasticities and Growth in Value-Added by Economic Sector, 1991–2003—Developed Economies ...................... 157 Table 4.6: Employment Elasticities by Age Group and Gender and Average Annual GDP Growth, 1991–2003—Transition Economies .. 159 Table 4.7: Employment Elasticities and Growth in Value Added by Economic Sector, 1991–2003—Transition Economies ...................... 159

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Table 4.8: Employment Elasticities by Age Group and Gender and Average Annual GDP Growth, 1991–2003—Asia and the Paciﬁc ...... 161 Table 4.9: Employment Elasticities and Growth in Value Added by Economic Sector, 1991–2003—Asia and the Paciﬁc .......................... 162 Table 4.10: Employment Elasticities by Age Group and Gender and Average Annual GDP Growth, 1991–2003—Latin America and the Caribbean ........................................................................................... 164 Table 4.11: Employment Elasticities and Growth in Value Added by Economic Sector, 1991–2003—Latin America and the Caribbean .... 164 Table 4.12: Employment Elasticities by Age Group and Gender and Average Annual GDP Growth, 1991–2003—Africa and the Middle East .......................................... 167 Table 4.13: Employment Elasticities and Growth in Value Added by Economic Sector, 1991–2003—Africa and the Middle East ............... 167 Table 4.14: Variables Examined ................................................................ 170 Table 5.1: Population Statistics, 1871–2001 ............................................. 214 Table 5.2: Basic Labor Force Statistics ....................................................... 214 Table 5.3: Labor Force Participation Rates (all ages, per 1,000) ............... 215 Table 5.4: Labor Force Participation Rates (LFPR) and Labor Force Sizes, Projected to 2026 (all ages, per 1,000) ..................................... 216 Table 5.5: Age Distribution, Projected to 2026 ......................................... 216 Table 5.6: Migration in India, 1971–1991 ................................................. 217 Table 5.7: Net Intercensal Migration Flows, 1971 and 1991 ..................... 217 Table 5.8: Poverty Incidence in India, 1987/88–1999/2000 ...................... 218 Table 5.9: Unemployment Rates, as a Percentage of the Labor Force ....... 221 Table 5.10: Rate of (time-based) Underemployment, 1999/2000 (%) ...... 223 Table 5.11: Employment and Value Added Per Worker, 1999/2000 ......... 224 Table 5.12: Percentage Distribution of Wage and Salaried Workers (Rural and Urban), 1983 to 1999/2000 .............................................. 224 Table 5.13: Average Hourly Wages and Salaries of Wage and Salaried Workers (Rural and Urban), 1983 to 1999/2000 ................................ 225 Table 5.14: Agricultural Wages in India, by State, 1983 to 1999/2000 ..... 228 Table 5.15: Distribution of Workers by Employment Status, 1983 to 1999/2000............................................................................... 230 Table 5.16: Total Employment and Organized Sector Employment .......... 230 Table 5.17: Organized Sector Employment, 1999/2000............................. 232 Table 5.18: Annual Wages Per Worker in the Factory Sector, 1997–1998 ........................................................................................... 232 Table 5.19: Results from Wage Regression, 1999/2000 ............................. 233 Table 5.20: Trends in Manufacturing Employment, 1961–1991................ 236 Table 5.21: Contract Labor as a Percentage of Total Employment, 1984–1998 ........................................................................................... 238

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Table 5.22: Number of Cases Pending in Labor Courts, by State (as of 10 May 2000) ............................................................................ 246 Table 5.23: Pendency/Disposal of Cases in Central Government Industrial Tribunals, 2000–2003 ........................................................ 246 Table 5.24: Enforcement of the Contract Labour (Regulation and Abolition) Act of 1970 (Central Sphere), 1985/86–2001/02 ............................... 248 Table 5.25: Differences in Layoff, Retrenchment, and Closure Provisions Between the Industrial Disputes Act and the Second National Commission on Labour (SNCL) ......................................................... 266 Table 5.26: Formal Social Security Protection in India.............................. 269 Table 5.27: Number of Employees and Beneﬁciaries Covered by the Employees’ State Insurance Scheme, 1991/92–2003/04...................... 270 Table 5.28: Coverage of the Employees’ Provident Fund and Miscellaneous Provisions Act of 1952, 1970–2003 ............................. 271 Table 5.29: Level of Education of Population and Labor Force, 1999/2000............................................................................................ 279 Table 6.1: Key Macroeconomic Indicators ................................................ 304 Table 6.2: Central Government Budget by Function, 2005 ...................... 307 Table 6.3: Summary of Main Labor Regulations, 1945–2004 ................... 308 Table 6.4: Minimum Wages by Province, 2004 and 2005 (Rp) ................ 316 Table 6.5: Severance Pay According to Law No. 13/2003 .......................... 318 Table 6.6: Percentage of Recent Migrants by Province, 1990–1995 and 1995–2000 .................................................................................... 326 Table 6.7: Underemployment Rates by Selected Characteristics, 2003 (%) ............................................................................................. 344 Table 6.8: Workers by Residency, Status, and Sector (million) ................. 344 Table 6.9: Index of Value Added per Worker (agriculture 1997 = 100) .... 348 Table 6.10: Change in Number of Employees ........................................... 350 Table 6.11: Number of Employees and Own-Account Workers by Status, Sector, and Education, 2003 (‘000) .................................................... 353 Table 6.12: Earning Index of Employees and Own-Account Workers by Status, Sector, and Education, 2003 .............................................. 354 Table 6.13: Monthly Earnings of Employees and Own-Account Workers by Status, Sector, and Education, 2003 (Rp) ........................................... 356 Table 6.14: Poverty in Indonesia, 1976 –2003 .......................................... 357 Table 6.15: HCR with Different Poverty Lines, 2003 ................................. 358 Table 7.1: Population and Average Annual Population Growth Rate, 1960–2000 .......................................................................................... 382 Table 7.2: Estimated Employment Elasticities .......................................... 387 Table 7.3: Percentage Share of Organized and Unorganized Sectors, by Economic Activity, 1999 ................................................................ 391 Table 7.4: Nonregular Workers in Establishments Employing 10 or more Workers, 1991–1997 (thousands) ........................................ 412

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Table 7.5: Employment Prospects, 2004–2010 (’000) ............................. 454 Table 8.1: Population Statistics, 1978–2003 ............................................. 513 Table 8.2: Projected Population and Working Age Population ................. 515 Table 8.3: Labor Force and Employment by Ownership (millions) ......... 517 Table 8.4: Employment by Industry (millions) ......................................... 518 Table 8.5: Urban Employment by Province, 1990 and 2003 ..................... 520 Table 8.6: Urban Unemployment, 1980-2003 (millions, end of year) ...... 521 Table 8.7: Long-Distance Migration and Average Annual Working Months ................................................................................. 523 Table 8.8: Demographics of Long-Distance, Long-term Migrants ............ 525 Table 8.9: Sectoral Distribution of GDP and Employment, 1990–2003 ... 526 Table 8.10: Average Wage and Indexes of Staff and Workers by Ownership ..................................................................................... 530 Table 9.1: Employment in Public and Nonpublic Sectors, 1995–2001 .... 571 Table 9.2: Unemployment Rates, by Age Group and Education, 2002 (%) ............................................................................................. 574 Table 9.3: Hours of Work, by Rural and Urban Workforce, 1993 and 1998 .................................................................................... 575 Table 9.4: Monthly Average Wage, by Industry, 1993 and 1998 (constant 1998 $) ................................................................................ 576 Table 9.5: Reasons for Migration (%) ........................................................ 580 Table 9.6: Poverty Rate and Poverty Gap, 1993, 1998, and 2002 (%) ....... 583 Table 9.7: Regional Incidence of Poverty ................................................... 584 Table 9.8: Share of Expenditures, by Population Quintile, 1993, 1998, and 2002 (%) ....................................................................................... 584 Table 9.9: Gini Index for Expenditures, 1993, 1998, and 2002................. 585 Table 9.10: Responsibilities of Labor Institutions in Viet Nam.................. 590 Table 9.11: Ratiﬁed ILO Conventions ....................................................... 591

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List of Figures

Figure 1.1: Framework for Full, Productive, and Decent Employment .......................................................................................... 13 Figure 2.1: Percentage Change in Labor Force Projections, 2005-2015 ............................................................................................. 27 Figure 2.2: Change in Unemployment Rates, 1996-2003 (%) .................... 34 Figure 2.3: Philippines—Unemployment, Underemployment (time-based), and Labor Underutilization Rates (%) ........................... 37 Figure 2.4: Employment Shares and GDP per Capita (constant US$), 2000 ...................................................................................................... 40 Figure 2.5: Employment Shares by Sector, (%) ........................................... 42 Figure 2.6: Share of Informal Sector Employment in Nonagricultural/ Urban Employment and GDP per Capita, Various Years (%)................ 46 Figure 2.7: Share of Formal and Informal Sector Employment, Indonesia (%) ....................................................................................... 47 Figure 2.8: Share of Nonregular Workers to Total Employment (in establishments employing 10 or more workers), Philippines (%) ..................................................................................... 48 Figure 3.1: The Near Halving of the Global Capital-Labor Ratio, 1999 and 2000 ...................................................................................... 65 Figure 3.2: Real Wages and Emoluments .................................................... 67 Figure 3.3: ILO Conventions Ratiﬁed, 1980 and 2000 ............................... 96 Figure 3.4: Employment Growth and Real GDP per Worker Growth ...... 115 Figure 3.5: The Aggregate Demand for Labor Function: The Wage-Led Case ............................................................................ 119 Figure 3.6: Effects of Faster Productivity Growth when Effective Demand is Wage-Led .......................................................................... 120 Figure 5.1: Sectoral Distribution of Employment, GDP, and Labor Productivity (1999/2000) ................................................................... 212 Figure 5.2: Employment Shares ................................................................ 212 Figure 5.3: Public Sector, Private Sector, and Total Organized Sector Employment ....................................................................................... 235 Figure 5.4: Employment in the Organized Sector ..................................... 237 Figure 5.5: Real Wages and Emoluments .................................................. 237

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Figure 5.6: Workers’ Wages as Share of Output ........................................ 238 Figure 5.7: Workers’ Wages as Share of Value-Added ............................... 238 Figure 5.8: Number of Disputes ................................................................ 252 Figure 5.9: Number of Workers Involved in Disputes .............................. 252 Figure 5.10: Number of Person-Days Lost in Disputes ............................. 253 Figure 5.11: Distribution of Workers by Employment Size in Organized Manufacturing, 1979/80 to 1997/98 ................................. 258 Figure 5.12: Distribution of Fixed Capital by Employment Size in Organized Manufacturing, 1973/74 to 1997/98 ............................. 258 Figure 5.13: Evolution of Sampoorna Gramin Rozgar Yojana (SGRY) ..... 274 Figure 6.1: Percentage of Firms Rating an Issue as Having Deteriorated after Decentralization ......................................................................... 312 Figure 6.2: Real Minimum Wage in Selected Major Cities in Indonesia, (Rp ‘000 per month in 1996 prices) ................................................... 314 Figure 6.3: Severance Pay in Number of Months of Wages, by Years of Service ................................................................................................. 317 Figure 6.4: Severance Pay in Number of Months of Wages, for an Employee with 4 Years Service Dismissed for Economic Reasons ..... 317 Figure 6.5: Population Classiﬁcations, 2004/2005 ................................... 320 Figure 6.6: Population Composition in Indonesia by Age and Gender (millions) ............................................................................................ 321 Figure 6.7: Age Structure of the Indonesian Population: Past and Projected .............................................................................. 323 Figure 6.8: Composition of Working-Age Population by Gender ............ 324 Figure 6.9: Overseas Registered Workers by Gender and Destination ...... 327 Figure 6.10: Number of Schools and Students by Education Level .......... 330 Figure 6.11: Gross Enrollment Ratio by Education Level ......................... 331 Figure 6.12: Ratio of Gross Enrollment of the Poorest to the Richest by Level of Education ......................................................................... 331 Figure 6.13: Workers by Education .......................................................... 332 Figure 6.14: Nonworkers by Education .................................................... 333 Figure 6.15: Number of Unemployed by Residency and Gender ............. 334 Figure 6.16: Unemployed by Education and Age ...................................... 335 Figure 6.17: Composition of Workers by Working Hours ........................ 340 Figure 6.18: Number of Workers by Gender ............................................. 341 Figure 6.19: Annual Growth Rates of Working-Age Population, Labor Force, and Number of Workers ................................................ 345 Figure 6.20: Employees by Age Group ...................................................... 346 Figure 6.21: Composition of Workers by Sector ....................................... 347 Figure 6.22: Distribution of Workers by Status ........................................ 349 Figure 6.23: Number of Employees by Sector ........................................... 350 Figure 6.24: Employees by Residency ....................................................... 351

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Figure 6.25: Monthly Wage of Employees by Education (Rp ’000)........... 352 Figure 6.26: Average Earning of Employees by Education and Gender, 2003 (Rp ’000) .................................................................................... 355 Figure 6.27: Wage Ratio of Employees (less than primary education as the benchmark) .............................................................................. 356 Figure 6.28: Mean per Capita Household Expenditures (Rp ’000) ........... 358 Figure 7.1: Number of Entrants into the Labor Market, and Jobs Created, 1981–2003 .......................................................................................... 375 Figure 7.2: New Jobs Created, by Sector and in Manufacturing, 1981–2003 .......................................................................................... 376 Figure 7.3: Unemployment Rate in the Philippines, 1980–2003 .............. 378 Figure 7.4: Unemployment Rate, by Location, 1980–2002 ...................... 378 Figure 7.5: Unemployment Rate, by Age Group, 1980–2003 ................... 379 Figure 7.6: Underemployment Rate, 1980–2003 ...................................... 379 Figure 7.7: Index of Labor Underutilization, 1980–2003 ......................... 380 Figure 7.8: Percentage Breakdown of Unemployment, by Education, 1980–2003 ........................................................................................... 380 Figure 7.9: Sectoral Contributions to the Employment-Population Ratio, 1992–2002 .......................................................................................... 382 Figure 7.10: Decomposition of GDP per Capita, 1980–2003 .................... 386 Figure 7.11: Employment-to-Population Ratio, by Sector, 1980–2003 .... 386 Figure 7.12: Ratio of Employment Growth to Output Growth, by Sector, 1981–2004 .......................................................................................... 387 Figure 7.13: Labor Turnover Rates ............................................................ 388 Figure 7.14: Percentage of Total Employment, by Sector, 1980–2003 ...... 388 Figure 7.15: Percentage of Total Employment, by Type of Worker, 1980–2003 .......................................................................................... 390 Figure 7.16: The Visibly Underemployed as a Percentage of Total Employment, 1987–2003 ................................................................... 392 Figure 7.17: Deployed Overseas Filipino Workers, 1984–2003 ............... 392 Figure 7.18: Annual Remittance per Overseas Filipino Worker, 1984–2003 .......................................................................................... 393 Figure 7.19: Percentage of Compensation Income from the Rest of the World to GNP, 1982–2004 .................................................................. 393 Figure 7.20: Real Wage Rate and Labor Productivity, 1980–2003 ............ 395 Figure 7.21: Average Real (base 2000) and Nominal Wage Rates, 1980–2003 .......................................................................................... 395 Figure 7.22: Gini Coefﬁcients for the Philippines, 1985–2000 ................ 397 Figure 7.23: Poverty Incidence, by Location, 1988–2000 ......................... 397 Figure 7.24: Memberships in Labor Organizations, 1980–2001 ............... 406 Figure 7.25: Median Gross Monthly Salaries of Unionized and Non-unionized Firms, 2003 ............................................................... 407

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Figure 7.26: Median Beneﬁts of Unionized and Non-unionized Firms, 2003 .................................................................................................... 407 Figure 7.27: Number of Collective Bargaining Agreements, 1980–2003 .. 408 Figure 7.28: Number of Workers Covered by Collective Bargaining Agreements, 1980–2003 ..................................................................... 408 Figure 7.29: Number of Strikes, 1980–2003 ............................................. 409 Figure 7.30: Number of Workers Displaced for Economic Reasons, 1995–2003 .......................................................................................... 413 Figure 7.31: Number of Part-Time and Full-Time Workers, 1991–2003 .......................................................................................... 413 Figure 7.32: Percentage of Firms with Violations of Labor Standards and Noncompliance with the Minimum Wage, 1980–2003 .......................................................................................... 417 Figure 7.33: Average Real Annual Wage and Average Real Annual Minimum Wage, 1980–2003 (base 2000) ............................ 420 Figure 7.34: Percentage of Workers with Social Security and Social Insurance, 1980–2003 ........................................................................ 424 Figure 7.35: Number of Apprentices, Program Graduates, and Those Absorbed into Establishment, 1980–2003 .......................................... 431 Figure 7.36: Labor Share in GDP, 1980–2003 ........................................... 442 Figure 7.37: Price Markup, 1980–2003 ..................................................... 442 Figure 7.38: Unit Labor and Capital Costs (with GDP deﬂator), 1980–2003 .......................................................................................... 444 Figure 7.39: Unit Labor and Capital Costs (with relative exchange rates), 1980–2003 .......................................................................................... 445 Figure 7.40: Proﬁt Rate, 1980–2003 ......................................................... 446 Figure 7.41: Investment Share, 1980–2003 .............................................. 446 Figure 7.42: Capital Productivity, 1980–2003 ........................................... 447 Figure 7.43: Growth Rate of Capital Stock, 1981–2003 ........................... 447 Figure 7.44: Capital–Labor Ratio, 1980–2003 .......................................... 449 Figure 9.1: Age Dependency Ratio, 1990–2004 ....................................... 562 Figure 9.2: Labor Force, by Age, 1996, 2002, and 2003 (%) .................... 564 Figure 9.3: Labor Force, by Education, 1996 and 2003 (%) ..................... 565 Figure 9.4: Population and Labor Force Summary ................................... 566 Figure 9.5: Employment Distribution by Age, 1993 and 1998 (%) .......... 567 Figure 9.6: Employment Structure, by Economic Sector, 1991–2002 (%) ................................................................................... 568 Figure 9.7: Employment in Public and Nonpublic Sectors, 1995, 2000, and 2001 (%) ....................................................................................... 569 Figure 9.8: Job Generation, by Economic Sector, 1996–2001 .................. 570 Figure 9.9: Job Generation, by Ownership Sector, 2001–2002 (%) .......... 572 Figure 9.10: GDP Growth Rate and Urban Unemployment, 1994–2003 (%) ................................................................................... 574

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Figure 9.11: Agricultural Land per Capita versus Underemployment Rate by Region, 2001 .................................................................................. 576 Figure 9.12: Productivity Growth Rate, by Sector, 1996–2001 (%) .......... 578 Figure 9.13: Distribution of Vietnamese Emigrants, by Continent, 1992–1999 (excluding seamen) (%) ................................................... 581 Figure 9.14: Applications of Viet Nam’s Labor Code ................................ 592 Figure 10.1: The Mystery of Capital: Developing Countries’ Inability to Produce Capital .............................................................................. 644 Figure 10.2: Breaking the Cycle: Reducing Poverty through Skills Training ............................................................................................... 654

List of Boxes Box 1.1 Growth without Employment .......................................................... 4 Box 2.1: Deﬁnitions ..................................................................................... 22 Box 2.2: Child Labor ................................................................................... 25 Box Figure 2.2.1: Percentage of Children Aged 10-14 in the Labor Force, 1990 and 2003 (with 1990 data over 10%) .......................................... 26 Box 2.3: The Costs and Beneﬁts of Population Growth .............................. 29 Box 2.4: Poverty and the Labor Market ...................................................... 41 Box 3.1: Unemployment, Underemployment, and Mismatches in the Labor Market .............................................................................. 70 Box 3.2: The Cases for and against Labor Market Regulation .................... 73 Box 3.3: The NAIRU and the Neo-Keynesian Labor Market ...................... 77 Box 3.4: Can a Reduction in Nominal Wages Stimulate Employment? ...... 82 Box 3.5: Thailand: Wage Hike Will Scare Investors .................................... 92 Box 3.6 Labor Market Regulations in Industrial Countries: The Empirical Evidence ........................................................................ 94 Box 5.1: Measures of Employment and Unemployment ........................... 222 Box 5.2: Different Types of Employment .................................................. 226 Box 5.3: Labor Laws and Gender .............................................................. 243 Box 5.4: Liberalization and Its Impact on Workers in Formal Manufacturing .................................................................................... 261 Box 5.5: Minimum Wage Laws in India ................................................... 263 Box Table 5.5 Enforcement of Minimum Wages Act of 1948, 1985/86–2003/04................................................................................. 264 Box 6.1: Compliance with ILO Standards ................................................. 310 Box Table 6.1: Labor Standards and Rights ............................................... 310 Box 6.2: Education System in Indonesia ................................................... 328

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Box 6.3: A New Unemployment Deﬁnition and Discouraged Job Seekers .............................................................. 336 Box Figure 6.3.1: Expanded Classiﬁcation of Unemployed, 2001–2003 .......................................................................................... 336 Box Table 6.3.1: Components of Unemployment by Education, 2003 ..... 337 Box Table 6.3.2: Composition of Discouraged Job Seekers by Education, 2001–2003 .......................................................................................... 338 Box 6.4: Underemployment and Overemployment .................................. 342 Box Figure 6.4.1: Willingness to Accept a New Job among Different Groups of Workers ............................................................................. 342 Box 7.1: Philippine Population Policy ...................................................... 384 Box 7.2: Land Reform Programs in the Philippines .................................. 399 Box 7.3: Conventions of the International Labour Organization Ratiﬁed by the Philippines .................................................................. 404 Box 7.4: Minimum Wage Setting in the Philippines ................................. 415 Box 7.5: Do Minimum Wages Cause Unemployment in the Philippines? .............................................................................. 418 Box 7.6: Government Programs for Overseas Filipino Workers ............... 436 Box 7.7: Policies for Full and Productive Employment in the Philippines: A Checklist ......................................................................................... 450 Box 10.1: National Economic Consequences of the Costs of Informality .................................................................. 641 Box 10.2: The Role of Economies of Scale and the Importance of Industry: Can Call Centers Provide the Growth and Employment Impetus Needed in the Philippines? ................................................................. 650 Box 10.3: Do Changing Conditions of Industrial and Ofﬁce Work Require an Increasingly Better Trained and Better Educated Labor Force? ................................................................................................. 655 Box 10.4: Labor Migration, “Brain Effect,” and “Brain Drain” .................. 658 Box 10.5: Vocational Training and Human Resources Development ........ 661 Box 10.6: Policies to Reduce Mismatches in the Labor Market ................ 662 Box 10.7: Components of Social Protection as Deﬁned by the Asian Development Bank ............................................................................. 666 Box 10.8: Extending Social Security to Nonformal Workers in Thailand ......................................................................................... 668

xxxiv

List of Appendixes

Appendix 2.1: Age Distribution as Percentage of Total Population ............................................................................................ 50 Appendix 2.2: The Lewis and Harris–Todaro Models ................................. 51 Appendix Figure 2.2: Economic Development with Unlimited Supplies of Labor .................................................................................. 52 Appendix 2.3: Deﬁnitions of Formal and Informal Sector Employment .... 55 Appendix 3.1: Some Theoretical and Empirical Problems with the Neoclassical Analysis of the Labor Market ......................................... 122 Appendix 3.2: Unit Labor Costs and Competitiveness ............................. 124 Appendix Figure 3.2.1: Unit Labor Costs and Unit Capital Costs ............ 127 Appendix Figure 3.2.2: Labor Income Shares to GDP ............................... 128 Appendix 3.3: Employment Growth and Real per Worker Growth .......... 129 Appendix 4.1: Countries Included in Analysis by Region and Subregion .................................................................... 178 Appendix 4.2: Employment Elasticities and GDP Growth by Country .... 179 Appendix Table A4.2.1: Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Developed Economies . 179 Appendix Table A4.2.2: Sector Employment Elasticities, Sector Value-Added Growth, and GDP Growth (1991–2003)— Developed Economies ........................................................................ 180 Appendix Table A4.2.3: Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Transition Economies . 181 Appendix Table A4.2.4: Sector Employment Elasticities, Sector Value-Added Growth, and GDP Growth (1991–2003)— Transition Economies ......................................................................... 183 Appendix Table A4.2.5: Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Asia and the Paciﬁc ..... 184 Appendix Table A4.2.6: Sector Employment Elasticities, Sector Value-Added Growth, and GDP Growth (1991–2003)—Asia and the Paciﬁc .................................................................................... 185 Appendix Table A4.2.7: Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Latin America and the Caribbean .............................................................................. 186

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Appendix Table A4.2.8: Sector Employment Elasticities, Sector Value-Added Growth, and GDP Growth (1991–2003)—Latin America and the Caribbean ................................................................ 187 Appendix Table A4.2.9: Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)— Africa and the Middle East ................................................................. 188 Appendix Table A4.2.10: Sector Employment Elasticities, Sector ValueAdded Growth, and GDP Growth (1991–2003)—Africa and the Middle East ......................................................................................... 191 Appendix 4.3: Aggregation Methodologies ............................................... 193 Appendix 4.4: Descriptive Statistics and Empirical Results ...................... 194 Appendix Table A4.4.1: Descriptive Statistics: Full Sample ...................... 194 Appendix Table A4.4.2: Descriptive Statistics: Partial Sample .................. 194 Appendix Table A4.4.3: Regression Results with Total Elasticity as Dependent Variable, Speciﬁcation 1 ............................................... 195 Appendix Table A4.4.4: Regression Results with Total Elasticity as Dependent Variable, Speciﬁcation 2 ............................................... 195 Appendix Table A4.4.5: Regression Results with Youth Elasticity as Dependent Variable, Speciﬁcation 1 ............................................... 196 Appendix Table A4.4.6: Regression Results with Youth Elasticity as Dependent Variable, Speciﬁcation 2 ............................................... 196 Appendix Table A4.4.7: Regression Results with Female Elasticity as Dependent Variable, Speciﬁcation 1 ............................................... 197 Appendix Table A4.4.8: Regression Results with Female Elasticity as Dependent Variable, Speciﬁcation 2 ............................................... 197 Appendix 5.1: Major Labor Laws in India ................................................ 285 Appendix Table A7.1: Sources of Job Creation, 1991–2002 ..................... 462 Appendix Table A7.2: Economically Active Population—Labor Force, Employment, and Unemployment Rates, by Sex, 1980–2003 .......................................................................................... 463 Appendix Table A7.3: Real and Nominal Daily Wages in the Philippines, 1980–2003 .......................................................................................... 464 Appendix Table A7.4: Monthly Average Earnings, by Industry (Pesos), 1991–1998 .......................................................................................... 465 Appendix Table A7.5: Monthly Average Earnings, by Region (Pesos), 1994–1998 .......................................................................................... 466 Appendix Table A7.6: Labor Market Laws in the Philippines .................. 467 Appendix Table A7.7: Legislation on Minimum Wage Fixing .................. 468 Appendix Table A7.8: Minimum Wages (Pesos), by Selected Sector, 1991–2003 .......................................................................................... 471 Appendix Table A7.9: Minimum Wages (Pesos), by Region, 2003–2004 .......................................................................................... 472

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Appendix Table A7.10: Minimum Wage Levels in Some Asian Countries .................................................................... 472 Appendix Table A7.11. Comparative Analysis of Labor Market Policies .. 474 Appendix Table A7.12: Enrollment and Graduates of Dual Training System, 2003 ....................................................................................... 491 Appendix Table A9.1: Macroeconomic Indicators, 1994–2003 ................ 615 Appendix Table A9.2: Population and Labor Force, 1996–2003 .............. 615 Appendix Table A9.3: Labor Force, by Urban and Rural Areas, 1996–2003 .......................................................................................... 616 Appendix Table A9.4: Labor Force, by Professional Skills, 1996–2003 .... 616 Appendix Table A9.5: Employment, by Economic Sector, 1995–2003 ..... 617 Appendix Table A9.6: Employment, by Ownership Sector, 1995–2001 ... 617 Appendix Table A9.7: Job Creation, by Ownership Sector, 2001–2002 ... 618 Appendix Table A9.8: Productivity Growth Rate, by Sector (%), 1996–2001 .......................................................................................... 618 Appendix Table A9.9: Number of People Repatriated, 1991–1997 .......... 618 Appendix Table A9.10: Vietnamese Laborers’ Remittances, 1996–2004 .. 619 Appendix Table A9.11: Main Contents of the Labor Code (revised in 2002) ................................................................................ 619 Appendix Table A9.12: Income Tax Rates for High-Income Individuals in Viet Nam ......................................................................................... 620 Appendix Table A9.13: Minimum Wage Decrees for Domestic State and Non-state Sectors ......................................................................... 620 Appendix Table A9.14: Leading Causes of Strikes in Viet Nam ................ 621 Appendix Table A9.15: Labor Market–Friendly Policy Initiatives in Viet Nam ......................................................................................... 621

CHAPTER 1 Introduction: Overview of the Volume JESUS FELIPE AND RANA HASAN

T

his volume addresses the most important problem that policy makers in developing Asia will face in the next few decades—that of generating employment for the huge labor force of the region.1 The phenomenal success measured in terms of GDP growth and poverty reduction in the last three decades, particularly in East and Southeast Asia, does not seem to have led to more and better employment, in the sense defined below. Some parts of Asia—mainly the newly industrialized economies of Hong Kong, China; Republic of Korea; Singapore; and Taipei,China—have done exceedingly well in employing their labor forces productively and in generating many “good jobs” (jobs that demand high skills and command high wages) in the industry and services sectors. But other parts of Asia have generally failed to do the same. In these other parts, labor markets continue to operate with considerable unemployment and underemployment. In South Asia, the movement of workers out of low-productivity employment in the agriculture sector has been protracted. Moreover, many of the new jobs outside agriculture in South Asia are in the informal sector and are not necessarily much better than those in agriculture. This is also true of many other subregions in Asia. The volume consists of 10 chapters (including this one), divided into three parts. The first part has three chapters that address important issues concerning labor markets in Asia: (i) labor market outcomes; (ii) the general

Jesus Felipe, Economics and Research Department, Asian Development Bank; Rana Hasan, Economics and Research Department, Asian Development Bank.

2 Jesus Felipe and Rana Hasan

context in which labor markets operate (i.e., globalization, technical progress, and competition); and (iii) the elasticity of employment growth with respect to output growth. The second part contains five chapters that give detailed analyses of the labor markets of five economies, namely, People’s Republic of China (PRC), India, Indonesia, Philippines, and Viet Nam. Finally, the single chapter in the third part discusses policy issues.2 As Chapter 2 (Labor Market Outcomes in Asia) documents, the developing countries of Asia have made considerable progress in improving the standard of living of their people. However, far too many Asians continue to live in poverty. In terms of the $2-a-day poverty line—the one typically used to measure the extent of poverty in low- to middle-income countries—around 1.9 billion people, or almost 60% of Asia’s population, were poor in 2003. Moreover, this poverty is widespread across Asia. Thus, while the incidence of $2-a-day poverty is extraordinarily high in South Asia, afflicting nearly 77% of the subregion’s population, it is by no means insubstantial in other parts of the region. A case in point is Indonesia, where $1-a-day poverty has been estimated in single digits (6.5% in 2003), but where $2-a-day poverty is much more pervasive (50.5% in 2003). Even in Thailand, which has succeeded in pushing $1-a-day poverty down to less than 1% of the population, around 28% of the population subsists on less than $2 a day. How can Asia help its poor climb out of poverty? While poverty has many causes, ultimately the “poor are poor because they earn too little from the work that they do” (Fields 2004). Regardless of whether they are self-employed, helping on the family farm or enterprise, or working for wages, most of Asia’s workers derive their incomes, and therefore sustain themselves and their families, by using their labor. From this point of view, therefore, improving labor market opportunities for workers is the key to reducing poverty and improving standards of living for the large majority of Asia’s workers and their families. Poverty reduction requires helping people as workers. Indeed, of all the problems that beset developing Asia, the employment problem is probably the central one. Indeed, large parts of the region remain in a situation similar to those described by Lewis (1965) and Myrdal (1968) four decades ago, and unfortunately, the discussions of poverty in Asia (and in the developing world in general) by Galbraith (1979) and Harrison (1979) are valid today. If anything, the situation has perhaps worsened in that dualism—the coexistence of the “modern” or “formal” sector with the “traditional” or “informal”—has become a more acute and notorious feature of labor markets in many Asian developing countries. This is because countries in the region today have very well-developed formal sectors in industry and services that resemble those in industrial countries, while simultaneously having large informal sectors. In some cases, employment has grown more rapidly in the informal sector than in the formal sector.

3 Introduction: Overview of the Volume

The challenge for Asia’s policy makers is not just to create jobs for the unemployed and for the new entrants to the labor force (of whom there will be many more in the years ahead) but also to improve the productivity and earnings of the available jobs. As elaborated throughout the chapters in this volume, Asia’s labor markets suffer from two main features. The first is considerable underutilization of labor, which manifests itself in unemployment and underemployment. A conservative estimate is that at least 500 million workers in developing Asia are either unemployed or underemployed. While unemployment is easily understood (i.e., an unemployed person is one who lacks a job and is looking for one), underemployment is a much more subtle problem. Moreover, it is not confined to rural labor markets since it affects urban labor markets as well, especially in the informal economy, where many migrants from rural areas and longtime urban residents work hard to eke out a very basic living. Underemployment takes mainly the following four forms: (i) workers involuntarily working less than full time; (ii) highly skilled workers forced to take up low-paying jobs that require, at best, modest levels of skill (this causes a mismatch in the labor market); (iii) employed workers underutilized because of overstaffing; and (iv) workers using their raw labor and assisted with few complementary inputs, especially capital, resulting in low productivity and meager earnings. The second main feature of Asia’s labor markets is that, while some countries have managed to achieve relatively high growth rates of output, the corresponding growth rates of employment have been somewhat disappointing (Box 1.1).3 What explains the relatively poor market outcomes documented above? Chapter 3 (Labor Markets in a Globalizing World) argues that while the forces of globalization, intense competition, and fast technological progress have brought immense benefits to a group of Asia’s workers in the last three decades, the impact of increasing returns to scale and technological progress has been such that output growth has led to less than proportional increases in employment growth. Proponents of globalization and market-oriented reforms have argued, following the prescriptions of the neoclassical model, that the solution to this problem is labor market reform, essentially to increase labor market flexibility. Usually, this is phrased in terms of the need to achieve a well-functioning labor market. Moreover, as “competitiveness” has taken center stage in policy discussions, developing countries have been advised to dismantle trade barriers, privatize state-owned enterprises, and contain increases in labor costs to lower unit labor costs. Chapter 3 lays out the arguments and theoretical rationale for labor market reforms aimed at increasing flexibility and argues that the evidence on their importance is not so clear. Moreover, Keynesian and Marxian theories view the causes of unemployment from a different point of view and hence their policy recommendations are different from those of the neoclassical model.

4 Jesus Felipe and Rana Hasan Box 1.1 Growth without Employment

The development literature recognizes that unemployment in urban areas is only one aspect of the wider problem of unemployment, underemployment, and poverty in developing countries. It may be that the situation of the unemployed (many of whom are young and educated but supported by the extended family system) is no worse than that of a fully employed poor farmer who works for a subsistence wage. Unemployment must be linked with the general problem of underutilization of resources and with poverty. Nevertheless, unemployment in urban areas, in particular affecting the 15– 24 age group has become a serious problem in most developing countries. In 2004, unemployment in Metro Manila (Philippines), for example, was around 16%, well above the national average; unemployment in the 15–24 age group was above 20%. However, the Philippines managed to grow by about 6.1% in 2004. This indicates that the country is facing a chronic, rather than a cyclical, problem. The phenomenon of growth without employment has exposed the problems of conventional development strategies based on the Lewis type of labor surplus models, which assume a modern sector with the capacity to lead the country’s industrialization. These models have seriously overestimated the capacity of the modern sector to absorb the unemployed and underemployed, including the surplus labor in the agriculture sector, and to be the engine of growth. Moreover, the type of modern sector development that has taken place has an urban bias, is capital-intensive, and has led to high wages and productivity in some sectors and areas. It has exacerbated the situation by further attracting migration toward urban areas that do not have the capacity to absorb new entrants. continued.

The chapter argues that since most modern technologies being adopted by developing countries were developed by the advanced countries, they are very capital-intensive and most often do not lead to significant increases in employment. Moreover, some of these new technologies have thrown out workers in what Myrdal (1968) termed the “backwash effect.” It is true that new sectors are generating employment. But the statistics indicate that, despite this, unemployment is on the rise and underemployment remains stubborn. In addition, the empirical evidence on the relationship between employment and productivity growth indicates that, overall, countries across the region are not doing very well when it comes to employment growth. While many countries have achieved very high output and productivity growth rates, corresponding employment growth rates are far lower. As this chapter documents, the elasticity of employment growth with respect to output growth was lower overall in the 1990s than in the 1980s, indicating that one percentage point of growth led to a lower increase in employment in the 1990s than in the previous decade.

5 Introduction: Overview of the Volume Box 1.1 Growth without Employment (cont'd.)

On the supply side, two factors in particular have contributed to a rapid increase in the labor force. The high rate of population growth and the “education explosion” has increased the proportion of the young leaving rural areas to seek modern sector jobs. The education system has a clear urban-academic bias. The rapid spread of universal primary education has raised the expectations among the young to seek modern sector jobs, causing widespread unemployment among primary-school leavers. Moreover, large inequalities in land-holdings result in large numbers of families being unable to provide enough work and income for their members, given their lack of capital and knowledge of capital-intensive techniques. Low and unstable prices of agricultural products, poor transport facilities, and poor general infrastructure turn the terms of trade against the rural sector. On the demand side, the capital-intensive nature of the modern sector has meant that output has grown faster than employment. The presence of multinational corporations plays an important role in explaining why this has happened, as these corporations determine the nature of the technologies being used. This is because the technologies are devised in industrial countries, where most of the research is carried out. Hence, they tend to reflect the conditions and relative prices there. Finally, the rural–urban differential is a key factor explaining the constant and high rate of migration from rural to urban areas. Thus, employment policies will have to consider this issue explicitly. Source: Ghatak (2003, p. 289–91).

Chapter 3 also develops the argument that increasing returns to scale and technological progress are responsible for this outcome. Under these circumstances, a faster rate of technical change may actually lead to increasing unemployment as faster output growth does not require a proportionate increase in employment, i.e., the growth of output is too slow to absorb the growth in the labor force. From this point of view, it is argued that countries in the region may be viewed as operating under a wage-led regime—a regime under which an increase in the share of labor in value added leads to an increase in aggregate demand—and, thus, wage increases need not lead to decreases in employment, as standard neoclassical models suggest. The problem, however, is that wageled economies are not well prepared to absorb technological progress, and productivity increases lead to lower employment. Hence, the challenge for policy makers in developing Asia’s economies is how to translate increases in productivity into higher real wages and aggregate demand.

6 Jesus Felipe and Rana Hasan

Chapter 4 (The Employment Intensity of Growth: Trends and Macroeconomic Determinants) delves into the magnitude of the elasticities of employment growth. It provides country, regional, and global estimates of the employment intensity of economic growth in 1991–2003. The chapter examines employment elasticities for the general employed population, and also for different demographic groups such as women and youth and for the three broad economic sectors including agriculture, industry, and services. It provides the first comprehensive world and regional aggregate estimates of the employment intensity of growth, and, with estimates of employment elasticities for 160 economies, the largest set of cross-country comparable employment elasticities to date. The global employment elasticity figures presented in the chapter reveal a recent decline in the employment intensity of growth, which is most likely a reflection of poor employment performance after the global economic slowdown that took shape in 2001. The results presented in this chapter show that in Asia and the Pacific and particularly in East Asia, rapid economic growth has resulted in large gains in labor productivity, contributing to rising living standards while also fostering robust employment growth. The exception in this subregion is the PRC, which has a low elasticity. Thus, employment growth has been more limited than one would expect given the PRC’s very high rates of economic growth. India, on the other hand, has a substantially higher elasticity of employment. Yet, India also needs more employment-intensive growth if it is to avoid rising unemployment. This is because’s India’s labor force is growing faster than the PRC’s and because economic growth has also been lower as compared to the PRC’s. Finally, the chapter’s findings related to determinants of employment elasticities themselves are highly relevant in policy discussions aimed at promoting employment and productivity for economic growth and poverty reduction. Importantly, the chapter finds no evidence across economies of a link between measures of the extent of employment protection in an economy and the job intensity of growth in that economy. While further work is certainly needed to examine this issue in greater detail, the finding could have significant implications in the areas of social dialogue, collective bargaining, and social protection. The second part of the volume consists of detailed analyses of the labor markets of five Asian countries—PRC, India, Indonesia, Philippines, and Viet Nam. As noted above, proponents of globalization and market-oriented reforms have argued that the solution to the problem of weak labor market outcomes is labor market reform, essentially geared toward fostering greater labor market flexibility. The main question driving the analyses in these chapters is whether supposed labor market rigidities are the main underlying cause behind poor labor market outcomes and, hence, whether labor market reform is the solution to the problem. A key conclusion of these chapters, and of the volume in general, is that, overall, labor market rigidities are not to be blamed for poor

7 Introduction: Overview of the Volume

labor market outcomes. This is a very important point, because many economists argue that the reason for such outcomes in the region has to do with rigidities in the labor market. Consequently, labor market reforms aimed at increasing the flexibility of the labor market are promoted as the solution. This is not to dismiss the key role of a well-functioning labor market in creating employment. Quite the opposite, in fact. Without a well-functioning labor market it will not be possible to achieve full, productive, and decent employment (see below). A labor market is said to perform well if it achieves the objectives of efficiency and fairness. These objectives imply that the job market will match workers with jobs and that workers will be paid a wage rate that is related to their productivity. Moreover, a well-functioning labor market will protect workers against the risk of income loss. To this end, countries will have to reform labor markets to develop social protection systems and provide basic rights to all workers to achieve the objective of decent employment. Hence, the chapter has rejected calls for across-the-board labor market reforms and has advocated well-designed country-specific piecemeal reforms that target the particular policies that inhibit employment creation. The overall conclusion of the country studies is that labor market reforms aimed at increasing flexibility are by no means a panacea for labor markets in the region. Some aspects of labor market regulation in some countries might indeed constrain employment growth and must therefore be addressed. For example, in India, overly stringent restrictions that make it difficult to lay off workers may need to be modified. However, even where such labor reforms are deemed necessary, they will have to be complemented with reforms in other areas outside the purview of labor market regulation. In other words, labor market regulations are very unlikely to be the binding constraint on employment generation. This conclusion undermines the case for across-the-board labor market reforms and advocates in-depth case studies to identify the specific policies that, in each country, constrain employment creation. At the same time, labor regulations covering basic rights of workers are conspicuous by their absence—due either to deliberate policy or to weak enforcement of regulation—for the large majority of workers in the informal sector. These workers are also poorly protected from the many risks they face because of the weaknesses of the systems of social protection. Labor market reforms will have to provide effective systems of social protection to achieve decent employment. The five country chapters try to follow a parallel structure to achieve some degree of uniformity. Thus, broadly speaking, they address three main issues. First, they contain an analysis of labor market outcomes. Second, they analyze labor market policies. Finally, they discuss knowledge gaps and propose a research agenda. Chapter 5 (Labor Markets in India: Issues and Perspectives) notes that while reasonably high rates of economic growth over the last two decades have

8 Jesus Felipe and Rana Hasan

been associated with improvements in various aspects of labor market outcomes (such as a reduction in poverty incidence), a closer examination of India’s labor markets reveals areas of serious concern. First, a huge proportion of India’s labor force is still engaged in low-productivity, low-earning jobs in the rural and urban informal sectors. Second, the pace at which jobs are being created in the formal sector not only remains slow, but has in fact declined in recent years. With the labor force expected to increase by around 90 million over the next 10 years, generating jobs in the formal sector is a matter of utmost urgency. How well are India’s policies geared to achieving progress on this front? A key factor that is widely believed to explain the lackluster creation of formal sector jobs is India’s labor market policies. In particular, it is widely held that employers cannot lay off even a single worker without the approval of the state or hire contract workers freely. Such restrictions have been held to cause a serious disincentive for firms to hire workers and enter labor-intensive lines of production. A detailed examination of India’s labor laws and consideration of their enforcement leads the authors to the following conclusions, however. First, while in principle the provision of strict job security (or inability to hire contract workers) can lead to rigidities, in practice the restrictiveness of labor laws has been diluted by an increasingly weak enforcement regime. Second, it would be overstating the case if the weak growth in formal employment were attributed mainly to rigidities stemming from labor market policy. A large part of the explanation also has to do with rigidities in other dimensions of economic policy and severe weaknesses in infrastructure. This is not to suggest that India’s labor laws are not in need of reform. Particular features of India’s labor laws, such as stringent restrictions on layoffs, do go against the grain of an economic environment where markets are increasingly relied on to allocate resources. However, modifying such laws should not be the only objective of labor market reforms in India, according to the authors. In particular, India’s labor markets will not function efficiently or fairly unless current systems of social protection for workers are dramatically improved and an enforceable set of basic rights is provided to workers in the informal sector. Incorporating these elements into the program of economic reforms is probably the best way to guarantee that reforms in India not only generate high growth but also allow many more of the country’s workers to share in this growth. Chapter 6 (Labor Markets in Indonesia: Key Challenges and Policy Issues) provides a detailed account of labor market outcomes in Indonesia since 1990. Until the economic crisis of 1997–98, labor market outcomes had been improving. Poverty rates had declined considerably and there had been a steady transition of employment from the agriculture sector to industry and services. The economic crisis put an end to many of the favorable trends. Despite a moderate economic recovery since 1999, unemployment rates remain higher today than in 1997. Similarly, the shares of workers in agriculture and in the informal

9 Introduction: Overview of the Volume

sector have both increased. Women workers have been hit particularly hard. Significantly, Indonesia’s labor market policies have undergone a dramatic change since the economic crisis and the ensuing political changes in 1998 when President Suharto’s rule gave way to democratically elected governments. Before the crisis, labor markets in Indonesia operated under conditions of labor repression with organized labor tightly controlled by the ruling party. The emergence of democratic rule in 1998 led to significant changes both in labor market policies and in their implementation. Most observers have welcomed the new policies, which generally strengthen workers’ rights. However, some observers are concerned that specific elements of the new policies may be having adverse, though unintended, consequences. In particular, it has been argued that large increases in minimum wages and severance pay have significantly inflated the costs of business and reduced the demand for labor in the formal sector. However, the empirical evidence to back these claims is not so clear-cut, especially on minimum wages. Moreover, Indonesia’s new labor regulations cannot be the only elements that are constraining the growth of formal sector employment. Macroeconomic instability, policy uncertainty, and corruption are often mentioned as key constraints by investors in Indonesia. Indeed, Indonesia’s business regulations are very cumbersome by international and regional standards. Chapter 7 (Unemployment, Labor Laws, and Economic Policies in the Philippines) notes that unemployment and underemployment affect about a quarter of the Philippine labor force. This reserve army of workers is a reflection of the economy’s lack of capacity to provide jobs, especially in the formal sector, to its growing labor force. In the 1980s, the Philippines undertook a series of policy reforms and structural adjustment programs. One expected, though indirect, effect was to expand employment. After decades of protectionism, the country opened itself to the world market, engaging in a process of globalization with a commitment to free markets. However, despite some notable growth in the mid-1990s, the average growth rate of the country has been lackluster. One of the most important results of such poor performance has been the increase in unemployment and underemployment, and a general feeling that the country cannot provide jobs to its increasing labor force. The chapter argues that although certain labor market policies may impede job creation, other factors such as substandard investment, lack of sensible population management policies, incomplete land reform, and the monopolistic structure of the economy are probably more important factors in explaining the country’s situation. Moreover, although the data seem to indicate that the Philippines has the highest (maximum) minimum wage in the region, it is hard to square unemployment in the Philippines with wages being “too high.” This is because the real wage in the Philippines today is below what it was in 1980, and labor’s share has lost about 10 percentage points in the last two decades. The sharp

10 Jesus Felipe and Rana Hasan

drop in real wages proves that wages have been flexible when they were required. The authors of this chapter argue that the Government’s Medium Term Philippine Development Plan (MTPDP) for 2004–2010, which set the target of creating about 1.5 million jobs a year between 2004 and 2010, i.e., a total of about 10 million jobs, will not be enough to solve the problem. The MTPDP 2004–2010 emphasizes the acceleration of economic growth, job creation, energy sector reform, support of social justice and basic needs, provision of education and better opportunities for young people, and good governance and anticorruption programs. However, in the authors’ words, “the policy of ‘high employment’ seems to remain toothless and is only secondary and complimentary to the two core policies of price stability and fiscal discipline. Fiscal consolidation and achievement of a balanced budget by 2010 have been given highest priority.” Given the very high number of unemployed and underemployed workers, a more committed objective toward eradicating unemployment should have been established by the administration. Chapter 8 (The Labor Market in the People’s Republic of China: Development and Policy Challenges in Economic Transition) provides an overview of the PRC’s labor market developments and labor policies since the economic reforms of the late 1990s. The PRC appears to be growing along a knife-edge path where high growth is necessary to continue lifting millions of people out of poverty and to create employment, but simultaneously this high growth is the source of imbalances and concerns (e.g., supply and demand, overcapacity, environment). Moreover, it is estimated that growth in the 1990s was much less employmentintensive than in the 1980s: while in the first decade it took a 3% growth rate of output to induce a 1% increase in employment, in the second decade a growth rate of almost 8% was needed to achieve the same result. Chinese authorities have acknowledged the need to step up job creation and recognize the current situation as a very difficult one. Estimates by the National Development and Reform Commission in early 2006 indicate that the country needs to generate about 25 million urban jobs to accommodate new entrants into the labor market, workers laid off from state enterprises, and rural migrants. However, urban areas will be able to generate only about 11 million jobs. After briefly reviewing the implications of the economic reforms of the 1990s for the development of the country’s labor market and for the allocation of the labor force, the chapter outlines the PRC’s labor market trends with respect to population, urbanization, labor force, employment, urban unemployment, migration, rural underemployment and unemployment, wages, and labor market segmentation in the process of economic transition. The PRC’s labor policies are also discussed, with special attention being paid to the country’s labor laws, as well as to the evolving social security system. The chapter then pinpoints four major policy challenges that the PRC is facing in developing a well-functioning labor market: (i) private sector development; (ii) hukou system reform and labor mobility; (iii) human capital upgrading; and (iv) social security strengthening. It is concluded that the further development of the PRC’s labor

11 Introduction: Overview of the Volume

market necessitates decisive and coordinated reforms under an integrated approach, rather than the traditional approach of “crossing the river by groping for the stone.” Chapter 9 (A Stocktaking of Viet Nam’s Labor Market Policies) provides a comprehensive stocktaking review of the labor market outcomes and policies of Viet Nam since the country started its economic reform program (Doi Moi) in 1986. The review includes an analysis of key features of labor market outcomes, the changes that have taken place in those outcomes over time, and the effects of labor market policies on the outcomes. The authors’ major finding is that while Doi Moi—whose fundamental objectives are the transformation of Viet Nam from a centrally planned economy into a market economy, and the integration of the country into regional and global markets—has contributed to the country’s impressive economic growth and poverty reduction, it has had limited influence on labor market outcomes. Overall, the changes in employment distribution across sectors has been insignificant, and consequently labor markets remain segmented into rural agriculture and urban industry and services, on the one hand, and into an informal sector and a formal sector, on the other. The labor market policies, enterprise laws, and government employment promotion programs introduced during Doi Moi have yet to result in significant transfers of employment from agriculture into industry and services, and from the informal into the formal sectors, in a more robust private sector, and in more efficient labor markets. The authors emphasize two major challenges facing Viet Nam’s labor markets: (i) the creation of enough jobs to meet the supply of over 1 million new market entrants per year, and (ii) the increase in labor productivity to ensure Viet Nam’s competitiveness and continuing economic growth and poverty reduction. Finally, Chapter 10 (Policies to Achieve Full, Productive, and Decent Employment in Asia) in part three addresses a number of policy issues. If labor market reforms represent only one piece—and not the key one—of the solution to the problem of creating productive jobs across developing Asia (in particular generating the rapid growth of “good” jobs), where should policy makers focus their efforts? In view of the large-scale unemployment and underemployment that characterize Asia’s labor markets and the difficulties inherent in accelerating the growth of employment, this chapter argues that governments across the region must give maximum priority to promoting full, productive, and decent employment and to implementing credible and measurable policies to achieve these three objectives. As argued in Chapter 3, Keynes maintained that the key to employment creation and ultimately full employment was to increase the rate of capital accumulation of the economy. Also as discussed in Chapter 3, the view that full employment can be pursued by increasing investment is not unanimous. This does not mean, however, that full employment should not be a primary objective of economic policy and that it should be abandoned. It should be pursued on several grounds. The first one is that the economic and social costs of unemployment and underemployment are staggering.

12 Jesus Felipe and Rana Hasan

Unemployment causes permanent losses in the potential output of goods and services, besides misery and social injustice, particularly in developing countries, as well as myriad related problems (e.g., crime and social instability, psychological problems, deterioration of skills). The second argument for full employment is that the right to employment is part of the Universal Declaration of Human Rights. Therefore, ensuring employment to all those willing to work is a government’s responsibility. The third and final argument is that full employment is an ethical imperative in today’s developing capitalist economies, where unemployment and underemployment are endemic. In societies characterized by this problem, public inaction is tantamount to consigning workers and their families to poverty. Moreover, since the major constraint on the growth of developing economies is their inadequate stock of capital, it is argued that the key to employment creation is investment. Figure 1.1 summarizes these ideas in a framework intended to guide policy action. The figure is divided into three blocks. The left-hand side shows the labor market outcomes across most Asian developing countries— unemployment and underemployment, the main causes of poverty and informality in the region. These outcomes are the result of the dynamics and interaction of labor supply (population growth) and demand (investment), which operate within each country’s particular context of labor market policies and institutions, as well as within the general context of a world characterized by globalization, technological progress, and competitiveness. The right-hand side of Figure 1.1 summarizes the important message that policy makers must give maximum priority to the achievement of full, productive, and decent employment. The block in the middle highlights three types of policies required to move from today’s labor market outcomes to these objectives—labor market, growth-promoting, and human capital policies. What does full employment mean? In industrial countries, where integrated formal labor markets exist, and where employed workers are paid at a marketdetermined wage rate, the notion of full employment consists in minimizing the number of unemployed in the labor force.4 In developing countries, however, the meaning is slightly different. The reason is that in these countries, an important proportion of the labor force is underutilized. Therefore, full employment in the developing country context is about reducing unemployment as well as reducing underemployment—a far more pressing problem than unemployment in most Asian developing countries. It must be added that the objective of full employment in itself is not enough. Indeed, the employment created must be productive. This is to avoid the prospect of governments succumbing to the temptation to solve the unemployment problem by creating thousands of unneeded jobs in, for example, state enterprises. That might offer no more than a temporary palliative to the unemployment problem while exacerbating the underemployment problem (or shifting workers from one type of underemployment to another). For

Figure 1.1 Framework for Full, Productive, and Decent Employment

Labor Market Outcomes

Demand for Labor

I. Labor Market Labor Market Reforms

Domestic Context

Well-Functioning Labor Market

Labor Market Policies and Social Protection

Allocation ·· Resource Income Allocation · Risk Allocation

LABOR MARKET OUTCOMES Unemployment Underemployment

Poverty and Informality

International Context

·· ·

Globalization Technological Progress Competitiveness

II. Growth-Promoting Improving Incomes

··

Rural Economy Urban Informal Sector

Export Push

III. Human Capital

· ··

Industrial Policies Public –Private Coordination Diversification Restructuring

Improvement in the Quality of the Labor Supply

FULL, PRODUCTIVE, AND DECENT EMPLOYMENT

13 Introduction: Overview of the Volume

Supply of Labor

Objectives

Policies

14 Jesus Felipe and Rana Hasan

example, state enterprises may hire many qualified people, such as engineers to run electricity companies. However, they may hire so many of them that, for all practical purposes, the engineers are underutilized.5 Governments also need to ensure that employment is decent. This means workers must be provided basic rights (such as the freedom of association, protection from forced or compulsory labor, and elimination of discrimination) and security. This is most critical in the informal sector, i.e., that part of the economy largely outside the purview of government regulations, where the absence of basic rights at work and inadequate social protection is most pronounced (ILO 2002).6 Protecting the basic rights of workers and giving them a say in the decisions that affect their lives are key to ensuring that workers can lead a life of dignity even when their earnings are low. Moreover, better and fairer working conditions, along with the ability to draw on mechanisms of social protection, can also enhance workers’ productivity. Chapter 10 does not claim that the achievement of full, productive, and decent employment is an easy task for policy makers. The message that it aims to convey is that, unless these three objectives become a fundamental part of the macroeconomic agenda across developing Asia, it is easy to conceive of a region, say, 25 years from now, that, despite continuous growth, still harbors most of the world’s poor. For this reason, developing country governments must devise time-bound, feasible, credible, and measurable strategies, which should be made part of their development plans, to reduce unemployment and underemployment in a sensible manner. That the plan must be time-bound means that policy makers must commit themselves to reducing, and potentially eliminating, unemployment and underemployment within a reasonable amount of time, say, 25 years (not necessarily the same in each country). This objective could be broken down into partial objectives for decades, 5-year periods, and years. For the plan to be feasible it must be consistent with the broad contours of a given country’s economic policy and economic context. A credible plan means that policy makers must avoid “populist” measures. Constituents will not be fooled by plans that are not credible.7 Finally, the plan must be based on measurable indicators. This will enable policy makers to provide appropriate policy responses. It was indicated above that policy makers must follow the evolution of both unemployment and underemployment.8 What government policies will promote full, productive, and decent employment? Extending and enforcing basic rights for all workers and strengthening systems of social protection will be key in promoting decent employment. As for the objectives of full and productive employment, the chapter proposes a broad range of policies for Asia’s developing countries to meet these. These policies, the goals of which are to generate gains in productvity and shift them into higher real wages and aggregate demand, fall into two groups: growth-promoting policies and human capital policies. Under the first,

15 Introduction: Overview of the Volume

the chapter discusses the following: (i) policies to improve incomes in the rural areas, including those generated by nonfarm enterprises, and in the urban informal sector; (ii) export push, based not on low wages but on increased productivity; and (iii) industrial strategies and policies to achieve coordination between public and private sectors, diversification, and restructuring. The term “industrial strategy” does not mean “picking the winners.” It is a process of embedding private initiative in a framework of public action that encourages restructuring, diversification, and technological dynamism. The essence of successful industrial policy is effective coordination, a role that must be undertaken by the government. A simple checklist of growth-promoting policies includes the following: (i) an industrial policy framework to coordinate the private and public sectors’ activities, to encourage restructuring, diversification, and technological dynamism; the imperative here is to be creative; (ii) strategies for the manufacturing and services sectors; (iii) a big-push rural development program in terms of targeted investments, particularly in infrastructure, to improve economic opportunities and reduce migration from the countryside; the big push will have to be enough to place a sufficiently large number of people in a situation where migration offers no attraction; (iv) policies to increase productivity and incomes in the informal urban sector, a sector that is small in scale, labor-intensive, and rather competitive, and has often been neglected by government and discriminated against via a range of measures that favor the modern sector; (v) policies to increase the proportion of workers in the formal sector to absorb workers from the informal sector; (vi) policies that encourage the use of labor-intensive methods of production and the development of intermediate technologies that do not entail reduction in employment; and (vii) policies that “push” exports via increases in productivity. The chapter also argues that policy makers will also have to improve the human capital of the labor force of their countries, especially in terms of trainability, that is, the capacity to understand how to use a given technology. With advancing globalization, this capacity has become necessary for assimilating new technologies effectively, and in moving up the development ladder. Developing countries often become immersed in a series of traps and vicious cycles that derive from the low quality of their labor. For example, if workers have insufficient skills to operate modern machines, the machines will be underutilized. Consequently, firms will have little incentive to invest in the latest technology, and workers’ productivity will be constrained. One of the most important consequences of the lack of skilled workers is the adverse effect on product quality, while skill deficiencies lead to the production and export of relatively low-quality and low-value products. Solving these problems will require implementing an education policy that places less emphasis on the quantitative link between occupation and formal education (to eliminate

16 Jesus Felipe and Rana Hasan

mismatches) and more attention to the structure and content of education, making it more appropriate for the economic environment in which most students will live.

Notes 1. For the purposes of this chapter and the volume in general, “developing Asia” refers to the developing member countries of the Asian Development Bank (see http://www.adb.org). This group excludes Japan but includes Hong Kong, China; Republic of Korea; Singapore; and Taipei,China. References to Taipei,China are to the island of Taiwan; references to Hong Kong, China are to the Special Administrative Region of Hong Kong; and references to the People’s Republic of China or the PRC are to mainland China. The terms “developing Asia”, “developing countries”, and similar expressions are used interchangeably here. 2. The material in three chapters—chapters 2, 3, and 10—is based on ADB (2005). 3. Certainly, between the 1960s and 1990s East Asia did very well, as documented by the World Bank (1993) in its famous East Asian Miracle. This wellknow volume explains the causes behind the region’s success and makes no reference to the unemployment–underemployment problem. Even Quibria (1995) and Quibria and Dowling (1996)—excellent surveys on critical and current issues in Asia— make no direct reference to these problems. Quibria (1995, chapter 1) indicates that not all economies in Asia did as well as those of East Asia and that, “contrary to popular perception, the economic challenge facing developing Asia, as measured by the metric of poverty, is far from over, and may have only begun” (Quibria 1995, p. 1). However, the connection between poverty and lack of employment is not made explicit, the issue that this volume highlights. This may be because a weakening link between economic growth and employment growth started surfacing in the mid1990s, especially after the Asian crisis. 4. We follow Pasinetti (1993), for whom full employment means zero involuntary unemployment, i.e., no one who is ready and willing to work full time (it also refers to zero involuntary part-time employment and underemployment) for an appropriate wage is jobless. This is different from the notions of the natural rate of unemployment (NRU) or the nonaccelerating inflation rate of unemployment (NAIRU). See Chapter 3. While achieving zero involuntary unemployment is virtually impossible, this does not mean that governments should not strive to achieve it. That is why reference is made in the text to minimizing (involuntary) unemployment rather than eliminating it. 5. Most Asian developing countries have statistics on underemployment. These correspond, in general, to the first type of underemployment mentioned above (workers involuntarily working less than full time). Statistics of the second and third types of underemployment (that due to skills mismatch and to overstaffing) are not published. The fourth type of underemployment (that due to work with few complementary inputs) is potentially the most difficult, but not impossible, to

17 Introduction: Overview of the Volume measure. In its extreme form, this type of underemployment can be approximated through statistics on poverty. 6. Common features are evasion of taxes, lack of enforcement of labor laws, and a nonexistent contract system. 7. This is the case of the Medium Term Philippine Development Plan 2004– 2010. See Felipe and Lanzona (2006, this volume). 8. One possibility is to devise a composite index of both unemployment and underemployment. Certainly, this calls for an improvement in the unemployment and underemployment statistics. As discussed in an earlier note, in most countries, statistics cover only one of the four types of underemployment.

References Asian Development Bank. 2005. Key Indicators 2005: Labor Markets in Asia: Promoting Full, Productive, and Decent Employment. Available: http://www.adb.org/ Documents/Books/Key_Indicators/2005/default.asp. Felipe, J., and L. Lanzona, Jr. 2006. “Unemployment, Labor Laws, and Economic Policies in the Philippines.” In J. Felipe and R. Hasan, eds., Labor Markets in Asia: Issues and Perspectives. London: Palgrave Macmillan for the Asian Development Bank. Fields, G. 2004. “A Guide to Multisector Labor Market Models.” Paper prepared for the World Bank Labor Market Conference, 18–19 November 2004, Washington, DC. Galbraith, J. K. 1979. The Nature of Mass Poverty. Cambridge: Harvard University Press. Ghatak, S. 2003. Introduction to Development Economics. 4th ed. London: Routledge. Harrison, P. 1979. Inside the Third World. London: Penguin Books. International Labour Organization. 2002. “Decent Work and the Informal Economy: Report VI.” International Labour Conference 90th Session. Geneva. Lewis, A. W. 1965. Theory of Economic Growth. London: George Allen and Unwin, Ltd. Myrdal, G. 1968. Asian Drama: An Inquiry into the Poverty of Nations. Pantheon: New York. Pasinetti, L. 1993. Structural Economic Dynamics. Cambridge: Cambridge University Press. Quibria, M. G., ed. 1995. Critical Issues in Asian Development: Theories, Experiences and Policies. Hong Kong, China: Oxford University Press. Published for the Asian Development Bank. Quibria, M. G., and J. Malcolm Dowling, eds. 1996. Current Issues in Economic Development: An Asian Perspective. Hong Kong, China: Oxford University Press for the Asian Development Bank. World Bank. 1993. The East Asian Miracle: Economic Growth and Public Policy. Washington, DC.

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PART I Labor Market Issues

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CHAPTER 2 Labor Market Outcomes in Asia JESUS FELIPE AND RANA HASAN

T

his chapter provides an overview of labor market outcomes in developing Asia. Comparing labor market outcomes across Asian countries is not as straightforward as it may seem. While virtually all countries in the region carry out labor force surveys—the single best source for most labor market data—surveys differ in frequency, coverage, scope, and definitions of labor market variables. But the available data do allow a broad understanding of the conditions of labor markets in the region. Common labor market terms are defined in Box 2.1.

2.1 Labor Force Table 2.1 gives estimates of labor force participation rates, the workingage population, and labor force size in developing Asian countries.1 It also gives projections of the labor force in 2015 and 2030. The data in the table have several salient features. First, not all of those in the working-age population participate in the labor force. As can be seen by comparing the first and second columns of Table 2.1, women participate less in the labor force than men. Moreover, women in South Asia, in particular, are less likely to participate than their counterparts elsewhere in the region. In Pakistan, for example, only 39.3% of working-age women are in the labor force. This contrasts with female

Jesus Felipe, Economics and Research Department, Asian Development Bank; Rana Hasan, Economics and Research Department, Asian Development Bank.

22 Jesus Felipe and Rana Hasan Box 2.1 Definitions

Labor Market Indicators Labor force: Persons classified as employed or unemployed during a specified period, usually a day or a week. Labor force participation rate: Number of persons in the labor force as a percentage of the working-age population. The working-age population is the population above a certain reference age, for example, at least 15 years old or 15–64 years old. Employed persons: All persons above a specific age who, during a specified period—either 1 week or 1 day—were under (i) paid employment, i.e., they performed some work for wage or salary, in cash or in kind, or were temporarily not at work but have a job; or (ii) self-employment, i.e., they performed some work for profit or family gain, in cash or in kind, or were temporarily not at work but have an enterprise. “Some work” may be interpreted as work for at least 1 hour. The self-employed include employers, own-account workers, and contributing family workers. Employment rate: Ratio of employed persons to total labor force. Unemployed persons: All persons in the labor force above a specified age who during the reference period were: (i) without work, i.e., without paid employment or self-employment; (ii) currently available for work; and (iii) seeking work, i.e., had taken specific steps in a specified recent period to seek paid employment or self-employment. Unemployment rate: Ratio of unemployed persons to total labor force. Underemployed persons (time-based): Persons in employment whose hours of work were below a certain cut-off point and reported involuntary reasons for working fewer than full-time hours, or who wanted to work additional hours, or who sought to work additional hours. continued.

labor force participation rates of 75–85% in countries like Cambodia, People’s Republic of China (PRC), Lao People’s Democratic Republic, Thailand, and Viet Nam, and 60–70% in the Central Asian republics. One reason for the lower labor force participation rates of women in South Asia is cultural, suggesting that raising the labor force participation rates of women in this region is an important challenge.2 At the same time, the labor force participation rates of children are positive and need to be reduced. Box 2.2 discusses the prevalence of child labor and the challenges in eliminating it. Second, large populations imply large labor forces. At about 1.7 billion, Asia’s labor force is enormous, accounting for 57.3% of the world’s labor force. A large share lives in Asia’s two giants—the PRC and India. As can be inferred

23 Labor Market Outcomes in Asia: An Overview Box 2.1 Definitions (cont’d.)

Underemployment rate (time-based): Ratio of underemployed persons to either total labor force or total employment. Employment Classification Wage and salaried workers: Those in paid employment jobs with explicit or implicit employment contracts that give them a basic remuneration not directly dependent on the revenue of the unit for which they work. Persons in “paid employment jobs” are typically remunerated with wages and salaries, but may receive commissions on sales, piece-rate payments, bonuses, or in-kind payments like food, housing, or training. Self-employed: Those in jobs where the remuneration depends directly on the profits (or the potential for profits) from the goods and services produced (where own consumption is considered part of profits). Employers: Workers who, working on their own account or with one or a few partners, hold a “self-employment job” and, in this capacity, have continuously (over the reference period) engaged one or more persons to work for them as wage or salaried workers in the business. Own-account workers: Workers who, working on their own account or with one or more partners, hold a “self-employment job” and have not continuously engaged any “employees” to work for them during the reference period. Contributing family workers: “Self-employed” workers in a market-oriented establishment run by a related person living in the same household who cannot be regarded as partners because their degree of commitment to the operation of the establishment is not comparable to that of the head of the establishment. Sources: ILO (2003a and 2003b).

from the fourth column of Table 2.1, these two countries together account for 71% of Asia’s labor force. Finally, Asia’s labor force is growing. Assuming unchanged rates of labor force participation in individual countries, projections of the working-age population (15–64 years) indicate that Asia’s labor force will be 14% (245 million) larger by 2015 than in 2005. While the PRC will account for much of this increase because of its sheer size, the increase in its labor force as a share of its current labor force will actually be quite low. In fact, as Figure 2.1 shows, the PRC’s labor force in 2015 is forecast to be only around 7% larger than it is today. The increase in the labor force will be far higher in countries like Pakistan (around 30%), Bangladesh (25%), and the Philippines (24%).

24 Jesus Felipe and Rana Hasan Table 2.1 Labor Force Participation Rates and Labor Force Estimates/Projections Labor Force (15-64 Years) Participation Rates, 2003 Economy

Male (%)

East Asia China, People’s Rep. of Hong Kong, China Korea, Republic of Mongolia Taipei,China Southeast Asia Cambodia Indonesia Lao People’s Dem. Rep. Malaysia Myanmar Philippines Singapore Thailand Viet Nam South Asia Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Central Asia Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan Pacific Fiji Islands Papua New Guinea Solomon Islands Tonga Total a b c

Note: Sources:

Estimated Working-Age Population (15-64 Years), Female (%) 2005 (’000)

Labor Force Estimates/ Projections (’000) 2005

2015

2030

88.8 85.6 79.9 86.2 76.2

79.2 57.7 59.7 77.6 51.2 a

934,056 5,182 34,416 1,740 16,366

785,945 3,662 24,072 1,425 10,127

842,388 3,996 25,053 1,702 10,419

812,930 3,820 21,994 1,975 9,119

84.3 84.7 90.0 81.4 89.3 82.6 81.7 89.7 83.5

83.9 59.5 77.9 51.9 68.5 52.0 54.5 77.7 77.3

8,374 147,458 3,288 15,972 33,130 50,644 3,114 44,405 54,769

7,042 106,310 2,759 10,682 26,105 34,126 2,125 37,119 44,027

8,830 121,642 3,630 13,187 30,297 42,451 2,418 40,141 53,026

11,642 136,358 5,080 15,685 33,174 52,267 2,134 40,779 60,044

87.7 88.6 91.5 86.6 75.7 86.5 85.6 82.6

48.9 b 68.4 59.5 b 45.2 28.6 b 58.4 39.3 47.8

15,171 86,384 1,230 691,453 183 15,551 91,405 14,239

10,464 68,026 932 460,174 97 11,211 57,795 9,354

14,917 85,322 1,225 550,809 136 14,642 75,444 10,133

24,021 108,290 1,692 654,272 190 19,582 101,620 10,355

77.9 80.0 77.9 77.3 80.4 78.1

61.4 69.1 68.0 64.1 67.3 68.2

5,644 10,131 3,287 3,719 3,071 16,508

3,913 7,534 2,396 2,625 2,265 12,071

4,536 7,820 2,860 3,408 2,780 15,084

4,550 7,325 3,218 4,334 3,223 17,962

80.5 86.9 90.3 77.5

40.3 c 69.2 84.4 b 43.5 c

546 3,373 271 59

332 2,641 237 36

368 3,476 318 40

395 4,562 448 39

2,315,139

1,747,630

1,992,499

2,173,076

—

—

Refers to 2001. Refers to 1995. Refers to 1996. To derive the labor force estimates, the United Nations projections for working-age population (15–64) in 2005, 2015, and 2030 were multiplied by recent labor force participation rates. Labor force participation rates: World Bank (2005a), except for (i) Afghanistan, Bhutan, Maldives, Fiji Islands, Solomon Islands, and Tonga, for which the source for labor force participation rates is ILO (2003a); and (ii) Taipei,China, where estimates were derived from DGBAS data. Working-age population estimates and projections: United Nations (2005) and DGBAS data for Taipei,China.

25 Labor Market Outcomes in Asia: An Overview Box 2.2 Child Labor

According to recent estimates, about 211 million children around the world aged 5–14 were engaged in economic activity in 2000 (ILO 2002). Data also indicate that 127 million, or 19% of all children in Asia, were doing paid or unpaid work. Moreover, the Asian region accounted for 60% of all working children in the world. While available statistics on child labor may underestimate the number of children at work, they reveal that the proportion of such children may be declining (ILO 2005). The pace at which children’s participation in the labor force has changed varies considerably across countries, however. The figure below, drawn from ILO (2005), reveals that between 1990 and 2003 the labor force participation of children aged 10–14 declined by 10 percentage points or more in the People’s Republic of China (PRC), Solomon Islands, Thailand, and Viet Nam. Declines, though lower, have similarly been registered elsewhere. Nevertheless, child labor continues to be large in many of these countries. It is still about 40% in Nepal and between 20% and 40% in Bangladesh and Cambodia. Concerns about the welfare of children have led to calls for the elimination of child labor. These concerns are partly rooted in the view that child labor is tantamount to child abuse, or that most child workers are employed by establishments in hazardous work conditions. However, a recent study by Edmonds and Pavnik (2005) shows that, contrary to this popular view, most child workers actually work for their parents rather than in some kind of paid work. These authors find that 65% of children aged 5–14 are engaged in domestic work (household chores in one’s own household) and only 25% are involved in paid, unpaid, family business, or farm work (market work). Most children involved in market work are also employed by their parents. Only a small proportion of children, at 2.4%, are actually hired to do paid work. Most economically active children are also in agriculture, which accounted for 73% of working children in Cambodia in 2001, 67% in Pakistan in 1996, and 92% in Viet Nam in 1998 (Edmonds and Pavnik 2005). To better understand why child labor exists and to design effective interventions, it is useful to contrast hazardous work with the more “benign” type of child labor, which can allow children to accumulate skills and experience useful in their adult lives. Hazardous work, “by its nature or type has, or leads to, adverse effects on the child’s safety, health (physical or mental), and moral development” (ILO 2002, p. 33). A key issue in child labor should be the elimination of all hazardous forms. But direct intervention, such as the outright banning of child labor, might have more adverse implications for children. In particular, this might push children into worse forms of child labor or lead them into acute hunger or starvation (Edmonds and Pavnik 2005, Basu 1999). Instead, policy measures should focus on improving access to schooling through better infrastructure and lower costs, and on expanding the opportunities for parents to continued.

26 Jesus Felipe and Rana Hasan Box 2.2 Child Labor (cont’d.)

find work that provides an adequate income. Beegle et al. (2004) also find that child labor is more prevalent not only among households that are farther away from schools but also among those that have higher borrowing costs. This implies that reducing child labor also requires facilitating access to credit and encouraging parents to be more forward-looking to appreciate the benefits of schooling.

Box Figure 2.2.1 Percentage of Children Aged 10–14 in the Labor Force, 1990 and 2003 (countries with 1990 data over 10%) Nepal Timor-Leste Bangladesh Lao PDR Afghanistan Cambodia Myanmar Solomon Islands Papua New Guinea Pakistan India Thailand Indonesia China, People’s Rep. of Philippines Viet Nam 0

10

20

30 1990

40

50

60

2003

Source: ILO (2005, Figure 11).

These wide differentials in the growth rates of the labor force across developing Asia simply reflect the varying pace of the demographic transition across Asia. Since the transition has moved furthest in East Asia and other countries like Thailand in Southeast Asia, Sri Lanka in South Asia, and Kazakhstan in Central Asia, the share of the young (14 years and below) in these countries’ populations tends to be around 20% or a little higher.3,4 In contrast, in many other countires the young make up close to a third or more of the population. Needless to say, in 10–15 years these countries will have many more potential workers. The countries that will see rapid growth in their labor force may reap a “demographic dividend”—that is, an increased proportion of the working-age

27 Labor Market Outcomes in Asia: An Overview

Figure 2.1 Percentage Change in Labor Force Projections, 2005–2015 East Asia

Taipei,China Korea, Rep. of China, People’s Rep. of Hong Kong, China Mongolia Southeast Asia Thailand Singapore Indonesia Myanmar Viet Nam Malaysia Philippines Cambodia Lao PDR South Asia

Sri Lanka India Bangladesh Pakistan Nepal Bhutan Maldives Afghanistan

Central Asia

Pacific DMCs

Kazakhstan Azerbaijan Kyrgyz Republic Turkmenistan Uzbekistan Tajikistan

Fiji Islands Tonga Papua New Guinea Solomon Islands 0 Note: Sources:

5

10

15

20

25

30

35

40

45

See note for Table 2.1. The figure for Taipei,China refers to percentage change in working-age population between 2005 and 2016. See Table 2.1 sources.

group translates into a higher proportion of workers and a lower proportion of dependent population. This raises the possibility of increased rates of savings and investment, and higher investment in the human capital of the young. Of course, the demographic dividend is not guaranteed. Among other things, it

28 Jesus Felipe and Rana Hasan

depends critically on whether countries can mobilize enough capital to employ the growing number and share of prospective workers productively (See Box 2.3 on the role of population growth in development, including its effect on savings and investment).5 Moreover, these workers will need minimum levels of education and skills to work productively. While the relationship between education, skills, and productivity are complex—see the relevant discussion in Chapter 10 of this volume—many of Asia’s workers, especially in South Asia but not only in it, have such little education as to suggest that they could find it difficult to acquire the skills needed for more productive work. Consider the data on educational attainment and average years of education in Table 2.2. As can be seen from that table, from 21% to an alarming 70% of the population aged 25 and over (an age group that includes the vast majority of those in the prime working Table 2.2 Education Statistics for Population Aged 25 and Over, 2000 Highest Educational Attainmenta (percent of the population aged 25+) Economy

No Schooling

East Asia China, People’s Rep. of 20.9 Hong Kong, China 10.7 Korea, Republic of 8.0 Taipei,China 12.4 Southeast Asia Indonesia 36.2 Malaysia 13.9 Myanmar 42.4 Philippines 6.3 Singapore 12.7 Thailand 17.3 South Asia Afghanistan 84.5 Bangladesh 55.7 India 44.5 Nepal 67.2 Pakistan 70.1 Sri Lanka 16.8 Pacific Fiji Islands 6.0 Papua New Guinea 57.1 a

Source:

Average Years of School

Postsecondary Total

Female (A)

Male (B)

Gender Ratio (A/B,%)

First Level

Second Level

40.7 26.6 16.7 27.5

35.7 47.4 49.5 41.1

2.7 15.3 25.8 19.1

5.74 9.47 10.46 8.53

37.0 35.6 41.0 40.1 28.3 62.2

21.8 43.0 13.3 31.4 48.5 9.3

5.0 7.5 3.3 22.2 10.6 11.3

4.71 7.88 2.44 7.62 8.12 6.10

4.05 7.24 2.21 7.69 7.47 5.73

5.39 8.54 2.69 7.54 8.76 6.49

75.2 84.8 82.1 102.1 85.3 88.3

9.1 27.7 33.2 17.3 13.1 38.3

4.2 13.4 17.4 12.9 14.0 42.2

2.2 3.3 4.8 2.5 2.8 2.7

1.14 2.45 4.77 1.94 2.45 6.09

0.50 1.45 3.33 0.98 1.21 5.79

1.75 3.40 6.14 2.90 3.60 6.41

28.9 42.5 54.2 33.8 33.5 90.3

52.0 34.6

34.8 6.9

7.1 1.4

7.96 2.39

7.58 1.90

8.35 2.85

90.8 66.7

4.49 6.94 8.83 10.09 9.42 11.54 7.69 9.32

64.7 87.6 81.7 82.5

Data include the percentage of the population (aged 25 or more) who have completed the indicated educational level as well as those who have completed at least 1 year of the indicated level but not the last year. Barro and Lee (2000).

29 Labor Market Outcomes in Asia: An Overview Box 2.3 The Costs and Benefits of Population Growth

Population growth plays a two-sided role in development—it can both stimulate and impede growth and development. The standard view is that high population growth is a problem for developing countries because it depresses human welfare. Population growth is seen as using up nonrenewable resources and causing environmental degradation, putting pressure on food supplies, leading to overcrowding and congestion in cities, adding to the employment problem, and reducing the savings ratio and diluting the quantity of capital per person employed. In Asia, close to 1 billion people live in cities, which already suffer from very high air pollution and congestion. If present trends persist, Asia will be the largest single source of greenhouse gases by 2015. The pessimistic approach to population growth originated with Malthus’ view that population grows faster than the means of subsistence, with the classical belief in the law of diminishing returns, and with an underestimation of humankind’s response to the challenge of diminishing productivity due to the expansion of population through invention and innovation. However, there are solid counterarguments that population growth has benefits. Indeed, the world as a whole has become richer while its population has grown. Moreover, the pessimistic view of population growth is rarely backed by direct empirical evidence. The effect of population growth on savings, for example, is very complex, and simply arguing that population growth reduces the savings ratio is incorrect. The conventional argument is that population growth reduces society’s savings ratio by leading to a high dependency ratio of younger people who consume but do not contribute to production. The implication of the argument is that a reduction in population growth would lead to an increase in the savings ratio by raising the age structure of the population. Against this, it must be noted that many retired people consume but do not produce and that the proportion of retired people to total population rises as population growth slows. Thus, the aggregate savings ratio will depend on how the composition of the total dependency ratio varies and on the propensity to save (or dissave) of the two groups of dependents. If the propensity to dissave of those retired is higher than that of the younger group, the aggregate savings ratio might fall with a reduction in population growth as the dependency ratio of those retired increases. The implication of this brief analysis is that it is wrong to conclude that countries with high rates of population growth will, all other things being equal, have lower savings ratios than countries with lower rates of population growth. In fact, in the long run, the savings ratio tends to rise with the rate of population growth as a consequence of the increase in the ratio of active to nonactive households. A related point is that the effect of children on a society’s total savings works primarily through the family as a unit and depends on how each family reacts to the increase in the number of children. On the one hand, there might be a continued.

30 Jesus Felipe and Rana Hasan Box 2.3 The Costs and Benefits of Population Growth (cont’d.)

substitution of one type of expenditure for another. On the other, the family might decide to work harder to provide for the additional children. Either way, there need not be an adverse effect on savings. It is also important to consider the relationship between population and productivity growth. This is because the increase in population, and hence in the labor force, creates work and production incentives that affect output and productivity. There is empirical evidence that supports this claim. Why should this be so? First, because an economy with a faster rate of growth of employment and output may be able to learn faster, and this increases its rate of technological progress. Second, if there are economies of scale in production, faster employment and output will lead to a faster rate of growth of labor productivity. And third, there are likely to be economies of scale in the use of capital. The conclusion is that population growth presents a paradox. On the one hand, increases in population may reduce living standards because of the adverse effect of population growth on savings and capital per head. Decreasing amounts of capital per worker imply a negative relationship between population growth and per capita output growth, so that output per head is lower than it would otherwise be as the population increases. Indeed, relatively poor countries may be immersed in a low-level equilibrium trap, namely, a situation in which income growth does not exceed population growth thereby constraining further rises in per capita income indefinitely. Indeed, many poor countries face very serious difficulties in achieving a self-sustaining rise in living standards. From a policy perspective, these countries are in need of a critical minimum effort or big push. This refers to the effort needed, in terms of investment requirements to raise per capita income to that level beyond which the further growth of per capita income will not be associated with income-depressing forces exceeding income-raising forces. On the other hand, increases in population and in the labor force can raise living standards via learning effects and economies of scale. The possibility of increasing returns implies a positive relationship between population growth and per capita output growth, so that living standards increase as the population grows. The empirical evidence seems to indicate that population growth and the rate of capital accumulation are inversely related. This decreases the growth of labor productivity. However, growth and technological progress are positively related. This increases the growth of labor productivity. The two effects tend to offset each other, thus leaving the total effect of population growth on the growth of per capita output roughly neutral. Indeed, correlation across a cross-section of countries of population growth and the growth of per capita output tends to be insignificant. This lack of empirical evidence is not to deny that decreasing population growth may be desirable for some of the reasons mentioned above, for example, continued.

31 Labor Market Outcomes in Asia: An Overview Box 2.3 The Costs and Benefits of Population Growth (cont’d.)

to relieve overcrowding and halt or even turn back environmental degradation. And certainly it does not dismiss the relevance of population-management programs. Quite the opposite: given the ambiguity of the relationship between population growth and per capita output and the relevance of the other arguments for population management, the most judicious strategy is to pursue these programs on the hypothesis that population management does lead to increases in per capita output. Source:

Thirlwall (2003).

ages) in Asia’s five most populous countries (Bangladesh, PRC, India, Indonesia, and Pakistan) have not had any schooling, raising serious questions about their trainability and ability to engage productively in modern production processes. Women, again especially in South Asia, are particularly disadvantaged in this respect. The last column of Table 2.2 reveals that in South Asian countries except for Sri Lanka, the average years of schooling for females ranges from a little more than a quarter to a little more than half of that of males.

2.2 Poverty A key indicator of a country’s labor market outcomes is the extent of poverty in that country.6 High poverty rates imply either that a large number of people do not have enough work or that the work they have does not earn enough to support them and their families at a minimally acceptable standard of living. Table 2.3 describes poverty rates (also known as headcount ratios) for the $1-a-day and $2-a-day poverty lines at two points in time, 1990 and 2003. The data reveal that while a number of countries in the region have done quite well in reducing poverty over the last decade and a half, poverty is still a persistent feature of the region’s landscape. This is especially true when one focuses on $2-a-day poverty rates. In Indonesia in 2003, for example, while $1-a-day poverty was only 6.5%, $2-a-day poverty was as high as 50.5%. The pattern is similar for Thailand, for which the $1-a-day poverty rate in 2003 was less than 1% while the $2-a-day poverty rate that year was almost 28%. The case of South Asian countries is much worse. In these countries, except for Sri Lanka, $2-a-day poverty rates lie between 65% and 80%. It is crucial to note that the $2-a-day poverty line does not represent a particularly high standard of living. In fact, it corresponds to national poverty lines typically found in

32 Jesus Felipe and Rana Hasan Table 2.3 $1-a-Day and $2-a-Day Poverty, 1990 and 2003 Headcount Ratio (%) $1-a-Day

$2-a-Day

Economy

1990

2003

1990

2003

East Asia China, People’s Republic of Mongolia South Asia Bangladesh India Nepal Pakistan Sri Lanka Southeast Asia Cambodia Indonesia Lao People’s Democratic Republic Malaysia Philippines Thailand Viet Nam Central Asia Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan

33.0 33.0 28.0 41.3 34.0 42.1 44.1 47.8 3.8 23.9 46.0 20.5 52.7 0.6 19.7 10.1 50.7 1.9 11.4 0.0 0.0 0.6 0.0 1.3

13.4 13.4 18.9 29.0 30.3 30.7 23.8 19.7 1.0 8.4 33.8 6.5 28.8 0.2 14.1 0.7 9.7 6.4 1.9 0.0 0.4 5.9 4.6 13.3

72.2 72.2 70.8 85.5 85.5 86.1 83.8 87.9 40.6 65.0 84.3 70.9 91.1 11.4 54.9 43.3 87.4 13.9 45.2 11.7 0.0 3.3 12.2 10.6

41.7 41.6 63.9 76.6 79.5 78.0 65.0 72.6 24.3 46.8 77.3 50.5 74.4 9.0 44.4 27.8 54.2 36.1 25.4 3.7 22.0 34.4 28.9 63.1

All Regions

34.3

19.3

75.3

57.4

Source:

ADB (2005).

low- to middle-income countries across the world. Thus, these numbers are a stark indication of serious weaknesses in the labor market outcomes of the region.

2.3 Unemployment and Underemployment An examination of unemployment rates in the region would not suggest that Asian countries have a bad track record in employing their labor forces productively. Indeed, the unemployment rates reported in Table 2.4 support Amartya Sen’s observation that unemployment statistics in low-income countries can be “low enough to put many advanced countries to shame” (Sen 1975).

33 Labor Market Outcomes in Asia: An Overview Table 2.4 Unemployment Rate and Number of Unemployed, 2003

Economy East Asia China, People’s Rep. ofa Hong Kong, China Korea, Rep. of Mongolia Taipei,China Southeast Asia Cambodiab Indonesia Malaysia Philippines Singapore Thailand Viet Nam South Asia Bangladeshc Indiad, e Maldivesb Nepale Pakistan Sri Lanka Central Asia Azerbaijan Kazakhstan Kyrgyz Republicf Tajikistan Turkmenistan Uzbekistanf Pacific DMCs Fiji Islandsc Kiribatic Marshall Islandsc Micronesia, Fed. States ofc Palauc a

Unemployment Rate (%)

Unemployed (million)

4.3 7.9 3.4 3.5 5.0

8.800 0.280 0.777 0.033 0.503

1.8 9.5 3.6 11.4 4.7 1.5 1.7

0.116 9.531 0.370 3.941 0.116 0.544 0.700

3.6 7.3 2.0 1.8 8.3 8.4

2.200 30.048 0.002 0.180 3.600 0.636

1.4 8.8 8.6 2.4 2.6 0.4

0.054 0.672 0.170 0.047 0.057 0.035

12.1 1.6 30.0 2.6 2.3

0.041 0.001 0.005 0.001 0.224

For urban sector only. Refers to 2001. c Refers to 2000. d Unemployment rate refers to the “current daily status” definition used by the National Sample Survey Organisation, India. e Refers to 1999. f Refers to 2002. Sources: ADB 2004; ADB SDBS accessed 6 June 2005; National Statistics Office, Labor Force Survey 2003 for the Philippines, cited in Felipe and Lanzona (2006, this volume); National Sample Survey Organisation (2000); Planning Commission (2001); State Statistical Committee, Tajikistan (n.d.); Sugiyarto et al. (2006, this volume). b

34 Jesus Felipe and Rana Hasan

Compare, for example, the unemployment rate in Bangladesh (3.6%) with that of Hong Kong, China (7.9%).7 Yet, as we have seen from Table 2.3 above, poverty is pervasive in Bangladesh but is likely to be minuscule in Hong Kong, China.8 Unfortunately, low to modest unemployment rates in many countries reflect the fact that a high proportion of the labor force is poor. For the most part, the poor cannot afford not to be engaged in economic activities. Nevertheless, unemployment rates still convey important information, and it is disturbing to find rather large increases in many of these rates over those prevailing 5–7 years ago. Figure 2.2 shows the change in unemployment rates for selected economies between 1996, the year before the economic and financial crisis in East Asia and Southeast Asia, and 2003. As can be seen,

a

Figure 2.2 Change in Unemployment Rates, 1996–2003 (%) East Asia Hong Kong, China Korea, Rep . of China, People’s Rep. of

7.9

3.4 4.3 5.0

Taipei,China

Southeast Asia

South Asia

Indonesiab Malaysia Philippines Singapore Thailand Viet Nam

5.6 3.6 11.4 4.7 1.5 1.7

Indiac Pakistan Sri Lanka

Central Asia

7.3 8.3 8.4

Azerbaijan

1.4

Kazakhstan Kyrgyz Republic d

8.8 8.6 2.4

Tajikistan Uzbekistand -100 a b

0.4 -50

0

50

100

150

200

The numbers beside the bars refer to the latest unemployment rates. Change in 1991–1996 average and 2003; for purposes of comparison, unemployment rates here for Indonesia refer to the old definition. c Change between 1993 and 1999. d Change between 1996 and 2002. Sources: Planning Commission (2001) for India; Felipe and Lanzona (2006, this volume) for the Philippines; Sugiyarto et al. (2006, this volume) for Indonesia; State Statistical Committee (n.d.) for Tajikistan; ADB SDBS for other countries.

35 Labor Market Outcomes in Asia: An Overview

recent unemployment rates typically remain well above precrisis levels for East Asian and Southeast Asian economies. But it is not just in these subregions that unemployment rates have increased. Unemployment has also grown substantially over the same or similar period in countries like Azerbaijan, Pakistan, and Uzbekistan. For a better appreciation of the region’s labor markets, underemployment must be considered—an underutilization of labor in addition to that resulting from unemployment. Underemployment manifests itself mainly in four forms. First, a worker may be involuntarily working less than full time. This form of underemployment is also known as time-based underemployment. A construction worker wanting to work 40 hours a week but finding employment for only 20 is underemployed in a time-based sense. The second form of underemployment occurs when high-skilled workers are forced to take up low-paying jobs that require at best modest levels of skill. A worker with a college education involuntarily employed as a bus conductor or messenger is underemployed in this sense. The third form of underemployment is overstaffing, as in public enterprises employing more people than they need from a technical point of view. The fourth form is associated with workers who have to make do with their raw labor and are assisted with few complementary inputs, including capital, such that their labor yields low productivity and meager earnings. The rickshaw puller who transports heavy loads but is barely able to make ends meet for himself and his family is an example.9 Direct estimates of the first type of underemployment can be obtained from labor force statistics. Table 2.5 indicates substantial time-based underemployment. In Indonesia, the underemployed—those involuntarily working less than 35 hours a week—accounted for about 34% of those employed in 2003. While underemployment in the Philippines has been on a downtrend since 2000, it remains substantial, at 17% of total employment. To give a better sense of the magnitude of the problem, Figure 2.3 shows for the Philippines an “index of labor underutilization,” computed as the sum of the number of time-based underemployed and unemployed people, divided by the labor force. Although the value of the index is below what it was in the 1980s, it is still unacceptably high, at about a quarter of the labor force. This index is a better indicator of the extent of the poor labor market outcomes than the unemployment rate alone. The information from Tables 2.1–2.3 can be used to gauge the approximate extent of the underutilization of labor in the region in terms of unemployment and time-based underemployment. More specifically, the unemployment and underemployment rates in Tables 2.2 and 2.3 when applied to the labor force projections for 2005 in Table 2.1 suggest that out of a total labor force of 1.7 billion in developing Asia, around 500 million (or around 29%) are either unemployed or underemployed in the time-based sense.10

36 Jesus Felipe and Rana Hasan

Large as this number may seem, it is still an underestimate of the underutilization of labor in the region, as it does not capture forms of underemployment that are not time-based. More generally, underemployment of labor in all senses of the term, especially the fourth form (raw labor with few complementary inputs), explains why low unemployment coexists with high poverty in many parts of Asia. One way to get a sense of the fuller extent of the underemployment problem would be to use data on poverty incidence and estimate the number of “working poor,” i.e., the number of employed persons living in households with per capita expenditures that place them below the poverty line. The working poor are employed (either full time or less) but earn such meager sums that they cannot provide a minimally acceptable standard of living for their families. Any such estimate of the working poor would obviously depend on how the poverty line is defined. On the basis of the $1-a-day poverty line, Kapsos (2004) estimates that in 2004 the working poor numbered 130.0 million in East Asia, 28.4 million in Southeast Asia, and 196.3 million in South Asia.11 As a share of total employment, the working poor comprised 15.7% in East Asia, 10.9% in Southeast Asia, and 35.9% in South Asia (Kapsos 2004). In terms of the $2-aday poverty line, the corresponding estimates of the working poor are 388.4 million in East Asia, 150.7 million in Southeast Asia, and 474.5 million in Table 2.5 Time-Based Underemployment Rates (%) Country Bangladesha Cambodiab Indonesiac Nepald Pakistane Philippinesf Thailandg Viet Namh a b

c d e f g h

Note:

As Share of Labor Force 35.4 n.a. n.a. 27.4 21.9 n.a. 3.8 n.a.

As Share of Employed n.a. 29.6 34.0 n.a. n.a. 17.0 4.0 11.0, 56.0

From Salmon (2002), cited in World Bank (2004). Estimated from the number of workers who reported being available for additional work in the Cambodia labor force survey 2001 (National Institute of Statistics 2001). For 2003; from Sugiyarto et al. (2006, this volume). From Central Bureau of Statistics, Nepal (1999), cited in World Bank (2004). From World Bank (2004), using the labor force survey of 2001/02. National Statistics Office, Labor Force Survey 2003. For 2000; from ILO (2003a). For 2002, for urban and rural sectors; from Nguyen et al. (2006, this volume). n.a. = data not available.

37 Labor Market Outcomes in Asia: An Overview

Figure 2.3 Philippines—Unemployment, Underemployment (time-based), and Labor Underutilization Rates (%) 45 40 35

Labor Underutilization

30 25 20

Underemployment

15 10

Unemployment

5 0 1980 Source:

1986

1992

1998

2003

National Statistics Office, Philippines, Labor Force Survey (various years).

South Asia. As a share of total employment, these numbers translate into 46.9%, 58.0%, and 86.7% for the three regions, respectively (Kapsos 2004). As is clear from these numbers, taking the $2-a-day poverty line as a basis for defining the working poor leads to a much higher estimate of the underutilization of labor than is obtained from a consideration of unemployment and time-based underemployment rates alone—around 1 billion versus 500 million. What explains such high rates of underemployment? Many observers have focused on Asia’s rural economy, and particularly on its agriculture sector as a sector with “surplus labor”—an extreme form of the fourth form of underemployment. In essence, a large number of farmers work with a limited amount of land and capital inputs. However, the resulting productivity of labor is so low that it would be possible to remove some of the labor without adversely affecting total output in any significant way. (Appendix 2.2 discusses unemployment and underemployment and their links to rural-urban migration in developing countries in the context of the Lewis and Harris-Todaro models.) While this view is not without its critics, it is a fact that a large proportion of Asia’s farmers (including agricultural wage workers) have low productivity and low earnings, as Tables 2.6 and 2.7 show. Not only is productivity (value added per worker) considerably lower in agriculture than in industry or services, agriculture also pays the lowest wages on average. These data on sectoral productivity and earnings are consistent with the finding that poverty rates in most Asian countries are higher in rural areas than in urban areas, and sometimes substantially so. This can be seen quite clearly

38 Jesus Felipe and Rana Hasan Table 2.6 Value Added per Worker by Sector (constant 2000 US$) Value Added per Worker Economy East Asia China, People’s Rep. of Hong Kong, China Korea, Rep. of Mongolia Southeast Asia Indonesia Malaysia Philippines Singapore Thailand Viet Nam South Asia Bangladesh India Nepal Pakistan Sri Lanka Central Asia Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Uzbekistan

Agriculture

Industry

Services

Year

530 17,096 10,208 696

4,351 34,115 32,663 1,704

4,133 52,534 23,912 4,034

2000 2001 2001 2000

662 4,647 1,103 16,384 688 264

4,612 15,271 5,279 54,957 8,211 1,925

1,692 7,929 2,907 35,748 5,662 1,543

2001 2000 2001 2001 2000 1997

361 432 270 1,001 1,106

2,167 1,602 1,061 2,322 2,645

1,843 2,039 1,292 2,826 3,493

2000 1999 1998 2000 1998

635 1,142 494 410 1,171

5,993 5,376 1,676 1,095 1,585

1,098 2,198 644 1,031 1,556

2001 1999 1999 1997 1999

Sources: ILO (2003a) for employment levels except for India, which is based on Planning Commission (2001), cited in Anant et al. (2006, this volume), and for Nepal, which is based on labor force surveys; World Bank (2005b) for value added.

from Table 2.8, which gives poverty estimates based on national poverty lines for selected countries.12 Moreover, since rural areas account for a large proportion of the population in these countries, the percentage of a country’s poor residing in rural areas can be very substantial, as the last column of Table 2.8 shows. Box 2.4 describes the types of activities of the poor. Reflecting the low productivity and earnings in agriculture, the association between the share of employment in agriculture and low per capita incomes at the national level is strong. As Figure 2.4 indicates, the share of employment in agriculture tends to be largest in Asian countries with the lowest income. As per capita income increases from left to right across the economies in the figure, there is a general decline in the share of employment in agriculture. The sector continues to account for the majority of employment in low-income countries like Bangladesh, India, and Nepal in South Asia, and Cambodia in Southeast

39 Labor Market Outcomes in Asia: An Overview Table 2.7 Wages and Earnings Ratio of Agricultural to Nonagricultural Wages or Earnings Country

Regular Workers

Indiaa Indonesiab Philippinesc Thailandd Viet Name

Casual Workers

0.46

All Workers

0.64 0.57 0.60 0.34 0.90

a

Agricultural to nonagricultural earnings in rural sector. Agricultural to nonagricultural earnings. c Agricultural to manufacturing earnings. d Agricultural to nonagricultural wage. e Agricultural to industry wage. Sources (basic data): Bales (2000), cited in Nguyen et al. (2006, this volume); Dyson et al. (2004), cited in Anant et al. (2006, this volume); Felipe and Lanzona (2006, this volume); Sugiyarto et al. (2006, this volume); National Statistics Office, Thailand (2002). b

Table 2.8 Poverty Estimates Based on National Poverty Lines, Urban and Rural, Various Years (%) Headcount Ratio Economy East Asia China, People’s Rep. of Mongolia Southeast Asia Cambodia Indonesia Lao People’s Dem. Rep. Malaysia Myanmar Philippines Thailand Viet Nam South Asia Bangladesh India Maldives Nepal Pakistan Sri Lanka a

Rural Povertya

Year

National

Urban

Rural

1998 1998

4.6 35.6

2.0 39.4

4.6 32.6

66.6 38.8

1999 2002 1997 1999 1997 2000 2002 2002

35.9 18.2 38.6 7.5 22.9 34.0 9.8 28.9

18.2 14.5 26.9 3.4 23.9 20.4 4.0 6.6

40.1 21.1 41.0 12.4 22.4 47.4 12.6 35.6

91.9 65.9 87.4 72.5 72.1 71.5 88.5 94.1

2000 1999 1998 1996 1999 1995

49.8 26.1 43.0 42.0 32.6 25.2

36.6 23.6 20.0 23.0 25.9 14.7

53.0 27.1 50.0 44.0 34.8 27.0

81.3 75.2 87.2 94.2 73.4 86.9

Authors’ estimates for share of rural poverty. Sources: ADB (2004) for national poverty rates except for the PRC, which is taken from ADB (2005).

40 Jesus Felipe and Rana Hasan

Figure 2.4 Employment Shares and GDP per Capita (constant US$), 2000 % 100

$238

$282

$360

$450

$531

$728

$856

$991 $2,021 $3,881 $10,890 $13,985 $22,767 $24,810

90 80 70 60

Figure 2.1: Percentage Change in Labor Force Projections, 2005–2015

50 40 30 20 10 0 Nepal

Cambodia Bangladesh India

Services Note: Sources:

Pakistan Indonesia China, Philippines Thailand Malaysia Korea, Taipei,China Singapore Rep. of People’s Rep. of

Industry

Hong Kong, China

Agriculture

Data for India and Nepal refer to 1999 and 1998, respectively. National Bureau of Statistics, PRC (2004); National Statistics Office, Korea (2003); Central Bureau of Statistics, Nepal (1999); DGBAS, Taipei,China (2004); Sugiyarto et al. (2006, this volume); World Bank (2005b, downloaded 12 May).

Asia. The share of employment in agriculture is lowest in Korea and Taipei,China (excluding Hong Kong, China; and Singapore). The inverse relationship between per capita incomes and the share of employment in agriculture also holds within countries. In developing Asia, the share of employment in agriculture has gone down over the last three to five decades as economies have grown. Since productivity levels and earnings are lowest on average in the agriculture sector, the transition away from agriculture is welcome. However, two features of this transition are troubling. First, as Figure 2.5 indicates, it has moved at very different speeds across developing Asia. Thus, while it was fastest in Korea and Taipei,China in the 1960s–1990s, it has been very slow in other countries, especially in South Asia. Second, all too often the jobs being created in the industry and services sectors are not significantly better than the agricultural jobs left behind. To examine this issue more closely, we now discuss the structure of labor markets in urban areas.13

41 Labor Market Outcomes in Asia: An Overview Box 2.4 Poverty and the Labor Market

In the rural sector, the poor are typically found among landless agriculture laborers. In India, for example, data from the 1999/2000 household expenditure survey reveals that, while households working primarily as agricultural laborers accounted for 32.2% of all rural households, they made up 48% of poor households. Households cultivating their own land were less likely to be poor: while such households made up 32.7% of total rural households, they accounted for 25% of poor households. This pattern, whereby landless agricultural workers are the poorest among all labor force participants, is repeated elsewhere. In Viet Nam, poverty incidence was highest among hired farm workers, at 55.4%, compared with 47% among self-employed farmers, in 1997/98. In Bangladesh, data show that casual wage laborers accounted for only 33% of the rural population but made up 46% of the rural poor in 2000. The urban counterparts of the agricultural laborers or small-farm cultivators are those employed as daily-wage laborers and the self-employed. Turning again to the case of India, the data indicate that 14% of households reported their primary engagement as daily-wage workers (“casual labor”). Such households, however, accounted for almost 30.2% of poor households. But the largest contributors to poor households were households described as self-employed. While such households made up 34.5% of all urban households, they were 38.7% of poor households. Data from other countries’ urban sectors reveal a similar pattern. In Bangladesh, casual wage workers accounted for only 20% of the population, but 36% of the total urban poor. In Pakistan, the self-employed in 1998/99 were estimated to be about 18.2% of the urban population. However, poverty estimates reveal that this group accounted for 21.4% of the urban poor. The finding that many of the self-employed are among the poor is confirmation that a large part of self-employment is a coping mechanism, one explained by the paucity of better earning opportunities, leading workers to engage in poorly paid (and low-productivity) jobs. Source:

ADB (2004).

2.4 Urban Labor Markets and Dualism Employment in urban areas essentially entails work in the industry and services sectors. While conditions of work in these two sectors are better, on average, than work in agriculture, labor market conditions are very heterogeneous in both sectors, especially services. Thus, the services sector includes well-paid accountants and lawyers, as well as low-paid domestic servants. Indeed, Arthur Lewis’ description of many nonagriculture jobs that

42 Jesus Felipe and Rana Hasan

Figure 2.5 Employment Shares by Sector (%) Taipei,China

Republic of Korea 80

80 70

70

60

60

50

50

40

40

30

30

20

20

10

10 0

0

1965

1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 Manufacturing

Agriculture

S.O.C. and Other Services

1970

1975

Agriculture

People’s Republic of China

1980

1985

1990

Industry

1995 2000 Services

Indonesia

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10 0

0 1965 1970 1975 Agriculture

1980 1985 1990 1995

1971 1978 1982 1986 1988 1990 1992 1994 1996 1998 2000

2000

Agriculture

Services

Industry

Malaysia

Industry

Services

Philippines 70

70 60

60

50

50

40

40

30

30

20

20

10

10

0

0 1980 1982

1984

1986

Agriculture

1988 1990

Industry

1993

1996 1998

Services

2000

1960 1970 1980 1982 1964 1986 1988 1990 1992 1994 1996 1998 2000 Agriculture

Industry

Services

continued.

43 Labor Market Outcomes in Asia: An Overview

Figure 2.5 Employment Shares by Sector (cont'd.) Bangladesh

Thailand 90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10 0

0

1961 1974

1960 19801982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Agriculture

Industry

1984 1986

Agriculture

Services

India

1989 Industry

1991 1996

2000

Services

Pakistan 80

80 70

70

60

60

50

50

40

40

30

30

20

20

10

10 0

0 1951 1961 1971 Agriculture

Note: Sources:

1981 1983 1988 Industry

1994 2000 Services

1967 1969 1971 1983 1986 1988 1992 1994 Agriculture

Industry

1997

Services

SOC refers to social overhead and capital (services and electricity, gas, water, and construction. Bangladesh Bureau of Statistics (various years); National Bureau of Statistics, PRC (various years); Sundrum (1987) and Chadha and Sahu (2002), cited in Anant et al. (2006, this volume); National Statistics Office, Korea; Federal Bureau of Statistics, Pakistan (various years); DGBAS, Taipei,China (various years); World Bank (2005b).

he observed in developing economies in the 1950s (Lewis 1954, p. 141) illustrates the point well: Another large sector to which [the phenomenon of surplus labor] applies is the whole range of casual jobs—the workers on the docks, the young men who rush forward asking to carry your bags as you appear, the jobbing gardener, and the like. These occupations usually have a multiple of the number they need, each of them earning very small sums from occasional employment….

44 Jesus Felipe and Rana Hasan

As the observation suggests, an important feature of the urban labor markets of most Asian developing countries is their dualism—the coexistence of the “modern” or “formal” with the “traditional” or “informal.”14 The informal sector is characterized by much self-employment. Wage labor, when used in this sector, typically exists in small firms employing up to 10 workers. Work arrangements are flexible, and wage and employment contracts are ill-defined. The operations of informal sector enterprises are often unregulated. This may be because regulations may not encompass the operations of enterprises below a certain threshold size or because regulations are poorly enforced, if at all, in small enterprises. Production in the informal sector is typically carried out with very little capital.15 The formal sector, in comparison, is dominated by large firms. Moreover, in South Asia and the transition economies of Asia like the PRC and Viet Nam, it is also dominated by government employment. Indeed, of the increase in wage employment over two decades, the public sector accounted for only 10% in Taipei,China (1965–1985) and 33% in Thailand (1963–1983). In sharp contrast, the public sector accounted for 71% of the corresponding increase in India between 1960 and 1980. In Sri Lanka, the importance of the public sector was even higher: between 1971 and 1983, it accounted for 87% of the increase in wage employment (World Bank 1993, p. 269). The operation of enterprises in the formal sector is regulated by the government in many dimensions. One of these relates to the terms governing the use of labor. In particular, the formal sector is characterized by well-defined wage and employment contracts. Among other things, these contracts provide workers not only with much better wages and salaries than similar workers in the informal sector (i.e., workers of a similar age and educational characteristics and the same gender), but also with much greater job security. In addition, they offer protection to workers through both formal mechanisms of insurance as well as coverage under and recourse to the labor regulations of the country. Labor regulations may also protect the right of workers to form labor unions to represent them in discussions with management. Finally, a large part of the enforcement machinery of the government is targeted at the formal sector. Presenting comparable statistics across the countries of developing Asia on the number of jobs in the formal versus the informal sector is not easy because of the different definitions used to distinguish between the two sectors and to measure employment. A key difference in definitions is whether distinctions between the two sectors are based on enterprise characteristics or employment status.16 Appendix 2.3, based primarily on Amin (2002), provides definitions used in selected countries. In India, informal sector workers are those who are not employed by the public sector, recognized educational institutions, or firms registered under various laws. In Indonesia, the selfemployed and unpaid family workers typically belong to the informal sector.

45 Labor Market Outcomes in Asia: An Overview

While the self-employed and unpaid family workers are part of the informal sector in both India and Indonesia, a big difference could arise from the treatment of wage and salaried workers, who are part of the formal sector in Indonesia but not entirely so in India. In India, only wage and salaried workers employed in registered enterprises are considered employees in the formal sector. The rest are categorized as informal sector workers. Clearly, therefore, the comparability of estimates of informal and formal employment between these two countries could well be weak. Subject to this caveat, the data indicate that informal sector employment (as a share of nonagricultural or urban employment) tends to be lower as per capita income increases, as Figure 2.6 shows. This would suggest that, as Asia’s economies grow, the importance of the informal sector in employment declines. However, this is not necessarily the case. In India, for example, the share of the informal sector in total nonagricultural employment increased from 80.5% to 83.2% between 1993/94 and 1999/2000. Over the same period, GDP per capita grew by around 5% yearly.17 The informal sector also appears to be expanding in fast-growing transition economies like the PRC and Viet Nam. Though hard numbers like those available for India are difficult to find, in both countries the retrenchment of workers in formal enterprises—driven by the situation in state-owned enterprises— combined with some easing of rural-urban migration appears to be increasing the extent of informal sector employment (Amin 2002). Where growth has been less robust, the extent of “informalization” may be even greater. The main example of this is Indonesia. Classifying the selfemployed and unpaid family workers as informal sector workers, recent labor force survey data show that since 1997, the year Asia’s economic and financial crisis broke, employment has become markedly more informal.18 As may be inferred from Figure 2.7, in 1998 there were 54 million informal sector workers in Indonesia, accounting for 65% of all workers. By 2003, the number had grown to 64 million, or 71% of all workers (Sugiyarto et al. 2006, this volume). The crisis seems to have reversed the decline in the share of informal sector employment in other countries as well, though less dramatically. In Thailand, for example, Amin (2002) reports that while the share of the informal sector in urban employment declined from 65.2% in 1976 to 58% in 1994, it had increased to 59.9% by 1999. In the Philippines, self-employed and unpaid family workers grew as a share of total employment in sectors other than agriculture from 30.6% in 1998 to 32% in 2004.19,20 At the same time, the nature of formal sector employment is changing. While formal sector employment used to be synonymous with “regular” contracts, which, among other things, offered considerable job security, this is increasingly not the case. For example, data from India’s formal sector manufacturing enterprises reveal the growing use of contract labor: its share

46 Jesus Felipe and Rana Hasan

Figure 2.6 Share of Informal Sector Employment in Nonagriculture/Urban Employment and GDP per Capita, Various Years (%) 90 80

$450 $230

70

$293

$531 $1,945

60

$360

$703

50 40

$998

30

$880

$7,916

$13,985

20 $21,618

10 0

Nepal

Cambodia Bangladesh

India

Pakistan Indonesia Sri Lanka Philippines Thailand

Korea, Taipei,China Singapore Rep. of

Note:

The GDP per capita figures are in constant 2000 US$ and pertain to the same year as the informal sector data. Informal sector workers in Bangladesh (1999/2000), Cambodia (2001), and Sri Lanka (2002) cover own-account workers and unpaid family workers in the urban sector. For India, the informal sector consists of enterprises not covered by various legislative acts, such as the Factories Act of 1948. Data pertain only to the nonagriculture sector for 1999/2000. The informal sector figure for Indonesia includes the own-account, self-employed assisted by family members or temporary employees, and family workers in the nonagriculture sector for 1999. For Nepal, the informal sector refers to unincorporated or unregistered economic units, which employ fewer than 10 paid employees. Data for Nepal cover the nonagriculture sector for 1999. The informal sector figure for Korea (1993) refers to the self-employed, day laborers, and unpaid family workers in the nonagriculture sector. For Pakistan, the informal sector figure covers all household unincorporated enterprises owned and operated by own-account workers, irrespective of the size of the enterprise, or household unincorporated enterprises owned and operated by employers with fewer than 10 persons engaged in the nonagriculture sector for 2000. Data for the Philippines (2001) pertain to the proportion of self-employed and unpaid family workers in the nonagriculture sector. Data for Singapore (2001) and Taipei,China (2000) refer to the proportion of own-account workers and unpaid family workers to total employment. Data for Thailand (1999) refer to the share of informal sector in urban employment, based on Amin (2002). Sources: Amin (2002); ILO (2003a); Bangladesh Bureau of Statistics (various years); Department of Census and Statistics, Sri Lanka (2003); Department of Labor and Employment, Philippines (personal communication, May 2005); National Institute of Statistics, Cambodia (2001); Ministry of Manpower, Singapore (2005); Planning Commission (2001); BPS-Statisics Indonesia (2000); DGBAS, Taipei,China (various years); World Bank (2005b) for GDP per capita.

has grown from about 7% of person-days worked in 1984 to 21% in 1998. Similarly, a 5-year survey by the Bureau of Labor and Employment Statistics in the Philippines of nonregular workers in establishments employing at least 10 workers shows that the share of nonregular workers in employment increased from about 20% in 1991 to about 28% in 1997 (Figure 2.8).21 Put differently, the distinction between the formal and informal sectors in terms of desirable job characteristics (from a worker’s perspective), in particular, has become somewhat blurred. Nevertheless, formal sector jobs are still coveted.

47 Labor Market Outcomes in Asia: An Overview

Figure 2.7 Share of Formal and Informal Sector Employment, Indonesia (%) 80 70.8

69.4

69.2

70

67.7

65.6

64.4

34.4

35.6

62.8

65.4

64.0

64.9

67.7

69.6

70.8

60 50 40 30

32.3

29.2

30.6

30.8

1990

1991

1992 1993

37.2

34.6

36.0

35.1

32.3

30.4

29.2

20 10 0 1994

1996

Informal Source:

1997 1998 1999

2000

2001

2002 2003

Formal

Sugiyarto et al. (2006, this volume).

So why work in the informal sector if the “good” jobs are in the formal sector? While some analysts believe that many of those working in the informal sector do so voluntarily for a variety of reasons—including the possibility of earning more than in formal employment, and the independence that selfemployment can provide—in Asia’s developing economies, the most important reason is that informal sector work is a coping strategy of individuals who seek but fail to find employment in the formal sector. In this sense, therefore, the informal sector worker is one who, having failed to find formal sector employment, enters the informal sector “to earn some cash in preference to earning nothing” (Fields 2004a). As pointed out by Mazumdar (1999), there is a long tradition of focusing on labor market regulations in the formal sector as a primary reason for differentials in earnings between the two sectors. In particular, laws governing minimum wages, employment security, social security, and labor union activity have been put forward as key reasons for the earnings differentials. Although such regulations may well have an impact, economic reasons unconnected to labor legislation are likely to be playing an important role as well, such as the much better access of firms in the formal sector to finance and technology.

48 Jesus Felipe and Rana Hasan

Figure 2.8 Share of Nonregular Workers to Total Employment (in establishments employing 10 or more workers), Philippines a (%) 30

25

20

15

10 1991 a

Source:

1992

1993

1994

1995

1996

1997

Excludes agriculture, forestry, and fisheries. Bureau of Labor and Employment Statistics, Philippines (various years).

Mazumdar argues that, in Asia, as distinct from Latin America, institutional intervention on behalf of formal sector workers has been weak and of recent origin in most countries in the region. As regards a country like India, where institutional intervention has been greater, Mazumdar points out that large factories—hence, the ones in the formal sector—historically paid higher wages well before the introduction of important pro-worker labor laws in the formal sector. He ascribes the wage differences to the higher productivity of factories working with modern capital inputs and technology, and to “efficiency wage” and “profit-sharing” considerations. Similarly, one does not need to appeal to the “closed shop” practices of strong labor unions to understand why vertical mobility from informal sector work to formal sector work may be limited. Employers may well rely on supervisors and senior workers to help recruit new workers if they believe that having a cohesive workforce is important for labor productivity. Thus, in stratified societies like those of South Asia, new recruits may be drawn not from individuals looking for jobs but rather from those with close kinship or community ties to those who are already employed. Practices like lifetime employment for workers—which need not be the result of labor market laws— would further restrict the vertical mobility of informal sector workers who missed joining the formal sector at an early point in their working career.

49 Labor Market Outcomes in Asia: An Overview

Finally, the pool of workers who can realistically hope to secure formal sector employment can be further narrowed by such attributes as gender and education. Considerable evidence from all around Asia shows that certain jobs tend to become associated with women. A problem with such labels is that when women seek to enter other parts of the formal sector, they may find it difficult to convince employers that they can adequately perform the tasks required. In India’s textile industry, for example, women are typically employed only in specific occupations. Partly as a result of these labels, women are more likely to end up seeking employment in informal work. Indeed, data from India show that the proportion of women in the formal sector, besides being small to begin with, has been declining over time. As regards the self-employed in the informal sector, including owners of microenterprises, their upward mobility is often limited by a serious lack of access to capital and other complementary inputs.

2.5 Conclusion This chapter’s overview of labor market outcomes in Asia highlights several important development challenges faced by the region. First, Asia’s labor force is not only large, it is also growing. On the basis of available projections for the working-age population, Asia’s labor force is expected to grow by 14% over the next 10 years and by 24% over the next 25. The assumption is that recent estimates of labor force participation rates continue to apply into the future. If, however, labor force participation rates increase—because of the greater participation of women, for example—the future labor force will be even larger. Second, ensuring that this labor force is used productively will not be easy. While some parts of the region have done an excellent job in this regard, large parts continue with a vast pool of underutilized labor. This is most evident in South Asia, where the large majority of the labor force is employed in agriculture and where low productivity of work has led to unacceptably high rates of poverty. Third, while a transition out of agriculture into industry and services holds the key to improving labor market outcomes, nonagricultural work in Asia presents some alarming features. A very large proportion of nonagricultural workers continue to be employed in the informal sector. Additionally, recent trends reveal either stagnation or even an increase in the share of workers engaged in the informal sector.22 Given the low earnings and low productivity of many informal sector jobs, these trends show the enormity of the challenge that lies ahead for Asia’s policy makers.

50 Jesus Felipe and Rana Hasan

Appendixes Appendix 2.1 Age Distribution as Percentage of Total Population 2000 Economy East Asia PRC Hong Kong,China Korea, Rep. of Mongolia Taipei,China Southeast Asia Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam South Asia Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Central Asia Azerbaijan Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan Pacific Fiji Micronesia, Fed. States of Papua New Guinea Samoa Solomon Islands Tonga Vanuatu

0–14

15–64

2005 Projections 65+

0–14

15–64

65+

2015 Projections 0–14 15–64

65+

25 17 21 35 22

68 72 72 61 70

7 11 7 4 9

21 14 19 31 19

71 74 72 66 71

8 12 9 4 10

19 13 14 26 16

72 73 73 70 71

10 14 13 4 13

41 30 43 34 33 38 22 26 34

56 65 54 62 63 59 71 68 61

3 5 4 4 5 4 7 6 5

37 28 41 32 30 35 20 24 30

60 66 56 63 66 61 72 69 65

3 6 4 5 5 4 9 7 5

34 25 37 27 24 30 13 21 25

62 68 59 67 70 65 74 70 69

4 6 4 6 6 5 13 9 6

47 38 41 34 44 41 41 26

51 59 55 61 53 56 55 67

3 3 4 5 4 4 4 7

47 36 38 32 41 39 38 24

51 61 57 63 56 57 58 69

3 4 5 5 4 4 4 7

45 31 35 28 36 34 34 21

52 65 60 66 61 62 62 69

3 4 5 6 3 4 4 9

31 28 35 42 36 37

63 66 60 54 60 58

6 7 6 3 4 4

26 23 32 39 32 33

67 68 62 57 64 62

7 9 6 4 5 5

21 21 28 33 27 28

72 71 67 64 69 67

7 8 6 4 4 4

33

63

3

32

64

4

28

67

5

40 42 41 42 38 42

56 56 55 55 57 55

4 2 4 2 6 3

39 40 41 41 36 40

58 57 55 57 58 57

3 2 5 2 6 3

38 34 34 36 31 36

58 63 61 61 62 61

4 3 5 3 7 4

Sources: United Nations (2005); DGBAS, Taipei,China (2001 and 2003).

51 Labor Market Outcomes in Asia: An Overview Appendix 2.2 The Lewis and Harris-Todaro Models

The British have exploited India through its cities, the latter have exploited the villages. The blood of the villages is the cement with which the edifice of the cities is built. –Gandhi

As noted in the main text of this chapter, unemployment and underemployment are probably Asia’s most pressing problems. They are different manifestations of essentially the same phenomenon, namely, an inadequacy in the economy’s capacity to employ its labor force. In industrial countries, excess supply manifests itself mostly in terms of unemployment. Social security and unemployment provisions take care of those affected. In contrast, in developing countries, due to the lack of a support system for the unemployed, workers must work. So the problem manifests itself in terms of underemployment, the bottom line of which is low productivity, caused by a lack of capital. Unemployment in developing countries is the extreme case of lack of employment. In this appendix both unemployment and underemployment are briefly reviewed from a theoretical point of view. This is important for a full understanding of discussions of the need to reform labor markets provided in Chapter 3 of this volume. Since less developed countries are thought to be less homogeneous than industrial countries, it is common to analyze developing economies in terms of “dual” economy models, that is, models with two sectors—one sector that, depending on model specifics and the choice of the modeler, has been variously called modern, formal, industrial, or urban, and the other variously called traditional, informal, agricultural, or rural. Nobel Laureate Arthur W. Lewis’ model continues being the starting point (at least from a conceptual point of view) of most analyses of developing countries from the point of view of dualism (Lewis 1954; see also Fields 2004b). The Lewis model is a long-run analysis of the development of a dual economy, which traces the path of a poor economy gradually industrializing over time. The central problem addressed is that of how to transfer “surplus” labor from unproductive to productive employment to promote growth. This issue was first tackled by Lewis (1954). The essence of labor market dualism is that workers earn different wages depending on the sector of the economy in which they can find work. Surplus labor is defined as that part of the labor force that can be moved without reducing the total amount of output produced. Lewis assumed that output per worker is higher in the modern sector (synonymous with the industrial or urban sectors in his framework) as compared to the traditional sector (synonymous with the agricultural or rural sectors) and that the latter sector is characterized by the existence of an unlimited labor supply at the “subsistence wage” (m) (Appendix Figure 2.2). This means that at the subsistence wage, there is an excess supply of labor and the excess supply is sufficiently large so that no employer worries, when considering employing more workers, about having to increase wages. This also means that the marginal product of labor in the traditional sector is negligible

52 Jesus Felipe and Rana Hasan

Appendix Figure 2.2 Economic Development with Unlimited Supplies of Labor

A2

Rural Marginal Product of Labor

A1

B1

w

B2

m

L1

OM

L2

LT L

Source:

OR

Basu (1997, Chapter 7).

or zero, or at least below the subsistence wage. This feature implies that if some workers from the agriculture sector obtained alternative jobs, the rest could maintain, and even increase, output.23 There is no unemployment in this model. In Lewis’ model, the traditional sector follows the classical authors, who assumed that rural wages will not fall below the minimum due to a number of institutional factors; in particular, people need a minimum wage to subsist. There are three main means to escape from the tendency to diminishing returns and zero marginal product in agriculture: (i) by increasing productivity faster than population through the absorption of more and more of the agricultural population into industry; (ii) through technological progress in the agriculture sector, which will increase the marginal product of labor; and (iii) by accumulating capital, which both raises productivity and stimulates technological progress. If the modern sector wishes to draw labor from the unlimited supply of labor, it cannot do it at the subsistence wage. It will have to pay a higher wage (w) in order to attract workers into the modern sector, and this higher wage rate depends on factors such as the higher real living costs in the modern sector (in general, urban areas) and job uncertainty. Given this, Lewis argued that capitalists, the owners of the modern sector, have an interest in holding down productivity in the agriculture sector. L denotes the total amount of labor in the economy. The marginal product curve of labor in the traditional sector is horizontal over a considerable stretch. OR is the origin of the traditional sector and OM is the origin of the modern sector. Initially, the marginal product curve of labor in the modern sector is given by A1B 1. To

53 Labor Market Outcomes in Asia: An Overview maximize profits, the modern sector employer employs OML1 units of labor. The remaining labor, i.e., L-OML1=ORL1 remains in the rural sector, with the marginal worker earning m; or workers in excess of what the modern sector can employ at this wage rate earn also the subsistence wage m. What matters now is what occurs in the model. For this purpose, it is assumed that only modern sector capitalists save and invest. The expansion of the modern sector and the rate of absorption of labor from the traditional sector depend on the use made of the profits obtained. If period 1’s profits (A1B1w) are reinvested in the modern sector, leading to greater capital formation, it will lead to an increase in the total product of labor. In these circumstances, the marginal product of labor will increase to A2B2, which means that if wages remain constant, the modern sector will be able to employ more labor (OML2), and will draw labor from the traditional sector (rural employment becomes ORL2). The surplus will further increase to A2B2w, and on the assumption that it is further reinvested, it will continue drawing workers from the traditional sector. This relentless cycle of surplus, reinvestment, and growth continues, and steadily the modern sector absorbs the rural one up to the point where OMLT labor is employed in the modern sector. This is the first major point of this model. The second one is that when all the surplus labor in the traditional sector has moved to the modern sector, wages will start rising in both sectors. At this point, the traditional sector’s wage rate ceases to be below that of the modern sector. Also at this point, the unlimited supplies of labor have been exhausted and the supply of labor to the industry sector becomes less than perfectly elastic. The economy will enter a stage of self-sustaining growth.24 Lewis (1954) mentioned that an urban–rural wage differential of about 30% was necessary to attract labor to the industry sector. What has in fact happened in many cases is that the urban-rural wage differential has increased and is beyond this level. This has led to a huge migration to urban areas. It is worth recalling that there is no unemployment in the Lewis model. In period 1, OML1 workers are employed in the urban sector at a wage w, and ORL1 workers are employed in the rural sector at the lower wage rate m. The wage rate differential should attract workers from the subsistence into the modern sector. Most likely however, not all these workers would find jobs instantaneously in period 1 in the modern sector, and therefore, there would be some urban unemployment (this situation remains at each point in time). Migration has, thus, served to transfer underemployment from rural to urban areas. The Harris-Todaro (1970) model constitutes a fundamental contribution to the understanding of the migration process and its links with unemployment (see also Basu 1997, chapter 8). In this model, migration is a response to differences in “expected” urban and rural incomes. As a result, the observed accelerated rates of migration from rural to urban areas in developing countries are rational decisions from the private “expected” income maximization viewpoint of individual migrants. The two main economic factors involved in the decision to migrate are the existing rural-urban real wage differential and the degree of probability of finding a job in the modern sector. Two important factors are at play. First, the rural-urban differential alone does not explain migration, given the relatively high urban unemployment. Second, the positive stimulus of the differential is likely to be restrained by the negative effect of the risk that a migrant may not find a job in the modern sector.

54 Jesus Felipe and Rana Hasan However, even if the probability of finding a well-paid job in the short term is low, hence the expected rural income might be higher than the expected urban income, it may still be rational to migrate. Indeed, if migrants take a longer view of their permanent income prospects, and if they expect that the probability of finding a job will increase as they become more familiar with the urban labor market, then the decision to migrate will be justified. An important conclusion of the Harris-Todaro model is that unemployment in the urban sector will increase if the elasticity of the urban labor supply (by migration) with respect to the urban–rural wage differential exceeds the expected urban–rural wage differential as a proportion of the urban wage times the unemployment rate. Indeed, in this model, while a reduction in the actual urban wage reduces the equilibrium level of unemployment (an increase in the rural wage will also reduce it), paradoxically, an increase in the rate of new job creation will raise the equilibrium level of unemployment by increasing the probability of obtaining a job and encouraging migration. This implies that the success of policies, such as wage subsidies to reduce unemployment, depends on whether the increase in the demand for labor is greater or lower than the induced supply.

55 Labor Market Outcomes in Asia: An Overview Appendix 2.3 Definitions of Formal and Informal Sector Employment

Country

Official Definition

Source

Bangladesh

Formal employment is defined as employment in establishments employing 10 or more workers. By implication the informal sector comprises enterprises with fewer than 10 workers.

ILO-UNDP (1998, p. 12)

China, People’s Rep. of

The informal sector refers to very smallscale units outside legally established enterprises. According to organizational forms, three types of such enterprises are distinguished as microenterprises, family enterprises, and independent service persons. Employment in these enterprises is deemed informal employment.

MOLSS (2001, pp. 11–2)

India

Formal sector employment (or the “organized sector”) according to the National Accounts Statistics of India comprises employment in the public sector and recognized educational institutions, and employment in enterprises registered under the Indian Factories, Bidi and Cigar Workers, Co-operative Societies and Provident Fund Acts. The remainder of the workforce are in informal sector employment.

ADB (2003a)

Indonesia

Informal sector employment is defined by Statistics Indonesia as consisting of individuals 10 years of age and over, who worked during the previous week as own-account workers, self-employed assisted by family members, farmer employees, and unpaid family workers.

Firdausy (1996, p. 104)

continued.

56 Jesus Felipe and Rana Hasan Appendix 2.3 Definitions of Informal and Formal Sector Employment (cont’d.)

Country

Official Definition

Source

Malaysia

Informal sector employment is defined to include (i) unprotected regular and casual workers (i.e., workers in establishments who do not participate in the social security system or the Employees Provident Fund); and (ii) the self-employed, including unpaid family labor.

ILO (1992, p. 2)

Pakistan

The common definition for the informal sector is based on the size of establishment. All workers in nonindustrial establishments employing fewer than 20 workers and all industrial establishments employing fewer than 10 workers are informal sector workers.

Naseem (1996, p. 135)

Philippines

Informal sector employment includes the self-employed, unpaid family workers, and those employed in enterprises with fewer than 10 people.a

Joshi (1997, p. 145)

Thailand

The National Statistical Office defines the informal sector to include enterprises typically operating with a low level of organization on a small-scale, offering low and uncertain wages and no social welfare and security. It also defines the formal sector as employing at least 10 people, which implies that enterprises employing 1 to 9 people should be included in the informal sector.

NSO (1994) cited in Sungoonshorn (2001, pp. 46–7)

a

An alternative definition, based on labor force surveys, includes only the selfemployed and unpaid family workers. Sources: Amin (2002), ADB (2003b).

57 Labor Market Outcomes in Asia: An Overview

Notes 1. Computing comparable estimates of the size of the labor force across countries for a common reference year—2005, for example—is difficult. In the first place, not all countries carry out labor force surveys or reasonably informative population censuses every year. More significantly, countries differ in the scope and coverage of the survey; the reference population (for example, those 10 years and older in Pakistan versus those 15 years and older in Indonesia); the reference period over which labor force status is determined; and the definitions used to identify labor force status and respondents. The labor force estimates and projections given here for 2005, 2015, and 2030 are computed by applying projections of recent labor force participation rates, primarily from World Bank (2005a) (but augmented from ILO 2003a and country sources for particular countries), to projections of the workingage populations (15–64) for 2005, 2015, and 2030 from United Nations (2005). As a result, the labor force estimates presented here for 2005 may differ from those based on other sources, including country sources. 2. Another reason, which applies more broadly in low-income countries, has to do with the fact that women take principal responsibility for housework, which consists of producing goods and services that their counterparts in higher-income countries would purchase in the market. In particular, housework in low-income countries includes collecting free goods like drinking water and firewood, as well as activities like knitting, tailoring, and weaving for the use of the household. Indeed, some estimates of labor force participation rates based on alternative definitions of economic activity reveal female participation rates in India marginally higher than those of men (Ghose 2004). 3. See Appendix 2.1 for projections of the age distribution as a share of the total population. 4. In the case of Kazakhstan, infant mortality rates remain fairly high while total fertility rates (i.e., replacement fertility) are less than 2.1. 5. Whether or not these countries are successful in harnessing the dividend, the dynamics of demographic change predict that eventually, the demographic “dividend” becomes a burden. As the “bulge” population ages, the relative share of old people increases. Several countries in the region, especially those in East Asia, are already facing the prospects of an aging population. For example, in the Republic of Korea about 4.5 million people belong to the age group of 65 and above, accounting for 9% of the population. The PRC has about 100 million elderly people, equal to 8% of the total population. More broadly, developing countries are aging faster than they are developing. In other words, the time left to establish effective and sustainable programs suited to an aging society is growing short. See ADB (2002) for a detailed discussion of these and related points. 6. This discussion defines poverty in absolute terms: an individual is considered poor if his or her consumption or income falls below a threshold level fixed in real terms. 7. Unemployment rates are not fully comparable across countries. For rates based on labor force survey data, comparability is reduced by differences in the scope and coverage of the survey, in the definition of the reference population, in the definitions used to define labor force and employment status, and in reference periods.

58 Jesus Felipe and Rana Hasan 8. $1-a-day poverty is, for all practical purposes, nonexistent in Hong Kong, China. 9. Interestingly, Marx used the degree of access to stable, full-time employment as the primary criterion for defining four groups of workers who make up the “relative surplus population”, loosely speaking what we have referred to as underemployment (Botwinick 1993, p. 96–7): (i) The latent surplus population; at the time Marx wrote, this group of workers mainly consisted of the workers being pushed away in the agricultural sector under the weight of modern industry; (ii) The stagnant sector; these are the workers in decaying industries phased out by mechanization; (iii) The floating sector; these are workers in relatively stable modern industries who must constantly respond to changes in market conditions. In other words workers in these industries have jobs, but are subject to periods of unemployment; and (iv) The sphere of pauperism; this group of workers is the lowest sediment of the labor force. This group includes those who are able to work but who are only called upon during the height of the industrial cycle, and those who are no longer able to work on a steady basis. 10. Since time-based underemployment rates are available for only a handful of Asian countries, these are used to impute underemployment rates for the others. For example, it is assumed that the underemployment rate in India is equal to the average of the underemployment rates available for the three South Asian countries listed in Table 2.3. Similarly, it is assumed that underemployment rates for the PRC are the average of the underemployment rates for the five Southeast Asian countries listed in Table 2.3. 11. The subregional country groupings of Kapsos (2004) do not coincide exactly with the country groupings that are used in this chapter (for example, in Table 2.1). Thus, for example, Kapsos includes Macao in East Asia and Fiji and Papua New Guinea in Southeast Asia. Such differences are, however, trivial for the most part given the tiny populations of the countries in question. 12. National poverty lines provide a better basis than currently available international poverty lines for distinguishing between poverty rates in rural versus urban areas. This is because national poverty lines typically take into account price differentials between rural and urban areas. These differentials can be substantial. Currently available international poverty lines make no such allowance for price differentials across rural and urban areas. 13. The focus on the urban sector should not be taken to imply that activities in the industry and services sectors take place only in urban areas. In fact, as increasingly acknowledged, these activities are an important part of economic activity in rural areas. 14. This type of dualism also exists in rural sectors but appears to be most stark in urban areas. 15. Most agricultural employment in developing Asia is informal, encompassing self-employment and unpaid family work on small farms and agricultural wage workers employed without well-defined and explicit contracts. 16. While the International Labour Organization offers a common operational definition of informal sector workers as the sum of nonprofessional self-employed, domestic workers, unpaid (family) workers, and workers in enterprises employing up to five workers, applying the definition to the data is not easy because of the way

59 Labor Market Outcomes in Asia: An Overview labor force statistics are originally collected by the various countries. In particular, enterprise characteristics are rarely canvassed from respondents of labor force surveys in Asia. Thus, there is no direct way to determine whether a wage/salaried worker is employed in a formal sector enterprise. In contrast, labor force surveys in various Latin American countries are able to probe deeper into respondents’ engagement in the formal or informal sector. 17. The growth of per capita GDP is based on data from World Bank (2005b). 18. Because of data availability, the reported numbers cover agriculture as well as nonagriculture sectors. 19. Wage and salaried employees of enterprises with fewer than 10 workers should also be counted in informal sector employment. The National Statistics Office stopped reporting this series in 2000. 20. Labor force survey data. 21. As the Survey of Specific Groups of Workers was terminated in 1998, the 1997 data are the last available. 22. There is also evidence of an increase in the share of formal sector workers engaged in nonregular work with few of the benefits that formal sector workers typically receive. 23. While the characterization of agricultural activity as one of surplus labor is not without its critics (see also Basu 1997, Chapter 7), it remains the case that a large proportion of Asia’s farmers (including agricultural workers) have low productivity and their earnings are very low (recall Tables 2.6 and 2.7 of the main text). 24. Certainly, it can be argued that reality is different from that depicted by this model. Once it is recognized that chronic underemployment is the normal condition within the aggregate labor market, the results of this model can be questioned, for labor mobility is no longer a sufficient condition for the equalization of wage rates across the two sectors. Even if it is assumed that many low-wage workers are eventually able to migrate to high-wage sectors, low-wage firms may continue to find ample sources of cheap labor within the pool of unemployed and underemployed. Consequently, there will be little upward pressure on wage rates at the low end of the labor market.

References Amin, T. M. N. 2002. The Informal Sector in Asia from the Decent Work Perspective. Working Paper on the Informal Economy No. 4, International Labour Organization, Geneva. Anant, T. C. A., R. Hasan, P. Mohapatra, R. Nagraj, and S. K. Sasikumar. 2006. “Labor Markets in India: Issues and Perspectives.” In J. Felipe and R. Hasan, eds., Labor Markets in Asia: Issues and Perspectives. London: Palgrave Macmillan for the Asian Development Bank. Asian Development Bank (ADB). 2002. Key Indicators 2002: Population and Human Resource Trends and Challenges. Manila. . 2003a. Technical Assistance to India for Pension Reforms for the Unorganized Sector. TAR: IND 36346. Manila.

60 Jesus Felipe and Rana Hasan . 2003b. Social Protection. Available: http://www.adb.org/Documents/Policies/ Social_Protection/default.asp. . 2004. Key Indicators 2004: Poverty in Asia: Measurement, Estimates, and Prospects. Manila. . 2005. Key Indicators 2005: Labor Markets in Asia: Promoting Full, Productive, and Decent Employment. Manila. . n.d. Statistical Database System (SDBS). Economics and Research Department, Manila. BPS–Statistics Indonesia (Badan Pusat Statistik). 2000. Statistik Indonesia (Statistical Yearbook of Indonesia 1999). Jakarta. Bales, S. 2000. “Viet Nam’s Labor Situation and Trends: Analysis Based on 1992–93 and 1997–98 Viet Nam Living Standards Data.” Background Paper to the Viet Nam Development Report 2000, Hanoi. Bangladesh Bureau of Statistics. Various years. Statistical Yearbook of Bangladesh. Bangladesh Bureau of Statistics, Dacca. Barro, R. J., and J. W. Lee. 2000. “International Data on Educational Attainment: Updates and Implications.” Oxford Economic Papers 53(3):541–63. Basu, K.1997. Analytical Development Economics. Cambridge: MIT Press. . 1999. “Child Labor: Cause, Consequence, and Cure, with Remarks on International Labor Standards.” Journal of Economic Literature 37(3):1183–19. Beegle, K., R. Dehejia, and R. Gatti. 2004. Why Should We Care about Child Labor? The Education, Labor Market, and Health Consequences of Child Labor. NBER Working Paper No. 10980, National Bureau of Economic Research, Cambridge, MA. Botwinick, H. 1993. Persistent Inequalities. Princeton, NJ: Princeton University Press. Bureau of Labor and Employment Statistics. Various years. Survey of Specific Groups of Workers. Department of Labor and Employment, Manila. Central Bureau of Statistics. 1999. Report on the Nepal Labour Force Survey 1998/99. Kathmandu, Nepal. Available: http:/www.cbs.gov.np/hhold_survey/ nlfs_tables.htm. Chadha, G. K., and P. P. Sahu. 2002. “Post-Reform Setbacks in Rural Employment: Issues that Need Further Scrutiny.” Economic and Political Weekly (May 25), 1198–2026. Department of Census and Statistics. 2003. Annual Report of the Sri Lanka Labour Force Survey 2002. Colombo. Directorate General of Budget, Accounting, and Statistics (DGBAS). Various years. Statistical Yearbook of the Republic of China. Executive Yuan, Taipei,China. Dyson, T., R. Cassen, and L. Visaria. 2004. Twenty-first Century India: Population, Economy, Human Development and the Environment. New Delhi: Oxford University Press. Edmonds, E., and N. Pavnik. 2005. Child Labor in the Global Economy. Journal of Economic Perspectives 19(1):199–220. Federal Bureau of Statistics. Various years. Pakistan Statistical Yearbook. Pakistan. Felipe, J., and L. Lanzona. 2006. “Unemployment, Labor Laws and Economic Policies in the Philippines.” In J. Felipe and R. Hasan, eds., Labor Markets in Asia: Issues and Perspectives. London: Palgrave Macmillan for the Asian Development Bank.

61 Labor Market Outcomes in Asia: An Overview Fields, G. 2004a. “A Guide to Multisector Labor Market Models.” Paper prepared for the World Bank Labor Market Conference, 18–19 November 2004, Washington, DC. . 2004b. “Dualism in the Labor Market: A Perspective on the Lewis Model after Half a Century.” The Manchester School 72(6, December):724–35. Firdausy, C. M. 1996. “The Informal Service Sector in Urban Poverty Alleviation in Indonesia.” In Role of the Informal Service Sector in Urban Poverty Alleviation. UN-ESCAP, Bangkok. Ghose, A. K. 2004. “The Employment Challenge in India.” Economic and Political Weekly 39(48, 27 November). Harris, J. R., and M. P. Todaro. 1970. “Migration, Unemployment and Development: A Two-sector Analysis.” American Economic Review 60(1):126–38. International Labour Organization. 1992. “A Malaysia Country Report.” Paper presented at the Seminar on Employment Policies for the Urban Informal Sector in East and Southeast Asia, 12–16 October 1992, Bangkok, Thailand. . 2002. Every Child Counts: New Global Estimates on Child Labor. Geneva. . 2003a. Key Indicators of the Labour Market, 3rd ed. Geneva. Available: http:/ /www.ilo.org/public/english/employment/strat/kilm/kilm01.htm, http:// www.ilo.org/public/english/bureau/stat/class/icse.htm. . 2003b. Yearbook of Labour Statistics 2003. Geneva. . 2005. Labour and Social Tends in Asia and the Pacific 2005. Bangkok. International Labour Office–United Nations Development Programme Bangladesh (ILO-UNDP). 1998. “Employment Promotion in the Non-Formal Sector.” Report prepared by ILO-South Asia Multidisciplinary Advisory Team (SAAT) under UNDP. Technical Support Service 1, Geneva. Joshi, G. 1997. Urban Informal Sector in Metro Manila: A Problem or Solution? South East Asia and the Pacific Multidisciplinary Advisory Team, International Labour Organization, Manila. Kapsos, S. 2004. Estimating Growth Requirements for Reducing Working Poverty: Can the World Halve Working Poverty by 2015? Employment Strategy Paper No. 2004/14, International Labour Organization, Geneva. Lewis, A. W. 1954. “Economic Development with Unlimited Supplies of Labor.” The Manchester School 22:139–91. Mazumdar, D. 1999. Constraints to Achieving Full Employment in Asia. Employment and Training Papers No. 51, International Labour Office, Geneva. Ministry of Labor and Social Security (MOLSS). 2001. “Urban Poverty Alleviation and Informal Sector Employment in China.” Paper prepared by MOLSS for the National Seminar on Poverty Reduction and Urban Informal Sector Employment, March, Beijing. Ministry of Manpower. 2005. Labor Force Survey. Singapore. Available: http:// www.mom.gov.sg/Statistics/ManpowerResearchNStatistics/LabourMarket Statistics/Employment-print.htm. Naseem, S. M. 1996. The Informal Service Sector in Urban Poverty Alleviation in Pakistan.” In Role of the Informal Service Sector in Urban Poverty Alleviation. UN-ESCAP, Bangkok.

62 Jesus Felipe and Rana Hasan National Bureau of Statistics. Various years. China Statistical Yearbook. Beijing: China Statistics Press. National Institute of Statistics. 2001. Labour Force Survey of Cambodia 2001. Available: http://www.nis.gov.kh/SURVEYS/LFS2001/table_3.htm. National Sample Survey Organisation. 2000. Employment and Unemployment in India: Key Results. Report No. 455 (55/10/1). New Delhi. National Statistical Office (NSO). 1994. Formal and Informal Labor Force Market Survey: 1994 Labor Force Survey. Bangkok. . 2002. Labor Force Survey 2002. Economic and Social Statistics Bureau, Bangkok. National Statistics Office, Korea. Various years. Korea Statistical Yearbook. Seoul. National Statistics Office, Philippines. Various years. Labor Force Survey. Manila. Nguyen, B., C. C. Loi, and N. C. Thang. 2006. “A Stocktaking of Viet Nam’s Labor Market Policies.” In J. Felipe and R. Hasan, eds., Labor Markets in Asia: Issues and Perspectives. London: Palgrave Macmillan for the Asian Development Bank. Planning Commission. 2001. Report of Task Force on Employment Opportunities. New Delhi. Available: http://www.planningcommission.nic.in/aboutus/taskforce/ tk_empopp.pdf. Salmon, C. 2002. “Performance of the Bangladeshi Labor Markets During the Nineties.” Background paper prepared for ADB and the World Bank. Sen, A. 1975. Employment, Technology, and Development. Oxford: Clarendon Press. State Statistical Committee. n.d. Labor Resources and Employment, 1985-2004. Tajikistan. Available: http://www.stat.tj/english_tables/table_14.xls. Sugiyarto, G., M. Oey-Gardiner, and N. Triaswati. 2006. “Labor Markets in Indonesia: Key Challenges and Policy Issues.” In J. Felipe and R. Hasan, eds., Labor Markets in Asia: Issues and Perspectives. London: Palgrave Macmillan for the Asian Development Bank. Sundrum, R. M. 1987. Growth and Income Distribution in India. New Delhi: Sage. Sungoonshorn, S. 2001. Accessibility of Urban Informal Sector Workers to Welfare and Non-Welfare Services: A Focus on Bangkok Slums. Ph.D. thesis. Asian Institute of Technology, Bangkok. Thirlwall, A. P. 2003. Growth and Development. 7th ed. New York: Palgrave Macmillan. United Nations. 2005. World Population Prospects: The 2004 Revision. Population Division, Department of Economic and Social Affairs, United Nations Secretariat. Available: http://esa.un.org/unpp/. World Bank. 1993. The East Asian Miracle: Economic Growth and Public Policy. World Bank Policy Research Report. Oxford: Oxford University Press. . 2004. “Labor Markets in South Asia: Issues and Challenges.” In collaboration with the Human Development Hub. Available: http://siteresources. worldbank.org/INTLM/Resources/390041-1103750362599/SAR_paper.pdf. . 2005a. World Development Indicators 2005. Available: http:// www.worldbank.org/data/wdi2005/wditext/Home.htm. . 2005b. World Development Indicators Online. Available: http:// devdata.worldbank.org/dataonline.

CHAPTER 3 Labor Markets in a Globalizing World JESUS FELIPE AND RANA HASAN

T

his chapter provides an overview of labor markets in a globalizing economy. It starts by arguing that a country’s labor market outcomes are greatly influenced by the effects of the interplay of globalization, technological progress, and competitiveness; and documents the impact of the increase in worldwide employment due to the incorporation of the People’s Republic of China (PRC), India, and the countries of the ex-Soviet bloc into the global economy. It then discusses the major functions of the labor market— allocation of resources, income, and risk. These form an important component of the policies to achieve the full and productive employment objectives. An evaluation of the arguments for labor market reform follows, from the perspective of mainstream economists who are calling for increasing labor market flexibility. It is argued that this call is a consequence both of the theoretical models used by these economists to explain unemployment, and of the fact that competitiveness is a major policy objective of countries in today’s world. The next section provides a summary of Keynesian and Marxian theories of unemployment for the purpose of stressing that the neoclassical theory is not the only one that provides a coherent argument for the existence of unemployment. The next section offers a discussion of labor market policies in Asia today. Next, the chapter presents an empirical analysis of the relationship between growth, productivity, employment, and technological progress. It is

Jesus Felipe, Economics and Research Department, Asian Development Bank; Rana Hasan, Economics and Research Department, Asian Development Bank.

64 Jesus Felipe and Rana Hasan

found that employment elasticities across the region are low and that, in general, they decreased in the 1990s vis-à-vis the 1980s. This, it is argued, may be the result of the interaction of increasing returns to scale and labor-saving technological progress. The chapter ends with a brief theoretical interpretation of this empirical evidence based on the notion of wage-led employment.

3.1 The Economic Context in which Labor Markets Operate The economic landscape in which labor markets operate has been undergoing tremendous changes over the last decade and a half. Today we live in a world characterized by the interplay of three factors, namely, globalization, technical change, and competition (ADB 2003, pp. 205–272). Their interaction is rapidly turning a segmented worldwide labor market into a very integrated market. At the same time, the global supply of labor has increased rapidly and continues to do so. In part, this is the result of the demographic transition experienced by many developing countries, especially in Asia. But it is also due to the integration of more economies, especially the PRC and increasingly so India, into the international economy. Many countries are pushing for reforms so as not to miss the train of the new economic order imposed by globalization and competitiveness. The objective is, ultimately, to try to attain growth rates as high as possible with a view to reducing poverty and catching up with the industrial world. Growth is seen as the key to poverty reduction and, ultimately, to the achievement of the Millennium Development Goals and broad development.1 Consequently, in order to become more competitive, developing countries have been advised to dismantle their trade barriers, abolish their legal monopolies, privatize their state-owned enterprises, and reduce overstaffing in their bloated bureaucracies and, lately, to reform their labor markets. The focus on competitiveness questions is clear in policy discussions throughout the developing world. Crucially, the increase in the effective size of the global labor force has not been accompanied by a concomitant surge in capital for investment. Figure 3.1 provides estimates of the impact on the capital–labor ratio of the increase in employment due to the incorporation of the PRC, India, and the ex-Soviet bloc countries into the global economy. Using data from the Penn World Table, Richard Freeman has estimated that the collapse of communism, India’s turn from autarky, and the PRC’s shift to market capitalism have increased the global workforce from about 1.46 billion workers (excluding this group) to about 2.93 billion (including this group).2 He has estimated the world’s capital–labor ratio at $53,500 in 1990 (excluding it), and at $29,800 (including it). By 2000, the world’s capital–labor ratio stood at $61,300 (excluding it) and $37,600 (including it). These are rough estimates but serve to highlight the issue.

65 Labor Markets in a Globalizing World Figure 3.1 The Near Halving of the Global Capital-Labor Ratio, 1999 and 2000 70,000

Capital-Labor Ratio ($)

60,000 50,000 40,000 30,000 20,000 10,000 0 1990 without PRC, India, ex-Soviet bloc Source:

2000 with PRC, India, ex-Soviet bloc

Richard Freeman (personal communication, May 2005).

A consequence of the smaller capital–labor ratio is apprehension of a “race to the bottom” whereby globalization may be forcing workers to compete to attract capital by accepting lower wages, inferior working conditions, or both (see Rodrik 1999). Indeed, it seems that globalization has brought the world closer together, by making it smaller and more homogeneous. But the same forces have fragmented the globe by creating winners and losers. Globalization begets multiple worlds. The fear of most Asian countries outside the two Asian giants (and indeed of other countries in the world) is that the PRC and India have the capacity to absorb much of this limited pool of available capital, which will reduce these other countries’ capacity to generate new employment so as to absorb their increasing labor supply. This and the following sections discuss how these factors appear to be affecting the evolution of labor market outcomes in broad terms. They also examine the interplay between these factors and labor market regulations. Clearly, a labor market does not operate in an institutional vacuum. In particular, governments intervene to make it well functioning. Of course, the nature and degree of this intervention varies widely across the world. It is possible that in some cases, these interventions may be seriously interfering with the full and productive employment objectives, especially in the context of globalization, technological change, and competition. In such cases, reform of labor market regulations might be necessary. However, reform must not entail indiscriminate elimination of labor regulations. Instead, reform requires identifying which specific elements of labor regulations are interfering with efficiency and fairness

66 Jesus Felipe and Rana Hasan

(see Section 3.2), and therefore, which elements are candidates for removal or adjustment. Equally, reform of labor market regulations involves identifying elements of labor regulations that are conspicuous by their absence, for example, protection of basic rights for all workers, including those in the informal sector. How are Asia’s policymakers grappling with the labor market problems they face? One way or another, market-oriented economic reforms play a central role. Developing countries, especially in Latin America, have been advised for a long time (particularly since the 1980s) to reform almost everything, along the lines of the “Washington consensus”:3 liberalization of trade and inward foreign direct investment, privatization of state-owned enterprises, industrial deregulation, strengthening of property rights regimes, tax reform, liberalization of prices (including interest rates), introduction of a competitive exchange rate, and fiscal discipline. This package could be labeled “first generation reforms.” The three key underlying ideas are: achieving macroeconomic discipline; putting in place a market economy; and opening to the world (at least with respect to trade and foreign direct investment). What does the record say about the success of these reforms in developing countries? Overall, results have been disappointing, especially when viewed from the perspective of most workers. First, several crises have occurred (e.g., the Mexican crisis of 1994 and the Asian crisis of 1997–98). While these crises may not have been the result of liberal policies concerning trade in goods and services per se, their occurrence was intimately connected to the broader process of globalization. The Asian crisis ended an era of high rates of economic growth and, while some crisis-affected countries have resumed economic growth (though below precrisis rates), in several cases the adverse impacts on labor markets persist. As may be recalled from Chapter 2, unemployment rates in several East Asian and Southeast Asian economies remain considerably higher than they were in 1996, prior to the crisis. As also noted in Chapter 2, the share of informal employment has increased since the crisis in countries such as Indonesia, Philippines, and Thailand. Second, although it is true that in some countries the economic and social transformations of the last decade have put their economies on a higher and more sustainable growth path, labor market outcomes, even there, have not improved systematically. Thus, in a number of countries where economic growth has been generally robust, problems with unemployment and underemployment are persistent, while informality appears to have grown—India offers a prominent example of this. And even in a manufacturing powerhouse such as the PRC, layoffs in state-owned enterprises have led to increased unemployment and a surprisingly large decline of around 15% in manufacturing employment between 1995 and 2002 (ILO 2004, p. 116). However, a group of workers has emerged— typically the most highly skilled and therefore a small minority of the workforce—for whom labor market opportunities have improved dramatically.

67 Labor Markets in a Globalizing World

In India, for example, an examination of the earnings of production workers versus non-production workers in the formal manufacturing sector reveals a growing divergence since the early 1990s (Figure 3.2). See Anant et al. (2006, this volume) for more details. The real problem in labor market outcomes of many developing countries is not a failure to create jobs; rather, that growth in the number of entrants into the labor market is outpacing that of jobs being created, particularly jobs in the formal (or modern) sector of the economy.4 Indeed, of all the jobs being created, a large—and in several cases growing—share is accounted for by the informal sector (as, for example, nonagricultural jobs in India and the Philippines). Certainly, the informal sector encompasses a wide variety of work and not all informal sector workers are there involuntarily. Nevertheless, on average, conditions of work and labor market opportunities in the informal sector are worse than those in the formal sector. This is especially true in the services sector, where informal jobs tend to command low wages but require arduous physical labor (domestic servants, haulers, and rickshaw pullers, for example).5 At the same time, it must be noted that not all formal sector jobs are desirable in all respects. Nevertheless, the terms and conditions of employment in formal sector jobs still make these jobs coveted. Indeed, greater job security, decent working conditions, and some social protection (access to subsidized health insurance, the chance to contribute to a pension program, etc.) are factors that impel many otherwise well-qualified workers to seek relatively low-skill tasks in the formal sector. An example of this would be a college-educated individual who takes up work as a waiter or waitress in a five-star hotel.

Figure 3.2 Real Wages and Emoluments 60,000

Constant Rupee

50,000 40,000 30,000 20,000 10,000 0 1980/ 81

1982/ 83

1984/ 1986/ 85 87

1988/ 89

Wages to Production Workers Source: Nagaraj (2004).

1990/ 91

1992/ 93

1994/ 95

1996/ 97

1998/ 99

2000/ 01

Emoluments to Nonproduction Workers

68 Jesus Felipe and Rana Hasan

At a broader level, the record of growth in the 1990s is disappointing as regards income inequality and, ultimately, the distribution of labor earnings. Indeed, the experience offers some contrast to that of newly industrialized economies, such as Korea and especially Taipei,China, during their phase of robust and rapid growth (the 1960s to the mid-1990s). In Taipei,China, the Gini index remained both low and stable, ranging from the low 30s to the high 20s (Dollar and Kraay 2002). In Korea, the Gini index was a little higher, generally in the low to mid-30s in the 1960s, 1980s, and mid-1990s. Although it hit the high 30s at various points in the 1970s in Korea, as Fields (1984, p. 79) points out, the “data supporting this conclusion are open to serious question.” The case of other Asian developing countries is different. The PRC, for example, recorded an almost 13 percentage point increase in the Gini index between 1981 and 2000 (Ravallion and Chen 2004). In India, robust economic growth in the 1990s was associated with growing inequality between rural areas—where the majority of India’s poor work—and urban areas (Deaton and Dreze 2002). Inequality has increased within urban areas as well (see Anant et al. 2006; this volume).6 In the meantime, the incidence of poverty measured in terms of the national poverty line has gone down, but by much less than if growth had been more equitable. Indeed, decomposition of poverty reduction into growth and distribution components using household expenditure survey data reveals that distributionally neutral growth in household expenditure would have been associated with a 1 percentage point reduction in urban poverty per annum between 1993 and 1999. However, worsening distribution meant that poverty reduction amounted to a little less than two thirds of a percentage point per annum (ADB 2004).7 What has driven increasing inequality in labor market outcomes? It is difficult to isolate the exact cause. However, the interplay of globalization and technology are probably important factors. Especially in the context of an inegalitarian distribution of skills acquired through education, it is possible that only a minority of people are gaining from the adoption of new technologies.8

3.2 Functions of the Labor Market The labor market is one of the main channels through which globalization is affecting developing countries (Rama 2003). First, employment shocks resulting from structural reforms are dealt with in the labor market. Second, a labor market that makes possible job creation and leads to increases in productivity is a key element of the development of a business climate where new firms are created and where innovation is fostered. Finally, labor is often the only asset that poor people have.

69 Labor Markets in a Globalizing World

One of the pillars to achieve the objectives of full, productive, and decent employment is the development of a labor market that is well functioning. A labor market is said to function “well” if it achieves the two primary objectives of efficiency and fairness. If these two objectives are met, the labor market will adequately perform the following three major functions: (i)

Resource Allocation. An important role of the job market is to match workers with jobs. In an efficient labor market, all workers willing to work are likely to find jobs that match their skills (this is one of the aspects of underemployment discussed above), and no vacancies should be left unfilled (Box 3.1). Moreover, in an efficient labor market workers are likely to have the right jobs given their education, skills, experience, and needs of the marketplace. Finally, in an efficient labor market, workers should be able to find employment fast. (ii) Income Allocation. The second function responds to the question of whether workers are paid a fair wage. Here it is important to make a clarification, namely, that there is a tendency to argue that when wages are “low,” they are not fair. For this reason, it is important to clarify what a fair wage is. For (most) economists, fairness is measured in terms of whether a worker is paid what he or she is worth, and this is measured in terms of a worker’s productivity. Thus, a fair wage is one that is related in some sense to that worker’s productivity.9 Indeed, at the most intuitive level, the statement that wage rates cannot outstrip labor productivity (a least for a significant amount of time) is a very general economic principle; otherwise no firm could survive. Fundamental to the process of growth of any economic unit is the concept of economic surplus, and the use to which such a surplus is put in allocating resources over time. The surplus can be defined as the difference between the value of output (Q) and its cost of production, measured at constant prices. Labor is often the primary input in the process. The cost of labor is the total wage bill (W). In per worker terms, the surplus is therefore the difference between the productivity of labor (Q/L) and its real wage rate (w/P). Hence, the survival of the firm requires that (Q/L) > (w/P).10 (See Appendix 3.1.) (iii) Risk Allocation. The third major function of the labor market is to allocate risks, mostly related to losing one’s job. A wellfunctioning market protects workers against the risk of income loss. If workers can find a new job quickly (the resource

70 Jesus Felipe and Rana Hasan Box 3.1 Unemployment, Underemployment, and Mismatches in the Labor Market

A mismatch in the labor market is defined as a gap between, on the one hand, the skills and abilities that enterprises (employers) consider necessary for workers to perform their assigned tasks and duties, and, on the other, the skills and abilities that workers actually possess. The affected parties in this situation are employers, workers, institutions of education and training, and national or local governments. What are their individual roles? Firms develop the strategies to stay in business and achieve their objectives as well as the abilities necessary to perform tasks and select workers with such abilities from the labor market; but it is workers who deal with the actual operations. Institutions of education and training determine the number of workers with certain abilities. Here, the role of the educational system, ranging from elementary school to university, is quite significant. Likewise, the influence of national policy on education and training is fundamental. Workers receive formal education in the school system before joining the labor market. This determines the quality and quantity of the labor force. However, workers enhance their abilities after employment. Indeed, many companies offer in-house education and training and many workers improve their skills through on-the-job as well as off-the-job training. Mismatches in the labor market would not occur if the quality and quantity of labor desired by companies and existing in the labor market coincided, and workers were distributed to workplaces suited to their abilities. Thus, mismatches exist because of failure in one or more parties in the roles of obtaining information on enterprise needs and other related matters, planning based upon this information, and carrying out the plans. Mismatches in the labor market have become an acute issue because human resources development is a complicated process and because the education and continued.

allocation function), income loss is kept to a minimum. For those who become unemployed, unemployment insurance provides a temporary solution.

3.3 The Mainstream Argument for Labor Market Reforms The calls for labor market reforms are a reaction to the alleged excessive regulation of the labor market that takes the form of labor codes that prevent the normal working of supply and demand. Why do governments regulate

71 Labor Markets in a Globalizing World Box 3.1 Unemployment, Underemployment, and Mismatches (cont’d.)

training systems are not usually flexible enough to adapt to new industrial circumstances. The imbalance between the rapidly changing skills requirements of many companies and the very slow changes to the training curricula of education and training institutes, as well as the malfunctioning of the mechanism of supply and demand of labor at the national level, has created a type of unemployment and underemployment that affects highly skilled and educated workers in many developing countries. While unemployment of highly educated workers can be the source of a sociopolitical conflict (such as the “brain drain” in the Philippines), underemployment of this type of workers is a different type of phenomenon. If someone with a college degree ends up driving a taxi, productivity need not necessarily fall. The problem is that from society’s point of view, sending this person to college was probably an investment with a low return and a waste of valuable resources. But in other cases this type of underemployment can lead to decreases in productivity due to lack of motivation, because the worker affected cannot fully utilize his or her skills and knowledge in a job more in accordance with the training received. In these cases, wages will not be commensurate with the abilities and educational levels and will also be a factor affecting productivity. Underemployment of skilled workers is a problem in many Asian countries due to the dynamic change in industrial structures and to the rapid development of information technologies. Thus, there is a constant pressure to improve workers’ skills and abilities because it is an essential strategy to remain competitive in a global market. It is important to stress that there is no immediate and standardized solution for overcoming the mismatch problem. The solution involves, among other things, appropriate educational policies, as well as changes in social norms and myriad country-specific factors. Source:

Muta (2003).

labor markets in the first place? The answer would seem to be that they aim to achieve a well-functioning labor market. Labor markets are often not competitive due to uneven market power between the two main participants—workers and employers. This is the result of imperfect mobility of workers and asymmetric information. These imperfections lead to unfair and inefficient outcomes in the form of underpaid workers, hazardous working conditions, or discrimination against certain groups of workers (women, for example), when their bargaining position is weak. In general, private markets, if left to themselves, tend to do a poor job of protecting unemployed workers. Governments typically intervene to correct these failures.

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However, labor market reforms tend to be a thorny issue for three reasons. First, from a technical point of view, to be successful, they need to be coordinated with reforms in other markets. Second, from a political point of view, some groups resist change—those with vested interests. These tend to be the ones that perceive the reform as a threat to the status quo (e.g., reforms to reduce employment protection). In fact, labor market reforms are probably more difficult to implement than reforms in any other economic area. It is possible that this happens because labor unions oppose them. However, another reason is worth considering. This is the existing public perception about the effects of reforms, for they are associated with deregulation and a tendency toward “free markets” and a laissez-faire view of the economy. Convincing the public in general, and certain groups of workers in particular, that reducing labor security and facilitating the firing process will improve labor market conditions is not easy. This is because the direct impact on those directly affected is very transparent and immediate. In the words of Freeman: “When workers decide, rightly or wrongly, that reforms are undesirable, there is a danger that they will protest and attempt to overturn the program” (Freeman 1993, p. 137). “Selling” a labor market reform on the grounds that it will benefit the economy is a much more difficult task than selling reforms in areas such as trade or taxes. For this reason, designing labor market reform programs needs strong political support. The third reason is that the economics profession is divided between those who see protective labor market interventions as a hindrance to development and those who argue that they have positive effects (Freeman 1993; Forteza and Rama 2001). The first group argues that the success of economic reforms depends, in general, on whether labor costs can vary freely in response to changes in labor demand. This is because reforms entail, one way or another, a process of labor reallocation. The time this takes depends on how flexible the labor market is; the longer it takes the worse. In broad terms, the first group’s criticism of labor market interventions rests on the following: they misallocate labor; they waste resources through rent seeking; they impair adjustments to economic shocks; and they deter investment, thereby reducing rates of growth.11 Moreover, according to proponents of market-oriented reforms (Box 3.2) a problem may arise if government interventions are poorly designed, in terms of, for example, providing excessive protection to a minority of formal sector “insiders.” For example, the protection of workers’ welfare through extremely costly dismissal clauses can prevent employers from responding to changes in product market conditions, such as those of that would result from trade liberalization. It would also make employers reluctant to hire new workers, effectively pushing those who are not hired into the informal sector, or into unemployment. In general, while governments intervene in the labor market to achieve a balance between the two primary objectives of efficiency and fairness, inappropriate interventions can lead to poor outcomes.12

73 Labor Markets in a Globalizing World Box 3.2 The Cases for and against Labor Market Regulation

For Labor Market Regulation The right to join a union and bargain collectively can increase workers’ voice, encourage stability in industrial relations, promote on-the-job training, and reduce pressure on taxpayers to maintain acceptable standards of living by placing the responsibility for decent income and benefits on firms (and consumers). The provision of unemployment insurance and assistance would not only help workers in time of need but would facilitate job search, and thereby potentially improve matches between jobs and worker skills and interests. The unemployment benefit system can reduce the incentive to work, but it can also promote job training and search among workers (since they do not have to take an inappropriate job immediately) and can facilitate productivity improvements through enhanced employment flexibility, since employers in “solidaristic societies” will be more likely to fire workers (and workers will be more likely to accept working under this threat) if there is a substantial safety net (for example, the “Danish” model). Against Labor Market Regulation The rationale has its roots in the basic supply and demand framework that assumes perfectly competitive markets. High minimum wages and widespread collective bargaining must raise wages and compress the wage structure, pricing less skilled workers out of the labor market. This follows from the supply-demand model used—constraining downward wage adjustments leads to employers responding with fewer jobs. The stakes are raised with demand shocks, such as productivity slowdowns, oil price hikes, significant technological changes, and intensifying trade competition, which may require downward wage flexibility, particularly for the less skilled. On the supply side, social spending that supports family income tends to reduce the incentive for family members to take available jobs. In sum, welfare-state interventions raise both the wage floor (the lowest wages that can be paid) and the reservation wage (the lowest wage at which workers will be willing to work), necessarily reducing the demand for labor.

Put differently, calls for reforms of the labor market by proponents of market-oriented reforms argue that such reforms are necessary to maintain, if not increase, competitiveness. The contrast in this way of thinking about economic policy with that in the first three decades following World War II— described as the “golden age of egalitarian economic policy”—is stark. As noted by Bowles and Gintis (1995): “attention has shifted from the effect of egalitarian policies on aggregate demand to their effect on “competitiveness” which is to say on costs and productivity […] and the growing focus on questions of wages and productivity under the general rubric of competitiveness has supported a near consensus that wage restraint and the limitation of social expenditures are

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necessary conditions for adequate economic performance. Society might still opt for egalitarian measures on moral grounds, many now believe, but at the cost of leaving even the poor to suffer in the long run” (Bowles and Gintis 1995, pp. 409–410; emphasis added). To increase competitiveness, runs the argument, it is imperative to reform labor markets (Appendix 3.2). Conversely, those who argue that interventions in the labor market play an important and positive role (Box 3.2) base their case on: (i) a rejection of standard neoclassical analysis, from which most of the case for reform draws, in the sense that the models used do not correspond to reality; and (ii) the belief that the more equal the distribution of adjustment costs, the shorter and weaker the resistance to economic reforms. They argue that adjustment programs must be complemented by mechanisms to compensate the workers affected by the reforms. These include job separation packages, early retirement programs, and unemployment benefits. In general, these economists argue that the enforcement of labor standards and legally mandated benefits “forces” employers to shift attention from cost-cutting issues to productivity-enhancement measures (for example, training and technical innovation). It is important to understand that the argument against labor market regulation as a solution to the unemployment problem is a consequence of the theoretical model used by the economists who favor them, namely, the neoclassical framework. The way in which these economists argue about (and the solutions they propose for) the unemployment problem is a function of what they believe causes it. Mainstream explanations of unemployment share the idea that wages are set above market-clearing levels for different reasons. This is what gives rise to unemployment. What these theories presume is that a market economy, if left undisturbed, has the mechanisms to produce a wage rate that clears the labor market (i.e., all those who want to work find jobs). Neoclassical theories argue that increases in real wages will cause employment to decline, for two reasons: (i) higher wages induce firms to substitute other inputs for labor; and (ii) higher wages entail cost increases, which induce buyers to shift suppliers. From a policy perspective, adherents to this view contend that a competitive market has an internal mechanism that allows it to eliminate unemployment (in particular, that a market economy has a long-run tendency to full employment). This mechanism is the speedy adjustment of prices (wages) to the equilibrium level at which demand equals supply. Thus, existing unemployment is the result of workers refusing to accept the equilibrium wage rate as determined by labor demand and supply. The policy implication and the solution to the unemployment problem is, they maintain, more competition and less government intervention in market processes through, for example, the setting of minimum wages or through ensuring job security. In competitive markets, the law of demand and supply ensures that eventually, in the long run, the demand for labor will equal the

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supply of labor—so that the labor market will clear and there will be no unemployment. In these circumstances, the level of employment in equilibrium represents “full employment,” that is, all those members of the labor force who desire to work at the equilibrium real wage can do so. The market then clears. Classical full employment equilibrium is, therefore, compatible with the existence of voluntary unemployment, but does not admit the possibility of involuntary unemployment. What is the most important policy prescription of this paradigm to eliminate unemployment? In short, that real wages should be reduced by cutting the money wage rate. What are the possible explanations for setting wages above the marketclearing level? One such explanation is provided by the “efficiency wage” model of wage rigidity and unemployment (Basu 1997, Chapter 10). This theory argues that employers prefer not to lower wages despite the existence of surplus labor because in poor countries higher wages lead to higher productivity. In other words, payment of wage rates that are above the market clearing level can often be a profit-maximizing strategy because it allows firms to minimize overall unit labor costs. Employers behave this way because output is a function of the wage that the worker receives. Depending on the particular efficiency wage theory, higher wage rates can presumably lower unit labor costs through increased effort and reduced “shirking” by employees; reduce turnover costs; and/or improve worker morale.13 Involuntary unemployment arises because, although there is competition among the unemployed to find jobs, it fails to lower wages because employers prefer to pay a higher wage.14 A second model that leads to wages above the market-clearing rate and that explains unemployment in developing countries is the “collusive theory” (Basu 1997, Chapter 10). In this case, it is workers’ refusal to undercut one another, since they fear that this will lower wages for everybody, not only now but also in the future. Thus, they prefer to remain unemployed in the hope that in the next period they may be lucky enough to find jobs at the prevailing high wage rate. Finally, a third model that explains unemployment in a context of wages set above the market-clearing level argues that wages in the formal sector in many developing countries are set by a juxtaposition of institutional forces different from supply and demand (Fields 2004). These institutional forces are minimum wages, labor unions, public sector pay policies, multinational corporations, and labor codes. These forces create inflexible labor markets. The converse—labor market flexibility—refers to the capacity to change the quantity, quality, and price of labor inputs to reduce production costs, and make output more adjustable to rapid changes in market demand (Sardaña 1998, p. 70). Inflexible labor markets are, therefore, those which do not allow these types of changes. Such inflexibility causes unemployment. Indeed, discussions in many

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developing countries today about making the labor market more flexible are based on the assumption that factors such as the increase in the bargaining power of labor unions are responsible for unemployment and, thus, policies designed to combat unemployment should focus on the labor market.15 These factors are called wage-push factors as they increase the wage demands of workers. The literature distinguishes three types: (i) labor costs, which include minimum wages, unemployment benefits, firing restrictions, and unionization of the labor force; (ii) lack of functional flexibility, which refers to the inability of firms to reorganize the labor process as needed, and the limited adaptability of workers in the firm to undertake different tasks as required by the production process; and (iii) lack of numerical flexibility, which implies difficulties in adjusting working hours or the size of the workforce to output demand fluctuations, or in response to technological changes. According to this argument, the rise in unemployment is due to changes in these wage-push factors. Hence, policies to increase labor market flexibility are usually recommended, and include cutting unemployment benefits, reducing the minimum wage, weakening labor unions, and doing away with employment protection measures—in short, deregulating the labor market to achieve market flexibility and to bring it closer to a perfectly competitive market. In fact, today’s main mainstream explanation of unemployment is that labor market institutions are “too rigid” and wages “too high.” The theoretical model used today to support these conclusions is the “nonaccelerating inflation rate of unemployment,” or NAIRU (see Box 3.3). Starting during the late 1970s and early 1980s, macroeconomic policy reversed the directions of Keynesianism. Monetary policy was to be targeted at controlling inflation, while microeconomic policy was to influence employment by reforming institutions and regulations in order to lower the NAIRU. Many economists believe that at any given time there is a certain level of unemployment that is consistent with stable inflation. If the government tries to increase demand to drive unemployment below that rate, it will pay the price of accelerating inflation. If the government wants to reduce the inflation rate, it must reduce demand so as to drive unemployment above the NAIRU. What is the logic behind the NAIRU? Suppose that when the government implements an expansionary program (e.g., by increasing public expenditures), prices in the economy are stable. Once demand increases, companies start running at close to full capacity and employment increases (unemployment decreases). At this point, the argument runs, prices will start to rise. Then workers will react by demanding wage increases above productivity increases. What happens in these circumstances? The government, in an attempt to reduce the unemployment rate from 7% to 4%, for example, will find that previously stable prices give way to inflation, for example running at 6%. The question

77 Labor Markets in a Globalizing World Box 3.3 The NAIRU and the Neo-Keynesian Labor Market

In the 1980s a new generation of Keynesian economists emerged, referred to as the New Keynesians. This school of thought shares basic principles with the neoclassical school, but its models show how market economies fail to deliver efficient outcomes in the face of informational asymmetries. Today, new Keynesians use different versions of the nonaccelerating inflation rate of unemployment (NAIRU) theory to explain inflation and unemployment. The interesting thing is that the NAIRU theory is used to give policy recommendations very similar to those of the neoclassical school. Indeed, the NAIRU also identifies the inflexibilities of labor markets as the culprits for the rise of unemployment, but through a different argument. Labor market reforms are again the solution. Indeed, the Organisation for Economic Co-operation and Development (OECD) (1994) and the International Monetary Fund (IMF) (1999, 2003) for example, have insisted for several years that, in order to accelerate growth, Europe has to reform its labor markets so as to make them more flexible, following the US approach. But the argument over the need to reform labor markets is also sweeping across developing countries, as the book by Heckman and Pagés (2004) shows.16 The NAIRU theory is based on bargaining models whose underlying rationale is that there is a conflict between workers and firms. This conflict is mediated by a bargaining process, not by the market. The NAIRU is the rate of unemployment which generates consistency between the target real wage of workers and the feasible real wage determined by labor productivity and the firm’s mark-up. The NAIRU is both a theory of inflation and of unemployment. At the core of this theory is a trade-off between the two. The NAIRU is determined by labor market institutions, and inflation by the difference between actual unemployment and the NAIRU so that at any time there will be only one rate of unemployment that allows for a stable rate of inflation. The theory takes wage bargaining as its starting point. Unlike in the neoclassical model, the real wage does not adjust to clear the labor market so as to ensure full employment. Rather, nominal wages are the result of a bargaining process between firms and unions. The nominal wage depends on the bargaining strength of the two parties. Unemployment affects the power of labor negatively. Prices, on the other hand, are thought to be set by firms with market power and depend on aggregate demand. Consequently, unemployment is an equilibrium phenomenon. If the real wages implied by the wage-bargaining process and by the price-setting mechanism are inconsistent with each other, unexpected inflation will occur. In terms of policy implications, the NAIRU theory is similar to the standard neoclassical arguments: frictions and inflexibilities in the labor market are the cause of unemployment. Labor market institutions like minimum wages increase equilibrium unemployment in the NAIRU theory, whereas in the standard continued.

78 Jesus Felipe and Rana Hasan Box 3.3 The NAIRU and the Neo-Keynesian Labor Market (cont’d.)

neoclassical model they increase unemployment because the labor market will be out of equilibrium. Thus, curbing unemployment benefits and reducing minimum wages are standard prescriptions. In this sense, there are great similarities between the NAIRU and the standard neoclassical theories although, as pointed out above, they are significantly different (the NAIRU is not based on the notion of a real wage set in the labor market as the result of the interaction between labor supply and demand). Finally, any attempt by fiscal or monetary policy to move unemployment away from the equilibrium level will only lower unemployment temporarily and cause inflation.

then becomes an issue of policy choice and trade-off. Perhaps the government regards 7% unemployment as a more serious problem than 6% inflation. What the NAIRU theory says is that the Government will find that the trade-off is not stable. The reason is that persistent inflation gets built into peoples’ expectations. This means that workers will systematically expect inflation to be present and running at about 5%. Hence, they will demand wage increases over and above that level. The conclusion is that to avoid ever-accelerating inflation, the government must accept an unemployment rate that is sufficiently high so that workers do not demand real wage increases above productivity growth, and ensure that firms do not raise prices faster than their costs. In sum, the minimum unemployment rate that will restrain inflation is the NAIRU. The consequence of this type of thinking is that unemployment rates that were quite high by historical standards became suddenly acceptable to policymakers and many economists recommended maintaining a pool of unemployed. Moreover, the idea of an inverse relationship between unemployment and inflation is so widespread that central bankers look with deep suspicion at any downward movement of unemployment as signaling potential inflation and the need to increase interest rates. The response from pro-reform policymakers and analysts to the difficulties faced by many developing countries in terms of generating enough employment has been from the technical point of view, namely, that they regard reforms as incomplete. In particular, they contend that reforming a distorted market will not usually lead to increased efficiency and growth unless the reform is comprehensive and is accompanied by complementary actions on several fronts. For example, they argue that opening up the economy to international trade is unlikely to attract significant investment if the physical infrastructure (such as roads and electric power) or the legal infrastructure (such as contract enforcement) is highly deficient. This way, while labor market reforms were not part of the

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first generation reform package, the recent purview of market-oriented reforms has been expanded to cover regulations of the labor market in what could be called “second generation reforms” (which also include a host of institutional reforms). Analogous to the case of deficient physical infrastructure, the proreform camp argues that the benefits of trade liberalization—including both “static” gains from trade resulting from sectoral reallocation of production in line with comparative advantage, as well as “dynamic” gains from trade resulting from improvements in efficiency—will not be forthcoming if existing laws and regulations make it difficult to shed or reallocate labor. More specifically, labor market reforms have often translated into a call for action on three fronts:17 (i)

Wage-Setting Practices. These directly affect labor costs and, consequently, decisions of firms on the best combination of factor inputs, adoption of new technologies, and ultimately output growth. Reformers propose to make wage and labor costs more flexible by removing restrictions that prevent wages from reflecting local conditions and individual skill levels, in particular of younger workers. (ii) Regulations Affecting Hiring and Firing. These provide job security for covered workers. Reformers argue that overly strict regulations tend to (i) raise the cost of workforce reorganization, often required when growth-enhancing new technologies are adopted; and (ii) tilt incentives for firms to move into the informal sector. Reformers propose revamping such employment security provisions. (iii) Taxes on Labor and Social Security Contributions. Reformers maintain that unemployment and related benefit systems and their interaction with the tax system should be changed, such that societies’ fundamental equity goals are achieved in ways that impinge far less on the efficient functioning of labor markets. These calls for action have led to recommendations that wages should be downwardly flexible, reflecting the demand for and supply of skills in local labor markets; that employment protection legislation should be limited or eliminated altogether; and, similarly, that social protection spending and regulations (passive labor market policies) should be scaled back. The only possible exception to a free market approach would be the promotion of job search and worker training (active labor market policies).

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3.4 Keynesian and Marxian Theories of Unemployment There are other theories that view unemployment as being caused through mechanisms different from that highlighted by the neoclassical model. Hence they propose different solutions to tackle unemployment. For example, the Keynesian and Marxian models reject the mechanisms that the neoclassical model claims a market economy has. The Keynesian model rejects any claim that market economies have an “automatic” or self-adjusting mechanism to eliminate unemployment due to the existence of rigidities and market failures. Keynes advanced three reasons: (i) there is no feedback from unemployment that guarantees that real wages will fall. An increase in unemployment will probably reduce nominal wages; but in a recession prices will also decrease. The result is that real wages need not fall; (ii) a significant part of effective demand depends on investment, which depends on unknown “animal spirits;” and (iii) financial markets are often a source of destabilization. In sum, markets do not work like the simple demand and supply model and, therefore, unemployment is a natural consequence. There is no invisible hand channeling self-interest into some social optimum. Keynes rejected the idea that capitalist economies gravitate smoothly to a general equilibrium where all markets clear and where full employment prevails. His vision of the functioning of the economy was one where there is an asymmetry in the relation between markets. He developed a theory of effective demand where output and employment are determined by investment expenditures and other autonomous expenditures (e.g., exports and government expenditures). In this theory, equilibrium in the goods market (mostly set by investment decisions), determines the level of employment. The labor market follows the developments in the goods market. In sum, employment growth is determined by demand growth, which is set by investment decisions. Therefore, unemployment is the result of various demand shocks, mostly through business investment and, more specifically, low accumulation. Indeed, for Keynes the accumulation of capital is a potential source of disequilibrium since it creates a gap between capacity and demand. Investment makes productive capacity grow faster than effective demand. This can be corrected only if distribution is flexible and monetary policy far sighted. The absence of the latter or its effectiveness due to the downward stickiness of the rate of interest was the fundamental cause of unemployment for Keynes. It is worth mentioning that Keynes did not a priori attribute the lack of effective demand specifically to underinvestment or to underconsumption. From the standpoint of economic policy, he considered the expansion of either investment or consumption as valid policy options. However, he argued that expanding investment had social advantages and it is for this reason that he leaned toward it (Keynes 1936, Chapter 24). The alternative between investment and consumption is only

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relevant in the short term, as in the long term, the acceleration of the pace of investment leads to distributional changes that favor consumption. The feedback from unemployment to the rest of the economy is either slow or dysfunctional, as it materializes in a deflationary tendency rather than a decrease in the real wage rate. In particular, involuntary unemployment is likely to be a feature of the labor market if money wages are rigid. But Keynes argued that flexibility of nominal wages would be unlikely to generate powerful enough forces that could lead the economy to full employment (see Box 3.4 on Keynes’ arguments). The policy implication is that well-designed intervention to achieve full employment is necessary via fiscal and monetary policies. The investment policy Keynes conceived was based on two considerations: (i) investment should be raised to a level such that, in relation to income, it offsets the propensity to save corresponding to the desired level of employment. In Keynes’ words, the recommendation is as follows: “…to provide that the growth of capital equipment shall be such as to approach saturation point at a rate which does not put a disproportionate burden on the standard of life of the present generation” (Keynes 1936, p.220). To this purpose, the rate of interest should be kept at a steady level (with regard to short-term investment fluctuation, but declining in the long run so as to comply with the downwardsloping trend of the marginal efficiency of capital) irrespective of the shortterm fluctuations of investments. Keynes argued that interest rates should not be used as a tool for short-term control; and (ii) both private and public investment should contribute to the attainment of full employment demand. The role of public investment is to stabilize total investment as well as to complement private investment so as to achieve the desired level of demand. Interestingly, regarding the level of investment, Keynes indicated that since “it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment [then] a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment […] but beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community” (Keynes 1936, p.378).18 According to the Marxian school of thought, unemployment is functional to capitalism. For Marx, capitalism needs to create and constantly reproduce a reserve army of labor.19 Marx pointed out that the capitalist mode of production always coexists with noncapitalist production such as subsistence agriculture, and draws part of its labor supply from these noncapitalist sectors through migration and the mobilization of female and child labor. Marx viewed these sectors and groups of the economy as reserve armies of labor. When a capitalist economy is growing rapidly enough so that the reserve army of unemployed is depleted, then workers will utilize their increased bargaining power to raise wages and shift the distribution of income in their favor. Profits are

82 Jesus Felipe and Rana Hasan Box 3.4 Can a Reduction in Nominal Wages Stimulate Employment?

Classical theory assumes that the economic system has a self-adjusting character that depends on the fluidity of nominal wages. Rigidity is the cause of maladjustment. The argument is that a reduction in nominal wages will, other things being equal, stimulate demand by diminishing the price of the finished product, and will therefore increase output and employment up to the point where the reduction in nominal wages that employees have agreed to accept is offset by the diminishing marginal efficiency of labor as output increases. As is well known, Keynes (1936, Chapter 19) challenged this proposition, in particular that a reduction in nominal wages can stimulate the economy. To be precise, Keynes did not question this; rather, he argued that this is possible under certain circumstances, but the way to reach this conclusion is not through the classical arguments. Keynes argued that the classical position, summarized above, is tantamount to assuming that the reduction in nominal wages leaves demand unaffected. Some economists, he noted, would maintain that there is no reason why aggregate demand should be affected, since the latter is determined through the quantity theory of money. It may also be argued that as wages go down, profits must increase. However, Keynes argued that a reduction in nominal wages must have some impact on aggregate demand via a reduction in the purchasing power of workers. On the other hand, he continued, the real demand for other factors whose nominal retributions have not been reduced will be stimulated by the fall in price of the finished products. The aggregate demand of the workers will increase as a result of the increase in employment, unless the demand for labor in response to changes in nominal wages is inelastic. In the new equilibrium there will be more employment than there would have been otherwise. However, Keynes disagreed with this line of reasoning and indicated that the underlying analysis was incorrect. In his view, the chain of reasoning used to reach this conclusion was as follows. In any given industry, there is a demand schedule for the product relating the quantities that can be sold and the prices asked. Simultaneously, there is a series of supply schedules relating the prices asked for the different quantities. These schedules lead to another one which, on the assumption that other costs remain, gives the demand schedule for labor in the industry relating the quantity of employment to different wage levels. Finally, this relationship is transferred without modification to the industry as a whole, which leads to the assumption that there is a demand schedule for labor in the industry as a whole relating the quantity of employment to different wage levels. And it seems that it makes no difference to this argument whether it is in terms of money or real wages. continued.

83 Labor Markets in a Globalizing World Box 3.4 Can a Reduction in Nominal Wages Stimulate Employment? (cont’d.)

Why is this argument a fallacy? The reason, Keynes argued, is that the demand schedules of particular industries can only be constructed on some fixed assumption as to the nature of the demand and supply schedules of other industries and as to the amount of aggregate effective demand. The important point is that it is invalid to transfer the argument to the industry as a whole unless one also transfers the assumption that aggregate effective demand is fixed. However, this assumption takes the argument to an irrelevant conclusion. Indeed, while it is true that a reduction in nominal wages with effective demand unchanged will induce an increase in employment, the precise question is whether the reduction in nominal wages will or will not be accompanied by the same aggregate effective demand as before, or by a level of aggregate effective demand that has decreased proportionally less than the decrease in nominal wages. But, Keynes concluded, if the classical theory is not allowed to extend by analogy its conclusions for a particular industry to the industry as a whole, then it is unable to answer the question of what will be the effect of a reduction in nominal wages on employment. Keynes argued that indeed it is possible that, in some circumstances, a reduction in nominal wages leads to an increase in employment, but his argument is different. The simplest way of showing it is by way of rebutting the conclusion that a reduction in nominal wages increases employment because it reduces the cost of production. Keynes agued that it is not unlikely that the individual entrepreneur, realizing that his costs decrease, will overlook the repercussions on the demand for his product and will act on the assumption that he will be able to sell a higher output than before at a profit. But will this indeed happen? This will occur only if society’s marginal propensity to consume equals unity, so that there is no gap between the increment in income and the increment in consumption. In general, a reduction in nominal wages will involve a redistribution of real income that will lead to a decrease in the propensity to consume; or, if the reduction in nominal wages has the effect of increasing the marginal efficiency of capital schedule relative to the interest rate, then investment increases. Otherwise, entrepreneurs will not be able to sell a higher output at a profit and employment will fall back to its previous level. The reason is that if firms could offer a level of employment (assuming they could sell their output at the expected price), which would provide incomes out of which workers would save more than the amount of current investment, firms will make a loss for this difference. And this will be the case irrespective of the level of the nominal wage. The conclusion is that the reduction in nominal wages will have no lasting tendency to increase employment except by virtue of its repercussions either on the propensity to consume, on the marginal efficiency of capital, or on the interest rate. There are no grounds to believe that a flexible wage policy is capable of maintaining a state of continuous full employment.

84 Jesus Felipe and Rana Hasan

correspondingly squeezed. As a result, capitalists’ animal spirits are dampened and they reduce investment spending. This then leads to a fall in job creation, higher unemployment, and a replenishment of the reserve army. In other words, the reserve army is the instrument capitalists use to prevent significant wage increases and thereby maintain profitability. Marx’s argument for the continual generation of the reserve army of labor relies on the dynamic interaction of three factors (Botwinick 1993, pp. 74–82): (i) changes in the rate of growth of capital accumulation; (ii) changes in the organic composition of capital (i.e., the ratio of the value of the capital stock to the wage bill); and (iii) changes in the labor force participation rate.20 As noted above, Keynesian theory argues that correct economic policies can essentially eliminate the problem of chronic unemployment/ underemployment. On the other hand, Marx’s arguments suggest that the continual generation of unemployment is not a product of disequilibrium. Nor is it a dysfunctional outcome of the capitalist system that can ultimately be rectified by good economic policy.21 On the contrary, it is an essential component of the process of capitalist accumulation for two reasons: (i) the reserve army of labor provides capital with a critical mechanism for regulating movements in the wage rate; and (ii) it provides capitalism with a necessary degree of flexibility. Unlike neoclassical models, Marx argued that modern capitalist societies are prone to sudden fits of expansion and frantic shifts from one branch of production to another. Thus, he argued that under these circumstances, the system must have the possibility of throwing out masses of workers without much effect on the scale of production in other spheres. Normal periods of accumulation therefore generally require significant degrees of reserve capacity in industrial plant and a sizable reserve army of labor. Indeed, Marx argued, even in exceptional periods of accelerated accumulation, there is no necessary guarantee that full capacity utilization will imply full employment.22 In this vein, the Polish economist Michal Kalecki, starting from premises similar to those of Keynes (e.g., the notion of effective demand, or the idea that economic adjustments occur not through changes in prices but through changes in the level of output) but from a Marxian perspective, reached somewhat different conclusions about the possibility and means of achieving full employment. Kalecki assumed that unemployment and excess capacity were the norm in a capitalist system. Full employment of labor would, at best, be achieved only at the top of a business cycle, and during most, if not all, of the cycle there would be significant levels of unemployment. Kalecki saw the asymmetrical effects of investment (i.e., investment makes productive capacity grow faster than effective demand) as the expression of the contradictions inherent in the process of capital accumulation. Moreover, this was the basic cause of crises. In his words: “We see that the question, ‘What causes periodical crisis?’ could be answered shortly: the fact that investment is

85 Labor Markets in a Globalizing World

not only produced but also producing. Investment considered as expenditure is the source of prosperity, and every increase of it improves business and stimulates a further rise of investment. But at the same time every investment is an addition to capital equipment, and right from birth it competes with the older generation of this equipment. The tragedy of investment is that it causes crises because it is useful. Doubtless many people will consider this theory paradoxical. But it is not the theory which is paradoxical, but its subject—the capitalist economy” (Kalecki 1939, pp. 148-9). As to the consequences for employment policies, Kalecki’s views are not different from those of Keynes, namely, employment policies should consider the fact that investment tends to widen production capacity more rapidly than demand. The difference with Keynes is that Kalecki did not believe the asymmetry between both could cease through the adjustment of distribution because prices, established on the basis of the degree of monopoly, are sticky with respect to the fluctuations in the quantities produced. It follows that market economies are constantly threatened with excess capacity. The fundamental problem in his view was underconsumption. Moreover, Kalecki was skeptical about the possibility of controlling private investment efficiently by means of the long-term interest rate. This is because this interest rate is relatively sticky, and because it cannot drop below certain values (Kalecki 1944). The implication is that Kalecki was skeptical about the efficacy of raising investment expenditure to achieve full employment. Moreover, Kalecki thought this was rather wasteful, as the capital equipment created was not directly useful in adding to social welfare. To this purpose, he believed that promoting consumer expenditure would be more beneficial. In his own words: “The proper role of private investment is to provide tools for the production of consumption goods and not to provide enough work to employ all available labor…. Both public and private investment should be carried out only to the extent to which they are considered useful. If the effective demand thus generated fails to provide full employment, the gap should be filled by increasing consumption and not by piling up unwanted public or private equipment” (Kalecki 1944, pp. 52– 3). For this reason, Kalecki argued that monetary and fiscal measures should be integrated, the latter consisting in tax relief for the share of profits reinvested. What did Kalecki specifically propose to achieve full employment? On this it is worth quoting him: “Thus what seems to be a rational way of achieving full employment should be based on the following principles: (i) the Government spends so much on public investment and on subsidizing consumption of the poorer sections of the populations that this secures full employment in combination with the private investment which is necessary to increase the productive capacity of equipment proportionately to the rise in ‘full employment national income’; (ii) public investment is carried on at the rate actually required for satisfying the needs of the community, while that of Government spending

86 Jesus Felipe and Rana Hasan

above this level is devoted to subsidizing mass consumption” (Kalecki 1945, p. 89). Kalecki realized that affecting demand by expanding investment or supporting mass consumption would give rise to political problems for it would require considerable public expenditure. He argued that public expenditure should avoid invading the field of productive investment, which is confined to the private sphere; otherwise, it would give way to “creeping Socialism.” He also contended that investment in the public service sector has limited scope and is probably not enough to ensure full employment. Moreover, Kalecki argued that prolonged periods of full employment (should they exist) tend to generate sociopolitical forces that eventually lead to the end of full employment, and further argued that the assumption that a government will maintain full employment in a capitalist economy if it only knows how to do it is fallacious. Thus, it cannot be assumed that governments will operate to secure full employment.

3.5 Labor Market Policies in Practice This section provides a discussion of labor market policies in Asia. Given that the task is complicated, two steps are involved. First, a brief summary of the findings of the empirical literature, based mainly on research conducted by the World Bank and ILO, is provided (pertaining to both Asia as well as the developing world more generally). Second, the information in a fairly recent data set created by Botero et al. (2003) is summarized. This contains data on employment laws and collective relations laws. 3.5.1

Overview of the International Experience

As discussed above, mainstream models rely on the idea that wages determine employment and that there exists an equilibrium wage rate for which all those wishing to be hired will indeed be hired. Based on this, critics of labor market regulation claim that collective bargaining institutions, employment regulations, and income security measures reduce employment growth. If collective bargaining institutions keep wages above the market-clearing wage rate, then wage-push factors will depress employment. And if employment protection increases the cost of laying off workers in the future, then employers will be more reluctant to hire today. Moreover, the argument goes, increasing workers’ rights (for example, the right to strike) undermines the business climate, raises labor costs, and reduces employment growth. However, “to validate the claim that interventions have major allocative, rent-seeking, adjustment, or growth costs requires empirical evidence that interventions are effective in producing differentials in pay or conditions of

87 Labor Markets in a Globalizing World

work that would not otherwise arise in unfettered markets and that they have sufficiently large adverse effects on resource allocation to affect the overall economy” (Freeman 1993, p. 120; emphasis added). Furthermore, adherents to a different school of thought argue that the mainstream view of the labor market does not seem to correspond to the reality in industrial countries, much less to that in developing countries, where unemployment and underemployment are constant features. In fact, they argue that interventions in the labor market lead to good outcomes. They base their case on a rejection of standard neoclassical analysis and on the belief that the more equal the distribution of adjustment costs, the shorter and weaker the resistance to economic reforms. A review of the empirical literature leaves the reader somewhat confused since both camps have managed to produce evidence that seems to validate their claims. For example, in a recent study by Heckman and Pagés (2004) for Latin American countries, the authors advocate the need for further labor market reforms in that region, on the basis of empirical evidence that seems to be overwhelming. In contrast, ILO studies have, among others, highlighted the positive role of minimum wages in protecting low-income workers and industrial relations systems (see, for example, ILO 1991a and ILO 1991b). Based on a thorough evaluation of the research conducted by the World Bank and ILO during the 1980s, Freeman (1993), in a very balanced “scorecard,” found little support for the notion that interventions are major impediments to resource allocation, structural adjustment, or stabilization programs. Interestingly though, he also found little evidence on the value of social pacts and relative consultative modes of adjustment favored by those who argue that interventions are beneficial. The following are Freeman’s main conclusions. (i)

Sectoral Wage Differentials. The drop in public urban salary premiums in the 1980s refutes fears that institutional rigidities make pay setting inflexible in the formal or modern sector and renders invalid the concerns of advocates of labor market reforms with regard to sectoral wage differentials and urban bias in labor market outcomes. Micro studies of wages in several developing countries have shown important pay differentials among comparable workers that cannot be explained by government or labor union interventions. These results cast doubt on the alleged negative effect of market interventions. (ii) Nonwage Costs. Nonwage costs (payroll taxes, unemployment compensation, etc.) do not necessarily constitute a distortionary factor. (iii) Minimum Wages. Freeman (1993, p. 126) claims that there is evidence that an enforced minimum wage substantially reduces employment (see Table 3.1 for minimum wages of various Asian

88 Jesus Felipe and Rana Hasan

countries). However, “such minimum wage intervention is far from the norm in the developing world. Many countries set minimum wages too low or are too lax in enforcing the law for the regulation to have much effect” (Freeman 1993, p. 127). One of the studies cited rejected the importance of minimum wages in India (Fallon 1987). However, another study for Zimbabwe claims that increases in minimum wages after independence had an important impact on the country’s wage structure (Fallon and Lucas 1991). Freeman argues that what denies legitimacy to the claim that minimum wages have had a distortionary effect is the evidence that real minimum wages have fallen in many countries (see Table 3.2), implying that they have had no impact in terms of being a harmful minimum floor. This also implies that minimum wages have failed to fulfill the role they were supposed to play in the first place. Freeman’s conclusion (1993, p.128) is that countries will not set minimum wages at levels that negatively affect employment (see, for example, Box 3.5). When the unemployment rate in a country is relatively high, the minimum wage will be unenforceable as both workers and employers will have an incentive not to comply with the law. (iv) Job Security and Other Employment Regulations. The evidence of the negative impact of job security regulations— which require firms to obtain the approval of government or other institutions for laying off workers and in some cases setting the amount of severance pay (hence raising the costs of reductions in staff)—is not compelling, according to Freeman (1993). In some of his studies these costs seem to be important. For example, the experience of Spain provides a strong case in which relaxation of regulations spurred job growth (where the reduction in the unemployment rate was achieved at the expense of a large increase in the number of temporary contracts). But in other countries, such relaxation may not have had much impact. The evidence on employment protection legislation appears to be strongly associated with more stable employment (OECD 1999, Bertola 1999). But while such legislation reduces job destruction, it also appears to reduce job creation. The result is that the net effect on total employment is uncertain. (v) Government Employment. High and increasing government employment in some developing countries is raising concerns that a large public sector may be a major distortion in the

89 Labor Markets in a Globalizing World Table 3.1 Minimum Wage Levels Country

Date of Introduction

Bangladesh

Agricultural laborers— 1984; Workers in EPZs— 1989; Workers in industries (non-EPZs)—1994

Minimum

Maximum

Agricultural laborers—3.27 kilograms of rice per day, or an amount of money than is equal to the price of this quantity of rice in the local market

US$50 for ordinary operators in the electronics industry in EPZs (approximately PPP$248.18—2003)

US$30 per month for helpers in EPZs (approximately Tk1,815— 2003) (approximately PPP$148.91—2003)

Tk900 per month for ordinary machine operators in the garment industry (non-EPZs) (US$15.3— 2003) (PPP$73.84— 2003)

Tk600 (US$10.20—2003) (PPP$49.23—2003), per month for helpers in the garment industry. Cambodia

1 July 2000

US$45 per month for regular workers in the textile, garment, and footwear sector

China, People’s Rep. of

Shanghai— 1 July 2004; Jianxi region— 1 March 2000

CNY190 per month (in certain towns in the Jiangxi region) (US$22.95—2003) (PPP$104.80—2003)

CNY635 per month (In Shanghai city) (US$76.69—2003) (PPP$350.21—2003)

India

The minimum wage rates included applied as of 1 October 2001

The following minimum/ maximum rates are taken from the minimum wage rates set by the central Government

Rs92.71 per day— Unskilled workers in Metropolitan cities and Ahmedebad, Lucknow, Nagpur, Kanpur and Greater Bombay, working in the agriculture sector (US$2.00—2003) (PPP$10.43—2003)

Rs52.00 per day—Unskilled workers in most rural areas, working in the construction sector (US$1.10—2003) (PPP$5.85—2003) Indonesia

1 February 2003

PRp281,750 per month in East Java (US$32.80—2003) (PPP$113.88—2003)

Korea, Rep. of

Effective from 1 September 2003 to 31 August 2004

Hourly: W2,510 Daily: (8 hours per day) W20,080 Monthly: (226 hours per month) W567,260 (US$476—2003) (PPP$674.74— 2003)

PRp631,550 per month in the province of Jakarta (US$73.60— 2003) (PPP$255.06— 2003)

continued.

90 Jesus Felipe and Rana Hasan Table 3.1 Minimum Wage Levels (cont’d.)

Country

Date of Introduction

Minimum

Lao People’s Dem. Rep.

1 February 2000

KN3,600 per day (US$0.34— 2003) KN93,600 per month (US$8.90— 2003) (PPP$46.19—2003)

Malaysia

No minimum wages. Only for cinema workers and Penang stevedores, cargo-handlers and lightermen sectors— 1989, shop assistants sector—1982, catering and hotel sector—1983

Cinema workers: RM155.00 per month for unskilled workers in cinemas normally showing four films a day (US$40.79—2003) (PPP$94.98—2003)

Pakistan

October 2001

Rs2,500 per month (rate for unskilled workers across whole country) (US$43.25—2003) (PPP$182.08—2003)

Philippines

The Wage Orders currently in force were issued between 2000 and 2002. Certain regions introduced staggered minimum wage increases, prescribing increases at 6–12-month intervals

P102 per day (US$1.88—2003) (PPP$8.24—2003) for workers in Sulu and Tawi-Tawi in the ARMM region working in the retail/services sector, employed by an enterprise employing not more than 10 workers

Thailand

1 August 2003

B133 per day (US$3.20—2003) B169 (US$4.07—2003) (PPP$10.53—2003) for all (PPP$13.38—2003) per provinces other than Samut day for the following Prakarn, Nakorn Pathom, Pathum provinces: Bangkok, Thani, Samut Sakorn and Phuket; Samut Prakarn, Nakorn Chonburi, Chiang Mai, Nakorn Pathom, Pathum Thani, Rachasima, Phang Ngar, and Samut Sakorn Saraburi

Viet Nam

Laborers working in enterprises operating under the State Enterprises and the Enterprises Law— January 2003; Vietnamese employees working in foreign invested enterprises— June 1999

D290,000 per month (US$18.70 —2003) (PPP$96.97—2003) (for laborers working in enterprises operating under the State Enterprises and Enterprises Law)

EPZ = export processing zone, PPP = purchasing power parity. Source: ILO (2005b).

Maximum

Shop assistants: RM250.00 per month for workers aged 21 and above in certain urban districts (US$65.79—2003) (PPP$153.19—2003)

P265 per day—P250 basic wage plus P15 cost of living allowance for nonagricultural workers in the National Capital Region (US$4.88—2003) (PPP$21.41—2003)

D626,000 per month (US$40.36—2003) (PPP$209.32—2003) (for laborers working in foreign-invested enterprises in Hanoi City and Ho Chi Minh City urban districts)

91 Labor Markets in a Globalizing World Table 3.2 Philippines: Minimum Wages by Region (Pesos), 2003–2004 2003 Nominal Wage

Region National Capital Region Cordillera Autonomous Region I II III IV V VI VII VIII IX X XI XII CARAGA Autonomous Region in Muslim Mindanao Mean Standard Deviation Note: Source:

2004 Real Wage

Nominal Wage

Real Wage

Fall in Real Wages (%)

280 190 190 185 229 237 182 180 200 188 175 192 195 180 179

159.89 116.02 114.10 112.35 136.98 136.71 100.16 111.66 108.72 108.39 103.55 110.13 118.33 113.00 107.18

300 205 200 193 244 255 194 190 208 195 180 202 195 200 189

157.71 110.18 108.56 110.05 132.16 131.90 96.43 108.19 105.19 104.53 100.38 105.75 109.12 109.61 102.05

1.36 5.03 4.86 2.05 3.52 3.52 3.72 3.11 3.25 3.56 3.06 3.98 7.78 3.00 4.79

150

75.91

150

72.91

3.95

195.72 909.07

114.57 336.60

206.22 1,176.50

110.30 335.90

3.73

Base year is 1994. National Wages and Productivity Commission (2005).

labor market. A fair assessment seems to be that while government employment beyond some level may prove harmful, few countries let things reach that stage (Freeman 1993). (vi) Wage Adjustments. Freeman’s analysis suggests that institutions (in general) did not obstruct stabilization and adjustment programs during the 1980s, when the world economy was sluggish. Once again, the sharp drop in real wages proves that wages were flexible when required. However, institutional interventions seem to have produced a “suboptimal rate of reduction” with accompanying unemployment. However, Freeman maintains, to contend that greater real wage reductions are still necessary “seems excessive because it puts the entire burden of adjustment to macroeconomic distress on wages and the labor market. […] When the reduction in real wages necessary to eliminate open unemployment exceeds the huge reductions observed in many developing countries, I would look beyond the labor market for the root cause of the economic disaster” (Freeman 1993, p. 133).

92 Jesus Felipe and Rana Hasan Box 3.5 Thailand: Wage Hike Will Scare Investors

The following was based on an article in The Nation newspaper, Bangkok. The Prime Minister Thaksin Shinawatra is unlikely to approve a demand from labor groups to increase the minimum daily wage. He said that the proposed daily wage increase from B175 to B233 was too large and would discourage foreign investors because this could lead to financial losses. It would, in turn, cause closure of factories and firing of workers. However, Prime Minister Thaksin agreed to other demands of workers, submitted by the Labor Congress of Thailand. He pledged to implement an eightpoint set of labor policies, namely to: create a greater choice of sustainable jobs by encouraging more investment; make sure that workers are not exploited or bullied; protect the welfare of workers and reduce work-related illnesses and diseases; provide more opportunities for the disabled to get work and develop saleable skills; improve the skills and wages of the labor force by increasing training opportunities to raise the general status of workers from “unskilled” to “semiskilled”; protect workers’ rights; formalize a wage, welfare, and taxation structure for migrant workers; and tighten the rules of outsourcing to ensure that temporary workers are not exploited. The State Enterprise Labor Relations Confederation of Thailand has asked the Government to increase the minimum monthly wage to no less than B7,000; stop privatization; control consumer product prices; and abolish subcontract employment and outsourcing. Source:

The Nation (2 May 2005).

(vii) Collective Bargaining. The success of the East Asian economies during the 1980s raises the question of the role of labor unions. This is because these were largely suppressed or severely restricted. This may lead some to believe that suppressing unions contributes positively to economic growth. Freeman (1993, pp. 133–134) indicates that no robust empirical evidence verifies this claim, and that the experience of a wide variety of countries, both industrial and developing, indicates that unions do not seem to hamper growth. He mentions, however, that the empirical evidence for Korea shows that suppression of labor was associated with a high rate of workrelated accidents and produced a very unhappy labor force, despite significant increases in real wages. He also shows that “tripartite pacts” (i.e., wage-setting arrangements among labor unions, employers, and government) are not easy to institute or maintain. This is because they “require a strong labor movement, with leaders able to assess the economic scene and

93 Labor Markets in a Globalizing World

convince workers to accept current consumption losses for future gains; a business community that accepts labor as a social partner; and a government willing to share some prerogatives with its social partners” (Freeman 1993, p. 138). More recently, Forteza and Rama (2001) evaluated the impact of labor market rigidities on growth rates over the decade preceding the adoption of a serious reform effort and the decade immediately after. Their regression analysis of empirical data compares the annual growth rates of 119 countries over the period 1970–1986. The indicators of labor market rigidity that the authors used are minimum wages, cost of mandated benefits, strength of the labor market movement, and size of government employment. The authors argue that the first two variables reflect the extent to which the government directly interferes in the adjustment of labor costs, while the second two capture the ability of potential losers from reform to convey their grievances. The results of their analysis show four main points. First, labor market rigidity is a determinant of the success or failure of economic reforms. Second, countries with more rigid labor markets experienced declines in growth rates before they adopted the adjustment programs and weaker recoveries afterward. Third, labor market rigidity matters more for political reasons than for economic reasons. That is, it is not factors such as high minimum wages or mandated benefits that make economic reforms less likely to be successful. Instead, it is greater unionization and government employment, which are associated with deeper recessions before adjustment and weaker recoveries afterward. The authors interpret this result as implying that organized interest groups that stand to lose from the reforms may succeed in delaying their adoption and diluting their content. Fourth, minimum wages and mandated benefits do not appear to hinder economic growth. This result is consistent with the evidence for industrial countries (Box 3.6), where labor market policies arguably have modest hardto-uncover effects on economic efficiency. Forteza and Rama conclude that “the possible irrelevance of minimum wages and mandated benefits for the success of economic reforms questions the wisdom of efforts to deregulate the labor market” (Forteza and Rama 2001, p. 29). Moreover, they argue that abolishing minimum wages or curtailing social security benefits might not contribute much to economic performance. In sum, labor market deregulation might be effective at reducing rigidity “on paper,” but not necessarily in practice: “… it seems preferable to concentrate reform efforts on issues such as taxation, government spending, trade barriers, financial regulations and enterprise ownership, rather than on re-drafting the labor code” (Forteza and Rama 2001, p. 29).

94 Jesus Felipe and Rana Hasan Box 3.6 Labor Market Regulations in Industrial Countries: The Empirical Evidence

The evidence of the role of labor market institutions in industrial countries is much more abundant than in developing countries. For example, Buchele and Christiansen (1992, 1995, 1999a, 1999b) have found that workers’ rights have a generally positive effect on the growth of output per hour worked. They maintain that all the basic determinants of productivity growth (e.g., pace of innovation in technology, rate of growth of the capital-labor ratio, development of human capital) depend crucially on the cooperation and effective participation of workers. The reason is that workers hold the key to the success of the production process (they carry it out!), so they are in a unique position to contribute improvements in technology and work organization that increase labor productivity. When will they cooperate the most? When they feel that they have a secure stake in the longrun success of the company they work for; and when they feel that they are treated fairly and trust that their employer will continue to treat them fairly in the future. How is this feeling on the workers’ part accomplished? By guaranteeing workers’ rights, including collective bargaining, and by implementing measures with a view to reducing workers’ vulnerability against job losses. The result, Buchele and Christiansen argue, is that strengthening workers’ rights encourages labormanagement cooperation and workers’ active involvement in improving productivity and product quality. Also studying the effect of wages on labor motivation, Bowles et al. (1983) documented the existence of a positive relationship between wages and productivity. These empirical findings are very much in line with the work of Bewley (1999), who, during 1990–91, interviewed 336 managers, labor leaders, and employment counselors mainly in Connecticut (US), on the subject of why, when unemployed workers are available, firms do not cut wages until the excess supply is eliminated.1 The answer from the interviews was one that conventional theory had not considered, namely, that the most important factor preventing nominal wage cuts was the psychological factor of morale.2 Good morale among a firm’s workforce has a positive effect on the firm’s profits, on the one hand, by increasing workers’ productivity, effort, creativity, and cooperativeness, and, on the other, by reducing absenteeism and turnover. Likewise, well-motivated employees tend to provide good customer service. Workers would perceive a cut in nominal wages as a hostile act.3 In a widely cited article about unemployment in Europe, Bean (1994) dismissed many clichés about unemployment there. For example, he argued that continued.

95 Labor Markets in a Globalizing World Box 3.6 Labor Market Regulations in Industrial Countries (cont’d.)

the hypothesis that unemployment results from unionization was rather unconvincing; that US salaries do not decline much in response to unemployment; that the welfare state was not a source of unemployment; and that the evidence available did not show that the existence of generous unemployment benefits was the cause of persistent unemployment. Nickel (1997, 1998) argued that higher unemployment in Europe than in the US is often attributed to more rigid labor institutions in the former (i.e., the NAIRU arguments summarized above). He regressed unemployment rates on wage-push variables such as unemployment benefits, employment protection measures, union density, level of collective bargaining and coverage of bargaining, the “tax wedge,” and the active labor market policy in a cross-country regression. He concluded that measures of labor market rigidity do not have any impact on total employment, although protection tends to lower short-term unemployment as expected. Nickel and Layard (2000) argue that labor market institutions such as unions and social security systems are important drivers of economic performance with strict labor market regulations, and that employment protection and minimum wages play a lesser role. Stockhammer (2004) has rejected the idea that unemployment in Europe is the result of rigid labor markets, contending that changes in labor market institutions are unable to explain the rise in unemployment (see also Howell 2005). According to him, the main reason is the decline in capital accumulation: employment growth is determined by demand growth and the path of growth is set by investment decisions. 1 2 3

There would seem to be is no reason why his findings should be restricted to a small US state. Bewley also indicated that the economic theories he wanted to discuss seemed ridiculously naïve to those he was interviewing. Edralin (2001) indicates, in the context of the Philippines, that a majority of management and labor groups are in favor of what is known as the “social clause,” which refers to the incorporation of various social provisions in labor relations. These provisions include freedom of association and the right to organize. Reasons cited in favor of this clause are: to enhance and improve the quality and productivity of workers; to boost benefits for better competition; and to serve as guide or protection for both union and management. Edralin also stresses that, despite the general agreement about the benefits of a social clause, a number of industries have found it very difficult to comply with such standards, and emphasizes the inflexibility of institutions in relation to workers’ benefits, despite the benefits brought about by globalization. She argues that firms can very well be willing to provide such rights and protection to workers, provided that the costs of doing so are not too prohibitive and that the productivity of workers is improved.

96 Jesus Felipe and Rana Hasan

3.5.2

Labor Market Policies in Asia: An Overview

Providing a detailed account and discussion of the labor regulations and policies of all Asian countries is well beyond the scope of this chapter. One problem is the large number of countries. Another one, perhaps more subtle, is that it is very difficult to make an “unbiased” evaluation of these policies. Freeman’s (1993) discussion (summarized above) of the different positions with respect to the role of labor market interventions (epitomized in the almost diametrically opposed positions of the World Bank and the ILO), indicates that while for some economists these have negative consequences, for others, they are necessary to protect workers. Thus, while minimum wages, for example, represent a clear distortion for some economists, for others they play an important role in terms of reducing inequalities. Some indication of the extent to which labor markets in Asia and elsewhere are regulated may be provided by the number of ILO conventions signed by countries.23 Information on ratified ILO conventions is provided in Figure 3.3. It shows that by 1980, the European and some Latin American countries had already ratified most of these conventions. Bangladesh, India, and Pakistan had also signed substantially more conventions than other Asian countries (but still fewer than the European and Latin American countries). Fewer conventions had been signed by Sri Lanka, Philippines, and Singapore. At the bottom were countries like Thailand, Malaysia, and Indonesia.

Figure 3.3 ILO Conventions Ratified, 1980 and 2000 ILO Conventions (2000)

ILO Conventions (1980) Europe Latin America Argentina Brazil Chile Japan Mexico Developing Asia Bangladesh China, People’s Rep. of India Indonesia Korea, Rep. of Malaysia Pakistan Philippines Singapore Sri Lanka Thailand Viet Nam

Europe Latin America Argentina Brazil Chile Japan Mexico Developing Asia Bangladesh China, People’s Rep. of India Indonesia Malaysia Pakistan Philippines Singapore Sri Lanka Thailand 0

20

40

Source: Hasan (2003).

60

80

0

20

40

60

80

97 Labor Markets in a Globalizing World

Some researchers have treated a higher number of ILO conventions ratified as an indicator of more restrictive and inflexible labor markets. One could ask: Is the number of ILO conventions ratified a good proxy for the distortion of the labor market? It is difficult to say. First, not all conventions may be equally relevant to the issue of labor market flexibility and rigidity. Second, even if a convention is ratified, the degree to which it is enforced is uncertain, since the ILO does not have power of enforcement. Instead, it relies on moral suasion and voluntary compliance. Conversely, nonratification does not imply that a country is failing to comply with the spirit of a convention (see the discussion in Forteza and Rama 2001 and Hasan 2003). Perhaps more crucially, using the number of ILO conventions ratified as a regressor in a regression exercise (probably a reduced form without a solid theory supporting it), however statistically significant, would not prove that signing them leads to lower growth or bad labor market outcomes. This is because there might be another variable not specified in the regression causing the seemingly significant relationship. Moreover, European countries have succeeded in delivering optimal labor market outcomes in terms of equity and efficiency and yet have signed most of these conventions. Something similar happens with the use of the Botero et al. (2003) data set on employment policies for 85 countries as of 1997. They codified data on employment laws (that govern individual employment contracts), industrial and collective relations laws (that regulate the bargaining), and social security laws (that govern the social response to needs and conditions that have a significant impact on the quality of life, e.g., unemployment, maternity leave, and pay). They also generated measures of worker protection. In essence, for each policy in each country, Botero et al. have identified the government regulation of each specific area, and assigned a higher score when a regulation is seemingly more protective to workers.24 Some of the information contained in this data set is now briefly summarized. First, a quick and general snapshot of the Asian countries is given, and the scores compared with those of other regions of the world. Table 3.3 provides regional summaries for Asia, industrial countries, Latin America, and Africa of the scores of 22 variables selected. The scores are of two types. Some variables are dummies, i.e., 1, 0; the others are continuous. For the dummy variables, the regional summary statistic used is the mode, while for the continuous variables it is the average. One can ask the following question: Is Asia different from the other three regions in terms of labor market policies? The response falls under three heads. (i)

Employment Laws. Asia is clearly not different. In the case of the dummy variables, the mode is the same as in at least two other regions (i.e., one of the other three regions is the different one). In the case of the averages, a cursory look at the data indicates that Asia does not stand out. For example, it has

Table 3.3 Regional Scores

Variablea

Variable Description

Asiab

Industrial Countries c

Latin Americad

Africae

Employment Laws Equals 1 if a part-time worker working half the time of a full-time worker enjoys at least half of the benefits enjoyed by the full-time worker. The variable is also equal to 1 if part-time employment is prohibited by the labor laws. The variable equals 0 if part-time workers are not entitled to: (i) at least half of the maximum hours of work, leaves, and overtime premiums; (ii) social security coverage (pensions, health, unemployment); or (iii) if there are entitlement thresholds of more than half of the legally mandated regular work week for premiums, leave, or social security coverage. In countries where there are minimum-earnings thresholds to obtain benefits (rather than time-based thresholds), the analysis is done considering a salary equal to half of the country’s gross national product per worker.

1

1

1

1

It is not easier or less costly to terminate part-time workers than full-time workers (no. 2)

Equals 1 if part-time workers working half time enjoy at least half of the legal rights to advance notice and separation fees for the termination of the employment contract of full-time workers. Equals 0 otherwise.

1

1

1

1

Fixed-term contracts are only allowed for fixedterm tasks (no. 3)

The term “fixed-term contract” refers to workers employed for fixed periods of weeks, months, or years. In many countries a person working for 2 or 3 days per week is considered a fixed-term, rather than a part-time, worker. This variable equals 1 if fixed-term contracts are allowed only: (i) for jobs that are temporary by nature; (ii) for temporary vacancies to replace a permanent worker in maternity or sickness leave; (iii) for training contracts; (iv) for seasonal work; and/or (v) if the law expressly states that the will of the parties involved in the contract is not a good enough reason for entering into a fixed-term contract. Equals 0 otherwise.

0

0

0

0

continued.

98 Jesus Felipe and Rana Hasan

Part-time workers are not exempt from the mandatory benefits of full-time workers (no. 1)

Table 3.3 Regional Scores (cont’d.) Measures the maximum cumulative duration of fixed-term contracts. The variable 0.30 is normalized from 0 to 1, where higher values mean a lower allowed duration of fixed-term contracts (higher protection). If there is no legally mandated ceiling or if fixed-term contracts can be renewed without limit, the variable equals zero. The highest observation in the sample is 96 months and the lowest observation is 0.

0.27

0.24

0.37

Days of annual leave with pay in manufacturing (no. 5)

Measures the length of annual paid leave in manufacturing after 20 years of employment. If annual leave entails less than full pay, the number of days are discounted proportionally. The highest observation in the sample is 30 days and the lowest is 0.

14.19

19.1

21.46

19.13

Paid mandatory holidays (no. 6)

Measures the number of mandatory paid holidays in a year. If only half a day is granted for particular holidays, each is counted as 0.5 days and is rounded off to the nearest whole. The highest observation in the sample is 18 and the lowest is 0.

10.00

7.43

10.23

8.87

Maximum number of hours per week (no. 7)

Measures the maximum duration of the regular work week (excluding overtime). The highest observation in the sample is 52 hours and the lowest observation is 37 hours.

45.25

40.81

46.15

44.47

Measures the cost of increasing the number of hours worked. The starting point 0.23 is calculating the “maximum number of hours of work in a year before overtime” per year in each country (excluding overtime, vacations, holidays, etc.). Normal hours range from 1,758 in Denmark to 2,418 in Kenya. Then it is assumed that firms need to increase the hours worked by their employees from 1,758 to 2,418 hours during 1 year. A firm first increases the number of hours worked until it reaches the country’s maximum normal hours of work, and then uses overtime. If existing employees are not allowed to increase the hours worked to 2,418 hours in a year, perhaps because overtime is capped, it is assumed that the firm doubles its workforce and each worker is paid for 1,758 hours, doubling the wage bill of the firm. The cost of increasing hours worked is computed as the ratio of the final wage bill to the initial one.

0.67

0.24

0.32

Cost of increasing hours worked (no. 8)

continued.

99 Labor Markets in a Globalizing World

Maximum duration of fixed-term contracts (no. 4)

Table 3.3 Regional Scores (cont’d.)

Variable a

Variable Description

Industrial Latin Asia b C o u n t r i e s c America d A f r i c a e 10.20

11.29

4.20

0.38

0.50

0.42

0

0

0

0

0

0

0

0

Measures the amount of mandatory severance payment for the dismissal of one redundant worker in manufacturing after 3 years of employment. The variable is expressed in weeks of pay. For countries that code their legally mandated severance pay in days or months of pay, it is changed into weeks, assuming 7 days per week and 4.3 weeks per month.

Cost of firing workers (no. 10)

Measures the cost of firing 20% of the firm’s workers (10% are made redundant 0.54 and 10% are fired without cause). The cost of firing a worker is calculated as the sum of the notice period, severance pay, and any mandatory penalties established by law or mandatory collective agreements for a worker with 3 years of tenure with the firm. If dismissal is illegal, the cost of firing is set as equal to the annual wage. The new wage bill incorporates the normal wage of the remaining workers and the cost of firing workers. The cost of firing workers is computed as the ratio of the new wage bill to the old one.

The employer needs the approval of a third party prior to a collective dismissal (no. 11)

Equals 1 if, by law or mandatory collective agreement, the employer needs the approval of a third party (labor union, workers’ council, or government agency) prior to a collective (more than one worker) dismissal. Equals 0 if the employer may dismiss more than one worker without third party approval, or if the employer may contract out of the prohibition.

The employer needs the approval of a third party to dismiss one redundant worker (no. 12)

Equals 1 if, by law or mandatory collective agreement, the employer needs the approval of a third party (labor union, workers’ council, or government agency) to dismiss a redundant worker. Equals 0 if the employer may dismiss a worker without the approval of a third party, or if the employer may contract out of the prohibition.

continued.

100 Jesus Felipe and Rana Hasan

3.71

Legally mandated severance payment (redundancy) (no. 9)

Table 3.3 Regional Scores (cont’d.)

Collective Relations Laws Labor Union Power Measures the protection of the right to form labor unions in the country’s constitution. Equals 1 if a right to form labor unions is expressly granted by the constitution. Equals 0.67 if labor unions are described as a matter of public policy or public interest (or mentioned within the chapter on rights). Equals 0.33 if labor unions are otherwise mentioned in the constitution. Equals 0 otherwise.

0

0

1

1

Right to collective bargaining (no. 14)

Measures the protection of the right to collective bargaining or the right to enter into collective labor contracts in the country’s constitution. Equals 1 if a right to collective bargaining is expressly granted by the constitution. Equals 0.67 if collective bargaining is described as a matter of public policy or public interest (or mentioned within the chapter on rights). Equals 0.33 if collective bargaining is otherwise mentioned in the constitution. Equals 0 otherwise.

0

0

1

0

Employers have the legal duty to bargain with unions (no. 15)

Equals 1 if employers have the legal duty to bargain and/or to reach an agreement with unions, workers’ councils, or other organizations of workers. Equals 0 if employers may lawfully refuse to bargain with workers. The variable only measures the duty to bargain, as opposed to the duty to bargain in good faith.

1

1

1

1

Workers’ councils are mandated by law (no. 16)

Equals 1 if workers’ councils, committees, or equivalent bodies are mandated by law. Equals 0 if workers’ councils are not regulated by law or if their creation is voluntary for the employer. Workers’ councils are institutions of employers and workers created for the discussion of company policies affecting workers at the company level. This arrangement is sometimes called the “Swedish” model. The employer still has the sole right to decide on the operations of the company, but must negotiate and decide all matters affecting workers within the framework of workers’ councils.

1

1

0

0

continued.

101 Labor Markets in a Globalizing World

Right to unionization (no. 13)

Table 3.3 Regional Scores (cont’d.)

Variable a

Variable Description

Industrial Latin Asia b C o u n t r i e s c America d A f r i c a e

Collective Disputes 0

0

1

0

A strike is not illegal Equals 1 if a strike is not illegal even if there is a collective agreement in force, even if there is a collective and 0 otherwise. agreement in force (no. 18)

1

0

0

0

Compulsory third party arbitration during a labor dispute is mandated by law (no. 19)

Equals 1 if the parties to a labor dispute are legally required to seek third-party arbitration or the government is always entitled to impose compulsory arbitration on them. Equals 0 otherwise. The term “compulsory arbitration” refers to arbitration of private disputes against the will of the parties. It may protect workers by granting them an alternative to costly strikes in case of deadlocks in the negotiation process, but it may also limit workers’ right to strike.

1

0

1

1

Employers are not allowed to fire or replace striking workers (no. 20)

Equals 1 if the law prohibits employers from firing striking workers or from hiring replacement labor to maintain the plant in operation during a nonviolent and nonpolitical strike. Equals 0 otherwise.

1

1

1

1

continued.

102 Jesus Felipe and Rana Hasan

Equals 1 if wildcat strikes are legal, and 0 otherwise. Wildcat strikes are strikes not authorized by the labor union or the assembly of workers.

Wildcat strikes are legal (no. 17)

Table 3.3 Regional Scores (cont’d.)

Civil Rights Mandatory minimum wage (no. 21)

1

0

1

1

0.21

0.42

0.21

0.20

Political Variable Union density (no. 22)

a b

c d e

Source:

Measures the percentage of the total workforce affiliated to labor unions in 1997. Sources: ILO (n.d., LABORSTA), and World Bank (2001).

Values of 1 or 0 represents the mode; otherwise, the value represents the average. Comprises People’s Republic of China; Hong Kong, China; India; Indonesia; Kazakhstan; Republic of Korea; Kyrgyz Republic; Malaysia; Pakistan Philippines; Singapore; Sri Lanka; Taipei,China; Thailand; and Viet Nam. Comprises Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, and United States. Comprises Argentina, Bolivia, Brazil, Chile, Columbia, Dominican Republic, Ecuador, Jamaica, Mexico, Panama, Peru, Uruguay, and Venezuela. Comprises Burkina Faso, Ghana, Kenya, Madagascar, Malawi, Mali, Mozambique, Nigeria, Senegal, South Africa, United Republic of Tanzania, Tunisia, Uganda, Zambia, and Zimbabwe. Authors’ computations based on Botero et al. (2003).

103 Labor Markets in a Globalizing World

Equals 1 if: (i) there is a mandatory minimum wage defined by statute; or (ii) there is a minimum wage established by mandatory (administratively extended) collective agreement, which is legally binding for most sectors of the economy. Ignored are variations in the minimum wage laws stemming from: (i) reduced or subminimum rates for youth, apprentices, students, and disabled employees; (ii) adjustments for regional costs of living; (iii) exemptions for public employees and those serving in the armed forces; (iv) experience and marital status of the employee; and (v) specific exemptions for certain groups. The variable equals 0 otherwise. The coding of this variable follows the principles laid down in the classification of minimum wages by OECD (1998).

104 Jesus Felipe and Rana Hasan

fewer days of annual leave with pay in manufacturing (no. 5); the number of paid mandatory holidays (no. 6) is slightly higher than in the industrial countries and Africa, but the same as in Latin America; the cost of increasing hours worked (no. 8) is similar in the three developing regions, and substantially lower than in the industrial countries; legally mandated severance pay (no. 9) is substantially higher than in the industrial countries and Africa, but about the same as in Latin America; finally, the cost of firing workers (no. 10) is also higher in Asia than in the industrial countries and Africa, and about the same as in Latin America. It seems, therefore, that there could be two areas where Asia may be labeled as different, in the sense of having a restrictive legal system that may affect the creation of employment. These are legally mandated severance pay and the cost of firing workers. In the latter, all Asian economies bear a high cost (except for Hong Kong, China). (ii) Collective Bargaining Laws. Once again, the overall Asian picture is not altogether different from that of the rest of the world. In this case, all scores displayed are modes. In Asia, workers’ councils (no. 16) are mandated by law, the same as in the industrial countries. Also, laws in Asia do not allow sympathy, solidarity, or secondary strikes, though they are allowed in the other three regions. However, Asia is the only one of the four regions where a strike is not illegal even if there is a collective agreement in force (no. 18). This is the only industrial relations aspect where Asia seems to be different and which may affect employment creation. (iii) Civil and Political Rights. Most Asian countries have mandatory minimum wages (no. 21), the same as the other two developing regions. Only Hong Kong, China; Malaysia; and Singapore do not have mandatory minimum wages. The industrial countries are split on this issue. Asia has the same union density (proportion of workers affiliated, no. 22) as the other two developing regions, and about half that of the industrial countries.

105 Labor Markets in a Globalizing World

Tables 3.4 and 3.5 provide the individual scores on worker protection for 15 Asian economies. Table 3.4 shows the score for selected East Asian and Southeast Asian economies, and Table 3.5 for selected South Asian and transition economies. The most salient features of these two tables are as follows. (i)

(ii)

Employment Laws. In most countries, part-time workers are not exempt from mandatory benefits (no. 1). The exception is Sri Lanka. Likewise, it is not easier or less costly in most countries to terminate part-time workers than full time workers (no. 2). Here the exceptions are Indonesia and Sri Lanka. Malaysia has the maximum duration of fixed-term contracts (no. 4), followed by India, Kyrgyz Republic, Singapore, and Korea. The economies with the highest number of days of annual leave with pay in manufacturing (no. 5) are Korea and Taipei,China with 28 and 24 days, respectively. India has far fewer, at 15. In terms of paid mandatory holidays (no. 6), Pakistan, Sri Lanka, and Thailand with 13 days, are the highest. India pays only 5 days. With regard to the cost of increasing hours worked (no. 8), the highest-cost countries are Indonesia, Kazakhstan, and Kyrgyz Republic. As for legally mandated severance pay (no. 9), two countries are far ahead of the rest, namely, Indonesia and Thailand with 25 days. Firing workers (no. 10) costs the least in Hong Kong, China and in Malaysia. For the rest, the cost is substantially higher. Finally, regarding the need for the approval of a third party prior to a collective dismissal or to dismiss one redundant worker (nos. 11 and 12), except for Indonesia and the Philippines, the East Asian and Southeast Asian economies do not require it. In the case of South Asia, India and Sri Lanka require third-party approval while Pakistan does not. Collective Relations Laws. These are split into two subgroups, labor union power (nos. 13–16) and collective disputes (nos. 17–20). Great dispersion is observed in the four variables of labor union power. In two countries all four measures take on a value of 1 (interpreted in the data set as pro-worker legislation), i.e., Kazakhstan and Korea; and in four countries three of the four variables are 1, i.e., Kyrgyz Republic, Philippines, Thailand, and Viet Nam. The three South Asian countries (India, Pakistan, and Sri Lanka) do not seem to have the most restrictive policies according to these variables (only one or two of these policies are required). Regarding collective disputes, there is also variation across countries. For

Table 3.4 Worker Protection, Selected East Asian and Southeast Asian Economies

Variable

Hong Kong, China

The employer needs the approval of a third party to dismiss one redundant worker (no. 12)

0

Korea, Rep. of

Taipei, China

Malaysia

Thailand

Philippines

Indonesia

1

1

1

1

1

1

1

1

1

1

1

1

1

0

1

0

0

0

0

0

0

0.63 14

0.63 28

0.00 24

0.88 16

0 6

0 5

0 10

11 44 0.14 12.90

12 44 0.19 12.80

10 48 0.09 12.90

10 48 0.06 2.14

13 48 0.03 25.70

12 48 0.01 12.90

12 40 0.42 25.80

0.60 0

0.62 0

0.61 0

0.19 0

0.63 0

0.57 1

0.68 1

0

0

0

0

0

1

1

continued.

106 Jesus Felipe and Rana Hasan

Employment Laws Part-time workers are not exempt from mandatory 1 benefits of full-time workers (no. 1) It is not easier or less costly to terminate 1 part-time workers than full-time workers (no. 2) Fixed-term contracts are only allowed for fixed0 term tasks (no. 3) Maximum duration of fixed-term contracts (no. 4) 0 Days of annual leave with pay in manufacturing 10 (no. 5) Paid mandatory holidays (no. 6) 11 Maximum number of hours per week (no. 7) 48 Cost of increasing hours worked (no. 8) 0.00 Legally mandated severance payment 8.60 (redundancy) (no. 9) Cost of firing workers (no. 10) 0.18 The employer needs the approval of a third party 0 prior to a collective dismissal (no. 11)

Singapore

Table 3.4 Worker Protection, Selected East Asian and Southeast Asian Economies (cont’d.) Collective Relations Laws

Collective Disputes Wildcat strikes are legal (no. 17) A strike is not illegal even if there is a collective agreement in force (no. 18) Compulsory third-party arbitration during a labor dispute is mandated by law (no. 19) Employers are not allowed to fire or replace striking workers (no. 20) Civil Rights Mandatory minimum wage (no. 21)

0 0

1 1

0 1

0 0

1 1

1 1

0 0

1 0

1 1

0 1

0 0

1 0

1 0

1 0

1

1

0

0

0

0

1

1

1

1

0

0

1

1

0

1

0

1

1

1

1

0

1

1

0

1

1

1

1

1

1

1

0

0

1

1

0

1

1

1

0.22

0.24

0.14

0.35

0.10

0.10

0.12

0.01

Political Variable Union density (no. 22)

Source:

Botero et al. (2003).

107 Labor Markets in a Globalizing World

Labor Union Power Right to unionization (no. 13) 1 Right to collective bargaining (no. 14) 0 Employers have the legal duty to bargain with unions (no. 15) 0 Workers’ councils are mandated by law (no. 16) 0

Table 3.5 Worker Protection, Selected South Asian and Transition Economies

Variable

Collective Relations Laws Labor Union Power Right to unionization (no. 13)

Sri Lanka

1

1

0

1

1

1

1

1

1

0

1

1

1

1

0

1

0

0

1

0

0

0.75

0.00

0.00

0.00

0.38

0.00

0.75

15

14

10

6

12

15

20

5 48 0.07 6.43

13 48 0.13 0.00

13 45 0.03 0.00

7 40 0.20 12.90

5 48 0.03 12.90

8 41 1.00 8.60

10 40 1.00 4.30

0.62 1

0.49 0

0.48 1

0.60 0

0.62 1

0.61 1

0.57 0

1

0

1

0

1

1

0

0

0

1

0

1

1

1

India

Viet Nam

Kazakhstan

Kyrgyz Republic

continued.

108 Jesus Felipe and Rana Hasan

Employment Laws Part-time workers are not exempt from mandatory benefits of full-time workers (no. 1) It is not easier or less costly to terminate part-time workers than full-time workers (no. 2) Fixed-term contracts are only allowed for fixed-term tasks (no. 3) Maximum duration of fixed-term contracts (no. 4) Days of annual leave with pay in manufacturing (no. 5) Paid mandatory holidays (no. 6) Maximum number of hours per week (no. 7) Cost of increasing hours worked (no. 8) Legally mandated severance payment (redundancy) (no. 9) Cost of firing workers (no. 10) The employer needs the approval of a third party prior to a collective dismissal (no. 11) The employer needs the approval of a third party to dismiss one redundant worker (no. 12)

Pakistan

China, People’s Rep. of

Table 3.5 Worker Protection, Selected South Asian and Transition Economies (cont’d.)

Pakistan

Sri Lanka

0 0

0 1

0 0

0 0

0 1

1 1

0 1

1

1

1

1

1

1

1

Wildcat strikes are legal (no. 17)

1

0

1

0

1

0

0

A strike is not illegal even if there is a collective agreement in force (no. 18)

1

0

0

0

1

1

1

Compulsory third party arbitration during a labor dispute is mandated by law (no. 19)

0

1

1

1

1

1

0

Employers are not allowed to fire or replace striking workers (no. 20)

1

1

1

1

1

1

1

1

1

1

1

1

1

1

0.03

0.10

0.70

0.14

0.50

—

—

Variable Right to collective bargaining (no. 14) Employers have the legal duty to bargain with unions (no. 15) Workers’ councils are mandated by law (no. 16)

Viet Nam

Kazakhstan

Kyrgyz Republic

Collective Disputes

Civil Rights Mandatory minimum wage (no. 21) Political Variable Union density (no. 22)

— = data not available. Source: Botero et al. (2003).

109 Labor Markets in a Globalizing World

India

China, People’s Rep. of

110 Jesus Felipe and Rana Hasan

example, three countries have a 1 in all four variables, i.e., Indonesia, Singapore, and Viet Nam; the Philippines and Sri Lanka have the same labor market policies regarding collective disputes; and what is legal in Hong Kong, China (nos. 17 and 18) is illegal in Korea and Taipei,China; and vice versa. (iii) Minimum Wages and Union Density. As noted above, minimum wages (no. 21) are mandatory everywhere except in Hong Kong, China; Malaysia; and Singapore. Sri Lanka and Viet Nam have the highest union density (no. 22), while India and Indonesia have the lowest. Among the East Asian economies, Taipei,China has the highest union density. This brief analysis of the Botero et al. (2003) data set leads to a series of conclusions. First, it appears to be extremely difficult to make generalizations about labor market policies. Some countries with different experiences in terms of labor outcomes seem to have similar labor market policies; and vice versa, some countries which on paper are perceived as similar, have different labor market policies. Second, it would seem that some labor market practices impose restrictions on and impediments to the creation of employment. These should be removed. But this does not mean, as stressed above, that overwhelming labor market reform is needed. Indeed, discussions about labor market policies often single out egregious regulations to argue that regulating labor is detrimental to economic performance. Though the analysis may be showing correctly that excessive severance payments or dismissal criteria impair firms’ ability to adjust in a recession, the policy implications are often exaggerated and taken as a call for broad-based labor market deregulation. This is seen, for example, in Heckman and Pagés (2004, p. 88), who conclude their survey of labor markets in Latin America by stating that “further labor reforms offer the promise of promoting both efficiency and equity.” The conclusion to this subsection is that the question of whether labor market policies constrain employment growth calls for detailed country analysis with a view to identifying the particular labor market policy or policies (minimum wages, hiring and firing restrictions, unemployment benefits, etc.) that are the source of controversy and, ultimately, constrain employment generation. What governments have to do is to address these policies.

3.6 Growth, Productivity, Employment, and the Role of Technology Defenders and detractors of globalization disagree on the effects on globalization. While the former group claims that globalization has positive effects on society at large, the latter group emphasizes the negative effects.

111 Labor Markets in a Globalizing World

For the first group, globalization has brought a series of worldwide benefits, mostly through trade and finance. To name a few: (i) openness to foreign direct investment can contribute to growth by increasing the available amount of investment resources; (ii) openness to capital flows may increase opportunities for portfolio risk diversification and consumption smoothing through borrowing and lending; (iii) increased access to the domestic financial system by foreign banks may raise the efficiency of the intermediation process between savers and borrowers, thereby lowering mark-up rates in the banking system; (iv) financial openness helps mitigate asymmetric information problems and can improve the opportunities for the poor to access the formal financial system; and (v) openness to trade leads to static and dynamic gains. Likewise, openness to trade facilitates the transmission of ideas. Overall, empirical evidence seems to suggest that countries that have opened themselves the most to trade during the last two decades have grown on average the fastest, though it is less clear on the benefits associated with financial integration. Despite the benefits of globalization via trade and financial integration, even most of its defenders are beginning to recognize and accept that the process of globalization entails both significant risks as well as potentially large economic and social costs that might last for quite some time. For example, openness to global capital markets has brought greater volatility to domestic financial markets. Large reversals in short-term capital flows have led to several financial crises and to sharp increases in unemployment and poverty in the short run. Likewise, trade liberalization has, in some countries, led to reduced demand for unskilled labor and lower real wages in the short term. Since developing countries often suffer from a low degree of intersectoral labor mobility, job losses and declines in income have led to higher poverty rates among affected groups. A key question is whether, as firms become more productive they need fewer workers. This question has no straightforward answer.25 In simple terms, detractors of globalization argue that, for a given rate of output growth, if productivity increases as a consequence of technological progress, then employment must go down. Indeed, in these circumstances, more rapid productivity growth will diminish the growth of employment and compound the unemployment problem. The argument is that as the workforce becomes more efficient, fewer workers will be needed. Globalization’s defenders though, on the other side of the debate, contend that this argument does not consider what happens after productivity improves and allows the economy to expand and create new jobs. The standard mechanism enabling real per capita demand to rise in market economies has been growth in real wages in line with productivity increases. In very simple terms, these arguments can be put as follows. As a matter of definition, one can think of output (Y) as the product of employment (L) times labor productivity (y), i.e., Y = L x y. This means that a given level of output can be achieved either with high productivity and low employment, or with

112 Jesus Felipe and Rana Hasan

low productivity and high employment. In the former case, the employment intensity of economic growth is said to be low, and in the latter, high. This also means that the growth rate of employment can be written as the difference between the growth rate of output and that of labor productivity, i.e., Lˆ = Yˆ − yˆ . As noted above, the problems in the eyes of globalization’s detractors is that a given rate of output growth can potentially lead to lower employment growth as productivity increases. From the point of view of the capital intensity of the techniques used, if labor is the more abundant factor of production in developing countries, one would expect to observe the use of more labor-intensive techniques of production in the industry sector there. This simply reflects the lower price of labor relative to capital. In practice, however, for the same output produced, the capital intensity of techniques is often not very different in industrial and developing countries, and the capital-labor ratio often differs between them in the aggregate only to the extent that the composition of output differs. This is because developing countries have sectors where the capital-labor ratio is very low, as in, for example, subsistence farming and petty services activities. In reality, the modern sector in developing countries is not much different from that in industrial countries in terms of capital intensity. The problem is that given the supply of labor available, and given the rate of investment, the more capital intensive the techniques, the less employment will be required. Hence, unemployment will be the result of the use of “inappropriate” techniques. Five main factors account for the relative capital intensity of modern sector techniques in developing countries. First, for a large number of commodities, there is very little capital-labor substitutability in their production; hence the manufacturing technology does not vary much between industrial and developing countries. Second, the market price of factors of production in developing countries often fails to reflect relative abundance. This is due to the existence of distortions in the form of, for example, subsidies to capital, and to the encouragement of high wages in the modern sector. The cheaper that capital is made relative to labor, the more capital-intensive the technique will be. Developing country governments appear to believe that labor-intensive techniques lead to a lower output because of the relative inefficiency of the production methods used and higher wage bill. Indeed, there is a potential conflict between employment and output because methods that employ low capital-labor ratios (i.e., labor-intensive techniques) may involve high capitaloutput ratios (i.e., low capital productivity).26 However, there is little evidence that techniques with a low capital-labor ratio have higher capital-output ratios than capital-intensive techniques. The empirical evidence gathered by Pack (1974) indicates that this is not true in general (i.e., that there is no conflict between the employment and output objectives). Techniques can be more labor intensive without affecting the level of output.

113 Labor Markets in a Globalizing World

Third, although money wages may be lower in developing countries, unit labor costs or efficiency wages (i.e., the wage rate divided by labor productivity) may differ little; in these circumstances, it is profitable to use a relatively capital-intensive technique. Fourth, capital intensity may be the result of a skill constraint. Typically, labor-intensive techniques require skilled labor, and capital-intensive techniques semiskilled labor, such that in developing countries, frequently short of skilled workers, capital may substitute for skills. Fifth and finally, perhaps the most important factor is that the techniques of production are frequently imported from industrial countries, and these techniques tend to be labor saving. This simply reflects the fact that technological progress in industrial countries saves on labor (since labor is the relatively expensive factor of production).27 This is also, then, a case of inappropriate technology. What does the empirical evidence reveal with regard to the relationship between output, productivity, and employment growth in Asia? First, employment elasticities have been estimated (i.e., percentage increase in employment associated with a 1 percentage point increase in GDP growth) by country. They are shown in Table 3.6. These elasticities have two important features. The first is that they are relatively low, at about 0.5 and below, reflecting relatively low employment-intensive growth. Interpreted from the point of view of Verdoorn’s law, this provides evidence of increasing returns to scale.28 These figures imply that an economy growing at about 7% (like many economies in Asia) and with an employment elasticity of 0.25, experiences average annual employment growth of about 1.75% and average annual productivity growth of 5.25%. The second feature is that the elasticities of the 1990s are lower than those of the 1980s, except for Pakistan, Philippines, and Singapore. It is worth noting the case of the PRC. In the 1980s, it took a 3% growth rate of output to induce a 1% increase in employment. By the 1990s, however, it took more than twice as much growth—about 7.8%, to achieve the same result. These elasticities are largely consistent with the regional estimates provided by Kapsos (2006, this volume; Tables 4.8 and 4.9) for the 1990s. For East Asia, his estimates are below 0.2; for Southeast Asia and the Pacific they range between 0.2 and 0.4; and for South Asia the range is 0.35 to 0.5. In the case of East Asia, he argues that the level of these elasticities, combined with high GDP growth rates, implies that the region has experienced robust growth of productivity (where productivity is measured by real GDP per worker). Kapsos also shows how employment growth, output growth, productivity growth, and employment elasticity are related theoretically. In countries with positive GDP growth and with an employment elasticity of between 0 and 1, employment growth and productivity growth are necessarily positive. For this reason, the relationship between employment and productivity growth across selected Asian countries is also examined. Figure 3.4 displays the scatter plots of the two variables for 11 DMCs in 1980–1989 and 1990–2000. The second

114 Jesus Felipe and Rana Hasan Table 3.6 Employment Elasticities Economy

1980s

1990s

Bangladesh China, People’s Rep. of Indonesia India Korea, Rep. of Malaysia Pakistan Philippines Singapore Thailand Taipei,China

0.550 0.330 0.435 0.384 0.223 0.683 0.406 0.535 0.375 0.315 0.242

0.495 0.129 0.379 0.312 0.225 0.406 0.553 0.731 0.711 0.193 0.139

Source:

Authors’ estimates.

period corresponds to an era in which Asia’s economies probably felt the forces of globalization, technological change, and competitiveness in a bigger way. The two graphs reveal several interesting features. First, with only one exception (the Philippines in 1980–1989), both employment growth and productivity growth have been positive. Second, employment growth displays less variation than growth in labor productivity, especially in 1980–1989. Finally, as indicated by the negative slope of the relationship, employment growth has tended to be slower in countries with higher productivity growth. This finding is consistent with the one that, while technological change raises productivity, it can have an adverse impact on employment growth. One interpretation of the above evidence is that increasing returns to scale and technological progress have produced an adverse combination. Indeed, a faster rate of technical change (if it does not lead to faster output growth) may actually lead to increasing unemployment. In these circumstances, faster output growth does not require a proportionate growth of employment (the situation is such that the growth of output is too low to absorb all the growth in the labor force).29 Even if wages do rise as productivity increases, such productivity increases may not necessarily lead to higher output and employment (see next section). The relationship between employment growth and productivity growth in terms of annual growth rates for each country has also been examined. Once gain, employment growth and productivity growth are both positive for the vast majority of cases (country-year observations). (Scatter plots for individual countries are given in Appendix 3.3.) There is also much less variation in employment growth than there is in output and productivity growth in each of the countries examined (Table 3.7).30 Moreover, in looking at these graphs, it is worth repeating that while countries in the region have managed to achieve

115 Labor Markets in a Globalizing World

Figure 3.4 Employment Growth and Real GDP per Worker Growth 1990–2000 7

6

6

Employment Growth

Employment Growth

1980–1989 7

5 4 3 2

5 4 3 2 1 0

1 -2

-1

0

1

2

3

4

5

6

Real GDP per Worker Growth

7

8

-2

-1

0

1

2

3

4

5

6

7

8

Real GDP per Worker Growth

Sources: Authors’ estimates based on Penn World Tables, Heston et al. (2002).

substantial annual productivity growth rates of as high as 10%, the employment growth rates are significantly lower. Finally, regression analysis indicates that, to the extent that the relationship between employment growth and productivity growth has changed across the two decades (in a statistically significant sense), it has often changed in the direction of lowering the elasticity of employment growth with respect to productivity growth.

3.7 Wage-Led Employment It is machinery that has impoverished India. By reproducing Manchester in India we shall keep our money at the price of our blood. –Gandhi

It was argued above that increasing returns to scale and technological progress may be responsible for the labor market outcomes described previously. Indeed, a faster rate of technological change may actually lead to increasing unemployment. The reason is that faster growth of output does not require proportionate growth of employment; or, put in different terms, the growth of output is too low to absorb all of the growth in the labor force. The situation described in the previous paragraph originated with the Luddite movement and David Ricardo. Toward the beginning of the nineteenth century, Ricardo argued that the opinion prevailing in “the labouring class, that the employment of machinery is frequently detrimental to their interests,

Table 3.7 Growth in Real GDP, Real GDP per Worker, and Employment Real GDP Growth

Bangladesh

Employment Growth

1990–2000

1980–1989

1990–2000

1980–1989

1990–2000

Mean Variance

Mean Variance

Mean Variance

Mean Variance

Mean Variance

Mean Variance

5.0

8.1

4.9

1.6

China, People’s Rep of

6.7

India

6.1

2.3

8.4

4.4

35.3

2.7

0.1

0.7

29.3

24.4

8.8

1.5

5.8

8.1

4.1

22.9

7.6

7.5

2.5

0.0

1.2

0.1

5.0

3.7

1.4

3.7

5.3

2.3

0.0

2.0

0.1 0.2

Indonesia

5.9

5.2

4.7

28.3

3.4

5.0

2.6

29.6

2.4

0.0

2.1

Korea, Rep. of

8.8

4.8

6.3

27.6

6.7

5.8

4.9

28.2

2

0.3

1.3

0.2

Malaysia

5.5

12.7

7.2

7.9

2.1

11.8

5.8

42.9

3.4

0.1

1.5

20.4

Pakistan

7.5

1.7

3.9

2.0

4.5

1.5

1.8

4.6

2.9

0.0

2.1

1.8

Philippines

1.6

22

3.3

7.7

-1.1

20.5

0.3

13.6

2.8

0.1

3.0

2.1 4.9

Singapore

6.8

23.1

9.2

14.5

4

16

3.1

26.9

2.6

3.5

6.1

Thailand

7.3

10.0

5.3

38.4

5.0

9.8

4.1

33.6

2.2

0.0

1.2

0.5

Taipei,China

8.3

8.9

6.5

1.0

6.1

10.9

5.4

1.2

2.1

0.3

1.0

0.0

Source:

Authors’ estimates based on Penn World Table, Heston et al. (2002).

116 Jesus Felipe and Rana Hasan

Economy

Real GDP per Worker Growth

1980–1989

117 Labor Markets in a Globalizing World

is not founded on prejudice and error, but is conformable to the correct principles of political economy” (1981, p. 392).31 Most contemporary and subsequent economists have disagreed with this view. We do not intend to take an open position on the issue. We believe, however, that the arguments are useful to help explain the reality of many countries, in particular developing economies.32 To understand how this can happen, one has to think of the labor market in terms different from those of standard neoclassical models.33 Luddite arguments can be valid if an economy with less than full employment is wage led, that is, if following an exogenous increase in the real wage or in the labor share, consumer demand increases and so does overall demand. However, if the corresponding reduction in the capital share results in a reduction in investment that dominates the increase in consumption, the economy is said to be profit led. A wage-led employment regime is defined as an “institutional structure within which an exogenous wage increase induces an increase in employment […] under a wage-led aggregate demand regime an exogenous increase in the real wage increases the level of aggregate demand” (Bowles and Boyer 1995, p. 145). The converse regimes are referred to as profit-led employment and profit-led aggregate demand, respectively. A necessary condition for a wage-led employment regime is that the aggregate demand regime be wage led. To explain what this concept means, we follow Bowles and Boyer (1995). The market clearing condition is D(w,h)=I(w,h)–S(w,h)=0, where D denotes excess aggregate demand, I is investment, and S is savings, all three written as functions of the wage rate (w) and employment (h). It represents loci in combinations of w and h which satisfy the macroeconomic equilibrium condition of market clearing. It is assumed that

dI dI = Iw < 0 , = Ih > 0 , dw dh

dS dS = Sw < 0 and = Sh > 0 . The effect of a wage change on employment is dw dh

obtained by totally differentiating the market clearing condition, that is, dh D S −I = − w = w w . A wage-led aggregate demand regime requires that dh > 0 dw Dh Ih − Sh dw

(i.e., demand function positively sloped).33 Given the assumption that (Ih − Sh ) < 0 , that is , that savings respond more to the employment level than does investment, and hence an increase in employment will reduce excess demand, the requirement for a wage-led regime is that (Sw − Iw ) < 0 , that is, a wage increase reduces savings more than it reduces investment. This will lead to an increase in aggregate demand and employment. Given appropriate savings and investment functions, empirically, an economy will be wage led if (sr − sw ) > ir , where sr is the savings propensity out of profits, sw is the savings

118 Jesus Felipe and Rana Hasan

propensity out of wages, and ir is the effect on investment of a change in the profit rate, holding the employment rate constant.34 The dotted lines in Figure 3.5 indicate the effects of a wage increase from w to w’. The investment function is drawn flatter than the savings function, implying that at employment levels above the equilibrium level indicated by D(h,w)=0, there is excess supply, leading to cutback in employment. The arrows in the lower part of the figure indicate the out of equilibrium adjustment of the employment level. To the right of D(h,w)=0, excess supply exists, and firms hire fewer workers, reducing employment h. On the other hand, to the left of D(h,w)=0, there is excess demand for goods and firms expand employment. It is therefore clear that, in a wage-led regime, an increase in the wage rate from w to w’ shifts the investment and savings functions, leading to an increase in employment from h* to h’. From a policy perspective, there are two types of wage-led prescriptions (Bowles and Boyer 1995, p.145). First, wage-led employment strategies focus on the likely positive effects of the wage on aggregate demand and employment. These will be seen if income distribution affects the demand for consumer goods; or, put another way, if a larger wage share supports a higher level of demand for consumer goods. On the other hand, proponents of wage-led productivity growth strategies advocate wage increases as a means of sustaining a higher level of output per unit of input. But if productivity growth is strongly wage led, it is unlikely that wage increases will lead to the creation of employment. In fact, a frequently heard objection to productivity-enhancing strategies is that if they are successful, they will lead to reductions in employment. These are the strategies that labor unions and many labor advocacy groups fear and oppose.35 Wage-led growth occurs when the impact of profits on investment is negligible; in this instance, an increase in the wage share will lead to an increase in the equilibrium capacity utilization rate, which will lead to a faster growth rate in the capital stock and to an increase in output growth. Wage-led growth occurs because the increase in consumption demand that is derived from the increase in the labor share has a positive feedback effect on investment through raising the capacity utilization rate. On the assumption that investment is not too sensitive to profits, there is no dampening effect through changes in profitability from the labor share increase (Foley and Michl 1999, Chapter 10). An important question to tackle is that of how wage-led economies react to productivity improvements (see Taylor 1996). In the short run, higher productivity is unlikely to lead immediately to real wage increases, especially in the context of open unemployment. The likely result will probably be the elimination of jobs and, consequently, total wage payments will decline. Then consumer demand will decline too. Eventually, investment and new capacity formation will also fall. The increase in productivity will eventually lead to

119 Labor Markets in a Globalizing World

Figure 3.5 The Aggregate Demand for Labor Function: The Wage-Led Case S.I

S(h,w) S(h,w’) A

I(h,w) I(h,w’)

B

h*

h’ D(h,w)=o

Wage Rate (w) w’

B’

Excess Supply w

A’ Excess Demand

h* Source:

h’

Employment (h)

Bowles and Boyer (1995).

increases in wages (though smaller than the increases in productivity), leading to a new position with lower unit labor costs (from ulcA to ulcB on the downwardly shifted cost curve in Figure 3.6). This, in turn, will most likely cause aggregate demand to drop.36 This will eventually lead to reductions in capacity utilization (from CUA to CUB) and the employment rate (from ERA to ERB). The result is that, in general, wage-led economies are not well prepared to absorb technological change. Therefore, what needs to be considered, then, is whether the unemployment that potentially results in a wage-led economy as a result of increases in productivity is a sufficient reason to prevent or control the diffusion of labor-saving techniques (Dutt 1984, Taylor 1991).37

120 Jesus Felipe and Rana Hasan

Figure 3.6 Effects of Faster Productivity Growth when Effective Demand is Wage-Led Unit Labor Cost (ulc) Demand

Cost ulc

A

A

B

ulc B

CU

ER

B

CU

A

Capacity Utilization (CU)

B

B

1

ER A

1

A

Employment Rate (ER) Source:

Taylor (1996).

As noted above, wage-led economies are not well equipped to absorb technical progress. The consequence is that in these economies, productivity increases lead to unemployment. The demand curve in Figure 3.6 shows capacity utilization increasing as a function of unit labor costs. In the lower part of the figure, the employment rate is an increasing function of capacity utilization. The cost schedules represent the supply side of the system. These curves slope upward because wages typically rise with output over the medium term. Starting

121 Labor Markets in a Globalizing World

at the combination (A, A’), assume there is a speed-up in productivity growth. This will shift downward the cost schedule, which will cause aggregate demand to drop. The wage share (unit labor cost), rate of capacity utilization, and employment rate will decrease (B, B’). This indicates that a wage-led economy is not well prepared to absorb technical change. To have a complete picture of how the economy reacts to increases in productivity, one has to analyze how the economy evolves in the long run and so see what happens to the growth rate of the capital stock in the new equilibrium. To this end, assume that investment in this wage-led economy responds negatively but weakly to higher unit labor costs (labor share) and positively to capacity utilization. In these circumstances, the lower capacity utilization effect dominates the higher investment effect due to lower unit labor costs (higher capital share). Hence, the overall result is a reduction in capital and output growth, and consequently in employment. This line of reasoning leads to the conclusion that, in a wage-led economy, the Luddite arguments also apply in the long run, a problem that is magnified in the context of globalization, where labor-saving technological advances are constantly being applied. The implication is that in the wage-led economy, arguments in favor of limiting labor-saving technological progress would seem to make sense. The problem with this conclusion is that it presents an interesting paradox, namely, that growth in real wages and per capita incomes are impossible without productivity gains, themselves the result of technological change. The key question for developing countries, therefore, is not how to impede productivity gains, but how to translate them into higher real wages and aggregate demand. (see Felipe and Hasan 2006, this volume).38

122 Jesus Felipe and Rana Hasan

Appendixes Appendix 3.1 Some Theoretical and Empirical Problems with the Neoclassical Analysis of the Labor Market

Section 3.2 discussed the income allocation function of a well-functioning labor market and referred to the question of fairness. It was argued that the survival of the firm requires that labor productivity be larger than the real wage rate. In the classical and neoclassical models, the idea of fairness, that is, that workers are paid according to their productivity, is presented in terms of the equality of the wage rate and marginal productivity. In this model, a profit-maximizing firm sets its marginal revenue equal to its marginal cost of production. If a firm hires labor in a perfectly competitive labor market, a certain money wage ( w ) must be paid to each extra worker hired. The additional cost of hiring an extra unit of labor (ΔL) will be wΔL. The extra revenue generated by an additional worker is the extra output produced (ΔQ) multiplied by the output price (P), that is, PΔQ. It pays for a profitmaximizing firm to hire labor as long as wΔL
123 Labor Markets in a Globalizing World estimated is an approximation to the income accounting identity that relates the value of output to that of the wage bill plus total profits. This identity determines a priori the negative relationship between employment and the wage rate. The notion of labor supply is also problematic. Long ago, Joan Robinson put it as follows: “The orthodox conception of wages tending to the marginal disutility of labour, which has its origins in the picture of a peasant farmer leaning on his hoe in the evening and deciding whether the extra product of another hour’s work will repay the extra backache, is projected into the modern labour market, where the individual worker has no opportunity to decide anything except whether it is better to work or starve” (Robinson 1942, pp.2–3; italics in the original). Reviving this view, Keen (2001, pp.124–5) has argued that: “The vision of a worker deciding how many hours to work on the basis of his/her preferences between income and leisure, and offering more labour as the wage rate rises is, like so much else of economic theory, superficially appealing. But […] how can one enjoy leisure time without income?” In real life, most leisure activities cost money, hence how can one enjoy leisure time without income? Blanchflower and Oswald (1994) have introduced the notion of a “wage curve,” namely, a negative empirical relationship between the wage and unemployment rates, where causality is thought to run from the unemployment level to the wage level. That is, all else being equal, higher unemployment is associated with lower wages, not higher. Empirical support for the wage curve comes from the analysis of random samples of data on individual workers in many countries. The implication is that employees who work in areas of high unemployment earn less, other things being equal, than those who are surrounded by low unemployment. The elasticity of the wage rate with respect to unemployment is estimated at about –0.1. This is a robust finding across countries, and it is also present within nations across different periods of time. The important observation is that in standard economic analysis, wages and unemployment are positively associated. The authors argue that the wage curve is an equilibrium locus of wages and unemployment rates that replaces the market level labor supply function. These findings lead the authors to argue that the standard competitive demand–supply framework is the wrong way to think about the labor market. It is important to emphasize that the wage curve is not the same as the Phillips curve. The latter links aggregate unemployment to the rate of change in the wage rate. The wage curve, on the other hand, links regional unemployment to the level of the wage rate. The Phillips curve is a disequilibrium dynamic model estimated on time-series macroeconomic data, while the wage curve is an equilibrium model estimated on cross-section microeconomic data. Finally, Thurow (1975, pp. 211–30) has argued that it is difficult to use the marginal productivity theory of factor pricing i.e., the neoclassical model, at the empirical level. The reason is that the theory could exist at different levels. As indicated above, a conclusion of this theory is that a profit-maximizing firm should hire labor up the point where the marginal product of labor equals the real wage rate. But what does this mean and how does one test it? Does it mean that if the real wage rate is above the marginal product then labor is “expensive”? Thurow argues that “In its most rigorous form, marginal productivity states that each individual factor of production is paid his, her, or its marginal product at each instant in time. From this

124 Jesus Felipe and Rana Hasan position there exists a continuum of possibilities where individual factors are paid their marginal products but only over longer periods of time. At the other end of this continuum, factors are paid their marginal products, but only over the course of their entire lifetimes” (Thurow 1975, p. 212). He concludes: “Fortunately or unfortunately, each reader is going to have to construct his or her own marginalproductivity model. […] As long as marginal productivity is left as a general amorphous theory, it can neither be used nor criticized” (Thurow 1975, p. 230). Appendix 3.2 Unit Labor Costs and Competitiveness

The most commonly held approach to international competitiveness focuses on differences in unit labor costs (ulcs).39 Unit labor costs are defined as the cost of worker compensation and benefits per unit of output. Algebraically, ulcs are defined as the ratio of the nominal wage rate (e.g., $ per worker) to labor productivity, where the latter is defined as the “quantity” of output produced per worker (e.g., bushels of corn per worker). At any level of aggregation, however, the quantity of output (a physical magnitude) has to be proxied by deflated value added. Therefore, it becomes (Felipe 2004a): ⎛w L⎞ wn = ⎜ n ⎟P (1) (VAn / P ) / L ⎝ VAn ⎠ where wn denotes the nominal wage rate, L is employment (e.g., number of workers), VAn is nominal value added, and P is the output deflator. (wnL/VAn) can be referred to as the “pure ulc effect,” and P is the “price adjustment effect.” At the most intuitive level, ulcs are used as a measure of competitiveness because wages are a major component of costs and hence of prices. But costs will be reduced if for any given money wage the level of productivity is higher. The standard argument is that the lower the ulc the more competitive the economy is. Unit labor costs are an important variable for policymaking. In the standard interpretation, if the ulc of a country grows faster than that of its competitor(s), this will reduce market shares at home and abroad, negatively affect economic growth, and increase unemployment. A concern with expression (1) for purposes of intercountry comparisons is how to translate the costs calculated for individual countries into comparable or common currency units. The most common method is to multiply country i’s local currency ulci by its current nominal exchange rate against the numeraire currency, usually the US dollar (XR—expressed in terms of units of the country’s currency per dollar). There is also a problem with output (or productivity) since it is also measured in terms of each country’s currency. Therefore, a meaningful comparison of ulcs requires the conversion of both wages (numerator) and output (denominator) into a common currency (e.g., US dollars). There is an added issue, however, if one converts output (value added) into dollars using market exchange rates. This is the wellknown problem that it is not unusual for the price of a particular good to differ substantially across countries when translated into common currency units at market exchange rates. Notice that this problem arises because aggregate output is not a physical quantity, but a value magnitude, however deflated. One proposal to deal with this problem has been the use of purchasing power parities (PPP). A PPP exchange ulc =

125 Labor Markets in a Globalizing World rate is the ratio of the local currency price of a particular basket of goods in two different countries, e.g., the number of pesos it takes to buy a hamburger in the Philippines relative to the number of dollars it takes to buy a hamburger in the United States. Suppose the ulc in expression (1) is adjusted by the market exchange rate in the numerator and by the PPP exchange rate in the denominator. This way, the ulc becomes: ⎛ w L ⎞ ⎛ PPP ⎞ (wn / XR ) =⎜ n ⎟ ⎜ ⎟ (2) (VAn / PPP ) / L ⎝ VAn ⎠ ⎝ XR ⎠ where, once again, (wnL/VAn) is the “pure ulc effect,” and xr=PPP/XR is the “price adjustment effect.” How does a firm (country) try to maintain a low ulc? This issue can be analyzed by looking at the elements of expressions (1) or (2): ulc =

(i) first, by keeping nominal wages (wn) as low as possible; (ii) second, by increasing labor productivity (VA/L), where VA=VAn/P in expression (1), and VA=(VAn/PPP) in expression (2). There are four mechanisms to achieve this. First, by increasing physical investment, that is, by increasing capital deepening (the capital-labor ratio). This has a triple effect: (a) each worker becomes more productive with a higher amount of capital; (b) the introduction of machines that bring in more up-to-date production technologies raises labor productivity; and (c) technological progress often destroys employment, at least in the short run. The second mechanism is investment in human capital (e.g., training). The third mechanism to increase labor productivity is through institutional factors such as change in work rules, i.e., the way labor is organized to operate the equipment, and by improving the rules and regulations governing competition. The final mechanism used by firms to increase labor productivity is to increase the unpaid labor time. This happens often in developing countries due to lax implementation of labor laws; and (iii) third, in terms of equation (2), through nominal devaluations of the exchange rate (XR). At the firm level nothing can be done in this area. At the national level, however, authorities can manipulate their exchange rates and intervene in the foreign exchange market. For all practical purposes, firms (countries) try to keep down ulcs through a combination of all these mechanisms. Nominal wages (wn) and labor productivity (VA/L) tend to move together since the latter is the most important determinant of the former; the question is which one does it faster. In this context, the key concern is how gains in labor productivity are passed on to wages in the labor-capital bargaining process. One important implication of this brief discussion is that correctly calculating ulcs is a difficult task for it requires good and comparable statistics across countries. Moreover, often, in empirical applications, researchers do not discuss clearly and openly how ulcs are calculated.

126 Jesus Felipe and Rana Hasan It will be appreciated that the expression s L ≡ (wn L / VAn ) , what we called the “pure ulc effect,” is nothing but the labor share in output, given that VAn = wn L + rn K , which implies that ulc = s L P in the case of expression (1) and ulc = s L xr in the case of expression (2). This point has three important implications. First, competitiveness, measured or interpreted in terms of unit labor costs, is not just a “technical” concept. This is because it embeds the factors that affect the functional distribution of income between the social classes, labor and capital. Second, if the ulc is decreasing (and thus the economy is considered be becoming more competitive), it means, all else being equal, that the labor share sL is decreasing, and thus the capital share in output must be increasing (since both factor shares add up to one). This consideration has profound implications for understanding growth in an economy, the policy implications of ulcs, and discussions about competitiveness. Third, it can be argued that the analysis of competitiveness could be equally carried out in terms of what could be defined as the unit capital cost (ukc), defined as the ratio of the nominal profit rate to capital productivity, i.e., ⎛r K⎞ rn =⎜ n ⎟ P (3) (VAn / P ) / K ⎝ VAn ⎠ where rn is the nominal ex-post profit rate and K is the stock of capital. As above, ukc =

s K ≡ (rn K / VAn ) is the capital share in output and thus, ukc=sKP (and similarly, ukc=sKxr). And it is easy to see that ulc+ukc=P (and ulc+ukc=xr in the case of equation (2)). Using a parallel argument to the one above with unit labor costs, the lower the ukc the more competitive the economy will be. Effectively, this means that the lower the capital share the more competitive the economy. The notion of ukc shifts the burden of competitiveness on to capital, i.e., to become more competitive, capitalists have to accept lower profit rates or increase the productivity of the capital invested. Can both unit costs decrease simultaneously? The answer is yes, but to understand how this can happen, one has to look at equations (1) and (3). Given that sK=(1–sL), the two “pure” unit cost effects must move in opposite directions (i.e., one increases as the other one decreases). The “price effect,” on the other hand, is the same. Given this, if both ulc and ukc are decreasing, it must be because the “price effect” is decreasing faster than the “pure effect” (i.e., factor share) that is increasing. But since most often prices increase, this implies that it will be unlikely to see both ulc and ukc simultaneously decreasing. The left-hand side of the Appendix Figure 3.2.1 shows the estimates of unit labor and capital costs for the Philippines for 1980–2003, both calculated with the own GDP deflator (P), that is, calculated as ulc=sLP and ukc=sKP. The labor share is shown in Appendix Figure 3.2.2 (together with those of Indonesia, Malaysia and Thailand). These labor shares incorporate the income of unincorporated enterprises (a large part of which is self-employment), typically shown under profits (surplus in the national accounts terminology), as part of the wage bill. This is because in developing countries, it is known that most of this income is really wages. The unadjusted labor shares of these countries, computed by dividing wage payments to GDP from the national accounts, are only about 30% (hence the capital share is

127 Labor Markets in a Globalizing World 70%). Computed with the adjustment, the labor shares (i.e., ulcs) are not significantly different from those of developed countries. It is worth mentioning that, except in Indonesia, labor shares show a downward trend. Appendix Figure 3.2.1 indicates that that both ulc and ukc have increased substantially. What is interesting to note is the source of this increase. If the labor share of the Philippines has decreased, the increase in the unit labor unit cost must be exclusively the result of the increase in the price deflator. On the other hand, the increase in the unit capital cost is due to the interaction of the increase in the capital share (one minus the labor share) and the increase in the deflator. The right-hand side of Appendix Figure 3.2.1 shows the Philippine ulc and ukc calculated with the ratio of the PPP to the nominal exchange rate, that is, ulc=sLxr and ukc=sKxr. Unit capital costs display a slight increase. These results are induced by the relative constancy of xr. This brief analysis indicates that the outcome of the discussion of unit labor (and capital) costs depends on the manner in which they have been computed, which can lead to very different conclusions.

Appendix Figure 3.2.1 Unit Labor Costs and Unit Capital Costs With GDP Deflator

With PPP and Nominal Exchange Rate

0.8

0.35

0.7

0.30

0.6

0.25

0.5

0.30

0.4 0.15

0.3

0.10

0.2

0.05

0.1

0.00

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Unit Labor Costs Unit Capital Costs Source: Felipe (2004).

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Unit Labor Costs Unit Capital Costs

128 Jesus Felipe and Rana Hasan

Appendix Figure 3.2.2 Labor Income Shares to GDP Malaysia

Indonesia 1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0 1980 1983 1986 1989 1992 1995 1998 2001

0.0 19601964 19681972 1976 19801984 19881992 1996 2000 Labor Share

Labor Share

Thailand

Philippines 1.0

1.0

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0.0 1980 1983 1986 1989 1992 1995 1998 2001

0.0

Labor Share Source:

Authors' calculations.

1980 1983 1986 1989 1992 1995 1998 2001 Labor Share

129 Labor Markets in a Globalizing World

Appendix 3.3 Employment Growth and Real per Worker Growth Bangladesh, 1980-1989

Bangladesh, 1990–2000 5

0 -5

0

5

10

15

20

25

-5 -10 -15 -20

Employment Growth

Employment Growth

5

0 0

5

20

-20 Real GDP per Worker Growth

People’s Republic of China, 1980–1989 3.0

People’s Republic of China, 1990–2000 3.0

Employment Growth

Employment Growth

2.5

1.5 1.0

2.0 1.5 1.0

0.5

0.5

0.0 -10

25

-15

Real GDP per Worker Growth

2.0

-5

0.0 0

5

10

-10

15

-5

Real GDP per Worker Growth

0

5

10

15

Real GDP per Worker Growth

India, 1980–1989

India, 1990–2000

3.0

3.0

2.5

2.5 Employment Growth

Employment Growth

15

-10

2.5

2.0 1.5 1.0

2.0 1.5 1.0

0.5

0.5

0.0 -2

10

-5

0.0 0

2

4

6

Real GDP per Worker Growth

8

-2

0

2

4

6

Real GDP per Worker Growth

8

130 Jesus Felipe and Rana Hasan

Appendix 3.3 Employment Growth and Real per Worker Growth (cont'd.) Indonesia, 1980-1989

Indonesia, 1990–2000 3.0

3.0

2.5 Employment Growth

Employment Growth

2.5 2.0 1.5 1.0

2.0 1.5 1.0

0.5

0.5

0.0 -15

-10

-5

0.0 5

0

-15

10

-10

Real GDP per Worker Growth

-5

3.0 2.5 Employment Growth

Employment Growth

2.5 2.0 1.5 1.0

2.0 1.5 1.0

0.5

0.5

0.0 0

-5

0.0 5

10

-15

15

-10

Real GDP per Worker Growth Malaysia, 1980–1989

10

15

-6 -8 -10 -12

20

25

Employment Growth

Employment Growth

5

5

10

-5

0 -2 0

5

10

15

20

-4 -6 -8 -10 -12 -14

-14 Real GDP per Worker Growth

15

Malaysia, 1990–2000

2

-4

0

8 6 4 2

4 0 -2 0

-5

Real GDP per Worker Growth

6

-5

10

Rep. of Korea, 1990–2000

Rep. of Korea, 1980–1989 3.0

-10

5

0

Real GDP per Worker Growth

Real GDP per Worker Growth

25

131 Labor Markets in a Globalizing World

Appendix 3.3 Employment Growth and Real per Worker Growth (cont'd.) Pakistan, 1980-1989 4.5

Pakistan, 1990–2000 4.5 4.0 3.5

Employment Growth

Employment Growth

4.0 3.5 3.0 2.5 2.0 1.5 1.0

3.0 2.5 2.0 1.5 1.0

0.5

0.5

0.0 -4

-2

0.0 -2 -0.5 0

-4

-0.5 0

2

4

6

2

Real GDP per Worker Growth

5

Employment Growth

Employment Growth

4

3 2 1

3 2 1

0 -4

-2

0 0

2

4

6

8

-10

-8

-6

-4

-2

-1

0

2

4

6

8

10

12

-1

Real GDP per Worker Growth

Real GDP per Worker Growth

Singapore, 1980–1989

Singapore, 1990–2000 10

8

8

Employment Growth

10

Employment Growth

8

Philippines, 1990–2000

4

-6

6

Real GDP per Worker Growth

Philippines, 1980–1989 5

-10 -8

4

8

6 4 2

6 4 2

0

-6

-4

-2

0

2

4

6

8

-2

10

12

0 -6

-4

0

-2

2

4

6

8

-2 Real GDP per Worker Growth

Real GDP per Worker Growth

132 Jesus Felipe and Rana Hasan

Appendix 3.3 Employment Growth and Real per Worker Growth (cont'd.) Taipei,China, 1990–2000 3.0

2.5

2.5 Employment Growth

Employment Growth

Taipei,China, 1980-1989 3.0

2.0 1.5 1.0 0.5

2.0 1.5 1.0 0.5

0.0

0.0 0

2

4

6

8

10

12

0

Real GDP per Worker Growth

2

4

Employment Growth

Employment Growth

1.5 1.0 0.5 0.0 -0.5

12

2.5

2.0

-5

10

3.0

2.5

-10

8

Thailand, 1990–2000

Thailand, 1980–1989 3.0

-15

6

Real GDP per Worker Growth

0

5

10

15

2.0 1.5 1.0 0.5 0.0 -15

-10

-5

-1.0 Real GDP per Worker Growth

-0.5

0

5

-1.0 Real GDP per Worker Growth

Sources: Authors’ estimates based on Penn World Tables, Heston et al. (2002).

10

15

133 Labor Markets in a Globalizing World

Notes 1. It is worth mentioning that the Millennium Development Goals make scant reference to the importance of employment creation or to making it central to macroeconomic policy to reduce poverty. 2. These figures were provided by Richard Freeman, Harvard University (personal communication). His contribution is gratefully acknowledged. 3. The term Washington consensus was coined by John Williamson in 1989. On several occasions, he has complained that his ideas have often been misinterpreted because they have been taken to extremes (neoliberalism) that he never intended, such as capital account liberalization, monetarism, supply-side economics, or a minimal state. 4. See, for example, Felipe and Lanzona (2006, this volume) for an analysis of the failure of the Philippine economy to achieve the government’s employment targets. 5. In countries such as India or the Philippines, call centers and software development are also part of the mushrooming of jobs in the formal services sector. But these jobs, which have received much attention by the media, are all too few. For example, even a fourfold increase in the number of information technology (IT) jobs (ranging from call-center work to software development) between 2004 and 2008 in India would leave the sector accounting for only 0.8% of the labor force, as calculated from 4 million IT jobs (based on projections by NASSCOM [2002], India’s main chamber of commerce for the IT industry), divided by a projected labor force of 485 million in 2008 (based on the projection implicit in Table 2.1 of Chapter 2 in this volume). 6. A particularly stark manifestation of the latter is the finding (from income tax records) that real incomes of the top 1% of income earners increased by 50% in real terms while the real incomes of the top 1% of 1% increased by 300% during the 1990s (Banerjee and Piketty 2001). 7. Birdsall and de la Torre (2001) have proposed a program that aims to complement the Washington consensus by listing a set of reforms intended to improve income distribution and reduce poverty without reducing growth. These include: an income floor for workers and middle-class households during slumps, greater public spending on preschool, anti-tax-evasion efforts, better worker protection, rural land reform, and improvements in public health. 8. New technologies need not be skill-biased for this result to prevail. As long as the more skilled have an advantage in utilizing new technologies more effectively, they will draw a disproportionate benefit from the adoption of these technologies. 9. Certainly the discussion of what is a “fair” wage rate is beyond the scope of this chapter. Suffice to say that it is not a straightforward issue. For example, for Marx, the notion of a “fair” wage under capitalism was clearly impossible given that profits primarily came from the exploitation of labor. Taylor, on the other hand, gave to the idea of a “fair’s day work” a physiological interpretation: all the work a worker can do without injury to his health, at a pace that can be sustained throughout a working lifetime. Why a “fair day’s work” should be defined as a physiological maximum is never made clear. See Braverman (1998, p. 67).

134 Jesus Felipe and Rana Hasan 10. The relationship between wage rates and productivity is directly concerned with the distribution of income between firms and workers. The key question is how firms and workers distribute productivity gains. 11. As Freeman puts it: “Claims that labor market interventions have an adverse effect do not follow mechanically, it should be noted, from ‘pure theory.’ Distortionist analysts make selective use of economic theory. For example, those who believe that social security payroll taxes adversely affect savings and investment reject Ricardian equivalence; those who use nonwage costs to measure interventionist distortions reject the fungibility of models of compensation; those who argue that employment protection laws have efficiency costs ignore Coase’s theorem that property rights do not affect efficiency. Even distortionist criticisms of minimum wages involve more than applying optimizing calculus […] Distortionist arguments are not the final word of economic theory ” (Freeman 1993, p. 120). 12. Certainly it is true that in the context of high open unemployment and underemployment, efforts of employed workers to ensure that they are not repeatedly laid off may have negative effects on those workers who are currently unemployed, for this leads to market segmentation. However, it is important to stress the following point: unions will normally attempt to raise the costs of, for example, workers’ labor mobility (i.e., bringing in replacement workers who would be willing to work for lower wages). By imposing these higher costs of mobility on their employers, they are ultimately attempting to prevent employers from utilizing the reserve army of labor to depress their wage rates. Thus, additional workers can be hired, but not as replacements for those already employed, and not at lower wage rates. This is quite different from arguing, as many neoclassical economists do, that unions generally have the monopoly power to block the entrance of other workers into their plants. This means that the neoclassical argument whereby unions are accused of increasing the inequality of wage rates between those workers working in organized sectors and those working in unorganized sectors is trivially true. According to an alternative view, workers in the unorganized sectors are not experiencing low wages due to an excess supply of labor that has been generated by a reduction of employment within the organized sectors. On the contrary, they are experiencing low wages because they have failed to push up their wage rates. Hence, the remedy to wage differentials between the two groups is not to dismantle unions but to organize the unorganized groups (see Botwinick 1993). 13. This last point is clearly related to the question of fairness referred to above. Indeed, there is a well-known positive relationship between wage rates and firm profitability. Wages rates that are not a “fair” reflection of a firm’s ability to pay will result in poor worker morale and hence, lower productivity. Thus, even in the absence of unions, it is suggested that “rent sharing” will tend to occur within firms that earn above average profits. 14. For a critique of the efficiency wage theory, see Botwinick (1993, pp.5261). 15. In the debate over job creation, nearly everyone agrees that flexibility is a good thing. It is certainly hard to argue with flexibility if the alternative is rigidity. But in the economist’s lexicon, “flexibility” has a particular meaning: a market is flexible if short-run adjustments of prices and quantities (wages and employment) produce

135 Labor Markets in a Globalizing World a match between demand and supply. In labor markets, this means that, with full information and negligible cost, workers should move quickly and smoothly from one job to another to land the best job, while employers should hire and fire workers— again with full information and negligible cost—to maximize profits. 16. Howell (2005) offers a collection of very critical papers of mainstream arguments for structural reforms of the labor market. It is particularly critical of the empirical work presented by OECD (1994) and IMF (1999 and 2003). 17. Drawn from OECD (1997, Box 3). 18. Years after publishing the General Theory, Keynes expressed his view that public investment should take a very high share of overall investment, two thirds to three quarters. Perhaps the reason for this is that he became skeptical of the possibility of accomplishing a consistent and steady reduction of the interest rate so as to stimulate private investment. 19. It is worth noting that some efficiency wage theorists have suggested that there may be some merit to Marx’s claim that unemployment is a necessary “worker discipline device” (e.g., Shapiro and Stiglitz 1984). 20. From a Marxian perspective, Botwinick (1993) argues that “even with no change in the average or marginal productivity of labor, higher wage rates that remain within the limits of capitalist competition will merely cause the rate of growth of employment to decelerate until relative prices can adjust to accommodate the new wage rate. Thus, there is little reason to argue that competitive pressures will generally require local wage increases to be accompanied by a reduction in the actual level of employment. Indeed, when we further recognize that the ample presence of reserve capacity suggests that most firms normally do not experience diminishing returns (or a declining marginal product of labor) until they are very close to full capacity, an immediate reduction in employment and capacity utilization levels would tend to reduce profit margins, not enhance them” (Botwinick 1993, p.176, italics in the original). 21. See Mattick (1969) for a pioneering analysis of the limits of expansionary government policies from a Marxian perspective. 22. Pollin (2000) argues that Marx shares a common conclusion with proponents of the natural rate of unemployment theories. This is that they all “would agree that positive unemployment rates are the outgrowth of class struggle over the distribution of income and political power” (Pollin 2000, p. 98). Naturally, this conclusion is reached via diametrically different perspectives and models. Indeed, mass unemployment results in the Friedman/new classical view “when workers demand more than they deserve, while for Marx and Kalecki, capitalists use the weapon of unemployment to prevent workers from getting their right share” (Pollin 2000, p. 98). 23. Once a country ratifies a particular convention, it commits to make it legally binding. In this way, the number of ILO conventions ratified by a country could be a proxy for the “thickness” of its labor code (Forteza and Rama 2001). 24. The employment laws of most countries are available on line in the NATLEX database of the ILO. This chapter used secondary sources to confirm the data, including Blanpain (various years), Borch (2004), ILO (1994 and 1995), and US Social Security Administration (1999).

136 Jesus Felipe and Rana Hasan 25. On this, see also ILO (2005a, Chapter 2). 26. The capital–output ratio (K/Y) may be written as the product of the capitallabor ratio (K/L) times the unit labor requirement, i.e., the inverse of labor productivity (L/Y). It is theoretically possible that a technique with a high K/Y ratio can have a low K/L ratio. This will be the case if the technique has low productivity, i.e., a high L/Y ratio. 27. It is worth noting that as the capital-labor ratio (K/L) increases, total wage costs tend to decrease as a percentage of total costs. Indeed, denoting total costs as TC=wL+rK, where w is the wage rate, L is employment, r is the profit rate and K is the stock of capital, (wL/TC) decreases as (K/L) increases as long as the r/w ratio does not decrease by more than the increase in the K/L ratio, an unlikely event. 28. Verdoorn’s law is the hypothesis that output growth causes a faster growth of productivity. For a detailed explanation, see McCombie and Thirlwall (1994, Chapter 2). 29. Perhaps paradoxically, with constant returns to scale, the same growth of output would require faster growth of employment. 30. The variance in employment growth is quite high in two cases: Bangladesh and Malaysia over 1990–2000. This variation is, however, most likely to be a result of changes in the collection/reporting of employment data from 1991. 31. Ricardo added the chapter “On Machinery” to the third (1821) edition of his Principles of Political Economy and Taxation. 32. The neoclassical literature argues that the idea that labor-saving technological change throws people out of work is “one of the silliest ideas to ever come along in the long tradition of silly ideas in economics” (Easterly 2001, p.53) and refers to it as “the Luddite fallacy.” The argument is that “there could very well be some unemployment of workers who know only the old technology—like the original Luddites—and this unemployment will be excruciating to its victims. But workers as a whole are better off with more powerful output-producing technology available to them. Luddites confuse the shift of employment from old to new technologies with an overall decline in employment” (Easterly 2001, pp. 53–4; italics in the original). To justify this argument, Easterly refers to Solow’s (1956 and 1957) papers to argue the importance of technology and labor-saving technical progress. In our view, it is this type of argument, and not the Luddite concern, that is a fallacy, for it defies empirical evidence and history. Moreover, the appeal to Solow’s (1956) growth model as a justification is somewhat striking for there is no unemployment in this model, i.e., resources are fully utilized. In the real world, workers who lose their jobs due to mechanization or to the permanent decline of their original sectors of employment are often placed in very difficult circumstances for a large part of the rest of their working lives. This is particularly true for older, skilled workers who are often thrown into competition with younger workers who can work harder and adapt more easily to the ever-changing conditions of modern work. A more realistic picture of the impact of labor-saving technologies is that a group of workers clearly benefits from the introduction of new technologies. For these workers, wages increase significantly. But displaced workers often cannot find jobs (thus become unemployed), or if they do, it is at lower wages. The overall result is that workers as a whole might be worse off, for wage rates for this latter group of workers may not increase after the

137 Labor Markets in a Globalizing World introduction of the new technologies. And since productivity has increased fast, the labor share in value added may well decline. 33. See Roberts (2002) for a growth model that contemplates the Luddite effect. 34. A profit-led aggregate demand regime requires that

dh < 0 (i.e., demand dw

function negatively sloped). See Bowles and Boyer (1995). 35. The model can be easily extended to incorporate net exports and government borrowing into the excess aggregate demand function. See Bowles and Boyer (1995, Sections 5 and 6). 36. Bowles and Boyer (1995) show how to test whether an economy is wage led. The econometric evidence they provide is for a group of industrial countries. These seem to be profit led. The authors of this chapter do not know of similar studies for developing countries. Preliminary empirical evidence for the Philippines indicates that it is a wage-led economy. 37. This is because unit labor costs are, essentially, the share of labor in output. 38. Marx’s analysis of capitalist production argues that the actual process of increasing labor productivity normally has a number of detrimental effects on both wages and working conditions of the labor force. The primary mechanism to increase labor productivity is through mechanization (i.e., the increase in the capital-labor ratio). However, this entails two negative effects: (i) within the industry where mechanization is taking place, skill levels tend to be lowered. Along with this deskilling process, the majority of workers will gradually come to command less overall knowledge of the production process and therefore have less ability to control it (Braverman 1998); (ii) because deskilling also tends to cut down on required training time, an increasing number of workers will become more and more vulnerable to competition from the reserve army. Therefore, Marx’s argument suggests that capitalist mechanisms for raising productivity will generally tend to make the worker’s situation more and more precarious. 39. Botwinick (1993) indicates that “industries that are in the process of experiencing sharp increases in capital intensity which result in both systematic deskilling and large absolute decreases in employment via labor displacing technology can often generate serious downward pressures on wage rates” (Botwinick 1993, p. 205; italics added). 40. Some authors have tried to define the concept of competitiveness more broadly by including issues such as the country’s capacity to export (and thus gain market share). See, for example, Lall (2001).

138 Jesus Felipe and Rana Hasan

References Anant, T. C. A., R. Hasan, P. Mohapatra, R. Nagaraj, and S. K. Sasikumar. 2006. “Labor Markets in India: Issues and Perspectives.” In J. Felipe and R. Hasan, eds., Labor Markets in Asia: Issues and Perspectives. London: Palgrave Macmillan for the Asian Development Bank. Asian Development Bank. 2003. Asian Development Outlook 2003. Hong Kong, China: Oxford University Press for the Asian Development Bank. Available: http:// www.adb.org/Documents/ Books/ADO/2003/default.asp. . 2004. Key Indicators 2004: Poverty in Asia: Measurement, Estimates, and Prospects. Manila. Banerjee, A., and T. Piketty. 2001. “Are the Rich Growing Richer? Evidence from Indian Tax Data.” MIT, Cambridge, and CEPREMAP, Paris. Unpublished. Basu, K.1997. Analytical Development Economics. Cambridge: MIT Press. Bean, C. 1994. “European Unemployment: A Survey.” Journal of Economic Literature 32:573–619. Bertola, G. 1999. “Microeconomic Perspectives on Aggregate Labor Markets.” In O. Ashenfelter and D. Card, eds., Handbook of Labor Economics. Vol. 3B. Amsterdam: North-Holland Publishers. Bewley, T. F. 1999. Why Wages Don’t Fall During a Recession. Cambridge: Harvard University Press. Birdsall, N., and A. de la Torre. 2001. Washington Contentious: Economic Policies for Social Equity in Latin America. Carnegie Endowment for International Peace Press, Washington, DC. Blanchflower, D., and A. Oswald. 1994. The Wage Curve. Cambridge: MIT Press. Blanpain, R., ed. Various years. International Encyclopedia for Labour Law and Industrial Relations. Deventer, Netherlands: Kluwer. Borch, S. 2004. International Handbook on Contracts of Employment. New York: Aspen Publishers, Inc. Botero, J., S. Djankov, R. La Porta, F. Lopez de Silanes, and A. Shliefer. 2003. The Regulation of Labor. NBER Working Paper No. 9756, National Bureau of Economic Research, Cambridge. Available: http://www.nber.org/papers/w9756. Botwinick, H. 1993. Persistent Inequalities. Princeton: Princeton University Press. Bowles, S., and R. Boyer. 1995. “Wages, Aggregate Demand and Employment in an Open Economy: An Empirical Investigation.” In G. E. Epstein and H. Gintis, eds., Macroeconomic Policy After the Conservative Era. Cambridge: Cambridge University Press. Bowles, S., and H. Gintis. 1995. Escaping the Efficiency-Equity Tradeoff: ProductivityEnhancing Asset Distributions.” In G. E. Epstein and H. Gintis, eds., Macroeconomic Policy After the Conservative Era. Cambridge: Cambridge University Press. Bowles, S., D. Gordon, and T. Weisskopf. 1983. “Hearts and Minds: A Social Model of US Productivity Growth.” Brookings Papers on Economic Activity 2:381–450. Braverman, H. 1998. Labor and Monopoly Capital. 25th Anniversary ed. New York: Monthly Review Press.

139 Labor Markets in a Globalizing World Buchele, R., and J. Christiansen. 1992. “Industrial Relations and Productivity Growth: A Comparative Perspective.” International Contributions to Labor Studies 2:77– 97. . 1995. “Productivity, Real Wages and Worker Compensation Rights: A CrossNational Comparison.” Labour: Review of Labor Economics and Industrial Relations 9(3):405–22. . 1999a. “Labor Relations and Productivity Growth in Advanced Capitalists Economies.” Review of Radical Political Economics 31(1):87–110. . 1999b. “Employment and Productivity Growth in Europe and North America: The Impact of Labor Market Institutions.” International Review of Applied Economics 13(3):313–32. Deaton, A., and J. Dreze. 2002. “Poverty and Inequality in India: A Reexamination.” Economic and Political Weekly. September:3729–48. Dollar, D., and A. Kraay. 2002. “Growth Is Good for the Poor (data set).” Journal of Economic Growth 7(3):195–225. Available: http://siteresources.worldbank.org/ DECResources/DollarKraayGIGFTPDataMarch2001.xls. Dutt, A. K. 1984. “Stagnation, Income Distribution, and Monopoly Power.” Cambridge Journal of Economics 8:25–40. Easterly, W. 2001. The Elusive Quest for Growth. Cambridge: The MIT Press. Edralin, D. M. 2001. “Factors Influencing the Observance of the Core ILO Labor Standards by Manufacturing Companies.” In L. A. Lanzona Jr. Manila, ed., The Filipino Worker in a Global Economy. Philippine APEC Study Center Network and Philippine Institute of Development Studies, Manila. Fallon, P. R. 1987. The Effects of Labor Regulation Upon Industrial Employment in India. Discussion Paper 287, Development Research Department, World Bank, Washington, DC. Fallon, P. R., and R. E. Lucas. 1991. “The Impact of Changes in Job Security in India and Zimbabwe.” World Bank Economic Review 5(3):395–413. Felipe, J. 2004. Competitiveness, Income Distribution, and Growth in the Philippines: What Does the Long-Run Evidence Show? ERD Working Paper Series No. 53, Economics and Research Department, Asian Development Bank, Manila. Felipe, J., and F. M. Fisher. 2003. “Aggregation in Production Functions: What Applied Economists Should Know.” Metroeconomica 54:208–62. Felipe, J., and R. Hasan. 2006. “Policies to Achieve Full, Productive, and Decent Employment in Asia.” In J. Felipe and R. Hasan, eds., Labor Markets in Asia: Issues and Perspectives. London: Palgrave Macmillan for the Asian Development Bank. Felipe, J., and L. Lanzona. 2006. “Unemployment, Labor Laws, and Economic Policies in the Philippines.” In J. Felipe and R. Hasan, eds., Labor Markets in Asia: Issues and Perspectives. London: Palgrave Macmillan for the Asian Development Bank. Felipe, J., and J. S. L McCombie. 2006. “What Can the Labor Demand Function Tell Us about Wages and Employment? The Case of the Philippines.” Centre for Applied Macroeconomic Analysis (CAMA), Australian National University, Canberra. Fields, G. 1984. “Employment, Income Distribution, and Economic Growth in Seven Small Open Economies.” The Economic Journal 94(373):74–83.

140 Jesus Felipe and Rana Hasan . 2004. “A Guide to Multisector Labor Market Models.” Paper prepared for the World Bank Labor Market Conference, 18–19 November.Washington, DC. Foley, K. D., and T. R. Michl. 1999. Growth and Distribution. Cambridge, MA: Harvard University Press. Forteza, A., and M. Rama. 2001. Labor Market ‘Rigidity’ and the Success of Economic Reforms Across More than One Hundred Countries. World Bank Policy Research Working Paper Series No. 2521, Washington, DC. Freeman, R. 1993. “Labor Market Institutions and Policies: Help or Hindrance to Economic Development?” Paper presented at the World Bank Annual Conference on Development Economics, March 1993, Washington, DC. Hasan, R. 2003. The Impact of Trade and Labor Market Regulations on Employment and Wages: Evidence from Developing Countries.” In R. Hasan and D. Mitra, eds., The Impact of Trade on Labor: Issues, Perspectives and Experiences from Developing Asia. Amsterdam: Elsevier Science (North-Holland Publishers). Heckman, J., and C. Pagés. 2004. “Introduction.” In J. Heckman and C. Pagés, eds., Law and Employment: Lessons from Latin America and the Caribbean. National Bureau of Economic Research, Cambridge. Heston, A., R. Summers, and B. Aten. 2002. Penn World Table Version 6.1. Center for International Comparisons at the University of Pennsylvania. Howell, D. R., ed. 2005. Fighting Unemployment: The Limits of Free Market Orthodoxy. Oxford University Press. International Labour Organization. 1991a. “Employment Policies in the Economic Restructuring of Latin America and the Caribbean.” Paper presented at the Tripartite Symposium on Structural Adjustment and Employment in Latin America and the Caribbean, Geneva. . 1991b. Social Protection, Safety Nets and Structural Adjustment. Governing Body Committee on Employment. GB.2511/CE/4/5, Geneva. . 1994 and 1995. Conditions of Work Digest. Geneva. . 2004. Economic Security for a Better World. Geneva. . 2005a. World Employment Report 2004-05: Employment, Productivity and Poverty Reduction. Geneva. Available: http://www.ilo.org/public/english/ employment/strat/wer2004.htm. . 2005b. Minimum Wages Database. Available: http://www.ilo.org/ travaildatabase/servlet/minimumwages (downloaded 11 May 2005). International Monetary Fund. 1999. “Chronic Unemployment in the Euro Area: Causes and Cures.” In World Economic Outlook. Washington, DC. . 2003. “Unemployment and Labor Market Institutions: Why Reforms Pay Off.” In World Economic Outlook. Washington, DC. Kalecki, M. 1939. Essays in the Theory of Economic Fluctuations. London: Allen and Unwin. . 1943. “Political Aspects of Full Employment.” Political Quarterly 14(4): 322–1. . 1944. “Three Ways to Full Employment.” In T. Balogh, The Economics of Full Employment. Oxford: Basil Blackwell. . 1945. “Full Employment by Stimulating Private Investment?” Oxford Economic Papers March:83–92.

141 Labor Markets in a Globalizing World Kapsos, S. 2006. “The Employment Intensity of Growth: Trends and Macroeconomic Determinants.” In J. Felipe and R. Hasan, eds., Labor Markets in Asia: Issues and Perspectives. London: Palgrave Macmillan for the Asian Development Bank. Keen, S. 2001. Debunking Economics. Sydney: Pluto Press. Keynes, J. M. 1936. The General Theory of Employment, Interest and Money. London: Macmillan. Lall, S. 2001. “Competitiveness Indices and Developing Countries: An Economic Evaluation of the Global Competitiveness Report.” World Development 29(9):1501–25. Mattick, P. 1969. Marx & Keynes. The Limits to the Mixed Economy. Boston: Extending Horizon Books. McCombie, J. S. L., and A. P. Thirlwall. 1994. Economic Growth and the Balance of Payments Constraint. New York: St. Martin’s Press. Muta, H., ed. 2003. Mismatch in Labor Market: Asian Experience. Asian Productivity Organization, Tokyo. Nagaraj, R. 2004. “Fall in Organized Manufacturing Employment: A Brief Note.” Economic and Political Weekly July:3387–90. National Association of Software and Service Companies. 2002. “NASSCOMMcKinsey Report Predicts Robust Growth For Indian IT Services and IT Enabled Services Industry (press release).” 10 June. Available: http://www.nasscom.org/ artdisplay.asp?Art_id=1435. National Wages and Productivity Commission (NWPC). 2005. “Wage Statistics.” Department of Labor and Employment, Manila. Available: http:// www.nwpc.dole.gov.ph/statistic.html (downloaded April). Nickel, S. 1997. “Unemployment and Labor Market Rigidities: Europe versus North America.” Journal of Economic Perspectives 11:54–74. . 1998. “Unemployment: Questions and Some Answers.” Economic Journal 108:802–16. Nickel, S., and R. Layard. 2000. “Labor Market Institutions and Economic Performance.” In O. Ashenfelter and D. Card, eds., Handbook of Labor Economics. Amsterdam: North-Holland Publishers. Organisation for Economic Co-operation and Development (OECD). 1994. The OECD Jobs Study: Facts, Analysis, Strategies. Paris. . 1997. Implementing the OECD Jobs Strategy: Member Countries’ Experience. Paris. . 1999. Employment Outlook. Paris. Pack, H. 1974. “The Employment-Output Trade-off in LDCs: A Microeconomic Approach.” Oxford Economic Papers 26(3):388–404. Pollin, R. 2000. “The “Reserve Army of Labor” and the “Natural Rate of Unemployment.” In R. Baiman, H. Boushey, and D. Saunders, eds., Political Economy and Contemporary Capitalism. New York: M.E. Sharpe. Rama, M. 2003. “Globalization and Workers in Developing Countries.” In R. Hasan and D. Mitra, eds., The Impact of Trade on Labor: Issues, Perspectives and Experiences from Developing Asia. Amsterdam: Elsevier Science (North-Holland Publishers). Ravallion, M., and S. Chen. 2004. China’s (Uneven) Progress Against Poverty. World Bank Policy Research Working Paper No. 3408, Washington, DC.

142 Jesus Felipe and Rana Hasan Ricardo, D. 1981. “On the Principles of Political Economy and Taxation.” In P. Sraffa, ed., The Works and Correspondence of David Ricardo, 1821. 3rd ed. Cambridge: Cambridge University Press. Roberts, M. 2002. “Cumulative Causation and Unemployment.” In J. McCombie, M. Pugno, and B. Soro, eds., Productivity Growth and Economic Performance: Essays on Verdoorn’s Law. London: Palgrave Macmillan. Robinson, J. 1942. An Essay on Marxian Economics. London: Macmillan and Co. Rodrik, D. 1999. “Globalization and Labour, or: If Globalization is a Bowl of Cherries, Why are There so Many Glum Faces around the Table?” In R. E. Baldwin, D. Cohen, A. Sapir, and A. Venebles, eds., Market Integration, Regionalism and the Global Economy. New York: Cambridge University Press. Sardaña, M. C. 1998. “Globalization and Employment Relations: The Philippine Experience.” Philippine Labor Review 12(1):57–92. Shapiro, C., and J. Stiglitz. 1984. “Equilibrium Unemployment as a Worker Discipline Device.” American Economic Review 74(June):433–44. Solow, R. 1956. “A Contribution to the Theory of Economic Growth.” Quarterly Journal of Economics 70(1):26-41. . 1957. “Technical Change and the Aggregate Production Function.” Review of Economics and Statistics 39:312–20. Stockhammer, E. 2004. The Rise of Unemployment in Europe: A Keynesian Approach. Cheltenham: E. Elgar. Taylor, L. 1991. Income Distribution, Inflation, and Growth. Cambridge: MIT Press. . 1996. “Stimulating Global Employment Growth.” In J. Eatwell, ed., Global Unemployment. New York: M.E. Sharpe. Thurow, L. C. 1975. Generating Inequality. London: The Macmillan Press. United States Social Security Administration. 1999. Social Security Programs Throughout the World. Washington, DC. Available: http://www.ssa.gov.

CHAPTER 4 The Employment Intensity of Growth: Trends and Macroeconomic Determinants STEVEN KAPSOS

4.1 Introduction

E

mployment-related economic indicators, particularly those that measure the ability of economies to generate sufficient employment opportunities for their populations, often provide valuable insights into economies’ overall macroeconomic performance. Among the most widely publicized indicators along these lines are unemployment rates, employment-to-population ratios, and labor force participation rates. Another labor market indicator that, perhaps owing to its somewhat less accessible title, receives less attention in the literature is the employment intensity of growth, or elasticity of employment with respect to output.1 The most basic definition of this indicator is that it is a numerical measure of how employment varies with economic output—for instance, of how much employment growth is associated with 1 percentage point of economic growth. Though discussed less frequently than other key labor market indicators, employment elasticities can provide important information about labor markets. In their most basic use, they serve as a useful way to examine how growth in economic output and growth in employment evolve together over time. They can also provide insights into how employment generation varies for different population subsets in an economy, and assist in detecting and analyzing structural changes in employment over time.

Steven Kapsos, Employment Strategy Department, International Labour Organization.

144 Steven Kapsos

Many of the previous empirical studies of employment intensity have been limited to single country- or region-specific cases. Moreover, most of these country or regional case studies do not provide comparative breakdowns of elasticities among subsets of the population, such as women and youth. This chapter seeks to address these gaps in the literature by taking advantage of an extensive cross-country panel dataset containing total employment disaggregated by age group and gender, along with available national GDP data, to generate estimates of total, youth, male and female employment elasticities for 160 countries.2 In addition, while some studies have produced fairly comprehensive cross-country estimates of employment elasticities for single economic sectors, little work has been done to examine international trends in employment intensity across the three main economic sectors (agriculture, industry, and services) over time. In order to address this gap, this chapter utilizes a cross-country panel of employment data disaggregated by economic sector along with corresponding sector value-added data to estimate historical employment elasticities by sector for 139 countries. As a result of the extensive country coverage for both sets of elasticities, this chapter also examines global and regional historical trends in these indicators. Finally, primarily due to lags in the data, estimates of employment elasticities currently in the literature are at least several years dated, with many a decade old or more. In order to provide more recent evidence on trends in employment intensity—which is a very dynamic phenomenon—the estimates generated in this paper cover the period 1991 to 2003. The first broad objective of this chapter is to outline the data and methodological requirements for generating estimates of employment elasticities. Second, this chapter provides a picture of recent historical differences among regions with respect to their employment intensity of growth for the total employed population, the youth cohort, and by gender and economic sector. The sector elasticities are utilized to identify the extent to which structural economic change is taking place throughout the various regions of the world. The final objective is to form a better understanding of the key determinants of employment elasticities themselves. A multivariate econometric model is developed to address: (i) why countries with similar economic growth patterns often have substantial differences in their employment intensity; and (ii) why employment intensity often varies substantially within countries among different subgroups of the population. It is important to note at the outset that the trends in employment intensity presented in this paper are indicative of the response of employment in terms of quantity of employed persons to GDP growth. While this is an important macroeconomic indicator in its own right, the tools at hand are limited in that they say nothing about overall changes in the quality of jobs or growth in the number of “decent” jobs. Another caveat relates to making value judgments

145 The Employment Intensity of Growth

on employment elasticities. While differences in opinion clearly exist in terms of whether employment-intensive or productivity-intensive growth is more desirable from an economic development perspective, this paper takes as a central assumption that employment growth and productivity growth must be jointly pursued in order to maximize the potential for realizing economic development objectives such as poverty reduction (ILO 2005a). The chapter proceeds as follows: Section 4.2 outlines the data and methodology used for calculating the various employment elasticities; Section 4.3 presents world and regional aggregate elasticity figures broken down by age, gender, and economic sector; Section 4.4 presents the econometric model designed to detect some of the macroeconomic correlates of historical elasticity levels, and subsequently looks at whether these determinants vary in type or magnitude across demographic groups; Section 4.5 concludes and discusses the implications of the chapter’s findings.

4.2 Methodological Background and Data Used 4.2.1 Calculating Country Employment Elasticities The most basic definition of employment elasticity is the percentage change in the number of employed persons in an economy or region associated with a percentage change in economic output, measured by gross domestic product (GDP). Within this broad definition, two methodologies are frequently utilized for calculating elasticities. The first technique, given in equation 1 below, gives the arc elasticity of employment, εi:

§ Ei1 Ei 0 / Ei 0 · H i ¨¨ ¸¸ © Yi1 Yi 0 / Yi 0 ¹

(1)

The numerator simply gives the percentage change in employment in country i, Ei, between periods 0 and 1, while the denominator gives the corresponding percentage change in output, Yi. While this methodology is computationally very simple, Islam and Nazara (2000) and Islam (2004) have demonstrated that year-over-year employment elasticities calculated using this method tend to exhibit a great deal of instability and may therefore be inappropriate for comparative purposes. As a result, this chapter utilizes a second method, a multivariate log-linear regression model with country dummy variables, Di, interacted with log GDP for generating the point elasticity. This is given in equation 2.

146 Steven Kapsos

lnEi = D +E 1 lnYi E 2(ln Yi u Di ) E 3Di ui

(2)

In equation 2, the elasticity of employment with respect to GDP in country i is given as β1+β2. This is calculated by differentiating both sides of equation 2 and solving for ∂E ∂Y :

∂E ⎛ Y ⎞ ⎛ ∂E ⎞ ⎛ ∂Y ⎞ ⎜ ⎟ = ( β 1 + β 2)⎜ ⎟ → ⎜ ⎟ = β1 + β 2 ⎝Y ⎠ ⎝ E⎠ ∂Y ⎝ E ⎠

(3)

Using this econometric method, β 1+β 2 represents the change in employment associated with a differential change in output. Thus, an elasticity of 1 implies that every 1 percentage point of GDP growth is associated with a 1 percentage point increase in employment. An elasticity of 0.4 implies that every 1 percentage point of GDP growth is associated with employment growth of 0.4 percentage points, and so forth. In order to capture differences in the employment-output relationship among different subsets of the population, 10 separate elasticities were calculated for each country. The first four correspond to different demographic groups including the total employed, youth, females, and males. Equation 2 was used to generate these four elasticities, in which Ei represents total employment for the respective group while Yi represents total GDP.3 Employment elasticities by economic sector (agriculture, industry, and services) make up the remaining six elasticities. The first three sector elasticities were also calculated using equation 2, whereby Ei represents employment by sector and Yi represents total GDP. The last three sector elasticities were generated using equation 4: Ln Ei = DE11nVi E2lnVi x Di EDi + ui

(4)

Ei again represents employment by sector and Vi represents value added by economic sector. Thus, equations 2 and 4 were used to calculate two types of elasticities: the elasticity of employment with respect to total output, and secondly, with respect to value added in the given economic sector. As will be shown in the next section, examining these two specifications together is particularly useful for showing patterns of structural economic change, as well as for providing insights into the relationship between productivity growth and employment growth in various economic sectors. At this point, it is important to raise a cautionary note regarding the relationship between employment elasticities and labor productivity. There is a fundamental arithmetic identity that links these concepts, which is given by:

147 The Employment Intensity of Growth

Yi = Εi x Pi

(5)

where Yi and Ei are, as before, output and employment, while Pi is equal to labor productivity (output per worker). Equation 5 implies that for small changes in output, the following holds:

ΔYi = ΔΕi +ΔPi

(6)

That is, for a given amount of output growth, ΔY, any increase in the rate of employment growth must be met by an equal and opposite decrease in labor productivity growth. In the context of this chapter, the significance of this employment elasticity-productivity relationship is great: in formulating conclusions about elasticities, one must necessarily consider the productivity side of the relationship. If we divide equation 6 by output growth, ΔY, we derive the following:

ε = 1−

ΔE ΔP , where ε = ΔY ΔY

(7)

Using equation 7 with different GDP growth scenarios clarifies the relationship between employment elasticities, ε, and actual employment growth and productivity growth. A summary of this relationship is provided in Table 4.1. Table 4.1 Interpreting Employment Elasticities4 GDP Growth Employment Elasticity

Positive GDP Growth

Negative GDP Growth

ε<0

(–) employment growth (+) productivity growth

(+) employment growth (–) productivity growth

0≤ε≤1

(+) employment growth (+) productivity growth

(–) employment growth (–) productivity growth

ε>1

(+) employment growth (–) productivity growth

(–) employment growth (+) productivity growth

The cells of the table can be interpreted as follows: (i) The upper left cell shows that in countries with positive GDP growth, negative employment elasticities correspond with negative employment growth and positive productivity growth.

148 Steven Kapsos

For instance, in an economy growing at 2% per annum with an employment elasticity of -0.2, the average rate of employment growth is approximately -0.4%, while the average rate of productivity growth is 2.4%. (ii) The middle left cell shows that in economies with positive GDP growth, employment elasticities between 0 and 1 correspond with positive employment and productivity growth and higher elasticities within this range correspond to more employmentintensive (lower productivity) growth. Hence, an economy growing at 2% per annum with an employment elasticity of 0.6 is experiencing average annual employment growth of about 1.2% and average annual productivity growth of 0.8%. This cell typically represents the ideal, whereby job growth is occurring hand in hand with gains in productivity.5 (iii)The lower left cell shows that in economies with positive GDP growth, elasticities greater than 1 correspond with positive employment growth and negative productivity growth. (iv) The three cells in the right column indicate that the interpretation of employment elasticities vis-à-vis employment growth and productivity growth is exactly the opposite in cases in which the corresponding GDP growth rate is negative. 4.2.2 Shortcomings of Employment Elasticities Several shortcomings in using employment elasticities as an analytical tool should be borne in mind before attempting to draw inferences from them regarding employment performance. First, equations 2 and 4 reveal that the current methodology utilized to produce employment elasticities only takes into account information pertaining to historical employment and output growth. As a result, it is likely that the estimated employment elasticities, represented by β1 + β2 suffer from omitted variable bias, as no other variables that may influence either employment performance or overall economic performance are controlled for in this simple model. Nevertheless, the elasticities presented in this chapter do provide a clear indication of how employment and output have historically varied together over time. The results should thus be interpreted as evidence of correlation rather than of causality. Second, employment elasticities within a given country or even region can display a large degree of volatility from one period to the next. While regression techniques help “smooth” results by giving average incremental changes over time, employment elasticities can still display large fluctuations from one period to the next. Volatility in the estimates has several potential sources, including real changes in the relationship between employment growth

149 The Employment Intensity of Growth

and output growth, changes in only one of these two variables, or mere statistical “noise.” The first case is not worrisome, as it is indicative of real changes in the underlying relationship between the variables under examination. The second case applies especially in cases in which output growth is very small. Indeed, countries with GDP growth close to zero may exhibit large swings in employment elasticities arising from relatively small changes in the underlying variables. It is therefore important to keep the country or region’s relative GDP performance in mind when interpreting elasticities. Finally, the third case arises mainly due to small sample size issues. Because the elasticities calculated in this chapter are for relatively short time periods, the relatively small number of observations for each period in each country can result in statistical “noise” and thus in a lower degree of certainty in the elasticity estimates themselves. The pooled data approach taken up in equation 2 provides some relief to this problem in the form of adding additional degrees of freedom, yet it is important to note that the individual country-level elasticities presented in the chapter as point estimates do have a degree of statistical uncertainty. Lastly, there is a danger in terms of assuming that seemingly favorable trends in employment intensity are indicative of positive overall macroeconomic performance in a given country or region. While it is indeed crucial to get the employment side of the macroeconomic picture right, success in this regard by no means automatically translates into other favorable outcomes, such as poverty reduction. It is therefore important to assess trends in employment elasticities together with other important macroeconomic variables, such as trends in output growth, inequality, real wages, and poverty rates. Yet despite these significant issues and shortcomings, the sections that follow discuss in detail the very useful information that can be ascertained by examining trends in the employment intensity of growth. 4.2.3 Data Used In terms of data requirements for the present analysis, several sets of information are required to produce the various elasticities examined in this chapter. Data on employment, unemployment, and employment by sector were taken from the ILO’s Global Employment Trends (GET) database (ILO 2005b). Employment and unemployment figures contained in the database are based on the ILO Key Indicators of the Labour Market (KILM) database (ILO 2003a), while labor force estimates are derived from the ILO LABPROJ database (ILO 2003b). United Nations (UN) Population Division data (2002 revision) were used as overall population benchmarks (UN 2002). All national GDP and sector value-added figures utilized in this chapter are expressed in constant local currency units. These were taken from the World Bank’s World Development Indicators 2004 database (World Bank 2004).

150 Steven Kapsos

The time period under examination is 1991–2003, which is divided into the three periods of 1991–1995, 1995–1999, and 1999–2003. These periods were chosen because each witnessed distinct regional macroeconomic events that played large roles in shaping overall employment outcomes. The first period contains the initial transition phase following the dissolution of the former Soviet Union. The second period captures the East Asian and Mexican financial crises. The final period captures the bursting of global equities market bubbles and the sharp contraction in economic growth throughout much of the developed world, as well as the financial crises in Argentina and the Russian Federation and the economic recovery in Southeast Asia.

4.3 World and Regional Trends in Employment Elasticities 4.3.1 Previous Estimates While there have not been any previous estimates of employment elasticities with precisely the same geographic coverage and time periods as those used in this chapter, the results of several previous studies are useful for broad comparative purposes. Mourre (2004) provides estimates of economywide employment elasticities in the euro area and the United States, covering the periods 1986–1990 and 1997–2000. He finds that employment elasticity in the euro area increased from 0.4 to 0.6 while it fell from 0.6 to 0.4 in the US between the first and second periods.6 He also examines the job intensity of growth in different economic sectors and finds that the euro-area’s marketrelated services sector exhibited very high employment elasticities between 1997 and 2001, which likely contributed to the rise in the region’s overall employment elasticity. In their analysis of employment intensity in G7 economies, Padalino and Vivarelli (1997) find evidence of a “structural difference” between North America, Europe, and Japan with regard to employment elasticities, with North America historically characterized by more employment-intensive growth. Saget (2000) examines data from 11 transition economies in Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS) for the period 1989–1998. She detects three types of elasticity patterns in the region. First, in countries such as Hungary, Poland, and Slovenia, employment growth appears closely linked with GDP growth, as evidenced by relatively high employment elasticities. In the second group, including the Baltic states, the Russian Federation, and the Slovak Republic, the elasticity is much lower. In the third country group, made up of Bulgaria, Romania, and Ukraine, no statistically significant relationship between employment and GDP was detected. Saget concludes that the high share of national output in the informal economy

151 The Employment Intensity of Growth

is likely to be accountable for the weak relationship in the third group, simply because the GDP figures used were not representative of actual output. In addition, she finds that after 1994 the CEE economies had low employment elasticities, reflecting both poor employment performance and gains in productivity necessitated during the transition to a more market-oriented system. Mazumdar (2003) provides regional employment elasticities for the manufacturing sector for East Asia, the Organisation for Economic Co-operation and Development (OECD) economies, Latin America and the Caribbean (LAC), and Sub-Saharan Africa for the two time periods 1971–1980 and 1981–1992. He finds that in manufacturing, elasticities declined in each of these regions between the two periods, while the OECD and LAC countries experienced negative manufacturing employment elasticities in both periods. Padalino and Vivarelli (1997) also examine elasticities in manufacturing and found negative elasticities in all cases except Japan over the 1980–1994 period.7 While many of the historical results correspond to different time periods and different regional groupings, they can indeed provide useful background information and facilitate some comparisons with the present results. Keeping these previous results in mind, the next sections provide the details of the current estimates of global and regional employment elasticities.8 4.3.2 Global Results Table 4.2 provides global employment elasticities by age and gender along with the average annual global GDP growth rates for the three time periods under investigation.9 The aggregated figures are based on country-level elasticities that were generated using the methodologies outlined in the previous section.10 The results shown in this table shed light on global trends in employment and productivity between 1991 and 2003. First, for every 1 percentage point of additional GDP growth, total employment has grown between 0.30 and 0.38 percentage points during the three periods between 1991 and 2003. This implies Table 4.2 Global Employment Elasticities by Age Group and Gender, 1991–2003 1991–1995

1995–1999

1999–2003

Total

0.34

0.38

0.30

Youth

-0.02

0.11

0.06

Female

0.40

0.44

0.33

Male

0.30

0.34

0.29

GDP Growth (%)

2.9

3.6

3.5

Source: Author’s estimates.

152 Steven Kapsos

that around two thirds of the economic growth realized between 1991 and 2003 can be attributed to gains in productivity, while one third resulted from increased labor supply. Of the three periods, employment growth was strongest in the period from 1995 to 1999, which was also the period with the strongest global economic growth. Significantly, during the most recent period there has been a slight decline in the rate of GDP growth, coupled with a reduction in the employment intensity of growth. In terms of differences in global elasticities along demographic lines, the figures show that the youth cohort (aged 15–24) has experienced low and stagnant employment elasticities. This has important implications: taking the most recent historical youth employment elasticity of 0.06 along with the forecast average annual growth rate in the world’s youth labor force of 0.5% per between 2003 and 2015 (ILO 2004b), a quick calculation reveals that global GDP growth of around 10% is required just to generate enough jobs to maintain constant youth unemployment. Thus, the very low youth employment elasticity indicates that the employment intensity of economic growth for the world’s youth population is insufficient and that in order to avoid a substantial increase in the number of unemployed youth, economies will need to develop plans for translating economic growth into employment gains for their young labor force entrants.11 Another interesting demographic observation at the world level is that female employment elasticities have exceeded male elasticities in each of the three periods. As will be discussed further in the analysis of regional results, it appears that this is due in part to a convergence, or “catching up,” in terms of women’s labor force participation relative to men’s. Yet higher female elasticities could also be indicative of greater relative responsiveness of female employment to both economic growth and economic contraction, whereby women suffer more than men in terms of employment lost during economic downturns. Furthermore, given that the trends in employment intensity presented in this chapter do not provide an indication of changes in job quality, another plausible explanation is that women may tend to be engaged in lower-wage and lowerproductivity (i.e., lower-quality) jobs. Gender-based segregation of occupations is another potential explanation, whereby women may tend to work in more labor-intensive sectors than men. Table 4.3 provides a picture of historical global employment elasticities and value-added growth by economic sector. This is based on country-level results generated using equation 4. The GDP elasticity shows the percentage point change in sector-specific employment associated with a 1 percentage point change in overall GDP. The value-added elasticity gives the percentage point change in sector employment associated with a 1 percentage point change in output in the corresponding sector. These two figures taken together can be useful indicators for measuring broad historical structural economic changes.

153 The Employment Intensity of Growth Table 4.3 Global Employment Elasticities and Value-Added Growth Rates by Economic Sector, 1991–200312 Agriculture

Industry

Services

Sector GDP Elasticity

0.24

0.21

0.61

Sector Value-Added Elasticity

0.41

0.28

0.57

Average Annual Value-Added Growth Rate (%)

2.0

2.1

3.0

Source:

Author’s estimates.

There is a large and diverse literature on the mechanics of structural change and the corresponding stages of economic development. Fisher’s (1939) and Clark’s (1940) initial observations that economies move from predominantly agrarian production to secondary and tertiary economic activities during the process of economic development remain informative in the present context.13 While the process of structural change is clearly a long-run phenomenon, the 12-year period under examination is sufficient to provide insights on current trends in employment and output by economic sector. In this regard, the sector GDP elasticity indicates whether employment is growing or shrinking in a given sector, both overall as well as relative to other sectors. The sector valueadded elasticity gives an indication of the extent to which growth in a given sector is being driven by productivity or employment. The former may be indicative of labor-substituting production and the potential for a future sectorspecific labor surplus. Beginning with the GDP elasticity, it is clear that at the global level, all three sectors have experienced employment growth over the full period, though the elasticity of services employment to GDP was nearly three times as large as the corresponding figure for agriculture and services. This implies that at the global level there is evidence of structural change, as employment is being generated in the services sector at a considerably faster rate than in the other sectors. However, this structural change has not been associated with a net loss in jobs in manufacturing or agriculture. In terms of value-added growth and value-added elasticities, the services sector was both the fastest growing sector and the sector with the most jobintensive growth. Indeed, for every 1 percentage point of growth in services sector value added, employment increased by 0.57 percentage points (while the corresponding growth in productivity was 0.43 percentage points). On the other hand, in the agriculture sector and especially in the industry sector, valueadded growth has been driven more by gains in productivity than by gains in employment. These global results are useful for recognizing broad trends and for highlighting the uses of the employment elasticity as a labor market indicator.

154 Steven Kapsos

The remainder of the section provides a more detailed view of the figures by looking at region-specific trends in employment intensity. 4.3.3 Developed Economies14 Turning to the results in Table 4.4, it is clear that the developed economy subregions witnessed very diverse employment outcomes. The employment elasticity from 1991 to 1995 in Western Europe reflects the region’s very poor overall employment generation in the period. Over the 4 years, unemployment rates rose by 2.1 percentage points in Western Europe, while the number of unemployed increased by over 25% (ILO 2005b). Between 1995 and 1999, Western Europe witnessed faster overall economic growth together with an increase in the employment intensity of growth. The employment picture thus improved, which was evidenced by a drop of nearly 1 million in the total number of unemployed. Employment intensity in the final period increased further, with the region’s unemployment rate declining by another 1 percentage point. However the very low economic growth rate in the region between 1999 and 2003 began to impact both on employment and productivity growth in the latter half of the period. Interesting patterns emerge when examining elasticities in Western Europe by gender. Most prominently, female employment elasticities have exceeded male elasticities in each of the periods. The underlying causes appear to relate to differences between women and men in the region with regard to historical labor force participation and unemployment rates. First, while male labor force participation rates have fallen over each of the periods, female participation has risen considerably over the full 12-year period (ILO 2005b). Second, the female unemployment rate was lower in 2003 than in 1991, whereas the male unemployment rate was slightly higher at the end of the period (ILO 2005b). These figures indicate that in terms of aggregate employment, the situation in Western Europe has improved considerably for women seeking work. The employment elasticity and economic growth figures in North America show a near opposite pattern to those in Western Europe, echoing Padalino and Vivarelli’s (1997) finding of a structural difference between the two regions. Economic growth rates in North America exceeded those in Western Europe in each of the three periods and the region experienced relatively more employment-intensive growth during the first two periods, resulting in a decline of nearly 2.5 million unemployed between 1991 and 1999. However, the bursting of the global equities market bubble, the terrorist attacks of September 11, 2001, and the ensuing recession in the United States reversed these positive labor market trends. From 1999 to 2003 economic growth in North America was only about one third as employment intensive as during the 1991 to 1995

Total 1991 to 1995 Western Europe North America

1995 to 1999

Youth

Female

Male

GDP Growth

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

-0.09

0.36

0.42

-3.38

-0.30

-0.35

0.32

0.56

0.77

-0.38

0.22

0.16

1.5

2.5

1.7

0.67

0.44

0.23

0.75

0.41

0.13

0.66

0.49

0.32

0.68

0.39

0.15

3.1

4.1

2.4

Japan

0.34

0.20

-0.24

0.06

-1.55

-2.29

0.15

0.32

-0.11

0.47

0.12

-0.32

1.1

1.0

1.6

Australia and New Zealand

0.55

0.35

0.57

0.41

-0.24

0.32

0.69

0.44

0.72

0.45

0.27

0.44

4.0

4.1

2.8

Source: Author’s estimates.

155 The Employment Intensity of Growth

Table 4.4 Employment Elasticities by Age Group and Gender and Average Annual GDP Growth, 1991–2003— Developed Economies

156 Steven Kapsos

period, while the rate of economic growth declined sharply. Not surprisingly, unemployment grew by over 3 million between 1999 and 2003. When comparing differences in elasticities between the demographic groups in Western Europe and North America, it is clear that economic growth has been more employment-intensive for youth in North America. Western Europe’s negative youth employment elasticities reflect demographic change (declining youth populations), coupled with falling participation among youth in labor markets—not a systematic rise in youth unemployment rates. In North America, youth populations are growing, while participation in the labor market among youth has remained rather steady. The youth employment elasticities in the first two periods were high enough to translate into declines in youth unemployment rates. However, in the most recent period, the employment intensity of growth among youth has declined sharply and youth unemployment rates have consequently been on the rise. In addition, these figures do not provide an indication of the quality of jobs being created for youth. Female employment elasticities indicate that gender-related differences clearly exist when the North American and Western European labor markets are compared. This is most visibly indicated by the smaller gap between male and female employment elasticities in North America than in Western Europe. The main reasons for this appear to be the smaller gender gap in labor force participation and unemployment rates in North America (ILO 2005b). Japan has experienced low and falling employment elasticities, a trend that is clear in each of the demographic subgroups. Accordingly, unemployment rates in the country have risen throughout the three periods, with higher increases registered by the youth cohort. Labor force participation rates among both women and men have declined, highlighting the adverse effects of a decade of economic stagnation. Australia and New Zealand, on the other hand, enjoyed relatively favorable growth and employment outcomes between 1991 and 2003. Growth in employment and output was particularly robust during the first two periods, in which aggregate employment grew by over 15% and unemployment rates declined by over 3 percentage points (ILO 2005b). The last period witnessed continued employment growth, though growth in output slowed. In contrast with the global trends in sector-specific employment elasticities, in developed economies the sector-specific data provide a clear picture of ongoing structural change accompanied by net employment losses in agriculture and industry (Table 4.5). In Western Europe, as evidenced by the GDP elasticities, there has been a pronounced reduction in employment in both agriculture and industry, in parallel with growth in the services sector. The value-added elasticities in the region point to labor-substituting productivity growth in agriculture, growth in industry shared roughly equally between employment and productivity growth, and growth in the dynamic services sector biased more toward employment growth than productivity growth. The

157 The Employment Intensity of Growth Table 4.5 Employment Elasticities and Growth in Value-Added by Economic Sector, 1991–2003—Developed Economies

Agriculture

Industry

Services

Average Annual ValueAdded Growth Rate (%)

GDP

Value Added

GDP

Value Added

GDP

Value Added

Agriculture

Industry

Services

Western Europe

-1.08

-1.39

-0.50

0.49

0.74

0.62

1.0

1.1

2.5

North America

-0.02

-0.09

0.26

0.27

0.60

0.53

3.5

3.0

3.7

Japan

-2.04

0.95

-0.83

-0.14

0.76

0.49

-2.1

-0.4

2.1

Australia and New Zealand

0.18

0.14

0.26

0.37

0.61

0.56

3.6

2.8

4.3

Source:

Author’s estimates.

structural trend in North America has been similar, albeit less pronounced, to that in Western Europe. In North America, GDP growth has been associated with a marginal decline in employment in agriculture, and there is evidence once again that the sector is experiencing labor-substituting productivity growth, though at a more moderate pace. Despite widespread reports of jobless growth and the decline of manufacturing in the United States, for the full 1991 to 2003 period, employment in industry did grow modestly, and productivity gains in the sector have not been associated with job destruction. Finally, as in Western Europe, the services sector in North America has experienced the most robust growth— both in terms of value-added growth and employment growth. Japan has witnessed job losses and declining output in both agriculture and industry, with the services sector experiencing both a positive growth in employment and a positive growth in output of 2.1% per annum. These trends point to structural change as well as to the country’s stagnant employment and output growth throughout the years under consideration. Australia and New Zealand stand in contrast to the experiences in the other developed regions, as employment growth was considerably more balanced between the three sectors, as evidenced by the elasticities with respect to both GDP growth and value added. 4.3.4 Transition Economies The transition economies underwent substantial labor market and overall macroeconomic adjustments during the 1991 to 2003 period. Yet despite experiencing severe macroeconomic shocks during the transformation toward more market-based economic institutions, CEE was able to achieve positive average rates of economic growth in each of the three periods. The CIS stood in stark contrast, with average annual economic growth rates of negative 10.9%

158 Steven Kapsos

in the first period and continued negative growth in the second period. However, the CIS has begun to recover, and registered considerably faster economic growth rates between 1999 and 2003.15 A look at trends in employment elasticities in the two regions reveals further divergence (Table 4.6). In CEE, there has been a steady deterioration in the region’s employment intensity of growth, and the last period’s positive annual GDP growth rate of 3.5% went hand in hand with job shedding. Accordingly, in CEE it is clear that productivity growth has benefited at the expense of employment growth throughout much of the period following the disintegration of the Soviet Union. Youth have fared the worst in each of the three periods— youth unemployment rates have risen sharply while the labor force participation has fallen. However, the size of the youth population has also remained relatively stagnant, rising by only 0.4% per annum over the period, which somewhat mitigates the need for new employment generation for youth (ILO 2005b). Finally, in contrast to the global figures, women in CEE have fared worse than men with respect to these employment trends.16 In the CIS, following two periods of very adverse employment outcomes, the most recent period has witnessed substantial improvements in employment generation. Youth have also fared the worst in the CIS, with total youth employment shrinking on average by 1.6% per annum. Meanwhile, the youth population grew by over 1.3% during the period, so the need for new job creation for youth remains great. The overall comparative trends between female and male employment elasticities in the CIS are not markedly different. Women fared somewhat worse initially in terms of job destruction, but employment among women rose faster in the last period than among men. The sector-specific elasticity trends in CEE reveal ongoing structural change (Table 4.7). As GDP has grown in the region, jobs have been shed in both agriculture and industry, while employment in the services sector has expanded. Every 1 percentage point of GDP growth has been associated with a reduction of 0.51 percentage points in agricultural employment and 0.11 percentage points of employment in industry. Value-added growth in agriculture and industry has been fully driven by productivity growth—an increase in agricultural value added has actually been associated with a decline in employment in agriculture. Employment and productivity contributed roughly equally to growth in services sector value added, as evidenced by the sector’s value-added elasticity of 0.47. In the CIS, both employment and productivity have declined in agriculture and industry, while there has been little correlation between GDP growth and employment growth in the services sector. Every 1 percentage point reduction in GDP was associated with a decline of 0.23 percentage points in agricultural employment and a reduction of 0.65 percentage points in industrial employment. The value-added elasticities indicate that both employment and

Table 4.6 Employment Elasticities by Age Group and Gender and Average Annual GDP Growth, 1991–2003—Transition Economies Total

Youth

Female

Male

GDP Growth

Central and Eastern Europe Commonwealth of Independent States

Source:

0.24 0.19

0.01 0.28

-0.19 0.18

0.00 0.22

-0.22 0.35

-1.26 0.15

0.09 0.23

-0.11 0.26

-0.31 0.22

0.35 0.15

0.10 0.31

-0.11 2.0 0.14 -10.9

3.0 -0.1

3.5 7.2

Author’s estimates.

Table 4.7 Employment Elasticities and Growth in Value Added by Economic Sector, 1991–2003—Transition Economies

Agriculture

Central and Eastern Europe Commonwealth of Independent States Source:

Industry

Services

Average Annual Value-Added Growth Rate (%)

GDP

Value Added

GDP

Value Added

GDP

Value Added

Agr.

Ind.

Serv.

-0.51

-1.06

-0.11

0.09

0.51

0.47

0.7

2.9

3.4

0.23

0.41

0.65

0.42

0.02

0.15

-1.2

-4.1

-0.5

Author’s estimates.

159 The Employment Intensity of Growth

1991 1995 1999 1991 1995 1999 1991 1995 1999 1991 1995 1999 1991 1995 1999 to to to to to to to to to to to to to to to 1995 1999 2003 1995 1999 2003 1995 1999 2003 1995 1999 2003 1995 1999 2003

160 Steven Kapsos

productivity declined in each of the sectors. In both the agriculture and industry sectors, every 1 percentage point reduction in value-added output has been associated with a reduction of around 0.4 percentage points in employment (and hence a reduction of 0.6 percentage points in labor productivity). In services, the decline in value added has been met by an even greater relative fall in productivity than employment. However this sector also experienced the highest growth rate. 4.3.5 Asia and the Pacific The Asia and Pacific region unquestionably witnessed the most dynamic growth and development of all of the regions of the world between 1991 and 2003, with average annual GDP growth over the three periods ranging between 7.4% and 11.5% in East Asia, and between 5.1 and 6.0% in South Asia. Yet the region also struggled through the Asian financial crisis during the second period, given its adverse effects on countries in Southeast Asia. This is evidenced by Southeast Asia’s sharp drop in output growth in the 1995 to 1999 period. Trends in employment elasticities provide further detail on both the region’s successes as well as its struggles with the Asian crisis (Table 4.8). In East Asia, total employment elasticities have remained quite low in comparison with global figures. Combined with high GDP growth rates, this implies that the region has experienced robust productivity growth. However, unemployment rates have remained fairly steady. Consequently, the region’s growth has been sufficiently employment-intensive, while allowing for rapid increases in living standards through productivity growth.17 Youth employment elasticities stand in contrast to the overall results, as jobs were shed among youth in each of the first two periods. However, it appears that this is the result of youth leaving the labor force (e.g., for continued education and training) rather than a systematic adverse employment trend for the cohort (ILO 2004b). There has been very little difference in employment intensity among women and men, which is not particularly surprising given the relative gender equality in terms of both labor force participation and unemployment rates in the region (ILO 2005b). Owing to the Asian financial crisis, Southeast Asia experienced a large degree of volatility in overall economic and employment performance in the three periods. From 1991 to 1995, the region’s output grew by over 7.4% and the overall employment elasticity of 0.39 was high enough to translate into a reduction in total unemployment. In the period reflecting the financial crisis, the region’s overall employment elasticity fell, indicating that the reduction in output was met with a greater relative decline in employment growth than in productivity growth. However, the sharp increase in the youth employment elasticity during the crisis indicates that youth employment was

Total

East Asia Southeast Asia and the Pacific South Asia

Youth

1991 to 1995

1995 to 1999

1999 to 2003

0.14

0.14

0.18

-0.23

0.39 0.40

0.20 0.49

0.42 0.36

0.12 0.10

Source:Author’s estimates.

1991 to 1995

1995 to 1999

Female

Male

GDP Growth

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

-0.45

0.07

0.16

0.17

0.18

0.13

0.12

0.31 0.27

0.10 0.06

0.38 0.49

0.20 0.61

0.49 0.30

0.39 0.37

0.20 0.44

1991 to 1995

1995 to 1999

1999 to 2003

0.18 11.6

7.4

7.7

0.37 0.38

1.6 5.8

4.8 5.1

7.4 6.0

161 The Employment Intensity of Growth

Table 4.8 Employment Elasticities by Age Group and Gender and Average Annual GDP Growth, 1991–2003—Asia and the Pacific

162 Steven Kapsos

disproportionately adversely affected by the crisis. The most recent period has witnessed a substantial increase in employment intensity in the region, coupled with a more moderate rise in output. In each of the periods, there has been little difference between the sexes with regard to employment intensity. South Asia’s strong growth between 1991 and 2003 has given rise to higher living standards, declining poverty rates, and faster overall development in the region. Yet the region remains one of the poorest in the world. Employment intensity trends in South Asia have been more similar to Southeast Asia than East Asia. One likely explanation for this is that while East Asia’s working-age population expanded by around 18% between 1991 and 2003, owing to different fertility patterns, the working-age population in both Southeast Asia and South Asia grew by about 32%. Thus, for a given rate of GDP growth, Southeast Asia and South Asia require a higher relative employment elasticity to maintain stable unemployment. The differences in elasticities by gender are starker in South Asia than in the other Asian regions. One potential explanation for this is South Asia’s substantially larger initial gender gap in labor force participation and the subsequent catching-up by women in the labor market. This question will be explored further in the discussion on elasticity determinants in Section 4.4. Overall, the employment intensity of growth in South Asia has allowed for relatively solid employment growth, while also allowing for rapid increases in labor productivity. As will be shown below, however, a slightly different picture emerges when the sector elasticities are examined. Breaking down these regional results by economic sector provides some additional information on overall trends (Table 4.9). The value-added growth rates reveal that East Asia and Southeast Asia’s growth has been led by growth in industry, which grew at an average annual rate of 12.5% in the former and 5.4% in the latter, followed by growth in services, which grew at 8.8% in East Asia and 4.6% in Southeast Asia. Service-sector growth in South Asia, at 6.9%, slightly outpaced the 5.9% average annual growth rate in the region’s industry sector. Table 4.9 Employment Elasticities and Growth in Value-Added by Economic Sector, 1991–2003—Asia and the Pacific

Agriculture

Industry

Services

Average Annual ValueAdded Growth Rate (%)

GDP

Value Added

GDP

Value Added

GDP

Value Added

Agriculture

Industry

Services

East Asia

0.10

0.23

0.07

0.06

0.47

0.50

3.7

12.5

8.8

Southeast Asia

0.01

0.20

0.82

0.68

1.08

0.99

2.1

5.4

4.6

South Asia

0.38

0.71

0.41

0.37

0.46

0.36

2.9

5.9

6.9

Source:

Author’s estimates.

163 The Employment Intensity of Growth

In terms of sector employment-to-GDP elasticities, in East Asia a 1 percentage point increase in GDP was associated with an increase of 0.1 percentage points in agricultural employment, 0.07 percentage points in industrial employment, and 0.47 percentage points in employment in services. In Southeast Asia, a 1 percentage point increase in GDP was associated with essentially no growth in agricultural employment, 0.82 percentage points in industrial employment, and 1.08 percentage points in services employment. These figures are indicative of an ongoing structural movement toward a larger share of industry and service-sector employment in the region. Finally, in South Asia a 1 percentage point increase in GDP was associated with an increase in agricultural employment of 0.38 percentage points, an increase in industrial employment of 0.41 percentage points, and an increase in service-sector employment of 0.46 percentage points. Thus, of the three regions, South Asia is exhibiting the least degree of structural economic change away from agriculture and into industry and services. The value-added elasticities indicate that East Asia’s industrial output growth is being led by robust productivity gains. The same is true to a lesser extent for the region’s agriculture sector, while growth in services has corresponded with roughly equal gains in employment and productivity. It is important to note, however, that the very rapid growth that has taken place in all three sectors in East Asia facilitated both sufficient employment generation as well as rapid productivity gains. This trend has led to a “virtuous cycle” of employment growth, productivity growth and poverty reduction in the region (ILO 2005a). In Southeast Asia, agricultural growth has been driven more by productivity growth, while growth in industry, and particularly services, has been led by employment growth. South Asia provides a contrast, as growth in agriculture has been driven mainly by employment growth, while around two thirds of industrial and services output growth has been due to growth in labor productivity. 4.3.6 Latin America and the Caribbean The Latin America and the Caribbean regions achieved modest to moderate rates of economic growth from 1991 to 2003. In Latin America, GDP growth was fastest in the period from 1991 to 1995 and subsequently decelerated in each of the following periods. The region has weathered two major financial crises—one occurring in Mexico primarily in the second period and the other in Argentina during the final period. Growth rates in the Caribbean have also experienced volatility, with the best growth performance registered between 1995 and 1999. Overall, economic growth in Latin America has been more employment intensive than growth in the Caribbean (Table 4.10). One potential reason for

Table 4.10 Employment Elasticities by Age Group and Gender and Average Annual GDP Growth, 1991–2003—Latin America and the Caribbean Total

Youth

1991 to 1995

1995 to 1999

1999 to 2003

Latin America

0.65

0.70

0.45

Caribbean

0.43

0.37

-0.42

1991 to 1995

Female

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

0.38

0.04

-0.23

0.96

0.32

0.61

-0.94

0.53

Male

GDP Growth

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1.01

0.49

0.49

0.52

0.43

3.5

2.7

1.4

0.59

-0.51

0.40

0.23

-0.35

1.9

5.2

2.5

Table 4.11 Employment Elasticities and Growth in Value Added by Economic Sector, 1991–2003—Latin America and the Caribbean

Agriculture GDP

Value Added

Latin America

-0.16

Caribbean

-0.38

Source: Author’s estimates.

Industry

Services

Average Annual ValueAdded Growth Rate (%)

GDP

Value Added

GDP

Value Added

Agriculture

Industry

Services

-0.33

0.63

0.54

1.09

1.04

2.5

2.2

2.6

-0.11

-0.21

0.05

1.02

0.99

2.5

3.7

3.8

1995 to 1999

1999 to 2003

164 Steven Kapsos

Source: Author’s estimates.

1991 to 1995

165 The Employment Intensity of Growth

this, which will be investigated in greater detail in the next section, is that the Latin America region has faster overall population and labor force growth than the Caribbean. To this end, in order to maintain stable unemployment, Latin America requires greater employment intensity for a given level of growth. Youth unemployment remains a problem in both regions. In Latin America, youth employment elasticities have fallen in each of the periods. Accordingly, youth unemployment rates have risen over the full 12-year period (ILO 2005b). Economic growth has been more employment intensive for females than for males throughout each of the periods, though this difference has narrowed. This trend is likely due in part to a substantial narrowing of the labor force participation gap between men and women over the course of the 12 years. Employment elasticities in the Caribbean have also shown a trend decline. Following declining unemployment rates in each of the first two periods, the region’s overall unemployment rate rose between 1999 and 2003. Youth unemployment rates, though high, declined during the first two periods. However, the final period also witnessed deterioration in the employment picture for youth. Female unemployment rates in the Caribbean are considerably higher than the corresponding rates for men (ILO 2004a; Elder and Schmidt 2004). The higher relative female employment elasticities during the first two periods translated into fairly large reductions in these rates, but the employment picture for women also deteriorated during the 1999 to 2003 period. There is evidence of ongoing structural change in both Latin America and the Caribbean, particularly regarding movement away from employment in agriculture and into the services sector, the latter having grown the fastest in both regions (Table 4.11). It is important to note that the services sector growth that occurred over the period was led fully by employment growth rather than by productivity growth—a different pattern as compared with other regions of the world. Industry continues to contribute to job growth in Latin America, and the growth in industry value added has been shared almost equally between productivity and employment gains. In the Caribbean, in terms of elasticity trends, it can be said that the industry sector is in moderate decline vis-à-vis employment, while the majority of value-added growth in the sector has been due to growth in productivity. 4.3.7 Africa and the Middle East The subregions in Africa and the Middle East18 have some of the highest employment elasticities of any of the areas under examination, reflecting the subregions’ unique growth, employment, and poverty-related characteristics. In the Middle East, overall elasticities were greater than one in each of the first two periods, which means that labor productivity actually declined. Between 1999 and 2003, the region did manage to generate some labor productivity

166 Steven Kapsos

growth (coupled with robust GDP growth of 4.1% per annum), but overall gains in output are still skewed heavily toward employment growth rather than labor productivity growth. There is a large difference in employment elasticities by gender in both the Middle East and North Africa, with female elasticities considerably higher than those for males in each of the periods. These two regions have the highest gender gap in labor force participation, implying that the higher elasticities likely reflect a “catching-up” in terms of participation among women. Youth unemployment remains a serious problem in both the Middle East and North Africa. In the Middle East, youth unemployment rates have remained relatively stable over the three periods. In North Africa, the low youth employment elasticity in the first period is reflective of the rapidly increasing youth unemployment rates during that time. This was followed by a pickup in the employment intensity of growth for youth and a sharp increase in youth employment. During the final period, youth employment has fallen in the region, owing both to rising unemployment and decreased youth labor force participation. In Sub-Saharan Africa, relative stability in employment elasticities and the relative homogeneity in elasticity levels across demographic groups highlight the shared struggles among the vast majority of workers in the region with regard to poverty and low productivity employment. Low labor productivity growth has hampered development in the region and the elasticity figures in Table 4.12 point to some improvement in the share of output growth accounted for by growth in productivity. Nevertheless, the region’s very high population growth rate necessitates high employment intensity of growth. In terms of overall economic performance, the higher economic growth rates of the last two periods under examination represent a positive trend. Continued growth in output, with gains shared between productivity and employment, are required for long-term, sustainable development in the region (ILO 2005a). Based on the data by sector provided in Table 4.13, there is no evidence of systematic structural economic change taking place in these three regions. Indeed, in the Middle East and in North Africa, the agriculture sector has seen the most job growth of the three sectors. In Sub-Saharan Africa, the overall employment intensity of growth has been greatest in the service and industry sectors. Growth in agriculture value added in the Middle East has coincided with rapid employment growth and declining productivity in the sector. In SubSaharan Africa, agricultural growth has been driven mainly through employment growth, but the sector has also experienced some productivity gains—though not enough to have a positive impact vis-à-vis poverty reduction. Industry value-added growth has been led by productivity growth in both the Middle East and North Africa, whereas in Sub-Saharan Africa it has been driven to a

Table 4.12 Employment Elasticities by Age Group and Gender and Average Annual GDP Growth, 1991–2003—Africa and the Middle East Total 1995 to 1999

Youth 1999 to 2003

1991 to 1995

Female

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

Male 1999 to 2003

1991 to 1995

1995 to 1999

GDP Growth 1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003 4.1

Middle East

1.10

1.29

0.91

0.82

1.79

0.98

2.11

2.12

1.09

0.83

1.03

0.85

3.9

3.0

North Africa

0.30

0.74

0.51

0.24

0.71

-0.34

0.41

1.04

0.59

0.26

0.65

0.50

2.2

4.8

4.1

Sub-Saharan Africa

0.73

0.82

0.53

0.72

0.90

0.62

0.79

0.89

0.57

0.69

0.76

0.50

1.1

3.2

3.2

Source: Author’s estimates.

Table 4.13 Employment Elasticities and Growth in Value-Added by Economic Sector, 1991–2003—Africa and the Middle East

Agriculture

Industry

Services

Average Annual ValueAdded Growth Rate (%)

GDP

Value Added

GDP

Value Added

GDP

Value Added

Agriculture

Industry

Services 4.6

Middle East

2.06

1.94

1.10

0.26

0.80

0.70

3.9

1.3

North Africa

0.88

0.55

0.45

0.43

0.77

0.76

2.4

3.2

4.0

Sub-Saharan Africa

0.69

0.82

0.88

0.90

0.89

0.79

2.3

2.0

2.8

Source: Author’s estimates.

167 The Employment Intensity of Growth

1991 to 1995

168 Steven Kapsos

greater extent by employment growth. Notwithstanding the lack of structural change, the services sector has provided the fastest overall value-added growth rates in each of these regions. However, as with overall economic growth, growth in services throughout Africa and the Middle East continues to lag far behind other regions such as Asia and the Pacific. The world and regional results discussed throughout this section have revealed substantial differences with regard to the employment intensity of growth between subsets of the population and among the different regions of the world. In order to shed light on the possible factors influencing these diverse outcomes, the following section seeks to identify and analyze some of the main macroeconomic determinants of countries’ employment intensity of growth.

4.4 Econometric Modeling of Employment Elasticities The substantial global coverage of the employment elasticities discussed in the previous section provides an opportunity to conduct a cross-country study of the determinants of the employment intensity of growth. This section utilizes some of the theoretical determinants of employment intensity put forth in the literature together with the main observations regarding regional elasticity trends discussed in the previous section in order to identify robust correlates of employment intensity. The goal is thus to pinpoint some of the broad macroeconomic factors that might influence individual economies’ employment intensity of growth. There is a large literature that examines macroeconomic determinants of employment and labor productivity growth, but little investigative work has been done to try to identify the relationship between macroeconomic variables and the overall employment intensity of growth explicitly represented by the employment elasticity. Nevertheless, previous findings related to the determinants of both employment and productivity growth are clearly relevant in the present context and thus a brief overview of these findings is warranted. Walterskirchen (1999) finds that increasing labor supply tends to raise employment and reduce productivity. This follows the classic economic notion that higher labor supply will lead to lower average wages and ultimately to an increase in demand for labor input. Beaudry and Collard (2002) examine the link between labor force growth (representing labor supply) and productivity and find a systematic, negative relationship between the two variables. However, they suggest that as countries become more integrated over time in the world economy this effect should diminish, due to convergence in capital flows between countries. The determinants of employment intensity within the European context are explored by Döpke (2001). In this study, the share of services in real GDP,

169 The Employment Intensity of Growth

real labor costs, labor market institutions, and exchange rate volatility are given as potential macroeconomic determinants of overall employment intensity. Döpke finds that a greater share of services leads to higher employment intensity and that in most of the countries under examination, there is a significant, negative relationship between real labor costs and employment elasticity. He posits that in general more labor market flexibility leads to more employmentintensive growth, but the related empirical findings are not robust. Finally, he suggests that while there are theoretically attractive arguments in support of the notion that exchange rate fluctuations lower employment intensity, the overall empirical results on this are ambiguous. Bruno et al. (2001) investigate whether there are linkages between economic openness and labor demand elasticity. They argue that economic openness can allow firms to use more capital equipment in production, which may ultimately lead to a reduction in the responsiveness of labor demand to economic growth. However, they do not find any statistically significant relationship between trade openness and labor demand elasticity.19 Mourre (2004) discusses employment performance in the euro area economies and finds that the job intensity of growth has been highest in the services sector. His findings regarding labor tax rates support the notion of a negative correlation between the rate of labor taxation and long-run employment generation. Finally, he examines the effects of employment protection legislation on job intensity. The effects of such legislation are mixed: while in general the sign on employment protection legislation is negative, Mourre’s overall results are not statistically significant. The interaction between inflation, labor market institutions and employment performance is investigated in Loboguerrero and Panizza (2003). Inflation can both encourage responsiveness of employment to changes in output (via its effect on reducing downward wage rigidity) and can decrease responsiveness (by increasing uncertainty of relative prices). The authors find that in industrialized economies, inflationary effects tend to have the former effect. Thus, all else equal, inflation in this context would be associated with higher employment elasticities. In developing economies, they find that neither effect appears to have a significant influence on employment performance. 4.4.1 Model Specification and Data Used For the purpose of the current empirical exercise, the dependent variables used are the total, youth, and female employment elasticities corresponding to the full 1991–2003 period under examination in the previous section, which were generated for each country using equation 2. The explanatory variables were chosen based on observations of employment elasticity trends from the previous section as well as from previous findings in the literature. The variables

170 Steven Kapsos

fall into the following six broad categories: labor supply/demographics, economic structure, macroeconomic volatility and uncertainty, extent of economic openness, health, and tax policy and labor regulation. The variables under each of these categories are listed in Table 4.14.20 The average annual growth in working-age population was chosen as a proxy for labor supply, following the findings of Walterskirchen (1999) and Beaudry and Collard (2002). The main insight in this case is that a more rapidly expanding supply of labor should lead to more employment-intensive (lowerproductivity) growth. Table 4.14 Variables Examined Category Labor Supply/Demographics Economic Structure Macroeconomic Volatility and Uncertainty Economic Openness and Export Orientation Health Tax Policy and Labor Regulation

Variable(s) Average annual growth in working-age population, 1991–2003 Share of employment in services, 1991 Share of employment in industry, 1991 Gender gap in labor force participation, 1991 Average annual inflation rate, 1991–2003 Proportion of years with conflict, 1991–2003 Average percentage of trade in total GDP, 1991–2003 Average trade balance, 1991–2003 Malaria deaths per 100,000 inhabitants Highest individual tax rate, 1997 Rigidity of employment index, 2004

Data source ILO LABPROJ, 2003 ILO GET Model, 2005 ILO GET Model, 2005 ILO LABPROJ, 2003 IMF, WEO 2004 IPRI, 2004 World Bank, WDI 2004 World Bank, WDI 2004 WHO, 2002 World Bank, WDI 2004 World Bank, 2005

The share of employment in services variable is based on findings of Mourre (2004), Döpke (2001), and Padalino and Vivarelli (1997). These articles find evidence of higher relative employment intensity in the services sector. The share of employment in industry variable is used as a control and to test whether there is any statistically significant difference in elasticities between the industry and agriculture sectors. The gender gap in labor force participation for 1991 was chosen due to the observance in the previous section that female employment elasticities in regions with greater overall gender gaps in participation tend to be higher. The coefficient on this variable is thus an indication of whether or not some degree of convergence in participation is occurring. The average annual inflation rate and proportion of years with conflict variables were chosen as control variables to identify whether uncertainty regarding prices and physical security impact the labor market to a greater or lesser extent than overall output. Following on from Bruno et al. (2001), the variables corresponding with economic openness and export orientation were chosen to identify whether measures of globalization and external balance appear to have any measurable impact on employment intensity.

171 The Employment Intensity of Growth

The malaria deaths per 100,000 inhabitants variable was chosen in order to identify whether there is a difference of the impact of the disease on productivity versus employment.21 The highest individual tax rate and rigidity of employment index variables were chosen due to studies by Mourre (2004) and Döpke (2001).22 These previous findings suggest that the labor tax rates should be negatively correlated with employment intensity, while greater employment protection and rigidity may be negatively correlated with employment intensity. The first specification used in this chapter was constructed with the purpose of maximizing country coverage, and includes 154 countries. As a result, the independent variables in the model exclude those related to tax policy and labor regulation, as these indicators are available for substantially fewer countries. Ordinary least square regression techniques were used throughout each of the models. A Breusch-Pagan test was carried out in which the presence of heteroskedasticity was detected. Consequently, heteroskedasticity-robust standard errors are used throughout each of the specifications. 4.4.2 Empirical Results Appendix Table A4.4.3 in Appendix 4.4 provides the results of the first set of regressions, which examine the relationship between the total elasticity and the various explanatory variables. Specification 1 is a bivariate regression of employment elasticity on the average annual growth rate in the working-age population. Specifications 2 through 4 add in the additional variables of interest. The results can be summarized and interpreted as follows: (i) The labor supply proxy is positively and very significantly correlated with employment elasticity. A 1 percentage point increase in the average annual growth rate of the working-age population is associated with an increase of 0.24 in the employment elasticity. This result is robust across all specifications. (ii) The initial share of total employment in services is also significantly and positively associated with employment elasticity. A 10 percentage point increase in this share corresponds with an increase of 0.06 in employment elasticity. The coefficient on the share of employment in industry is not statistically significant and an F-test of whether the coefficient on share of employment in industry is equal to that on the share in agriculture (represented here as the omitted base case variable) led to failure to reject the null hypothesis of equality.

172 Steven Kapsos

(iii)In terms of the volatility proxies, the average annual rate of inflation is negatively associated with employment elasticity at 1% significance. Importantly, this relationship only has an economically significant impact given very high inflation rates.23 Every 100 percentage point increase in the average annual rate of inflation is associated with a reduction in the employment elasticity of 0.12. The conflict indicator is also significant: all else equal, an economy in conflict over the full 12-year period is expected to have an employment elasticity that is 0.16 lower than an economy without any conflict during the period. (iv) The economic openness and export orientation variables show no statistically significant relationship with employment intensity. The sign on the trade balance coefficient is positive— implying a tendency for exporting countries to have higher employment elasticities, but the results are far from robust. Thus, the present analysis provides little evidence that globalization and export orientation have a systematic relationship with employment intensity. (v) The malaria variable is not significant. Far from implying that malaria is unimportant for employment and labor productivity, this lack of relationship implies that malaria may have a reasonably equal negative impact on both labor quality (productivity) and quantity (employment). The second set of regressions carried out for this exercise incorporates the labor tax and employment protection variables. Due to data availability limitations of these variables, the sample for these regressions represents a smaller number of countries (100 countries versus 154 in the previous regressions). In order to maximize coverage, the variables that were not statistically significant in the previous set of regressions (economic openness, export orientation, and health status) were dropped from this section of the analysis. The findings can be summarized as follows: (i) With the exception of the conflict variable, each of the explanatory variables from the first set of regressions remains significant. The magnitude of the working-age population growth rate variable has diminished somewhat, though it is still large and significant throughout the specifications. (ii) The individual tax rate variable is significant at 10% and carries the expected sign. A 10 percentage point increase in the individual tax rate is associated with a decrease of 0.08 in the employment elasticity.

173 The Employment Intensity of Growth

(iii)The coefficient on the World Bank’s employment rigidity index is not statistically significant, and the sign is opposite to that which is hypothesized in the literature. Each of the subcomponents of the employment rigidity index (including rigidity of hours, difficulty of hiring and firing, and firing costs) was also tested and each was also statistically insignificant. This is certainly an interesting finding—one that runs contrary to the widely held notion that employment protection legislation reduces demand for employment. The lack of a negative relationship could be an indication that labor protection does not have a significant, adverse effect on employment performance or it could also be an indication that much employment protection legislation is not, in fact, enforced.24 Next, these same models were carried on youth and female employment elasticities. The results from this exercise are given in Appendix Tables A4.4.5 and A4.4.6. With regard to the youth elasticity regressions, the chosen independent variables did not perform very well in general. The average annual growth rate in the youth population is still positively and significantly correlated with employment elasticity: a 1 percentage point increase in the growth rate of the youth-age population is associated with an increase in the youth elasticity of 0.33. However, while the sign on each of the other variables is the same, none of the remaining coefficients is statistically significant. The same basic results occurred in the second set of regressions for youth: while the direction of the coefficients remains the same, only growth in the youth age cohort remains significant. Although more investigative work on this is needed, one potential explanation for the poor performance of the youth indicator is that the indicator being examined is the elasticity of youth employment with respect to total output as opposed to output among youth. A closer look at the main characteristics of youth employment—for instance, that it is typically less well remunerated and more frequently part-time and informal—makes this outcome somewhat less surprising. In essence, there are clear reasons to believe that changes in youth employment may not be as linked with total output as changes in output among the overall population or among adults (ILO 2004b). The first set of regressions of female employment elasticities (given in Appendix Table A4.4.7) performed well in terms of significance and fairly well in terms of explanatory power. Working-age population growth is once again positive and significant, with an increase in the average annual growth rate of 1 percentage point corresponding with an increase in female employment elasticity of 0.21. The share of employment in services is also significant and the coefficient is larger in this specification than for the one corresponding

174 Steven Kapsos

with the population as a whole. The coefficient on the gender gap variable is large and significant at 1%, reflecting the ongoing “catching up” in participation among women that was observed in the previous section. Indeed, every 10 percentage point increase in the gap in the 1991 labor force participation rate between men and women is associated with an increase of 0.15 in the subsequent employment elasticity for women. The inflation variable remains significant. The conflict variable is not significant in this specification, though the sign remains negative as before. The average trade balance variable is significant at 5% in this specification. This provides evidence that exportorientation may have a positive impact on the employment intensity of growth for women. This finding is in agreement with previous studies that have found evidence of relatively cheaper female labor driving export growth forward.25 However, this variable was not significant across all specifications and thus inference related to this finding should be made with caution. Incorporating the labor tax variable into the female elasticity models (the results of which are given in Appendix Table A4.4.8) produces similar results to those for the total population. Indeed, one important observation is that the coefficient on labor tax is considerably larger in magnitude for female elasticities than for the population as a whole. An increase of 10 percentage points in the labor tax indicator is associated with a decrease of 0.17 in the female employment elasticity. This coefficient is more than twice as large as the corresponding one for the total population, implying that higher taxes on labor appear to provide a greater disincentive to employment for women than for men. Interestingly, the employment rigidity variable is also insignificant for women. Whereas employment protection legislation is commonly believed to adversely affect groups such as women and young workers to a greater extent than the population as a whole, these empirical results find no evidence of this phenomenon at the macroeconomic level. Taken together, the empirical results provide many expected outcomes along with one clear surprise. In terms of expected outcomes, throughout each regression, labor supply is strongly positively associated with employment intensity—a finding that is clearly supported by the literature—and one that likely reflects both the relative abundance of cheap labor in tandem with greater wage flexibility in these economies. Uncertainty in the form of hyperinflation is negatively associated with employment intensity, as is armed conflict, though the results on the latter variable are not robust throughout all specifications. Nevertheless, the findings related to these two variables support the hypothesis that uncertainty may have a greater relative impact on employment generation than on economic growth. Globalization does not appear to have a systematic direct link vis-à-vis determining employment intensity levels. The notable exception to this is for female employment intensity, which may be positively associated with export orientation. Taxes on labor are negatively associated

175 The Employment Intensity of Growth

with employment intensity—and more so for women than for men. The notable surprise in the results is that greater employment “rigidity,” or protection, was not significant in any of the specifications. This finding appears to contradict the relatively widespread notion that employment protection legislation hinders employment performance, and in particular for women and youth.

4.5 Concluding Remarks This chapter has utilized the employment elasticity as a tool for detecting broad trends in employment generation, productivity growth, and structural economic change. By examining historical trends in the employment intensity of growth among subsets of the population, it has also sought to provide a clearer picture of the diversity in employment outcomes among these different groups. The chapter established a methodology for producing world and regional trends in employment intensity, and the corresponding results were presented for the period from 1991 to 2003. Finally, results were presented from an econometric model aimed at providing insights into some of the macroeconomic determinants of the employment intensity of growth. The global employment elasticity trends showed that while the share of employment growth in total output growth has been about one third over the past decade, there was a decline in the employment intensity of growth in the period from 1999 to 2003. This is most likely a reflection of poor employment performance following the global economic slowdown that took shape in 2001. In terms of broad global trends among demographic groups, given expectations in labor force growth, youth employment elasticities are currently too low to avoid substantial future increases in the number of youth without a job. This problem highlights a great need to identify and address ways in which more and better jobs can be made available for young persons entering the labor market. Future analytical work on this matter is clearly warranted. Another significant trend in the global labor market is evidenced by higher female employment elasticities in each of the three time periods than the corresponding elasticities for men. This result appears to indicate a “catching up” in terms of women’s labor force participation relative to men’s, a finding that is supported by the results in cross-country regressions. However the result may also be indicative of women’s continued disproportionate representation in low-wage and low-productivity jobs. It is clear from the regional trends presented in the chapter that there is a wide variation in the employment intensity of growth in regions throughout the world. Between 1991 and 2003, the most employment-intensive growth was registered in Africa and the Middle East, reflecting these regions’ large surplus of labor. However, these regions’ relatively low output growth and low

176 Steven Kapsos

productivity growth continue to inhibit their poverty-reducing potential. Meanwhile in Asia and the Pacific and particularly in East Asia, rapid economic growth has allowed the region to realize large gains in productivity, contributing to rising living standards while also maintaining robust employment growth. The chapter provides some evidence in support of the notion of a structural divide between North America and Western Europe, with the employment intensity of growth decreasing in the former and increasing in the latter over the course of the three periods under examination. The regional results also provided indications of ongoing structural economic change, particularly in the developed world, but also in the transition economies, Latin America and the Caribbean, and throughout parts of Asia and the Pacific. The empirical analysis presented in Section 4.4 points to a systematic, positive relationship between labor supply and the employment intensity of growth. This result agrees with previous findings in the literature that growth in the supply of labor tends to lead to low productivity growth. The findings also support the notion of a positive relationship between economies’ share in services and their employment elasticities. However, whether this represents greater flexibility and dynamism of the sector or rather whether the jobs created in services tend to be of lower quality (and hence lower productivity) requires further investigation. Uncertainty in the form of inflation and armed conflict may lower the employment intensity of growth, though the results related to conflict are not robust across all specifications. Measures of globalization and export orientation showed no strong correlation with employment intensity, except in the case of women. Among women, the results suggest that greater export-orientation may lead to a higher employment intensity of growth. The results found no systematic link between malaria and employment intensity. One proposed explanation of this result is that malaria may have a roughly equal adverse impact on employment growth as it has on productivity growth. The econometric results support the notion that high taxes on labor tend to lower employment intensity, particularly for women, but no evidence was found regarding a link between employment rigidity (employment protection) and the job intensity of growth. This may mean that employment protection policies do not have a broad impact on economies’ job creation potential, but it could also be due to a lack of enforcement of employment protection legislation. More work is clearly needed to identify additional correlates of employment intensity, particularly regarding youth employment. In addition, further investigation of the differences in determinants of employment intensity between developed and developing countries is needed, as the strong relationship between labor supply and the employment intensity of growth raises the hypothesis that there may be substantial differences between labor surplus and labor scarce economies in this regard. Investigating the correlates of employment intensity in the different economic sectors is another area that

177 The Employment Intensity of Growth

deserves attention. Such an analysis would be particularly relevant for developing economies currently undergoing structural change away from agrarian-based production and into higher value-added, more industrial economic activities. The current findings would also greatly benefit from country-specific and comparative case studies to investigate in greater detail the trends, determinants, and implications of countries’ employment intensity of growth. Indeed, the regional and global trends in employment intensity presented in this chapter are built upon the country-level employment elasticities provided in Appendix 4.2. While individual country case studies are beyond the scope of the present analysis, this series of country-level employment intensity data should be useful in future related work. Finally, while the results presented in this chapter provide an empirical overview of the relationship between output growth, productivity, and employment and highlight some of the factors that appear to drive this relationship, the chapter does not provide policy conclusions based on these results. This analysis may indeed help inform future policy discussions, yet much additional work is needed to identify macroeconomic “best practices” for encouraging economic growth and development while striking an optimal balance between employment promotion and productivity growth.

178 Steven Kapsos

Appendixes Appendix 4.1 Countries Included in Analysis by Region and Subregion Developed Economies Western Europe Austriaa Belgiuma Cyprus Denmarka Finland a

Transition Economies Central and Eastern Europe Albaniaa Bulgaria a Croatiaa Czech Republica Estoniaa

Asia and the PPacific acific East Asia PRC a Hong Kong, China Korea, Rep. of Macau, China Mongoliaa

Latin America and the Caribbean Latin America Argentinaa Belizea Boliviaa Brazila Chilea Colombiaa

Africa and the Middle East Middle East Bahrain Iran, Islamic Rep. ofa Israel Jordana Kuwait Lebanon Oman Saudi Arabiaa Syrian Arab Republica United Arab Emirates Yemen, Rep. of a a

Francea Germanya Greecea Icelanda Ireland Italya Luxembourga Malta

Netherlandsa Norwaya Portugala Spaina Swedena Switzerland United Kingdoma

North America Canadaa United States a Other Japan a Australia a New Zealanda

Hungary a Latviaa Lithuania Macedonia, TFYR of a Polanda Romaniaa Slovakiaa Sloveniaa Turkeya

Commonwealth of Independent States Armeniaa Azerbaijana Belarusa Georgia Kazakhstana

Kyrgyzstana Moldova, Rep. ofa Russian Federationa Tajikistana Turkmenistana Ukrainea Uzbekistana

Southeast Asia Cambodia Fiji Islandsa Indonesiaa Lao People’s Dem. Rep.a Malaysiaa Myanmar

Papua New Guineaa Philippinesa Singaporea Solomon Islands Thailanda Viet Nama

Costa Ricaa Ecuadora El Salvadora Guatemalaa Hondurasa Mexicoa Nicaraguaa Panamaa North Africa Algeriaa Egypta Moroccoa Sudana Tunisiaa Sub-Saharan Africa Angolaa Benina Botswanaa Burkina Fasoa Burundia Cameroona Cape Verdea Central African Rep.a Chada Comorosa Congoa

Paraguaya Perua Uruguaya Venezuelaa Caribbean Bahamas Barbadosa Dominican Côte d’Ivoirea Dem. Rep. of the Congoa Equatorial Guineaa Eritreaa Ethiopiaa Gabona Gambiaa Ghanaa Guineaa Guinea-Bissaua Kenyaa Lesothoa Liberia Madagascara Malawia Malia

Included in both total and sector regional elasticity estimates.

South Asia Bangladesha Bhutana Indiaa Nepala Pakistana Sri Lankaa

Republica Guyanaa Haitia Jamaicaa Puerto Rico Surinamea Trinidad and Tobagoa Mauritaniaa Mauritiusa Mozambique a Namibiaa Nigera Nigeriaa Rwandaa Senegal a Sierra Leonea South Africaa Swazilanda Tanzania, United Rep. ofa Togoa Ugandaa Zambia a Zimbabwea

Appendix 4.2 Employment Elasticities and GDP Growth by Country Appendix Table A4.2.1 Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Developed Economies Total Employment Elasticity

Youth Employment Elasticity

Female Employment Elasticity

Male Employment Elasticity

Average Annual GDP Growth (%)

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

Australia Austria Belgium Canada Cyprus Denmark Finland France Germany Greece Iceland Ireland Italy Japan Luxembourg Malta Netherlands New Zealand Norway Portugal Spain Sweden Switzerland United Kingdom United States

0.52 1.22 0.14 0.34 0.37 -0.02 0.20 0.07 -0.44 1.36 0.26 0.59 -1.01 0.34 -0.07 0.38 0.63 0.71 0.22 -0.20 -0.24 -0.16 2.06 0.12 0.71

0.37 0.04 0.50 0.54 -0.19 0.42 0.44 0.14 0.04 0.28 0.80 0.62 0.49 0.20 0.22 0.27 0.67 0.25 0.53 0.65 1.04 0.20 0.22 0.43 0.43

0.56 0.10 0.57 0.44 1.01 -0.04 0.38 0.57 0.05 0.27 0.37 0.40 0.74 -0.24 1.08 2.50 0.70 0.60 0.26 0.40 0.72 0.52 0.10 0.37 0.20

0.38 -2.49 -3.39 -0.41 -0.25 -0.58 -0.19 -5.32 -5.29 -0.11 -0.55 0.15 -4.51 0.06 -2.11 0.81 -1.39 0.52 -0.64 -2.72 -3.37 -1.06 -6.71 -1.23 0.90

-0.02 -1.12 0.05 0.22 -0.84 -0.89 1.73 -0.91 -0.80 -0.19 1.25 0.98 -1.18 -1.55 -0.99 -0.88 0.36 -1.46 0.52 0.73 0.90 -0.05 -1.26 -0.01 0.43

0.27 -1.21 0.55 0.45 1.19 -1.51 0.26 0.49 -0.17 -0.62 0.40 -0.22 -2.36 -2.29 0.82 -0.06 0.52 0.58 -1.17 -2.30 -0.61 1.25 -0.36 0.29 0.09

0.68 1.92 0.67 0.38 0.42 -0.43 -0.04 0.61 -0.20 2.31 0.61 1.33 -0.70 0.15 0.12 0.78 1.27 0.75 0.25 0.11 0.66 -0.32 4.54 0.29 0.69

0.43 0.11 0.98 0.63 -0.14 0.61 0.41 0.17 0.45 0.58 0.75 0.80 0.77 0.32 0.50 0.63 0.91 0.52 0.61 0.77 1.34 0.11 0.82 0.44 0.48

0.74 0.39 0.95 0.56 1.86 0.09 0.54 0.73 0.67 0.47 0.50 0.49 1.58 -0.11 1.36 1.00 1.26 0.63 0.41 0.55 0.96 0.61 0.54 0.42 0.29

0.41 0.71 -0.20 0.31 0.35 0.32 0.41 -0.36 -0.61 0.86 -0.04 0.19 -1.17 0.47 -0.17 0.25 0.20 0.67 0.19 -0.43 -0.69 -0.01 0.37 -0.03 0.72

0.32 -0.02 0.16 0.47 -0.22 0.26 0.46 0.12 -0.27 0.12 0.84 0.50 0.33 0.12 0.05 0.14 0.50 0.03 0.47 0.55 0.88 0.29 -0.21 0.41 0.39

0.42 -0.12 0.30 0.33 0.45 -0.15 0.23 0.45 -0.42 0.16 0.26 0.35 0.24 -0.32 0.90 3.03 0.28 0.58 0.12 0.28 0.58 0.45 -0.24 0.33 0.12

4.0 1.7 1.5 2.7 5.4 2.2 0.8 1.1 1.3 0.8 0.4 5.4 1.2 1.1 2.8 5.3 2.0 4.2 3.9 1.0 1.2 1.0 0.1 2.6 3.1

4.4 2.7 2.5 3.8 3.5 2.6 4.6 2.5 1.5 3.2 4.8 9.7 1.6 1.0 6.8 4.1 3.8 2.7 3.9 4.0 3.7 3.0 1.5 2.9 4.1

2.7 1.4 1.5 2.9 3.8 1.7 2.5 1.9 0.9 4.2 2.4 6.1 1.4 1.6 3.1 2.2 1.1 3.2 1.3 1.2 2.8 2.3 0.9 2.3 2.3

Source:

Author’s estimates.

179 The Employment Intensity of Growth

Developed Economies

1991 to 1995

Appendix Table A4.2.2 Sector Employment Elasticities, Sector Value-Added Growth, and GDP Growth (1991–2003)—Developed Economies Agriculture Elasticity, 1991–2003 Developed Economies

Source:

Services Elasticity, 1991–2003

Sector Value-Added Growth and Total Growth, 1991–2003 (average annual %)

GDP

Value Added

GDP

Value Added

GDP

Value Added

Agriculture

Industry

0.27 -0.95 -0.14 -0.58 -2.02 -1.23 0.70 -2.78 -0.89 0.10 -2.38 -2.04 -3.88 -0.72 -0.10 -0.61 0.50 -0.76 -1.67 1.16 0.07

0.22 -0.29 -0.06 -0.61 -1.68 -1.67 0.76 -2.08 0.31 -0.30 -3.53 0.95 3.25 -1.10 -0.10 -0.55 -2.30 -0.59 4.58 -1.95 -0.01

0.20 -0.57 -0.11 0.56 -0.03 0.32 -0.70 -1.57 0.00 0.39 -0.07 -0.83 -0.17 0.12 0.56 0.29 0.73 0.87 -0.34 -0.38 0.23

0.27 -0.46 -0.11 0.56 0.02 0.19 -0.65 2.22 0.10 0.29 -0.14 -0.14 -0.25 0.19 0.83 0.34 0.57 0.94 -0.20 -0.75 0.24

0.60 0.90 0.74 0.53 0.50 0.45 0.63 0.95 1.00 0.92 0.57 0.76 0.55 0.90 0.70 0.51 0.26 1.10 0.30 0.61 0.61

0.55 1.06 0.85 0.55 0.49 0.53 0.60 0.59 0.91 0.75 0.51 0.49 0.48 0.80 0.63 0.49 0.31 1.08 0.41 0.49 0.53

3.9 3.5 3.4 0.3 2.6 2.0 2.0 1.7 -0.5 -0.9 0.6 -2.1 0.6 1.6 2.6 1.3 -0.2 0.1 -0.2 -1.3 3.8

2.9 2.3 1.7 2.9 2.1 4.2 1.5 -0.4 2.2 3.6 1.1 -0.4 3.2 1.4 2.3 2.9 2.6 2.2 4.1 1.0 3.0

Author’s estimates.

Services 4.3 1.8 1.8 3.3 2.5 2.2 2.2 2.4 3.1 3.7 1.8 2.1 5.2 2.9 3.8 3.5 2.1 2.9 1.7 3.3 3.7

Total 3.9 2.0 1.8 3.1 2.4 2.9 2.0 1.5 2.5 3.3 1.5 1.1 4.7 2.4 3.3 3.3 2.1 2.5 2.4 2.5 3.5

180 Steven Kapsos

Australia Austria Belgium Canada Denmark Finland France Germany Greece Iceland Italy Japan Luxembourg Netherlands New Zealand Norway Portugal Spain Sweden United Kingdom United States

Industry Elasticity, 1991–2003

Appendix Table A4.2.3 Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Transition Economies Total Employment Elasticity

Albania Armenia Azerbaijan Belarus Bulgaria Croatia Czech Republic Estonia Georgia Hungary Kazakhstan Kyrgyzstan Latvia Lithuania Macedonia, The former Yugoslav Rep. Moldova, Rep. of Poland Romania Russian Federation

Female Employment Elasticity

Male Employment Elasticity

Average Annual GDP Growth (%)

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

0.00 0.10 -0.01 0.18 1.99 0.33 -0.40 0.58 0.08 -0.02 0.20 0.03 0.10 0.39

-0.65 -0.34 0.00 -0.03 0.19 -0.22 -0.31 -0.34 -0.20 0.29 -2.26 -0.17 0.06 -0.21

0.66 0.24 0.16 -0.05 0.50 0.47 -0.04 -0.01 -0.09 0.03 0.02 0.72 -0.02 -0.29

-0.26 0.33 0.15 0.47 3.30 0.33 -0.57 0.69 0.19 0.33 0.30 0.15 -0.02 0.75

-1.83 -0.15 -0.55 0.06 0.77 0.10 -1.58 -0.77 -0.44 0.56 -4.21 -0.78 -0.55 -0.55

1.15 0.84 0.00 -0.21 1.25 0.25 -2.88 -0.19 -0.16 -2.40 0.07 0.94 -0.31 -0.93

-0.04 0.16 -0.01 0.18 1.92 0.24 -0.92 0.63 0.11 -0.71 0.21 0.01 0.12 0.34

-0.71 -0.12 0.10 0.03 0.27 0.07 -0.74 -0.28 -0.33 0.42 -1.86 -0.20 0.02 -0.40

0.73 0.28 0.13 0.02 0.60 0.26 -0.12 0.02 0.32 0.00 0.03 0.65 0.00 -0.12

0.03 0.05 -0.01 0.18 2.06 0.40 0.03 0.53 0.05 0.55 0.20 0.05 0.08 0.45

-0.62 -0.52 -0.07 -0.09 0.11 -0.44 0.02 -0.40 -0.07 0.18 -2.62 -0.14 0.09 -0.04

0.61 0.20 0.19 -0.11 0.40 0.64 0.02 -0.03 -0.52 0.05 0.00 0.79 -0.04 -0.45

5.0 -12.0 -18.3 -9.8 -1.1 -2.2 1.9 -7.2 -22.7 0.1 -9.0 -13.9 -13.7 -11.5

4.9 4.9 6.0 6.4 -2.3 3.7 0.7 4.3 6.9 3.7 0.7 5.7 4.9 4.7

6.4 10.5 10.8 5.5 4.6 4.1 2.9 6.1 5.0 3.8 10.7 3.9 7.1 5.9

0.75 0.06 -0.29 0.51 0.38

-2.62 0.83 0.09 0.11 0.40

-3.54 0.25 -0.57 -0.13 0.13

1.05 0.04 -0.57 0.36 0.34

-6.22 1.63 0.00 0.97 1.21

-7.59 0.55 -1.60 -1.09 0.05

1.38 0.06 -0.34 0.55 0.47

-2.41 0.71 0.12 0.05 0.26

-3.38 0.16 -0.51 -0.06 0.21

0.35 0.06 -0.26 0.48 0.30

-2.75 0.95 0.07 0.17 0.53

-3.64 0.33 -0.61 -0.19 0.06

-4.2 -16.9 4.6 0.8 -10.0

2.5 -3.6 6.1 -2.1 -0.4

0.9 5.5 3.2 4.4 6.8

continued.

181 The Employment Intensity of Growth

Transition Economies

Youth Employment Elasticity

Appendix Table A4.2.3 Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Transition Economies (cont’d.) Total Employment Elasticity

Youth Employment Elasticity

Female Employment Elasticity

Male Employment Elasticity

Average Annual GDP Growth (%)

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

Slovakia Slovenia Tajikistan Turkey Turkmenistan Ukraine Uzbekistan

0.22 1.49 -0.03 0.37 -0.13 -0.11 -0.19

0.05 0.14 0.11 0.06 0.05 0.83 0.31

0.30 0.05 0.26 -0.16 0.19 0.12 0.76

0.32 4.85 0.08 -0.24 0.09 -0.11 0.16

-0.49 0.41 -0.81 -0.39 0.10 0.51 -0.35

-0.53 -2.20 0.38 -1.15 0.17 0.10 0.72

0.05 1.21 -0.03 0.15 -0.13 -0.13 -0.19

0.18 0.15 0.17 -0.44 0.04 0.90 0.33

0.24 -0.02 0.24 -0.84 0.17 0.11 0.69

0.37 1.73 -0.03 0.46 -0.13 -0.09 -0.19

-0.05 0.12 0.07 0.26 0.06 0.77 0.29

0.35 0.11 0.28 0.09 0.20 0.12 0.83

0.3 4.7 -18.2 3.8 -10.1 -14.9 -5.0

4.1 4.3 1.5 3.2 0.7 -3.9 3.8

3.6 3.1 9.5 3.0 18.9 7.4 4.2

Source:

Author’s estimates.

182 Steven Kapsos

Transition Economies

1991 to 1995

Appendix Table A4.2.4 Sector Employment Elasticities, Sector Value-Added Growth, and GDP Growth (1991–2003)—Transition Economies Agriculture Elasticity, 1991–2003

Sector Value-Added Growth and Total Growth, 1991–2003 (average annual %)

Value Added

GDP

Value Added

GDP

Value Added

Agriculture

Industry

Services

GDP Growth

-0.61 0.12 0.08 0.00 0.11 -1.91 -3.70 -1.76 -1.52 0.03 -0.04 -0.30

-0.81 0.63 0.11 0.74 0.17 2.16 -1.21 4.83 0.28 0.35 0.89 0.42

-0.24 -0.78 0.18 0.00 0.16 0.15 -1.06 -0.32 0.27 0.35 0.33 0.00

0.05 0.01 0.19 -0.04 1.14 0.14 -0.44 0.05 0.14 0.49 0.74 0.33

0.16 0.10 0.02 0.12 0.49 0.34 0.39 -0.06 0.21 -0.12 0.01 -0.09

0.11 0.14 0.03 0.34 0.22 0.32 0.29 -0.07 0.24 -0.10 0.11 -0.16

5.1 1.5 0.4 -2.9 1.0 -1.1 2.2 -1.8 -0.6 -2.4 2.5 -3.9

2.6 -4.9 1.6 -0.4 -1.4 -0.9 0.7 -0.8 4.1 -3.4 -6.8 -5.5

7.8 -1.6 -0.3 0.5 -2.4 2.8 2.1 2.3 2.3 -0.8 -2.2 4.2

5.6 -2.3 0.7 -0.6 -1.8 1.0 1.5 1.0 2.7 -2.0 -1.6 0.0

-0.54 -0.33 -0.74 0.63 0.70 -1.82 0.06 -0.86 -0.83 -0.07 0.16 0.12

-0.83 -0.23 -1.30 -0.19 0.68 -2.55 0.84 -1.18 -1.72 -0.03 0.55 0.16

-0.04 -0.01 -0.30 -0.58 0.94 -0.16 -0.07 0.51 0.58 -0.06 0.28 0.78

0.42 0.00 -0.24 -0.19 0.65 -0.15 -0.07 0.12 0.62 -0.15 0.15 -0.11

0.19 0.66 0.30 0.47 -0.06 0.38 0.59 0.16 0.98 0.06 0.02 0.82

-0.68 -0.54 0.35 0.42 0.15 0.30 0.59 1.21 0.95 -0.01 0.03 0.79

-1.4 -9.2 1.1 -0.7 -1.0 2.7 -0.4 -2.4 1.0 0.2 -2.9 1.4

-1.9 -7.0 5.0 0.6 -4.3 3.1 4.4 -6.7 3.1 0.4 -5.2 -2.3

1.5 -0.5 4.1 1.8 -0.3 5.0 3.8 2.9 3.6 -1.1 -4.9 2.1

-0.1 -5.8 4.3 0.9 -2.2 4.3 3.8 -1.5 3.1 -0.3 -4.5 0.6

Author’s estimates.

183 The Employment Intensity of Growth

Source:

Services Elasticity, 1991–2003

GDP

Transition Economies Albania Armenia Azerbaijan Belarus Bulgaria Croatia Czech Republic Estonia Hungary Kazakhstan Kyrgyzstan Latvia Macedonia, The former Yugoslav Rep. Moldova, Rep. of Poland Romania Russian Federation Slovakia Slovenia Tajikistan Turkey Turkmenistan Ukraine Uzbekistan

Industry Elasticity, 1991–2003

Appendix Table A4.2.5 Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Asia and the Pacific Total Employment Elasticity

Youth Employment Elasticity

Female Employment Elasticity

Male Employment Elasticity

Average Annual GDP Growth (%)

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

PRC Hong Kong, China Korea, Republic of Macau, China Mongolia Cambodia Fiji Islands Indonesia Lao People’s Dem. Rep. Malaysia Myanmar Papua New Guinea Philippines Singapore Solomon Islands Thailand Viet Nam Bangladesh Bhutan India Nepal Pakistan Sri Lanka

0.14 0.22 0.30 -0.04 -0.40 0.52 0.64 0.37 0.06 0.31 0.35 0.24 0.99 0.21 0.69 0.09 0.24 0.38 0.04 0.40 0.35 0.49 0.14

0.14 0.68 0.17 -1.16 0.48 0.59 0.50 -0.08 0.08 0.51 0.36 0.41 0.69 0.54 0.16 0.14 0.26 0.48 0.42 0.43 0.46 0.96 0.82

0.17 0.43 0.38 0.51 1.18 0.00 0.65 0.43 0.61 0.67 0.21 -1.46 0.76 0.62 -0.44 0.38 0.35 0.06 0.56 0.36 0.64 0.63 0.19

-0.23 -0.41 -0.11 -0.97 -0.36 0.77 0.02 0.18 -0.23 0.17 0.20 0.09 0.83 -0.67 0.67 -0.38 -0.12 0.13 -0.09 0.08 0.14 0.25 -0.36

-0.44 -0.10 -0.96 0.38 -0.29 0.71 0.56 0.32 -0.36 0.35 0.11 0.33 0.07 -0.72 0.10 1.16 -0.22 0.35 0.39 0.13 0.23 0.86 1.34

0.07 -0.70 -0.09 0.49 0.46 0.80 0.17 -0.15 0.57 0.48 0.03 -1.19 0.86 0.64 -0.32 -0.10 0.04 -0.97 0.57 0.16 0.53 0.72 -0.83

0.15 0.35 0.32 0.17 -0.34 0.37 1.84 0.38 0.05 0.29 0.37 0.32 1.09 0.19 0.77 0.01 0.23 0.13 0.13 0.54 0.22 0.93 -0.08

0.17 1.18 0.31 -1.89 0.49 0.50 0.64 -0.20 0.06 0.50 0.38 0.47 0.86 0.63 0.18 0.18 0.24 0.50 0.51 0.57 0.31 1.16 1.39

0.17 0.74 0.49 0.66 1.20 0.51 1.00 0.57 0.57 0.82 0.22 -1.55 0.79 0.71 -0.45 0.42 0.34 -0.10 0.59 0.33 0.57 0.69 -0.05

0.13 0.13 0.28 -0.18 -0.46 0.68 0.16 0.37 0.07 0.33 0.34 0.17 0.92 0.23 0.63 0.15 0.25 0.54 -0.02 0.34 0.43 0.36 0.22

0.12 0.36 0.08 -0.56 0.47 0.68 0.43 -0.01 0.10 0.52 0.35 0.37 0.57 0.48 0.14 0.11 0.27 0.47 0.37 0.37 0.54 0.90 0.59

0.17 0.20 0.31 0.37 1.15 -0.57 0.47 0.35 0.63 0.59 0.20 -1.38 0.75 0.56 -0.43 0.36 0.35 0.16 0.53 0.38 0.67 0.61 0.29

12.7 5.7 7.4 6.6 -1.1 7.9 4.9 7.6 7.0 9.5 7.5 8.4 2.8 9.6 5.9 8.6 8.8 4.6 6.3 6.3 4.9 4.5 5.6

8.3 1.8 3.4 -2.1 3.3 6.6 2.1 -0.3 6.4 3.7 7.2 1.7 3.4 5.4 0.2 -0.6 6.9 5.0 6.8 6.3 4.5 3.0 4.8

8.1 4.0 5.6 5.6 2.8 6.5 2.3 4.1 5.2 4.6 11.7 -0.4 4.4 2.8 -5.8 4.8 7.0 5.3 7.1 5.3 3.5 3.9 3.4

Source:

Author’s estimates.

184 Steven Kapsos

Asia and the Pacific

1991 to 1995

Appendix Table A4.2.6 Sector Employment Elasticities, Sector Value-Added Growth, and GDP Growth (1991–2003)—Asia and the Pacific

GDP

Value Added

GDP

0.09 1.51 1.04 -0.03 -0.01 0.16 0.53 0.20 0.83 -0.28 0.13 0.26 0.34 0.38 -0.41 0.80 1.01

0.23 1.25 -0.24 0.23 0.00 1.01 0.53 0.34 -2.29 -0.12 0.23 0.35 0.59 0.78 -0.64 0.69 2.67

0.07 -1.14 0.81 1.11 -0.05 0.58 0.18 0.69 -0.38 0.90 0.09 0.71 0.66 0.28 3.84 0.71 0.02

Asia and the Pacific PRC Mongolia Fiji Islands Indonesia Lao People’s Dem. Rep. Malaysia Papua New Guinea Philippines Singapore Thailand Viet Nam Bangladesh Bhutan India Nepal Pakistan Sri Lanka Source:

Industry Elasticity, 1991–2003

Author’s estimates.

Value Added 0.06 -0.60 0.56 0.91 -0.03 0.47 -0.05 0.69 -0.29 0.70 0.06 0.51 0.47 3.05 0.65 0.04

Services Elasticity, 1991–2003

Sector Value-Added Growth and Total Growth, 1991–2003 (average annual %)

GDP

Value Added

Agriculture

Industry

0.47 1.43 1.00 1.16 0.66 0.60 0.79 1.36 0.65 0.85 0.91 0.03 0.41 0.54 1.92 0.44 -0.15

0.50 1.51 0.76 1.04 0.64 0.59 0.65 1.14 0.65 0.87 0.98 0.03 0.40 0.41 1.60 0.37 -0.16

3.7 3.8 0.3 2.2 5.3 1.0 3.6 2.3 -3.1 1.6 4.3 3.0 3.4 2.8 2.6 3.4 1.7

12.5 -0.2 3.6 4.5 10.1 7.2 3.7 3.4 5.9 5.2 11.4 7.2 9.9 6.0 5.5 4.2 5.6

Services 8.8 0.9 3.6 3.5 5.9 5.9 2.5 4.3 6.0 3.9 7.0 4.9 7.0 7.7 5.3 4.5 5.2

GDP Growth 9.7 1.6 3.0 3.7 6.4 5.9 3.2 3.6 6.0 4.2 7.6 4.9 6.4 6.0 4.2 4.1 4.5

185 The Employment Intensity of Growth

Agriculture Elasticity, 1991–2003

Appendix Table A4.2.7 Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Latin America and the Caribbean Total Employment Elasticity

Youth Employment Elasticity

Female Employment Elasticity

Male Employment Elasticity

Average Annual GDP Growth (%)

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

Argentina Bahamas Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Puerto Rico Suriname Trinidad and Tobago Uruguay Venezuela

-0.01 2.91 1.37 0.97 0.95 0.54 0.35 0.63 0.56 1.02 2.01 0.44 0.95 0.12 -0.34 1.01 0.31 0.81 1.06 1.01 1.97 0.46 0.61 -0.32 1.26 0.31 1.28

0.71 0.77 0.90 0.87 1.23 0.50 0.22 0.42 0.66 0.64 0.61 0.88 0.97 0.34 0.57 2.27 -1.25 0.71 1.11 0.63 3.55 1.36 0.43 -0.27 0.72 0.28 0.92

0.01 -0.06 -0.23 0.48 1.59 0.68 0.28 0.94 1.33 0.29 1.18 2.00 1.04 0.89 -2.42 -0.31 1.55 0.67 0.56 1.04 2.20 -2.76 0.32 0.60 0.85 -0.01 -0.36

-0.65 1.97 1.55 0.87 0.57 0.22 0.17 0.21 0.22 0.97 0.79 0.72 1.00 -0.39 -0.25 0.95 -0.68 0.67 0.86 0.89 2.31 0.61 1.26 -0.14 1.64 0.34 0.68

0.29 0.04 0.49 0.73 1.41 -0.46 -0.96 -1.22 0.62 1.10 0.23 0.38 0.93 -0.49 0.57 1.55 -0.04 0.33 1.21 0.20 2.70 1.22 0.41 -2.37 0.94 0.04 1.25

1.48 -1.70 0.69 0.32 1.55 -0.65 -0.92 0.52 0.51 -0.76 1.53 -0.40 1.09 -0.61 -2.22 -2.00 2.02 -0.86 0.36 0.49 1.94 -0.26 -0.10 0.62 1.30 0.99 -0.05

0.49 3.81 1.36 1.51 1.74 0.74 0.55 0.82 0.76 1.93 4.38 0.13 1.75 0.13 -0.55 1.33 0.08 1.31 -0.07 1.24 3.03 0.39 0.85 0.07 1.68 0.48 1.38

1.17 1.03 0.96 0.96 1.25 0.62 0.49 1.01 0.95 0.90 0.68 1.42 1.57 0.58 0.78 4.02 -0.64 0.92 1.07 0.81 5.21 2.11 0.58 -1.15 0.88 0.58 1.46

-0.44 0.07 0.12 0.51 1.97 0.83 0.21 0.35 2.42 0.26 1.88 3.49 0.84 1.28 -2.45 -0.63 1.86 0.77 0.84 1.03 2.23 -2.63 0.43 0.27 0.93 -0.02 -0.44

-0.25 2.13 1.38 0.77 0.43 0.42 0.26 0.52 0.48 0.71 0.84 0.64 0.65 0.12 -0.18 0.90 0.48 0.59 1.55 0.91 1.37 0.50 0.46 -0.52 1.03 0.19 1.23

0.45 0.52 0.84 0.84 1.21 0.42 0.08 0.05 0.54 0.53 0.57 0.55 0.71 0.22 0.39 1.53 -1.69 0.61 1.12 0.54 2.38 0.89 0.33 0.14 0.63 0.08 0.65

0.31 -0.18 -0.53 0.47 1.30 0.59 0.31 1.33 0.81 0.30 0.74 0.99 1.14 0.69 -2.39 -0.15 1.34 0.62 0.43 1.04 2.17 -2.85 0.24 0.74 0.79 0.00 -0.32

5.1 0.0 0.3 4.5 3.8 3.6 8.9 4.6 6.3 5.0 2.1 6.8 4.5 7.4 -7.0 3.6 1.7 0.8 1.9 4.5 3.5 6.3 4.5 -0.8 1.0 4.1 1.9

3.4 4.1 3.8 4.5 3.6 1.7 4.3 0.5 5.7 7.7 0.5 3.3 4.1 3.8 2.9 2.4 -0.3 5.1 5.3 5.0 0.9 2.5 4.5 1.9 4.7 3.1 0.0

-2.0 1.2 0.0 6.9 2.2 1.8 3.2 2.4 2.9 3.3 3.5 2.0 2.6 0.1 -0.2 3.4 1.4 2.1 4.7 2.1 0.4 2.8 3.9 2.5 4.0 -3.4 -3.2

Source:

Author’s estimates.

186 Steven Kapsos

Latin America and the Caribbean

Appendix Table A4.2.8 Sector Employment Elasticities, Sector Value-Added Growth, and GDP Growth (1991–2003)—Latin America and the Caribbean Agriculture Elasticity, 1991–2003 Latin America and the Caribbean

Source:

Services Elasticity, 1991–2003

Sector Value-Added Growth and Total Growth, 1991–2003 (average annual %)

GDP

Value Added

GDP

Value Added

GDP

Value Added

Agriculture

Industry

-0.02 -0.20 0.34 5.33 -0.66 -0.30 1.14 -0.02 0.28 1.78 0.94 0.90 0.00 -0.44 0.89 -1.91 -0.46 1.02 0.23 -0.73 0.35 2.12 -0.20 -0.38 0.31

-0.24 0.00 0.19 7.14 -0.56 -0.50 -0.85 0.00 0.47 0.35 3.42 1.32 0.02 -0.36 0.83 -0.02 -0.71 1.02 0.38 -0.54 0.23 -1.11 -0.17 -0.11 0.01

0.04 1.67 -0.83 0.95 0.46 0.04 -0.29 0.41 0.60 1.81 0.48 -0.27 -0.03 -0.71 1.31 -0.14 1.31 1.04 0.88 3.23 -0.08 -10.21 0.85 -0.29 1.22

-0.06 1.22 0.16 0.88 0.48 0.03 -0.19 0.35 0.58 0.66 0.40 -0.28 -0.02 -0.30 1.09 0.27 1.16 1.49 1.04 1.85 -0.08 -6.18 0.72 0.40 0.57

0.31 1.17 2.36 0.96 1.09 0.47 0.93 1.19 0.76 1.80 0.98 1.98 0.51 0.05 2.05 2.97 1.13 0.69 1.06 5.20 0.67 1.30 1.01 0.52 2.16

0.42 1.38 2.30 0.89 1.06 0.60 0.66 1.24 0.73 1.40 0.84 1.73 0.70 1.00 1.65 1.57 1.13 0.41 0.97 5.29 0.76 0.98 1.15 0.46 1.91

2.8 -1.1 5.4 2.2 3.7 2.5 -1.0 3.1 3.2 -2.4 1.3 2.5 4.4 -4.4 2.7 0.3 1.9 2.3 2.4 2.0 4.9 -0.4 2.2 1.4 1.2

1.7 1.6 3.8 3.5 2.0 5.0 1.6 5.1 5.5 2.7 4.8 3.6 5.8 -3.7 3.8 -0.1 2.6 2.1 3.2 3.0 4.4 0.2 3.6 -1.2 0.7

Author’s estimates.

Services 2.0 1.1 5.6 3.5 2.7 4.5 3.4 4.9 5.6 2.7 4.3 4.3 3.0 0.2 3.6 1.7 2.8 5.7 4.2 0.6 3.4 1.5 2.9 2.2 0.2

GDP Growth 1.9 1.1 5.2 3.3 2.5 4.5 2.1 4.8 5.3 2.0 4.0 3.7 4.2 -2.1 3.4 1.0 2.7 4.0 3.9 1.6 3.8 1.0 3.2 1.1 0.5

187 The Employment Intensity of Growth

Argentina Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Suriname Trinidad and Tobago Uruguay Venezuela

Industry Elasticity, 1991–2003

Appendix Table A4.2.9 Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Africa and the Middle East Total Employment Elasticity

Youth Employment Elasticity

Female Employment Elasticity

Male Employment Elasticity

Average Annual GDP Growth (%)

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

Algeria Angola Bahrain Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Rep. Chad Comoros Congo Côte d’Ivoire Dem. Rep. of the Congo Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea-Bissau Iran, Islamic Rep. of

-0.37 -0.21 0.65 1.15 0.36 0.98 -0.21 -1.11 0.57 0.37 -0.02 0.75 -0.61 0.98 -0.19 0.53 0.27 0.02 0.62 0.67 2.39 0.81 0.80 1.01 0.85

0.99 0.31 0.89 0.77 1.41 0.55 0.05 0.63 0.63 0.45 1.05 1.82 1.34 0.46 -0.06 0.48 0.07 0.48 1.11 0.55 1.72 0.68 0.46 -0.15 1.22

0.91 0.38 0.81 0.69 0.52 0.60 1.60 0.57 0.73 -0.20 0.37 1.81 0.52 -1.20 0.00 0.33 0.12 0.38 0.73 0.86 0.98 0.69 0.51 -0.36 0.62

-0.85 -0.26 0.56 0.96 -0.52 0.83 -0.73 -1.14 0.35 0.45 0.15 0.69 -0.66 1.37 -0.14 0.89 0.26 0.02 0.75 0.80 2.99 0.81 0.81 1.13 0.66

0.16 0.37 0.69 0.78 1.43 0.49 -0.09 0.65 0.70 0.64 1.78 1.84 1.49 0.77 0.07 0.72 0.07 0.51 1.39 0.56 2.49 0.66 0.56 -0.14 1.95

0.49 0.44 0.42 0.84 0.61 0.60 2.14 0.67 0.70 -0.41 0.47 1.52 0.67 -1.90 -0.07 -1.43 0.15 0.39 0.90 0.61 1.20 0.67 0.46 -0.41 0.75

-0.20 -0.20 1.07 1.88 1.46 0.93 -0.12 -1.29 0.59 0.36 -0.08 0.73 -0.64 1.26 -0.13 0.39 0.28 0.02 0.81 0.71 2.65 0.79 0.79 1.04 2.56

1.93 0.30 1.40 1.21 1.51 0.51 0.06 0.72 0.63 0.43 0.95 1.78 1.40 0.60 0.13 0.39 0.07 0.48 1.67 0.57 2.05 0.67 0.45 -0.15 1.98

1.10 0.38 0.98 0.84 0.87 0.54 1.36 0.59 0.67 -0.17 0.37 1.76 0.52 -1.34 0.00 0.83 0.12 0.38 0.94 0.87 1.05 0.67 0.49 -0.37 0.77

-0.42 -0.21 0.56 0.62 -0.40 1.04 -0.30 -1.01 0.56 0.38 0.04 0.76 -0.59 0.86 -0.24 0.56 0.27 0.02 0.49 0.65 2.20 0.82 0.81 0.98 0.38

0.68 0.32 0.77 0.37 1.32 0.58 0.04 0.57 0.63 0.47 1.13 1.84 1.30 0.39 -0.20 0.50 0.06 0.48 0.69 0.54 1.47 0.70 0.47 -0.14 0.96

0.84 0.39 0.76 0.55 0.21 0.65 1.85 0.55 0.77 -0.23 0.37 1.85 0.52 -1.13 -0.01 0.21 0.12 0.38 0.55 0.85 0.92 0.71 0.54 -0.36 0.57

0.6 -5.4 5.8 4.1 3.3 2.5 -4.0 -1.4 6.2 1.3 0.3 2.4 0.2 1.8 -7.0 4.1 9.0 12.2 3.2 2.4 1.9 4.0 4.5 2.7 3.0

3.4 7.2 4.0 5.3 4.9 5.0 -1.1 4.8 6.3 2.4 3.0 1.5 1.0 5.0 -3.2 5.3 39.6 4.7 5.0 1.6 4.6 4.6 4.8 -2.0 3.4

3.9 6.5 3.5 5.6 5.3 4.7 1.1 4.5 5.3 -1.2 7.1 1.4 4.1 -2.0 -0.4 3.7 21.5 0.6 3.0 2.7 4.3 4.4 3.0 -0.3 6.0

continued.

188 Steven Kapsos

Africa and the Middle East

Appendix Table A4.2.9 Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Africa and the Middle East (cont’d.) Total Employment Elasticity

Youth Employment Elasticity

Female Employment Elasticity

Male Employment Elasticity

Average Annual GDP Growth (%)

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

Israel Jordan Kenya Kuwait Lebanon Lesotho Liberia Madagascar Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Oman Rwanda Saudi Arabia Senegal Sierra Leone South Africa Sudan Swaziland Syrian Arab Republic

0.97 1.26 1.64 -0.07 0.78 0.50 0.07 2.14 0.07 0.65 0.44 0.27 -0.09 0.73 0.48 0.51 1.51 1.36 0.24 2.16 1.13 0.23 -0.34 0.77 0.84 0.73

0.58 2.01 1.51 3.23 1.21 0.21 0.13 0.73 0.42 0.41 0.74 0.19 1.07 0.24 -1.12 0.66 1.21 1.11 0.88 1.71 0.58 0.10 1.94 0.70 0.72 1.34

0.85 1.07 2.72 1.67 1.46 0.18 0.65 0.10 0.30 0.41 0.74 0.23 0.28 0.23 2.10 0.83 0.62 0.48 0.58 1.11 0.68 0.44 -0.23 0.56 0.51 1.71

1.38 1.09 1.85 -0.39 0.24 0.70 0.09 1.93 0.04 0.67 0.44 -0.24 -0.24 0.57 0.32 0.49 1.60 0.80 0.27 0.41 1.23 0.42 -1.88 0.71 1.30 0.83

-0.60 0.76 1.62 3.61 0.10 0.28 0.10 0.66 0.59 0.44 0.66 -0.01 1.13 0.18 -3.45 0.62 1.35 2.31 1.11 3.69 0.60 0.37 2.17 0.79 0.91 1.22

0.36 0.69 3.32 2.39 0.99 0.70 0.75 0.06 0.40 0.43 0.59 -0.55 -0.69 0.32 4.27 0.70 0.67 0.35 0.66 1.30 0.65 0.27 -0.46 0.57 1.27 1.68

1.25 1.65 1.70 -0.08 1.07 0.50 0.09 2.12 0.08 0.66 0.43 0.28 -0.06 0.71 0.58 0.51 1.64 1.64 0.22 5.04 1.20 0.25 -0.18 1.29 1.17 0.93

0.90 2.83 1.60 3.56 1.59 0.22 0.11 0.73 0.42 0.41 0.70 0.26 1.34 0.24 -1.70 0.67 1.29 2.77 0.95 4.98 0.60 0.12 2.31 0.84 0.67 1.89

1.02 1.07 2.75 1.93 1.38 0.31 0.67 0.10 0.26 0.40 0.70 0.23 -0.85 0.22 2.15 0.82 0.62 0.81 0.57 1.74 0.69 0.42 -0.28 0.67 0.52 1.77

0.78 1.17 1.58 -0.07 0.67 0.50 0.05 2.15 0.06 0.65 0.45 0.26 -0.10 0.76 0.40 0.51 1.44 1.33 0.26 1.77 1.07 0.23 -0.43 0.59 0.65 0.66

0.33 1.79 1.43 3.13 1.05 0.20 0.14 0.74 0.41 0.41 0.78 0.15 0.97 0.25 -0.70 0.66 1.17 0.90 0.81 1.11 0.56 0.09 1.73 0.65 0.75 1.13

0.72 1.07 2.69 1.60 1.50 0.11 0.65 0.10 0.33 0.41 0.77 0.22 0.64 0.25 2.07 0.84 0.63 0.43 0.59 0.97 0.67 0.45 -0.21 0.52 0.50 1.68

6.3 8.5 1.7 15.1 6.4 3.9 -24.5 1.2 1.7 3.2 5.2 5.0 -0.7 2.9 4.1 0.3 2.0 5.1 -10.1 1.4 2.0 -7.3 1.3 4.4 3.0 8.0

3.5 2.8 2.2 0.0 2.9 3.3 38.7 3.7 4.4 5.7 3.8 5.6 4.4 9.6 3.5 3.9 2.5 2.8 10.7 2.0 5.2 -5.5 2.4 6.3 3.5 2.9

1.7 4.2 0.8 0.6 1.6 3.0 6.9 1.5 1.2 6.3 4.4 4.6 3.9 7.2 2.9 3.1 4.7 4.8 6.3 2.4 4.8 5.5 2.9 6.2 2.5 2.4

continued

189 The Employment Intensity of Growth

Africa and the Middle East (2)

Appendix Table A4.2.9 Employment Elasticities and GDP Growth (1991–1995, 1995–1999, and 1999–2003)—Africa and the Middle East (cont’d.) Total Employment Elasticity

Youth Employment Elasticity

Female Employment Elasticity

Male Employment Elasticity

Average Annual GDP Growth (%)

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

1991 to 1995

1995 to 1999

1999 to 2003

Tanzania, United Rep. of Togo Tunisia Uganda United Arab Emirates Yemen, Rep. of Zambia Zimbabwe

1.80 0.01 0.81 0.31 1.70 1.21 -0.50 1.84

0.67 0.87 0.65 0.23 0.60 0.95 0.89 0.26

0.42 1.06 0.92 0.48 0.34 0.85 0.20 -0.21

1.78 0.00 0.35 0.36 2.81 1.72 -0.62 4.45

0.63 0.92 0.77 0.18 -1.24 1.95 1.32 0.42

0.49 1.08 0.95 0.48 -0.42 1.06 0.43 -0.68

1.76 0.01 1.34 0.32 2.38 1.06 -0.51 1.67

0.64 0.90 1.29 0.24 1.53 1.22 0.84 0.26

0.40 1.06 1.41 0.46 0.68 0.90 0.16 -0.13

1.84 0.01 0.67 0.30 1.62 1.25 -0.50 1.99

0.69 0.85 0.46 0.22 0.47 0.85 0.93 0.27

0.44 1.06 0.75 0.50 0.29 0.84 0.23 -0.28

1.8 0.2 4.0 7.4 2.4 6.5 -1.8 0.1

3.9 3.3 5.8 6.7 4.6 5.8 2.5 3.7

5.8 1.3 4.2 5.6 5.8 4.6 4.3 -6.3

Source:

Author’s estimates.

190 Steven Kapsos

Africa and the Middle East (3)

Appendix Table A4.2.10 Sector Employment Elasticities, Sector Value-Added Growth, and GDP Growth (1991–2003)—Africa and the Middle East Agriculture Elasticity, 1991–2003 Africa and the Middle East

Services Elasticity, 1991–2003

Sector Value-Added Growth and Total Growth, 1991–2003 (average annual %)

GDP

Value Added

GDP

Value Added

GDP

Value Added

Agriculture

Industry

Services

GDP Growth

1.92 0.36 0.67 2.03 0.60 -0.78 0.77 0.01 0.77 0.84 2.75 1.84 0.87 -0.02 0.19 -0.53 0.34 0.91 0.98 1.80 0.50 0.53 0.00 1.73 2.22

1.22 0.16 0.60 -6.38 0.78 -0.34 0.53 0.02 0.45 0.89 0.81 1.31 0.84 1.41 0.27 -1.34 -0.14 1.46 0.46 1.03 0.58 0.48 0.65 1.53 -1.61

0.75 0.42 1.17 0.18 1.30 2.04 0.73 0.94 0.28 0.83 -0.23 0.33 0.48 -0.73 0.14 0.94 0.72 1.44 0.88 1.76 1.22 1.02 0.34 0.96 1.45

0.75 0.38 1.22 0.20 1.70 0.63 0.76 1.05 0.50 0.34 0.01 0.19 0.22 0.22 0.14 0.52 0.40 1.24 0.88 1.47 1.26 0.89 0.09 -0.33 1.27

0.54 0.42 1.01 0.99 1.10 1.29 0.76 0.77 0.45 0.86 0.59 0.78 0.61 -0.57 0.87 0.53 0.60 1.31 0.90 1.78 1.01 0.87 0.28 0.40 1.33

0.51 -0.01 1.09 0.65 0.86 1.41 1.04 0.73 -0.19 1.06 -0.18 0.33 0.73 -0.20 0.81 1.23 0.56 0.87 0.69 1.49 0.84 1.11 0.00 0.22 1.28

3.7 0.4 5.4 -0.7 3.0 -0.3 5.9 4.4 3.9 3.1 4.4 2.3 2.8 0.2 3.1 5.1 -1.2 0.7 0.6 3.1 3.3 4.6 2.8 4.7 -0.6

2.3 5.3 5.1 4.0 2.8 -0.5 1.4 5.4 2.0 7.7 9.3 2.4 2.3 -6.3 3.8 44.8 11.9 4.4 2.6 3.7 3.0 4.5 1.1 0.3 6.0

3.2 -1.5 4.6 6.8 5.0 -0.4 0.6 6.3 -6.7 2.4 -4.6 1.1 0.8 -10.0 4.6 9.5 5.7 6.3 2.1 4.6 5.7 3.1 1.0 7.3 4.6

2.7 2.6 5.0 5.0 4.1 -0.3 2.6 5.9 1.0 3.6 1.8 1.8 1.6 -4.3 4.1 23.1 5.1 3.4 2.2 4.1 4.3 3.9 1.8 4.4 4.7 continued.

191 The Employment Intensity of Growth

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Rep. Chad Comoros Congo Côte d’Ivoire Dem. Rep. of the Congo Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea-Bissau Iran, Islamic Rep. of Jordan

Industry Elasticity, 1991–2003

Appendix Table A4.2.10 Sector Employment Elasticities, Sector Value-Added Growth, and GDP Growth (1991–2003)—Africa and the Middle East (cont’d.) Agriculture Elasticity, 1991–2003 Africa and the Middle East (2)

Source:

Services Elasticity, 1991–2003

Sector Value-Added Growth and Total Growth, 1991–2003 (average annual %)

GDP

Value Added

GDP

Value Added

GDP

Value Added

Agriculture

Industry

Services

GDP Growth

1.67 -0.99 1.17 0.41 0.44 0.59 0.17 3.60 0.26 -0.03 1.16 1.33 0.58 3.91 0.65 -0.35 0.50 0.89 0.73 2.16 0.68 1.03 2.32 0.06 1.17 0.95 0.21

1.93 -1.25 1.70 0.18 0.73 0.72 0.10 0.63 0.32 -0.19 1.00 0.88 0.65 4.44 0.88 -0.15 0.27 0.53 0.49 1.89 0.78 0.93 2.05 0.11 1.14 0.46 0.45

1.58 1.18 -0.13 0.65 0.74 0.72 -0.99 0.57 0.94 1.21 0.36 0.89 0.78 1.58 0.81 2.67 0.80 0.42 0.78 1.23 0.60 0.49 0.78 2.09 0.85 -0.42 1.00

2.04 0.91 -0.18 0.61 0.44 0.94 -0.96 0.52 0.47 1.33 0.46 0.96 0.61 1.97 0.61 2.53 1.16 0.37 0.75 0.63 0.45 0.32 0.77 1.32 0.72 0.60 0.04

1.76 0.85 0.28 0.59 0.66 0.68 0.94 0.99 0.80 0.77 0.58 1.00 0.75 1.24 0.78 1.90 0.70 0.07 0.77 1.15 0.64 0.66 0.65 0.85 0.77 0.00 0.86

1.25 0.82 0.22 0.90 0.91 0.47 0.78 1.06 1.54 0.69 0.63 0.88 0.73 0.90 0.75 1.91 0.58 0.10 0.70 1.50 0.66 0.35 0.57 0.75 0.77 -0.08 1.06

0.9 1.6 1.7 5.1 3.2 3.0 -0.1 0.3 4.5 0.9 2.5 3.5 4.0 1.8 2.3 -2.5 0.0 9.3 0.0 4.2 3.5 3.1 2.2 3.8 6.3 2.3 0.9

1.2 4.7 1.7 -0.2 7.5 2.9 5.0 3.2 13.0 3.6 2.1 0.3 0.4 1.1 5.4 -0.4 1.4 5.7 3.4 7.3 4.7 2.1 4.6 10.2 5.3 -0.8 -2.5

2.6 3.6 2.7 1.8 3.6 6.2 6.2 2.9 2.9 4.0 2.5 2.5 0.5 2.7 3.9 -2.7 2.8 3.3 3.5 3.4 3.7 -0.1 5.3 7.6 5.6 2.9 0.9

1.8 3.6 2.2 2.5 4.2 4.5 5.3 2.5 6.2 3.5 2.4 2.2 1.9 1.9 3.9 -2.4 2.2 5.7 3.0 4.4 3.8 1.6 4.6 6.3 5.7 1.5 -0.1

Author’s estimates.

192 Steven Kapsos

Kenya Lesotho Madagascar Malawi Mali Mauritania Mauritius Morocco Mozambique Namibia Niger Nigeria Rwanda Saudi Arabia Senegal Sierra Leone South Africa Sudan Swaziland Syrian Arab Republic Tanzania, United Rep. of Togo Tunisia Uganda Yemen, Rep. of Zambia Zimbabwe

Industry Elasticity, 1991–2003

193 The Employment Intensity of Growth Appendix 4.3 Aggregation Methodologies

This appendix provides an explanation of the weighting methodologies used to produce the various world and regional aggregations presented in this chapter. Economy-Wide Elasticities For economy-wide employment elasticities (total, youth, male and female), country-level results were weighted by labor force. For the 1991 to 1995 period, labor force from 1993 was used. For 1995 to 1999, labor force from 1997 was used. Finally, for 1999 to 2003, labor force figures from 2001 were used. The labor force chosen for the weight was identical to the group for which elasticities were calculated (female labor force weight for female elasticity, etc.). Sector-Specific Elasticities For sector-specific elasticities (agriculture, industry, and services) for the 1991 to 2003 period, country-level results were weighted by total country employment in each sector in 1997 (i.e., employment in agriculture in 1997 was used to weight the agriculture elasticities). GDP and Value-Added Growth Aggregate average annual growth rates in GDP were calculated by weighting the country-level average annual growth rates by each country’s respective share in world output given by the International Monetary Fund’s “Shares of Aggregate GDP Based on Purchasing Power Parity (PPP) Valuation of Country GDP Indicator.” Aggregate average annual growth rates in value added by economic sector were calculated by weighting the country-level average annual growth rates by each country’s respective share of global value added by sector (in constant 1995 dollars), given in the World Bank’s World Development Indicators 2004 database.

194 Steven Kapsos Appendix 4.4 Descriptive Statistics and Empirical Results Appendix Table A4.4.1 Descriptive Statistics: Full Sample Variable Employment elasticity, 1991–2003 Youth employment elasticity, 1991–2003 Female employment elasticity, 1991–2003 Average annual growth in working-age population, 1991–2003 Average annual growth in youth population, 1991–2003 LFPRgap91 Share of employment in services, 1991 Share of employment in industry, 1991 Average annual inflation rate, 1991–2003 Degree of conflict Average trade as percentage of GDP, 1991–2003 Average trade balance, 1991–2003 Malaria deaths per 100,000 inhabitants

N

Mean

Std. Dev.

Min

Max

154 154 154 154

0.548 0.235 0.704 0.020

0.482 0.857 0.713 0.012

-0.461 -2.575 -0.812 -0.009

2.403 3.060 5.101 0.068

154

0.016

0.017

-0.027

0.069

154 154 154 154 154 154 154 154

0.317 0.412 0.222 0.314 0.127 0.797 0.061 40.831

0.154 0.199 0.117 0.702 0.277 0.425 0.125 86.327

0.037 0.036 0.009 -0.003 0.000 0.031 -0.162 0.000

0.706 0.791 0.475 5.508 1.000 2.773 0.780 469.0

Appendix Table A4.4.2 Descriptive Statistics: Partial Sample Variable Employment elasticity, 1991–2003 Youth employment elasticity, 1991–2003 Female employment elasticity, 1991–2003 Average annual growth in working-age population, 1991–2003 Average annual growth in youth population, 1991–2003 LFPRgap91 Share of employment in services, 1991 Share of employment in industry, 1991 Average annual inflation rate, 1991–2003 Degree of conflict Highest individual tax rate Employment stringency index

N

Mean

Std. Dev.

Min

Max

100 100 100 100

0.522 0.139 0.712 0.019

0.480 0.876 0.770 0.012

-0.461 -2.575 -0.812 -0.006

2.403 3.060 5.101 0.068

100

0.012

0.018

-0.027

0.069

100 100 100 100 100 100 100

0.305 0.452 0.243 0.283 0.128 0.337 39.850

0.159 0.185 0.107 0.642 0.282 0.130 19.254

0.037 0.036 0.028 -0.003 0.000 0.000 0.000

0.706 0.791 0.475 5.508 1.000 0.600 86.0

195 The Employment Intensity of Growth Appendix Table A4.4.3 Regression Results with Total Elasticity as Dependent Variable, Specification 1 (1) Average annual growth in working-age population, 1991–2003 Share of employment in services, 1991

22.957 (3.066)***

Share of employment in industry, 1991 Average annual inflation rate, 1991–2003 Degree of conflict

(2)

(3)

25.414 24.515 (4.296)*** (4.450)*** 0.761 0.639 (0.205)*** (0.208)*** -0.423 -0.422 (0.382) (0.388) -0.114 (0.033)*** -0.157 (0.082)*

Average trade as percentage of GDP, 1991–2003 Average trade balance, 1991–2003 Malaria deaths per 100,000 inhabitants Constant Observations R-squared

0.085 (0.057) 154 0.34

-0.184 (0.157) 154 0.40

-0.060 (0.161) 154 0.44

(4) 24.444 (4.520)*** 0.608 (0.220)*** -0.435 (0.424) -0.116 (0.033)*** -0.164 (0.091)* 0.001 (0.068) -0.161 (0.189) 0.000 (0.000) -0.033 (0.183) 154 0.44

Robust standard errors in parentheses: * significant at 10%; ** significant at 5%; *** significant at 1%. Source: Author’s estimates.

Appendix Table A4.4.4 Regression Results with Total Elasticity as Dependent Variable, Specification 2 (1) Average annual growth in working-age population, 1991–2003 Share of employment in services, 1991

20.923 (4.151)***

Share of employment in industry, 1991 Average annual inflation rate, 1991–2003 Degree of conflict

(2)

(3)

20.655 19.953 (5.665)*** (5.949)*** 0.669 0.515 (0.263)** (0.264)* -0.624 -0.600 (0.588) (0.593) -0.136 (0.032)*** -0.110 (0.106)

Highest individual tax rate Employment stringency index Constant Observations R-squared

0.128 (0.067)* 100 0.29

-0.018 (0.220) 100 0.34

Robust standard errors in parentheses: * significant at 10%; ** significant at 5%; *** significant at 1%. Source: Author’s estimates.

0.112 (0.219) 100 0.38

(4) 16.680 (6.300)*** 0.568 (0.255)** -0.689 (0.623) -0.147 (0.028)*** -0.072 (0.100) -0.774 (0.446)* 0.003 (0.002) 0.309 (0.286) 100 0.42

196 Steven Kapsos Appendix Table A4.4.5 Regression Results with Youth Elasticity as Dependent Variable, Specification 1

Average annual growth in youth population, 1991–2003 Share of employment in services, 1991

(1)

(2)

32.232 (4.274)***

32.880 (6.066)*** 0.699 (0.444) -0.920 (0.758)

-0.273 (0.083)*** 154 0.41

-0.366 (0.257) 154 0.43

Share of employment in industry, 1991 Average annual inflation rate, 1991–2003 Degree of conflict Average trade as percentage of GDP, 1991–2003 Average trade balance, 1991–2003 Malaria deaths per 100,000 inhabitants Constant Observations R-squared

(3)

(4)

33.163 33.404 (6.232)*** (6.452)*** 0.602 0.506 (0.447) (0.441) -0.904 -1.016 (0.781) (0.826) -0.077 -0.076 (0.053) (0.057) -0.212 -0.231 (0.146) (0.158) 0.013 (0.122) -0.329 (0.373) -0.000 (0.001) -0.283 -0.199 (0.256) (0.281) 154 154 0.44 0.44

Robust standard errors in parentheses: * significant at 10%; ** significant at 5%; *** significant at 1%. Source: Author’s estimates.

Appendix Table A4.4.6 Regression Results with Youth Elasticity as Dependent Variable, Specification 2

Average annual growth in working-age population, 1991–2003 Share of employment in services, 1991

(1)

(2)

31.668 (5.737)***

29.772 (8.073)*** 0.791 (0.505) -1.516 (1.158)

-0.251 (0.091)*** 100 0.41

-0.217 (0.349) 100 0.44

Share of employment in industry, 1991 Average annual inflation rate, 1991–2003 Degree of conflict Highest individual tax rate Employment stringency index Constant Observations R-squared

Robust standard errors in parentheses: * significant at 10%; ** significant at 5%; *** significant at 1%. Source: Author’s estimates.

(3)

(4)

30.309 26.734 (8.567)*** (8.586)*** 0.690 0.670 (0.505) (0.504) -1.455 -1.635 (1.207) (1.241) -0.081 -0.062 (0.081) (0.073) -0.138 -0.080 (0.201) (0.199) -1.038 (0.650) 0.001 (0.003) -0.152 0.237 (0.336) (0.420) 100 100 0.44 0.46

197 The Employment Intensity of Growth Appendix Table A4.4.7 Regression Results with Female Elasticity as Dependent Variable, Specification 1 (1) Average annual growth in working-age population, 1991–2003 Share of employment in services, 1991

28.507 (3.939)***

Share of employment in industry, 1991 Gender gap in labor force participation Average annual inflation rate, 1991–2003 Degree of conflict

(2)

(3)

21.601 21.667 (5.512)*** (5.595)*** 1.140 1.032 (0.329)*** (0.334)*** -0.546 -0.532 (0.565) (0.590) 1.525 1.449 (0.485)*** (0.497)*** -0.097 (0.040)** -0.190 (0.137)

Average trade as percentage of GDP, 1991–2003 Average trade balance, 1991–2003 Malaria deaths per 100,000 inhabitants Constant Observations R-squared

0.129 (0.068)* 154 0.24

-0.563 (0.180)*** 154 0.41

-0.444 (0.189)** 154 0.43

(4) 21.078 (5.766)*** 0.875 (0.324)*** -0.619 (0.641) 1.491 (0.501)*** -0.099 (0.044)** -0.232 (0.153) -0.020 (0.088) -0.669 (0.327)** -0.000 (0.001) -0.295 (0.200) 154 0.44

Robust standard errors in parentheses: * significant at 10%; ** significant at 5%; *** significant at 1%. Source: Author’s estimates.

Appendix Table A4.4.8 Regression Results with Female Elasticity as Dependent Variable, Specification 2 (1) Average annual growth in working-age population, 1991–2003 Share of employment in services, 1991

28.649 (5.887)***

Share of employment in industry, 1991 Average annual inflation rate, 1991–2003 Degree of conflict

(2)

(3)

32.210 31.844 (8.066)*** (8.654)*** 1.236 1.041 (0.446)*** (0.442)** -0.305 -0.287 (0.781) (0.806) -0.150 (0.036)*** -0.225 (0.180)

Highest individual tax rate Employment stringency index Constant Observations R-squared

0.173 (0.081)** 100 0.21

-0.379 (0.303) 100 0.29

Robust standard errors in parentheses: * significant at 10%; ** significant at 5%; *** significant at 1%. Source: Author’s estimates.

-0.217 (0.302) 100 0.31

(4) 24.704 (8.572)*** 1.110 (0.404)*** -0.520 (0.874) -0.155 (0.055)*** -0.134 (0.159) -1.719 (0.841)** 0.004 (0.003) 0.358 (0.443) 100 0.38

198 Steven Kapsos

Notes 1. The terms “employment intensity of growth”, “job intensity of growth”, and “employment elasticity” are used interchangeably throughout this chapter. 2. Employment is expressed as the total number of employed persons. This definition was chosen in favor of total number of hours worked due to better overall data coverage in the former. 3. Total GDP is also used in the calculation of youth, female, and male elasticities. As a result, the elasticities by demographic group do not provide an indication of how employment for a given group varies with the group’s respective output. Ideally, this would also be calculated, but data limitations (the absence of GDP broken down by age and gender) prohibit such a calculation. 4. This table corresponds with interpretations that can be made when output exactly corresponds with employment (e.g., total output and total employment, or agriculture value added and employment in agriculture). The relationships between productivity, employment, and output may not hold in cases in which employment corresponds with a population subgroup (such as youth or women) and where total output is used instead of output for the population subgroup. 5. Kahn (2001) asserts that employment elasticities in developing economies should ideally be around 0.7 until these economies attain upper-middle-income status. He demonstrates that employment elasticities gradually fall as a country becomes more developed and more labor scarce. Kahn argues that labor-abundant economies, and especially those with a relatively high incidence of poverty, need to achieve relatively higher employment intensity than do less labor-abundant economies. 6. These estimates were generated using the arc elasticity formula given in equation 1. 7. Kahn (2001) takes an extensive look at regional and country-level trends in manufacturing employment elasticities. 8. Many other studies have investigated the relationship between employment growth and output growth, without explicitly discussing employment elasticities. This literature is excluded from the present discussion. 9. A list of countries included in the global and regional estimates is provided in Appendix 4.1. The actual country-level elasticities by age group, gender, and economic sector are provided in Appendix 4.2. 10. Aggregations of elasticities and GDP growth rates were carried out as described in Appendix 4.3. 11. This argument does not, however, account for the possibility of exogenous changes (perhaps owing to aging of populations, particularly in the developed world, or changes in youth labor force participation rates) impacting on the youth employment elasticity in the coming years. 12. Value-added growth rates correspond with the 139 countries for which sector value-added elasticities were calculated. These countries are indicated by an “a” in Appendix 4.1. 13. The level of sector disaggregation utilized in this chapter is quite broad and therefore ignores potentially important within-sector heterogeneity, as well as betweensector interrelationships and interdependence (see Andersen and Corley 2003). However,

199 The Employment Intensity of Growth these broad categories were chosen due to their overall data coverage and cross-country comparability. 14. The regional and subregional groupings utilized in this chapter are derived from those published in the Global Employment Trends Brief (ILO 2005c). 15. For helpful background information on these regions, see ILO (2005d). 16. For further discussion of factors contributing to labor market outcomes in CEE during the region’s transition to a market-based system, see Nesporova (2002). 17. For a discussion of employment and productivity growth performance in East Asia, see ILO (2005a). 18. This grouping combines the two ILO Global Employment Trends regions of the Middle East and North Africa and Sub-Saharan Africa. This was done primarily due to data considerations. In addition, Israel is included in the Middle East region, whereas it is in the Developed Economy region in the Global Employment Trends publications. This modification was made due to the fact that Israel has experienced more similar trends in employment intensity to its geographic neighbors over the periods under examination than to the other economies in the Developed Economies region. 19. Freeman (2004) also discusses the potential impact of trade and exchange rate fluctuations on labor markets. He argues that exchange rate volatility and international capital flows play a far more important role than trade in developingcountry labor markets. 20. Descriptive statistics for each of the variables examined in this section are given in Appendix 4.4. 21. Malaria (as well as HIV/AIDS) is known for its negative impact on labor, both in terms of labor productivity and aggregate employment (see for instance Fox et al. 2004 and McCarthy et al. 2000). In the present context, the question is whether the impact of malaria appears to be greater on either labor productivity or employment. Malaria was chosen in favor of HIV/AIDS due to better relative data availability. 22. The “Rigidity of Employment” index is the average of three subindexes including a “Difficulty of Hiring” index, a “Rigidity of Hours” index, and a “Difficulty of Firing” index. For more information, see http://rru.worldbank.org/DoingBusiness/ Methodology/HiringFiringWorkers.aspx 23. Muqtada (2003) provides an excellent discussion of the impact of inflation and price stability policies on employment and economic growth outcomes. 24. The standard definition of employment utilized by the ILO encompasses workers in both the formal and informal economies. As a result, another potential explanation of this result is that employment in the informal economy may not be affected by stringent employment protection legislation. 25. See for instance Bhattacharya and Rahman (1999), Lim (1997), and Tennekoon (1997).

References Andersen, B., and M. Corley. 2003. The Theoretical, Conceptual and Empirical Impact of the Service Economy: A Critical Review. WIDER Discussion Paper No. 2003/ 22, Washington DC.

200 Steven Kapsos Beaudry, P., and F. Collard. 2002. Why has the Employment–Productivity Tradeoff among Industrialized Countries been so Strong? NBER Working Paper No. 8754, National Bureau of Economic Research, Cambridge, Massachusetts. Bhattacharya, D., and M. Rahman. 1999. Female Employment under Export-Propelled Industrialization: Prospects for Internalizing Global Opportunities in the Apparel Sector in Bangladesh. Occasional Paper, United Nations Research Institute for Social Development, Geneva. Bruno, S. F., A. M. Falzoni, and R. Helg. 2001. Measuring the Effect of Globalization on Labour Demand Elasticity: An Empirical Application to OECD Countries. FLOWENLA Discussion Paper 2, Hamburg. Clark, C. 1940. The Conditions of Economic Progress. London: Macmillan. Döpke, J. 2001. The “Employment Intensity” of Growth in Europe. Kiel Working Paper No. 1021, Kiel Institute of World Economics, Germany. Elder, S., and D. Schmidt. 2004. Global Employment Trends for Women, 2004. Employment Strategy Paper 2004/8, International Labour Organization, Geneva. Fisher, A. G. B. 1939. “Production, Primary, Secondary and Tertiary.” The Economic Record June:24–38. Fox, M. P., S. Rosen, W. B. MacLeod, M. Wasunna, M. Bii, G. Foglia, and J. L. Simon. 2004. “The Impact of HIV/AIDS on Labour Productivity in Kenya.” Tropical Medicine and International Health 9(3):318–24. Freeman, R. 2004. “Trade Wars: The Exaggerated Impact of Trade in Economic Debate.” The World Economy 27(1):1–23. International Labour Organization (ILO). 2003a. Key Indicators of the Labour Market, 3 rd Edition. CD-ROM. Geneva. Available: http://www.ilo.org/public/english/ employment/strat/kilm/. ———. 2003b. LABORSTA. LABPROJ, Economically Active Population 1950–2010. 5th ed. Geneva. Available: http://laborsta.ilo.org/. ———. 2004a. Global Employment Trends for Women. Geneva. Available: http://www. ilo.org/public/english/employment/strat/download/trendsw.pdf. ———. 2004b. Global Employment Trends for Youth. Geneva. Available: http:/www.ilo.org/ public/english/employment/strat/download/getyen.pdf. ———. 2005a. World Employment Report 2004/05. Geneva. Available: http://www.ilo.org/ public/english/employment/strat/wer2004.htm. ———. 2005b. Global Employment Trends Model 2005. Geneva. ———. 2005c. Global Employment Trends Brief. Geneva. Available: http://www.ilo.org/ public/english/employment/strat/global.htm. ———. 2005d. Global Employment Trends Supplement for Europe and Central Asia. International Labour Organization, Geneva. Available: http://www.ilo.org/public/ english/employment/strat/download/get05sen.pdf. IMF. 2004. World Economic Outlook (WEO) Database. International Monetary Fund, Washington, DC. Available: http://www.imf.org/external/pubs/ft/weo/2004/01/ data/index.htm. International Peace Research Institute (IPRI). 2004. “Armed Conflict Database, Version 3.0.” Center for the Study of Civil War, Oslo. Islam, I., and S. Nazara. 2000. Estimating Employment Elasticity for the Indonesian Economy. ILO Technical Note, Jakarta.

201 The Employment Intensity of Growth Islam, R. 2004. “The Nexus of Economic Growth, Employment and Poverty Reduction: An Empirical Analysis.” Recovery and Reconstruction Department, International Labour Organization, Geneva. Kahn, A. 2001. “Employment Policies for Poverty Reduction.” Recovery and Reconstruction Department, International Labour Organization, Geneva. Lim, L. 1997. More and Better Jobs for Women: An Action Guide. International Labour Organization, Geneva. Loboguerrero, A., and Panizza, U. 2003. “Inflation and Labor Market Flexibility: The Squeaky Wheel Gets the Grease.” Inter-American Development Bank, Washington, DC. Mazumdar, D. 2003. “Trends in Employment and the Employment Elasticity in Manufacturing, 1971–92: An International Comparison.” Cambridge Journal of Economics 27:563–82 . McCarthy, D., H. Wolf, and Y. Wu. 2000. The Growth Costs of Malaria. NBER Working Paper No. 7541, National Bureau of Economic Research, Cambridge, Massachusetts. Mourre, G. 2004. Did the Pattern of Aggregate Employment Growth Change in the Euro Area in the Late 1990s? European Central Bank Working Paper Series No. 358, Frankfurt. Muqtada, M. 2003. Macroeconomic Stability, Growth and Employment: Issues and Considerations beyond the Washington Consensus. Employment Paper 48, International Labour Organization, Geneva. Nesporova, A. 2002. Why Unemployment Remains so High in Central and Eastern Europe. Employment Paper 43, International Labour Organization, Geneva. Padalino, S., and M. Vivarelli. 1997. “The Employment Intensity of Economic Growth in the G-7 Countries.” International Labour Review 136(2):191–213. Pieper, U. 1998. “Openness and Structural Dynamics of Productivity and Employment in Developing Countries: A Case of De-industrialization?” Employment and Training Department, International Labour Organization, Geneva. Saget, C. 2000. “Can the Level of Employment be Explained by GDP Growth in Transition Countries (Theory versus the Quality of Data). ILO Development Policy Group, International Labour Organization, Geneva. Tennekoon, R. 1997. Labour Issues in the Textile and Clothing Industry: A Sri Lankan Perspective. Social Dialogue Workshop Background Paper, International Labour Organization, Geneva. Available: http://www.ilo.org/public/english/dialogue/ sector/papers/tclabor/tclabor3.htm. United Nations (UN). 2002. World Population Prospects 2002 Revision. United Nations Population Information Network. Available: http://esa.un.org/unpp/. Walterskirchen, E. 1999. “The Relationship between Growth, Employment and Unemployment in the EU.” European Economists for an Alternative Economic Policy. World Bank. 2004. World Development Indicators (WDI). Washington, DC. Available: http://www.worldbank.org/data/wdi2003. ———. 2005. Doing Business 2005 Database. Washington, DC. Available: http:// rru.worldbank.org/DoingBusiness/default.aspx. World Health Organization (WHO). 2002. “Table 4, Numbers of Deaths and Death Rates, by Cause, Sex and Age. In World Health Statistics Annual. World Health Organization, Geneva. Available: http://unstats.un.org/unsd/mi/mi_goals.asp.

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PART II Country Studies

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CHAPTER 5 Labor Markets in India: Issues and Perspectives T.C.A. ANANT, R. HASAN, P. MOHAPATRA, R. NAGARAJ, AND S.K. SASIKUMAR

5.1 Introduction

M

arket-oriented structural reforms in India, begun in the 1980s and intensified in the 1990s, are widely believed to have put the economy on a path of higher growth. But there are concerns that outcomes in labor markets have not improved for large segments of the labor force. Many observers of India’s labor markets are bothered by the slow growth of employment in the organized sector—where the “good” jobs are. Despite growth of around 5% in GDP per capita between 1993/94 and 1999/2000, the share of the organized sector in total employment decreased from 7.3% to 7.1%.1 At the same time, jobs in the organized sector have themselves been undergoing a change, with contract labor getting a growing share of employment. More broadly, workers on daily or periodic contracts have increased their share of total wage and salary employment, in what some observers have described as the “casualization” of the Indian workforce.

T. C. A. Anant, Department of Economics, University of Delhi; R. Hasan, Economics and Research Department, Asian Development Bank; P. Mohapatra, Department of History, University of Delhi; R. Nagaraj, Indira Gandhi Institute of Development Research; S. K. Sasikumar, V. V. Giri National Labour Institute. The authors thank participants at the workshop, Labor Markets, Employment Growth, and Social Protection in India (7 October 2005, New Delhi), for their comments and suggestions on an earlier draft of the chapter. They also thank Jesus Felipe for useful discussions on labor market issues.

206 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

Concerns are also being raised about the continued lack of better economic opportunities for those in the informal sector and the slow pace of poverty reduction. For example, while the estimated hourly wages at the 90th percentile of the urban wage distribution were almost 7.6 times as high as those at the 10th percentile in 1983, this differential had increased to 9.5 by 1999/2000.2 And although poverty rates have fallen over the last 20 years, the decline has been less than in a number of East and Southeast Asian economies during their periods of high growth.3 The results of the 2004 elections in India suggest that such trends can have serious political consequences as well. The labor market is a key instrument in ensuring that the larger population shares in the benefits of growth. How well the labor market discharges that responsibility is therefore a question of critical importance. This chapter takes stock of what is known about Indian labor markets, to understand how they work, especially given the growing market orientation of the economy. Such a stocktaking can bring out policy reforms to help ensure that, as the economy grows, reasonably well-paying and productive jobs also multiply rapidly and those who are less well-off thrive. The rest of this chapter is organized as follows. Section 5.2 briefly reviews economic policies in India since independence and Section 5.3 looks at labor market outcomes. Section 5.4 gives a detailed account of India’s labor laws and their enforcement, particularly those laws at the heart of the ongoing debate on labor market rigidities. India’s labor laws, some say, are a major cause of the slow growth of organized sector jobs, especially in industry, and the growing casualization of employment. Section 5.4 also reviews the evidence that has been brought to bear on this issue. It ends with a discussion of the recommendations of the Second National Commission on Labour (Ministry of Labour 2002). Section 5.4 argues that weak enforcement of labor laws, especially since the 1990s, has given Indian firms more de facto flexibility than a reading of Indian labor laws might suggest. This is not to suggest that India’s labor laws are not in need of reform. Particular features of India’s labor laws, such as stringent restrictions on layoffs do go against the grain of an economic environment where markets are increasingly relied on to allocate resources. However, modifying such laws should not be the only objective of labor market reforms in India. In the plethora of central and state government laws on labor issues, the overlaps and contradictions run counter to good governance and the welfare of workers. These laws must be rationalized. Labor reforms must also take into account the fact that the overwhelming majority of India’s workers are in the unorganized sector, where the protection of their basic labor rights is at best weak. Perhaps most critically, reforms of labor laws must be accompanied by reforms of social protection institutions and mechanisms available to workers. Section 5.5 discusses not only India’s social protection system but also points out the various challenges that must be met to strengthen social protection.

207 Labor Markets in India: Issues and Perspectives

Section 5.6 goes on to discuss issues related to skills and training in India. There is a severe mismatch between the supply and demand of skills. Moreover, while India’s recent success in IT services has spurred many institutions to provide technical training, and has led many students to join these institutions, the quality of the education and training in these institutions is cause for concern. Section 5.7 contains closing remarks and offers directions for future research.

5.2 Indian Economic Policy and Economic Reforms4 5.2.1

1950–1965

India gained political independence in 1947 and launched a process of planned economic development in 1951-52. The economic goals of the new state had their origin in the philosophy of the Indian National Congress (INC) during the independence movement. The INC resolved to adopt a socialistic pattern of development in its annual session in Karachi in 1931 and made the same pledge in its 1955 “Avadi” session. And so in 1956 India set forth on the path to self-sustaining growth through increased domestic saving and investment. Following Mahalanobis, an architect of India’s planning and statistical systems, emphasis in investment shifted to heavy industrialization aimed at rapid import substitution, with the public sector filling the role of “strategic entrepreneur” in a predominantly market economy. The plans were premised on the following:5 (i)

Export pessimism. It was believed that demand for Indian exports would not grow fast enough to be a major source of growth. (ii) Savings pessimism. It was believed that private savings would not be enough to finance capital accumulation and would need to be supplemented by public resource mobilization. (iii) Investment pessimism. The private sector was considered unable or unwilling to come up with large investments in key basic industries. This provided the economic rationale for public sector involvement. (iv) Elastic supply of food grains in response to growing demand from the modern, industry sector (Chakravarty 1987). These assumptions were combined with:

208 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

(i)

Distrust of multinational enterprises. There was concern that the state could not adequately control these enterprises and that they would undermine its power. This, in combination with the Gandhian distrust of modern technology, led to a limited role for foreign direct investment (FDI) and technology transfer into India. (ii) Distrust of large private industrialists. Like the foreign companies, domestic industrial houses were held in distrust, perhaps not as much by the political class as by the bureaucratic and intellectual community. (iii) Distrust of the market. Both on account of an aversion to “free market” concepts as part of the rhetoric of the struggle for freedom, and because of the relatively fragmented and primitive nature of most major markets in the country, there was a profound distrust of the use of market mechanisms to attain policy goals.6

This structure of assumptions was not inconsistent with the state of economic knowledge at the time. But what was interesting and distinct about the Indian experience was its persistence. This first phase of development saw the economy develop at a rapid rate. However, this was not to last. 5.2.2

1965–1980

For the Indian economy, 1965 to 1980 was a period of many exogenous (economic as well as noneconomic) shocks. The period was marked by two successive crop failures (in 1965/66 and 1966/67), two wars with Pakistan (in 1965 and 1971), and the oil price shock of 1973. Industry was in “relative stagnation”—manufacturing sector growth decelerated to about 4.5% per year from 7-8% per year registered during the first 15 year period of planned economic development (1950-1965). But a “wheat revolution” during this time enabled the economy to survive the food crisis. Soon, the focus of import substitution shifted from machinery manufacturing to fertilizer production and commercial energy sources to ease the effects of the external shocks. As the growth in domestic absorption was relatively low, export growth showed a modest improvement, with manufactures increasing their share. However, these achievements were unexceptional relative to the growth in world trade, and the export performance of many East Asian economies. The period saw the coming to power of Indira Gandhi, who tightened regulation and reduced freedom in the business sector.7 Many of the production and related industries were nationalized.8 The period was also one of political uncertainty and upheaval. The Congress party split in 1969, and from 1973 there was a rapid rise in urban unrest. A conflict arose between the government and judiciary

209 Labor Markets in India: Issues and Perspectives

over the right to property. All these trends culminated in the brief experiment with authoritarianism, starting with the declaration of a state of emergency in 1975. The last few years of the period saw the return to democracy and the passage of the 44th amendment to the constitution, which ended the long standoff with the courts over the right to property. 5.2.3

1981–1991

Toward the end of the 1970s, India’s domestic saving rate rose to nearly one fifth of GDP, with surplus food stocks and a comfortable level of foreign exchange—easing the two long-term binding constraints on the country’s industrialization effort. But industrial growth remained sluggish. The 1980s witnessed the start of trade liberalization (a shift from quotas to tariffs), a revival of public investment in energy and infrastructure, and a slow but steady deregulation of investment and output controls. In response to these policy changes, along with a significant improvement in agriculture growth, industrial growth in the 1980s regained the lost momentum of the first 15 years of planned economic development (Nagaraj 1989). The GDP growth rate in this decade accelerated to about 5.5% per year, with manufacturing as the leading sector, growing at about 8% per year (Nagaraj 1990, Ahluwalia 1992). The gradual reforms of the 1980s, however, were confronted with a serious balance-ofpayments crisis in 1990. 5.2.4

Economic Reforms of 1991

Faced with a balance-of-payments crisis, the new minority government that took office in mid-1991 launched a major stabilization and structural adjustment program. Whether the crisis was caused by the unsustainable policies of the 1980s or was merely a short-term liquidity problem created by external and political factors is keenly debated. Similarly, whether the reforms of 1991 represented a sharp break from the dirigiste regime of the past four decades or were merely a continuation of the “creeping liberalization” begun in the 1980s is a moot point (Nagaraj 1997). However, there is a reasonable consensus that the reforms were an internally consistent set of policies that, on the face of it, sought to break in a significant way from the past. Although the pace of reforms was comparatively modest, it seemed very fast by Indian standards. In response to the crisis in mid-1991, the following measures were initiated: (i)

Currency devaluation. In July 1991, the Indian rupee was devalued by about 18% against the US dollar. Cash incentives for exports were also withdrawn.

210 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

(ii)

Fiscal correction. Central government spending was cut to reduce the fiscal deficit from 8.4% to 6% of GDP in 1991/92. (iii) Increase in interest rate. The State Bank of India’s advance rate was hiked from 16.5% to 19% in 1991/92. (iv) Structural reforms. These consisted mainly of trade and industrial policy reforms: replacing import licensing with tradable import permits and rapidly reducing tariff rates, especially on capital goods; eliminating licensing requirements for new entry and expanding manufacturing capacity; drastically pruning industries reserved for the public sector; and reducing entry barriers for inward FDI. (v) Mobilization of exceptional financing. The International Monetary Fund (IMF) provided standby credit of $2.3 billion over 20 months.

As the economy turned around in about 18 months with an improvement in the balance of payments and a reduction in domestic inflation, the program of structural reforms was strengthened. In his letter to the World Bank seeking a structural adjustment loan, the then finance minister Manmohan Singh outlined the following reform measures: (i) (ii) (iii)

(iv) (v)

(vi)

(vii)

Convertibility of Indian currency on the current account. Tax reform: introduction of value-added tax (VAT), reduction in average tariff rates and reduction of their dispersion. Disinvestment in public sector enterprises and conclusion of a memorandum of understanding with the enterprises providing for improvements in their performance and a reduction in budgetary support for them.9 Reduction in the role of public investment. Trade and industrial policy reform: abolition of investment and output controls, pruning of industries reserved for the public sector, abolition of the Monopolies and Restrictive Trade Practices Commission, fiscal incentives for investment in industrially backward areas. Abolition of controls on FDI: authorization of portfolio investments, provision of access to international capital markets for large Indian companies. Stock market reform: abolition of Controller of Capital issues, relaxation of norms for company listing in stock markets, authorization of investments in Indian stocks by nonresident Indians, development of modern institutions for the stock market and the regulatory agency.

211 Labor Markets in India: Issues and Perspectives

(viii) Financial sector reform: liberalization of interest rates, entry of private sector banks, dilution of directed credit, development of market for government securities, greater independence for the central bank, constitution of banking regulatory authorities. (ix) Creation of the National Renewal Fund for voluntary retirement in public sector enterprises, legitimizing layoffs and retrenchments in the organized private sector. Otherwise, despite vocal support for changes in labor laws, the lack of a consensus held back the necessary legislative changes. The long list of reforms mostly pertained to trade and foreign investment. Over the last decade many of these reforms have been implemented, although perhaps not to the precise extent that was originally intended. While the overall effects of these policies on the external sector have been quite favorable, resulting in a balance-of-payments surplus, their effectiveness in improving employment and standards of living across socioeconomic groups has been less obvious.

5.3 The Labor Market in India: Structure and Key Features India’s labor force is enormous. Its size has been estimated at 406 million in 1999/2000, the most recent year for which “large-sample” survey data on labor force and employment are available.10, 11 The vast majority of this labor force—around 78%—lives in the rural areas. The remaining 22% resides in urban areas. Since a majority of the labor force is rural, agriculture is still the single most important sector of employment in India. Indeed, as the first set of bars in Figure 5.1 show, 60% of total employment in India is in the agriculture sector. Industry accounts for 18%, and services account for 22% of total employment. The single most striking feature of labor market outcomes in India is the extremely low productivity of agriculture, as can be seen from the second set of bars in Figure 5.1. The bars illustrate not only the shares of the three major sectors in GDP, but also average labor productivity (sectoral value added divided by sectoral employment). Unfortunately, structural transformation in employment—i.e., a shift from the sector of lowest productivity (agriculture) to higher-productivity sectors (industry and services)—has not been very rapid. This can be seen from Figure 5.2 below, which describes the evolution of employment shares across agriculture, industry, and services from the early 1950s to 2000. These figures highlight the central challenges facing the Indian economy: the need to raise the meager productivity of Indian agriculture and, at the same time, accelerate the shift from agricultural employment to higher-productivity employment in industry and services.

212 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Figure 5.1 Sectoral Distribution of Employment, GDP, and Labor Productivity (1999/2000) 70 60 Rs95,149

Percent

50 40

Rs19,195 Rs66,185

30 20 10 0

Share in Employment

Share in GDP and Labor Productivity Industry

Agriculture

Services

Note:

GDP shares and labor productivity data are based on constant 1999-2000 prices. Figures above shares in GDP represent average labor productivity for each sector. . See Table 5.11 for more details. Source: Tendulkar (2004) for employment data; authors’ computations for GDP and labor productivity data based on CSO (2005).

Figure 5.2 Employment Shares 80

70

Percent

60 50 40 30 20 10 0

1951

1961

1971

Agriculture

1981

1983

Industry

1988

1994

2000

Services

Note:

The data for 1951 to 1981 are from the decennial population census, and those for the remaining years are from NSS large-sample surveys on employment and unemployment. While the census and intercensal data are not strictly comparable with the NSS estimates, the two sets of figures do show the broad pattern of change. Sources: Sundaram (1987), Chadha and Sahu (2002).

These are not the only important challenges, of course. As will be discussed below, labor force participation rates, especially for women, are exceedingly low and must increase. On the other hand, the participation of children in the labor force must be eliminated. Moreover, India’s labor markets are more complex

213 Labor Markets in India: Issues and Perspectives

than the sharp dichotomies between employment shares and aggregate productivity across its agriculture, industry, and services sectors indicate. Indeed, it is useful to think about Indian labor markets in terms of three broad segments: (i)

An agriculture sector, which employs around 60% of the total workforce (and 76% of the rural workforce) and contributes about a quarter of domestic output, as seen above. Agricultural output is largely produced by self-employed cultivators of family farms. Agriculture labor, which mainly subsists on wage labor, consists of about 30% of the rural workforce and its share seems to be rising. (ii) An organized (or formal) sector, which is predominantly urban, employs around 7% of the workforce, and produces about 40% of the domestic output mainly in industry and services in the public sector, private corporate sector, and factory manufacturing. 12, 13 (iii) An urban informal sector which lies between the above two broad sectors, engaged in the production of a variety of consumer and producer goods and services in urban areas. Wages and working conditions in this sector are usually much poorer than in the organized sector, perhaps close to those in rural areas. However, compared with rural areas, the informal sector has some access to “modern” facilities like education and health and more opportunities to increase earnings. With this perspective, a key feature of labor market trends in India is the slow shift in employment toward the urban informal sector, with out-migration from rural areas and a small decline in the share, if not the size, of the organized sector. The rest of this section looks in much more detail at the structure of the Indian labor market and trends in its key indicators. 5.3.1

Population, Labor Force, and Employment

As may be seen from Table 5.1, which gives various demographic statistics, India’s population nearly tripled in the second half of the 20th century. The population is now a little more than one billion, the bulk of which is rural (72%). Although population growth rates have recently fallen below 2% per year, high population growth rates over the last four to five decades have given rise to a population that is relatively young. Forty-seven percent of the population—around 483 million individuals—is in the 15– 44 age group. Table 5.2 below combines information from the last four large-sample surveys on employment and unemployment with population estimates for the

214 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Table 5.1 Population Statistics, 1871–2001

Year

Population (millions)

1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001

211.7 213.5 234.0 238.3 252.0 251.2 278.9 318.5 361.0 439.1 548.2 683.3 846.3 1,027.1

Source:

Increment (millions) — 1.8 20.5 4.3 13.7 -0.8 27.7 39.6 42.5 78.1 109.1 135.1 163.0 180.6

Average Annual Growth Rate (%) — 0.08 0.92 0.18 0.56 -0.03 1.05 1.33 1.25 1.96 2.22 2.20 2.14 1.93

Sex Ratio (males per 1,000 females) 1,059 1,039 1,039 1,029 1,038 1,047 1,053 1,058 1,057 1,063 1,075 1,071 1,076 1,072

Percentage of Population in Age Group 0–14

15–44

45+

% Urban

— 38.4 38.8 38.0 37.8 38.7 38.5 39.1 38.4 41.0 41.9 39.5 37.2 34.4

— 47.0 46.5 46.9 47.0 45.9 46.0 44.3 45.1 43.1 41.9 43.2 44.9 47.1

— 14.6 14.7 15.1 15.2 15.4 15.5 16.5 16.5 15.9 16.2 17.2 17.9 18.5

8.7 9.3 9.4 10.8 10.3 11.2 12.0 13.9 17.3 18.0 19.9 23.3 25.7 27.8

Dyson et al. (2004, p. 20).

Table 5.2 Basic Labor Force Statistics Growth Rate (% per year) Employment (millions) Sector Total Population Total Labor Force a Total Employmenta

1983

1987/88

1993/94

1999/00

1983– 1993/94

718 309 303

790 333 324

895 382 374

1,004 406 397

2.02 1.96 1.95

1993/94– 1999/00 1.93 1.03 0.98

a

Labor force and employment estimates are based on large-sample NSS surveys for 1987/ 88, 1993/94, and 1999/2000. Note: The total labor force and employment figures are based on usual principal and subsidiary status. The rates of growth of total employment are compound rates of growth. Sources: Based on Planning Commission (2001), Table 2.12, except for growth rates, which were computed by the authors from unrounded figures reported in Planning Commission (2001).

corresponding years. The first four data columns give the size of the population, labor force, and employment over the 4 years of the surveys, and the last two columns present the growth rates for these three variables for 1983–1994 and 1994–2000 (when India underwent significant economic liberalization). A comparison of the growth rates for the three variables across the two periods

215 Labor Markets in India: Issues and Perspectives

reveals a slowdown in population growth, labor force growth, and employment growth. While the first is to be welcomed, the latter two have been some cause for concern to policy makers. First, the sharp decline in the growth of the labor force is surprising. From the data in Table 5.1, one would expect the labor force to grow at a faster rate as a larger proportion of India’s population moves into the working-age groups. Second, although the growth in total employment was only marginally below that of the labor force between 1983 and 1994, the gap between the growth rates of the two variables widened between 1994 and 2000, implying that unemployment had increased. The issue of declining labor force participation rates can be examined in more detail in Table 5.3. A couple of key features are worth noting. First, labor force participation rates in India are relatively low compared with those in other countries outside South Asia. This is largely because of the low participation rates of females in the labor force. See, for example, the labor force participation rates for females in East Asia and Southeast Asia in Chapter 2 of this volume. Second, the labor force participation rates for females fell rather dramatically in the 1990s. According to Sundaram (2004), this decline was driven largely by shifts in the age structure of the female population, especially in rural India, combined with a rise in the participation of girls in the 5–19 age group in schooling. This phenomenon also applies to males, though less markedly. Table 5.3 Labor Force Participation Rates (all ages, per 1,000) Year 1983 1987/88 1993/94 1999/00 Source:

Males

Females

All Persons

545 545 556 541

291 290 287 258

423 422 427 404

Dyson et al. (2004).

Regarding labor force projections, Table 5.4 shows that increases in labor force participation rates for females over the next 20 years and the proportion of the population in the prime working age (see the projected age distribution in Table 5.5) would lead to enormous growth in India’s labor force. For example, India’s labor force is projected to be around 530 million by 2011. While these numbers indicate the potential for a demographic dividend as dependency rates decline, they also highlight the major challenge facing the country, namely that of securing productive employment for the growing labor force.

216 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Table 5.4 Labor Force Participation Rates (LFPR) and Labor Force Sizes, Projected to 2026 (all ages, per 1,000) Year

Males

Females

All Persons

Labor Force (millions)

2006 2011 2016 2021 2026

546 544 543 542 541

317 329 341 353 361

435 440 445 450 453

485 530 574 613 643

Source:

Dyson et al. (2004, p. 170).

Table 5.5 Age Distribution, Projected to 2026 Year

% Aged 0–14

2001 2006 2011 2016 2021 2026

34.4 31.0 28.8 27.7 25.7 23.2

Source:

5.3.2

% Aged 15–49 51.7 54.3 55.0 54.4 54.4 54.9

% Aged 50–59 6.9 7.5 8.1 8.9 9.7 10.3

% Aged 60+ 7.0 7.2 8.1 9.0 10.2 11.6

Median Age 22.7 24.0 25.6 27.5 29.6 31.6

Dyson et al. (2004, p. 92).

Migration

Historically, India has been considered a low-migration country. Recent data show that migration rates have come down between 1971 and 1991 (Tables 5.6 and 5.7).14 The bulk of migration in India occurs among women on account of marriage; mobility for economic reasons seems still limited. Therefore, the migration is mostly within and across districts and very seldom across states. In fact, interstate migration has been declining in recent decades. International migration is quite minuscule in relation to the size of the population, though made visible outside India and in the country’s balance of payments by the inward remittances of emigrants.15 Admittedly, the low estimates of migration reported in the decennial census may underestimate economic migration of shorter duration, as well as circulatory migration between rural and urban areas. Recent surveys of NSSO have sought to capture some of these dimensions by applying a tighter definition. According to these surveys, the levels of migration are going up, but it is hard to discern an acceleration in migration in recent decades.16

217 Labor Markets in India: Issues and Perspectives Table 5.6 Migration in India, 1971–1991

Census Year

Population

All Migrants

Intradistrict Migrants

Interdistrict Migrants

Interstate Migrants

International Migrants

1971 Number (‘000) Percentage Males/100 females

528,585 — 107

161,812 100.0 46

101,225 62.6 33

35,009 21.6 60

18,293 11.3 104

6,653 4.1 116

1981 Number (‘000) Percentage Males/100 females

659,300 — 107

206,486 100.0 43

126,469 61.3 31

50,521 24.5 53

23,448 11.4 91

6,045 2.9 114

1991 Number (‘000) Percentage Males/100 females

816,154 — 108

226,705 100.0 38

137,065 60.5 28

57,469 25.4 45

26,202 11.6 80

5,673 2.5 107

Note: Source:

Based on census data on the place of last residence. Dyson et al. (2004, p. 109).

Table 5.7 Net Intercensal Migration Flows, 1971 and 1991 1971

1991

Number (‘000)

Percentage

All Internal Rural to rural Urban to rural Urban to urban Rural to urban Total

40,355 5,086 10,775 8,867 65,083

62.0 7.8 16.6 13.6 100.0

47 91 121 109 65

44,756 6,013 16,504 10,978 78,251

57.2 7.7 21.1 14.0 100.0

31 66 93 88 50

Interstate Rural to rural Urban to rural Urban to urban Rural to urban Total

2,671 911 2,430 2,870 8,882

30.1 10.3 27.4 32.3 100.0

88 133 172 122 122

2,828 925 3,541 3,558 10,852

26.1 8.5 32.6 32.8 100.0

58 91 125 91 90

Sector

Source:

Dyson et al. (2004, pp. 110–1).

Males/100 Number Females (‘000)

Percentage

Males/100 Females

218 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

5.3.3

Poverty

One of the most critical indicators of a country’s labor market outcomes is the extent of poverty in the country. As can be seen in more detail below, unemployment rates in India are not excessively high. If poverty rates are much higher, this means that many jobs in the economy cannot deliver even a minimally acceptable standard of living to the worker and the worker’s family. Table 5.8 gives various poverty estimates (poverty incidence or headcount ratios) for 3 years over a 12-year period from 1987/88 to 1999/2000. Separate estimates are presented for the rural and urban sectors. The estimates come from both the Government’s Planning Commission and independent researchers.17 Table 5.8 Poverty Incidence in India, 1987/88–1999/2000 Reduction in Poverty Incidence (Percentage Points)

Headcount Ratio (%) Source of Data Rural Government of India (Official) Deaton Sundaram and Tendulkar (MRP)a Sen and Himanshu (MRP3)a Sen and Himanshu (MRP5)a Deaton and Dreze Urban Government of India (Official) Deaton Sundaram and Tendulkar (MRP) Sen and Himanshu (MRP3) Sen and Himanshu (MRP5) Deaton and Dreze a

1987/88

1993/94

1999/2000

1987/88 to 1993/94

1993/94 to 1999/2000

39.1 39.4

37.3 37.1

27.1 30.0

1.8 2.3

10.2 7.1

—

34.2

28.9

—

5.3

35.2

31.9

—

3.3

—

— 39.4

31.6 33.0

28.8 26.3

— 6.4

2.8 6.7

38.2 39.1

32.4 32.9

23.6 26.7

5.8 6.2

8.7 6.2

—

26.4

23.1

—

3.3

34.9

28.0

—

6.9

—

— 23.5

27.9 17.8

25.1 12.0

— 5.7

2.8 5.8

Mixed recall period. The estimates of Sen and Himanshu are for mixed recall periods based on either three (MRP3) or five (MRP5) broad subgroups of consumption. See Sen and Himanshu (2005) for details. Sources: Official estimates reported in Sharma (2004); Deaton (2005); Deaton and Dreze (2005); Sundaram and Tendulkar (2005); and Sen and Himanshu (2005).

219 Labor Markets in India: Issues and Perspectives

The official estimates indicate a sharp decline in poverty between 1993/ 94 and 1999/2000. In particular, poverty incidence in both rural and urban areas is seen to decline by around 10 and 9 percentage points, respectively. These declines are much more dramatic than those between 1987/88 and 1993/ 94. Since transfers to the poor have been limited, labor market conditions may have improved significantly for many of India’s poorest workers. Unfortunately, there is considerable controversy over the official poverty estimates. Some of it pertains to the deflators used to adjust poverty lines over time. However, a large part of the controversy is due to a change in the questionnaire design used in the 1999/2000 household consumption expenditure survey of the NSSO. Ever since the Government of India began carrying out household expenditure surveys, households have been asked to recall their consumption expenditures over a 30-day reference period. Pilot surveys done by the NSSO between 1994 and 1998 randomly assigned among sample households questionnaires with either a 7-day or a 30-day recall period. On the questionnaires with the shorter recall period, standardized per capita consumption was higher (13–18% higher on average in both urban and rural areas) (Sharma 2004). This result is not surprising since respondents’ memory becomes less reliable as the recall period lengthens. The 1999/2000 questionnaire, however, asked all sample households to report consumption expenditures over both a 7-day and a 30-day recall period, resulting in only a 3–4% difference in standardized per capita consumption between the two periods. This close consistency is widely believed to result from attempts by respondents to reconcile their answers for the two recall periods. Since it is unclear which households may have scaled up their expenditures (i.e., multiplied their 7-day expenditures by about 4 to arrive at their 30-day expenditures) or scaled down their expenditures (i.e., divided their 30-day expenditures by about 4 to arrive at their 7-day expenditures), the consumption expenditures are not consistent with the results of earlier large-sample surveys, which focused on a 30-day recall period only. The fact that official poverty estimates show the sharpest declines in poverty rates between 1993/94 and 1999/2000 has led critics to argue that the extent of poverty reduction has been overstated by the use of a 7-day recall period by a significant proportion of sample households. Attempts to correct for the changes in the questionnaire design—by relying on responses to those sets of goods for which recall periods have remained the same, such as clothing, footwear, and fuel and lighting—reveal a less rapid decrease in poverty rates. These attempts include those of Deaton (2005), Sundaram and Tendulkar (2005), and Sen and Himanshu (2005), as well as Deaton and Dreze (2005), who also use a very different set of deflators to keep their poverty lines constant in real terms over time and especially across rural and urban areas.18

220 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

As an examination of Table 5.8 reveals, the declines in poverty between 1993/94 and 1999/2000 as estimated by these researchers were less rapid than those based on the official estimates. The smallest declines were reported by Sen and Himanshu: a 2.8 percentage point decline in both rural and urban areas. Unfortunately, a clearer picture of poverty reduction since the economic reforms of 1991 may well have to wait for the release of the 2004/05 largesample survey, which reverted to the exclusive use of a 30-day recall period for major consumption goods. 5.3.4

Unemployment and Underemployment

Underdeveloped economies suffer from widespread underemployment, and much less open unemployment for the simple reason that it is hard to remain unemployed without a formal and effective social security system. Nevertheless, it is important to examine the behavior of unemployment rates. The NSSO in India has evolved a system of capturing unemployment through the time-use method (see Box 5.1). Put simply, a worker is asked if he or she was working (i) last year (usual status), (ii) last week (current week status), and (iii) yesterday (current daily status). If a worker has not been working, but sought or was available for work during the reference period, he or she is classified as part of the labor force but unemployed. Table 5.9 shows the trends in unemployment according to the above definitions based on the large-sample NSS surveys. As may be expected, unemployment is very low on the Usual Principal Status basis (over the last 365 days), and is highest on the Current Daily Status (CDS) basis. The CDS unemployment rates in rural and urban areas were between 7% and 8% in 1999/2000, the latest year in which a large-sample survey was carried out. These unemployment rates were higher than those for 1993/94. To make matters worse, projection-based estimates of unemployment indicate that CDS unemployment rates have climbed even further since 1999/2000.19 The actual time requirements used by the NSSO in classifying a labor force participant as employed are quite meager. For example, a worker who was employed for only 1 hour in a day on each of the 7 days of the reference week would be classified as employed (according to the CWS and CDS definitions). Clearly, such an approach could seriously overstate or understate the true extent of employment or unemployment in the country if the worker was not working more hours involuntarily. The concept of time-based underemployment tries to give a more complete picture of labor underutilization by taking into account the situation where workers are involuntarily employed less than full-time (typically between 40 and 48 hours a week, depending on country practice). What is the extent of underemployment in India? Unfortunately, Indian statistics do not provide a

221 Labor Markets in India: Issues and Perspectives Table 5.9 Unemployment Rates, as Percentage of the Labor Force Alternative Measures

Year

Usual Principal Status (UPS)

Usual Principal and Subsidiary Status (UPSS)

Current Weekly Status (CWS)

Current Daily Status (CDS)

Rural 1983 1987/88 1993/94 1999/2000 Urban 1983 1987/88 1993/94 1999/2000 India (Rural and Urban) 1983 1987/88 1993/94 1999/2000 Source:

1.91 3.07 1.80 1.96

1.13 1.98 1.20 1.43

3.88 4.19 3.00 3.91

7.94 5.25 5.63 7.21

6.04 6.56 5.21 5.23

5.02 5.32 4.52 4.63

6.81 7.12 5.83 5.89

9.52 9.36 7.43 7.65

2.77 3.77 2.56 2.81

1.90 2.62 1.90 2.23

4.51 4.80 3.63 4.41

8.28 6.09 6.03 7.32

Planning Commission (2001).

way to answer this question satisfactorily. The difference between the weekly and daily unemployment status is often used as a measure of underemployment. However, as Ghose (2004) points out, this procedure leads to implausibly low figures for underemployment. For example, a person who can find work for only 1 hour a day each day of the week would have an identical weekly and daily unemployment status (not unemployed in terms of both). Such a person would not be deemed to be underemployed. Ghose computes an alternative estimate of underemployment for 1999/ 2000, on the assumption that each worker seeks 8 hours of work for 6 days a week. Further, he assumes that each worker who reports having worked in a 4hour half-day unit (the time frame adopted by the NSSO in its surveys) is fully employed for 4 hours. On the basis of these assumptions, Ghose obtains an overall underemployment rate of 13% (among the employed) for India in 1999/ 2000. However, casual wage workers—those who work on daily or periodic (short-term) contracts—experience far higher rates of underemployment, as can be seen from Table 5.10. However, even Ghose’s measure of (time-based) underemployment does not adequately capture the underutilization of labor that results from lowproductivity, low-wage employment. One way to tackle this problem is to examine the number of workers from families whose per capita expenditures

222 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Box 5.1 Measures of Employment and Unemployment

(i)

Usual Principal Status (UPS): A person is counted as being in the labor force on UPS basis if he or she was engaged in economic activity (work) or was seeking or was available for work for the major part of the preceding 365 days. Those classified as being in the labor force on this basis are further classified as employed or unemployed depending on whether the majority of the days in the labor force were spent in economic activity or in seeking/being available for work. The UPS unemployment rate is the proportion of those classified as unemployed on this basis, expressed as a percentage of those classified as being in the labor force. On this criterion, persons can be counted as being employed even if they were unemployed (or were outside the labor force) for a significant part of the year. Equally, a person can be counted as unemployed even though he or she may have been employed for part of the year. (ii) Usual Principal and Subsidiary Status (UPSS): This provides a more inclusive measure covering, in addition, the participation in economic activity on a more or less regular basis of those classified as unemployed on the UPS basis as well as those classified as being outside the labor force on the same criterion. This would result in a larger proportion of the population in the labor force, with a higher proportion of workers and lower unemployment rates relative to the UPS criterion. (iii) Current Weekly Status (CWS): The reference period here is the week, i.e., the 7 days before the interview. A person is counted as employed if he or she was engaged in economic activity for at least 1 hour on any day during the reference week. A person not engaged in economic activity even for 1 hour on any day but seeking or available for work during the reference week is classified as unemployed. To the extent that employment varies seasonally over the year, the labor force participation rates on the CWS basis would tend to be lower. However, reflecting the unemployment during the current week of those classified as being employed on the UPS (and the UPSS) criterion, the CWS unemployment rates would tend to be higher. The difference between the unemployment rates on the CWS and the UPS basis provide one measure of seasonal unemployment. (iv) Current Daily Status (CDS): On the basis of the reported time disposition of the person on each day of the reference week (in half-day units for the various activities in a day), person-days in employment or unemployment are aggregated to generate estimates of person-days in employment or unemployment. The person-day unemployment rate is the ratio of persondays in the labor force (i.e., person-days in employment plus person-days in unemployment). This measure captures the within-week unemployment of those classified as employed on the CWS basis. It is widely agreed that the CDS measure of unemployment most fully captures open unemployment in the country. Source:

Planning Commission (2001).

223 Labor Markets in India: Issues and Perspectives Table 5.10 Rate of (time-based) Underemployment, 1999/2000 (%)

Self-Employed Casual Wage Worker All Employed Persons Source:

Male

Female

5.0 21.7 10.0

21.7 28.3 21.7

Employed Persons 11.7 25.0 13.3

Ghose (2004).

put them below the poverty line. Since there is a close link between labor earnings and expenditures, such an approach should be more reflective of the true extent of underemployment in India. This is the approach taken by Sundaram and Tendulkar (2002), who focus on the nature of poverty in the workforce. Taking the rural and the urban population together and netting out the (openly) unemployed, Sundaram and Tendulkar estimate the number of working poor in 1994 as 133.5 million, or more than 37% of the workforce. Between 1994 and 2000 they estimate that the number went down by about 4.7 million. This decrease combines a sharper decline in rural areas and a rise in the number of working poor in urban areas by about 1.5 million. A second approach to capturing the broader notion of underemployment is to estimate how many workers are employed at low levels of productivity. As may be noted from Table 5.11, labor productivity in the agriculture sector, which employed 240 million workers, is far lower than in either the industry or the services sector. By computing the difference between the actual number of workers employed in the agriculture sector and the smaller number that would need to be employed to produce an unchanged volume of agricultural output had labor productivity been the same as in industry, one can get a rough estimate of the extent of underemployment in the sense of lowproductivity work. The computations reveal that about 171 million workers in agriculture—43% of total employment—were underemployed in 1999/2000. If labor productivity in the services sector were to be taken as a benchmark, underemployment would be even higher. 5.3.5

Wages

Tables 5.12 and 5.13 give statistics on wage and salaried workers (regular and casual) in rural and urban areas and their real hourly wages respectively, using data from the last four large-scale NSS surveys (see Box 5.2 on the different types of employment as captured by Indian labor force statistics).20 Because of data problems, information on rural workers from the 1987/88 round is not presented.21 Before describing the behavior of wages, it is useful to examine

224 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Table 5.11 Employment and Value Added Per Worker (1999/2000) Sector

Employment (in millions)

Agriculture Industry Services

Value Added per Worker (rupees)

240 69 89

19,195 66,185 95,149

Note:

Value added figures are in constant 1999/2000 rupees. Value added in agriculture is a 3-year average (1998/99, 1999/2000, 2000/01). Sources: Tendulkar (2004) for employment; authors’ computations for value added per worker based on Central Statistical Organisation (2005).

Table 5.12 Percentage Distribution of Wage and Salaried Workers (Rural and Urban), 1983 to 1999/2000 Rural

By Type Regular Casual By Gender Male Female By Education Illiterate Below Primary Primary School Middle School Secondary School College By Sector Agriculture Industry Services Source:

Urban

1983

1993/94

1999/2000 1983 1987/88

1993/94 1999/2000

21.11 78.89

18.05 81.95

17.91 82.09

72.10 27.90

73.69 26.31

71.07 28.93

70.81 29.19

68.66 31.34

69.20 30.80

69.46 30.54

82.64 17.36

82.34 17.66

81.67 18.33

82.53 17.47

67.20 10.47 9.93 5.81 4.99 1.60

59.20 12.15 10.14 8.49 7.46 2.56

53.89 11.85 10.66 11.32 9.24 3.04

25.75 11.00 15.33 15.25 20.46 12.21

24.12 10.97 15.61 13.42 21.67 14.20

22.01 10.41 12.27 14.79 23.28 17.23

19.03 8.70 11.25 16.53 25.28 19.21

74.04 12.57 13.39

71.33 14.86 13.81

69.95 15.21 14.84

7.52 38.52 53.96

6.51 39.09 54.40

7.25 38.50 54.26

5.76 37.24 56.99

Hasan and Magsombol (2005).

various summary statistics on wage and salaried workers.22 As can be seen from Table 5.12, around four fifths of wage and salaried workers in the rural areas are casual workers and therefore subject to daily or periodic (short-term) contracts. In contrast, around 70% of urban workers define themselves as being regular workers and therefore subject to longer-term contracts. Almost 70% of wage and salaried workers in the rural areas are male, compared with around

225 Labor Markets in India: Issues and Perspectives Table 5.13 Average Hourly Wages of Wage and Salaried Workers (rural and urban), 1983 to 1999/2000 Rural 1983 Average Hourly Real Wages 3.39 10th Percentile 1.22 20th Percentile 1.63 80th Percentile 4.26 90th Percentile 6.74 By Gender Male 3.95 Female 2.16 By Type Regular 6.03 Casual 2.68 By Education Illiterate 2.57 Below Primary 3.44 Primary School 3.95 Middle School 510 Secondary School 8.38 College 12.35 By Sector Agriculture 2.58 Industry 4.62 Services 6.84 By Occupation (selected) Professionals, Technical 8.87 Administrative, Executive, Managerial 12.41 Clerical 7.97 Service Workers 3.79 Agrarian Workers 2.59 Production and Transportation Workers 4.60 Gini Coefficient of Hourly Real Wages 0.39 Note: Source:

1993/94

Urban 1999/2000 1983 1987/88

1993/94 1999/2000

4.41 1.61 2.02 5.14 8.42

6.72 2.50 3.11 7.71 12.50

9.30 2.36 3.38 13.61 17.99

10.71 2.62 3.59 15.97 21.63

11.82 2.85 3.99 18.31 24.70

16.25 3.75 5.32 24.82 35.71

5.13 2.80

7.83 4.22

10.06 5.63

11.50 7.06

12.60 8.33

17.07 12.39

8.90 3.42

14.55 5.02

11.13 4.55

12.81 4.84

14.37 5.55

19.92 7.35

3.20 4.08 4.68 5.64 9.24 14.86

4.62 6.02 6.63 7.80 13.29 23.17

4.97 6.81 7.17 8.35 12.60 18.96

5.34 7.26 7.88 9.38 14.21 21.57

5.99 7.66 7.94 9.53 14.43 22.97

7.28 9.67 10.10 11.65 18.66 32.51

3.23 5.70 9.33

4.67 8.63 14.58

3.81 8.93 10.49

3.86 9.96 12.35

4.74 10.83 13.64

6.09 13.78 19.01

14.88

21.49

18.85

21.76

22.82

33.99

17.74 10.77 5.37 3.24

24.90 17.44 10.74 4.61

24.93 12.66 6.70 3.94

29.93 14.86 7.62 4.19

31.49 16.59 8.60 4.95

45.57 23.51 11.89 6.67

5.76

8.54

7.80

8.46

9.23

11.63

0.39

0.40

0.41

0.42

0.43

0.46

In constant 1999/2000 prices. Hasan and Magsombol (2005).

82% in the urban areas. As may be expected, educational attainment is far lower in rural areas—in fact, a majority of rural wage and salaried workers are not literate. Finally, while agriculture employs around 70% of wage and salaried workers in the rural areas (with the rest distributed about equally between

226 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Box 5.2 Different Types of Employment

Self-employed in household enterprises. Persons who operate their own farm or nonfarm enterprises or are engaged independently in a profession or trade on own-account or with one or a few partners. The essential feature of selfemployment is that the remuneration is determined wholly or mainly by sales or profits of the goods or services produced. In the “putting out” system, where part of a job is done in different household enterprises, persons are considered self-employed if they have some tangible or intangible means of production, they work in an enterprise, and the fee or remuneration consists of two parts, namely, the share of their labor and the profit of the enterprises. Self-employed persons may be further categorized as follows: Own-account workers. Self-employed persons who operate enterprises on their own account or with one or a few partners and who during the reference period by and large run the enterprise without hiring any labor. They may, however, have unpaid helpers to assist them in the activity of the enterprise. Employers. Self-employed persons who work on their own account or with one or a few partners and by and large run their enterprise by hiring labor. Helpers in household enterprise. Self-employed persons, mostly family members, who keep themselves engaged in household enterprises, working full- or part-time, and do not receive a regular salary or wages in return for the work performed. They do not run the household enterprise on their own but assist the related person living in the same household in running the enterprise. Regular salaried/wage employee. Persons working in others’ farm or nonfarm enterprises (both household and nonhousehold) and getting in return salary or wages on a regular basis (and not on the basis of daily or periodic renewal of work contract). This category includes not only persons getting timebased wage but also persons receiving piece wage or salary, and paid apprentices, both full-time and part-time. Casual wage labor. A person casually engaged in others’ farm or nonfarm enterprises (both household and nonhousehold) and getting in return wages according to the terms of the daily or periodic work contract. Source:

NSSO (1996).

industry and services in 1999/2000), the services sector is the single biggest employer in the urban areas (employing 57% of the urban workforce, versus 37% for industry, in 1999/2000). Regarding real hourly wages, the data reveal a number of regularities across the years (Table 5.13). Urban wages are higher than rural wages (142% to 174% higher over the various years); men get paid more than women (83% to 171% higher over the various years); regular workers earn more than casual

227 Labor Markets in India: Issues and Perspectives

workers (125% to 190% higher over the various years); better-educated workers are paid more (281% to 402% higher for college-educated workers than for illiterate workers over the various years); and average wages are highest in services, followed by industry and then agriculture (average wages in the services sector are 17% to 69% higher than in the industry sector, and 165% to 212% higher than in the agriculture sector over the various years). The data also reveal a relatively sharp increase in average wages between 1993/94 and 1999/2000. This is true for both the rural and urban sectors. An examination of wages at different points of the wage distribution reveal, however, that the largest gains—in levels if not percentage terms—have gone to workers at the top end of the wage distribution. In other words, a fair amount of the large increase in average wages registered between the latest two large-sample NSS surveys has been driven by the wages of the relatively better off. Additionally, the behavior of wages by educational attainment, occupation, and sector of employment indicates that the largest wage increases (in levels and often also in percentage terms) have taken place for workers with a college education; those in professional, technical, administrative, executive, and managerial occupations; and those working in the services sector. Finally, inequality measured in terms of the Gini coefficient has worsened marginally in the rural areas but more dramatically in the urban areas. For example, while the urban Gini coefficient increased by around one percentage point between 1983 and 1987/88 and between 1987/88 and 1993/94, it increased by as much as three percentage points between 1993/94 and 1999/2000. Focusing more closely on the wages of agricultural workers—the lowest paid of all workers in India—Table 5.14 shows that there is enormous interregional variation in real agricultural wages across the major Indian states.23 It is perhaps reasonable to suggest that the observed spatial variation is broadly consistent with land productivity, though there is no clear evidence on this issue. The table also shows that the wage rates increased in all the states from 1983 to 1999/2000, but there is some dispute about the observed deceleration in 1993/94–1999/2000. The earnings of agriculture workers—current wages times the number of days of work—are, however, not enough to overcome poverty, as noted previously. 5.3.6

Quality of Employment and Labor in the Organized Sector

Assessing the quality of employment, and its evolution over time, is by no means easy. From the perspective of workers, several attributes of employment besides the amount of wages and salaries (or earnings for the self-employed) are important. Working conditions, including the hours of work, the degree of job or income stability, and access to social security schemes providing coverage for pensions, ill health, and disability, are all important attributes that contribute

228 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Table 5.14 Agricultural Wages in India, by State, 1983 to 1999/2000 Growth in Wages

Real Wages per Day State

1983

Andhra Pradesh Assam Bihar Gujarat Haryana Karnataka Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal All India

31.2 40.0 28.8 36.5 68.4 25.2 56.5 27.0 26.1 21.4 58.8 49.2 24.8 34.8 32.4 32.0

Note: Source:

1987/88 1993/94 38.8 52.2 37.4 36.2 67.3 29.6 68.0 31.5 29.8 27.9 69.9 56.7 29.0 41.0 54.1 40.0

42.8 50.0 41.6 41.9 81.9 37.5 78.2 37.9 42.7 37.0 85.0 43.4 41.5 46.3 61.6 47.0

1999/2000

1983– 1987/88

46.0 51.7 41.4 62.1 73.0 43.3 110.6 43.0 38.9 36.8 75.8 58.6 63.7 54.0 64.9 50.9

5.0 6.4 6.0 (0.2) (0.4) 3.4 4.2 3.4 3.0 6.1 3.9 3.2 3.5 3.7 12.1 5.1

1987/88– 1993/94– 1993/94 1999/2000 1.6 (0.7) 1.8 2.5 3.3 4.0 2.4 3.2 6.2 4.8 3.3 (4.4) 6.1 2.0 2.1 2.7

1.2 0.6 (0.1) 6.8 (1.9) 2.4 6.0 2.1 (1.6) (0.1) (1.9) 5.1 7.4 2.6 0.9 1.3

In constant 1999/2000 prices. Himanshu (2004, p. 8).

to the quality of employment. The degree of upward mobility offered by employment, including how much a particular job allows the worker to build his or her human capital, could also be considered an important attribute of good employment. Data limitations make it very difficult to examine these other nonwage attributes of employment. However, the available data do allow us to examine “employment status” in India. In broad terms, workers can be assigned to four types of employment status: regular wage employment in the organized (or modern or formal) sector; regular wage employment in the unorganized (or traditional or informal) sector; self-employment (mostly in the unorganized sector); and casual wage employment (in the organized or unorganized sector). Most, if not all, observers of Indian labor markets would agree that regular wage employment in the organized sector is the highest-quality and most coveted type of employment. In addition to being relatively well paid and having greater job stability, regular wage workers in the organized sector are protected by various labor laws and formal systems of social security. In contrast, casual wage employment would qualify for the lowest quality of employment. Such workers are not only the lowest-paid (Table 5.13), their short contracts—often on a daily basis—and little or no recourse to protective labor regulations and social security mechanisms subject them to difficult working conditions and leave them unprotected from a variety of job-related risks.

229 Labor Markets in India: Issues and Perspectives

In between are self-employed persons and regular wage employees in the unorganized sector. Ranking the quality of employment between these two groups is not easy. Ghose (1999), for example, argues that the former enjoy greater income security/stability than the latter and therefore assigns higher quality to self-employment than to regular wage employment in the unorganized sector. However, the self-employed constitute a very heterogeneous group (something that Ghose himself points out) and includes individuals who are forced to turn to self-employment in low-productivity but arduous tasks for want of better employment opportunities. The data in Table 5.15 on the employment of workers by employment status for 1983 to 1999/2000 (using the last four large-scale NSS surveys) should be viewed with this caveat in mind. Unfortunately, except for the most recent survey, NSS data do not allow one to distinguish between regular wage and salaried workers in the organized sector and their counterparts in the unorganized sector. Nevertheless, these data reveal that the share of selfemployment has been declining over time, especially in the rural areas. While the shares of both regular and casual wage employment have increased for the country as a whole, the greater part of this increase is composed of increases in casual wage employment in the rural areas. If casual wage employment can be categorized as the worst type of employment, these data suggest that the quality of employment in India has deteriorated over the last 20 years. The increasing proportion of casual employment is popularly referred to as the “casualization” of the Indian workforce. Of course, it is possible that while the share of casual workers has gone up, the share of regular wage and salaried workers employed in the organized sector has also been increasing. To see if this is the case, it is useful to merge data from the NSS surveys with employment statistics on the organized sector workers collected by the Directorate-General of Employment and Training (DGET) of the Ministry of Labour for roughly overlapping periods. For comparison, data on population, labor force size, and total employment are repeated. As can be inferred from Table 5.16, organized sector employment is less than 10% of the workforce. The growth in organized employment was low over the period listed. It was about 1.2% per year in the 1980s, and it declined to less than 1% in the 1990s. These growth rates were consistently less than the growth in the labor force and in total employment.24 As a result, the share of organized sector employment in total employment declined steadily in the 1990s.25 The share of organized sector employment in total regular wage and salaried employment also declined in general.26 The decline in organized sector employment (in share terms) suggests that at the same time that the share of “low-quality” employment, i.e., the share of casual wage labor, has increased, there has also been a decline in the share of the highest-quality jobs. However, two points must be considered in assessing

230 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Table 5.15 Distribution of Workers by Employment Status, 1983 to 1999/2000 Year

Self-Employed (%)

Rural Areas 1983 1987/88 1993/94 1999/2000 Urban Areas 1983 1987/88 1993/94 1999/2000 Rural and Urban Combined 1983 1987/88 1993/94 1999/2000 Source:

Regular Salaried (%)

Casual (%)

61.0 59.4 58.0 56.0

7.5 7.7 6.4 6.7

31.5 32.9 35.6 37.3

41.8 42.8 42.3 42.1

40.0 40.3 39.4 40.1

18.2 16.9 18.3 17.8

57.4 56.0 54.8 52.9

13.9 14.4 13.2 13.9

28.7 29.6 32.0 33.2

Planning Commission (2001).

Table 5.16 Total Employment and Organized Sector Employment Employment (millions) Item Population Labor Forcea Total Employmenta Self-employed b Regular salariedb Casual workerb Organized Sector Employment Public sector Private sector a

1983

Growth Rate(% per year) 1983– 1993/94– 1993/94 1999/2000

1987/88

1993/94

1999/2000

718 309 303 174 42 87

790 333 324 182 47 96

895 382 374 205 49 120

1,004 406 397 210 55 132

2.02 1.96 1.95 1.52 1.47 2.96

1.93 1.03 0.98 0.39 1.85 1.60

24 16 8

26 18 7

27 19 8

28 19 9

1.20 1.52 0.45

0.45 (0.03) 1.56

Labor force and employment estimates are based on large-sample NSS surveys for 1987/88, 1993/94, and 1999/2000. b These are computed by multiplying the rural and urban combined percentage data in Table 5.15 with total employment. Note: The total labor force and employment figures are on Usual Principal and Subsidiary Status basis. The rates of growth are compound rates of growth. The organized sector employment figures are as reported in the Employment Market Information System of the Ministry of Labour and pertain to March of 1983, 1988, 1994, and 1999. Sources: Based on Planning Commission (2001), Table 2.12, except for the growth rates, which the authors computed on the basis of unrounded figures reported in Planning Commission (2001).

231 Labor Markets in India: Issues and Perspectives

the decline in organized employment as seen from the data just presented. First, the organized employment numbers reported by the DGET have come under criticism. Sundaram (2004), in particular, points to deficiencies in the collection of statistics from organized sector enterprises, especially in the rapidly expanding private sector. On the basis of the 1999/2000 large-scale NSS survey on employment and unemployment, a survey in which workers reported the type of enterprise that employed them, Sundaram reports organized sector employment of 31.85 milion in nonagricultural activities. This figure may be compared with the 26.54 million reported by the DGET for March 2000. The services sector makes up almost entirely for the difference between the two estimates. Second, even if one were to go with the DGET numbers, a striking feature of organized sector employment is the dominance of the public sector and the slowdown in public sector employment growth. A closer understanding of the operations of the public sector can help put the trends in organized sector employment in clearer perspective. Table 5.17 gives details of organized sector employment by industry, as well as the share of organized sector employment in total employment and the share of the public sector in organized sector employment. As can be seen from the table, two-thirds of organized sector employment is generated by the public sector (including public administration and defense). The rest comes from the private corporate sector, registered manufacturing, and recognized educational institutions; even here, two sectors— manufacturing and community, social, and personal services—account for more than 60% of employment. Public sector employees, mainly in industry and especially services, receive much higher wages and various benefits such as job security and access to social security. The higher wages of public sector employees is clearly seen from Table 5.18, which gives the annual wages per worker in different subsectors of the factory sector. The higher wages in the public sector are due partly to the sector’s compliance with labor regulations and human capital variables like education, skill, and experience. However, the superior wages and working conditions in the public sector are also to some extent due to the wage-setting mechanism for central government employees, which is more of a political bargain, and is regardless of the Government’s ability to pay or productively employ these workers.27 This is consistent with the findings of a Mincerian wage regression. Table 5.19 gives the results of a regression of hourly real wages on employment in the public sector after controlling for individual characteristics including age, gender, educational attainment, industry of employment, and nine occupational categories. In addition, two separate dummies are included for employment in public sector (or semipublic sector) units and private organized sector units. This regression is based on data from the 1999/2000 employment-unemployment NSS survey. Employment in the public sector is associated with a wage premium

232 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Table 5.17 Organized Sector Employment, 1999/2000

Employment (millions) Sector

Total

Agriculture 237.6 Mining and Quarrying 2.3 Manufacturing 44.0 Electricity, Gas, and Water Supply 1.1 Construction 17.6 Trade 41.3 Transport, Storage, and Communication 14.7 Financial Services 5.0 Community, Social, and Personal Services 33.4 All Sectors 397.0

Organized Sector

Organized Sector Share in Total Employment (%)

1.4 1.0 6.8 1.0 1.2 0.5 3.2 1.7 11.5 28.1

Public Sector Share in Organized Sector Employment (%)

0.6 44.7 15.3 95.2 6.7 1.2 21.4 32.9 34.4 7.1

36.2 91.9 23.1 95.8 95.0 33.1 97.8 78.4 85.0 69.1

Sources: Planning Commission (2001); Glinskaya and Lokshin (2005, Table 2).

Table 5.18 Annual Wages Per Worker in the Factory Sector, 1997/98 Subsector

Mean per Worker (rupees)

% of Average

Wholly Central Government Wholly State/Local Government Central and State/Local Government Total Public Sector

80,605 54,754 39,819 62,937

194 132 96 152

Joint Sector (Public) Joint Sector (Private) Total Joint Sector

70,353 60,067 66,644

170 145 161

Wholly Private Unspecified

32,342 40,215

78 97

Average

41,496

100

Note: Source:

The factory sector comprises manufacturing, electricity, gas and water, repair services, and cold storage. Glinskaya and Lokshin (2005, Table 4).

of 73% in the urban areas. In contrast, employment in the organized private sector is associated with a wage premium of 30% in the urban areas. Of course, it is quite possible that more capable workers are attracted to employment in the better-paying public sector—a phenomenon that would account for at least some of the wage premium for working in the public sector.28 But it is unlikely that this is all that is driving higher wage premiums, given what is known about how the public sector operates.

233 Labor Markets in India: Issues and Perspectives Table 5.19 Results from Wage Regression, 1999/2000 Dependent Variable Age

Total

0.04** (1404.15) Age Square –3.0 x e –4 ** (1022.30) Male 0.36** (2965.69) Below Primary 0.13** (774.85) Primary School 0.18** (1028.03) Middle School 0.23** (1341.39) Secondary School 0.48** (2553.17) College Graduate 0.90** (3371.96) Industry 0.19** (408.82) Services 0.16** (332.52) Professionals, Technical 0.63** (1090.60) Teachers 0.30** (547.51) Artists, Entertainers, Religious Workers –2.5 x e –3 * (2.17) Administrative, Executive, Managerial 0.86** (1270.18) Clerical 0.36** (722.06) Sales Workers 0.07** (127.75) Service Workers 0.17** (341.54) Production and Transportation Workers 0.22** (478.77) Public Sector 0.54** (2753.80) Private Sector (Organized) 0.21** (942.58) Constant 0.35** (758.10) R-square 0.57 Sample Observations 70,172 Note: Source:

Rural 0.03** (1097.99) –3.0 x e –4 ** (839.16) 0.36** (2951.44) 0.11** (666.55) 0.15** (840.01) 0.18** (997.09) 0.39** (1751.52) 0.66** (1699.22) 0.08** (168.34) 0.08** (168.56) 0.55** (706.03) 0.54** (887.42) 0.03** (21.41) 0.72** (665.78) 0.44** (775.28) 0.02** (22.51) 0.20** (346.52) 0.29** (604.51) 0.44** (1599.69) 0.05** (169.63) 0.53** (1136.83) 0.45 39,358

Urban 0.06** (951.41) –6.0 x e –4 ** (681.04) 0.39** (1231.02) 0.19** (421.77) 0.24** (564.70) 0.32** (823.95) 0.56** (1459.30) 0.96** (2055.59) 0.24** (205.01) 0.16** (141.63) 0.49** (402.40) 0.16** (128.94) –0.05** (25.89) 0.67** (516.68) 0.21** (178.98) –0.03** (24.18) 0.04** (37.64) 0.08** (71.32) 0.55** (1795.62) 0.26** (755.53) –0.06** (52.12) 0.51 30,814

Household sample weights were used in estimation. Absolute t-statistics in parenthesis. * significant at 5%; **significant at 1%. Hasan and Magsombol (2005).

234 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

When seen in this light, the rapid expansion of organized sector employment—driven by public sector employment until the early 1990s (Figure 5.3)—may have been unsustainable. Tendulkar (2004) points out that in the 1980s in particular, public sector employment grew despite declining productivity and profitability, and rising labor costs. He goes on to argue that this itself was a significant reason for the subsequent troubles in the sector. To the extent that employment in the private organized sector is based on better economic foundations, the faster growth of private organized sector employment is a positive sign. But even so, the growth in the private sector was registered on account of trends in the first half of the 1990s; the years between 1996 and the early 2000s were marked by a slowdown. 5.3.7

Industrial Employment and Wages

For many economists, industrialization has often been synonymous with economic development. While a structural transformation, whereby agriculture’s share of employment and production declines in favor of industry, has been under way in India, the pace of this transformation has been slow, as noted from Figure 5.1. Moreover, an important feature of the transformation out of agricultural employment and production has been the greater dynamism of India’s services sector compared with the industry sector. Between 1983 and 1999/2000, industry’s share of employment grew by 2.7 percentage points and its share of GDP grew by 2.3 percentage points. In contrast, the services sector’s share of employment grew by 4.9 percentage points and its share of GDP by 10.7 percentage points (Tendulkar 2004). The rapid growth of India’s services sector was in fact the main driver of India’s high growth in the 1990s. Not only did the services sector contribute nearly 60% of the overall growth of the Indian economy, exports of services grew at over 17% per year in the 1990s—one of the fastest rates of growth in the world (World Bank 2004). While the dynamism of the services sector is welcome, India needs a strong industry sector. This is especially important from the perspective of generating employment opportunities that are not only productive but can also be filled by semiskilled workers—an abundant factor in India.29 For example, while the fast-growing information technology (IT) and business process outsourcing services and financial services are primarily based on, and generate demand for, highly skilled and highly educated workers, often with advanced degrees in specialized subjects, the production of automotive components would require, as an important input, workers with more general levels of skill and education. Put differently, the profile of the average Indian worker matches the latter type of job much better than the former. It is in this context that the industry sector is of particular importance.

235 Labor Markets in India: Issues and Perspectives

Figure 5.3 Public Sector, Private Sector, and Total Organized Sector Employment 30 25

Millions

20 15 10 5 0 1955 1960

1965

Public Sector

1970

1975

1980

Private Sector

1985

1990

1995

2000

Total Organized Sector

Source: Tendulkar (2004).

Several factors have been advanced to explain the slow growth of industrial employment. These include India’s trade and industrial licensing regime and labor regulations. With the liberalization of trade and the dismantling of industrial licensing, labor regulations have become the focus of much attention. While the next section discusses labor regulations in much more detail, it is worth describing here a few broad features of and trends in industrial employment. First, the vast majority of employment in the industry sector is in the unorganized sector. From NSS data (for total employment in industry) and DGET data (for organized sector employment in industry), the share of organized sector employment in industry was only around 15% in 2000. The case of the manufacturing sector, by far the largest component of the industry sector, is virtually identical (recall Table 5.17). Because it is the modern component of the industry sector, and is therefore much more productive and provides better wages and working conditions, much importance is given to how organized industry, and manufacturing in particular, is performing. Second, the last two decades have seen a shift in manufacturing employment into smaller factories and the unorganized sector. Table 5.20 breaks down manufacturing employment into household and nonhousehold manufacturing. Although the share of employment in household manufacturing declined steadily between 1961 and 1991, a breakdown of the nonhousehold manufacturing sector into factory manufacturing (roughly equivalent to the organized sector) and nonfactory, nonhousehold manufacturing (which is a part of the unorganized sector) reveals the growing importance of the

236 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Table 5.20 Trends in Manufacturing Employment, 1961–1991 Growth Rate Percentage Share Sector

1961

1981 1991

Total Manufacturing 100.0 Household Manufacturing 55.0 Nonhousehold Manufacturing 45.0 Factory Manufacturing 17.4 Nonfactory and Nonhousehold Manufacturing 27.5

100.0 100.0 32.0 23.7 68.0 76.3 29.1 27.0

Source:

38.1

49.3

Percentage Share 1961

1981

1991

100.0 100.0 100.0 38.7 43.0 35.0 61.3

57.0

65.0

1961– 1981– 1981 1991 2.1 –0.6 4.2 4.7

1.3 –1.3 2.3 –0.04

3.9

3.8

Ramaswamy (1994).

unorganized sector in employment.30 Some observers have pointed to this shift as an effect of labor market rigidities in the organized sector; others have argued that the growth of the unorganized sector can be traced to a variety of incentives offered to the small-scale sector.31 Third, employment in the organized manufacturing sector in 2001 was 11% lower than in 1997/98. The decline was largely due to declines in the number of workers (production, as opposed to nonproduction, workers) (Figure 5.4).32 While recent data indicate an increase in the number of workers employed since 2001, the total number of workers employed is still lower than in 1997. Fourth, data from the Annual Survey of Industries reveal that the growing use of contract labor, from about 7% of person-days worked in 1984 to around 22% in 1998, compounded the slow growth in formal manufacturing employment. The growth was more marked in the case of public sector enterprises, though in absolute terms private firms did twice as much contracting out (Table 5.21). Finally, growth in real wages per manufacturing sector worker (production worker) in the last two decades was about 1.1% per year, at a time when per capita income grew more than 3.5% per year. However, the real earnings of nonproduction workers (wages plus other benefits, also known as “emoluments”) increased rapidly during this period, increasing the wage inequality in this sector (Figure 5.5).33 In addition, there has been a decline over time in the share of the workers’ wage bill in both value added and output (Figures 5.6 and 5.7), consistent with the possibility of a decline in the bargaining power of workers.34

237 Labor Markets in India: Issues and Perspectives

Figure 5.4 Employment in the Organized Sector 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 Workers

Nonproduction Workers

Source: Nagaraj (2004b).

Figure 5.5 Real Wages and Emoluments 60,000

Constant Rupee

50,000 40,000 30,000 20,000 10,000 0 1980/81 1982/83 1984/85 1986/87 1988/89 1990/91 1992/93 1994/95 1996/97 1998/99 2000/01 Wages to Workers Source: Nagaraj (2004b).

Emoluments to Nonproduction Workers

238 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Table 5.21 Contract Labor as a Percentage of Total Employment, 1984–1998 Year

Public

Private

Total

1984 1989 1998

2.9 5.6 10.9

10.1 11.9 29.1

7.0 9.8 21.6

Annual Survey of Industries.

Figure 5.6 Workers’ Wages as Share of Output 10 9 8

Percent

7 6 5 4 3 2 1 0 1981/82 1983/84 1985/86 1987/88 1989/90 1991/92 1993/94 1995/96 1997/98 Source: CSO, Annual Survey of Industries.

Figure 5.7 Workers’ Wages as Share of Value-Added 30 25 20 Percent

Source:

15 10 5 0 1981/82 1983/84 1985/86 1987/88 1989/90 1991/92 1993/94 1995/96 1997/98 Source: CSO, Annual Survey of Industries.

239 Labor Markets in India: Issues and Perspectives

5.4 Labor Laws in India Several important features of India’s labor laws are worth noting at the outset. First, under the Indian constitution, legislative matters pertaining to labor and labor welfare are placed in the Concurrent List, with both the central Government and the state government having the power of legislating in these matters. Accordingly the labor-related administrative and enforcement machineries operate at both central and state levels. Central acts have nationwide coverage while state acts have more limited jurisdiction. Second, a characteristic feature of the regulation of labor laws in India is the overwhelming presence of the state. To that end, an elaborate machinery has been constructed to implement and enforce labor laws, especially those governing industrial relations and wages. This machinery exists at the central and state levels under the Ministry of Labour. Typically the machinery consists of a hierarchy of labor enforcement officers and inspectors headed by the chief labor commissioner (at the center) and labor commissioners (state). Apart from these, there are also specialized administrative apparatuses that mainly deal with welfare, safety, social security, and environmental laws. The industrial dispute adjudication machinery consists of the industrial tribunals and labor courts under the purview of the central and state governments. Third, the persistent structural dualism of the labor market in terms of the division between the organized (formal) and unorganized (informal) sectors carries over to, and is also at least partly the result of, the regulation of labor markets. India’s legislative, administrative, and enforcement machineries are disproportionately targeted toward the organized sector even though it accounts for only around 7% of the labor force and has been in decline since the 1980s. Other important features of the legislative/regulatory framework in India are: (i) the historical legacy of colonial labor legislation; (ii) a tendency toward legislative proliferation along with weak enforcement; and (iii) a focus on direct employee-employer relationships to the exclusion of other forms of labor relationships such as subcontracting, outsourcing, temporary work, or even fixed-contract employment. We now turn to a more detailed discussion of these features. We also describe some of the most important labor regulations in India. Our focus is on those labor regulations that lie at the center of a major debate on whether or not labor regulations in India have led to serious rigidities in the operation of labor markets and are contributing to some of the weak labor market outcomes reviewed in the previous section, especially the slow growth of the organized sector. This section closes with some remarks on the recommendations of the Second National Commission on Labour (SNCL) regarding reform of labor laws in India.

240 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

5.4.1

Labor Legislation in Colonial India: A Brief Overview

State-dominated labor regulations in India are often traced to the “import substitution, planned development” period of post-independence India (1950– 1976). However, this view is grossly mistaken. Practically all of the most significant labor laws—Industrial Disputes Act, Trade Union Act, Industrial Employment (Standing Orders) Act, Workmen’s Compensation Act, Payment of Wages Act, etc.—were enacted in the colonial period between 1926 and 1947. It can even be argued that state intervention in the labor market originated in early colonial rule and was elaborated in the 19th and early 20th centuries. The models for such intervention were drawn from English common law and the Masters and Servants Statutes. Two classic forms of such legislative intervention were the Workmen’s Breach of Contract Act of 1859 (which itself was a culmination of a series of legislative initiatives dating from the early 19th century curbing free exit and association among workers) and the Plantation Labour Laws of 1860s (which institutionalized the penal contract indenture system in India). The long history of operation of these laws (1800–1926) deeply influenced the character of labor market institutions (e.g., intermediaries, jobber, sardari system—all pertaining to different ways of contracting workers) and employment relations (criminalization of free labor). The welfarist and protective aspect of labor regulations are commonly traced to the introduction of the Factory Acts in 1881, which regulated the employment of children and women and hours of work and safety provisions. The Factory Acts were widely believed to have been introduced under pressure from the Lancashire cotton manufacturers to curtail India’s competitive advantage in cheap labor. However, implementation and enforcement remained weak and without teeth till well into the 1920s. The next spurt of legislative intervention happened in the post–World War I period (1920–1946) when India joined the International Labour Organization and the statutory legacy of criminal breach of contract and penal contract indenture was abolished in 1926. The same year saw the enactment of the Trade Union Act, which legalized trade unions and gave immunity against civil and criminal action. The Workmen’s Compensation Act of 1923 was also passed in this phase, as were the first Maternity Benefit Acts and Payment of Wages Act. A spurt of industrial action in the late 1920s led to the passage of the Trade Disputes Act of 1929 with provisions for arbitration and adjudication through industrial courts under state authority. The high point of renewed state intervention in labor relations was reached during World War II when, under the Defence of India Rule 81-A, industrial disputes were subjected to compulsory adjudication, and strikes and lockouts were banned while the disputes were pending.35 Interestingly, the passage of the Industrial Disputes Act of 1947 retained the relevant sections of the Defence of India Rules and elaborated on

241 Labor Markets in India: Issues and Perspectives

the adjudication machinery of the Trade Disputes Act. The Trade Union Act, the Industrial Employment (Standing Orders) Act of 1946, the Minimum Wages Act of 1948 (initiated in 1946), and the Industrial Disputes Act of 1947 were the basic pillars of the interventionist architecture of labor relations in India. This account of the historical development of labor laws and regulations in the colonial period indicates the following: (i)

State interventionism had become entrenched in industrial relations and employment relations and had adapted to a changing economic and ideological environment. (ii) The roots of both “protective” and regulatory aspects of the labor policy are to be found in the developments in the colonial period. (iii) The dualism of the labor market in the form of the organized/ formal and the unorganized/informal sector already presupposed the emerging labor policy scenario. 5.4.2

Labor Laws Since Independence

At the end of World War II, a new orthodoxy of economic management was born. It envisaged sustained economic growth if full employment could be maintained by raising effective demand. Financially, it meant a budget in deficit; in the labor market it meant that labor policy should be directed toward encouraging formal and long-term employment relationships and contracts and providing access to social security. The social engineering role of the state in planned development and a policy of import substitution industrialization led to the massive growth of public sector industries in key areas such as iron and steel, power, heavy engineering, shipping, railways, and public transport. Major services sector industries such as insurance and banking also came to be owned by the state. Allied to this was the substantial expansion of state activities and consequent expansion of the bureaucracy at both central and state levels. The emergence of the state as a major employer of labor accentuated the already strong state involvement in the labor market. The legislative framework for managing labor relations established at the time of independence has not changed its basic orientation in the postindependence period. This, however, does not mean that no changes were made over time. The pressures for these changes emerged from two sources, which now assumed great importance. A first source of change was the increasing juridification of labor relations and expansion of judge-made laws.36 A second source was the changing socioeconomic ideologies of the regime, reflected in a greater welfare orientation and a tendency toward social legislation. These changes typically led to:

242 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

(i)

(ii)

Periodic amendments to the basic labor laws (for example, amendments to the Industrial Disputes Act, Trade Union Act, and Industrial Employment Acts). New legislative initiatives (for example, the Contract Labour Act of 1970, the Equal Remuneration Act of 1976, the Bonded Labour Act of 1976, the Child Labour Act of 1986, and several pieces of social security and welfare legislation). These new legislative initiatives were bunched around the 1970s and early 1980s. In addition, there was an increasing tendency for states to legislate for a specific industry or sector.

Although the basic orientation of labor laws has remained the same since independence, labor laws of many kinds have proliferated such that there are now 47 central labor laws and no fewer than 200 state laws. The laws are of five types: industrial relations laws, welfare and safety laws, social security laws, wage laws, and special laws for different sectors and categories. The aim and coverage of major central labor laws in each of these categories are given in Appendix 5.1. The tendency toward legislative proliferation has led to severe problems of definitional incompatibilities and administrative overlap and inefficiencies, all of which have created a judicial nightmare. One major fallout of all of this has been considerable delay in the adjudication of industrial disputes, leading to the clogging of the labor adjudication system. The need to codify and rationalize labor laws has been on the anvil for several years. The most comprehensive proposal is that of the National Labour Law Association’s Indian Labour Code (1994). Additionally, the definitional, jurisdictional, and administrative incompatibilities of labor laws and their harmonization and rationalization have been major issues taken up for review by the Second National Commission on Labour (Ministry of Labour 2002). At the same time, there is considerable debate regarding the efficacy and effects of some of India’s labor laws not only on employment and wage outcomes, but also on industrial performance. Here we discuss in detail the evolution of certain key laws that are currently at the heart of the debate on labor market rigidities, drawing in part on case laws contained in Pai (2001). We provide an account of the interaction between statutory laws and the judge-made case laws that have shaped the legal framework of labor and employment relations in India. A brief account of the enforcement of these laws is also provided. (Box 5.3 discusses some gender-related issues pertaining to labor laws.) Industrial Disputes Act The Industrial Disputes Act was promulgated in May 1947, even before the formal independence of India. The act contains 40 sections, spread over

243 Labor Markets in India: Issues and Perspectives Box 5.3 Labor Laws and Gender

All the major central labor laws are equally applicable to women workers. The Equal Remuneration Act was passed in 1976, providing for equal pay for men and women workers for the same or similar work. Under this law, no discrimination is permissible in recruitment and service conditions except where the employment of women is prohibited or restricted by law. The enforcement of the provisions of this law is regularly monitored by the central Ministry of Labour and the Central Advisory Committee. In respect of an occupational hazard concerning the safety of women in the workplace, in 1997 the Supreme Court of India announced that sexual harassment of working women amounts to a violation of gender equality rights. As a logical consequence, it also amounts to a violation of the right to practice any profession, occupation, and trade. The judgment also laid down the definition of sexual harassment, the preventive steps, the complaint mechanism, and the need to create awareness of the rights of women workers. Employers have already begun to implement these guidelines by amending the rules under the Industrial Employment Standing Orders Act of 1946.

five chapters and five schedules. It provides the machinery and procedure for the investigation and settlement of industrial disputes. The law, except for some provisions, applies to all industries regardless of size. The act is in direct lineal descent of two laws: the Trades Disputes Act of 1929 and the Defence of India Rules No. 81-A. The former prohibited strikes and lockouts in public utilities and specified the process of adjudication by the establishment of a board of conciliation or a court of enquiry. The latter introduced the system of compulsory adjudication and enforcement of awards by the adjudicators. Two new initiatives were added to the act, namely, the institution of industrial tribunals and the labor courts, on the one hand, and the provision of works committees, on the other. The works committee was to be instituted in all establishments employing more than 100 workers. The government, either on its own or on application by either party to a dispute, is empowered to refer any industrial dispute to the labor court or industrial tribunal. Conciliation through designated conciliation officers is compulsory for all disputes of public utility services and optional for other industrial establishments. The appropriate government can refer the dispute for adjudication to the labor court and tribunals and declare any industry a public utility service. Strikes and lockouts are prohibited while conciliation and adjudication are pending, and are illegal without notice in public utility services. The awards given by the adjudicator are enforceable within 30 days of publication of the award. The act, apart from laying down procedures for settlement of disputes, also lays down the conditions under which layoff, retrenchment, and closure of an industry could take place and the appropriate level of compensation in

244 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

each case (dealt with in Section 25 of Chapters V and V-B).37 The act also prescribes the terms under which employers may change certain “conditions of service” (dealt with in Sections 9-A and 9-B of Chapter II-A). The act was amended several times in the light of experience gained in its actual working, case laws, and the industrial relations policy of the Government. It was amended in 1956, 1964, 1965, 1971, 1972, 1976, 1978, 1982, and 1984. Since 1984 there have been no amendments. The major changes introduced were as follows: (i)

The 1964 amendment made the notice of termination of an award by adjudication conditional on the approval of the majority of those working in the establishment. (ii) The 1965 amendment allowed disputes raised by individual workers to be raised as industrial disputes without the mediation or sponsorship of a union. This was incorporated in the Industrial Disputes Act rules in 1968 and considerably intensified the juridification of employment relations and increased the number of cases in the labor courts. The act also provided for increased punishment for continuous disregard of awards and settlements by tribunals. (iii) The 1971 amendment explicitly empowered the industrial tribunals to order the reinstatement of a dismissed worker. This amendment followed the Indian Iron and Steel Co vs. their Workmen case of 1958, where the Supreme Court had objected to such orders. (iv) The 1972 amendment required any industrial establishment employing more than 50 persons to give 60 days’ notice to the appropriate government before the closure of the industry, stating the reasons for the closure. (v) The 1976 act inserted a special Chapter V-B, which made prior approval of the appropriate government necessary in the case of layoffs, retrenchment, and closure in industrial establishments employing more than 300 workers. This followed the observed trend of large-scale closures and layoffs in the preceding years. This provision is often seen as causing rigidity in the labor market. (vi) The 1982 amendment laid down the procedure for obtaining government permission for closure with reasons for assent or refusal to be recorded in writing and after adequate hearing of the affected parties. This followed the Supreme Court judgment in the Excel Wear Case (1979), which ruled that refusal of permission for closure was an unreasonable restriction on the

245 Labor Markets in India: Issues and Perspectives

fundamental right to carry on business. The amendment also lowered the limit of the employment size to 100 for mandatory permission before closure, and increased the number of days of notice before closure to 90 days. A separate schedule of unfair labor practices by the employers, trade unions, and workmen was inserted in the act and penalties for these were provided. The amendment also specifically excluded from the definition of “industry” such institutions as hospitals and educational and research institutions, and made the law inapplicable to government institutions performing sovereign functions and specific institutions such as atomic energy, space, and defense research. This followed after the Supreme Court judgment of Bangalore Water Supply and Sewerage Board (1978) had widened the definition of industry to include all establishments producing goods and services with employeremployee cooperation. (vii) The 1984 amendment basically redrafted the 1982 act taking into account the objections raised in rulings of several high courts on the issue of the Chapter V-B provision for mandatory permission for retrenchments and layoffs. Thus layoffs, retrenchments, and closures in establishments having more than 100 employees now followed the same procedures for seeking permission from the government. As for the “conditions of service rules,” Section 9-A of the act requires that employees be given at least 21 days’ notice before modifying wages and other allowances, hours of work, rest intervals, and leave. According to some observers, including the Government’s Task Force on Employment Opportunities: “The requirement of a 21 day notice can present problems when units have to redeploy labor quickly to meet the requirement, for example, for time bound export orders.” (Planning Commission 2001, p. 7.8). Others have also raised the possibility that this section of the act, along with certain provisions of the Industrial Employment (Standing Orders) Act (see below), can constrain industrial restructuring and technological upgrading. This brief review of the history of the Industrial Disputes Act, considered the fulcrum of the industrial relations system in India, indicates the following: (i)

A state-oriented compulsory adjudication system is the basis of the industrial relations system in India. The wide-ranging discretionary power of the state is crucial in structuring the balance of force between capital and labor. This is reflected in the amendments to legislation, which while restraining capital

246 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

(ii)

(Chapter V-B) also seeks to restrain labor (by curbing unfair labor practices, defining illegal strikes, and having the right to declare an industry a public utility). The tendency for excessive juridification of work relations has militated against the development of a healthy collective bargaining system. It has also led to increasing resort to the adjudication machinery and excessive delays.

The degree to which the adjudication machinery is overburdened with industrial dispute cases is obvious. Up to 2000, around 533,000 cases were pending in the labor courts under the purview of the state governments. Of these, around 29,000 cases were pending for more than 10 years. In all the major industrialized states, nearly 10% of all pending cases had been pending for more than 10 years (Shenoy 2004). Tables 5.22 and 5.23 give more details. Table 5.22 Number of Cases Pending in Labor Courts, by State (as of 10 May 2000)

State

No. of Cases Pending

Assam Bihar Delhi Gujarat Kerala Karnataka Maharashtra Madhya Pradesh Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal Total Note: Source:

189 5,200 28,837 133,916 3,450 17,457 142,345 89,341 14,784 20,066 21,713 22,539 2,225 533,038

No. of Cases Pending for More Than 10 Years 138 566 2,342 8,616 63 2,924 11,508 — 110 775 150 10,303 283 28,864

— means not available. Annual Report (various years), Ministry of Labour.

Table 5.23 Pendency/Disposal of Cases in Central Government Industrial Tribunals, 2000–2003 Year

Registered

Pending

Disposed

2000 2001 2002 2003

11,791 15,132 13,033 12,674

10,924 13,329 11,376 11,828

867 1,803 2,057 846

Source:

Annual Report (various years), Ministry of Labour.

247 Labor Markets in India: Issues and Perspectives

What impact does this machinery of adjudication and its delay have on employees and employers? Very few studies track the impact of adjudication delays. Saini (1995), in a detailed study of the industrial adjudication system in a major industrial cluster (Faridabad, a suburb of New Delhi), found that adjudication took an average of 3 years. Of the 195 collective disputes in a 5year period, 40% (76) were abandoned by workmen because of delays and an inability to sustain the adjudication procedure. In 37 of the 48 cases that went through full adjudication, workers got no relief. The delay obviously affected the workers more and favored the employers. In most of the cases settled, workers were forced to settle after the unions raising the disputes were dislodged, union leaders dismissed, and puppet unions or work committees were created to enforce settlement (Saini 1995). Contract Labour (Regulation and Prohibition) Act The Contract Labour (Regulation and Prohibition) Act regulates the employment of contract labor in certain establishments. It also provides for the abolition of contract labor in certain circumstances. The act applies to all establishments employing at least 20 workmen as contract labor on any day in the preceding 12 months, and to every contractor employing 20 or more contract workers in the same period. The act provides for the registration of establishments of the principal employer employing contract labor and the licensing of contractors. The principal employer must provide facilities such as rest room, canteens, first aid, etc., if the contractor fails to do so. The principal employer must also ensure that the contractor pays the wages due to the laborers. Under Section 10 of the act, the appropriate government is empowered to abolish contract labor after consultation with the advisory board (central or state) in any process, operation, or other work that is incidental to or necessary for the trade, business, manufacture, or occupation that is carried on in the establishment, is of a perennial nature, and is carried out by regular workmen in the same or similar establishments. The Contract Labour Act was designed to protect contract workers from exploitation. Its chief aim was to regulate, and in certain instances abolish, contract labor. The act, however, gave rise to industrial disputes over the regularization of contract labor. The bulk of the disputes arose in cases of public sector undertakings or corporations. In a major judgment, Gujarat Electricity Board vs Hind Mazdoor Sabha (1995), the Supreme Court ruled that the employment of contract labor in public sector undertakings was an unfair labor practice and recommended its abolition and the absorption of contract laborers as regular workmen. In the Supreme Court judgment, The Air India vs United Labour Union (1996), the court directed that in a process, operation, or other work where contract labor is prohibited, the contract laborers engaged in the

248 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

process are automatically to be absorbed as regular workers. Subsequently, however, a five-judge constitutional bench quashed this ruling in the case of SAIL vs United Waterfront Workers (2001). However, despite the continued dispute on the regularization of contract labor, there has been no letup in the increasing “contractualization” of work. As noted in the previous section, contract labor as a percentage of employment in manufacturing increased from 7% in 1984 to 21.6% in 1998. The latest available figures (2001) on the Census Sector (mainly establishments in the industry sector with more than 100 employees) show the huge prevalence of contract workers in Andhra Pradesh (64%), which recently (in 2003) passed a law permitting temporary contract labor employment in core activities of firms and widening the scope of noncore activities. The recent trends in the enforcement of the Contract Labour Act have shown very low and declining levels of inspection (as a proportion of prosecutions and convictions) under the act in the central sphere (Table 5.24). This trend is occurring even as there has been a large increase in the number of contract labor employed in different occupations. Table 5.24 Enforcement of the Contract Labour (Regulation and Abolition) Act of 1970 (Central Sphere), 1985/86–2001/02

Year 1985/86 1995/96 2001/02 Note: Source:

No. of Inspections

No. of Prosecutions

No. of Convictions

No. of Contract Laborers Covered by Licenses

9,217 4,653 6,052

5,956 3,705 3,671

— 2,770 2,071

— 489,776 709,030

— means not available. Annual Report (various years), Ministry of Labour.

Trade Union Act The Trade Union Act facilitates unionization in both the organized and unorganized sectors. The act used to allow any seven workers in an enterprise to form a trade union and register it. Half of the trade union officers could be outsiders. An amendment of the act in 2001 has raised the minimum number of workers that can form a trade union in the case of enterprises with 100 or more workers. In such enterprises, the minimum has been set at 10% of the total number of workers up to a maximum of 100 workers. Additionally, onethird or five officers of the trade union, whichever is less, are permitted to be outsiders in the case of organized sector enterprises as per the 2001 amendment.

249 Labor Markets in India: Issues and Perspectives

The law is supported by the constitutional right to freedom of association. The right to register a trade union, however, does not mean that the employer must recognize the union—there is, in fact, no nationwide law that provides for the recognition of trade unions and consequently no legal compulsion for employers, even in the organized sector, to enter into collective bargaining. The course of collective bargaining was influenced in 1948 by the recommendations of the Fair Wage Committee (1948) regarding the concept of a minimum, fair, and living wage. These three wage levels were defined and it was pointed out that all industries must pay the minimum wage and that the capacity to pay would apply only to the fair wage, which could be linked to productivity.38 This gave a boost to collective bargaining; many organized sector trade unions achieved reasonably satisfactory indexation and a system of paying an annual bonus. This later became law, and a thirteenth monthly wage must be paid as a deferred wage to all those covered by the Payment of Bonus Act. The minimum bonus payable is 8.33% and the maximum is 20% of the annual wage. Industrial Employment (Standing Orders) Act In addition to Chapter V-B of the Industrial Disputes Act, additional provisions for job security among individual workers may come from the operation of the Industrial Employment (Standing Orders) Act. This act requires all employers with 100 or more workers (50 in certain states) to inform workers of the specific terms of their employment. While the act seeks to make labor contracts complete, fair, and legally binding, it has some features that may interfere with quick adjustments to changing conditions. In particular, workers’ consent is required to modify job descriptions or to move workers from one plant to another, in response perhaps to changes in the market. The problem, according to some analysts, is that the workings of India’s Trade Union Act make it difficult to obtain such consent. Since the Trade Union Act has no provisions for union recognition (for example, via a secret ballot), the result has been multiple unions (within the same establishment) with rivalries common across unions so that a requirement of workers’ consent for enacting changes “can become one of consensus amongst all unions and groups, a virtual impossibility” (Anant 2000, p. 251). 5.4.3

Trends in Industrial Relations and Industrial Conflict

Industrial relations between 1947 and 2004 mirrored the broad pattern of economic policy and growth outlined in the first section. It may be useful to describe the changes in four broad temporal phases: 1947–1965, 1966–1977, 1980–1991, and 1991 to the present drawing upon Bhattacherjee (1999).

250 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

The first phase (1947–1965) was characterized by the development of state-led industrialization, based on import substitution and employmentintensive public sector enterprises. This period witnessed the rapid growth of unionization. The number of unions grew from 4,623 in 1951 to 11,614 in 1962. Their membership also trebled during this period. The public sector emerged as a major arena for unionization. There also developed a strong tendency toward a state-sponsored trade union movement. The tendency toward collective bargaining was effectively curbed as tripartitism rather than bipartism became the norm (Ramaswamy 1984). This was the phase when wage setting was conducted through the setting up of wage boards for several key industry sectors. This phase was marked by comparative peace and relatively low levels of industrial disputes. The second phase (1966–1977) coincided with severe industrial stagnation and low rates of employment growth. This phase saw a dramatic increase in the levels of industrial disputes. Both strikes and lockouts increased, as did the number of person-days lost due to disputes. Centralized industrial relations structures showed signs of crisis. Several wage boards stopped functioning and decentralized bargaining started to become important. This was also the phase when several states (Maharashtra, Gujarat, Madhya Pradesh, Rajasthan, and Uttar Pradesh, among others) enacted special labor laws to intervene in and control industrial conflict through laws defining trade union recognition and defining unfair labor law practices. There was also some fractionalization in the trade union movement. This phase reached its climax in the massive All India Railway Strike in 1974 and the subsequent clampdown during the emergency (1975–1977). It is not without significance that the first major central amendment to the Industrial Disputes Act 1947 was made during the emergency, introducing the provision for prior permission for retrenchment and closures precisely at the time when the central Government had smashed the railway strike and clamped down severely on rising industrial conflict. The third phase (1980–1991) coincided with the start of liberalization and the gradual withdrawal of the state from economic activities and industrial relations. No overt changes in the labor law and labor market policies were made (except for the 1982 and 1984 amendment to the Industrial Disputes Act, which lowered the ceiling on the establishment size for which permission for closure and retrenchment would be required to 100 workers and introduced the unfair labor practices schedule), but there emerged significant subterranean changes affecting the industrial relations system at the level of individual firms, specific industries, and regions. As noted earlier, it was a period of jobless growth—”the best decade for economic growth but the worst decade in terms of employment generation” (Ghose 1992). In this period, one can see the beginning of a trend where firms engaged in the production of consumer nondurables began subcontracting and outsourcing their production to the

251 Labor Markets in India: Issues and Perspectives

unorganized sector (Ramaswamy 1999, Banaji and Hensman 1990). The productivity gains in manufacturing were now sought to be captured by the strengthening of independent plant-level unions. While earnings per worker increased substantially in the organized manufacturing sector, it was achieved by intensifying labor use, i.e., increasing the number of person-days per worker (Nagaraj 1994). Earning differentials between decentralized union workers in the modern sector widened while the centralized unions in the traditional sunset sectors saw their earnings decline. Lockouts emerged as an important employer strategy for beating down wage demands. The declining power of unionism in the sunset industries was reflected in the longest-ever strike in India (Bombay textile strike of 1982), which ended in utter failure. It is interesting to note that the state stayed out of this dispute, marking a new phase in the industrial relations system. The final phase (1991 to the present), coinciding with a vigorous acceleration of economic reforms, has seen a greater decline in public sector employment and a continued decline in the power of centralized unions. The erosion of the centralized industrial relations system has gone apace. This is reflected in the continued decline in strikes (Figure 5.8) and the number of workers involved in disputes—at least until the late 1990s (Figure 5.9)—and the relatively low levels of person-days lost because of strikes (Figure 5.10). Additionally, the person-days lost because of lockouts now outstrip losses due to strikes (Datt 2003). In an interesting analysis of the industrial disputes and lockouts in West Bengal, Datt found that most of the lockouts ended with a bipartite settlement leading to the downsizing of the workforce and a striking absence of state intervention. It must be noted that West Bengal has been ruled by a communist since 1978, a clear indication that the background rules of the industrial relations system have changed. Overall, the trends in the industrial relations system in the postindependence period have seen a change from a state-dominated industrial relations system and centralized wage bargaining structure to a more pluralistic and decentralized industrial relations system. This has been accompanied by a sharp decline in the level of industrial disputes and strikes, which were the main feature of the 1947–1980 system of industrial relations and conflict. These long-term trends can be seen in the graphical illustration of the indices of industrial conflict depicted in Figures 5.8, 5.9, and 5.10. These long-term trends, especially the move to a more decentralized industrial relations system, can also be seen as a tendency among trade unions to stay away from the more politically oriented Central Federation of Trade Unions (Ministry of Labour 2002). Additionally, while the number of trade unions submitting returns increased in the 1980s and 1990s, the average membership per union submitting returns was lower in the late-1990s than in the mid-1980s. While about 7,718 unions submitted returns and averaged

252 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

Figure 5.8 Number of Disputes 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 Strikes Source:

Lockouts

Total

Ministry of Labour, Indian Labour Yearbook.

Figure 5.9 Number of Workers Involved in Disputes 3,500 3,000

Thousands

2,500 2,000 1,500 1,000 500 0 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 Strikes Source:

Lockouts

Total

Ministry of Labour, Indian Labour Yearbook.

around 831 workers each in 1985, the corresponding numbers in 1997 were 9,918 unions and 743 workers.39, 40 5.4.4

Labor Laws and the Labor Market Rigidity Debate

The debate on labor market reforms in India has centered on the argument that India’s labor laws have been excessively tilted toward workers in the

253 Labor Markets in India: Issues and Perspectives Figure 5.10 Number of Person-Days Lost in Disputes 80 70 60

Millions

50 40 30 20 10 0 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

Strikes

Source:

Lockouts

Total

Ministry of Labour, Indian Labour Yearbook.

organized sector, especially in industry. This has produced, it is argued, serious rigidities in the operation of labor markets and adverse consequences for the performance of the organized industry sector. Three major effects are presumed to result from these rigidities induced by protective labor laws. (i)

Employment effect. Recent studies have argued that labor market rigidities, induced by labor laws that effectively guarantee job security, have hindered employment growth since firms have a strong disincentive to hiring additional labor, which can not be laid off easily (see, for example, Fallon and Lucas 1991, Khan 2005, and Nath 2005). (ii) Labor substitution effect. Disincentives to hiring workers lead firms to gravitate toward capital-intensive production processes and sectors. As a result, there is an artificially induced substitution of abundant labor with scarce capital (see, for example, Datta-Chaudhuri 1996). (iii) Industrial disputes effect. By strengthening the bargaining power of formal sector labor or by increasing the discretion given to the government in deciding industrial disputes, India’s labor laws can make industrial disputes more likely (see, for example, Besley and Burgess 2004). The major rigidity argument revolves primarily around the effects of the Industrial Disputes Act and the Contract Labour Act. The specific provisions

254 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

that are under a cloud are the amendments made to the Industrial Disputes Act (Chapter V-B) in 1976 and 1984, wherein any industrial establishment employing more than 100 workers must apply to the Government for permission before resorting to layoff, retrenchment, or closure. Employers resorting to any of these forms without permission are acting illegally and workers are entitled to receive wages for the period of illegality. In the Contract Labour Act, the specific target is Section 10 of the act, which empowers the Government to prohibit the employment of contract labor in any industry, operation, or process. To a lesser extent, Section 9-A of the Industrial Disputes Act and the service rules provisions of the Industrial Employment (Standing Orders) Act— which pertain to procedures that must be followed by employers before changing workers’ hours of work, nature of work, etc.—are believed to constrain firms from responding quickly to changing demand conditions, industrial upgrading, and new technologies. Finally, it is believed that the Trade Union Act has played a role in facilitating the rigidities induced by the other laws as described above for Section 9-A of the Industrial Disputes Act and the Industrial Employment (Standing Orders) Act. How important have these provisions of labor laws been in creating rigidities? Much of the empirical literature on this issue has examined the impact of the amendments to the Industrial Disputes Act. A widely cited study that first examined that impact is that by Fallon and Lucas (1993). These authors used data from the Annual Survey of Industries to estimate dynamic labor demand equations on the basis of a cost minimization framework for 36 industries from 1959/60 to 1981/82. Fallon and Lucas found no change in the speed at which firms adjust employment levels in response to shocks to labor demand after the 1976 amendment to the Industrial Disputes Act. They did, however, find a drop in labor demand after 1976, which was significant at the 5% level in 11 out of 35 industries. The average decline in labor demand, according to Fallon and Lucas, was 17.5%. But these results have been contested. As Bhalotra (1998) points out, the stated decline in labor demand was computed by averaging the relevant coefficients of estimated labor demand over the 25 industries in which a negative coefficient was estimated at the 25% level of significance, as opposed to only those industries for which the negatively signed coefficients were significant at more conventional levels of significance. Even ignoring this issue, a puzzling feature of Fallon and Lucas’ results is that the 1976 amendment affects labor demand but not the speed of adjustment of employment. Presumably, if the new labor regulations had significant bite, firms would take longer than before to adjust employment levels in response to unanticipated shocks to labor demand. An alternative approach to measuring the impact of firing restrictions is that of Roy (2002). In particular, Roy uses annual data on accession and

255 Labor Markets in India: Issues and Perspectives

separation rates for “directly employed regular” workers from 1963 to 1992. While accessions include additions to the workforce (including those reemployed or transferred from other establishments under the same management), separations are made up of quits by employees and layoffs at the instance of employers (with the data available not allowing separations to be broken down into these two components). Roy models accessions and separations in terms of a number of economic variables including “planned employment growth.” She notes that her model’s specification tries to uncover the response of separation rates to “desired” changes in employment. A key challenge is to derive estimates of planned employment growth. Roy points out that earlier literature for developed countries relied on estimates of dynamic factor demand functions, which were used to derive desired employment levels, given factor prices and other determinants of employment demand. Data limitations prevent Roy from estimating such factor demand functions for regular workers alone. Instead, Roy models employment growth as determined by output growth and growth in labor cost. She acknowledges that this is a simple characterization of labor demand and therefore that her results should be taken as “indicative.” Roy finds that the pre-1976 era is “characterized by significant responsiveness of worker turnover to employment decisions.” Both accessions and separations are positively associated with planned growth and employment. This suggests that employment growth was accomplished through both hiring and separations, with the former outstripping the latter. After 1976, accession and separation rates are negatively associated with planned employment growth. Finally, neither accession nor separation rates are significantly associated with planned employment growth in the post-1984 era. Roy considers this finding important as it suggests that employee turnover decisions have been significantly affected by the amendments made in 1976 and 1982. In particular, the post1984 results appear to indicate a significant decline in flexibility in the labor market (in hiring and firing decisions). An even more recent study on the impact of the Industrial Disputes Act, and one that has attracted considerable international attention, is that of Besley and Burgess (2004). These authors exploit state-level amendments to the Industrial Disputes Act over 1958–1992, and classify legislative changes across major states as pro-worker, neutral, or pro-employer. These legislative amendments are then used in a regression analysis of a variety of outcomes in the formal manufacturing sector, including employment, output, and investment. Besley and Burgess find that pro-worker labor regulations have had a negative impact on employment, output, and investment in formal manufacturing. The impact can be large. The most dramatic case is that of the state of West Bengal. Besley and Burgess’ results indicate that, had West Bengal not passed any pro-worker amendments, formal employment in its

256 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

manufacturing sector would have been 23% higher than its 1990 level, and formal manufacturing output would have been 24% higher. The results suggest that large gains may be had from legislative changes that make the Industrial Disputes Act more employer-friendly. Several points need to be kept in mind, however, when interpreting the results of these studies and the arguments of those who hold that labor regulation–induced rigidities are the key to understanding the lackluster performance of India’s organized sector. First, reading off directly from legal statutes to measure rigidities, as Besley and Burgess have done, could be misleading. The effect of laws is translated into labor market outcomes indirectly through a range of intermediate factors such as the enforcement environment and cultures of governance and compliance. Changes in these intermediate factors could very easily deflect or nullify the presumed effect of statutes.41 Such factors could explain some puzzling features of Besley and Burgess’ coding of various states’ labor regulations. A case in point is the coding of Maharashtra and Gujarat as proworker states and Kerala as a pro-employer state. Such a coding is puzzling when one takes into account the industrial records of these three states, the perceptions of investors, the Left-leaning nature of successive governments in Kerala, and the results of a World Bank study on regulatory bottlenecks in the operations and investments of manufacturing firms across 10 states (World Bank 2003). For example, a question on “overstaffing”—i.e., how the optimal level of employment would differ from current employment, given the current level of output—indicated that while overstaffing was present in all states, it was lowest on average in Maharashtra and Gujarat.42 Moreover, even if amendments to the Industrial Disputes Act have been pro-employee in these two states, their enforcement may have been weak. In particular, the study reports that small and medium enterprises receive twice as many factory inspections a year in poor-climate states (of which Kerala is one) as in the two best-climate states of Maharashtra and Gujarat. Second, the results of other studies suggest weak linkages between labor regulations and industrial outcomes. On the basis of surveys of industrial firms, Sharma and Sasikumar (1996) studying 233 manufacturing firms in the Ghaziabad and Noida industrial cluster found that neither employment growth nor fixed capital investments of firms were constrained by labor laws. Similarly, a detailed investigation of a sample of 1,307 firms across 10 major states and across all size classes and manufacturing industry groups found little evidence of differences in employment growth or fixed capital investment due to the effect of labor laws (Deshpande et al. 2004). At a more aggregate level, one can also find evidence that appears to weaken the validity of the three presumed rigidity effects mentioned above, namely, employment effect, labor substitution effect, and industrial disputes

257 Labor Markets in India: Issues and Perspectives

effect. Consider the industrial disputes effect first. Contrary to the presumption of labor legislation contributing to a rise in disputes, the data indicate a generally secular decline in both the number of disputes and person-days lost because of disputes, as noted earlier. This trend has been all the more pronounced since 1984, when labor regulations were tightened in a pro-worker direction. Moreover, since 1990 person-days lost because of strikes have consistently been below those lost because of lockouts. Regarding the employment effects of the labor laws, a recent comprehensive study of manufacturing sector employment growth shows two contrasting trends in manufacturing employment since the 1980s (Goldar 2002). Organized sector manufacturing experienced a decline in 1983–1988 and an acceleration in the 1994–1997 period. The decline was seen as an effect of restructuring and downsizing. This was in contrast to unorganized sector manufacturing, which grew in 1983–1988 but declined in 1994–1997. The study also reports that both employment growth and employment elasticities grew significantly in the 1990–1997 period in organized manufacturing in spite of all the “protective” labor legislation. Additionally, if labor laws have a rigidity effect it should be visible in the shifting composition of employment in the various size classes as they affect the size class of establishments with 100 or more workers. Using Annual Survey of Industries data for the period 1973/74 to 1997/98, Figures 5.11 and 5.12 graph the percentage distribution of total employment and fixed capital in size classes below 100, 100–999, and 1,000+ workers. What is evident in these two figures is that the expected compositional shifts are not visible. What we see is that the 100–999 size class has increased (as a percentage of total employment) much more than the below-100 size class. The presumed deceleration of employment seems valid only in the case of 1,000+ size class employment. It is possible that the employment decline of 1,000+ size establishments is due less to the labor laws than to the substantial restructuring of large public sector units and traditional manufacturing industries (cotton textiles, jute manufacturing, steel and engineering). Thus, these data do not seem to support the presumed employment effect of the labor laws. Similarly, the composition of fixed capital investment by employment size class also does not show much difference in growth patterns between the below-100 and the 100-and-above class. However, it is clearly evident that there is a strong inverse relation between the 1,000-and-above and the 100– 999 size class. Thus, the major shifts in fixed capital distribution have taken place in these two size classes. Third, and more generally, it would be overstating the case if we were to attribute the lack of flexibility in organized employment entirely to labor laws. A good part of the explanation has also to do with rigidities in other dimensions of industrial and economic policies. Anant and Goswami (1995)43 provide a

258 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

Figure 5.11 Distribution of Workers by Employment Size in Organized Manufacturing, 1979/80 to 1997/98 50 45

Percent

40 35 30 25 20 15 10 5 0 1979/80 1981/82 1983/84 1985/86 1987/88 1989/90 1991/92 1993/94 1995/96 1997/98

Below

100-999

1,000+

Source: CSO, Annual Survey of Industries.

Figure 5.12 Distribution of Fixed Capital by Employment Size in Organized Manufacturing, 1973/74 to 1997/98 80 70

Percent

60 50 40 30 20 10 0

1973/74 1975/761977/78 1979/801981/82 1983/841985/86 1987/88 1989/90 1991/92 1993/941995/96 1997/98

Below

100-999

Source: CSO, Annual Survey of Industries.

1,000+

259 Labor Markets in India: Issues and Perspectives

detailed case study that brings out the interplay of rigidities in banking, land and labor laws, and industrial licensing in causing industrial sickness. While a number of these rigidities have been dealt with over the last decade or so of reforms, there are still many unreformed areas. Land and Land-Related Laws One argument made against labor laws is that they discriminate against large firms. We noted earlier that between 1973 and 1997 there was a reduction in the share of factories employing 1,000+ workers in total employment and capital stock. A major contributor to this decline was the decline in the large composite textile mills in Bombay and Ahmedabad. As Anant and Goswami have pointed out, these enterprises were often sitting on a considerable amount of vacant land in the factory premises. However, the operation of urban land ceiling laws and other municipal regulations meant that the factories were effectively prevented from using this resource effectively, thus depriving the companies of what could have been a valuable source of capital. These laws therefore posed a barrier to the effective restructuring of the companies and, hence, to the continued viability of large employers. What is not often recognized is that in a number of economic sectors that include manufacturing, trade, and construction, land is an essential complement to labor. Rigidities and imperfections in the market for land translate into poor and low-quality demand for labor. Problems with Winding-Up and Insolvency Laws Weaknesses in the legal regime for insolvency and bankruptcy were discussed in Anant and Goswami and subsequently elaborated on in reports of the Eradi Committee and the Standing Committee on International Financial Standards and Codes (Reserve Bank of India 2002). The weak regime has effectively prevented companies from closing down, locking up valuable assets in long-drawn-out litigious court proceedings. These delays hurt workers as their dues are subject to court orders, and the inability to recover loans raises the cost of lending to enterprises. Once again the greater burden is put on larger corporate enterprises. As smaller entities are not subject to the vagaries of this procedure as part of the ongoing reform agenda, the law was amended in 2002 but its implementation is still being held up by litigation. Other Impediments In addition, there are impediments to the development of organized manufacturing because of the weakness in infrastructure, reservations for small-

260 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

scale enterprises, and the fragmented localized markets for goods. The effect of these impediments has been to constrain growth in the organized sector. Indeed, a detailed examination of the industrial landscape in India, and a comparison with other countries has led Lewis (2004) to conclude that it would be incorrect to pin too much blame on India’s labor laws for the lack of dynamism in industry, given the many barriers to product market competition and infrastructure-related deficiencies that exist in the country. Lewis agrees that a number of large firms are financially weak and have many excess workers. The financial weakness of these firms constrains them from using voluntary retirement schemes. However, he notes that the “fundamental reason these plants have a problem now is not the labor laws. The real reason is that competition didn’t force them to solve the excess labor problem with voluntary retirement schemes long ago when they were financially able to do so” (Lewis 2004, p. 206). Fourth, and more relevant from the standpoint of policy reform issues today, it is far from clear how much impact labor laws have had since the early 1990s. While there has been much verbal support from many policy makers for changes in labor laws, the necessary legislation for diluting the Industrial Disputes Act, in particular, has not been introduced as the political consensus is lacking. However, the introduction of the National Renewal Fund in the 1990s to finance a voluntary retirement scheme in public sector enterprises may well have legitimized layoffs and retrenchments in the formal private sector. Though the labor laws themselves remain unchanged, their enforcement appears to have been substantially diluted as the Government appears to have shown gradually less enthusiasm for enforcing them, as noted previously. Why would the Government let up on enforcement? The dirigiste development policies followed by India’s Government until the 1990s functioned through a web of mutually interrelated policies. The private sector was assured returns via policies limiting entry and competition from trade. In return, it was expected that employers would “protect” employment by respecting labor legislation. The Government’s commitment to trade and industrial liberalization from the early 1990s has appeared to dilute, in a de facto sense, the labor laws, given the heightened competition to which Indian industry has been exposed. Box 5.4 summarizes the results of a study that are consistent with such an interpretation. Further supporting evidence comes from the trend of increasing use of contract labor not just in private enterprises but also in public sector enterprises, as well as trends relating to industrial disputes discussed earlier. Given the strong state involvement in shaping industrial relations, it might be hypothesized that shifts in the mind set with which government officials have approached regulations have played a big role in explaining recent trends.

261 Labor Markets in India: Issues and Perspectives Box 5.4 Liberalization and Its Impact on Workers in Formal Manufacturing

The impact of trade liberalization on workers in developing countries has been the subject of a number of studies in recent years. While many of these have examined whether trade liberalization hurts or benefits unskilled workers relative to skilled workers, a few have looked at the impact of trade liberalization on labor demand elasticity—in other words, how responsive labor demand is to changes in wages. Some scholars have argued that greater openness to trade makes labor demand more responsive to changes in wages (see, in particular, Rodrik 1997). They maintain that since greater openness makes it easier to import all kinds of goods—capital inputs, finished goods, and intermediate goods—it can make it easier to substitute the services of domestic workers via the import of capital inputs or the products they were producing.1 For any given increase in wages, more elastic labor demand would lead to a larger reduction in labor demand than otherwise. In this way, trade liberalization can erode the bargaining power of workers vis-à-vis the owners of capital in the sharing of profits. It can also lead to workers bearing a greater burden of the impact of nonwage labor costs (such as improved working conditions). Hasan et al. (2005) use industry-level panel data from India’s formal manufacturing sector along with industry-specific information on average tariff rates and nontariff barrier (NTB) coverage ratios to examine whether India’s trade liberalization, begun in earnest in 1991, has made the demand for labor more elastic. They find that estimates of labor demand elasticity are larger after 1991 and larger in industries with lower tariff rates or NTB coverage ratios. For example, a reduction in average tariff rates from 150% (as was the case in 1988) to 40% (as was the case in 1997) would be associated with an increase of 9–13% in labor demand elasticities, depending on model specifics. Significantly, Hasan et al. also find that the share of the wage bill in either total output or value added is lower in the more open trading environment after 1991, and is lower in industries that have lower barriers to trade. For example, controlling for industry and location (via the introduction of industry-location fixed effects), their estimates of labor share equations suggest that labor shares would decline by around 4% (as a share of total output) and 5% (as a share of value added) for a reduction in tariffs from 150% to 40%. These results are consistent with the argument that workers in India’s formal manufacturing sector have seen their bargaining power weaken as a result of trade liberalization. This is despite the fact that domestic labor laws have not changed on paper—though there is evidence of weaker enforcement. Source: Hasan et al. (2005).

1

Trade can also render more elastic the demand for the final goods that workers are making. In turn, this would lead to a more elastic demand for labor.

262 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

(Interestingly, and in contrast with the situation in other countries, minimumwage laws have not been part of the labor market rigidity debate. Box 5.5 provides some discussion on this issue.) 5.4.5

Policy Debate on Labor Market Reforms

The previous discussion on India’s labor laws has highlighted the following. First, labor regulations, as well as the administrative and enforcement machinery, have been heavily targeted toward workers in the organized sector. Second, the nature of regulations has been driven more by concerns with job security and protection of outcomes rather than any attempt to protect rights. Third, the enforcement machinery has been weak and has been associated with a poor adjudicatory infrastructure and weak legal support for nonadjudicatory systems. Indeed, as our survey of the evidence on the impact of India’s labor laws on labor market outcomes has suggested, a major reason for being skeptical about the view that India’s labor laws have introduced serious rigidities is that the laws are poorly enforced. This, of course, is not a healthy situation. In the first place, if laws meant to protect workers are not being implemented then they are failing workers. Second, poor enforcement creates a poor culture of governance, which is ultimately detrimental to both workers and entrepreneurs. Finally, if the laws are poorly enforced, it needs to be asked why this is so. One reason, provided above, is that in the context of economic liberalization, firms have needed de facto, if not de jure, labor market flexibility to survive. Indeed, it is precisely because of the changed economic circumstances in which Indian firms operate that the Indian Government requested views on labor regulations from the Second National Commission on Labour (SNCL). In its resolution announcing the appointment of the SNCL, the Government set two tasks before it. The first was to “suggest rationalization of existing laws relating to labor in the organized sector,” while the second was to “suggest an umbrella legislation for ensuring a minimum level of protection to the workers in the unorganized sector” (Ministry of Labour 2002, p. 6). According to the Government’s resolution, the emerging economic environment was characterized by the “globalization of the economy” and “rapid changes in technology.” These forces required “responses that were necessary to acquire and retain economic efficiency and international competitiveness” (Ministry of Labour 2002, p. 6). Recognizing that an emphasis on jobs and job security without addressing concerns with productivity and growth would raise the risk of re-creating the public sector problems of profitability and long-term nonviability in other areas as well, the SNCL formulated an integrated program of reforms. In what follows we discuss some of the main elements of their recommendations, along with a brief assessment of these.

263 Labor Markets in India: Issues and Perspectives Box 5.5 Minimum Wage Laws in India

Unlike the case in a number of other countries, minimum wage laws are not part of the labor rigidity debate in India. There are several reasons for this. First, the key legislation—the Minimum Wages Act of 1948—covers workers in the unorganized sector, where wages are much lower than in the organized sector. The Government sets minimum wage guidelines only for the organized sector; wages here are set through collective bargaining in many industries and by industry-wide tripartite wage boards in others. Second, minimum wages as set by the Minimum Wages Act are typically low even insofar as the wage distribution of the unorganized sector is concerned. For example, a study by the International Labour Organization (ILO 1996, p. 35) found that minimum wages revised to account for inflation were often lower in real terms than minimum wages before the revision; moreover, the official minimum wages were often below poverty-line wages. Finally, even when they may be binding—as would happen for certain categories of workers— enforcement is weak. The main objective of the Minimum Wages Act of 1948 is to protect laborers from exploitation in those industries and localities where the wages are likely to be very low for lack of organization of labor or for want of proper arrangements for the effective regulation of wages. The act provides for the fixing of minimum wages, by the appropriate government, in jobs covered by a schedule appended to the act. The appropriate government is empowered to add to the schedule for which statutory minimum wages are to be fixed. Currently 45 “scheduled employments”— corresponding loosely to sectors of economic activity—are listed for the fixing of minimum wages in the central sphere and a wide range of employment (from 83 in Orissa to 24 in Himachal Pradesh) in the state sphere. Examples of such scheduled employments (and the corresponding daily minimum wages) are: agriculture, Rs 86.63; construction or maintenance of roads or building operations, Rs54.28; stone breaking or stone crushing, Rs70.27; a variety of mines, Rs54.28; and security services, Rs54.28 (Ministry of Labour 2005). The statutory regulation of minimum wages emerged from the recommendations of the Fair Wages Committee in 1948, which defined minimum wages as something above the bare subsistence wage. The 15th Indian Labour Conference stipulated the need-based minimum wage concept, which has been the basis for the fixing of minimum wages. In calculating the minimum wages the standard working-class family is assumed to consist of three consumption units (household/family members), and consuming food at the rate of 2,700 calories per average Indian adult, requiring clothing of 72 yards per year, paying a minimum level of rent, and making 20% of miscellaneous items of expenditure out of total expenditures. But the concept of need-based minimum wages and its components have been questioned and modified several times. The labor minister’s conference in 1987 recommended that minimum wages be fixed in relation to the Indian poverty line. The act provides for an industry-cum-region approach in determining minimum continued.

264 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Box 5.5 Minimum Wage Laws in India (cont’d.)

wages in different regions and different industries. The 28th Indian Labour Conference of 1985 recommended that a national basic subsistence wage, below which no minimum wage can be fixed regardless of the nature of work and employment condition, be determined. The central Government in 1996 fixed the national floor level minimum wage at Rs35, which with changes in the consumer price index went up to Rs66 per day in 2004. However, several scheduled occupations in states have minimum wages still below the national floor level. The act provides for inspection and summary procedures for the recovery of claims under the act. While inspections have improved somewhat in recent years, prosecutions are still quite tardy (see Box Table 5.5). Box Table 5.5 Enforcement of Minimum Wages Act of 1948, 1985/86–2003/04

Year 1985/86 2001/02 2003/04 Note: Source:

No. of Inspections

No. of Prosecutions

No. of Convictions

9,217 13,222 15,212

5,956 3,903 5,260

— 2,019 3,904

— means not available. Annual Report (various issues), Ministry of Labour.

First, a central concern of the SNCL was to provide a uniform framework for labor market regulation that would cover all employees. Ideally, if this were done correctly there would be no need to have a separate regime for the formal and informal sectors. However, the need for continuity so that existing protections are not removed too dramatically led the SNCL to posit a twofold structure. Establishments employing 20 or more workers would be subject to a more onerous legal reporting regime, while the smaller units would have a simpler regime. While this does have the benefit of sparing the smaller units from intrusive legislation, it reduces the incentive to grow. It may have been better if intrusive systems were identified and provided for with a sunset clause. Further, the SNCL appears to compound this problem by creating a third category of labor regulations (those dealing with establishments with 300 or more employees) for issues like method of union recognition and permission under the Industrial Disputes Act for closure and retrenchment. The problem with regulations that

265 Labor Markets in India: Issues and Perspectives

depend on the number of employees is that they create two types of distortions. First, they fragment the labor force into protected and unprotected segments. Second, since the aim of exempting the smaller units is to relieve them of their onerous reporting obligations, the regulations remove some of the incentives to improve the monitoring regime. Second, the SNCL has sought to protect labor rights through a two-pronged strategy. First, it sought to end the fragmentation in the various social security schemes, as well as the systems for labor organization and representation. Thus, the SNCL emphasizes that the umbrella legislation proposed for the unorganized sector must recognize and protect all types of workers regardless of industry, occupation, and work status. Further, the requirement in the Trade Unions Act that workmen in a trade union must be employed in a “trade or industry” has hampered the extension of unions to unorganized activities. The SNCL therefore recommends the de-linking of this requirement so that many activities and occupations that do not now fall under the definition of “industry” under the labor laws could be covered. Second, the SNCL has sought to enhance the framework for unionization and collective bargaining. Thus, there are comprehensive recommendations for collective bargaining, union recognition, and dispute settlement through arbitration rather than adjudication. This approach seeks to emphasize rights and tries to enforce them, and leaves issues of minimum bonus, productivity wages, etc., which are primarily outcomes to be negotiated, as part of the bargained outcome. Such a two-pronged approach seems eminently sensible, and a starting point could be the umbrella social security system discussed in the SNCL and the ILO’s fundamental principles.44 Third, the SNCL has sought to make labor regulations more flexible in providing employers with more leeway in hiring and firing decisions. The two main ways in which it has attempted to achieve this is by proposing major amendments to the Industrial Disputes Act and the Contract Labour Act. Table 5.25, which is drawn from Sundar (2005), gives a snapshot view of the most important changes recommended by the SNCL in the Industrial Disputes Act, along with the actual provisions that are now in place. As the first row of the table indicates, the SNCL has sought to extend the scope of the act to all sectors and not only industrial factories, mines, and plantations, as is now the case. This would be in keeping with the recommendation of the SNCL for a uniform framework for labor market regulations, as discussed above. The SNCL has also extended from 30 days to 60 days the notice period that must be given by employers for layoffs, retrenchment, and closure. Most significantly, the SNCL has recommended the abolition of the requirement to seek government permission for layoffs and retrenchments. Government permission would, however, continue to be required for closures. But this would apply only to firms with 300 or more workers. The greater flexibility given to employers in adjusting their employment levels is accompanied by an increase in compensation

266 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Table 5.25 Differences in Layoff, Retrenchment, and Closure Provisions between the Industrial Disputes Act and the Second National Commission on Labour (SNCL) Particulars Scope Factories, mines, and plantations Notice period or pay in lieu of it Notice to Affected workers Negotiating agent Appropriate government Government permission required for Layoff Retrenchment Closure Compensation rates (No. of days’ pay per year of completed service) for Retrenchment Closure Layoff Clearance of dues to workers as a precondition to closure Source:

Industrial Disputes Act

SNCL

All industries 30 days

60 days

Yes No Yes

Yes Yes Yes

Yes (100+ workers) Yes (100+ workers) Yes (100+ workers)

No (all companies) No (all companies) Yes (300+ workers)

15 15 50% of wages No

45–60 (300+ workers) 22.5–30(fewer than 100 workers) 30–45 (300+ workers) 15–22.5(fewer than 100 workers) 50% of wages Yes

Sundar (2005, Table A-1).

rates to affected workers. Finally, the SNCL has recommended that firms should clear all dues to workers before retrenchment or closure (Sundar 2005). On contract labor, the SNCL has noted that the present law, with its emphasis on abolition, and the distinction it makes between perennial and short-run employment, misunderstands the nature of technical change. The SNCL argues that the focus should instead be on core and peripheral activities. This argument is valid, except that the method of defining core activities through legislation throws the baby out with the bathwater. India’s recent success in outsourcing should make it clear that core activities are decided by technology. Thus, changes in communication can make record keeping a “noncore” activity. The judgment regarding which activities to do in-house and which to contract out is a trade-off between costs and risk bearing. It is a judgment best left to the entrepreneur. Once it is recognized that the focus of contract labor law should be on regulation rather than abolition, one must ask the question why the law is needed at all. Since regulation is best dealt with by specific laws on rights and safety applicable to all employees, a recommendation to abolish this act

267 Labor Markets in India: Issues and Perspectives

should have been emphasized. On the whole, the recommendations of the SNCL appear to be in the right direction in rationalizing India’s labor laws and related institutions. Trade unions and employers, however, disagree on a number of points. But, as Sundar (2005) states, the dissent from the trade unions has been sharper. A key area of disagreement concerns the recommendations made in relation to layoffs, retrenchment, and closure. Ultimately, there are two sources of concern. First, in contrast to the confidence of liberal policy makers and economists, the trade unions do not believe that labor market flexibility will create jobs. They believe that increased market competition and new technologies will result in fewer jobs, especially stable ones. The experience from several of India’s leading manufacturing companies that have undergone dramatic restructuring over the last five to ten years lends support to these concern. Consider, for example, the cases of Bajaj Auto and Mahindra and Mahindra whereby new production technologies have allowed these firms to raise production dramatically without significantly increasing employment levels (see Merchant et al. (2005) cited in Chapter 10 of this volume). Second, India’s system of social protection remains weak (for the most part) or, in cases where protection is available, it is associated with specific jobs. If such jobs go, so does the social protection. In the next section, we turn to a closer examination of social protection in India.

5.5 Social Protection in India Social protection encompasses policies and programs that, on the one hand, enhance workers’ capacity to protect themselves against loss of income and, on the other, diminish workers’ exposure to job-related risks. Loss of income may be due to layoffs or other factors, including ill health, disability, and old age. There are many forms of social protection.45 Here, we discuss two forms of social protection that have special significance to workers and the operation of labor markets in India. These are social security policies and programs and active labor market programs. While the former are designed to cushion risks associated with old age, ill health, disability, work-related injuries, and unemployment, the latter include programs that aim to put people to work, for example, through employment generation programs. A couple of key points may be noted regarding social protection in India. First, the provision of formal social security, encompassing the provision of pension and health-related benefits, etc., has by and large been for workers in the organized sector (which, as seen earlier, comprises only around 7% of India’s workforce). For the rest of the workforce, however, the approach to social protection has relied mostly on “promotional” measures such as the special programs to encourage employment (self-employment as well as wage

268 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

employment) among the very poor, rudimentary health-care services and education, and a system for distributing subsidized food to the public. Some “protective” schemes have also been introduced in several states to cover workers in the unorganized sector, but the extent and coverage of these is extremely limited except in a very few states. Second, provisions for job security in India’s labor code have been a de facto substitute for a system of unemployment insurance insofar as organized sector workers are concerned. Moreover, the fact that recourse to systems of social protection typically goes hand in hand with employment in the organized sector gives a sense of how much a worker in the organized sector has to lose as a result of job loss. From a policy perspective, the implications should be clear. If for no other reason than political economy considerations, it is difficult to remove regulations providing job security unless adequate compensatory mechanisms are developed. This is especially so since displaced workers in the organized sector are unlikely to benefit from systems of social protection that are tied to the job, especially those relating to public works programs and other “safety net” programs aimed at the very poorest. More generally, making it easier to lay off organized sector workers will require some commitment on the part of the Government to develop mechanisms for protecting laid-off workers from the loss of income. Rationalizing severance pay schemes and, ultimately, moving toward unemployment insurance mechanisms need to be contemplated. 5.5.1

Social Security: Legislative Provisions and Coverage Formal Social Security

As Table 5.26 indicates, a variety of social security programs and security related policies provide social protection to workers. Although these programs are not always limited to workers in the organized sector, such workers tend to be their main beneficiaries. A brief description of formal social security programs is as follows. The Workmen’s Compensation Act of 1923, one of the earliest pieces of labor legislation, covers all cases of “accident arising out of and in the course of employment.” Compensation is paid in a lump sum, according to a schedule, and is proportionate to the extent of injury and the loss of earning capacity. The younger the worker and the higher the wage, the greater is the compensation, up to a limit. If a worker dies, dependents can claim the compensation. The amount of compensation has been fixed at Rs90,000– Rs548,000 for permanent total disablement, and Rs80,000–Rs456,000 for death. This law applies to certain categories of unorganized sector industry and to those in the organized sectors who are not covered by the Employees’ State Insurance Act, which is considered to be superior in concept to the Workmen’s Compensation Act.

269 Labor Markets in India: Issues and Perspectives Table 5.26 Formal Social Security Protection in India Type of Benefit

For Public Employees

For Private Sector Employees

Medical Care

Free treatment in hospitals and reimbursement of cost of drugs

Free treatment and reimbursement of drugs under ESI Act

Sickness

Medical leave with full pay

Sickness leave with pay under ESI Act

Maternity

Maternity leave with full pay

Maternity benefits under ESI Act or Maternity Benefits Act

Unemployment

Severance benefits under Industrial Disputes Act

Severance benefits under Industrial Disputes Act

Disability

Ex-gratia relief

Benefits under ESI Act or Workmen’s Compensation Act

Old-Age

Pension and gratuity or contributory provident fund and gratuity

Payment under EPF Act and Payment of Gratuity Act

Survivor

Subsidized group insurance for death while in service; family pension in the case of death after retirement

Deposits-linked insurance and family pensions under EPF Act

ESI = Employees’ State Insurance EPF = Employees’ Provident Fund

The Employees’ State Insurance Act (1948), the first post-independence legislation relating to social security, provides a scheme under which the employer and the employee must contribute a certain percentage of the monthly wage to the insurance corporation that runs dispensaries and hospitals in workingclass localities. The act covers all employees earning less than Rs6,500 a month. Workers are compensated for employment-related injury or disease in proportion to the extent of injury and loss of earning capacity, according to a schedule of rates. Payment is monthly. Despite the existence of tripartite bodies to supervise the running of the scheme, the entire project has fallen into disrepute through corruption and inefficiency. This facility is rarely availed of by workers in genuine need of medical attention but is used quite liberally to obtain medical leave. Workers have, in fact, sought exemption from the scheme in the courts in anticipation of better facilities available through collective bargaining. There has been a steady decline in the number of insured and beneficiaries since the mid-1990s. This may be due partly to the wage ceilings under the act and also to a shift to private insurance and health-care systems by employees in the organized sector (Table 5.27).

270 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

The Maternity Benefit Act (1961) applies to notified establishments. Coverage is not subject to wage limits and can therefore also extend to the unorganized sector, though this is rare in practice. A woman employee is entitled to 90 days of paid leave for delivery or miscarriage. Other benefits, including hospitalization, are available under the law. Workers are generally entitled to two types of retirement benefit, provided under the Payment of Gratuity Act of 1972 and the Employees’ Provident Fund Act of 1952. Under the Payment of Gratuity Act, a worker who has put in at least 5 years of work may receive, on retirement or termination of employment, a lump sum equal to 15 days’ wages for every completed year of service. Every month the employer is expected to contribute the required money into a special fund. There is no wage ceiling for coverage. Under the Employees’ Provident Fund Act, both the employee and the employer make equal contributions to a national fund. The current rate of contribution is 12% of the wage, including a small percentage toward family pension. This contribution earns interest, currently 8.5% per year, and the accumulated amount, along with the accrued interest, is paid to the employee on retirement. However, as employees may borrow from the fund for house construction, the wedding of children, education, etc., very little is available at the time of retirement. Since 2001, all those who join covered establishments and get wages up to Rs6,500 have been required to join the fund. The act now covers 180 specified industries or classes of establishments notified by the central Government and employing 20 or more persons. This benefit is steadily being extended to sections of the unorganized sector, especially where the employer is clearly identifiable (Table 5.28). Despite this seemingly comprehensive coverage, social security in India lacks a clear policy direction. The various schemes and types of benefits provided Table 5.27 Number of Employees and Beneficiaries Covered by the Employees’ State Insurance Scheme, 1991/92–2003/04 Year 1991/92 1995/96 1997/98 1998/99 1999/00 2000/01 2003/04 Source:

No. of Insured Persons (’000)

No. of Beneficiaries (’000)

6,109 7,303 9,095 8,819 8,601 8,493 7,865

23,703 28,335 35,290 34,218 33,372 32,955 30,373

Annual Report (various issues), Ministry of Labour.

271 Labor Markets in India: Issues and Perspectives Table 5.28 Coverage of the Employees’ Provident Fund and Miscellaneous Provisions Act of 1952, 1970–2003 Year

No. of Factories/ Establishments

No. of Subscribers (’000)

1970 1975 1980 1985 1990 1995 2000 2001 2003

46,504 64,712 93,094 154,124 194,961 251,038 326,541 340,013 344,508

5,605 7,603 10,463 12,930 14,665 18,724 24,537 26,301 39,498

Source:

Annual Report (various issues), Ministry of Labour.

do not conform to any overall plan or design. As a matter of fact, there is no plan for social security, and the Government’s 5-year plans are for all practical purposes silent about social security issues. The schemes have limited coverage, as their applicability depends on wage ceilings, the number of employees in an establishment, the type of establishment, the number of years an establishment has been in existence, etc. Such provisions have only hindered attempts to extend the scope and coverage of schemes. There are no uniform criteria for coverage. Different schemes have overlapping provisions. Moreover, there is too much dependence on employers’ liability schemes as against social insurance in case of retrenchment, termination of service, employment injury, and maternity-related requirements. Social Security for the Unorganized Sector Protective social security for the vast majority of workers in the unorganized sector and for the self-employed is very limited in India. The single most significant form of social security in the unorganized sector is the old-age pension provided by some state governments and union territory administrations. Apart from general old-age pensions, some states have introduced separate pension schemes for agricultural labor, the destitute, and the physically handicapped, as well as a maternity benefit scheme for landless agricultural women. Schemes providing financial assistance to widows and divorced women have also been introduced by some state governments. The state governments of Kerala and Tamil Nadu, in particular, have introduced many social security and welfare schemes for the unorganized sector. In mid-1995, the Government of India introduced the National Social Assistance Program, which provides three cash benefits: old-age pensions, maternity benefits, and death-related benefits.

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The dominant reliance on “promotional” social security measures for the poor in the unorganized sector, to the virtual neglect of protective social security schemes for others, stems mainly from the notion that with so many poor people, chronic poverty had to be dramatically reduced before any plans for contingent poverty relief could be made. It is important to reexamine this view and explore the feasibility of protective social security measures for those poor people who cannot be reached by promotional measures. The protective social security measures are an integral, but now missing, element of the fight against poverty and complement the promotional and targeted antipoverty programs. Recognizing the highly skewed nature of the social security system in India, the Second National Commission on Labour recommended the formulation of umbrella legislation for the social security needs in the unorganized sector (Ministry of Labour 2002). A draft bill was prepared in 2003 with the backing of the Ministry of Labour. The bill provided for the universal registration of unorganized workers in designated worker facilitation centers. Workers had to register to qualify for health benefits, old-age pension, and accident benefits. In March 2004, the Government began implementing some social security provisions of the draft bill in 50 selected districts. But the change in government later that year prevented the full implementation of the scheme. More recently, a new draft bill on social security for organized sector workers has been proposed by the National Advisory Council and submitted to the Government.46 The draft bill builds on the previous one. Workers still register, pay their contributions, and receive benefits at worker facilitation centers. Once registered, a worker would be entitled to a “floor level” of life insurance, health and disability insurance, and maternity benefits, without having to contribute. But workers must contribute (through membership fees, for example) to avail themselves of old-age benefits including pensions. The various benefits would be funded by the central Government directly or through employer contributions (among other sources of funds being considered). The effective implementation of the proposed social security system for unorganized sector workers is still probably several years away at least. 5.5.2

Active Labor Market Policies

Active labor market policies include an array of measures intended to create employment, assist workers with job searches, and enhance workers’ skills through training and education. In India, employment creation policies have been particularly prominent, especially over the last 30 years. But active labor market policies have a fairly long history, dating to the precolonial period, when the Mughal emperors carried out mass public works to relieve famine distress.

273 Labor Markets in India: Issues and Perspectives

Similar attempts were made in the colonial period, especially in the 1880s. The Indian Famine Commission (1880) set up after the massive Deccan famine of 1877–1878 recommended public works programs to relieve acute distress and mortality. Elaborate and stringent famine relief codes were devised to regulate the programs including wage rates and conditions for starting and ending these programs. However, the massive and continued mortality from famines in the late 19th and 20th century, the most infamous being the Bengal famine of 1943, showed that the programs were far from successful in alleviating distress. Sporadic and aimed mainly at alleviating periodic distress, they hardly took into account the chronic distress due to entitlement failures in large parts of India. Employment generation was hardly their main objective. Since independence, and especially since the 1970s, the Government has launched a series of wage employment programs, as well as programs to encourage self-employment. Most of the programs have been targeted to specific social groups (scheduled castes, scheduled tribes, rural poor, women, etc.), but a few have had universal coverage. Wage employment programs, also known as public works programs (or workfare), have typically combined the objective of creating jobs for the unemployed and underemployed with that of creating community assets and physical infrastructure. Participating workers are paid in cash or food grains, or both. The first major wage employment program, called Food for Work, was begun in India in the 1970s. Other programs, introduced later, included the National Rural Employment Program (NREP) and the Rural Landless Employment Guarantee Program (RLEGP), which was also introduced in the 1970s. Over the years, various national programs have been merged. As Figure 5.13 shows, many of the programs were eventually placed under the Sampoorna Gramin Rozgar Yojana (SGRY). There have also been state-led initiatives, the best-known of which is probably the Maharshtra Employment Guarantee Scheme. The various employment generation programs have mostly been for the rural areas. But over the years, urban poverty has shown itself to be as persistent as rural poverty. Studies show that urban poverty is relatively high among the self-employed households, which account for about two fifths of the urban population. Therefore, employment generation programs have been started in urban areas as well. The first initiative in this direction was taken in 1986 with the introduction of the Self Employment Program for Urban Poor (SETUP). Poor urban households could take out a bank loan of up to Rs5,000 to start self-employment ventures. Twenty-five percent of the loan was subsidized by the Government. How effective have the various programs been? The features and performance of a couple of major programs are briefly reviewed here.

274 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

Figure 5.13 Evolution of Sampoorna Gramin Rozgar Yojana (SGRY) National Rural Employment Program (1970s) Jawahar Rozgar Yojana (1989)

Employment Assistance Schemes (1993)

Rural Landless Employment Program (1970s)

Food for Work Jawahar Gram Samridhi Yojana (1999) SGRY (2001)

Source: Srivastava (2004, p 20).

Jawahar Rozgar Yojana (JRY)47 The creation of more employment opportunities for the unemployed and underemployed in rural areas was a primary objective of this program. A secondary objective was the creation of sustained employment for the rural poor through strengthened rural economic infrastructure and assets, and improvements in the quality of life in the rural areas. According to a concurrent evaluation by the Ministry of Rural Development in 1993/94, the JRY generated about 11 days of employment per person during the reference period of 30 days before the survey. In some comparatively poor states such as Madhya Pradesh and Orissa, JRY workers got work for less than 10 days a month. As the average employment per participant was about 11 days a month, wage rates of Rs33.36 per day implied a supplementary monthly income of Rs369 to the household—about 40% of the poverty line. Thus, the JRY seems to have contributed substantially to the family income of the poor. The concurrent evaluation also showed that the beneficiaries largely fit the criteria—82% of the JRY workers were poor. But there were large variations across states. The percentage of nonpoor beneficiaries was quite high in Punjab (56%), Andhra Pradesh (51.7%), Karnataka (34%), Kerala (32%), Uttar Pradesh (30.2%), and Bihar (22%). Among the major weaknesses of the program, as the evaluation pointed out, were delays in the completion of work owing to lack of funds (affecting

275 Labor Markets in India: Issues and Perspectives

47% of work), and noncompliance with policies stipulating the extent of job creation for women (30% of jobs, versus the 16.6% that actually went to women) and the type of asset to be created (40% for watershed development and 20% for minor irrigation, link roads, building for schools, etc.). The conflict between employment generation and asset creation objectives, common to all wage employment programs, assumed greater significance in the case of the JRY, particularly in view of its large outlays. It is therefore argued that while providing additional gainful employment to the rural poor is the main objective of the program—and this objective is being met to a significant extent—the large outlays must at the same time help to create useful community and productive assets for sustaining the employment generation and development in the rural areas. To develop village infrastructure, the JRY was strengthened and restructured as Jawahar Gram Samridhi Yojana (JGSY) on 1 April 1999. The JGSY gave explicit priority to creating village infrastructure including durable assets at the village level and assets to increase the opportunities for sustainable employment for the rural poor and, secondarily, to generate supplementary employment. After a short time, the JGSY was merged into a new program, the Sampoorna Gramin Rozgar Yojana (SGRY). Maharshtra Employment Guarantee Scheme (MEGS) Begun in 1973, the MEGS is aimed at providing guaranteed employment to all adult persons living in the rural areas and small municipal towns of the state of Maharashtra. The state guarantees to provide unskilled manual work at the minimum wage within a 5 km radius from where a registered participant lives. If the state fails to do so it must pay an unemployment allowance. So far, the program has spent more than Rs90 billion and generated about 3.7 billion, person-days of employment (Krishnaraj et. al. 2004a and 2004b). Assets created under the program have contributed to the development of agriculture, the dairy industry and horticulture, and watersheds in certain places. This program has been funded through a special tax on urban professions and matching government contributions. Significantly, the provision of a separate fund has made the program financially sustainable over the long term. A major limitation of MEGS has been the fact that it has not dramatically reduced poverty or unemployment. In fact, Maharashtra has not done too well in poverty reduction compared with many other states (Hirway 2004). According to official data, the incidence of poverty in Maharashtra was 23.72% in 1990/ 2000, placing the state ninth among the 15 major states in India in poverty rates. In 1973/74 the state was in seventh place. Moreover, between 1973/74 and 1993/94 the poverty rate declined by 31.19%—less than the 33.90% decline for the whole of India. In addition, distressed seasonal migration still persists

276 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

in many parts of the state because of the weak implementation of the scheme in relatively more backward and tribal-dominated districts. However, this does not mean that the program has not helped the poor. Datt and Ravallion (1992) find, for example, that participation in the program reduced the severity of poverty from 5% to 3.2%. Social gains also seem to have been achieved. Specific features of the program were designed to encourage the participation of women. For example, crèche facilities (for the care of young children) have been provided. As a result, half of all participants have been women and, as some researchers have noted, the participating women have risen in status within their families (Subbarao 2003). Finally, MEGS has shown that it is possible to put in place a permanent system of employment-based social security backed by a legal guarantee. This overview of the JRY and MEGS programs, along with reviews of recent evaluation studies carried out on similar programs in India, indicates the following: (i)

The employment generated under various active labor market policies has been quite limited, given the magnitude of unemployment and underemployment in the country. (ii) The employment generated under these programs has declined in recent years despite a significant rise in funds allocated to these programs. (iii) These programs have also had limited impact in generating durable and high-quality assets; moreover, the assets created are poorly maintained. (iv) Leakage of funds and top-heavy implementation are chronic drawbacks of the programs. (v) Program beneficiaries and assets are often improperly targeted and selected. In sum, though there have been pockets of success, the overall impact of these schemes has been discouraging. Many analysts maintain that the lack of statutory legal backing for most of the schemes is an important reason for the problems highlighted above. Similarly, it is argued that the programs fail mainly because the poor are not empowered and employment is not viewed as a right. It is in this context that the experience of MEGS, which obligates the state government to provide employment, has acquired renewed significance. In fact, the National Rural Employment Guarantee (NREG) Act of 2005 attempts to build on the experiences of previous programs in tackling the problems of rising unemployment and insecure employment for most workers in rural India. The NREG guarantees 100 days of employment per year for at least one adult in every rural household in 200 districts (600 districts in 5

277 Labor Markets in India: Issues and Perspectives

years’ time after notification of the NREG Act).48 Participants are entitled to the state-specific statutory minimum wage applicable to agricultural workers within a prescribed time limit or, failing that, a daily unemployment allowance.49 Whether the NREG can address the concerns of employment generation and poverty reduction is unclear. Two issues have risen to the forefront. First, critics say the NREG is too costly. Proponents, on the other hand, calculate that, even assuming universal coverage for 40% of all rural households living below the poverty line, the total cost will not be more than 1% of GDP (see, for example, Papola 2005). Given the objective of providing productive employment and creating durable assets, this cost is perhaps not unbearable. The second issue concerns targeting and self-selection. The NREG will use the minimum wage as a means of self-selection into the program. Critics argue that the wage rates offered by the NREG must be below market wages to ensure that the workers who participate in the program are indeed the poorest. (In large parts of rural India, market wages are below the minimum wage.) The critics cite the example of MEGS, where a large increase in the wage paid in 1988 (program wages were made equal to the minimum wage) led to a drastic rationing of work. This rationing was associated with a decline in the participation of the poor, as the nonpoor grabbed the available jobs. An analysis of household survey data has shown that the poor made up 48% of the participants in MEGS in 1979 but barely 27% in 1989 (Gaiha 2005). While these concerns have some legitimacy, offering wages below the minimum wage may well increase employment but is unlikely to ensure a better life for the poor. As noted recently by Amartya Sen, the mere provision of employment does not make people more productive. Ensuring a minimum income without expanding capabilities commensurately (through health, education, and infrastructure services) would only make the poor more dependent on low-end marginal jobs rather than productively and decently employed. The synergy between private income generation and public expenditures is the best way to make active labor market policies more inclusive. All things considered, the NREG is an important step for active labor market policies, with empowerment and legal rights for the poor being its main departure from earlier programs. How it actually plays out remains to be seen.

5.6 Skills, Education, and the Labor Market Two salient points can be made with regard to skills, education, and the labor market in India. The first is that there are weaknesses in human capital at all levels. The second is that a mismatch between demand and supply in the labor market imposes a significant rigidity on the labor market.

278 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

The general literacy of the population is the broadest measure of skill of the workforce. Despite substantial improvements in literacy rates over the last two decades, 35% of the population over the age of 7 was still illiterate in 2001 according to the population census of 2001 (Office of the Registrar General). This figure conceals significant gender and regional/state disparities in literacy. In 2001, literacy was 76% for males, compared with only 54% for females, and three states/territories had literacy rates over 85% while four had rates below 55%. At the extremes are the southern state of Kerala, with a 91% literacy rate, and the north-central state of Bihar, with a literacy rate of only 48%. Such disparities exist at higher levels of skill attainment as well. As the literacy figures suggest, a substantial proportion of the labor force is low-skilled. In 1999/2000, 42% of the labor force had no education, 6% had tertiary education, and across the labor force the average number of years of education was only 3.9 years (see Table 5.29, from Ghose 2004). The SNCL has estimated that only 12% of the 86 million or so new entrants into the workforce in 2000–2007 will have acquired any formal training (Ministry of Labour 2002). As one might expect, research shows a strong inverse relationship between poverty and years of education (Ghose 2004), and a significant correlation between the education and skills of the workforce and population and the level of economic development of the states (Mathur and Mamgain 2002). Technical education, in particular, shows a strong correlation with economic growth consistent with the view that growth of technical education is an important driver of economic development in India (Mathur and Mamgain 2002). Technical education is provided at three levels in India: school-level programs, post-school diploma programs, and post-school degree programs. Some of their key features are as follows: (i)

Industrial training institutes and centers (ITIs) specialize in vocational programs with an emphasis on skills/crafts training to prepare skilled workers. Students enter these after completing primary school. The quality of vocational training is extremely uneven and inadequate. Many programs have limited resources and the content of practical training is generally below desired levels. The curriculum does not respond to technological changes and is lacking in the entrepreneurial aspects necessary for expanding selfemployment opportunities. There is generally a low interface between industry and the vocational training structure, leading to a persistent mismatch between emerging demand and available supply. As a result of all these factors, the programs

279 Labor Markets in India: Issues and Perspectives Table 5.29 Level of Education of Population and Labor Force, 1999/2000 Average No. of Years of Education Population All 3.4 Male 4.2 Female 2.7 Population Not Attending Educational Institutions All 3.3 Male 4.2 Female 2.3 Labor Force All 3.9 Male 4.6 Female 1.9 Note:

Source:

(ii)

No Education (%)

Tertiary Education (%)

38.2 28.3 48.3

3.9 5.0 2.6

49.4 37.7 61.7

4.7 6.5 3.0

42.4 33.0 68.5

6.3 7.3 3.7

Age group: 5 years or older. Labor force is based on the Usual Principal Status. The education categories in NSSO surveys are not in terms of number of years of education. The following assumptions were made to derive the estimates in terms of number of years of education: “not literate” = 0 years of education; “literate and up to primary” = 1–5 years of education; “middle” = 6–8 years of education; “secondary” = 9–10 years of education; “higher secondary” = 11–12 years of education; and “graduate and above” = more than 12 years of education. Ghose (2004).

produce graduates who are hardly employable. In a study of 835 graduates of ITIs in Delhi, Ramachandran (2002) found unemployment rates to be as high as 35–40%. Most industrial establishments preferred to train their employees on the job rather than to hire graduates of these programs (Ramachandran 2002). Finally, the earning differentials of vocationally trained students are reported to be low, reducing demand for these courses among students. Of more than 232,000 available apprenticeship positions as part of these training programs, only 162,000 have been used (Ministry of Labour, Annual Report 2003). Vocational and training institutes such as polytechnics offer diploma programs to prepare supervisory manpower and middle-level executives. These programs are open to high school graduates. In the 1980s, 500 new polytechnics opened (there were 363 in 1981). In the 1990s, only 200 new polytechnics were added. The absorption rate of the graduates

280 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

proved low, with technical diploma holders having the highest unemployment rate among the educated workforce (Mathur and Mamgain 2004). The expansion of degree programs discussed below is the reason most often given for this situation. (iii) Professional institutions such as engineering colleges and technical departments of universities offer post-school degree programs in the functions of planning, design and production. Degree programs have had phenomenal growth. The number of programs doubled between 1981 (171) and 1991 (351), 500 new programs were added in the 1990s, and another 500 were added in the single year 2001/02. Admissions doubled during the 1980s and quadrupled between 1990 and 2001. Concerns have been raised with respect to both quantity (number of institutions) and quality (not high enough). Student intake capacities have outstripped labor market demand by a factor of 7 (Ramachandran 2002), suggesting a gross mismatch between what the economy can support and what has been sanctioned by the All India Council for Technical Education. Two years after finishing their education, 30% are unemployed. Increasingly, more engineering graduates are performing functions at a lower level of skills than their training would suggest, causing an acute contraction of the labor market for diploma holders and lowering their incomes. A micro-level examination of these issues further bears out this picture. Varma and Sasikumar (2003), while examining the skill development systems at the district level (Jabalpur, Madhya Pradesh), concluded: (i)

Centralized decision making as regards course curricula bars flexibility in responding to emerging labor demands at the local level. (This is especially true of the ITIs.) (ii) There was no evidence of partnerships between industry and skills development institutions, which could bridge the gap between the skills demanded by industry and the skills being supplied. (iii) Labor market information was patchy and hardly used for designing effective skill development programs. Employment service institutions in India, such as the employment exchanges, were conceived as labor market information systems. However, a closer examination of their functioning reveals that the concept was never put into practice.

281 Labor Markets in India: Issues and Perspectives

(iv) An examination of professional technical education, including the information and communication technology institutions, shows a mushrooming of courses for low-end skills, which are prone to rapid obsolescence. (v) There was no certification or competence monitoring of skills acquired through informal systems of skills delivery (such as apprenticeship and acquisition of hereditary skills in the family). In sum, the formal system of skills development in India is grossly inadequate for providing a skilled labor force. There are not enough venues for acquiring formal training—the bulk of skill acquisition is done through onthe-job training or informal skill delivery systems. There are serious problems with the content and product of the training that is provided. There is a complete lack of certification and standardization of competence acquired through informal methods, on the one hand, and a gross mismatch between skill demand and formal skill development capacity, on the other. Fortunately, there is a growing awareness of these problems and an agreement that corrective steps need to be taken. Looking to the future, the SNCL has recommended a three-pronged strategy for skill development, especially in relation to the informal sector and the changing nature of the labor market: (i)

Modular approach to vocational training. Multiple skills are provided so that an individual gets trained in a set of interrelated skills rather than a single skill. With shorter product cycles this is considered crucial, especially in the manufacturing sector. (ii) Competency-based training systems. Avenues are provided for competence assessment and certification at each level of the learning and training hierarchy for different trades/ disciplines. The emphasis would be on the attainment of competence rather than simply on the time spent in training. (iii) Competence certification systems. Competence-based modular training can function effectively if a system certifying competence is in place. The SNCL has recommended the setting up of an independent regulatory authority with statutory powers to set standards of competence at different levels in each important trade/discipline. The certification will be of competencies acquired through both informal and formal means. The model for this is the National Council of Vocational Qualification (NCVQ) system set up in the UK in 1986.

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The SNCL, while recommending these strategies, also recommended certain specific measures to expand and revamp the existing skill development systems, such as the setting up of an adequate labor market intelligence system for mapping existing skills and forecasting demand for marketable skills. The SNCL also recommended a revamp of the ITIs by restructuring their courses to make them market-driven and to have a stronger interface with industry. Finally, it recommended the setting up of a skill development fund for the needed retraining of redundant or retrenched workers in the organized sector. The fund is to be financed from the provident fund contributions of employers and employees (2% and 1%, respectively). The skills issues discussed above apply equally to higher-level technical education, where a persistent mismatch between demand and supply, on the one hand, and the low quality of education, on the other hand, have been highlighted.

5.7 Concluding Remarks This chapter has examined several dimensions of India’s labor markets. In addition to describing the evolution of a variety of labor market outcomes, it has provided an overview of labor market regulations, social protection systems, and the status of skills and skills delivery institutions in India. This chapter’s review has served to highlight the following. Dualism is a deep-rooted aspect of India’s labor market. One segment of the labor market, the organized or formal sector, functions within an elaborate structure of protective legislation and institutions providing social protection, and has been characterized by remarkably slow growth in employment. The other segment, the unorganized or informal sector, has seen much more employment growth. Unfortunately, wages in this sector are poor (thereby leading to vast poverty), there is little in the way of social protection, and even basic labor laws are hardly enforced. The attitude to employment in the organized sector has been governed more by concerns with job security and protection of outcomes rather than an attempt to protect rights. At the same time, while in principle the provision of job security can lead to serious rigidities in the operation of the organized labor market, in practice the extent of job security has surely been diluted by an increasingly weak regime for the enforcement of labor and other laws, a poor adjudicatory infrastructure, and weak legal support for nonadjudicatory systems. This is not to suggest that India’s labor laws are not in need of reform. Rather, reforms have to be viewed more broadly, and not as the mere removal of particular features of the labor laws, such as the restrictions on firing and layoffs and on the hiring of contract workers. While such restrictions may go against

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the grain in an economic environment where markets are increasingly relied on to allocate resources, these restrictions are by no means all that needs to be reformed. In the first place, de facto flexibility in firing workers and hiring contract workers—a strong possibility because of weak enforcement—suggests that a package of labor market reform that focuses solely on providing more flexible labor regulations may not do much to improve the workings of labor markets. Second, India’s many overlapping and sometimes contradicting labor laws must be rationalized. Equally essential is the need to extend an enforceable set of basic rights to workers in the unorganized sector. Finally, India’s labor markets will not function effectively if the systems of social protection and skills development for workers remain as they are. As highlighted in our discussion on social protection, it is not as if India’s Government has not paid attention to delivering social protection. In fact, for a poor country, India appears to devote considerable resources (both financial and administrative) to social protection. The real problem appears to be the ad hoc and nonintegrated character of the social protection system, leading to low-quality coverage for most of the workforce including, paradoxically, workers in the organized sector. Similarly, while a few educational institutions have done a remarkable job in imparting high-level skills to an elite group of students (for example, in engineering, medicine, biotechnology, finance, and management), the overwhelming majority of India’s skills-generating infrastructure seems to be sustaining a low-level equilibrium wherein few useful skills are developed and supplied and firms are consequently forced to rely on a less productive workforce. Fortunately, these “stylized facts” on India’s labor markets are leading to a vigorous debate on labor laws, social protection systems, and skills-related issues. However, the empirical analysis that is informing these debates needs to be improved. In particular, empirical work examining the impact of India’s labor laws has not paid enough attention to issues of enforcement. How firms react to labor laws has a crucial bearing on final outcomes. Although there is anecdotal evidence on this, much more systematic work needs to be carried out. For example, one can find many individual accounts of violations of labor laws carried out so easily as to suggest that any “distortionary” effects associated with noncompliance are minimal. It is as if the law simply did not exist. On the other hand, one also hears reports of large-scale investments in manufacturing being held back by labor laws. Gaining a better understanding of the interplay between labor laws and enforcement issues will have at least two benefits. First, we are likely to get a more realistic assessment of the actual impact of labor laws on outcomes. Second, better understanding can contribute to better-designed labor laws, that is, labor laws that not only protect the welfare of labor but also promote better governance and industrial relations, and give firms the flexibility to grow and react to market conditions as required.

284 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar

How should such research be carried out? The analysis of secondary data on industrial outcomes should continue with obvious refinements—such as incorporating measures of enforcement into the analysis. However, new approaches are urgently required. One such approach would be to administer well-designed and focused questionnaires to key stakeholders. In the case of company managers, the questions asked should not be sensitive to initial conditions.50 Rather, they could focus on the evaluation of common managerial tasks relating to “reallocating work,” “disciplining misconduct,” “deciding on annual wage increases,” or “going to the dispute settlement body.” It would also be important to survey workers who lost their jobs in the 1990s to determine how they have coped with job loss.51 Such a survey is likely to shed light on social protection issues—a key area where much more research is needed. Indeed, as argued above, the reform of Indian labor laws needs to include and go hand in hand with a much better system of social protection. A whole gamut of issues needs to be addressed by research. The issues range from the very broad to the narrow. An example of the former would be research that informs national policy on social protection, tackling in particular the fractured nature of the current system and the extension of social security to the unorganized sector. The narrower issues would include research on best practices for providing health care, the feasibility of introducing an unemployment insurance scheme, and improvements in the design and implementation of active labor market policies, including public works programs, self-employment programs, and labor market information systems. With such policy-relevant research, the debates on labor laws, social protection systems, and skills-related issues will be in an excellent position to bring about a holistic set of labor market reforms. Such a set of reforms is probably the best way to guarantee that market-oriented reforms in India generate not only high growth but also a much wider share in this growth for the country’s workers.

285 Labor Markets in India: Issues and Perspectives

Appendix Appendix 5.1 Major Labor Laws in India

I.

Industrial Relations Laws

Legislation

Aim

Coverage

Industrial Disputes Act, 1947

Provides machinery and procedures for the investigation and settlement of industrial disputes.

Applies to an existing industry. Coverage extends to the whole of India.

Trade Unions Act, 1926

Seeks to confer a legal and corporate status on registered trade unions. The act provides immunity from civil and criminal liability for trade union executives and members engaged in bona fide trade union activities.

Applies to the whole of India.

Industrial Employment (Standing Orders) Act, 1946

Regulates the conditions of recruitment, discharge, dismissal, disciplinary action, holidays, etc., of workers.

Applicable to those industrial establishments/undertakings wherein 100 or more workers are employed or were employed on any day of the preceding 12 months. Scope extends to the whole of India.

continued.

286 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Appendix 5.1 Major Labor Laws in India (cont’d.)

II.

Wage Laws

Legislation

Aim

Coverage

Minimum Wages Act, 1948

Fixes minimum rates of wages in certain specified employments.

Extends to the whole of India. Appropriate government (central or state) to fix minimum wages. The appropriate government is empowered to extend the application of the act to other employments.

Payment of Wages Act, 1936

Aimed at ensuring regular Extends to the whole of India and and prompt payment of primarily to manufacturing wages and preventing the establishments using power and exploitation of wage earners employing 10 or more workers or by prohibiting arbitrary employing 20 or more workers fines and deductions if not using power. An employee from wages. under the act is any person employed at a monthly wage of not more than Rs1,600.

Payment of Bonus Act, 1965

Provides for the payment of bonuses to persons employed in certain establishments, and for matters connected therewith.

Equal Remuneration Act, 1976

Provides for the payment Extends to the whole of India. of equal remuneration to men and women workers and for the prevention of discrimination on the grounds of sex against women in the matter of employment, and for the matters connected therewith or incidental thereto.

Extends to the whole of India. An employee under the act is any person (other than an apprentice) who is employed at a monthly wage/salary of not more than Rs6,500.

continued.

287 Labor Markets in India: Issues and Perspectives Appendix 5.1 Major Labor Laws in India (cont’d.)

III.

Social Security Laws

Legislation

Aim

Coverage

Workmen’s Compensation Act, 1923

Requires employers to pay compensation to their workers for accidental injury caused to the workers arising out of and in the course of employment, resulting in death or in total/ partial disablement.

Extends to the whole of India and applies to certain categories of railway servants and workers employed in any capacity specified in schedule II of the act, which includes factories, mines, plantations, mechanically propelled vehicles, construction work, and certain other hazardous occupations.

Employees’ State Insurance Act, 1948

Provides for certain benefits to employees in case of sickness, maternity, and employment injury, and other related matters.

Extends to the whole of India except the State of Sikkim and applies to all factories employing 10 or more workers (using power) or 20 or more workers (not using power), and service activities like shops and hotels employing 20 or more workers. The coverage is restricted to those persons whose total monthly remuneration does not exceed Rs6,500.

Employees’ Provident Funds and Miscellaneous Provisions Act, 1952

Provides for the setting up of compulsory provident funds for employees in factories and other establishments.

Extends to the whole of India except the state of Jammu & Kashmir. J&K instituted a separate provident fund scheme, effective 1 June 1961. The act extends to all factories and other establishments of any notified industry that employ 20 or more workers. The wage ceiling for coverage under the provident fund scheme is Rs6,500 per month.

continued.

288 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Appendix 5.1 Major Labor Laws in India (cont’d.)

Maternity Benefit Act, 1961

Aims to regulate the employment of women in certain establishments for certain periods before and after childbirth and provides for maternity benefits and certain other benefits.

Employees’ Pension Provides for the payment Scheme, 1995 of monthly pensions in case of contingencies like superannuation, retirement, permanent total disablement, or death during service.

Extends to the whole of India and applies to every factory, mine, and plantation, except the factories and establishments to which provisions of the Employees’ State Insurance Act, 1948, are applicable. Extends to all persons who were members of the Family Pension Scheme, 1971. It is also compulsory for persons who became members of the provident fund after 16 November 1995.

Payment of Provides for the payment of Extends to the whole of India Gratuity Act, 1972 gratuity to employees in except Sikkim and plantations in factories and establishments. the state of Jammu & Kashmir. It applies to every factory, mine, oil field, plantation, port, oil company, and shop or establishment in which 10 or more workers are employed or were employed on any day of the preceding 12 months. There is no wage ceiling for coverage under the act. The maximum amount obtainable under the act is Rs350,000 per employee.

continued.

289 Labor Markets in India: Issues and Perspectives Appendix 5.1 Major Labor Laws in India (cont’d.)

IV. Welfare Laws Legislation

Aim

Factories Act, 1948 Aims to ensure adequate safety measures and to promote the health and welfare of the workers.

Coverage Extends to the whole of India and applies to all manufacturing establishments employing 10 or more workers (for establishments that use power), or 20 or more workers (for those not using power).

Mines Act, 1952

Aimed at providing safe and Extends to the whole of India. proper working conditions in mines and certain amenities to the workers employed therein.

Plantation Labour Act, 1951

Aims to secure the welfare Applies to the whole of India of labor on plantations and except the state of Jammu & to prevent their exploitation Kashmir. by regulating conditions of work.

Mica Mines Aim to constitute welfare Labour Welfare funds in the concerned Fund Act, 1976 sector to meet certain Limestone and welfare requirements of Dolomite Mines the employees. Labour Welfare Fund Act, 1972 Iron Ore Mines, Manganese Ore Mines and Chrome Ore Mines Labour Welfare Fund Act, 1976Iron Ore Mines, Manganese Ore Mines and Chrome

Applies to the concerned industries throughout the country.

continued.

290 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Appendix 5.1 Major Labor Laws in India (cont’d.)

Ore Mines Labour Welfare Cess Act, 1976 Beedi Workers Welfare Fund Act, 1976 Beedi Workers Welfare Cess Act, 1976 Labour Welfare Fund Laws (Amendment) Act, 1987Dock Workers (Safety, Health and Welfare) Act, 1986Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996Building and Other Construction Workers Welfare Cess Act, 1996 V. Laws Targeting Specific Categories Legislation

Aim

Coverage

Bonded Labour System (Abolition) Act, 1976

Aims to provide for the Extends to the whole of India. abolition of the bonded labor system with a view to preventing the economic and physical exploitation of the weaker sector of the people, and for matters connected therewith or incidental thereto.

continued.

291 Labor Markets in India: Issues and Perspectives Appendix 5.1 Major Labor Laws in India (cont’d.)

Child Labour (Prohibition and Regulation) Act, 1986

Aims to prohibit the Extends to the whole of India. engagement of children (below 14 years of age) in certain employments and to regulate the conditions of work of children in certain other employments.

Contract Labour Regulates the employment (Regulation and of contract labor in certain Abolition) Act, 1970 establishments and provides for its abolition in certain circumstances.

Extends to the whole of India. The act applies to (i) every establishment in which 20 or more workmen are employed or were employed as contract labor on any day of the preceding 12 months, and (ii) every contractor who employs or employed 20 or more workmen on any day of the preceding 12 months.

Interstate Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979

Extends to the whole of India and applies to every establishment in which five or more interstate migrant workmen (whether or not in addition to other workmen) are employed or were employed on any day of the preceding 12 months. It also applies to every contractor who employs or employed five or more interstate migrant workmen on any day of the preceding 12 months.

Aims to regulate the employment of interstate migrant workmen and to provide for their conditions of service and for matters connected therewith.

continued.

292 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Appendix 5.1 Major Labor Laws in India (cont’d.)

Shops and Aim to regulate the Commercial conditions of work (daily Establishments Acts and weekly hours of work, payment of wages, overtime, annual leave, etc.) of employees engaged in shops and commercial establishments.

Cover shops and commercial establishments, restaurants, hotels, and places of amusement in certain notified urban areas.

Notes 1. The growth estimates are from World Development Indicators (online) and the employment estimates are based on Planning Commission (2001), Table 2.13. 2. These wage differentials are based on an analysis of National Sample Survey data. See Section 5.3 for more details. 3. See ADB (2004) for the experience of Asian countries in poverty reduction. 4. This section is based on Nagaraj (2001). 5. This background material has been discussed in detail in Bhagwati (1993) and elsewhere. 6. The ideology of the freedom struggle was not as monolithic as it would seem from this discussion. It had at least two main strands. The first, dominant strand was influenced by the Soviet experience and socialist discussion. The second strand was reflected in what is termed as Gandhian economics. While it was not sufficiently influential in the overall scheme as developed in the 1950s, it played a critical role in later developments. A major aspect of this was a distrust of modern technology and a concern for social welfare and for the needs of the poor. 7. See, for example, the Monopolies and Restrictive Trade Practices Act, 1969. 8. For example, banks were nationalized in 1969, followed by the insurance sector. 9. Disinvestment refers to the sale of government equity without giving up managerial control. 10. Detailed information on labor force and employment issues comes from the employment-unemployment survey of the National Sample Survey Organization (NSSO). The NSSO has been conducting stratified random sample surveys of more than 100,000 households every 5 to 6 years since 1972/73. These large-sample, or “quinquennial round” surveys, have two main components: a “consumption expenditure” component and an “employment-unemployment” component. The latter gives the standard data for analyzing aspects of the Indian economy related to the labor force (although the Indian census also provides useful information on the labor force). Much of this section uses the last four large-sample surveys. These were

293 Labor Markets in India: Issues and Perspectives carried out in 1983 (January–December), from July 1987 to June 1988, from July 1993 to June 1994, and from July 1999 to June 2000. 11. This estimate of the labor force is based on the “usual principal and subsidiary status” definition of the labor force (see Box 5.1 for details of the various definitions). Between the quinquennial rounds, the NSSO also carries out thin-sample, or “annual round,” surveys of household consumption expenditure. Some of these surveys also collect data on the labor force. The latest thin-sample employmentunemployment survey (NSSO 2005) estimates the labor force in 2003 at 417 million. Other sources provide slightly different estimates. Adjustments made in population estimates from National Sample Survey (NSS) sample data to conform to censusbased population estimates account for some of the difference. 12. There is a very small overlap between the organized sector and the agricultural sector, as plantations would be part of the organized sector. In 1999/ 2000, the organized sector accounted for only 0.6% of total agricultural employment (Planning Commission 2001, Table 2.13). 13. According to the National Accounts Statistics of India, the organized sector comprises employment in the public sector and recognized educational institutions and employment in enterprises registered under the Indian Factories, Bidi and Cigar Workers, Co-operative Societies and Provident Fund acts. The rest of the workforce is classified as being in the unorganized sector for statistical purposes (ADB 2003). 14. Decennial population census data are widely used in studying migration. The census questionnaire records information on (i) the place of last residence and (ii) the length of stay at the place of enumeration. These questions are decidedly inadequate for an understanding of all aspects of migration. 15. Remittances to India in 2004 totaled $21.7 billion (World Bank 2005). 16. Srivastava and Bhattacharya (2003) have put together NSS data on this issue. Contrary to their claim, a close reading of the data does not seem to suggest a speeding up of male migration. 17. Official poverty estimates are based on the large-sample rounds of the NSS. The thin-sample NSS rounds carried out between the large-sample rounds are not used by the Government in estimating and presenting official poverty statistics. 18. Given the serious difficulties in price adjustments, some studies have alternatively looked at “nutrition poverty”—the proportion of the population that is not getting the minimum desired level of nutrition, based on the direct count of calorie intake (see, for example, Meenakshi and Vishwanathan 2003). On this basis, nutrition poverty increased from 64% in 1972/73 to 76% in 1993/94. But nutritional measures are flawed because they do not factor in the income effect (of rising incomes and price subsidies) leading to shifts to higher-quality grains like wheat and rice. 19. Since the thin-sample surveys of the NSSO do not provide information on employment and unemployment based on current daily status, there is no information on unemployment rates on CDS basis. Nevertheless, estimates for more recent years by the Planning Commission, based on the observed relationship between output and CDS employment between 1993/94 and 1999/2000, suggest that the unemployment rate was as high as 9.11% in 2004 for the country as a whole (Planning Commission 2005). 20. The wage data reported here pertain to the primary activity of responding workers. Additionally, because the NSS surveys record the time spent on any activity

294 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar only in terms of 4-hour half days, the hourly rates reported here are by necessity approximations. 21. Wages for rural male workers were missing for a large number of observations. 22. The statistics pertain to only those wage and salaried workers whose reported wages pass certain data checks. In particular, they exclude workers reporting zero wages as well as those whose wages were in the lowest 0.1 and highest 0.1 percentiles. All statistics are based on weighted individual data (using household sample weights). 23. There are four sources of information on agriculture wages in India: the official series of the agriculture ministry, the large-sample NSS surveys, annual costof-cultivation surveys, and Rural Labour Enquiry reports. However, the official series and the NSS survey data are the most widely used series. 24. For details see Sundaram (2001) and Planning Commission (2001). 25. Table 5.16 follows the practice of Planning Commission (2001) and other researchers for combining employment data from NSSO for 1999/2000 with March 1999 DGET data on organized sector employment. Using March 2000 DGET data instead would not change trends qualitatively. In fact, the March 2000 number is slightly lower than the March 1999 number. 26. Organized sector employment was 57.1% of total regular wage and salaried employment in 1983, 55.1% in 1988, 55.4% in 1994, and 50.9% in 2000. 27. Wages thus set are said to become the norm for the rest of the public sector, if not for all of the organized sector (Anant and Sundaram 1998). 28. For example, the public sector hires many highly qualified engineers and scientists for capital- and skill-intensive enterprises and research institutions. 29. Strictly speaking, if workers were categorized into three types on the basis of their educational attainments (unskilled, semiskilled, and skilled), India could well be categorized as an unskilled labor–abundant country. However, improved enrollment rates among the young and the entry of literate youth into the labor force are making semiskilled labor the abundant factor. 30. These data are based on the economic census. Unfortunately, similar breakdowns from the economic census of 2001 are still not available. 31. For a summary of the debate on this issue, see Nagaraj (2004a). 32. The terms production workers and nonproduction workers are referred to as workers and supervisors, respectively, in Annual Survey of Industries data. 33. Strictly speaking, the wage bill is reported for production workers while emoluments are reported jointly for production and nonproduction workers in the Annual Survey of Industries. Emoluments of nonproduction workers reported here were computed by subtracting wages of production workers from total emoluments and dividing the result by the number of nonproduction workers. 34. The wage share figures are based on data from the entire factory sector, and not just the manufacturing sector. However, the trends for the former are driven by the latter since manufacturing accounts for around 90% of factory sector employment. 35. Adjudication refers to the form of dispute resolution whereby the parties to the dispute present evidence and arguments to the state (or an agency of the state). The state has the power to deliver a binding decision.

295 Labor Markets in India: Issues and Perspectives 36. Juridification as used here refers to an increase in formal law and greater involvement of courts and the legal profession. 37. The term “layoff” refers to a temporary or seasonal dismissal of a group of workers due to slackness of current demand. “Retrenchments,” on the other hand, denote permanent dismissals of a group of workers. Finally, “closure” refers to the closing of an establishment and the permanent dismissal that this leads to. 38. The living wage is higher than the fair wage. It is hard to define explicitly. However, it pertains to wages which would provide a decent living standard to the worker and his or her family. 39. There were about 44,309 registered trade unions in 1985 and 59,198 in 1997. 40. The data on unions submitting returns and average membership were derived by summing up state-level data on these variables reported in various issues of the Indian Labour Yearbook. 41. Moreover, the assumption that the labor laws are necessarily protective of labor may not be valid. A more nuanced reading of the laws might reveal the ways in which protective provisions are diluted or counterbalanced by provisions favoring employers. 42. A supplement to the original World Bank survey carried out in two states with a good investment climate and one state with a poor investment climate was aimed at determining the reasons behind overstaffing. The results indicated that overstaffing was partly a result of labor hoarding in anticipation of higher growth in the future in the states with a good investment climate, but hardly so in the state with a poor investment climate. In fact, labor regulations were noted as a major reason for overstaffing in the latter. This lends indirect support to the notion that, given Maharashtra and Gujarat’s ranking as states with the best investment climate, labor regulations have in effect been less binding on firms than the amendments to the Industrial Disputes Act may suggest. 43. A more elaborate discussion may be found in Anant et al. (1995). 44. See the discussion in Anant and Sankaran (2003) for an elaboration of ILO fundamental principles and rights at work. 45. For example, social assistance and welfare schemes may provide cash or in-kind transfers to vulnerable groups such as victims of natural disasters and handicapped people. 46. The council was up to coordinate between government and civil society for the Government’s National Common Minimum Program. The draft bill was submitted by the council to the Government in November 2005. 47. The JRY was launched on 1 April 1989 by merging the National Rural Employment Program (NREP) and the Rural Landless Employment Guarantee Program (RLEGP) (see Figure 5.13). 48. The program can commence only after the NREG Act has been notified. 49. An approximate average of state-specific minimum wage rates is Rs60 per day. 50. For example, managers may have already taken into account Indian labor laws before making key production decisions. In that case, the question whether current employment levels are optimal or not is unlikely to be very illuminating.

296 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar This is because a company may have already chosen a capital-intensive production process or product line to minimize hiring workers in the first place. 51. Useful questions to answer would relate to issues such as whether workers have received their severance payments in the correct amounts and on time. Did they get the promised retraining support and assistance in finding jobs?

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299 Labor Markets in India: Issues and Perspectives . 1997. “What Has Happened Since 1991? Assessment of India’s Economic Reform.” Economic and Political Weekly 32(8–14 November):2869–79. . 2001. “Trade and Labour Market Linkages in India: Evidence and Issues.” Paper presented at the International Economic Integration and Labour Markets in Developing Countries Workshop. Revised version. 15–16 January, East-West Center, Hawaii. . 2004a. Labour Market Issues in India: A Note. Available:http://www.gdnet. org/pdf2/gdn_library/annual_conferences/fifth_annual_conference/rayaprolu _paper.pdf. . 2004b. “Fall in Organised Manufacturing Employment: A Brief Note.” Economic and Political Weekly 39(30, July 24):3387–90. Nath, S. 2005. Labour Policy and Economic Reforms in India. In B. Debroy and P. D. Kaushik, eds., Reforming the Labour Market. New Delhi: Academic Foundation. National Sample Survey Organization. 1996. Key Results on Employment and Unemployment—Fifth Quinquennial Survey. NSS 50th Round, Government of India, New Delhi. . 2005. Household Consumer Expenditure and Employment-Unemployment Situation in India. NSS 59th Round, Government of India, New Delhi. Office of the Registrar General. Various years. Census of India. New Delhi. Pai, G. B. 2001. Labour Law in India. Vols. 1 and 2. New Delhi: Butterworth (India). Papola, T. S. 2005. “A Universal Program is Feasible.” Economic and Political Weekly 12 February:594–99. Planning Commission. 2001. Report of Task Force on Employment Opportunities. Government of India, New Delhi. . 2005. Mid-Term Appraisal of the Tenth Five-Year Plan 2002–2007. Government of India, New Delhi. Available: http://planningcommission.nic.in/midterm/ cont_eng1.htm. Ramachandran, H. 2002. “Education, Skill Development, and Changing Labour Market.” The Indian Journal of Labour Economics 45(4, October–December). Ramaswamy, E. A. 1984. Power and Justice. New Delhi: Oxford University Press. Ramaswamy, K. V. 1994. “Small-Scale Manufacturing Industries: Some Aspects of Size, Growth, and Structure.” Economic and Political Weekly 29(9, 26 February). . 1999. “The Search for Flexibility in Indian Manufacturing: New Evidence on Outsourcing Activities.” Economic and Political Weekly 34(6):363–8. Reserve Bank of India. 2002. Report of the Standing Committee on International Financial Standards and Codes. Mumbai. Rodrik, D. 1997. Has Globalization Gone Too Far? Institute for International Economics, Washington, DC. Roy, S. D. 2002. “Job Security Regulations and Worker Turnover: A Study of the Indian Manufacturing Sector.” Indian Economic Review XXXVII. Saini, D. S., ed. 1995. Labour Law. Work and Development. New Delhi: Westville Publishing House. Sen, A., and Himanshu. 2005. “Poverty and Inequality in India.” In A. Deaton and V. Kozel, eds., The Great Indian Poverty Debate. New Delhi:Macmillan India Ltd. Sharma, A. N., and S. K. Sasikumar. 1996. “Structural Adjustment and Labour.” V. V. Giri National Labour Institute, Noida. Mimeo.

300 T.C.A. Anant, R. Hasan, P. Mohapatra, R. Nagaraj, and S.K. Sasikumar Sharma, S. 2004. Poverty Estimates in India: Some Key Issues. ERD Working Paper No. 51, Economics and Research Department, Asian Development Bank, Manila. Shenoy, P. D. 2004. “Effective Labour Court Administration: Trends and Issues.” Training Program on Making Adjudication Effective, V.V. Giri National Labour Institute, Noida. Mimeo. Srivastava, P. 2004. Poverty Targeting in Asia: Country Experience of India. ADB Institute Discussion Paper No. 5, Tokyo. Srivastava, R., and S. Bhattacharya. 2003. “Globalisation. Reforms and Internal Mobility: Analysis of Recent Indian Trends.” Labor and Development 9(2, December):31–55. Subbarao, K. 2003. Systemic Shocks and Social Protection: Role and Effectiveness of Public Works Programs. Social Protection Discussion Paper Series No. 0302, Social Protection Unit, Human Development Network, World Bank. Sundar, K. R. S. 2005. “Labour Flexibility Debate in India: A Comprehensive Review and Some Suggestions.” Economic and Political Weekly 28 May:2274–85. Sundaram, K. 2001. “Employment-Unemployment Situation in the Nineties: Some Results from NSS 55th Round Survey.” Economic and Political Weekly 17 March:931–40. . 2004. Growth of Work Opportunities in India: 1983–1990-2000. Working Paper No. 131, Centre for Development Economics, Department of Economics, Delhi School of Economics. Sundaram, K., and S. D. Tendulkar. 2002. The Working Poor in India: Employment– Poverty Linkages and Employment Policy Options. Discussion Paper 4, Recovery and Reconstruction Department, International Labour Office, Geneva. . 2005. “Poverty Outcomes in India in the 1990s.” In A. Deaton and V. Kozel, eds., The Great Indian Poverty Debate. New Delhi:Macmillan India Ltd. Sundrum, R. M. 1987. Growth and Income Distribution in India. New Delhi: Sage. Tendulkar, S. 2004. “Organized Labour Market in India: Pre- and Post Reform.” Paper presented during the Conference on Anti-poverty and Social Policy in India, January, Alwar, Rajasthan, India. Varma, U. K., and S. K. Sasikumar. 2003. Labour Market and Employment Assessment: A District Level Analysis. NLI Research Studies Series No. 42/2003, V. V. Giri National Labour Institute, Noida. World Bank. 2003. Improving the Investment Climate in India. World Bank, Washington, DC. . 2004. Sustaining India’s Services Revolution. World Bank, Washington, DC. . 2005. World Development Indicators Online. Available: http://devdata. worldbank.org/dataonline.

CHAPTER 6 Labor Markets in Indonesia: Key Challenges and Policy Issues GUNTUR SUGIYARTO, MAYLING OEY-GARDINER, AND NINASAPTI TRIASWATI

6.1 Introduction

U

ntil 1997, Indonesia’s economy was among the faster growing in both the region and the developing world generally. Economic growth of around 5% over a period of 25 years had brought significant gains to workers and the population more widely. Poverty rates declined dramatically from the 1970s to 1996, and at the same time a steadily growing share of Indonesia’s labor force made the transition from agriculture to industry and services. Poverty rates decreased from around 40% in 1976 to around 11% in 1996. The share of workers in agriculture declined fairly constantly from around 55% in 1990 to around 41% in 1997. Over this period, industry saw its share of the workforce increase from 14% to 19%. A severe economic crisis, which began in 1997 and lasted at least until 1998, brought to a close an era of high-growth and improving labor market outcomes. Although an economic recovery was under way by 1999, growth has been moderate, with GDP per capita growing by 2–4% between 2000 and 2004. Investment, a key driver of growth prior to 1997, has been around 20% of GDP in recent years, down from around 27% in the 10 years before 1997.

Guntur Sugiyarto, Economics and Research Department, Asian Development Bank; Mayling Oey-Gardiner, Insan Hitawasana Sejahtera; Ninasapti Triaswati, Insan Hitawasana Sejahtera. The authors thank participants at the workshop, Improving Labor Market Conditions in Indonesia (15 November 2005, Jakarta), Jesus Felipe, and Rana Hasan for very useful comments on an earlier draft of the chapter.

302 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati

Significantly, various outcomes in labor markets have continued to deteriorate. In particular, unemployment rates have been rising since 1997 and are a matter of considerable concern to the Government. Indeed, it has made clear its intention to reduce unemployment from 10% in 2004 to 5% by 2009. In absolute numbers, this entails a reduction from 10.3 million unemployed in 2004 to 5.8 million by 2009 (Bappenas 2004). However, rising unemployment rates are only one indicator of weaknesses in Indonesia’s labor markets. First, underemployment, in particular, is widespread. Around 34% of the labor force is underemployed in the sense of working less than 35 hours per week. Moreover, many of the existing jobs are not particularly productive and/or well paying, giving rise to underemployment in terms of low productivity or low earnings. Around 17% of workers live below the poverty line and around 35–50% of them earn slightly above the poverty line.1 Second, informal workers—defined as the self-employed and unpaid family workers—have accounted for a growing share of total employment since 1997. Given that low-quality jobs with poor working conditions characterize many informal jobs, this trend is a troubling one. Related to this is the increase since 1997 in agriculture’s share of total employment. In 1971, two thirds of workers were in agriculture. By 1997, 41% were. The crisis reversed this declining trend: by 2003 the share had increased to 46%. Finally, much of Indonesia’s labor force is characterized by a low level of skills, itself a result of relatively low levels of educational attainment and limited access to training. Many observers of the Indonesian economy share the view that improving these labor market outcomes, and in particular reversing the recent trends of growing unemployment, underemployment, informalization, and importance of the agriculture sector as an employer, requires igniting and sustaining high levels of investment. However, whether high rates of economic growth (driven by a resumption in investment rates to precrisis levels) will be enough, and how investments are to be raised are topics of considerable debate. One of the debates that is particularly pertinent for labor market issues centers around the role of labor market policies adopted after the crisis of 1997– 98. Postcrisis Indonesia may be characterized as a country where new institutions are taking shape. Democratization and decentralization of various functions of government are two key processes which are under way. While most observers view both processes as broadly positive, some have pointed to specific aspects of the new labor market policies, which have moved from being repressive of labor rights to being protective of labor rights, as having the unintended consequences of constraining both employment and investment growth. The specific policies in question concern especially, minimum wages, severance pay, and the industrial relations system. There have been large increases in both minimum wages and severance pay.2 Additionally, the number of unions

303 Labor Markets in Indonesia: Key Challenges and Policy Issues

has mushroomed from one government-controlled union to 87 free unions; industrial disputes have become more common. This chapter examines key trends in the Indonesian labor market since 1990. It covers not only a wide range of labor outcomes, but also describes the evolution of labor market policies. In doing so, it takes stock of the main challenges confronting the country’s labor markets and identifies knowledge gaps for further research. The rest of this chapter is organized as follows. Section 6.2 describes briefly recent developments in the economy. It provides a picture of macroeconomic developments and a discussion of the Government’s plans for dealing with the key economic challenges it faces. Section 6.3 then provides a discussion of labor market policies and regulations. Among other things, it covers the recent debates on labor market policies and regulations put in place since the crisis. Section 6.4 then gives a detailed discussion of labor market outcomes. This is followed by a discussion of trends in poverty in Section 6.5. Section 6.6 concludes with some closing remarks and suggestions for future research.

6.2 Recent Developments in the Indonesian Economy 6.2.1

Macroeconomy

After expanding during 1970–1996, the Indonesian economy has suffered from an economic crisis and slow recovery since 1997. In 1998, GDP declined by 13.1% after registering growth of 4.7% in 1997. Over the same period, inflation jumped from 6.6% to 77.5% (Table 6.1). Since 1999, the economy has started to grow slowly. GDP grew by 3.5% in 2001 while in 2003 growth was 4.1%. These moderate rates of growth, however, were driven mainly by consumption, creating no additional employment. The latest estimates of GDP growth (i.e., for 2004 and 2005) show that growth is picking up but still without making a significant positive impact on employment. In fact, the unemployment rate continues to increase. The period after the crisis is therefore characterized by low economic growth and high unemployment as a result of low and decreasing investments. Accordingly, the main challenge for the Government now is to increase investment to precrisis levels and to attain the high and sustained economic growth necessary for reducing unemployment and poverty incidence. The Government has attempted to increase investment. But this is proving to be difficult, especially given the widespread perception that Indonesia’s investment climate has worsened over the last few years. This may be seen from the results of a large-scale survey of firms’ managers and a comparison of business

304 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Table 6.1 Key Macroeconomic Indicators

Description GDP Growth (% a year constant 2000) GDP Growth (% a year constant 1993) Consumption growth (% a year) Investment growth (% a year) External Sector Export growth (% a year) Import growth (% a year) Current account ($ billion) Direct investment ($ billion) Unemployment Rate (%) Old definition New definition Inflation/CPI (% a year) Budget Deficit (% of GDP)

1991–96 Average 1997

1998

1999

2000

2001

2002

2003

3.8

4.3

4.5

7.8

4.7

–13.1

0.8

4.9

3.5

3.7

4. 1

8.9

7.8

–6.2

4.6

1.6

4.4

4.7

5. 0

10.4

8.6

–33.0

–18.2

16.7

6.5

0.2

1.4

9.4

7.8

11.2

–31.8

26.5

2.9

-2.2

5.8

12.1

14.7

-5.3

–40.7

25.9

8.2

-5.0

2.0

–4.3

–5.1

4.1

5.8

8.0

6.9

7.8

7.4

4.7

–0.4

–2.7

–4.6

–3.0

0.1

–0.6

3.7

4.7

5.5

6.4

6.1

8.7

6.6

77.5

2.0

9.4 –1.3

5.4 8.1 12.6 –2.8

5.9 9.1 10.0 –1.5

5. 6 9.5 5.1 –1.9

Note:

The old definition of unemployment includes only working age people without a job and looking for one. In 2001, a new definition was introduced in which the unemployed also includes “discouraged” job seekers, i.e., those who are not looking for a job because they are discouraged. Sources: Authors’ calculations based on BPS-Statistics Indonesia, Economic Indicators (various years); ADB (2004a); Bank of Indonesia, Indonesian Financial Statistics (various years).

regulations in Indonesia with those of other countries. The former highlights perceptions among managers of widespread corruption, regulatory obstacles and uncertainties, and rigidities in labor regulations (ADB 2005a), while the latter reveals a lengthy and costly process of doing business in Indonesia (World Bank 2005). 6.2.2

The Government’s Development Plan

The Government has promised to tackle unemployment as part of its welfare improvement program by making employment creation as its first priority. However, it is unclear how credible and feasible the policy agenda and targets are. First, some policy documents indicate that the goals of improving the investment climate and upgrading technology and productivity have become more important priorities than reducing unemployment. Second, there may be

305 Labor Markets in Indonesia: Key Challenges and Policy Issues

inconsistencies between some of the Government’s objectives—for example, those of reducing both inflation and unemployment, since there may be a trade-off between inflation and unemployment. Finally, the Government has not revised its stated targets in a manner consistent with the attainment (or lack of attainment) of previous annual targets. For instance, the target unemployment rate for 2006 still stands at 8.9%; this is despite the fact that the targets for 2004 and 2005 were not achieved (see http://www.bappenas.go.id). Unless there is an acceleration in the number of jobs being created, it is hard to see how future targets (2006–2009) can be met. The current president, Dr. Susilo Bambang Yudoyono, was one of the Coordinating Ministers in the previous administration until his resignation in early 2004. After campaigning for about 6 months, he became the first Indonesian president elected directly by the people. He was inaugurated on 20 October 2004, bringing optimism for an improvement in the Indonesian economy. In his vision and mission statement, “Building People’s Welfare”, unveiled during the presidential campaign, he promised to increase economic growth from 4% to 8% and per capita income from $968 to $1,731 over the period 2003–2009. He also put job creation and unemployment reduction at the top of his agenda. In November 2004, Bappenas published the Government’s Medium-Term Development Plan (MTDP) for 2004–2009 (Bappenas 2004). The MTDP presents an optimistic scenario. Over the period 2003–2009, for instance, the Government is to increase GDP growth from 4.5% to 7.6%, reduce unemployment from 9.5% to 5.1%, and cut the poverty incidence from 17.4% to 8.2%. These three macroeconomic indicators are consistent with previous promises. Some targets, however, have changed. Per capita income, for instance, is expected to increase from $772 to $1,164, or about 7% per year, which is lower than earlier promised. Yet another example of shifting targets, and more seriously, shifting priorities, comes from the document produced by the Coordinating Minister of Economic Affairs in December 2004. The document, “Maintaining the Economic Growth Momentum”, has lowered two important macroeconomic targets in comparison to those promised in the presidential campaign. The unemployment target for 2009 is 6.7% (compared with 5.1% in the campaign) and economic growth in 2009 is targeted at 7.2 % (7.6% in the campaign). More seriously, the goal of lowering the unemployment rate has slipped down to the third priority, after improvements in the investment climate and technology. The most serious weaknesses in the various documents, is however, the fact that the channels through which the Government’s policies and actions will reduce unemployment have not been made explicit. As a result, possible inconsistencies in some of the targets and policies are present. Among other things, this means that a number of the targets could well be unrealistic. One

306 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati

illustration of inconsistencies stems from the targets for inflation and unemployment. The inflation rate is targeted to decline from 5.1% in 2003 to 3% in 2009, which is very low given Indonesia’s experience during the 1990s and in the postcrisis period. The lower inflation target is also contrary to the target of reducing unemployment. Furthermore, given that there has been a trade-off between inflation and unemployment in the last few years, reducing both at the same time is even more unlikely. The latest controversy is the targeted budget deficit, which was meant to be further reduced from 1.7% in 2003 to 0.2% in 2009. This is again inconsistent with the goal of accelerating the creation of jobs, which would likely need an expansionary fiscal policy. All of these conflicting elements and inconsistencies question the credibility and feasibility of the Government’s stated policies and targets. A related problem is that the channels linking policies to reduced unemployment rates have not been explicitly spelled out. Indeed, the lack of a clear outline in the MTDP on exactly how enough jobs will be created so that unemployment rates go down suggests that the Government is relying perhaps exclusively on a trickle-down approach. However, Indonesia’s experience in the last 4 years has been that increases in GDP, admittedly moderate, have been followed by increasing unemployment. The trickle-down approach is also evident from the economic report of the Coordinating Minister of Economic Affairs entitled “Maintaining the Economic Growth Momentum” (Bakrie 2004) as well as the Government’s 2005 budget plan (RAPBN). In the latter case, there is an absence of any explicit mention of employment-generation programs, which when well designed and implemented, have been known to reduce unemployment and underemployment among the most disadvantaged workers (as revealed by international experience) (Table 6.2).3 Although the Government has introduced such programs in the past, they have never been conducted in a systematic way or on a scale large enough to enable them to have a significant impact.

6.3 Labor Market Policies 6.3.1

Overview

Indonesia’s labor market policies have undergone a dramatic change since the crisis and the ensuing political changes in 1998 during which President Suharto’s rule gave way to democratically elected governments. Prior to the crisis, labor markets in Indonesia operated under conditions of labor repression (though not necessarily wage repression). Interestingly, labor market policies were, in theory, protective of workers’ welfare, at least by the standards of neighboring countries (Manning 2004a). Their pro-worker nature was the result

307 Labor Markets in Indonesia: Key Challenges and Policy Issues Table 6.2 Central Government Budget by Function, 2005 Expenditures by Function 1. General Services Subsidy and Other Transfers Interest Payments for Domestic Loans Interest Payments for Foreign Loans Basic Research and Development Others 2. Economy Employment Others 3. Education 4. National Defense 5. Public Order and Safety 6. Health 7. Environment 8. Housing and Public Facilities 9. Social Security 10.Tourism and Culture 11.Religion Total Source:

Rp trillion

%

160.6 52.4 38.8 25.1 1.2 43.0 26.3 0.6 25.7 25.7 22.0 15.2 6.8 2.6 2.2 1.9 0.9 0.6 264.9

60.6 19.8 14.7 9.5 0.5 16.2 9.9 0.2 9.7 9.7 8.3 5.7 26.6 1.0 0.8 0.7 0.3 0.2 100.0

Government budget plan (RAPBN) 2005.

of laws introduced in the 1950s and 1960s (prior to President Suharto’s rule), which were partly based on labor policies operating in the Netherlands at the time. However, under Suharto’s rule the implementation of labor laws was diluted through tight control of organized labor—from 1973 until 1998 workers could join only one official labor union with close links to the ruling party. The practice of using the police and military to clamp down on strikes, and the fact that many labor inspectors and officials were on the payroll of private companies, further diluted the protection provided to workers under the law (Manning 2004a). In the early 1990s, domestic concerns at labor unrest coupled with international pressure to improve labor standards led to a strengthening of minimum wage regulations and the introduction of social security for workers, Jamsostek. The most significant changes to labor market policies and institutions, however, came about with the 1997 crisis and the emergence of democratic rule in 1998. Labor market policies and institutions moved sharply in the direction of stronger workers’ rights and the protection of their welfare. This was the result of two factors. First, workers and labor unions had a significant role in the process of Suharto’s resignation. Second, Suharto’s successors have needed political support from workers and labor unions.4

308 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati

The restrictions on labor unions during Suharto’s era were removed and the earlier labor policy regime gave way to one which was much more friendly to labor. Indeed, in 2001 a labor union leader was appointed as the Minister of Manpower and Transmigration (MOMT).5 Two key pieces of legislation that embody significant changes are the Trade Union Act of 2000 and the Manpower Protection Act of 2003. The former guarantees to workers the right to set up their own union. The scope of the latter is particularly broad and addresses labor concerns in both large and small enterprises. Issues include the terms of employment for children, women, and foreign workers; wages and conditions of work; contract employment; dismissals; collective bargaining; and settlement of grievances (Manning 2004a). Table 6.3 summarizes the main labor market policies and regulations in different eras.6 Box 6.1 discusses the Government’s compliance with International Labour Organization (ILO) standards. Table 6.3 Summary of Main Labor Regulations, 1945–2004 Presidential Era and Regulations I.

Sukarno (1945–1967) 1. Law No. 12/1948 2. Law No. 1/1951 3. Law No. 21/1954 4. Law No. 18/1956 5. Law No. 22/1957 6. Law No. 80/1957

II.

Suharto (1967–1998) 1. Law No. 14/1969 2. Law No. 1/1970 3. PP No. 33/1977 4. PP No. 8/1981 5. PP No. 25/1981 6. Ministerial Regulation No. 01/MEN/1990 7. PP No. 67/1991 8. PP. No. 69/1991 9. Law No. 3/1992

Description

Labor Law Implementation of Labor Law No. 12/1948 Law on labor union and employer to provide a basic agreement Ratification of ILO Convention No. 98 on the right to organize and bargain collectively Dispute Settlement Law to replace emergency law No. 16/1951 Ratification of ILO Convention No. 100 on wages for male and female workers Main Regulation on Employment Occupational Safety Worker’s Social Insurance (Astek) Regulation on Wage Social Insurance and Retirement Benefit for Civil Servant (Taspen) Explanation on minimum wage and its implementation Social Insurance for Military Officer (Asabri) Health Insurance for Civil Servant, Retired Civil Servant and Retired Military Officer (Askes) Government monopoly on the management of the workers’ social security fund (Jamsostek)

continued.

309 Labor Markets in Indonesia: Key Challenges and Policy Issues Table 6.3 Summary of Main Labor Regulations, 1945–2004 (cont’d.) 10.PP No. 14/1993 11.Ministry of Labor Regulation No. 3/1993 12.Ministry of Labor Decrees No. 4/1986; No. 1108/1986; and Regulation No. 62/1993 13.Ministerial Decree No. 81/M/1995 14.Labor Law No. 25/1997 15.PP No. 79/1998 to replace PP 14/1993 III.

IV.

Habibie (1998–1999) 1. Ministerial Regulation No. 5/1998 to replace Ministerial Regulation No. 3/1993

Wahid (1999–2001) 1. Amendments to Labor Law No. 25/1997 2. Trade Union Act, Law No. 21/2000 to replace Regulation No. 5/1998 3. Ministerial Decree 150/2000

V.

Megawati (2001–2004) 1. Labor Law No. 13/2003, replaced among others Labor Law No. 25/1997, Law No. 14/1969, Law No. 21/1954 and Law No. 1/1951 2. Industrial Dispute Settlement Bill, Law No. 2/2004 3. Migrant Workers Bill, Law No. 39/2004 4. Law No. 40/2004 on National Social Security

Government regulation on the implementation of Jamsostek Overall control of all aspects of labor organization Limitations on the right to strike based on mandatory bipartite and tripartite negotiations involving the Ministry of Labor and the security forces and mechanism to force workers to resign after 6 days absence of strike Minimum needs for living (KHM) components It was supposed to be implemented in 1998, but was ultimately implemented in October 2000 Implementation of Jamsostek

Ratification of ILO Convention No. 87 (on Freedom of Association and Protection of the right to organize); introduce a new system for registration of trade unions and abolish the previous monopoly union On labor unions Guarantee workers’ right to organize; setting the minimum number of members of a trade union (10), conditions governing multiple unionism in single establishments, rules for information on union federation and confederation Operational procedures on rationalization of workers including severance pay The new Labor Law includes all basic aspects of employment protection such as planning, training, industrial relations, occupational safety, wages, and welfare. Several detailed regulations are also included in this law, such as for severance pay Provides basic procedures on industrial disputes Provides basic rights of migrant workers The beneficiaries are all Indonesian workers. The systemincludes Jamsostek, Taspen, Asabri, and Askes

Note: PP = government regulation (Peraturan Pemerintah). Sources: Fenwick et al. (2003); Kansil and Kansil (2000 and 2003); Law No. 2/2004 and Law No. 40/2004; Manning (2004b).

310 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Box 6.1 Compliance with ILO Standards

With regard to the Government’s compliance with ILO standards, Indonesia has become the first country in Asia to ratify all fundamental ILO conventions on labor,1 including the right to organize into a trade union and the right to bargain and strike in support of claims (Box Table 6.1). This is in addition to extensive arrays of labor standards, such as minimum wages (set by regions), a formal industrial dispute-resolution system, working hours limitation (up to 40 hours per week with 30 minutes rest for each 4 hours work), public holidays (12 days per year), maternity leave, sick leave, holiday leave (minimum 2 weeks), overtime pay, severance pay, prohibitions on gender discrimination in wages, and restrictions on the rights of employers to terminate workers. Absolute prohibition on dismissal is also imposed for reasons of involvement in union activities; pursuing grievances with the employer; absence to fulfill a civic or religious duty; and discrimination based on tribe, race, marital status, gender, religion or political affiliation. Box Table 6.1 Labor Standards and Rights Types

Right against/to

Basic Rights

Forced labor Physical coercion Discrimination Child labor exploitation Free association Collective representation Expression of grievances Living wage Working information Accident compensation Limited hours of work Arbitrary dismissal Severance pay Retirement compensation Survivor’s compensation

Civic Rights Survival Rights

Security Rights

Source:

Manning (2004b).

1 Conventions No. 28 on Forced Labor (1950), No. 98 on the Right to Organize and Bargain Collectively (August 1956), No. 100 on Wages for Male and Female Workers for the work of equal value (December 1957), No. 87 on Freedom of Association and Protection of the Right to Organize (June 1998), No. 105 on Abolition of Forced Labor (May 1999), No. 111 on Discrimination of Employment and Occupation (May 1999), No. 138 on Minimum Age of Employment (May 1999), and No. 182 on the Worst Forms of Child Labor (March 2000).

311 Labor Markets in Indonesia: Key Challenges and Policy Issues

Most observers have welcomed the broad thrust of the new policies that grant stronger workers’ rights and the protection of their welfare. However, some observers are concerned that particular elements of the new policies may be harmful for Indonesia’s investment climate and for employment generation in the formal sector. More specifically, while employers do not have complaints about extending and protecting the basic rights of workers (as defined in Box Table 6.1), they believe that large increases in minimum wages and severance pay (which are embedded in survival rights and security rights as per Box Table 6.1) along with an industrial relations regime that has led to a mushrooming of trade unions, have inflated the costs of doing business, reduced investments, and therefore the demand for labor. These concerns, as well as the related evidence, are described in more detail below. However, it is first useful to discuss briefly Indonesia’s experience with decentralization, since it has important implications on how labor market policies have operated. 6.3.2

Decentralization

The big bang implementation of decentralization since 2001 appears to have had important implications for the labor market. Regional governments are now responsible for all policy issues except those pertaining to international relations, national security, justice, monetary and fiscal, religion, national planning, macro policies, state administration, and institutions (Law No. 22/ 1999). The regional governments have a greater mandate on labor and human resource policy, meaning that labor market performance at the regional level depends on the style and capabilities of local leaders. According to Lindenthal (2005), most local governments do not have significant experience in running employment or poverty reduction programs. They have also not taken into account the ramifications of raising user costs for the provision of public services in health and education or imposing various types of taxes and user charges on businesses within their regions. Poor decisions made at local levels may well show up in terms of weaker labor market outcomes later. More immediately, a major instrument of labor market policies, which has been transferred to governments at the local district level under the decentralization program, is the setting of minimum wages. According to Lindenthal (2005) actual practice in minimum wage setting appears to vary across provinces. Some local governments have set wages above the provincial floor for minimum wages. Others have set them for specific industries. As a result, the decentralization of the minimum wage setting process seems to have created a complex and confusing system. Not surprisingly, minimum-wage increases in some areas have been very controversial, with employer groups

312 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati

withdrawing their participation from the district wage councils (Lindenthal 2005). A study on the investment climate in Indonesia (ADB 2005a) reveals the adverse effects of decentralization from the perspective of employers. They believe that decentralization has contributed to the worsening of key aspects of the investment climate, especially in creating more uncertainty and corruption, and leading to more burdensome labor regulations. Results from the study showed that close to 25% of firms consider labor regulations to have deteriorated after decentralization (Figure 6.1). Moreover, labor regulations have become a bigger concern for firms than labor skills (ADB 2005a).

Figure 6.1 Percentage of Firms Rating an Issue as Having Deteriorated after Decentralization Corruption Regulatory Policy Uncertainty Labor Regulations

Business Licensing 0

5 Source:

10

15

20

25

30

35

40

45

ADB (2005a).

In addition, most local governments have only limited resources to carry out their extended role as a result of decentralization. In particular, decentralization has created unfavorable outcomes for MOMT as its regional offices were detached and then incorporated into different local institutions with different names and functions without clear mandates. As a result, even the supply of basic statistics related to the labor market from some regions was discontinued, making the development of labor force or employment plans in general, and by region and sector, more difficult.7 Data on labor markets from BPS-Statistics Indonesia, which is still centralized, have accordingly become more crucial. 6.3.3

Industrial Relations and Labor Unions

Indonesia has experienced a very uneven development of labor unions. The first president, Sukarno, supported labor activities while his successor,

313 Labor Markets in Indonesia: Key Challenges and Policy Issues

Suharto, repressed labor activities. The industrial relations under Suharto had three aims: to systematize government control of labor affairs by introducing a corporative and coercive model, to ensure labor market flexibility, and to facilitate government mobilization of labor to suit the needs of capital mobilization (Fenwick et al. 2003).8 The total membership of the sole government-approved labor union9 during this era never exceeded 1 million, a small fraction of the total number of workers. After Suharto, the Government codified the right of workers to organize and establish their own unions through the ratification of ILO Freedom of Association Convention (No. 87) and through the Trade Union Act of 2000. The latter allows labor unions with membership as low as 10 workers, and provides the conditions and rules for the operation of multiple unions and establishments. As a result, Indonesia has seen a mushrooming of the number of labor unions. There are now more than 86 labor unions (MOMT 2004). Additionally, there has been a large increase in industrial disputes, although statistics for 2004 reveal a decline in the number of disputes, strikes, workers involved, and working hours lost in comparison with previous years (Lindenthal 2005). Notwithstanding the apparent improvement in industrial relations statistics in 2004, there appears to be an urgent need for improving the climate of industrial relations in Indonesia. This requires action on a number of fronts including building up the capacity of trade unions. At the moment, there seems to be “little understanding of how a trade union should operate in a democratic society” (Lindenthal 2005, p. 96). Moreover, a key challenge for the future will be to build professional trade union organizations with good communications between trade union officers and workers. Finally, the importance of negotiations before industrial action needs to be better appreciated by trade unions. Of course, there are similar challenges for employers’ associations. Among these has to be the recognition that Indonesia’s labor environment has changed and that negotiation with labor will be the most beneficial way to deal with industrial disputes. Ultimately, the concept of “Pancasila Industrial Relation”—which refers to the importance of harmonious relationships between labor unions, associations of employers, and the Government—needs to be adhered to and not just given lip service. 6.3.4

Minimum Wage and Severance Pay

Minimum wage regulations have been around for some time in Indonesia, though for many years they were largely symbolic (Rama 1996). In the 1970s and early 1980s, for example, minimum wages were set very low. This began to change from the late 1980s. In the early 1990s, minimum wages doubled in real terms as can be seen from Figure 6.2, which tracks minimum wage increases

314 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Figure 6.2 Real Minimum Wage in Selected Major Cities in Indonesia (Rp ‘000 per month in 1996 prices) 250

200

150

100

50

0

1992

1994

Source:

1996

1998

2000

Jakarta

Surabaya

Bandung

Indonesia

2002

Manning (2004b).

between 1992 and 2002.10 Although domestic concerns at the possibility of labor unrest were a factor in giving minimum wage regulations more teeth, international pressure played an important role. In particular, pressure was brought to bear by union members and consumers in the United States, resulting in complaints filed under the Generalized System of Preferences, which ultimately would have deprived Indonesia of the low tariffs it carried on its exports to the US (Rama 1996). An additional threat was the withdrawal of investment guarantees to US companies interested in operating in Indonesia. The impact of the minimum wage increases of the early 1990s appears to have been modest. Rama’s (1996) analysis found that a doubling of the minimum wage in the first half of the 1990s led to a decrease in urban wage employment of 0–5% and an increase in average wages of 5–15%. A considerable portion of the disemployment effect of the minimum wage increases was borne by small manufacturing firms, according to Rama. Still smaller employment impacts of minimum wage increases were found by Islam and Nazara (2000) over the same period. They also argued that minimum wage levels were themselves quite low even in the late 1990s.11

315 Labor Markets in Indonesia: Key Challenges and Policy Issues

In the post-Suharto era, it is primarily domestic forces that have strengthened minimum wage regulations, in terms not only of raising the levels at which minimum wages are set but also of improving compliance. Minimum wages significantly increased after the crisis such that in 2001, they were already above their peak precrisis levels in 1997. In 2001, minimum wages in local currency terms increased by 46–49%, twice as fast as the increase between 1999 and 2000 (Sudjana 2002, Smeru 2001). In Jakarta, for instance, the real minimum wage has increased by about 40% over 1999–2004 (ADB 2004b). As Figure 6.2 clearly shows, increases in minimum wages are not a postcrisis phenomenon. However, while minimum wages appear to have had relatively small impacts on the wage distribution in earlier years, by 1999 and 2000, the minimum wage had become the mode of the wage distribution and minimum wages were not well below average wages as they used to be for most of the Suharto era (Smeru 2001). In other words, minimum wages in recent years seem to have become more binding. Given that minimum wages have continued to increase (often higher than the inflation rate) and have increased by vastly different amounts across provinces—Table 6.4 shows considerable variance in minimum wages across provinces—the possibility of an adverse impact of minimum wages on employment in the formal sector (where minimum wages are being enforced) has caused alarm among a number of stakeholders. For example, a large-scale survey of Indonesian manufacturing firms reveals that rising minimum wages have been a key concern of managers (ADB 2005a). The results of a 2002 study seem consistent with such concerns. Bird and Manning (2002) have used province-specific labor force data for 1990–2000 to examine the impact of minimum wages on the allocation of employment between the formal and informal sectors in urban areas. Controlling for regional GDP and the size of the working age population, they find higher minimum wages to be significantly associated with a larger share of informal sector employment (and a smaller share of formal employment) after 1997. The authors interpret their findings as indicating that higher and binding minimum wages have led employers to hire fewer workers in the formal sector than they would have otherwise. Severance pay has been part of Indonesia’s labor code since well before the crisis. Like the minimum wage, severance pay has in recent years experienced both an increase in rates and more efforts at improving its compliance. Figure 6.3 shows how severance pay (in terms of months of pay) varies by years of service as per not only most recent regulations passed in 2003, but also as early as 1986. As can clearly be seen, sharp increases in severance pay have been instituted for workers who have put in 3 years of service, and even more so for those with 10 years or more of service. Indonesia’s severance pay rates are high relative to other economies in the region.

316 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Table 6.4 Minimum Wages by Province, 2004 and 2005 (Rp) Province Nanggroe Aceh Darussalam North Sumatra West Sumatra Riau Jambi South Sumatra Bangka Belitung Bengkulu Lampung Banten Jakarta West Java Central Java Yogyakarta East Java Bali East Nusa Tenggara West Nusa Tenggara West Kalimantan Central Kalimantan East Kalimantan South Kalimantan North Sulawesi South Sulawesi Central Sulawesi South East Sulawesi Gorontalo Maluku North Maluku Papua Source:

2004

2005

550,000 537,000 480,000 476,875 425,000 460,000 447,923 363,000 377,500 515,000 671,550 367,000 365,000 365,000 310,000 425,000 400,000 412,500 420,000 482,250 572,652 482,212 545,000 455,000 450,000 470,000 430,000 450,000 400,000 650,000

620,000 600,000 540,000 551,500 485,000 503,700 560,000 430,000 405,000 585,000 711,843 408,260 390,000 400,000 340,000 447,500 450,000 475,000 445,200 523,698 600,000 536,300 600,000 510,000 490,000 498,600 435,000 500,000 440,000 700,000

% Increase 12.73 11.73 12.50 15.65 14.12 9.50 25.02 18.46 7.28 13.59 6.00 11.24 6.85 9.59 9.68 5.29 12.50 15.15 6.00 8.59 4.78 11.22 10.09 12.09 8.89 6.09 1.16 11.11 10.00 7.69

Ministry of Manpower and Transmigration (from Lindenthal 2005).

An example of severance and long service pay according to Labor Law No. 13/2003 shows that firing workers has become very expensive (Table 6.5). Even if the firm is bankrupt, for instance, it still needs to pay 18 month salary for workers with more than 10 years service. Figure 6.4 further shows that the severance pay in Indonesia on account of separation for economic reasons as opposed to other reasons, for example, on disciplinary grounds, has become very expensive relative to the case in other Asian countries. According to Manning (2004b) the increases in severance pay have had negative impacts on the investment climate in Indonesia. The concerns with the recent increases in minimum wages and severance pay need to be put in some perspective, however. These elements of Indonesia’s new labor regulations cannot be the only elements that are constraining the

317 Labor Markets in Indonesia: Key Challenges and Policy Issues Figure 6.3 Severance Pay in Number of Months of Wages, by Years of Service 30 25

Months

20 15 10 5 0

Less than 1 year

3 years

5 years

10 years

20 years

Maximum

Years of Service 1986 Source:

1996

2000

2003

Manning (2004a).

Figure 6.4 Severance Pay in Number of Months of Wages for an Employee with 4 Years Service Dismissed for Economic Reasons 10 9 8 Months

7 6 5 4 3 2 1 0

India

Japan Source:

Korea

Malaysia

PRC

Bangladesh Philippines Thailand

Indonesia

Alisjahbana and Manning (2005).

growth of formal sector employment. In fact, available data are also consistent with another view that suggests that factors other than labor regulations are of greater importance. In the first place, the large-scale survey of manufacturing enterprises described above found macroeconomic instability, policy uncertainty,

Table 6.5 Severance Pay According to Law No. 13/2003

Basic Rates

Economic

Retirement/ Change of Firm Death/ Status Bankruptcy Illness Dismissal Quits

Dismissal Minor Major Offense Offense

Quits

Months of Wage Severance Pay < 1 year service 3 years service 5 years service 10 years service 20 years service Maximum

1 4 6 9 9 9

2 8 12 18 18 18

2 8 12 18 18 18

2 8 12 18 18 18

2 8 12 18 18 18

1 4 6 9 9 9

1 4 6 9 9 9

0 0 0 0 0 0

0 0 0 0 0 0

Long Service Leave < 1 year service 3 years service 5 years service 10 years service 20 years service Maximum

0 2 2 4 7 10

0 2 2 4 7 10

0 2 2 4 7 10

0 2 2 4 7 10

0 2 2 4 7 10

0 2 2 4 7 10

0 2 2 4 7 10

0 0 0 0 0 0

0 0 0 0 0 0

2 10 14 22 25 28

2 10 14 22 25 28

2 10 14 22 25 28

2 10 14 22 25 28

1 6 8 13 16 19

1 6 8 13 16 19

0 0 0 0 0 0

0 0 0 0 0 0

Total Severance < 1 year service 3 years service 5 years service 10 years service 20 years service Maximum Source:

Manning (2004b).

318 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati

Cause of Separation

319 Labor Markets in Indonesia: Key Challenges and Policy Issues

corruption, current tax rates, and costs of financing to be listed more often than labor regulations as “major” or “severe” constraints to their business (ADB 2005a). Second, and in a related vein, Indonesia’s business regulations can by no means be absolved of blame. A World Bank study of such regulations from around the world shows that procedures for starting and closing a business in Indonesia are among the most cumbersome in Asia (World Bank 2005). Of the 15 developing Asian countries covered by the study, the number of days it takes to start a business was 151—the highest—compared with 41 days in the PRC, and only 8 days in Singapore (the lowest).12 Similarly, the time it takes to close a business due to bankruptcy was estimated to be as high as 6 years (the second highest in Asia after India). The corresponding periods for the PRC and Singapore (again the lowest) are 2.4 years and 0.8 year, respectively. Finally, a widely used indicator of governance developed by Kauffman et al. (2003) shows a deterioration of the quality of governance in Indonesia on five out of six dimensions between 1996 and 2002. As has been stressed by many observers, poor governance can be a major drag on business investments plans, and thereby on the growth of employment. Taking all of this other evidence into account, it seems reasonable to conclude that while certain elements of new labor regulations may reduce formal firms’ incentives to hire, other factors—ones that a large-scale survey of firms’ managers themselves list as more important—are also constraining the expansion of the formal sector. Relaxing labor constraints needs to be carried out in a fair manner with close and cooperative discussions between all the key stakeholders involved, including employers, labor unions, and the Government.

6.4 Labor Market Outcomes Labor market outcomes can be viewed as the result of the dynamics and interactions of labor supply and demand, operating within the context of the country’s labor market policies and economic circumstances. The discussion on labor market outcomes provided here describes the basic characteristics of Indonesia’s labor force and provides details on unemployment and underemployment as well as the evolution of employment and wages in recent years. The data used here are primarily derived from the National Labor Force Survey, also known as Sakernas (Survei Angkatan Kerja Nasional).13 6.4.1

Labor Force: Basic Characteristics Population

Figure 6.5 provides a snapshot of the broad structure of Indonesia’s labor market. As the figure suggests, the size of a country’s labor force and its growth

320 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Figure 6.5 Population Classifications, 2004–2005 Total Population (220 m)

Working Age > 15 Years (156 m)

Labor Force (106 m)

Working (95 m)

Full Time (67 m) Source:

Nonworking Age < 15 Years (63 m)

Nonlabor Force (50 m)

Unemployed (11 m)

Underemployed (28 m)

Adapted from Lindenthal (2005).

are influenced by demographic factors such as the size, composition, and growth of the population. In Indonesia, population growth is slowing due to, among other things, a successful program of family planning. The program started in the early 1970s and resulted in the decline of the total fertility rate from 5.6 children per woman in the early 1970s to 2.6 children in 1999–2001.14,15 Results from the population censuses conducted in 1971, 1980, 1990, and 2000 show the population at 118 million, 147 million, 201 million, and 220 million, respectively. Over the period 1971–1980, the population grew at 2.4% per annum, declining to 2.0% and 1.2% per annum in the subsequent two decades. The decline in the total fertility rate is also reflected in the changes of the population pyramid shape, i.e., from a broad-based to a bell shape (Figure 6.6). This indicates a slow maturing of the population as the proportion of young people declines and the share of adults and aged increases. The share of the population below 15 years old decreased from 44% in 1971 to 31% in 2000, and it is expected to further decrease to 26% by 2010 (Figure 6.7). Labor Force The population aged 15 years and above, i.e., the working age population, is presented in Figure 6.8 by main activity, which is determined by the amount of time spent in each activity in the preceding week of the survey date. Based on replies to the labor force survey (Sakernas), those belonging to the working age population can be classified into the employed (i.e., those who are working), the unemployed (i.e., not working but looking for work and, depending on

321 Labor Markets in Indonesia: Key Challenges and Policy Issues

survey questionnaire specifics, those who were not working and not looking for work because they were discouraged), and those who are not in the labor force (i.e., attending school, engaged in housekeeping and other activities, etc.). The employed and unemployed together constitute the labor force.

Figure 6.6 Population Composition in Indonesia by Age and Gender (millions) 1971

Female

Male

75+ 70 - 74 65 - 69 60 - 64 55 - 59 50 - 54 45 - 49 40 - 44 35 - 39 30 - 34 25 - 29 20 - 24 15 - 19 10 - 14 5-9 0-4 12

10

8

6

4

2

0

2

4

6

8

10

1980

Female

12

Male

75+ 70 - 74 65 - 69 60 - 64 55 - 59 50 - 54 45 - 49 40 - 44 35 - 39 30 - 34 25 - 29 20 - 24 15 - 19 10 - 14 5-9 0-4 12

10

8

6

4

2

0

2

4

6

8

10

12

continued.

322 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Figure 6.6 Population Composition in Indonesia by Age and Gender (cont'd.) Female

Male

1990 75+ 70 - 74 65 - 69 60 - 64 55 - 59 50 - 54 45 - 49 40 - 44 35 - 39 30 - 34 25 - 29

20 - 24 15 - 19 10 - 14 5-9 0-4

12

10

8

6

4

2

Female

0

2

4

6

8

10

12

Male

2000 75+ 70 - 74 65 - 69 60 - 64 55 - 59 50 - 54 45 - 49 40 - 44 35 - 39 30 - 34

25 - 29 20 - 24 15 - 19 10 - 14 5-9 0- 4

12

10 Source:

8

6

4

2

0

2

4

6

8

10

12

BPS-Statistics Indonesia, Indonesian Population Census for the respective years.

Migration Human capital theory predicts that people will move from areas of relatively poor earnings possibilities to other places where opportunities are better. Migration can be internal (for example, between provinces) or international. Unfortunately, data on both types of mobility are scant. Sakernas does not collect information on internal migration. Statistics on migration must therefore be based on information provided in Supas and the Population Census. It should be noted that due to data limitations, the estimates on migration provided here are based on the population aged 5 years and over and are not limited only to the working age population and/or the labor force (Table 6.6).

323 Labor Markets in Indonesia: Key Challenges and Policy Issues Figure 6.7 Age Structure of the Indonesian Population: Past and Projected Millions 250 12 11 10

200

28

7

42

34

24

150

5 18 3 13

100

45

50

54

51

60

62

64

33

24

22 40 28

50 52

60

66

63

62

60

1971

1980

1990

2000

2005

2010

0-14

15-29

30-44

45-64

65+

% 100

80

60

2.5

3.2

3.8

4.7

5.0

5.2

11.0

12.4

13.2

13.8

15.7

18.0

18.6

23.9

16.4

27.0

18.1

21.7

22.8

28.3 29.2

28.3

40

20

44.0

40.9

23.4

36.7

27.4

30.7

28.2

25.9

2000

2005

2010

0 1971

1980 0-14

1990 15-29

30-44

45-64

65+

Sources: BPS-Statistics Indonesia: Population Census in 1971, 1980, 1990, and 2000; and BPS-Statistics Indonesia 2002.

324 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Figure 6.8 Composition of Working-Age Population by Gender Millions

Total

200 150 100 50 0 1990

1992

1994

1997

Millions

1999

2001

2003

2001

2003

2001

2003

Male

100 80 60 40 20 0 1990

1992

1994

Millions

1997

1999

Female

100 80 60 40 20 0 1990

1992

1994

1997

1999

Working

Unemployed

Attending School

House Keeping

Other

continued.

325 Labor Markets in Indonesia: Key Challenges and Policy Issues Figure 6.8 Composition of Working-Age Population by Gender (cont'd.) Total

% 100 80 60 40 20 0 1990

1992

1994

1997

1999

2001

2003

Male

% 100 80 60 40 20 0 1990

1992

1994

1997

1999

2001

2003

1999

2001

2003

Female

% 100 80 60 40 20 0 1990

1992

1994

1997

Working

Unemployed

Attending School

House Keeping

Other Source:

Authors' calculations from Sakernas.

326 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Table 6.6 Percentage of Recent Migrants by Province, 1990–1995 and 1995–2000

Province Nanggroe Aceh Darussalam North Sumatra West Sumatra Riau Bangka-Belitung Jambi South Sumatra Bengkulu Lampung Jakarta West Java Banten Central Java Yogyakarta East Java

1990– 1995

1995– 2000

Province

0.84 1.06 3.62 4.29

1.00 1.37 2.90 12.55 4.53 5.12 2.67 4.97 2.50 9.20 3.43 8.62 1.26 6.79 0.58

Bali West Nusa Tenggara East Nusa Tenggara West Kalimantan Central Kalimantan South Kalimantan East Kalimantan North Sulawesi Gorontalo Central Sulawesi South Sulawesi Southeast Sulawesi Maluku North Maluku Papua Total

2.72 2.00 5.29 1.93 7.14 3.19 1.31 6.13 1.42

1990– 1995

1995– 2000

2.20 1.44 1.06 1.39 2.51 2.68 6.78 0.92

3.05 1.76 2.12 1.49 7.77 3.34 7.17 3.06 1.26 4.26 1.15 7.13 1.86 2.53 4.31 3.06

4.13 2.05 4.13 1.26 3.19 2.44

Note:

Many changes in the provinces took place in 1995–2000. In addition to East Timor’s separation from Indonesia in 1999, Riau was split into Riau and Bangka-Belitung, West Java became West Java and Banten, North Sulawesi became North Sulawesi and Gorontalo, Maluku was split into Maluku and North Maluku, and Irian Jaya became Papua and Irian Jaya Barat. Sources: BPS-Statistics Indonesia, Supas 1995, and Population Census 2000.

The 1995 Supas and the 2000 Population Census provide an indicative picture of internal migration patterns represented by “recent migrants” (defined here as people who lived in a different province in the last 5 years). Overall, interprovince migration has increased from 2.4% of the population aged 5 years and over in 1990–1995 to 3.1% in 1995–2000. Using a 5% rate of recent migrants as the cut-off point for determining a favored destination, the main provincial destinations for migrants have increased from four to eight provinces. While Jakarta, Yogyakarta, and East Kalimantan have always been popular destinations, new favored destinations include Banten, Central Kalimantan, Jambi, Riau, and Southeast Sulawesi. Data on international mobility are limited to registered migrants. The total amount of international migration is believed to be far more. Poverty and limited job opportunities in the domestic economy have forced some people to work abroad. Among them, the number of female overseas workers is much higher than male. Female overseas workers constitute around 75% of the total (Figure 6.9). There is also a stark gender difference in their country destinations. Male workers from Indonesia mostly go to East Asian and Southeast Asian

327 Labor Markets in Indonesia: Key Challenges and Policy Issues Figure 6.9 Overseas Registered Workers by Gender and Destination Male

Thousands 400

300

200

100

0 1989

1991

1993

1995

1997

1999

2001

2003

1997

1999

2001

2003

F emale

Thousands 400

300

200

100

0 1989

1991

1993

Asia Pacific Source:

1995

Europe

USA

Ministry of Manpower and Transmigration.

Middle East

328 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati

destinations such as Malaysia and Taipei,China, while female workers opt for Middle Eastern countries such as Saudi Arabia, mostly to be housemaids. Labor Quality The quality of a worker is a function of numerous elements, including individual ability, the level and quality of formal education, the amount and type of specialized training, and work experience. Due to data limitations, the discussion on labor quality provided here is based on the level of formal education attained. (See Box 6.2 for details on the Indonesian education system.)

Box 6.2 Education System in Indonesia

The education system in Indonesia is complex, involving numerous government agencies. The main ministries responsible for education are the ministries of National Education (MONE), Religious Affairs (MORA), and Home Affairs (MOHA). In addition, the Ministry of Manpower and Transmigration (MOMT) also conducts some specific training. The private sector plays an important role in the provision of education and training, making education a big business. The Government issues operating permits and collects fees. The higher the education level the greater the role of the private sector. While more than 90% of elementary schools are public, only half of junior secondary schools are public. At senior level, the public sector share is only 30%. Schools under MORA are almost all private. Public schools tend to be larger than private schools. Children used to start primary school at 7 years old, but with the declining fertility rate and excess supply of schools, the age limit was lowered to 6 years. Primary school lasts for 6 years with a national exam, but in 2003 the exam was abolished. After primary school is junior secondary school, lasting for 3 years. Its completion is marked by passing a national exam for the main subjects. The next level is senior high school, lasting for another 3 years with its completion also marked by passing a national exam in the main subjects. Beyond this level, there are various academic and professional training programs. Undergraduate programs are usually for 3–4 years, followed by masters and doctorate programs. In addition, there are institutes offering degrees in specialized subjects. There are also nondegree programs, ranging from 1 to 4 years. Vocational training is offered at various levels under the management of MONE and MOMT. MONE provides school substitute programs for drop-outs, such as “Package” A, B, and C for the equivalent of primary, lower secondary, and upper secondary levels. MONE also provides training for women in cooking, sewing, and hair styling while MOMT has job training centers for welding and automotive tasks.

329 Labor Markets in Indonesia: Key Challenges and Policy Issues

Focusing, therefore, on formal education, a policy that had a significant impact on the educational attainment of Indonesia’s labor force was introduced in the early 1970s. The policy was the free access to education at the primary school level. This policy was made possible by the oil windfall at that time. In 1973, for instance, at least one primary school was built in each village through the Presidential Decree on Primary School. As a result, the number of primary schools expanded very rapidly, from around 66,000 in 1973 to 137,000 in 1984.16 The number is currently around 148,000 (Figure 6.10). In addition to school construction, education fees in public primary schools grades 1–3 were abolished in 1976. This was later extended in 1978 to include grades 4–6. These policies resulted in rapid growth of student numbers, which peaked in the late 1980s and then slowed down due to the declining fertility rate (Figure 6.10). Such rapid expansion in the numbers of primary school educated children created more demand for higher level schooling, which also increased (though at a much slower pace than primary level schooling). The number of junior secondary schools increased from 7,500 in 1973 to more than 20,000 in recent years. When primary school enrollments had reached above 90% in the mid1990s (Figure 6.11), the Government extended compulsory basic education from 6 to 9 years, which consists of 6 years of elementary and 3 years of junior secondary school. The extension was to be achieved by the end of the 5-year development plan in 2003. Due to the crisis, however, the schedule has been pushed back to 2008.17 Overall, access to education has become more equitable as shown by the increasing gross enrollment ratio of the poorest quintile to the richest quintile in the 1990s. A ratio of 1 implies that the poor have equal access to the rich. Primary schooling is characterized by a ratio very close to or equal to one (Figure 6.12). At junior secondary level, the ratio has risen from 0.36 in 1993 to 0.63 in 2003. This means that in 1993 only 36% of children in the poorest quintile were able to attend junior high school compared with the same group of the richest. A decade later the number increased to 63%. The enrollment gap at senior secondary level also narrowed from 15% to 30%. The impact of free access to education in primary school on labor outcomes has been very significant. In 1971, less than 3% of the labor force had completed senior secondary schooling, while in 2000 more than 23% had. Moreover, the education level of workers in Indonesia consistently improved from 1990 to 2003 as can be seen from the steady decline in the proportion of workers with less than primary school education (Figure 6.13). In 1990, only about 15 million (or one fifth) of workers had a secondary education and in 2003 the number had reached 35 million, or about two fifths of the total number of workers. Increasing workers’ educational qualifications raised their expectations regarding remuneration and the type of work they

330 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Figure 6.10 Number of Schools and Students by Education Level Thousands

Number of Schools

160 140 120 100 80 60 40 20 0 1969

1973

1977

1981

1985

1989

1993

1997

2001

1989

1993

1997

2001

Number of Students

Millions 30 25 20 15 10 5 0 1969

1973

1977

1981

1985

Primary Senior Secondary Source:

MONE, Education Statistics (various years).

Junior Secondary Tertiary

331 Labor Markets in Indonesia: Key Challenges and Policy Issues Figure 6.11 Gross Enrollment Ratio by Education Level % 120 105

107

107

108

107

74.2

73.0

44.9

46.6

107

108

108

107

106

106

76.0

77.5

78.1

79.9

81.1

47.2

48.4

50.2

46.5

48.2

100

80 61.1

65.7

64.4

70.5

60

50.9

43.0

42.4

8.3

10.1

9.5

10.4

9.7

10.6

10.7

10.3

10.4

10.7

10.8

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

40.1 40

20

0 Primary Source:

Junior Secondary

Senior Secondary

Tertiary

Authors' calculations from Susenas.

Figure 6.12 Ratio of Gross Enrollment of the Poorest to the Richest by Level of Education 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1993

1994

1995

Primary Source:

1996

1997

1998

Junior Secondary

Authors' calculations from Susenas.

1999

2000

2001

Senior Secondary

2002

2003

Tertiary

332 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Figure 6.13 Workers by Education Millions 100 90 80

3

3

3

4

4

4

4

4 17

2 10

2 11

13

14

15

16

16

2 8

2 9

16

1 8

15

70 60

7

8

8

9

9

11

12

12

13

14

15

15

27

28

28

29

30

32

30

33

33

34

34

35

23

22

22

21

18

50 40 30 20

30

10

28

29

28

28

25

26

25

35

17

0 1990

1992

1994

1997

1999

2001

2003

% 100 90 80

1 11

3 11

3 12

3

3

4

4

3

5

4

4

4

4

13

14

10

15

16

17

17

18

18

18

11

19

11

12

11

13

14

14

15

16

16

16

38

38

37

38

24

24

23

70 60

37

38

37

50

37

38

38

35

38

40

20

38

30 20

41

38

38

36

35

10

30

31

28

26

19

0 1990

1992

Source:

1994

1997

1999

Less than Primary

Junior Secondary

Primary

Senior Secondary

Authors' calculations from Sakernas.

2001

2003 Tertiary

333 Labor Markets in Indonesia: Key Challenges and Policy Issues

wanted. On the other hand, the number of more educated among nonworkers increased steadily over the same period (Figure 6.14), growing faster after the turn of the century. In 2003, about 30 million people with secondary education were not working. Figure 6.14 Nonworkers by Education Millions 70 60 50 40 30 20 10 0 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 Less than Primary Primary Source:

6.4.2

Junior Secondary Senior Secondary

Tertiary

Authors' calculations from Sakernas.

Unemployment and Underemployment Unemployment

The definition of unemployment in Indonesia changed in 2001, mainly over the treatment of individuals who are not working and who are not looking for a job because they are discouraged. Prior to 2001, such individuals were treated as being outside the labor force. Since 2001, they have been treated as part of the labor force, and more specifically, as unemployed (Box 6.3). In terms of the new definition of unemployment, the open unemployment rate was 8% in 2001 and increased to 9.1% in 2002 and 9.5% in 2003 which correspond to 9.1 million and 9.5 million unemployed, respectively (Figures 6.15 and 6.16). Even by the old definition of unemployment, there has been an increasing trend of unemployment since the 1990s, especially in urban areas, among females, youth (15–29 years old), and educated (secondary and above) segments of the labor force. Open unemployment, as defined by the earlier concept (i.e., essentially composed of those not working and looking for a job), remained low at around 3% of the labor force in early 1990s. In 1994, the rate rose to more than 4% and further to 6% in 2000. The increase was partly due to employment contraction among women, which shrunk from 67% in 1994 to 60% in 2000. The contraction was followed by a steady increase

334 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Figure 6.15 Number of Unemployed by Residency and Gender Millions 12 10 8 6

1.5

0

2.3

2.4

3.8

3.5

2.0

4 2

4.1

4.4

5.0

5.1

3.5

0.8

0.8

0.8

1.2

1.2

1.3

1990

0.9 1.3

1992

2.1

1.8

1.6

2.5

1994

2.6

3.1

1997

Urban

1999

4.5

2001

2003

Rural

Millions 12 10 8 4.4

6 4

0

2.5

2.5

3.5

3.3

2.2 1.7

2

4.6

4.0

0.8

0.9

0.9

0.9

1.1

1.1

1.2

1.3

1990

1992

2.0

1994

2.0

1.9

2.3

2.3

1997

Male Source:

2.9

Authors' calculations from Sakernas.

1999 Female

4.0

2001

4.7

4.9

2003

335 Labor Markets in Indonesia: Key Challenges and Policy Issues

Millions 12

Figure 6.16 Unemployed by Education and Age

10

8

6

4

2

0 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 Less than Primary School

Lower Secondary

Upper Secondary

Post Secondary

Millions 12

10

8

6

4

2

0 1990

1992 15-29 Source:

1994

1997 30-44

Authors' calculations from Sakernas.

1999 45-64

2001

2003 65+

336 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Box 6.3 A New Unemployment Definition and Discouraged Job Seekers

A person who was not working and was not looking for a job used to be classified as being outside the labor force. In 2001 the definition was changed to follow the ILO’s approach to estimating unemployment as described in the document An ILO Manual on Concepts and Methods. According to the new definition, the open unemployed include those who: (i) are not working and are looking for a job; (ii) are not working and are not looking for a job because they have been discouraged by labor market conditions and/or lack of success in finding a job (discouraged job seekers); (iii) are in the process of setting up a business; and (iv) have a job but have not started work yet. The key difference with the earlier definition is in the treatment of those who are not working and are not looking for a job. While the earlier definition would have labeled all such individuals as being outside the labor force, the new definition treats those who are not looking for a job because they are discouraged as part of the labor force and unemployed. This has significantly increased the magnitude of open unemployment. In 2001, a switch from the old to the new definition led to an increase of about 2.7 million unemployed. In 2003, the increase would have been about 3.9 million people. In term of ratio, the introduction of the new concept increased the unemployment rate by one third in 2001 and two fifths in 2003. Notice that the number of discouraged job seekers expanded from 2.1 million to 3.1 million, and their share increased from 27% to 32% of the total unemployed (Box Figure 6.3.1). These discouraged job seekers are basically those who have given up competing in the labor market. Box Figure 6.3.1 Expanded Classification of Unemployed, 2001–2003 Millions

Growth in Unemployed, 2001–2003

12 10 8 6

0.5

0.1 0.7

2.7

3.1

5.9

5.6

2002

2003

0.1 0.2 0.4

2.1

4 2

5.3

0 2001

continued.

337 Labor Markets in Indonesia: Key Challenges and Policy Issues

Box Figure 6.3.1 Expanded Classification of Unemployed (cont'd.) %

Composition of Unemployed, 2001–2003

100

2.0 4.9

1.2 5.0

1.2 7.5

80

26.5

29.0

32.3

66.6

64.7

59.0

2001

2002

2003

60 40 20 0

Looking for Work Source:

Disc. Job Seekers

Have Job but Not Started

Establ. New Bus

Authors' calculations from Sakernas.

The composition of unemployed by old definition and discouraged job seekers by education is very different (Box Table 6.3.1 and Box Table 6.3.2). Discouraged job seekers are relatively less educated than the unemployed by the old definition. Box Table 6.3.1 Components of Unemployment by Education, 2003 Looking for work Education

Source:

Have job but not started

Establ. new bus

(%)

No School Some Primary School Primary School Lower Secondary School Upper Secondary School Post Secondary School Total Note:

Disc. job seekers

9 21 43 58 79 89 59

71 60 47 33 16 8 32

20 18 10 7 3 3 7

1 2 1 1 1 1 1

Total (%)

(000)

100 100 100 100 100 100 100

327 657 2,360 2,345 3,397 445 9,531

Disc job seekers = discouraged job seekers; Establ new bus = Established new business but not started. Authors’ calculations from Sakernas.

continued.

338 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Box Table 6.3.1 Components of Unemployment by Education, 2003 (cont’d.) Looking for work

Disc. job seekers

Education

Establ. new bus

9.1 16.4 32.4 23.7 16.6 1.7 100.0

3.5 8.8 21.1 27.2 36.8 2.6 100.0

(%)

No School Some Primary School Primary School Lower Secondary School Upper Secondary School Post Secondary School Total Note:

Have job but not started

0.5 2.4 17.9 24.3 48.0 7.0 100.0

7.5 12.8 35.7 25.3 17.5 1.1 100.0

Disc job seekers = discouraged job seekers; Establ new bus = Established new business but not started.

Box Table 6.3.2 Composition of Discouraged Job Seekers by Education, 2001–2003 2001 Education No School Some Primary School Primary School Lower Secondary School Upper Secondary School Post Secondary School Total

2002

2003

2001

(‘000) 186 332 796 480 311 19 2,124

156 385 1,051 623 406 30 2,652

2002

2003

(%) 231 396 1,101 780 540 35 3,082

8.8 15.6 37.5 22.6 14.6 0.9 100.0

5.9 14.5 39.6 23.5 15.3 1.1 100.0

7.5 12.8 35.7 25.3 17.5 1.1 100.0

Source: Authors’ calculations from Sakernas.

in the share of housewives, showing that more and more women withdrew from the labor market to stay at home. Ideally, this could reflect an improvement of welfare (for example, women who were forced to work in order to make ends meet for their households could give up their jobs due to an improvement in the earnings of their husbands). However, the lack of decent employment opportunities and worsening working conditions in general seem to indicate otherwise—previously employed women were more likely to have been pushed out of the labor market. Turning to some key characteristics of unemployment and the unemployed, the data indicate that unemployment grew faster in rural areas than urban areas between 2000 and 2003. As may be seen from Figure 6.15, the number of urban unemployed rose from 3.5 million in 2000 to 5.1 million in

339 Labor Markets in Indonesia: Key Challenges and Policy Issues

2003. The corresponding numbers of rural unemployed were 2.4 million and 4.4 million. However, taking the early 1990s as a starting point, unemployment in urban areas has grown faster than in rural areas. Similarly, there has been an increasing trend of female unemployment. In 1990 women accounted for 41% of the unemployed, but in 2003 48% (Figure 6.15). Compared with males, access to employment for females is becoming more difficult. Unemployment rates between males and females were about equal at around 3% in the early 1990s, but a gap started to develop in 1994, when the unemployment rate among females and males was 5% and 4%, respectively. The new definition of unemployment then classified more females than males as unemployed, so that the rates of both increased to 13% and 8%. This suggests that discouraged job seekers (the new component in the revised unemployment definition) are mostly women, who are without hope and so give up looking for a job, knowing that the market has become increasingly less friendly to them. The number of unemployed with higher education continues to increase and the highest unemployment rates were recorded among upper secondary graduates (Figure 6.16). In Sakernas, members of the labor force are also asked about their previous job to identify new entrants. Most new entrants are graduates from senior secondary school, aged between 19 and 24. The increasing number of young, new entrants, and more educated unemployed shows an increasingly limited availability of good jobs available in the market, raising concern over a mismatch between education and labor market demand. It is likely that open unemployment among youth and new entrants reflects transitional unemployment, which is generally more temporary than structural unemployment. Transitional unemployment is seen among recent graduates or those laid off who are looking for new jobs. Structural unemployment occurs when the structure of an industry changes, i.e., ending old jobs and opening new positions for specific workers. Structural unemployment can also arise from a mismatch between the needs of employers and the skills and training of the labor force.18 Underemployment Given the general condition of low incomes and savings of households and the absence of any unemployment benefits from the state, most people in a developing country like Indonesia cannot afford to be unemployed. Nevertheless, they may be underemployed. Underemployment is typically defined as covering the situation of a worker (involuntarily) working less than full time. 19 Underemployment defined in this way is commonly referred to as time-related underemployment. A common practice in Indonesia is to use 35 hours per week as the minimum working hours for a worker to be defined as full time.20

340 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati

In line with this definition, a classification can be made as follows: (i) underemployed: those working less than 35 hours a week; (ii) full-time employed: those working 35–40 hours a week; (iii) overemployed: those working 40–60 hours a week; and (iv) excessively overemployed: those working more than 60 hours a week. Using this classification, around 34% of the labor force in Indonesia was underemployed in 2003. The underemployment rate reached a peak in 1993, where the rate was 44%, and declined thereafter (Figure 6.17). The remaining workers worked for long hours. More than 45% of the workers worked more than full time (overemployed) and around 8% of the workers worked for more than 60 hours per week (excessively overemployed). These statistics raise an interesting question. Are the underemployed the only ones who need additional work and/or better jobs? What about those

Figure 6.17 Composition of Workers by Working Hours Millions 100 90 9 8 9 9 9 9 9 80 8 8 6 7 7 70 7 37 32 35 37 31 37 31 60 33 25 29 27 27 28 50 13 14 40 12 14 15 15 13 14 13 12 12 11 12 30 20 34 34 34 32 32 31 31 30 31 31 30 28 27 10 0 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 <35

35 - 40

41 - 59

60 +

% 100

9

10

9

8

37

38

36

33

16

16

16

38

37

39

80

10

10

11

10

10

10

10

9

9

37

37

38

36

36

39

40

40

40

15

16

15

15

16

16

16

16

16

38

38

36

39

38

35

33

34

34

60 40 20

15

44

0 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 <35 Source:

35 - 40

Authors' calculations from Sakernas.

41 - 59

60 +

341 Labor Markets in Indonesia: Key Challenges and Policy Issues

overemployed? Should they work less? Do they need better jobs? Many of those under- and overemployed are so engaged involuntarily. Given the overall poor working conditions, widespread underemployment seems to reflect the lack of full-time employment opportunities while the overemployed groups reflects the low level of wages that forces them to work more hours just to meet their needs. This conclusion is supported by the fact that many in these groups would like to have a new job (see Box 6.4). The underemployed are very prevalent among women with low education, those living in rural areas, and those working in agriculture as informal workers (Table 6.7). More than 33% of them would like to have a new job. The reality seems to be the overall poor and harsh conditions of workers, and the lack of well-paying jobs. This fact once again shows that the Government’s intention to provide decent work is a daunting challenge, even if the decent jobs are only for existing workers. 6.4.3

Employment General Trends

Between 1990 and 2003, total employment grew from 73.5 million to 90.8 million, though the rate at which employment grew slowed. In fact, in 2003 total employment actually declined from its 2002 level (Figure 6.18). During 2000–2003, total employment expanded only 1 million (Table 6.8) This was very low compared with the number of new entrants in the labor market of around 2 million–3 million a year. Ideally, there should have been at least 9 million new jobs created in 2000–2003. Figure 6.18 Number of Workers by Gender Millions 100 80 60

28

28

29

30

31

45

46

47

47

49

32

32

34

34

34

34

33

31

52

53

54

55

55

57

59

60

40 20 0 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 Male Source:

Authors' calculations from Sakernas.

Female

342 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Box 6.4 Underemployment and Overemployment

If underemployment, defined as less than full-time work, is an indicator of weakness of the labor market, then should working for longer be seen as a positive thing? Fortunately, Sakernas allows this issue to be examined. There is a question in the survey about the willingness to accept a new job that can be used as a signal for the intention to have a more desirable or better job. The willingness among workers to accept a new job could also indicate discontent or dissatisfaction with the existing job. Box Figure 6.4.1 shows the willingness to accept a new job among workers who are under- and fully employed or overemployed, and among different age

%

Box Figure 6.4.1 Willingness to Accept a New Job among Different Groups of Workers

40 35 30 25 20 15 10 5 0 1990

1991

1992

1993

1994

1996

Working <35 hours/week

1997

1999

2000

2001

2002

2003

Working >35 hours/week

continued.

343 Labor Markets in Indonesia: Key Challenges and Policy Issues Box 6.4 Underemployment and Overemployment (cont’d.)

groups. The results show that a significant portion of workers would still like to have a new job, and there seems no variation in trend among those under- and overemployed. The younger workers are more willing to accept new jobs than older ones, which might be associated with job security among older workers. The overall result seems to indicate increasing dissatisfaction with existing jobs, suggesting that a focus on only unemployment and underemployment may not give a full picture of the problems in the labor market. There may be many people who are working very long hours out of desperation. Their situation will be missed by a focus on unemployment and underemployment alone.

Box Figure 6.4.1 Willingness to Accept a New Job among Different Groups of Workers (cont'd.) % 60

50

40

30

20

10

0 1990

1991

1992

15-29 Source:

1993

1994

1996

30-44

Authors' calculations from Sakernas.

1997

1999

2000

45-64

2001

2002

65+

2003

344 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Table 6.7 Underemployment Rates by Selected Characteristics, 2003 (%) Hours per Week Selected Characteristics

< 35

Female Rural x Primary School 45 years and above Informal Sector Agriculture Manufacturing Trade Services Other Source:

Total >35

48.0 77.4 71.0 37.7 88.6

26.8 51.7 49.3 26.0 61.6

34.0 60.5 56.7 30.0 70.8

73.1 5.1 10.3 8.2 3.3

32.4 15.6 22.8 12.0 17.1

46.3 12.0 18.6 10.7 12.4

Authors’ calculations from Sakernas.

Table 6.8 Workers by Residency, Status, and Sector (millions) Total

Agriculture

Worker

2000

2003

Change, 2000–03

2000

2003

Urban Self-employed Unpaid worker Employer Employee

34.1 12.3 3.3 1.0 17.6

35.9 14.8 3.0 1.4 16.8

1.8 2.5 –0.3 0.4 –0.8

3.8 1.8 0.9 0.1 1.1

4.8 3.1 1.0 0.2 0.5

1.0 1.3 0.1 0.1 –0.6

Rural Self-employed Unpaid worker Employer Employee

55.7 27.9 14.8 1.0 11.9

54.9 31.7 14.8 1.4 7.0

–0.8 3.8 0.0 0.4 –4.9

36.8 19.2 12.7 0.6 4.3

37.2 21.9 12.9 0.8 1.6

0.4 2.7 0.2 0.2 –2.7

Urban and Rural Self-employed Unpaid worker Employer Employee

89.8 40.2 18.1 2.0 29.5

90.8 46.5 17.8 2.8 23.8

1.0 6.3 –0.3 0.8 –5.7

40.6 21.0 13.6 0.7 5.4

42.0 25.0 13.9 1.0 2.1

1.4 4.0 0.3 0.3 –3.3

Source:

Authors’ calculations from Sakernas.

Change, 2000–03

345 Labor Markets in Indonesia: Key Challenges and Policy Issues

The slowdown in employment growth after 2001 was also reflected in the lower growth of the number of workers as compared with the growth of the working age population and labor force, respectively (Figure 6.19). This trend was in contrast to conditions in 1998–2000, where the annual growth of workers was above the growth of the labor force. This finding suggests that after 2001, the new entrants in the labor market could not all be employed, thereby contributing directly to increasing unemployment. A key driver of the slowdown in employment relates to female employment. During 1990–2003, male employment increased from 45.0 million to 59.9 million, but female employment declined. Female employment rose from 28.5 million in 1990 to peak at 34.4 million in 2000. The number then steadily declined, to 30.9 million in 2003, which is exactly the same as it was in 1994. Was the decline in the female participation rate a result of push or pull factors? Given the overall poor working condition and the general trend of employment, the reduction of female workers seems more the result of push factors rather than pull factors. The number of adult workers is growing faster than young workers due to the declining fertility discussed above (Figure 6.20). Since 1998, there have been more experienced adult workers aged 30–44 years than new entrants aged 15–29, especially male workers. The employment participation gap of the two age groups has widened. In 2003, there were already 2 million more adult workers than the new entrant workers (i.e., 7.7 million and 5.7 million). In 1990 they were about equal. This trend is very different with female groups, Figure 6.19 Annual Growth Rates of Working-Age Population, Labor Force, and Number of Workers % 6

5.6

5

3.8

3.3

4 3

2.2 2.8 2.2

1.8

2

1.8

2.5

1.2

1.1

1.1

2.6 3.5

2.4 2.6

2.7

1 0

2.6

3.9

1.6

2.7

1.8

2.3

1.3

1.1

2.0

2.6

3.3 2.0

0.1 0.8 1.1 1.1

0.9 -0.5

-1

-0.9

-2 1991

1992

1993

1994

1996

1997

Working-Age Source:

Authors' calculations from Sakernas.

1998

Labor Force

1999

2000

2001

Employed

2002

2003

346 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Figure 6.20 Employees by Age Group Millions 15

12

9

6

3

0 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 15-29 Source:

30-44

45-64

65+

Authors' calculations from Sakernas.

where new entrants remain favored. Many firms prefer to hire young female workers, who presumably have much fewer constraints from family matters than older female workers. Additionally, the younger workers entering the labor market are more likely to be better educated. Structural Transformation There was a structural transformation of employment away from agriculture to industry and services in Indonesia until 1997, but the process was then reversed. In 1990, around 55% of the workforce was in agriculture, and the share continued to decline to 41% in 1997. From 1998, however, more workers returned to agriculture, lifting its share to 46%. In 2003, around 42 million workers were employed in agriculture. More than 90% of them were selfemployed and unpaid family workers. About 88% of agriculture sector workers were in rural areas while the remaining 12% were in urban areas (Table 6.9 and Figure 6.21). The increasing trend of workers in agriculture during the crisis and afterward suggests that agriculture has served as a safety net for low-skilled workers for there are not many nonfarm opportunities in rural areas due to the lack of skills, good infrastructure, and information (APO 2004). Productivity of workers in agriculture was low to begin with and declined sharply in 1997 and 1998. Subsequently, it rose again slightly (Table 6.10).

347 Labor Markets in Indonesia: Key Challenges and Policy Issues Figure 6.21 Composition of Workers by Sector Millions 100

80

60

40

20

0 1990

1992

1994

1997

1999

2001

1997

1999

2001

2003

% 100

80

60

40

20

0 1990

1992

Source:

1994

Agriculture

Mining

Manufacturing

Utilities

Construction

Trade

Transport

Finance

Services

Authors' calculations from Sakernas.

2003

348 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Table 6.9 Index of Value Added per Worker (agriculture 1997 = 100) Industrial Origin

1997

1998

2000

2003

Agriculture Mining Manufacturing Electricity, Gas, and Water Construction Trade and Accommodation Services Transport and Communications Finance Private and Social Services GDP

100 2,376 528 1,268 456 234 416 3,167 101 274

87 2,998 518 2,061 344 193 350 2,470 95 232

88 4,645 487 5024 359 185 345 1,678 127 239

90 3,005 572 2,779 357 227 406 1,355 128 264

Source:

BPS-Statistics Indonesia, Economic Indicators (various years).

Before the crisis, rapid industrialization after the mid-1980s increased manufacturing employment from 8% of the total in 1986 to 13% in 1994. Employment growth in manufacturing then has slowed down, however. In 1997/1998, the number of employees declined from 6.6 to 6.0 million, picking up in 1999 to 6.7 million and further to 7.6 million in 2000. After that, it declined to 7.3 million and 6.8 million in 2002 and 2003 (see also Figure 6.21). Trade and accommodation services sector (which includes hotels and restaurants) took the second largest number of employed, with about 20% of workers in this sector. During 1986–2000, the number of workers in the sector increased, but it then declined, and about 1.6 million workers lost their jobs in 2000–2003.21 Informalization Sakernas classifies workers’ employment status into employers, employees, self-employed, and unpaid family workers. In Indonesia, the practice is to group the first two categories as formal workers, while the last two categories are informal workers.22 During 1990–1997, the number of employees increased steadily from 21 million to a peak of 30 million, giving shares of 29% to 35% of the total labor force. The trend after the crisis was, however, very different. In 2003, for instance, the number of employees had dropped to only 24 million (Figure 6.22). This is, of course, related to the developments in the economy during and since the crisis. In particular, one can distinguish three periods: (i) economic shock (1997–1998); (ii) economic recovery (1998–2000); and (iii) slow economic

349 Labor Markets in Indonesia: Key Challenges and Policy Issues Figure 6.22 Distribution of Workers by Status

Millions 100 80

15

16

17

16

18

18

16

18

35

39

38

40

41

40

44

48

47

24

27

29

30

29

29

29

27

25

24

1

1

1

2

2

3

2

3

3

3

19

19

19

18

17

33

33

34

34

21

22

23

1

1

1

60 40 20 0

1990 1991 1992

1993 1994 1996 1997 1998 1999 2000

2001 2002 2003

% 100 80

18

19

20

18

20

19

18

20

44

47

44

46

46

45

48

52

51

31

34

34

36

33

33

33

29

27

26

1

1

1

2

2

3

2

3

3

3

26

25

25

23

21

45

44

44

45

28

30

30

1

1

1

60 40 20 0

1990 1991 Employer Source:

1992 1993 1994 1996 Employee

1997 1998 1999 2000 2001 Self-Employed

2002 2003

Unpaid Workers

Authors' calculations from Sakernas.

growth (2000–2003). In the first period, GDP contracted by 13% and the number of employees fell by 1.5 million, mostly in construction and manufacturing (of about 0.7 million each). The only expanding sector was agriculture, which gained almost half a million workers (Table 6.10 and Figure 6.23). In the second period, the number of employees increased slowly, especially in manufacturing (1.6 million) and trade (0.7 million). In the third period, that of slow growth in 2000–2003, the economy grew by 3.7% a year but the number of employees declined by 5.7 million, a reduction of 6.9%. This suggests that the ratio of GDP growth to number of employees was -1.8, meaning that a 1% increase in GDP was associated with a reduction in the number of employees of 1.8%. Three sectors with the highest reductions

350 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Table 6.10 Change in Number of Employees 1997–1998 Industrial Origin

(million)

Agriculture Mining Manufacturing Electricity, Gas, and Water Construction Trade and accommodation Transport and Communications Finance Private and Social Services Total

0.45 –0.06 –0.65 –0.09 –0.71 –0.25 –0.08 –0.04 –0.05 –1.47

Source:

(%) 9.5 –15.2 -9.8 –41.2 –20.8 –9.3 –4.7 –6.0 –0.5 –4.9

1998–2000 (million) 0.17 –0.16 1.62 –0.06 0.13 0.69 –0.02 0.18 –1.87 0.69

2000–2003

(%) 1.7 –26.0 12.8 –28.5 2.4 13.2 –0.7 14.7 –9.9 1.2

(million) –3.28 0.12 –0.81 0.07 –1.08 –0.22 –0.17 0.43 –0.71 –5.67

(%) –26.9 16.6 –3.7 27.9 –14.8 –2.4 –4.0 16.2 –3.1 –6.9

Authors’ calculations from Sakernas.

Figure 6.23 Number of Employees by Sector

Millions 35 30 25 20 15 10 5 0

1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 Agriculture Trade Source:

Mining Transport

Manufacturing Finance

Utilities Services

Construction

Authors' calculations from Sakernas.

were agriculture (3.3 million), construction (1.1 million), and manufacturing (0.8 million). Only three sectors gained employees during this period, i.e., finance, mining, and electricity, contributing only 0.6 million additional employees. The number of self-employed increased by 6.7 million. This shows that many employees shifted to self-employment, mainly in agriculture.

351 Labor Markets in Indonesia: Key Challenges and Policy Issues

The data show that the economic contraction forced male employees to become self-employed and female employees to become unpaid family workers. Any more pressure from further contraction will probably push female workers out of the labor force before men. Since 1997, the number of female employees has shrunk more than male employees. Agriculture experienced the biggest contraction, followed by private and social services, and then construction. The number of male employees contracted from 20.9 million in 1998 to 16.8 million in 2003 (a decline of 20%). Female employees were able to hold on for a longer period. In fact the number rose from 9.4 million in 1997 to a peak of 9.7 million in 2000. But since then the labor market has become increasingly less friendly to them, so that by 2003, only 7.0 million female employees were left, a 28% reduction between 2000 and 2003. It seems that there have been increasingly limited opportunities for women to get paid jobs. Whereas the economic boom before the crisis expanded formal sector employment, the crisis and its following developments have reversed the trend. Job losses in the formal sector as employees (there are relatively few employers) were replaced by jobs in the informal sector as self-employed. This is in addition to the departure of female workers from the labor market highlighted above. The number of employees in rural areas has decreased more rapidly that in urban areas, raising concerns as regards poverty as this could be indicative of ever-fewer job opportunities in rural areas (Figure 6.24).

Figure 6.24 Employees by Residency

Millions 20

16

12

8

4

0 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 Urban Source:

Authors' calculations from Sakernas.

Rural

352 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati

In sum, the labor market during 1997–2003 was characterized by a reduction in the formal sector and an increase in the informal sector as a result of increases in the number of self-employed from 38 million to 47 million (mainly in 2000–2003) and in the number of unpaid family workers from 15 million to 18 million. During 1990–1997, the share of formal workers had expanded from 29% to 37% and the share of informal workers had declined from 77% to 63% of total workers. The crisis reversed the trend, pushing 3.7 million workers into the informal sector, i.e., 2.4 million employees became self-employed and another 1.3 million employees became unpaid workers in 1998. By 2003, the share of formal workers had fallen to 29%, while the share of informal workers had risen to 71%, clearly showing increasing informalization (Table 6.8 and Figure 6.22). The informal sector has, in this way, offered a measure of protection against declining formal sector employment. 6.4.4

Wages Wage and Education

Sakernas collects data on wages. Since 2001, data on earnings have also been recorded for own-account workers. In general, the results show that wages or incomes are positively related to education, i.e., better educated workers earn more (Figure 6.25). This finding applies to both formal and informal workers. Data in 2003 also show a consistent positive relationship between earnings and education level. Table 6.11 shows the number of workers by worker status and education while Table 6.12 shows earnings by educational level. Figure 6.25 Monthly Wage of Employees by Education (Rp '000) 1,600 1,400 1,200 1,000 800 600 400 200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source:

Less than Primary

Primary

Senior Secondary

Tertiary

Authors' calculations from Sakernas.

Junior Secondary

353 Labor Markets in Indonesia: Key Challenges and Policy Issues Table 6.11 Number of Employees and Own-Account Workers by Status, Sector, and Education, 2003 (‘000)

Description

LP

A. Informal = A1+A2+A3 1. Casual employee in agriculture 2. Casual employee not in agriculture 3. Self employed (Own-account worker) B. Employee 1. Agriculture 2. Mining and Quarrying 3. Manufacturing Industry 4. Electricity, Gas and Water 5. Construction 6. Trade 7. Transportation and Communication 8. Finance 9. Services Note: Source:

P

JS

SS

T

Total

10,948

21,183

8,950

5,023

398

46,502

1,489

2,380

559

126

2

4,555

423

1,618

823

377

18

3,259

9,036

17,185

7,568

4,521

378

38,688

1,256 430 27 282 130 83

4,760 892 74 1,557 14 670 380

4,757 516 72 1,801 15 456 577

9,538 242 122 2,789 86 419 1,612

3,519 20 18 342 15 90 267

23,829 2,100 312 6,771 130 1,764 2,919

52 8 243

306 66 801

383 143 794

491 649 3,129

107 326 2,334

1,339 1,192 7,301

LP = Less than Primary, P = Primary, JS = Junior Secondary, SS = Senior Secondary, T = Tertiary. Author’s calculations from Sakernas (2003).

In 2003, the average monthly wage of workers with tertiary education was about Rp1.4 million, senior secondary Rp874,000, junior secondary Rp617,000, and primary Rp499,000. Compared with the wage of workers with less than primary school as the benchmark, their wage ratios were 3.4; 2.2; 1.6; and 1.3 times. This shows that the value of education depends on sector, type of job, and job status in addition to the level of education. Furthermore, continuing with the use of the earning of workers with less than primary school as the benchmark, and assuming that the number of schooling years for primary school graduate workers is 6 years, junior secondary 9 years, and senior secondary 12 years, a very rough estimate on the return to years spent in education for these three groups can be calculated. The results suggest that spending 3 more years in junior secondary school will increase income by 34% for workers in the informal sector and 30% for workers in the formal sector. Adding 3 more years in senior secondary school could further increase earnings by 42% for workers in the informal sector and 65% for workers in the formal sector. In 1990, only about 15 million workers (20%) had secondary education, a figure that rose to 35 million (40% of total workers) in 2003.

354 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Table 6.12 Earning Index of Employees and Own-Account Workers by Status, Sector, and Education, 2003 LP Description

=100

(Rp 000)

P

JS

SS

T

A. Informal 1. Casual employee in agriculture 2. Casual employee not in agriculture 3. Self-employed (ownaccount workers)

100

349

128

162

204

232

100

213

125

164

190

149

100

406

114

117

129

203

100

408

123

151

186

292

B. Employee 1. Agriculture 2. Mining and quarrying 3. Manufacturing industry 4. Construction 5. Trade 6. Transport and communications 7. Finance 8. Services

100 100 100

397 345 475

125 123 159

155 165 202

220 200 306

344 426 544

100 100 100

371 582 505

131 106 95

164 107 108

219 138 138

432 315 286

100 100 100

558 517 339

115 145 123

137 137 142

164 178 294

330 305 365

Note: Source:

LP = Less than Primary, P = Primary; JS = Junior Secondary, SS=Senior Secondary, T=Tertiary. Authors’ calculations from Sakernas (2003).

Wage and Sector Average earnings of workers in agriculture are much lower than those in other sectors, rendering them more vulnerable to poverty (Table 6.13). For example, a casual worker with no education in agriculture only receives about half the earnings of the same workers in other sectors. Earnings of informal workers are only available for casual and self-employed workers. Most casual workers have low education (completed primary school only) and work in agriculture. In the formal category, workers in agriculture also earn much less than workers in other sectors, except in services. Wage and Gender Male workers in general earn more than female workers, in both formal and informal categories. This could indicate market discrimination against females. Further examination shows that earnings profiles of male workers are also more stable than those of female workers (Figure 6.26).

355 Labor Markets in Indonesia: Key Challenges and Policy Issues Figure 6.26 Average Earnings of Employees by Education and Gender, 2003 (Rp '000) Formal 1,800 1,500 1,200 900 600 300 0 LP

P

JS

SS

T

SS

T

Informal 1,500 1,200 900 600 300 0 LP

P

JS Level of Education

Total Note: Source:

Male

Female

LP = Less than Primary, P = Primary, JS = Junior Secondary, SS = Senior Secondary, T = Tertiary Authors' calculations from Sakernas.

Wage Inequality During the period of high economic growth in 1991–1994, the wage inequality for different education levels was higher than during the period of low economic growth in 2000–2003. Using the wage of less than primary education workers as the benchmark, the wage gap between less educated and more educated groups widened during 1991–1993 but became stable after 1994 (Figure 6.27).

356 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati Table 6.13 Monthly Earnings of Employees and Own Account Workers by Status, Sector, and Education, 2003 (Rp) Description A. Informal = A1+A2+A3 1. Casual employee in agriculture 2. Casual employee not in agriculture 3. Self employed (Own-account worker) B. Employee 1. Agriculture 2. Mining and Quarrying 3. Manufacturing Industry 4. Electricity, Gas, and Water 5. Construction 6. Trade 7. Transportation and Communication 8. Finance 9. Services Note: Source:

LP

P

JS

SS

T

349,422

445,959

565,373

714,412

1,160,147

212,514

266,379

348,011

403,868

316,606

405,900

462,961

476,805

521,856

825,907

407,933 397,468 344,948

502,883 498,725 425,993

616,478 616,917 567,591

758,764 874,076 688,614

1,192,994 1,366,216 1,471,013

475,230

753,622

961,197

1,453,886

2,583,559

370,594

485,501

605,993

811,361

1,602,506

582,028 504,990

580,438 616,198 477,842

601,438 625,521 546,271

1,162,689 802,283 698,233

1,906,392 1,833,719 1,442,579

557,896 516,930 339,280

644,188 749,870 415,920

762,138 732,902 598,386

917,477 918,477 998,027

1,838,272 1,579,011 1,239,883

LP = Less than Primary, P = Primary, JS = Junior Secondary, SS = Senior Secondary, T = Tertiary. Author’s calculations from Sakernas (2003).

Figure 6.27 Wage Ratio of Employees (less than primary education as the benchmark) 5.0 4.5 4.1

4.0

3.0 2.5 2.0

3.7

3.6

3.5 2.2 1.8

4.4

4.3

3.9

3.8

3.5

2.9

2.4

2.5

1.8

1.8

1.5

1.6

2.2

2.3

2.4

1.6

1.7

1.7

1.3

1.3

1.4

2.1

2.1 1.5

3.7

2.4

2.4

1.7

1.3

3.8

3.6

3.3

2.2

2.1

2.2

1.6

1.5

1.5

1.6

1.3

1.2

1.2

1.3

3.4

1.5 1.0 0.5

1.4

1.1

1.2

0.0 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 P/LP Note: Source:

JS/LP

SS/LP

T/LP

LP = Less than Primary, P = Primary, JS = Junior Secondary, SS = Senior Secondary, T = Tertiary Authors' calculations from Sakernas.

357 Labor Markets in Indonesia: Key Challenges and Policy Issues Table 6.14 Poverty in Indonesia, 1976–2003 Poverty Line (Rp per capita per month)

Headcount Ratio (%)

Poverty Incidence (million)

Year

Urban

Rural

Urban

Rural

Total

Urban

1976 1978 1980 1981 1984 1987 1990 1993 1996 1999 2000 2001 2002 2003

4,522 4,969 6,381 9,777 13,731 17,381 20,614 27,905 38,426 89,845 91,632 100,011 130,499 138,803

2,849 2,981 4,449 5,877 7,746 10,294 13,295 18,244 27,413 69,420 73,648 80,382 96,512 105,888

38.8 30.8 29.0 28.1 23.1 20.1 16.8 13.5 9.7 15.1 14.6 9.8 14.5 13.6

40.4 33.4 28.4 26.5 21.2 16.1 14.3 13.8 12.3 20.2 22.4 24.8 21.1 20.2

40.1 33.3 28.6 36.8 21.6 17.4 15.1 13.7 11.3 18.2 19.1 18.4 18.2 17.4

10.0 8.3 9.5 9.3 9.3 9.7 9.4 8.7 7.2 12.4 12.3 8.6 13.3 12.2

Rural Total 44.2 38.9 32.8 31.3 25.7 20.3 17.8 17.2 15.3 25.1 26.4 29.3 25.1 25.1

54.2 47.2 42.3 40.6 35.0 30.0 27.2 25.9 22.5 37.5 38.7 37.9 38.4 37.3

Source: BPS-Statistics Indonesia, various publications.

6.5 Labor Market and Poverty Table 6.14 shows poverty-related data for Indonesia during 1976–2003.23 It can be seen that considerable progress in poverty reduction had been made until the crisis of 1997–98, especially from the mid-1970s to the mid-1980s.24 In 1976, about 40% of the population, or 54 million people, were poor. By 1984, the share of the population living in poverty (the head count ratio, or HCR) had fallen to 22% while the number of poor (poverty incidence) had declined to 35 million. The almost 19 percentage point decline in the HCR in a matter of only 8 years was a remarkable achievement. The pace of poverty reduction slowed subsequently, largely due to declining oil revenues. By 1993, the HCR was about 14% and in 1996 it was only 11.3%, the lowest in the history of the country. Unfortunately, the reductions in poverty halted with the onset of the economic crisis. The HCR spiked up in 1998, remaining fairly stable at around 17–19% between 1999 and 2003. In 2003, about 37.3 million people in Indonesia still lived below the poverty line. About 25.1 million of the poor lived in rural areas, and the remaining 12.2 million in urban areas. The corresponding HCRs were 17.4% in total, 20.2% in rural areas, and 13.6% in urban areas. Given that the overall open unemployment rate is 10% or around 10 million people, it means that many of the poor are workers. In other words, being employed in Indonesia

358 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati

does not guarantee an escape from poverty. The fact that many of the workers are poor can also be seen from the comparison of workers’ average wages and poverty line. Given that the dependency ratio of workers to total population in 2003 was around 2.5 (i.e., number of workers was about 91 million with the total population of 220 million), the minimum income of workers to be above the poverty line was about Rp347,000 and Rp265,000 per month in urban and rural areas, respectively. In addition to the relatively high incidence of poverty, many people live just above the poverty line so that a small increase in the poverty line will result in a sharp increase in poverty. Increasing the poverty line by 25%, for instance, will make the HCR increase from 17.4% to 35.3% (Table 6.15). Figure 6.28 shows that the average expenditure of rural households was only about 60% of urban households, and the gap widened after 1993. In 2003, the mean per capita household expenditure in urban areas was about Rp294,000, while in rural areas it was Rp173,000. Table 6.15 HCR with Different Poverty Lines, 2003 Headcount Ratio (HCR) Poverty Line

Urban

Rural

Total

Official Poverty Line Official Poverty Line * 1.25

13.6 27.8

20.2 40.8

17.4 35.3

Sources: BPS-Statistics Indonesia, Statistical Yearbook of Indonesia; authors’ calculations from Susenas (2003).

Figure 6.28 Mean per Capita Household Expenditure (Rp '000) 350 300 250 200 150 100 50 0 1993

1994

1995

1996

Urban Source:

1997

1998

1999

Rural

Authors' calculations from Susenas (various years).

2000

2001 Total

2002

2003

359 Labor Markets in Indonesia: Key Challenges and Policy Issues

6.6 Concluding Remarks The Indonesian Government faces a tremendous challenge in meeting its target of reducing the unemployment rate from 10% in 2004 to 5% by 2009. Taking new entrants to the labor market into account, meeting the employment target means creating at least 15 million new jobs over 2005–2009, or 3 million jobs per year. To make matters more difficult, a high rate of unemployment is not the only major problem. Among other things, there is also the issue of widespread underemployment, which affects about 35% of the total labor force, or 35 million workers. Dealing with the underemployed and the unemployed, the Government needs to create 50 million jobs by 2009, or 10 million jobs per year from 2005. The challenge the Government faces is even more daunting once it is recognized that Indonesia’s postcrisis experience with economic growth has been disappointing in terms employment generation. In particular, investment— a key driver of employment opportunities—has been low. Over the last 5 years or so, growth has been driven mostly by consumption and has not been high enough to significantly increase per capita income, generate sufficient jobs, and reduce poverty. What should the Government do to change the situation? Increasing investment is a key part of the solution and will require, among other things, an improvement to Indonesia’s investment climate. As revealed by a study of its investment climate, regulatory uncertainty, and perceptions of widespread corruption have undermined investor confidence in a serious way (ADB 2005a). Indonesia is also lagging in terms of access to infrastructure such as electricity and telephones, while financing costs and access to credit have become more problematic. Finally, regulations governing businesses in Indonesia have become among the most cumbersome in the world in several areas, including the time taken to start and close a business. One aspect of regulations which has come under considerable criticism from the business community is that pertaining to labor. In particular, it is argued that a wave of policy changes in the labor market, introduced after Suharto and especially in the Megawati administration of 2001–2003, have inadvertently contributed to a deterioration of labor market outcomes since 2001. The changes include large increases in minimum wages and severance pay that may have raised the cost of hiring labor and thereby lowered the demand for labor. In addition, it argues that new laws governing trade unions have led to a multiplicity of such unions, many of which lack professionalism and are subject to “capture” by political groups. Decentralization, for some, is part of the problem, with many local governments seemingly unequipped to set minimum wages, among other policies, through careful social dialogue between the various stakeholders. In addition to urging the Government to

360 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati

rationalize its labor-related policies, for example, by reining in minimum wage increases and severance pay, especially for small enterprises, businesses have also highlighted the need for improvements in skills and productivity of labor. In response, labor unions have argued that the low productivity of workers should not be blamed on workers. Instead, they have argued that low productivity is the result of old technologies being used by firms, which have not been upgraded since the crisis. The unions have also pointed out that high severance pay is required due to lack of appropriate social protection for workers and the difficulty of them finding work again. Clearly, there are many challenges ahead if the Government is to jumpstart investment and employment. At the broadest level, there is a need for policy coherence. If employment creation is to be accorded the top priority—as done by some government documents—this needs to be stated unambiguously and policies need to reflect this concern. The policies in question go well beyond simply those which are directly related to labor issues. As some observers have argued, there is a danger that the Government has been taking its stabilization program “too seriously” and that the stance of monetary and fiscal policy has not been geared toward jumpstarting investment and putting in place a muchneeded public investment program, both key elements in generating employment and improving productivity.25 Turning more specifically to labor-related issues, promoting labor-intensive industries to increase job creation is crucial, especially in the agriculture and services sectors, which together absorb more than 80% of workers. There is clearly a lack of a master plan and commitment for the development of industries that have considerable potential and are labor intensive, such as agro-processing, through public-private partnerships. Turning to the issue of labor regulations, the key challenge will be in striking the right balance between protecting the welfare of workers and providing sufficient flexibility and incentives to firms to operate and grow.26 A well-formulated system providing social protection may well be part of the solution. At the same time, efforts need to be made in improving the industrial relations environment. There has been a large increase in industrial disputes. Although statistics for 2004 reveal a decline in the number of disputes, strikes, workers involved, and working hours lost in comparison with previous years (Lindenthal 2005), this may be a one-off. To make sure that it is not, the Government must encourage greater social dialogue between entrepreneurs and representatives of labor while at the same time work to strengthen the capacity of the still nascent labor unions to operate more professionally. For their part, Indonesian enterprises need to recognize that a clean break from a past of labor repression has been made and that negotiated solutions to industrial disputes are the best way forward. As Indonesia grapples with these challenges, it is important that the country’s policy makers and key stakeholders be informed by sound research.

361 Labor Markets in Indonesia: Key Challenges and Policy Issues

There are several specific issues that deserve attention. First, the factors driving the slowdown in employment growth since the early 1990s need to be identified. In particular, the factors causing declines in female employment need to be better understood. Second, careful analysis of the role of the new labor market policies on labor outcomes, including the slowdown in employment as well as the growing share of informal jobs, is needed. A key challenge will be disentangling the effects of the new labor policies from those of other factors, such as political uncertainty (partly due to decentralization), the deterioration in governance standards, and other (nonlabor) regulatory barriers to business that seem to characterize postcrisis Indonesia. Third, and related to the second issue, an assessment of how decentralization has influenced the investment climate and labor market outcomes locally is necessary. Fourth, the scope for sector-specific policies needs to be examined. In particular, in what way can the Government, working with the private sector, encourage new labor-intensive activities, not only in the industry sector but in the agriculture and services sectors as well?27 Similarly, what is the scope for promoting small-scale enterprises and what types of policies would be most effective? Finally, the scope for putting in place more effective social protection systems needs to be examined. While the issues listed above are wide-ranging, they will be an important input into developing appropriate policies and strategies for ensuring employment opportunities that are productive and decent.

Notes 1. About 30% of workers receive wages below the minimum wage level. The latest estimate of average monthly wages is about Rp400,000–500,000 per household or just 70% of the average minimum wage. In rural areas, the average monthly wage is even lower, at Rp200,000–400,000. 2. Severance pay in Indonesia has become one of the highest in the Asia and Pacific region. 3. The RAPBN was signed on 18 November 2004. The macroeconomic priorities in the RAPBN 2005 and MTDP 2004–2009 are the same, except that employment creation is made a second priority after economic growth in the RAPBN. 4. University students and workers were behind the “reformation” movements that changed the political landscape in Indonesia during the crisis. 5. The minister supported workers’ rights and passed at least four union-friendly laws including: (i) Labor Law in June 2003, (ii) Industrial Dispute Settlement Bill in January 2004, (iii) Migrant Workers Bill in 2004, and (iv) National Social Security Law in October 2004. 6. Labor issues in Indonesia are mainly dealt by the Coordinating Ministry for People’s Welfare (CMW) and the three ministries of Manpower and Transmigration (MOMT), National Education (MONE), and Health (MOH). The CMW is responsible for coordinating overall government policies on welfare improvement, which include

362 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati employment, while the MOMT is responsible for their implementation with the main focus of (i) expansion and development of employment opportunities, (ii) improvement of labor quality and productivity, (iii) protection and development of labor institutions, and (iv) development of entrepreneurship culture for poor communities. The MONE and MOH are responsible for policies related to labor supply such as capacity building and human capital investments. The National Planning Agency (Bappenas) is responsible for developing government plans, such as the 2004–2009 MTDP. The plan, however, excludes details of ministerial workplans, which should be prepared by each ministry in its annual strategic plan (Law No.25/ 2004 on the National Development Planning System). 7. See MOMT (2003) for examples of how the profile on human resources has not been reported for some regions. 8. Fenwick et al. (2003) further divided the labor movements during Suharto’s era into three phases: prohibition of unions (1966–late 1970s), co-opting of unions (late 1970s–early 1990s), and market as veneer (1990–1998). 9. Known in Indonesian as the Serikat Pekerja Seluruh Indonesia or SPSI. 10. In the early 1990s, the minimum wage policy was set based on the “Minimum Physical Needs” (Kubutuhan Fisik Minimum or KFM), which was extended in the mid-1990s to become the “Minimum Subsistence Needs” (Kebutuhan Hidup Minimum or KHM) based on a larger consumption bundle. This change was partly behind the increase in real minimum wages in the early 1990s. 11. For instance, the minimum wage in 1999 could meet only two thirds of the basic expenditure needs of households of four persons (Islam and Nazara 2000). Despite the low minimum wage, in 1998 nearly one third of paid workers received incomes lower than the minimum wage. 12. Some of the time taken has to do with labor-related procedures such as enrolling workers in the social security program. However, this is still a separate issue from labor regulations and their impact on firms’ operations and incentives. 13. Sakernas was not conducted in 1995 since there was an Inter-Census Population Survey (known in Indonesian as Survei Penduduk Antar Sensus or Supas). Supas is designed to generate population indicators commonly available from the population census. It generates main aggregate labor market indicators but not detailed characteristics as Sakernas does. The differences in survey design, instruments, and sample size between Sakernas and Supas make their detailed results strictly incomparable. Sakernas covers around 65,000 households while Supas covers 207,000 households. This is why the data here from Sakernas are not mixed with the 1995 data from Supas. 14. BPS-Satistics Indonesia (2003). 15. BPS-Statistics Indonesia et al. (2003, p. 46). 16. Department of Education and Culture (1994). 17. As elementary school attendance remained stable in the 1990s, the issue of education quality became important. The Government needed to focus more on quality, especially given that schools’ physical conditions and the learning process were poor (Clark et al. 1998). To support the free basic education program, the central Government recruited many new elementary and junior secondary teachers in the 1970s. Most of them had been retired by the end of the 1990s. Currently, both

363 Labor Markets in Indonesia: Key Challenges and Policy Issues maintenance of those elementary schools and replacement of those teachers are part of local government responsibilities. Given the significant dropout rate from primary to secondary schools, the target seems unattainable except if additional measures are introduced. The MONE primary school currently caters around 25 million students, while its junior secondary school is attended by only 7 million students, indicating a significant drop out from primary to junior secondary school. 18. It is important to note here that Sakernas are conducted in the month of August, not long after the end of the academic year in July, when school leavers and recent graduates enter the labor market. 19. Unfortunately, data on whether a person is working less than full time involuntarily or not were not available for all years. Given the difficulties that workers face in the labor market, including low wages, it is probably not too misleading to treat many of those working less than full time as having to do so involuntarily. 20. BSP-Statistics Indonesia defines the underemployed as working less than 35 hours per week, despite the official number of working hours per week of 40 hours. Others use 30 hours per week as the cut-off point. In its Key Indicators of the Labor Market, ILO use 30 hours per week as the cut-off point for its definition of parttime worker (Irawan et al. 2000). 21. The value added per worker in this sector worsened during 1997 and 2000 but improved again in 2003 to almost the same level as in 1997. The average annual growth in value added per worker in trade and accommodation services grew sharply between 2000 and 2003. 22. In the Key Indicators of the Labor Market, ILO classifies workers into three categories, namely wage and salaried workers, self-employed workers or employers on their own account, and contributing or unpaid family workers. From 2001, BPSStatistics Indonesia added two categories of casual workers of (agriculture and nonagriculture), which were included in the informal categories for they were treated as self-employed in the survey. 23. In Indonesia, poverty is defined in terms of a consumption bundle (which when converted into monetary terms constitutes the poverty line) consisting of a food component equivalent to 2,100 calories per day plus a nonfood component. The poverty calculation is based on household expenditure data collected through the nationally representative National Socio-Economic Surveys (Susenas). BPSStatistics Indonesia first published poverty indicators in 1984 for the period 1976– 1984 and poverty reduction was set as one of the government objectives in 1994 by the implementation of the Presidential Instruction on poor villages. Unfortunately, the economic crisis hit Indonesia in 1997, increasing the number of poor people. 24. A poverty line should be raised in order to account for price increases (inflation). According to some analysts, poverty lines in Indonesia have increased faster than the rate of inflation, reflecting an increase in the real consumption of poor people. If correct, this would indicate that Indonesia’s performance in terms of reducing absolute poverty is even better than the statistics presented in the table. At the same time, there are those who argue for raising significantly the poverty line in real terms. This argument is based on the observation that the official poverty line represents an extremely meager standard of living and is below the minimum wage of a worker without any dependents.

364 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati 25. See Lindenthal 2005 for a discussion on this. 26. Three measures to reduce unemployment identified by the Government include a flexible labor market policy, investments in human capital, and conducive investment environment (Bappenas 2005). 27. Examples from PRC, Malaysia, and Republic of Korea show that government can play a significant role in development. Some aspects of Indonesia’s development model before the crisis have proved to be very successful in reducing poverty and benefiting workers. The Government’s programs in agriculture, education, and infrastructure provided productive employment opportunities and gradually improved labor quality through education and training (Agrawal 1996).

References Agrawal, N. 1996. “The Benefits of Growth for Indonesian Workers.” Paper presented at the World Bank Workshop for Economic Reforms and Labor Market Restructuring for Indonesia: Indonesian Workers in the 21st Century, April, Jakarta. Asian Development Bank. 2003. Key Indicators 2003: Education for Global Participation. Manila. Available: http://www.adb.org/Documents/Books/Key_Indicators/2003/ default.asp. ———. 2004a. Key Indicators 2004: Poverty in Asia: Measurement, Estimates, and Prospects. Manila. ———. 2004b. “Country Economic Review: Indonesia.” Manila. ———. 2005a. Improving the Investment Climate in Indonesia. Manila. Available: http://www.adb.org/Statistics/pdf/INO-Report-19-May.pdf. ———. 2005b. Key Indicators 2005: Labor Markets in Asia: Promoting Full, Productive, and Decent Employment. Manila. http://www.adb.org/Documents/Books/ Key_Indicators/2005/default.asp. Asian Productivity Organization (APO). 2004. Non-farm Employment Opportunities in Rural Areas in Asia: Indonesia. Tokyo. Available: http://www.apo-tokyo.org/ 00e-books/AG-05_Non-FarmEmployment/10Indonesia_Non-Farm.pdf. Alisjahbana, A., and C. Manning. 2005. “Employment, Labor Standards and Flexibility: Getting the Balance Right.” Unpublished. Badan Perencanaan dan Pembangunan Nasional (Bappenas). 2004. Draft Rencana Jangka Menengah 2004–2009 (Medium Term Development Plan 2004–2009). 27 November. ———. 2005. “Employment-Friendly Labor Policies and Harmonious Industrial Relations.” Paper presented at the ADB Workshop on Improving the Labor Market Conditions in Indonesia, 15 November, Jakarta. BPS-Statistics Indonesia (Badan Pusat Statistik Indonesia). 1993. Proyeksi Penduduk Indonesia per Propinsi 1990–2000 (Projection of the Indonesian Population by Province 1990-2000). Jakarta. ———. 2002. Proyeksi Penduduk Indonesia per Propinsi Menurut Kelompok Umur dan Jenis Kelamin 2000–2010 (Projection of the Indonesian Population by Province, Age Group, and Gender 2000–2010). Jakarta.

365 Labor Markets in Indonesia: Key Challenges and Policy Issues ———. Various years. Economic Indicators. Jakarta. ———. Various years. Sakernas (National Labor Force Survey). Jakarta. ———. Various years. Susenas (National Socio-Economic Survey). Jakarta. BPS-Statistics Indonesia, National Family Planning Coordinating Board, Ministry of Health, and ORC Macro. 2003. Indonesia Demographic and Health Survey. Jakarta. Bakrie, A. 2004. “Mendorong Momentum Pertumbuhan Ekonomi (Maintaining the Economic Growth Momentum).” Report of the Coordinating Minister of Economics. Jakarta. Bank of Indonesia. Various years. Indonesian Financial Statistics. Jakarta. Bird, K., and C. Manning. 2002. “Impact of Minimum Wage Policy on Employment and Earnings in the Informal Sector: The Case of Indonesia.” Paper presented at the 8th Convention of the East Asian Economic Association, 4–5 November, Kuala Lumpur. Clark, D., J. Hough, A. Pongtuluran, R. Sembiring, and N. Triaswati. 1998. Financing of Education in Indonesia. Asian Development Bank and the University of Hong Kong. Department of Education and Culture (Departemen Pendidikan dan Kebudayaan). 1994. Pembangunan Pendidikan dan Kebudayaan Menjelang Era Tanggal Landas (Development of Education and Culture toward the Take-off Era). Jakarta. Fenwick, C., T. Linsey, and L. Arnold. 2003. Labor Disputes Settlement Reform in Indonesia: A Guide to the Policy and Legal Issues Raised by the Industrial Issued Settlement Bill. International Labour Organization, Jakarta. Irawan, P. B, I. Ahmed, and I. Islam. 2000. Labor Market Dynamics in Indonesia: Analysis of 18 Key Indicators of the Labor Market (KILM): 1986–1999. International Labour Organization, Jakarta. Available: http://www.ilo.org/public/english/ region/asro/jakarta/publ/kilm.htm. International Labour Organization. 1998. Employment Challenges of the Indonesian Economic Crisis. Jakarta. ———. 2002. Improvement of the Industrial relations at the Enterprise Level: A Resource Book for Trainers. Jakarta. Islam, I., and S. Nazara. 2000. Minimum Wage and the Welfare of Indonesian Workers. Occasional Discussion Paper Series No. 3, International Labour Organization, Jakarta. Kansil, C. S. T., and C. Kansil. 2003. Kitab Undang-Undang Ketenagakerjaan: Buku Kesatu (Manpower Law: Book I). Jakarta: Pradnyaparamita. ———. 2000. Kitab Undang-Undang Ketenagakerjaan: Buku Kedua (Manpower Law: Book II). Jakarta: Pradnyaparamita. Kauffman, D., A. Kraay, and M. Mastruzzi. 2003. Governance Matters III: Governance Indicators for 1996–2000. World Bank, Washington, DC. Lindenthal, R. 2005. Employment and Labor Market Policies in Indonesia: Issues and Options. UNSFIR Discussion Series No. 05/5-E, United Nations Support Facility for Indonesian Recovery, Jakarta. Manning, C. 1996. “Deregulation and Regional Labor Markets in Indonesia: Have Other Outer Islands Been Left Behind?” Paper presented at the World Bank Workshop for Economic Reforms and Labor Market Restructuring for Indonesia: Indonesian Workers in the 21st Century, April, Jakarta. ———. 2000. “Indonesian Labor Markets: Adjusting to Crisis and Slow Recovery.” The Indian Journal of Labor Economics 43(3):545–564.

366 Guntur Sugiyarto, Mayling Oey-Gardiner, and Ninasapti Triaswati ———. 2003. Labor Policy and Employment Creation: An Emerging Crisis? Report No.110, Partnership of Economic Growth-USAID. Jakarta. Available: http:// www.pegasus.or.id/Reports/110)%20Labor%20Policy%20&% 20Emp.pdf. ———. 2004a. Legislating Labor Protection: Betting on the Weak or the Strong? Working Papers in Trade and Development No. 2004/08, The Australian National University, Canberra. ———. 2004b. “Labor Regulation and the Business Environment: Time to Take Stock.” In M. Chatib Basri and P. van der Eng, eds., Business in Indonesia: New Challenges, Old Problems. Australian National University, Canberra. Ministry of Manpower and Transmigration (MOMT). 2003. The Human Resources Profile in Indonesia. Jakarta. ———. 2004. “Permasalahan Ketenagakerjaan di Indonesia dan Pemecahannya (Manpower Problems and Solutions).” Information, Development and Research Board, Jakarta. Processed. Ministry of Manpower and Transmigration and BPS-Statistics Indonesia (Depnakertrans dan BPS). 2002. Perencanaan Tenaga Kerja Nasyonal (National Manpower Planning) 2004-2009. Jakarta. Rama, M. 1996. “The Consequences of Doubling the Minimum Wage: The Case of Indonesia.” Paper presented at the Workshop for Economic Reforms and Labor Market Restructuring for Indonesia: Indonesian Workers in the 21st Century sponsored by the World Bank, April, Jakarta. ———. 2003. “Globalization and Workers in Developing Countries.” In R. Hasan and D. Mitra, eds., The Impact of Trade on Labor—Issues, Perspectives and Experiences from Developing Asia. Amsterdam: Elsevier Science (North-Holland Publishers). Republic of Indonesia. 2004. Law No. 2/2004 on Industrial Dispute Resolution. Jakarta. ———. 2003. Law No. 13/2003, on Labor. Jakarta. Smeru. 2001. “Wage and Employment Effects of Minimum Wage Policy in the Indonesian Urban Labor Market.” In Smeru Research Report. The Smeru Research Institute, Jakarta. Sudjana, B. 2002. Voices of the Private Sector: Assessment of a Changing Environment. UNSFIR Working Paper 02/10, United Nations Support Facility for Indonesian Recovery, Jakarta. Triaswati, N. 2004. “Pertumbuhan Ekonomi, Kesempatan Kerja dan Kebijakan Pendidikan dalam Era Global: Bersaing? Siapa Takut? (Economic Growth, Employment Opportunity, and Education Policy in the Globalized Era: Competing? Who Scored?).” Paper presented at the Kongres Nasional Pendidikan Indonesia V (National Congress of Indonesian Education V), 7 October, Surabaya. ———. 2005. “Industrialisasi dan Penciptaan Lapangan Kerja: Pertumbuhan Ekonomi Untuk Siapa? (Industrialization and Employment Creation: Economic Growth for Who?).” Paper presented at the Kongres Ikatan Sarjana Ekonomi Indonesia (Congress of Indonesian Economics Graduates), 22 March, Jakarta. United Nations Development Programme. 2002. Human Development Report 2002: Deepening Democracy in a Fragmented World. Oxford: Oxford University Press. World Bank. 2005. Doing Business in 2005: Removing Obstacles to Growth. Washington, DC.

CHAPTER 7 Unemployment, Labor Laws, and Economic Policies in the Philippines JESUS FELIPE AND LEONARDO LANZONA, JR.

7.1 Introduction

U

nemployment and underemployment are the Philippines’ most important problems and the key indicators of the weaknesses of the economy. Today, around 4 million workers (about 12% of the labor force) are unemployed and another 5 million (around 17% of those employed) are underemployed. This Reserve Army of workers is a reflection of what happens in the economy, particularly because of its incapacity to provide jobs (especially in the formal sector) to its growing labor force. The social costs of this mass unemployment range from income losses to severe social and psychological problems resulting from not having a job and feeling insecure about the future. Overall, it causes a massive social inefficiency. This chapter is a comprehensive stocktaking of the data and literature on Philippine labor markets. The exercise covers labor market trends and outcomes, as well as labor market policies and key issues affecting the labor market. The main question behind the exercise is whether the supposed rigidity of the Philippine labor market is the cause of unemployment, and whether such rigidity is preventing the creation of employment. Hence, the question of labor market reforms has been put on the table by different sectors: could reforms of Jesus Felipe, Economics and Research Department, Asian Development Bank; Leonardo Lanzona, Jr., Economics Department, Ateneo de Manila University. The authors thank participants at the workshop, Employment Creation, Labor Markets, and Growth in the Philippines (19 May 2005, Manila) for their comments and suggestions on an earlier draft of the chapter. They also thank Rana Hasan for useful discussions on labor market issues.

368 Jesus Felipe and Leonardo Lanzona, Jr.

the labor market help spur growth? The reality is that, except in a few cases, governments do intervene in the labor market to achieve some balance between the objectives of fairness, efficiency, and risk allocation. In practice, however, labor market reforms tend to be an effort to reduce government intervention. Labor markets are often not competitive because of the uneven market power between the two main participants, workers and employers, resulting from the imperfect mobility of workers, insufficient information, or discrimination. These imperfections lead to unfair and inefficient outcomes in the form of immobile, underpaid workers, hazardous working conditions, or discrimination against certain groups of workers (e.g., women) with a weak bargaining position. Likewise, private markets, left to themselves, do a poor job of protecting unemployed workers. Governments typically intervene to correct these failures. However, a problem may arise. Poorly designed government intervention, which ends up giving excessive protection to a minority of formal sector insiders, for example, can potentially make things worse. Indeed, excessive protection of workers (e.g., through extremely costly and cumbersome dismissal clauses) can make employers reluctant to hire new workers, effectively pushing these workers into the informal sector or into open unemployment. In the 1980s, the Philippines undertook a series of policy reforms and structural adjustment programs. An expected, though indirect, effect was to expand employment. After decades of protectionism, the country opened itself to the world market, engaging in globalization with a commitment to free markets. However, despite some notable growth in the mid-1990s, the average growth rate of the country has been lackluster. The reasons behind this lack of growth and generally poor performance of the economy, especially vis-à-vis other East Asian and Southeast Asian economies, have been explored at length (Balisacan and Hill 2003; ADB 2004, pp. 88–93; ADB 2005a, pp. 109–113). One of the most important results of this poor performance has been the increase in unemployment and underemployment, and a general feeling that the country cannot provide jobs to its growing labor force. While the Philippine Government claims that the fight against unemployment is a top priority, its actions do not seem to support this alleged concern. Price stability and fiscal austerity, not sustained attempts to create jobs and reduce unemployment, are the two top priorities. In 2004, when the Government unveiled its Medium Term Philippine Development Plan (MTPDP) for 2004–2010, the administration openly acknowledged the unemployment problem and set the target of creating about 1.5 million jobs a year between 2004 and 2010, i.e., a total of about 10 million jobs (60% in the services sector) (MTPDP 2004–2010, Introduction, Table D).1 The MTPDP 2004–2010 emphasizes the acceleration of economic growth, job creation, energy sector reform, support of social justice and basic needs, provision of education and better opportunities for young people, and good governance and anti-corruption

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programs. However, so far, the policy of “high employment” seems to remain toothless and is only secondary and complementary to the two core policies of price stability and fiscal discipline. Fiscal consolidation and the achievement of a balanced budget by 2010 have been given highest priority. Given the very high number of unemployed and underemployed workers, the MacapagalArroyo administration should have made a greater commitment to eradicating unemployment.2 Assuming the MTDP 2004–2010 objectives are met (something to ponder since it will be extremely difficult to create 1.5 million jobs a year, and previous government programs to create large-scale employment have failed; see Section 7.6.1), will the 10 million new jobs be enough to solve the unemployment problem? To understand the magnitude of the problem, one must look at the segment of the population that has not yet entered the labor market, i.e., those below 15. The Philippines has around 30 million people under the age of 15; over the next 14 years, they will join the labor force. The ratio of the labor force to the population is around 42%. This means that 13 million more workers will join the labor market over 14 years, so the economy needs to create about 1 million jobs a year just to absorb these new entrants. These are approximately the jobs created under the optimistic assumptions of the MTPDP 2004–2010. But given the current number of unemployed, the unemployment rate in 2010 would still be 8.9%, according to the MTPDP 2004–2010 (Introduction, Table C). It is worth noting that the MTPDP 2001–2004 argued that “the unemployment rates will steadily improve in the medium term. From 11.2 percent in 2002, the unemployment rate will further go down to 7.6 to 8.6 percent by 2004. In nominal terms, the number of the unemployed shall decline from around 3.5 million in 2000 down to a range of 2.6 to 2.9 million by the end of the medium term” (MTPDP 2001–2004, p. 36). The plan clearly failed. Other policies, e.g., sound population management policies as well as macroeconomic policies, are needed to reduce population and labor-supply pressures. Economic reforms and programs have only slightly affected the Philippine labor market, particularly in generating employment. In the early 1970s, the Philippine labor market responded to various economic policies (e.g., government expenditures, expansionary monetary policy), but with increasing liberalization and restructuring, the country seems to have suffered from a prolonged condition of “jobless growth.”3 To be precise, the problem of the Philippines is not one of “jobless growth,” as the term is used in the literature, since the Philippine economy does create jobs.4 The number of labor entrants into the market is higher than the number of jobs generated. Moreover, a large number of the jobs generated are unproductive occupations in the services sector, which contribute very little to economic growth. In 2004, the Philippine economy created 977,000 new jobs (67% in services; the rest is equally divided

370 Jesus Felipe and Leonardo Lanzona, Jr.

between the agriculture and industry sectors), from 574,000 in 2003, while there were 1,289,000 new entrants. This implies that the objective of the MTPDP 2004–2010 for 2004 was not achieved and that the system added 312,000 new unemployed to the already high level of unemployment. This happened in a country that grew by 6.1% in 2004.5 The chapter has four specific aims. First, it seeks to foster an empirically based view of how labor market policies and institutions can lead to higher employment creation and thus contribute to reducing the incidence and duration of poverty, promote long-term and sustainable growth (e.g., job creation and productivity growth), and contribute to an equitable distribution of the benefits of growth. Second, the chapter examines whether or not labor market policies hinder job creation. In particular, it discusses how labor market policies interact with other economic policies influencing product markets, e.g., the overconcentration of productive assets in the industry sector. Third, the chapter situates the labor market movements in the context of globalization, where all Asian countries are facing major technological and structural changes. Fourth, the chapter identifies a future research agenda to study the most important constraints that the Philippines faces with a view to creating jobs and reducing unemployment. The rest of the chapter is structured as follows. Section 7.2 gives a general analysis of the rationale for labor market reforms. Section 7.3 discusses labor market outcomes and present economic conditions arising from such outcomes, particularly the effect of labor market conditions on poverty.6 Section 7.4 discusses the most salient features of the Philippine Labor Code, and presents an initial assessment of whether labor market policies have hindered the operations of the labor market. Section 7.5 discusses the problem of job creation in the context of globalization. Three labor market–related policies are discussed: (i) international migration, (ii) trade policy, and (iii) overconcentration of ownership in manufacturing. Section 7.6 argues that the Government needs to make employment central to macroeconomic policy and give priority to attaining full employment, and reviews the feasibility of the MTPDP 2004–2010. Section 7.7 discusses directions for future research.

7.2 Arguments for Labor Market Reforms Three arguments have led to the conclusion that labor market reforms are needed. The first is that competitiveness has become the main objective of economic policy. To become more competitive, reforms in all areas, including labor markets, are needed. The second argument pertains to institutional forces that lead to the inflexibility of labor markets. These are wage-push factors like unionization or minimum wages, which increase the bargaining power of labor,

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increase the cost of labor, and lower the demand for labor. Again, the implication is that the labor market must be deregulated. Finally, some central banks see the role of monetary policy as exclusively to combat inflation and believe that their policies have no impact on employment; on the other hand, the fear of budget deficits does not allow expansionary fiscal policies to stimulate employment (in many cases, including that of the Philippines, expansionary fiscal policies have little room to maneuver because of the budget deficit–debt problem). If fiscal and monetary policies cannot be used, the only option left to stimulate employment seems to be, once again, labor market reforms. One of the main forces affecting labor market outcomes is globalization. As a result of greater competition, technological advances, and shifts in policy makers’ priorities, particularly from the pursuit of egalitarian economic policies to the achievement of competitiveness (measured in terms of costs and productivity), significant movements across countries in the levels of world output and employment have been experienced since the late 1980s, causing shifts in production structure and trade patterns (see also Sardaña 1998). The national consensus is that globalization is necessary for growth, and more importantly, for greater efficiency (competitiveness). Two economic crises and changes in the way of thinking of academics and policy makers in the 1970s were instrumental in pushing for reforms. Although these events took place in the developed countries, they had a direct influence on the developing countries. The impact of these events was felt in the 1980s and 1990s. The result was the end of the golden age of egalitarian economic policy, which ran from the end of WWII until the 1970s. During this period, the belief was that wage increases and the expansion of publicly funded social services and transfers would promote growth. Under this view, policies to promote high employment or to expand unemployment insurance commanded wide support from workers and even from employers. However, the scenario began changing in the 1980s (because of heightened international competition, among other factors), and the process accelerated in the 1990s. In addition, two changes in the past decade have produced a huge global oversupply of labor, with far-reaching consequences. First, the end of the Cold War threw hundreds of millions of workers from nonmarket economies (mostly in Russia and other countries in Eastern Europe) into the global labor market, and they have been joined in the last two decades by workers from the People’s Republic of China (PRC) and India. Second, the significant increase in new entrants into the labor force due to the demographic transition (decrease in mortality rates) in many Asian countries has compounded the problem. Finally, the interaction between globalization, rapid technical progress, and intense competition has turned a segmented worldwide labor market into a very integrated market that permits, for example, outsourcing of a large number of manufacturing and service jobs.

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The problem is that this large increase in the labor force has not been accompanied by a concomitant increase in capital for investment in countries like the Philippines. The consequence is that jitters are being felt all over the world from the interaction of these changes, which has led to the so-called “race to the bottom” argument, according to which globalization is forcing workers to compete for capital by accepting lower wages. The result has been the end of the belief that government redistributive policies and wage increases can promote full employment and economic growth, and attention has shifted from the effect of egalitarian policies on aggregate demand to their effect on “competitiveness,” that is to say, on costs and productivity. To increase competitiveness, the argument seems to be, labor market reforms must be implemented. What explains unemployment in the Philippines? Certainly there is no single answer to this question. Mainstream models explain unemployment in developing countries through three types of theories whose common link is that wages are set above market-clearing levels for different reason. What these theories presume is that a market economy, if left undisturbed, has the mechanisms to produce a wage rate that clears the labor market (i.e., all those who want to work find jobs).7 One such theory is the “efficiency wage” model of wage rigidity and unemployment (Basu 1997, chapter 10). This theory argues that employers prefer not to lower wages despite the existence of surplus labor because, these models assume, in poor countries higher wages lead to higher productivity. Employers behave this way because output is a function of the wage the worker receives. Involuntary unemployment arises because the competition among the unemployed to find jobs fails to lower wages; employers prefer to pay a higher wage. A second type of model that leads to wages above the market-clearing rate and that explains open unemployment in developing countries is the socalled “collusive theory” (Basu 1997, chapter 10). In this case, unemployment follows from the workers’ refusal to undercut one another, for fear that this will lower wages for everybody, not only now but also in the future. Thus, they prefer to remain unemployed in the hope that in the next period they may be lucky enough to find jobs at the prevailing high wage rate. Finally, a third model that explains unemployment is that wages in the formal sector in many developing countries are set by institutional forces different from supply and demand (Fields 2004). These institutional forces are: (i) minimum wages, (ii) trade unions, (iii) public sector pay policies, (iv) multinational corporations, and (v) labor codes. These forces create inflexible labor markets. Labor market flexibility refers to the ability of changes in the quantity, quality, and price of labor inputs to reduce production costs and make output more adjustable to rapid changes in market demand (Sardaña 1998, p.

373 Unemployment, Labor Laws, and Economic Policies in the Philippines

70). Hence, labor market reforms are necessary. Today’s chief mainstream explanation for unemployment is that labor market institutions are “too rigid” and wages “too high.”8 But the “need to reform labor markets” argument is also sweeping across developing countries, as the recent book by Heckman and Pagés (2004) shows. In a recent study on the Philippines, Brooks (2002) suggests that an increase in the minimum wage rate leads to a rise in the unemployment rate. The author concludes that higher economic growth and moderate increases in the real minimum wage are required to reduce unemployment in the Philippines. This type of argument seems to relate unemployment to a restrictive and inflexible labor market. The idea is that inflexibility of labor markets is the cause of unemployment, and that the latter can be reduced only by weakening the social institutions like labor unions in which the labor market is embedded. The implication of this argument is that inflexible labor markets are to be blamed for the rise in unemployment. Indeed, discussions in the Philippines about making the labor market more flexible seem to indicate that factors like the increase in the bargaining power of labor unions are responsible for unemployment and, thus, policies designed to combat unemployment should focus on the labor market. These factors are called wage-push factors, as they increase the wage demands of workers. The literature distinguishes among three types of factors: (i) labor costs, which include minimum wages, unemployment benefits, firing restrictions, and unionization of the labor force; (ii) lack of functional flexibility, which refers to the inability of firms to reorganize the labor process as needed, and the limited adaptability of workers in the firm to undertake different tasks as required by the production process; and (iii) lack of numerical flexibility, which implies difficulties in adjusting working hours or the size of the workforce to output demand fluctuations, or in response to technological changes. This argument would claim that the rise of unemployment in the Philippines is due to changes in these wage-push factors. Hence, policies to increase labor market flexibility are usually recommended. These include: cutting unemployment benefits, reducing minimum wage, weakening labor unions, and doing away with employment protection measures—in short, deregulating the labor market to achieve market flexibility and to bring it closer to a perfectly competitive market. How do policy makers in the Philippines think of unemployment? Officials of the Department of Labor and Employment (DOLE) and the National Economic and Development Authority (NEDA), the Philippine planning agency, view unemployment as the result of a variety of factors, such as the high population and labor force growth rates, lack of investment, and the manufacturing sector’s low capacity to create employment. Some other sectors of the administration (in particular those that emphasize the lack of competitiveness as the country’s key problem) and some private sector

374 Jesus Felipe and Leonardo Lanzona, Jr.

organizations favor the explanation that the country’s lack of capacity to generate employment, and in general the unemployment problem, is due to inflexible labor markets. On the other hand, the mandate of the Central Bank of the Philippines (Bangko Sentral ng Pilipinas, or BSP) seems to be exclusively inflation targeting, and the BSP seems to think that labor market outcomes are outside the scope of monetary policy. It is more concerned with the relationship between inflation and growth, perhaps thinking that a price-stable environment will lead to growth and hence to job creation (this is elaborated on in Section 7.6). The reality of the Philippines is that, “in large part, public policies have created distortions that have not only been inimical to sustainable growth but have likewise been adverse to the employment content of growth” (Balisacan 1996a, p. 500). Indeed, the problems of unemployment and underemployment in the Philippines “are deeply rooted in the economic policies which have been pursued to achieve industrialization and growth” (Balisacan 1996b, p. 530). Finally, it is tempting to think that unemployment is “functional” to Philippine capitalism. Under this view, unemployment is an instrument that the capitalists use to maintain the profitability of their investments. According to Marxian theory capitalism creates a Reserve Army. Marx pointed out that capitalist production always coexists with noncapitalist production, such as subsistence agriculture, and draws part of its labor supply from these noncapitalist sectors through, for example, migration and the mobilization of female and child labor. Marx viewed these sectors and groups of the economy as reserve armies of labor.9 The reality is that the situation is very complicated and the Government does not have many policy options. Although there is a recognition that lack of investment is a problem, the debt situation does not allow an increase in muchneeded public investment. On the other hand, private investment is low because of the poor “investment climate.” The BSP seems to be concerned with other issues, and the truth is that monetary policy in the Philippines after the Asian crisis has not been restrictive. What is left? The argument seems to be that the solution to joblessness is labor market reforms.

7.3 Labor Market Outcomes and Economic Conditions As indicated above, a high rate of population growth, insufficient job creation in industry, a series of inappropriate trade policies, and a history of controversial labor market policies have contributed to high unemployment and underemployment, and to a relatively high proportion of the labor force being in low-productivity, services sector jobs since the late 1980s.

375 Unemployment, Labor Laws, and Economic Policies in the Philippines

7.3.1

Unemployment and Underemployment

Figure 7.1 shows the Philippines’ lack of capacity to create enough jobs for all those who enter the job market. The figure shows how the number of new entrants into the labor force has often outpaced net job creation (i.e., the difference between gross job creation and job destruction), leading to increasing unemployment. This difference is particularly large for various years, e.g., 1985, 1998, and 2000, when the Philippine economy destroyed jobs in net terms. The large number of entrants into the Philippine labor market is a consequence of the growth of the working-age population, as well as the rise in the labor force participation rates, especially among the female members of the workingage population. Figure 7.2 shows the number of jobs created by each of the three sectors of the economy and by the manufacturing subsector. This figure indicates that there has been plenty of job creation and job destruction within each sector. One word of caution is necessary in analyzing Figures 7.1 and 7.2. This is that the series of the number of entrants into the labor market and of job creation have a break in 1998/99. This leads in our database to an incorrect negative number for the number of entrants in 1998 (see Figure 7.1), and to an

Figure 7.1 Number of Entrants into the Labor Market, and Jobs Created, 1981–2003 2,500 2,000 1,500

Thousands

1,000 500 0 1981 1983 1985 1987 1989

1991 1993 1995 1997 1999 2001 2003

-500 -1,000 -1,500

Labor Entrants Source:

Jobs Created

Bureau of Labor and Employment Statistics, Employment, Hours and Earnings Surveys.

376 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.2 New Jobs Created, by Sector and in Manufacturing, 1981-2003 3,000 2,000

Thousands

1,000 0 1981

1983

1985

1987 1989

1991

1993

1995 1997

1999

2001

2003

-1,000 -2,000 -3,000 -4,000 Total Source:

Agriculture

Industry

Manufacturing

Services

Bureau of Labor and Employment Statistics, Employment, Hours and Earnings Surveys.

excessively large number of jobs destroyed (negative net job creation) also in 1998. The latter is due to the very large number of jobs destroyed in the services sector (see Figure 7.2). However, this is due to the break in the original series and the way we have to adjust the series to make them consistent with each other. Between 1981 and 1997, the Philippine economy generated 11,815,000 new jobs (an average of about 695,000 a year), of which 2,779,000 were in agriculture, 2,673,000 in industry (1,104,000 in manufacturing), and 6,399,000 in services. In the meantime, 13,087,000 new workers joined the labor force. This means that, during this period, unemployment increased by 1,272,000 people. On the other hand, for 1999–2003 (for the reasons stated above we skip 1998), the economy generated 4,011,000 new jobs (an average of about 1,000,000 a year), of which 1,141,000 were in agriculture, 298,000 in industry (225,000 in manufacturing), and 2,572,000 in services. In this time, 4,897,000 new workers joined the labor force, leading to an increase in unemployment of 886,000 workers. This indicates that the services sector has been the largest generator of employment in the Philippines, followed by agriculture and finally by industry.10 It is very important to mention that manufacturing, the sector that has thrived

377 Unemployment, Labor Laws, and Economic Policies in the Philippines

in other East Asian and Southeast Asian countries, has created only slightly above 1 million jobs. Figures 7.3, 7.4, and 7.5 give the total unemployment rate, unemployment by location, and unemployment by age, respectively; and Figure 7.6 shows the underemployment rate. (i.e., percentage of those who are working but would like to work more hours). Unemployment (Figure 7.3), which had averaged about 4.5% in the 1970s, increased significantly after the economic crises of the early 1980s, peaking in early 1985 at 12.6%.11 Although unemployment began to decline in the late 1980s, the recession in the early 1990s contributed to an increase in the rate. The Asian financial crisis did not cause any sharp increase in the unemployment rate, but the slowdown in the agriculture sector in early 2000 caused another rise in the rate, which in 2003 was slightly above 12%. Unemployment is largely a phenomenon affecting urban areas, as shown in Figure 7.4; unemployment in the mid-1990s, in particular, remained above 16% in Metro Manila. On the other hand, the unemployed have tended to be young (inexperienced entrants into the labor force), relatively well educated, and not heads of households. Figure 7.5 presents the unemployment rates broken down by age group, with the rates highest, close to 25%, for the 15–19 and 20–24 age groups. Figure 7.6 shows that underemployment is a more serious problem. It affects about 17% of those employed.12 If we add the unemployment and underemployment levels and divide the result by the total labor force, we can construct an “index of labor underutilization.” In 2003, this rate was about 26.2% (Figure 7.7). Although the series displays a slight downward trend, it is telling that during the last two decades, at least 25% of the labor force has been in a very precarious condition.13 Figure 7.8 shows that unemployment affects seriously those with high school and college degrees. Indeed, persons with tertiary education compose about 35% of the unemployed, and those with a high school education, close to 45%.14 This can be partly due to educational policies, which have led to some mismatch of workers in the market. The problem can be traced to the country’s failure to invest more in the quality of the educational system and, more importantly, to the mismanagement of the educational system. The latter is the result of deficiencies in the information system, especially the lack of data monitoring the employability of graduates, including the vocational and technical training institutions. One can use a simple decomposition of the employment-population ratio I L / P to analyze the sources of job creation across sectors. Define xi = Xi / P as the sectoral output per capita. The employment–output ratio in sector i can be written as bi = Li / Xi; let Ii Li / P the ratio of employment in sector i to population; Hi = 1/bi is labor productivity; and Oi = Li / L is the sectoral employment ratio. Then we have I 6(Li / Xi)(Xi / P) = 6bixi, which in growth

378 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.3 Unemployment Rate in the Philippines, 1980–2003 14 12

Percentage

10 8 6 4 2 0 1980 1982 1984 1986 1988 1990 Source:

1992 1994 1996 1998 2000 2002

National Statistics Office, Labor Force Surveys.

Figure 7.4 Unemployment Rate, by Location, 1980–2002 16 14 12

Percentage

10 8 6 4 2 0 1980 1982

1984

1986

1988

1990

1992

1994

Urban Source:

National Statistics Office, Labor Force Surveys.

1996

1998 2000 Rural

2002

379 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.5 Unemployment Rate, by Age Group, 1980–2003 30

25

Percentage

20

15

10

5

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 15-19

20-24

25-34

45-54

55-64

65 and above

Source:

35-44

National Statistics Office, Labor Force Surveys.

Figure 7.6 Underemployment Rate, 1980–2003 35 30

Percentage

25 20 15 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Source:

National Statistics Office, Labor Force Surveys.

380 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.7 Index of Labor Underutilization, 1980–2003 45 40 35

Percentage

30 25 20 15 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Source:

2000 2002

Authors' computations.

Figure 7.8 Percentage Breakdown of Unemployment, by Education, 1980–2003 50 45 40

Percentage

35 30 25 20 15 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 No Schooling Source:

Elementary

High School

National Statistics Office, Labor Force Surveys.

College

Not Reported

381 Unemployment, Labor Laws, and Economic Policies in the Philippines

rates is:

φˆ = ∑ λi (xˆ i + bˆi ) = ∑ λi ( xˆ i − εˆi )

(1)

This means that the growth rate of the overall employment ratio can be written as a weighted sum across sectors of differences between growth rates of output levels per capita and labor productivity. Equation (1) provides a framework for analyzing the sources of job creation ( φˆ = Lˆ > Pˆ ). In expanding sectors (relative to population growth), productivity increases do not necessarily translate into reduced employment; in slow-growing or shrinking sectors, higher productivity means that employment declines. The numerical computations are shown in Appendix Table A7.1 and the results are shown in Figure 7.9. The conclusion is that the largest contributor to the growth rate of the employmentpopulation ratio has been the services sector. The contribution of industry has been very small and that of agriculture has been largely negative. 7.3.2

Population, Labor Force, and Employment

Table 7.1 shows the population growth rates between two census periods. Although the growth rate has declined from around 3% in the 1960s and 1970s, in 2000 it was still 2.36%. While more than 40% of the population was below 15 years of age, the growth of the working-age population—those 15 years of age and older—was even more rapid than the growth rate of the total population. Appendix Table A7.2 shows that the working-age population grew by 2.7% yearly in the 1980s and by 2.5% in the 1990s. In addition, the labor force participation rate—the proportion of working-age people who were in the labor force—rose about 5 percentage points in the 1980s and 2 percentage points in the 1990s, largely because of the increase in the proportion of women entering the workforce. This implies that the actual labor force grew by about 4 percentage points each year in the 1980s and by 2.7 percentage points in the 1990s. It has been argued for some time that rapid population growth has counteracted whatever economic gains the country has made. The high population growth rate puts pressure on the national Government to create jobs for a workforce that is expected to increase considerably over the next few years. The conventional view (Thirlwall 2003, p. 304) is that high rates of population growth depress human capital welfare because they induce environmental degradation, put pressure on food supplies, lead to congested and overcrowded cities, and reduce the savings ratio. Because of this, the government population policy has been criticized for being too complacent in addressing the huge surplus of labor (see Box 7.1). Specifically, in both design and implementation, family planning programs have been relegated to local

382 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.9 Sectoral Contributions to the Employment-Population Ratio, 1992–2002 0.06

Percentage P oints

0.04

0.02

0 1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

-0.02

-0.04

-0.06 Agriculture Source:

Industry

Services

Total

Authors' computations.

Table 7.1 Population and Average Annual Population Growth Rate, 1960–2000

Year

Population Average

Annual Rate of Increase (%)

1960 1970 1975 1980 1990 1995 2000

27,087,685 36,684,486 42,070,660 48,098,460 60,703,206 68,616,536 76,503,333

2.89 3.08 2.78 2.71 2.35 2.32 2.36

Note:

The rate of growth of population between two census periods was estimated using the following formula: P1 = P0(1+r)t, where P1 = population as of the latest census P0 = population of the previous census t = number of years in between census years r = intercensus growth rate. Sources: National Statistics Office, 1997 Philippine Yearbook, and results of 2000 Census of Population and Housing.

383 Unemployment, Labor Laws, and Economic Policies in the Philippines

government units. The problem is due to a combination of the strong advocacy of religious groups against the use of contraceptives plus the failure of the economy to generate enough jobs. Figure 7.10 plots the movement of gross domestic product (GDP) per capita, labor productivity, employment rate, and labor force participation rate, in index form, normalized with 1980 as the base year. The evolution of GDP per capita in the Philippines is slightly better than that of labor productivity: today, GDP per person in the Philippines is 7% higher than in 1980, while labor productivity is 6% lower. Since 1985, in particular, the former has grown at a slightly faster rate. This implies that the growth of labor productivity has dragged down the growth of GDP per capita. The difference in evolution between the two series is the sum of the contributions of the growth of the employment rate (ratio of total employment to the total labor force) and of the labor force participation rate (ratio of the total labor force to total population). The graph shows that the latter rate has increased by 19%, from 36% to 42.7%, indicating that the labor force has grown faster than population; thus the dependency ratio has decreased, a positive factor. This has been largely due to the increase in the proportion of women entering the workforce. However, the employment rate is stagnant (slight decline from 92% to 88%), indicating that the Philippine economy has had serious problems generating employment for those who enter the labor force, especially since the 1990s. Figure 7.11 indicates that the employment-to-population ratio by sector has remained virtually constant. A substantial share of the total workforce is absorbed by the agricultural and services sectors. The latter sector’s share has increased since 1998, after the Asian financial crisis. The other sectors have not contributed to job creation. In particular, the manufacturing employmentto-population ratio is only about 4%. This figure has hardly changed in the last two decades. It increased slightly in 1992, when the Government instituted a number of trade and market-oriented reforms, but then it declined after the Asian financial crisis. Figure 7.12 shows the ratio of the employment growth rate to that of output growth rate, for the whole economy as well as by sector. To provide estimates of the employment elasticity, however, it is better to estimate the regression of the growth rate of employment on the growth rate of output. Results are shown in Table 7.2, indicating low overall employment elasticity (the elasticities are poorly estimated). The highest elasticities are registered for the last decade (1993–2004) and for the manufacturing sector (around 1), followed by industry (0.74) and then agriculture (0.47). The averages for 1980– 2004 and for the subperiod 1980–1992 indicate very low employment elasticities, in the range of 0.05 to 0.18.15 Balisacan (1996a, p. 502) indicates that “while employment growth was persistently lower than output growth in 1970s (the implicit employment elasticity with respect to output for this period was close to 0.65), such was not the case in the early part of the 1980s.”

384 Jesus Felipe and Leonardo Lanzona, Jr. Box 7.1 Philippine Population Policy

Despite claims of its apparent weaknesses, the Philippines has had a population policy since the 1970s. During the Marcos regime, the Population Commission, which was created in 1971, and the Department of Agriculture (DA) designed two modules for the Integrated Planning for Improved Living Program, aimed at incorporating the concepts of family and population planning in the home extension education program of the then Bureau of Agricultural Extension (now called Agricultural Training Institute) of the DA. Given its more than 800 female familyextension workers, who regularly carried out village-to-village training and information on family and community development, this bureau achieved some measure of success by handing out free contraceptives mostly to women in the rural areas. After the fall of the Marcos government, the family planning program continued with the Aquino administration but began to weaken. The family planning functions were eventually transferred from the Population Commission to the Department of Health (DOH) in 1989. The program further waned in the mid-1990s with the devolution of some national government functions to the local governments, including some of the functions of the DA. With a limited budget and the lack of an integrated national population program, the local governments showed little interest in population growth. In 1993, with the arrival of President Ramos, and in preparation for the 1994 International Conference on Population Development in Cairo, the Population Commission, which continued its task of formulating the country’s population program, established the program called Integrated Population Concept on Agriculture and Home Extension, to be jointly funded by the Food and Agriculture Organization and the United Nations Population Fund. However, this program was ineffectively pushed and as a result failed to reduce the growth of the population, which already reached 68.5 million in 1995. A key factor behind the lack of state commitment to the population programs was the presence of various women’s and Catholic Church organizations that expressed their opposition to the population policies in the 1990s. Through the socalled Third World Network, these organizations proposed that the population policy be closely integrated with the distribution and use of the resources of the country, as well as of the world, as the program promotes women empowerment. The Government’s Medium Term Development Plan for 1992 to 1997 thus attempted to integrate population and development policies, but was viewed by many with skepticism for being merely a part of the country’s structural program with the World Bank. A study in 1997 by the Population Commission further showed that young people’s attitudes about sex and family had not been influenced by previous family planning programs. During the Estrada administration, population policy became more focused by assisting married couples to reduce unwanted fertility and by meeting their demand for contraceptives. In addition, the Government expanded the resources available continued.

385 Unemployment, Labor Laws, and Economic Policies in the Philippines Box 7.1 Philippine Population Policy (cont'd.)

for family planning through budgetary appropriations for the purchase of contraceptives, which had previously been available only because of donations from international agencies. Again, this initiative has not progressed. Many politicians and academics have criticized the Arroyo government for ambivalence on the population question. The Government faces opposition from the powerful Catholic Church (in the southern Philippines, the Church has even said that it would deny communion to government health workers who want to implement a safe-motherhood program through the Department of Health) and prolife groups. In stark contrast to the aggressive stance of the Estrada government, the present administration sees the population issue as primarily a health intervention problem and as a means to help couples achieve their fertility preference. Aside from the lack of financing, the Arroyo govenment’s family planning program has emphasized the improvement of reproductive health at the expense of what others see as its main goal—the reduction of fertility. A number of researchers (e.g., Herrin and Pernia 2003) have attributed the failure of these programs to the opposition of the Catholic Church to the use of contraceptives. Likewise, ignorance (e.g., rumors that the birth-control pill could cause psychological illnesses) and scare tactics are widespread among poor people. However, these studies have seldom noted the other factors that are necessary for implementing an effective population program. Schultz (1994) observed that, despite the controversial treatment of family planning as exogenous, it is statistically insignificant in estimates using cross-country data when this variable interacts with education, nutritional inputs, natural resources, and other socio-economic variables affecting the costs and benefits of children. Mellor (1998) noted that while family planning programs are effective, these are not independent of other socioeconomic policies, and failure to consider their endogeneity will lead to either underestimates or overestimates of program effectiveness.

This observation is supported by firm-level surveys on labor turnover rates, shown in Figure 7.13. It shows a decline in the labor turnover rate from 1.4% in 1995 to only 0.2% in 2000. This means that in 1995, an average of 14 new workers per 1,000 persons employed in the industry sector were added to industrial employment. However, in 2002 this figure declined to only 2. 7.3.3 Employment Composition, the Informal Economy, Underemployment, and Overseas Workers Figure 7.14 indicates that agriculture, which accounted for over 50% of employment in the early 1980s, employed about 45% of the workforce in 1990 and 35% in 2000. The share of employment in manufacturing remained stable, at about 12% in the 1990s, but fell to 9.5% in 2000. The services sector

386 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.10 Decomposition of GDP per Capita, 1980–2003 1.4 1.2

Index 1980=1

1.0 0.8 0.6 0.4 0.2 0.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

2002

Labor Force Participation Growth Rate

Labor Productivity Growth Rate

GDP Per Capita Growth Rate

EmploymentGrowth Rate

Source:

Felipe (2005a).

Figure 7.11 Employment-to-Population Ratio, by Sector, 1980–2003 45 40 35

Percentage

30 25 20 15 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Total

Agriculture

Mining

Construction

Utilities

Services

Source:

National Statistics Office, Labor Force Surveys.

2000 2002 Manufacturing

387 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.12 Ratio of Employment Growth to Output Growth, by Sector, 1981–2004 15

Employment Elasticity

10

5

0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 -5

-10

-15 Total Source:

Agriculture

Industry

Services

Authors' computations based on data from the National Statistics Office, Labor Force Surveys.

Table 7.2 Estimated Employment Elasticities 1980–2004

1980–1992

1993–2004

Total

0.1404 (0.83)

0.1532 (0.75)

0.6441 (1.33)

Agriculture

0.0971 (0.41)

0.1643 (0.60)

0.4760 (0.64)

Industry

0.1772 (0.83)

0.1871 (0.76)

1.0937* (1.87)

Services

0.0823 (0.41)

0.0515 (0.17)

0.7444* (2.03)

Note:

Figures in parentheses are t-values. * indicates that the estimate is statistically significant at the 10% probability level.

388 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.13 Labor Turnover Rates 1.6 1.4 1.2

Percentage

1.0 0.8 0.6 0.4 0.2 0.0 1995

1996

Source:

1997

1998

1999

2000

Bureau of Labor and Employment Statistics, Employment, Hours and Earnings Surveys.

Figure 7.14 Percentage of Total Employment, by Sector, 1980–2003 60 50

Percentage

40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

2002

Agriculture

Mining

Manufacturing

Construction

Utilities

Services

Source:

National Statistics Office, Labor Force Surveys.

389 Unemployment, Labor Laws, and Economic Policies in the Philippines

(commerce, finance, transportation, and a host of private and public services) perforce became the residual employer, accounting for almost 40% of the workforce in 1988 and almost 50% now, in contrast to the 33% in 1980. Under this category, government workers (national plus local government units) occupy a significant portion, constituting, on average, 5% of all workers in the 1980s and 1990s. While the shares of services and agriculture have undergone important changes, industry’s share (and, within this, manufacturing) in total employment barely increased. The failure of industry’s share to grow despite the rapid expansion of its share in GDP has meant that services and agriculture are the major sources of employment generation. As noted above (Figure 7.2), the services sector has generated most of the jobs in the economy. Thus, addressing the unemployment problem requires an in-depth analysis of what happens in the three sectors of the economy. Much of the employment in the service sector is concentrated in smallscale enterprises or self-employment activities like hawking and vending, repair work, transportation, and personal services. A large part of the employment in services (as well as in agriculture) reflects a forced adoption by the sector of surplus workers and a high degree of underemployment in the sector. Most of these workers are own-account and unpaid family workers (the latter alone are close to four million). As Figure 7.15 shows, the combined percentage of these workers (which the Labor Force Survey defines as the informal sector workers) in total employment in 2003 was about 50%. Although the share of wage and salaried workers increased 13 percentage points between 1980 and 2003, the other 50% of those employed are in the informal sector (indeed, this is one of the criteria DOLE follows to estimate the degree of informality of the economy. Soriano and Sardaña 1998, p. 33). Informal sector occupations are characterized by low productivity, modest fixed assets, long hours of work, and low wages.16 The Philippine System of National Accounts (PSNA), under the National Statistical Coordination Board (NSCB), started to make explicit the contribution of the informal economy in 1993. The first set of estimates covering the period 1980–2000 was incorporated in the latest PSNA revision in 2004. This was in response to questions raised by policy makers on whether the estimate of GDP adequately captured output in the informal economy. This concern stems from the role played by the unorganized sector in the Philippine economy. It is well known that the informal economy is a significant contributor to employment creation and to the production of goods and services. Estimates of the NSCB show that the unorganized sector contributed roughly about 45% of GDP between 1987 and 1993. By industrial origin, the unorganized sector is found mostly in services (about 48%), followed by agriculture, fishery, and forestry (30%) and industry (22%) (Soriano and Sardaña 1998, p. 35). The most recent

390 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.15 Percentage of Total Employment, by Type of Worker, 1980–2003 60 50

Percentage

40

30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Wage and Salary Workers Source:

Own Account Workers

Unpaid Workers

National Statistics Office, Labor Force Surveys.

estimate for 2004 is presented in Table 7.3, indicating that still almost 44% of GDP in 1999 could be attributed to the unorganized or informal sector. This percentage is relatively high compared with that for the rest of the world. In a survey of 85 countries, Botero et al. (2003) have estimated an average share of the informal sector of 28.3% for Asia, 17% for the developed countries, 41% for Latin America, and 43% for Africa. In any case, these activities are not enough to absorb all the entrants into the labor force, and unemployment increases as a result, as documented above. Beyond the unemployment caused by economic mismanagement and crises, there is a more long-term, structural unemployment problem. This is the result of the high concentration and control of productive assets, and of the inadequate number of workplaces created by investment in the secondary sector. The size and growth of the service sector is one indicator. Underemployment is another one (see Figure 7.6 above). Underemployment has predominantly affected the poor, the less educated, and older people. In the first half of the 1980s, about 25% of male household heads and 17% of female household heads in the labor force could not find more than 40 days of work per quarter. In the late 1990s, this percentage was reduced to about 22% of male household heads and 16% of female household heads. Figure 7.16 shows the percentage of those employed who are classified as visibly underemployed, i.e., those who work less than 40 hours and wish to work more. Notice that the share in 2003 has remained high at around 10–12%, with a slight increase in the female rate to about 8%.

391 Unemployment, Labor Laws, and Economic Policies in the Philippines

Overseas contract work absorbs a significant amount of Philippine labor. From the late 1940s through the 1970s, migrants were largely Filipino members of the United States armed services, professionals, and relatives of those who had previously migrated. In the 1970s, 1980s, and 1990s, quite a different flow of migration developed: most emigrants were workers engaged in contract work in the Middle East and, to a larger extent, elsewhere, especially in more recent years. Although some were professionals, the majority were production, construction, and transport and equipment workers or operators, as well as service workers. An increasing number were merchant seamen. As long as wages offered in other countries are a multiple of the wages offered in the Philippines, Philippine workers will continue to seek employment opportunities abroad. Figure 7.17 shows that overseas placements of land-based workers increased from 350,982 in 1984 to about 900,000 currently. This has led to an increase in the annual remittance per worker deployed, as indicated in Figure 7.18. Moreover, remittances have become a major source of foreign exchange for the country. Figure 7.19 shows the percentage of compensation income from the rest of the world to gross national product in constant prices. 7.3.4

Wages and Salaries

Labor productivity (y = Y / L)), the ratio of value added (Y) to total employment (L), and the average real wage rate for the overall economy are Table 7.3 Percentage Share of Organized and Unorganized Sectors, by Economic Activity, 1999 Economic Activity Agriculture, Fishery, and Forestry Industry Sector Mining and Quarrying Manufacturing Construction Electricity, Gas, and Water Service Sector Transportation, Communication, and Storage Trade Finance Own Dwellings and Real Estate Private Services Government Services Gross Domestic Product Source:

Domingo (2004).

Organized

Unorganized

Total

35.92 64.32 82.29 52.46 90.37 100.00 58.10

64.08 35.68 17.71 47.54 9.63 — 41.90

100.00 100.00 100.00 100.00 100.00 100.00 100.00

66.62 49.61 98.69 8.93 41.60 100.00 56.08

33.38 50.39 1.31 91.07 58.40 — 43.92

100.00 100.00 100.00 100.00 100.00 100.00 100.00

392 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.16 The Visibly Underemployed as a Percentage of Total Employment, 1987–2003 14 12

Percentage

10 8 6 4 2 0 1987

1989

1991

1993

1995

Total Source:

1997

1999

2001

Male

2003

Female

National Statistics Office, Labor Force Surveys.

Figure 7.17 Deployed Overseas Filipino Workers, 1984–2003 1,000 900 800

Thousands

700 600 500 400 300 200 100 0 1984

1986

1988

Total Source:

1990

1992

1994

Land-based

1996

1998

2000

2002

Sea-based

Philippine Overseas Employment Administration, Bangko Sentral ng Pilipinas.

393 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.18 Annual Remittance per Overseas Filipino Worker, 1984–2003 9,000 8,000 7,000

US Dollars

6,000 5,000 4,000 3,000 2,000 1,000 0 1984

1986

1988

1990

1992

Total Source:

1994

1996

1998

Land-based

2000

2002

Sea-based

Philippine Overseas Employment Administration, Bangko Sentral ng Pilipinas.

Figure 7.19 Percentage of Compensation Income from the Rest of the World to GNP, 1982–2004 12

10

Percentange

8

6

4

2

0 1982

1984 Source:

1986

1988

1990

1992

1994

National Statistical Coordination Board.

1996

1998

2000

2002 2004

394 Jesus Felipe and Leonardo Lanzona, Jr.

shown in Figure 7.20 (base year is 2000). The figure indicates that real wages and labor productivity declined significantly after the crisis of the 1980s, but despite the recovery in the 1990s, they are still below the 1980s value. The figure also indicates that the ratio of the real wage rate to labor productivity was about 75% in 1980, while in 2003 it had decreased to about 65%. This indicates that real wages have increased more slowly, or, stated differently, that gains in labor productivity have not yielded parallel increases in the real wage rate. In his survey, Balisacan (1996a) already noted the patterns of labor productivity and real wages, and mentioned that they “are reflective of the structural bottlenecks in the economy, particularly in its persistent inability to absorb the growing number of underemployed members of the labor force” (Balisacan 1996a, p. 506). He documents the decline in labor productivity in the Philippine economy since the 1950s and concludes that “it is apparent that not only has industry failed to absorb an increasing proportion of the labor force, as was the case in other countries of similar income levels and in Asia’s newly industrializing economies, but it was likewise unable in recent years to reverse the decline in labor productivity” (Balisacan 1996a, p. 507). Figure 7.21 indicates that the average nominal wage rate increased 800% between 1980 and 2003. On the other hand, the real wage rate in 2003 was around 80% of the 1980 rate. The real wage rate suffered a significant decline between 1980 and 1988. In 1988, it was a mere 75% of the wage rate in 1980. Balisacan (1996a, p. 512) notes that declines in real wages, together with a rise in per capita income (however small), are a unique feature of the Philippines. Disaggregated data for agriculture and nonagriculture are shown in Appendix Table A7.3. It shows the schedule of daily nominal and real wages in the Philippines for 1980–2003. Two points are worthy of note. First, the average daily nominal wage in the agriculture sector increased 13 times during this period, while the nonagriculture sector wage rate increased by a factor of 11. In absolute terms, nonagriculture daily wage rates are, however, substantially higher than those for the agriculture sector, owing to such considerations as cost of living, productivity, and employers’ ability to pay, which are presumed to be higher in the urban areas, where most of the nonagriculture sector is situated. Second, in real terms, however, wages increased substantially less. In agriculture, the 2003 wage rate was 1.5 times that in 1980, while for nonagriculture the ratio was 1.3. According to the neoclassical model, if factors of production are equally distributed among the main regions of the country, we should expect little regional variation of earnings. Appendix Tables A7.4 and A7.5 provide the average nominal monthly earnings per paid employee in establishments employing more than nine employees, classified by industry and location, for selected years, when the surveys were conducted.17 An analysis of variance

395 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.20 Real Wage Rate and Labor Productivity, 1980–2003 140,000 120,000

Pesos (base 2000)

100,000 80,000 60,000 40,000 20,000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Labor Productivity Source:

Real Wage Rates

Felipe (200b).

Figure 7.21 Average Real (base 2000) and Nominal Wage Rates, 1980–2003 120,000

100,000

Pesos

80,000

60,000

40,000

20,000

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Average Real Annual Wage Source:

Felipe (200b).

2002

Average Nominal Annual Wage

396 Jesus Felipe and Leonardo Lanzona, Jr.

indicates that that there are both strong regional and industry sector effects. The National Capital Region offers the highest wages, while transportation and utilities pay the highest among the industry sectors. The lowest pay is seen in Mindanao and in agriculture and services. There is migration toward the cities but little evidence of wage equalization. This can be partly explained by the higher costs of living and transportation in areas of higher wages and by the different factor intensities by region and sector. 7.3.5

Extent of Poverty and the Employment–Poverty Link

Individuals are said to be in absolute poverty when they cannot obtain at least a specified minimum of the food, clothing, and shelter that are considered necessary for continued survival. In the Philippines, two such minimums have been established. The poverty line is defined in terms of a least-cost consumption basket of food that provides 2,016 calories and 50 grams of protein per day, and of nonfood items consumed by families in the lowest quintile of the population. The subsistence level is defined as the income level that allows the purchase of the minimum food requirements only. Figure 7.22 indicates that inequality, measured in terms of the Gini coefficient, barely changed between 1985 and 2000. In 1985, slightly more than 50% of the population lived below the poverty line—about the same proportion as in 1971. By 1988, the poverty incidence rate had declined to 40.2%. This rate declined gradually to 39.9% in 1991, 35.5% in 1997, 35% in 1994, and 32% in 1997, but it rose slightly to 33.7% in 2000 (Figure 7.23). This suggests that output growth in the Philippines has not brought about a more equitable distribution of total output, leading to uneven development. The economic turndown in the early 1980s and the economic and political crisis of 1983 and 1986 and their subsequent effects on employment have had a devastating impact on living standards. The slowdown in the economy after the Asian financial crisis has had similar effects on the economy. The countryside contains a disproportionate share of the poor. For example, more than 80% of the poorest 30% of families in the Philippines lived in rural areas in the mid-1980s and in the 1990s. The majority were tenant farmers or landless agricultural workers. The landless, fishermen, and forestry workers were found to be the poorest among the poor. In some rural regions— the sugar-growing region on the island of Negros being the most-often-cited example—there was a period in which malnutrition and famine were widespread. Urban areas are also affected by poverty, with the incidence of urban poverty increasing between 1971 and 1985 by 13 percentage points, with the result that in 1985 half the urban population was considered poor. The urban poor (squatters) generally live in crowded slum areas, often on land or in

397 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.22 Gini Coefficients for the Philippines, 1985–2000 0.6

0.5

Gini Coefficient

0.4

0.3 0.2

0.1

0 1985

1988

1991

1994

Philippines Source:

1997

2000

National Capital Region

National Statistics Office, Family Income and Expenditures Surveys.

Figure 7.23 Poverty Incidence, by Location, 1988–2000 50 45 40

Percentage

35 30 25 20 15 10 5 0 1988 Philippines Source:

1991

1994

National Capital Region

1997

2000

Areas Outside National Capital Region

National Statistics Office, Family Income and Expenditures Surveys.

398 Jesus Felipe and Leonardo Lanzona, Jr.

buildings without permission from the owner. These settlements often lack basic necessities like running water, sewerage, and electricity. Poverty is a function of the total output of an economy relative to its population and the distribution of that income among families. From this perspective, the Philippines ranks at the bottom of the lower-middle-income economies, with the actual distribution of income being highly skewed. Given this situation, the country should make efforts to limit the extent of poverty by implementing income policies that lead to a more equitable sharing of the country’s income. Although considerable underreporting is thought to occur among upperincome families, and incorrect reporting due to lack of information is widespread, particularly with respect to noncash income, the available data is adequate to provide a broad overview. In 1988, the most affluent 20% of families in the Philippines received more than 50% of total personal income, with most of it going to the top 10%. Below the richest 10% of the population, the share accruing to each decile diminishes rather gradually. A World Bank study (World Bank 2001, p. 31) suggested that there has been a small shift toward a more equal distribution of income since 1961. The beneficiaries appear to have been middle-income earners, however, rather than the poor. The World Bank report concluded, and many economists associated with the Philippines concur with the assessment, that the country’s high population growth rate is a major cause of widespread poverty, particularly in the rural areas. These issues are in turn linked to the concentration of control of economic resources and the structure of the economy. Land ownership is highly unequal, but land reform initiatives have made little progress (see Box 7.2). In urban areas the extent of poverty is also related to the concentrated control of wealth. Considerable portions of both industry and finance are highly monopolized. Access to finance is severely limited to those who already possess resources. The most profitable investment opportunities are often in areas in which tariffs or other forms of government protection ensure high profits but do not necessarily result in rapidly expanding employment opportunities. Unlike other presidents both past and present, Presidents Aquino and Ramos considered eliminating the monopolies and structures of privilege aggravated by the Marcos regime as a key policy agenda in their campaigns. Both administrations looked to the private sector to revitalize the economy, create jobs for the Filipino masses, and lead society to a higher standard of living. State-protected monopolies were mostly dismantled, but not the monopoly structure of the Philippine economy that had existed long before Marcos assumed power. However, the business elite did not contribute to the Government’s attempts to revitalize the economy through a stronger private sector. With the election of Estrada and later of Arroyo to presidency, unemployment and underemployment remained widespread.

399 Unemployment, Labor Laws, and Economic Policies in the Philippines Box 7.2 Land Reform Programs in the Philippines

Land reform has a long history in the Philippines. A series of republic acts even before the martial law period mandated the redistribution of large rice and corn estates, the shift from share tenancy to leasehold, and the establishment of an administrative institution for implementation. Despite previous attempts, however, it was Presidential Decree 27 (PD 27) of 1972, or the Land Reform Program, that initiated and enforced a large-scale program of land reform. The objectives of the program were: (i) the conversion of tenants into owners of the land they were tilling for rice and corn; (ii) the introduction of a system to allow tenants to purchase tenanted land by installments; and (iii) the establishment of a rental ceiling to ensure a higher income to remaining tenants. The program was applied to rice and corn tenanted areas (1.01 million hectares). Under the program, lands in excess of a 7-hectare retention limit (with another 3 hectares for each legal heir) were to be transferred to tenants. This was undertaken by Operation Land Transfer (OLT). Meanwhile, the reform of the tenure system was implemented through Operation Leasehold (OLH). In its first 14 years of implementation (1972–1986), the Land Reform Program had achieved 48% of its target, distributing 539,000 hectares of land. This success can be attributed partly to the extensive irrigation program of the Government, and the introduction of modern varieties during the period. Nevertheless, the program failed to alleviate rural poverty for several reasons. First, the program exempted 368,000 hectares of sugarcane land, 2.15 million hectares of coconut land, and 1.8 million hectares of other cropland. Second, the landowners took many measures to evade the redistribution, e.g., subdividing the land to their relatives, selling or mortgaging their land, shifting to cash crop from rice and corn. Third, a land reform program by itself and without other inputs cannot boost agricultural production. PD 27 was centered on land reform or redistribution of land rather than agrarian reform or the provision of adequate infrastructure and inputs. Many of the problems raised against the previous land reform programs were addressed by the Comprehensive Agrarian Reform Program (CARP), or Republic Act 6675 of 1987. This program covers all agricultural land, including public lands, for a total scope of 8.2 million hectares. It also incorporates an extensive support services component to boost the productivity of the new landowners. Under CARP, owners of private agricultural lands are subject to a 5-hectare retention limit. Land awardees meanwhile are to receive no more than 3 hectares in the form of a Certificate of Land Ownership Award (CLOA). Awarded lands are officially acquired with funding by the Land Bank and are amortized by beneficiaries over a 30-year period. Repayment terms are leniently set at 6% per year, with a further minimum rate set at 10% of the average value of harvest. Under CARP, the transfer of land ownership continued.

400 Jesus Felipe and Leonardo Lanzona, Jr. Box 7.2 Land Reform Programs in the Philippines (cont’d.)

need not eliminate the former landowner from productive access to land. In the case of commercial agriculture, former owners are allowed to enter joint ventures, corporate farming, or leaseback arrangements with land awardees. Aside from redistribution, land reform also implements various land market restrictions: land under coverage cannot be sold or transferred unless by inheritance. The prohibition applies even to beneficiaries for a period of 10 years. Share tenancy continues to be prohibited, while location-specific rental ceilings are also imposed. The pace of land distribution has been very slow. Between 1987 and June 2002, only around 5.7 million hectares, or about 70% of the target area of 8.2 million hectares, was distributed (Department of Agrarian Reform 2002). Among the difficult areas are the remaining 1.41 million hectares of private lands, whose redistribution is expected to be a prolonged process. This slow pace of the program prompted Congress to give CARP a 10-year extension after the Government failed to complete its land transfers. According to Llanto and Ballesteros (2003, p. 15), aside from the lack of financing, the problems of CARP are cumbersome land valuation (leading to conflicts on “fair market value”), slow land surveys, the difficulty of coordinating land reform–related activities; and numerous loopholes in the law (e.g., land use conversions). In September 2004, President Gloria Macapagal-Arroyo further complicated matters by signing into law Executive Order No. 364, which transformed the Department of Agrarian Reform into the Department of Land Reform. This law makes the newly transformed department responsible for all types of land reform, i.e., agrarian reform, urban land reform, and ancestral domain reform. The Government sees this move as a means of streamlining the bureaucracy. However, given the limited budget of this department, an overall increase in its functions may only reduce further the budget that is intended for agrarian reform beneficiaries. There have also been claims that continued delays in land reform implementation has contributed to the decline in investments, particularly in agriculture. The declines are attributed to two factors. The first is the depletion of bank credit for agriculture, as the uncertainty due to CARP has eroded to a large extent the collateral value of land. The second is the delay in CARP implementation, which keeps land in the hands of persons who may eventually lose them and so fail to recover the value of invested capital, thus diminishing investment incentives. A study by Habito, Briones, and Paterno (2003) looked into the causes of depressed investment, among other things. Using farm-level data, the study showed that the delay in the implementation is more significant than the erosion of collateral values. Hence, the failure to complete land reform to some extent can account for the lack of investment incentives in the countryside. Sources:

Department of Agrarian Reform (2002), Habito et al. (2003), Llanto and Ballesteros (2003).

401 Unemployment, Labor Laws, and Economic Policies in the Philippines

7.4 Labor Market Policies in the Philippines The role of the labor market in fostering or hindering the creation of employment in the Philippines is an issue subject to intense debate. The parties involved, mostly firms and unions, strongly disagree on the effects of a number of labor market policies. While firms argue that many of these policies undermine their ability to generate jobs because of the restrictive nature of the policies, unions argue that the policies (e.g., minimum wage, right to organize) are necessary to maintain minimum levels of dignity (i.e., political economy reasons). In the early 1980s, the Philippines embarked on a series of structural adjustment measures aimed at implementing the export-led growth model, accelerating growth in the context of globalization, and making the Philippines more attractive to foreign investors. A key strategy to achieve this was to attract foreign investments. To this purpose, the Government passed the Omnibus Investment Code of 1987, which included incentive provisions for labor use. It provided income tax holidays for enterprises engaged in a preferred area of investment and tax deductions for labor expense allowances. The Government then enacted the Foreign Investment Act in 1991, liberalizing existing regulations by allowing up to 100% foreign equity participation. The privatization of government owned and controlled corporations and the deregulation of vital support industries like shipping, telecommunications, and energy, were major parts of the structural adjustment program. The overall aim of these measures was to achieve higher growth rates of output and to create employment. In retrospect, however, the structural adjustment efforts have not lived up to their expected objectives. In terms of employment growth, they have failed since unemployment, underemployment, and the number of workers working part-time have increased. And, moreover, most of the jobs generated are in agriculture and services—sectors with low productivity. The policy and legal framework for the labor sector is embodied in the 1987 Constitution, the 1974 Labor Code, and other executive policy instruments. They are implemented by DOLE. The Labor Code especially promotes tripartism, defined as the interaction between the State, employers, and labor as social partners in the development of industrial relations policies that seek solutions to issues of common concern. The Labor Code institutionalized tripartism as an industrial relations policy during the Marcos regime. Over the years, various administrations considered as their priority the establishment of a policy environment that respects the rights of both management and labor to bargain for their respective interests, guided only by the condition that these negotiations must not hinder government programs

402 Jesus Felipe and Leonardo Lanzona, Jr.

and development goals. Under this agreement, management recognizes the valid role of labor unions in the success of the enterprise. Labor organizations are expected to assume a similar degree of responsibility in ensuring that the firm can meet any demands and challenges from competition, both domestic and global. The strength of these labor organizations has been a main issue in the way labor markets are perceived to function. Another key question is whether existing contract norms create incentives that discourage long-term employment or undermine skills development. A list of the key laws affecting the labor market and their main features is found in Appendix Table A7.6. The Labor Code (amended several times) can be divided into two parts. First are the employment laws that govern individual employment contracts, determining the compensation, the length of trial periods, and the conditions of part-time work. The Government regulates employment relationships by restricting the range of feasible contracts and by raising the costs of both laying off workers and increasing the hours of work. These regulations seem to favor full-time, indefinite contracts over short-term, fixed-term, or temporary contracts. As a form of worker protection to permanent workers, the Labor Code mandates a minimum advance notice period before termination, specifies the causes that are considered justified cases for dismissal, and establishes compensation to be awarded to workers depending on the reason for termination. However, temporary contracts can be terminated at no cost. To prevent firms from exclusively hiring workers on temporary contracts, the use of such arrangements is restricted. The Labor Code also imposes a limit of 6 months to test and dismiss a worker at no cost if his or her performance is considered unsatisfactory. The second category is collective or industrial relations laws. These regulate the bargaining, adoption, and enforcement of collective agreements, the organization of trade unions, and industrial action by workers and employers. To counteract the power of employers against workers, the Government empowers labor unions to represent workers collectively, and protects particular union strategies in negotiations with employers. These laws thus govern the balance of power between labor unions, employers, and associations of employers. The collective laws of the Labor Code effectively allow workers to play a part in contract negotiation, particularly in the area of compensation, through their participation in collective bargaining agreements (CBAs) and in the arbitration process. The Labor Code was conceived primarily to distribute the rents that employers supposedly gained from the various types of trade policy protection measures existing at the time. However, as trade restrictions were dismantled, the rigidity introduced by these laws was questioned, and the law itself has been modified to more adequately reflect supply and demand in the labor market. Three key labor market policies seem to create difficulties (binding

403 Unemployment, Labor Laws, and Economic Policies in the Philippines

constraints) for employers. The first deals with labor relations and the protection of permanent and unionized workers (Articles 234, 253A, 260, 263, and 264). The second refers to the laws relating to labor contracts. Two articles, in particular, are the source of contention. One refers to the restrictions on subcontracting arrangements (Article 106); the other to security of tenure (Article 279). After a probationary period of 6 months (Article 281) the employer must offer a permanent employment, out of which it is very difficult, but not impossible, to release workers. The controversial third labor market policy is the one that guarantees a minimum wage (Article 127). These issues, along with social security and training programs and migration policies, are discussed closely in the following subsections. An important question to debate is whether these restrictions do discourage employment significantly, as employers often argue (Leogardo 2005). This is important because employers can often avoid their implications by offering short-term contracts. Box 7.3 provides a summary of the ILO Conventions ratified by the Philippines. 7.4.1

Labor Relations (Articles 234, 253A, 260, 263, and 264)

The Labor Code provides workers with various rights, including the right to organize (Article 234), the right to set CBAs with employers (Article 253A), and the right to stage strikes, pickets, and lockouts (Article 263). These rights are accompanied by procedural mechanisms, restrictions, and limits to allow both employers and workers to discuss and resolve workplace issues amicably and efficiently. In particular, Article 260 stipulates that parties engaged in a CBA must establish “a machinery for the adjustment and resolution of grievances arising from the interpretation of their CBA and those arising from the interpretation of enforcement of company personnel policies.” In addition, Article 264 enumerates the prohibited activities of workers pertaining to the staging of strikes, pickets, and lockouts. In these articles, the role of the Government has been limited to the monitoring and evaluation of labor organizations, CBAs, grievance machineries, and strikes, to assure both workers and employers that the provisions of the Labor Code are consistently followed. In sum, these articles form the basis of the tripartite system (or collective decision-making process participated in by the Government, employers, and workers) that the State espouses in creating the proper resolution of laboremployer conflicts. Teodosio (2001, p. 140) indicates that while collective agreements are constantly forged, the tripartite system has failed to deliver employment, job security, and effective enforcement of the labor law. In reality, attempts to discuss issues relating to the tripartite system usually get caught up in the larger question of the system’s inability to close the gap between policy statements and practice in a divided society. The result, in the author’s view, is that “contentious problems

404 Jesus Felipe and Leonardo Lanzona, Jr. Box 7.3 Conventions of the International Labour Organization Ratified by the Philippines

The Philippines has ratified the six ILO core labor standards. These are: (i) freedom of association and protection of the right to organize (ILO Convention No. 87); (ii) right to organize and engage in collective bargaining (ILO Convention No. 98); (iii) abolition of forced labor (ILO Convention No. 105); (iv) equal remuneration (ILO Convention No. 100); (v) freedom from discrimination in employment and occupation (ILO Convention No. 111); and (vi) minimum age of admission to employment, or freedom from child labor (ILO Convention No. 138). Edralin (2001) analyzed the degree of compliance by Philippine manufacturing companies with these six standards. The author claimed that “various reports and studies seem to indicate that in the Philippines partial compliance with core labor standards is attributed to a number of factors” (p. 92). Likewise, her empirical analysis, based on a survey of manufacturing firms, led her to conclude that in the Philippines “there is a lack of adherence to core ILO labor standards and, therefore, there is no full protection of basic labor rights” (p. 129). Some of the factors that influence this lack of compliance are: (i) the Marcos administration’s policy of interfering with union organization; (ii) the prevailing high unemployment and underemployment; (iii) the trend toward increasing flexibility of the labor process, as manifested in the reduction of the core permanent workers and the increase in the proportion of temporary and casual workers; (iv) weak trade union movement; and (v) the economic crises and increased competition, making it difficult for some firms to survive and leading to retrenchments, layoffs, and lowered wages and benefits.

were intensified rather than resolved” (Teodosio 2001, p. 140). This divergence of views is clear, for example, in discussions of the so-called “social clauses.” These are guarantees that some groups try to incorporate in international trade agreements to ensure that the liberalization of markets is accompanied by improvements in conditions of work, or at least by the elimination of abuses and exploitation. Edralin (2001) has argued that a majority of management and labor groups in the Philippines are in favor of what is known as the “social clause,” which refers to the incorporation of various social provisions into labor relations. 18 These provisions include freedom of association and the right to organize. Reasons cited in favor of this clause are its ability: (i) to enhance and improve the quality and productivity of workers; (ii) to boost benefits for better competition; and (iii) to serve as guide or protection for both union and management. Edralin, however, stresses that, despite general agreement on the benefits of a social clause, a number of industries have found it very difficult to comply with such standards, and institutions remain inflexible in the matter of worker benefits, despite the benefits of globalization. She argues that firms could be willing to provide such rights and protection to workers if the costs of doing so were not too prohibitive and the productivity of workers were improved.

405 Unemployment, Labor Laws, and Economic Policies in the Philippines

Freeman (1993) indicates that “tripartite pacts” (i.e., wage-setting arrangements with business and government) are not easy to institute or maintain. This is because they “require a strong labor movement, with leaders able to assess the economic scene and convince workers to accept current consumption losses for future gains; a business community that accepts labor as a social partner; and a government willing to share some prerogatives with its social partners” (Freeman 1993, p. 138). Organized labor in the Philippines has been relatively weak. In 1986 about 2.3 million Filipinos—about 25% of the wage-and-salary workforce and 12% of the total labor force—were part of the union movement (Figure 7.24). In 2001, about 4 million workers, composing about 26% of wage-and-salary workers and 13% of the labor force, belonged to a labor organization. These workers were organized into about 10,000 unions, only one fifth of which were connected to a national union or federation. The importance of these labor unions is reflected in the way they are able to influence wages and CBAs. The Employers Confederation of the Philippines (ECOP) recently conducted two surveys (ECOP 2003, ECOP 2004) that can shed light on the effect of CBAs on worker compensation. ECOP (2003) dealt directly with the various CBAs drawn up in 2002 and to be completed in 2004 and 2005. ECOP chose at random 250 of 600 CBAs of rank-and-file employees secured from the Bureau of Labor Relations of DOLE. The final number of CBAs surveyed was trimmed to 203 to give priority to the more recent agreements. The data shows that the CBAs to be completed in 2004 and 2005 favored lower increases in monthly salaries and higher increases in noncash benefits. Among the nonwage benefits that increased were night-rate wage differentials, retirement benefits, transportation allowance, and education and training benefits. ECOP (2004) summarizes the results of a survey conducted in 2003. Survey questionnaires were e-mailed to about 500 companies. These firms were chosen through purposive sampling so that the major manufacturing and service sectors would be fairly represented. The questionnaire was divided into two parts. The first part was aimed at getting information about the nature of operations, size and categories of human resources and industrial relations structure, and aggregate payroll and benefit costs of the surveyed firms. The second part involved the positions and characteristics of the workers, classified as senior executives, middle executives, junior executives, and rank and file. A total of 74 firms submitted complete and valid compensation data. The majority of these (57 out of 74) were nonmanufacturing firms, while the rest were in manufacturing. Seventy percent of the surveyed firms were Filipino-owned and had operations that were oriented purely to the domestic market. The main survey results were the following:

406 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.24 Memberships in Labor Organizations, 1980–2001 35 30

Percentage

25 20 15 10 5 0 1980

1982

1984

1986

1988

1990

% of Total Wage and Salary Workers Source:

1992

1994

1996

1998

2000

% of Total Number of Workers

Bureau of Labor and Employment Statistics, Yearbook of Labor Statistics.

(i) In 2003, the annual gross basic salaries in median terms were P975,000 for senior executives, P623,805 for middle executives, P284,274 for junior executives, and P139,000 for the rank and file. For all employees, the median gross basic salary was P175,500. (ii) The gross payroll median cost in 2003 was P249,740,000, and the gross nonpayroll median benefits cost P50,000,000. (iii)As Figure 7.25 shows, the median monthly gross basic salaries for rank-and-file employees is generally higher for firms with affiliated and independent unions than for nonunionized firms. However, Figure 7.26 indicates that, for the same type of employees, nonunionized firms have a larger median budget, especially for car and related basic expenses. This means that, to some extent, unionized firms are still competitive with respect to nonunionized firms in overall salaries and noncash benefits. In 1987, only 355,000 workers were covered by CBAs, while in 2001, 460,000 workers were covered by CBAs. As shown in Figures 7.27 and 7.28, the number of CBAs being completed and the number of workers covered increased significantly between 1980 and the early 1990s, but then began declining gradually. The National Labor Relations Committee (NLRC) was created in 1986, when 581 separate strikes were recorded. Since that time, the number of strikes per year has consistently fallen (Figure 7.29) and has stayed below 100 since

407 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.25 Median Gross Monthly Salaries of Unionized and Non-unionized Firms, 2003 25,000

20,000

Pesos

15,000

10,000

5,000

0 Firms w/Affiliated Unions

Firms w/ Independent Unions

Monthly Gross Basic Services Meal and Transportation Allowances Source:

Non-unionized Firms

Monthly Overtime Pay Differential Monthly Gross Basic Services

Employers Confederation of the Philippines, Corporate Compensation Survey 2004.

Figure 7.26 Median Benefits of Unionized and Non-unionized Firms, 2003 100,000

80,000

Pesos

60,000

40,000

20,000

0 Firms w/Affiliated Unions Education and Training Health Insurance Premiums Source:

Firms w/ Independent Unions Car and Related Basic Expenses Pension Plan Premiums

Non-unionized Firms Life Insurance Premiums

Employers Confederation of the Philippines, Corporate Compensation Survey 2004.

408 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.27 Number of Collective Bargaining Agreements, 1980–2003 6,000

5,000

4,000

3,000 2,000

1,000

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Existing CBAs Source:

2002

New CBAs Filed

Bureau of Labor and Employment Statistics, Yearbook of Labor Statistics.

Figure 7.28 Number of Workers Covered by Collective Bargaining Agreements, 1980–2003 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Existing CBAs Source:

New CBAs Filed

Bureau of Labor and Employment Statistics, Yearbook of Labor Statistics.

2002

409 Unemployment, Labor Laws, and Economic Policies in the Philippines

1994. This attests to a greatly improved labor-relations climate, which can be described as “amicable.” In 1998, only 556,796 person-days were lost to strike actions, compared with 1,139,809 in 1991. And in 2002, only 358 person-days were lost.19 7.4.2 Subcontracting Provisions (Article 106), Permanent Employment (Article 279), and Probationary Period (Article 281) Subcontracting is the most common form of flexible labor arrangement in the Philippines, together with agency hiring and the use of homeworkers. In the words of the MTPDP 2004–2010: “Flexible working arrangements have emerged in the wake of globalization. Companies adopt more flexible work arrangements to compete in the global economy. Employers are restructuring their companies, downsizing workforce and utilizing nontraditional employment practices like the hiring of part-time or temporary workers, subcontracting and business process outsourcing to remain more competitive” (MTPDP 2004–2010, p. 112). Many firms in the Philippines hire nonregular workers or subcontract some work to meet short-term demand. The resort to flexible labor arrangements by many companies has promoted high work turnover and discouraged unionism. According to Teodosio (2001, p. 151), subcontracting in the garments sector includes textile printing, embroidery, cutting, and laundry and ironing. Figure 7.29 Number of Strikes, 1980–2003 700 600

500 400 300 200

100 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Sources:

2000

2002

Bureau of Labor and Employment Statistics, National Coordination and Mediation Board.

410 Jesus Felipe and Leonardo Lanzona, Jr.

In the electronics sector, it includes the manufacture of spare parts previously made, maintenance services, and spare parts machining, among others. Subcontracting also occurs in the agriculture sector, where the contracting of livestock raising and vegetable farming is popular. Subcontracting, however, is considered legitimate only if any one of the following conditions is satisfied (Article 106):20 (i) The contractor or subcontractor carries on a distinct and independent business from that of the main firm. (ii) The contractor or subcontractor has substantial capital or investment. (iii)The agreement between the principal and the contractor or subcontractor entitles the contractual employees to all occupational safety and health standards, free exercise of the right to selforganization, security of tenure, and social and welfare benefits. “Substantial capital” refers to any investment, whether money, facilities, tools, equipment, machineries, work premises, or subscribed capital stock, that would indicate the subcontractor’s capacity to undertake the subcontracted work or service independently. For example, a subcontractor with a capital stock of P1 million, which is fully subscribed and paid for, has been deemed by the Supreme Court to be a highly capitalized venture that satisfies the requirement of “substantial capital.” The law guarantees Philippine workers security of tenure (Article 279) after a probationary period of 6 months (Article 281). Once this is granted, it is difficult, but not impossible, to release workers. By virtue of these legal provisions, security of employment is given to a probationary worker after 6 months and confers to him or her all the guarantees and various benefits, including membership in labor unions and freedom from dismissal except for just cause. Unfortunately, an employer often has many reasons for wanting to remove some workers, mainly economic reasons related to the survival of the firm in the market. In a globalized economy, these laws may prevent firms from responding immediately to the unexpected fluctuations in the world market. The problem with such regulations, as Sicat (2004) points out, concerns the legal requirement to grant regular employees job security. Because of this, it seems that the Government interferes with the prerogatives and judgment of management and with the working of the labor market, making it difficult for employers to dismiss workers or otherwise end their employment.21 The law, however, allows an employer to terminate a regular employee if the employer can present justifiable reasons or if economic conditions make termination necessary. Article 282 of the Labor Code lists the following as

411 Unemployment, Labor Laws, and Economic Policies in the Philippines

“just causes” for termination: (i) serious misconduct by the employee in connection with his or her work; (ii) willful disobedience by the employee; (iii) gross or habitual neglect by the employee of his or her duties; (iv) fraud or willful breach of the trust reposed on the employee by the employer; (v) commission of crime or offense by the employee; and (vi) causes analogous to the foregoing, such as gross inefficiency, violation of company rules, and abandonment of work. On the other hand, Article 283 of the New Labor Relations Law of 1989 allows the employer to terminate the employment of any employee because of: (i) installation of labor-saving devices; (ii) redundancy; (iii) retrenchment to prevent losses; or (iv) closing or cessation of operation of the establishment or undertaking. However, the system requires the company to justify its decision to DOLE—a process that may be very costly. Because of this, short-term subcontracting has become a feasible and practical option. Moreover, the theoretical interference in the labor market may not necessarily be as restrictive as it is on paper. The results of a survey of nonregular workers by the Bureau of Labor Statistics are presented in Table 7.4. Three points are worthy of note. First, there has been a steady increase in the use of nonregular workers, from 20% to 28%. Second, there are other types of contracts, other than subcontracting, that are available to the firms. These include piecerate work, which is paid on the basis of some particular output; or pakyao work, which is remunerated on the basis of a specific task. In effect, firms have some leeway in hiring nonregular workers. Third, in 1997, nonregular employees, i.e., those doing contractual, casual, commission-paid, part-time, and pakyao work, stood at 808,000, representing 28.2% of the 2.8 million employed in establishments with 10 or more workers. Around half were contractual workers. This indicates that, in practice, the Labor Code is not much of a hindrance since it allows individual firms to contract directly with individual workers to meet specific requirements of the firms. The dismissal of workers is not, therefore, considered a matter of national concern by both firms and workers. Rather, it belongs to the area of negotiation that may be developed between labor and management at the firm level.22 Figure 7.30 shows the number of workers displaced for economic reasons. Note that manufacturing and services have the highest number of workers laid off. These sectors are directly influenced by the business cycle. Teodosio (2001, pp. 150–153) documents the increase in part-time employment (less than 40 hours of work) between 1997 and 1998, by an estimated 540,000 workers (from 9,171,000 to 9,711,000), while full-time employment decreased by 460,000 (from 18,169,000 to 17,709,000).23 As Figure 7.31 shows, part-time employment has continued increasing and in 2003 it affected 11,311,000 workers. On the other hand, the number of full-time workers has increased, but only marginally, and in 2003 there were 18,845,000 workers in this category.

412 Jesus Felipe and Leonardo Lanzona, Jr. Table 7.4 Nonregular Workers in Establishments Employing 10 or more Workers, 1991–1997 (thousands) Type of Worker

1991a

1992

1993

1994

1995

1996

1997

Total Employment Nonregular Workers Contractual Workers Commission-Paid Workers Casual Workers Part-Time Workers Task, or Pakyao Workers % of Nonregular Workers to Total Employment

2,292 470 161 163 95 34 17

2,504 514 250 90 102 37 35

2,561 547 250 129 87 46 35

2,493 505 197 135 108 37 28

2,692 672 319 143 119 48 43

2,606 630 320 119 108 51 32

2,865 808 401 170 134 63 40

20.51

20.53

21.36

20.26

24.96

24.17

28.20

a

Note: Source:

Excludes agriculture, fishery, and forestry. The Survey of Specific Groups of Workers was terminated in 1998. Bureau of Labor and Employment Statistics, Survey of Specific Groups of Workers (various years).

Apart from reduced work time and nonregular jobs, labor flexibility can also be seen in the number of establishments resorting to closures, layoffs, and job rotation. Between 1997 and 1999, a total of 4,955 firms resorted to closure and retrenchment, affecting 209,072 workers. A survey undertaken in 1990 by the Philippine Institute for Labor Studies on the extent of labor flexibility concluded that about two thirds of the respondent establishments employed nonregular workers (Sardaña 1998, p. 72). Overall, this evidence seems to suggest that companies are given enough flexibility in determining employment. As we shall see in Section 7.6, an important strategy of the Government’s MTPDP 2004–2010 to generate employment is to amend the Labor Code so as to introduce flexible work arrangements. 7.4.3 Minimum Wage–Setting Process (Article 127) Minimum wage setting is highly contested all over the world. Freeman (1993, p. 126) argues that: the minimum wage is a bête noire to distortions because it is the textbook case of an intervention that misallocates resources: an effective minimum wage reduces employment. The major question is whether the induced increase is worth the job loss. If it does raise the wages of the most povertystricken at little cost to employment, many would find this an appealing way to redistribute income. If, by contrast, the cost is many jobs, and only a few highly paid formal sector workers benefit at the expense of lowerpaid informal or rural sector workers, few would favor minimum wage policies.

413 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.30 Number of Workers Displaced for Economic Reasons, 1995–2003 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1995

1996

1997

1998

1999

2000

2001

2002

2003

All Industries

Agri, Forestry and Fishing

Mining and Quarrying

Manufacturing

Electricity, Gas and Water

Construction

Services Source:

Bureau of Labor and Employment Statistics, Yearbook of Labor Statistics.

Figure 7.31 Number of Part-Time and Full-Time Workers, 1991–2003 20,000 18,000 16,000

Thousands

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Part time workers Source:

National Statistics Office, Labor Force Surveys.

Full time workers

414 Jesus Felipe and Leonardo Lanzona, Jr.

What does the empirical evidence say, Freeman asks? He indicates that there is some evidence that an enforced minimum wage substantially reduces employment. However, “such minimum wage intervention is far from the norm in the developing world. Many countries set minimum wages too low or are too lax in enforcing the law for the regulation to have much effect” (Freeman 1993, p. 127). One of the studies cited rejected the importance of minimum wages in India. However, another study mentioned for Zimbabwe claims that increases in minimum wages after independence had an important effect on the country’s wage structure. Freeman argues that what denies legitimacy to the argument that minimum wages have had a distortionary effect is the evidence that real minimum wages have fallen in many countries, implying that they have had no impact in terms of being a harmful minimum floor. This also implies that minimum wages have failed to fulfill the role they were supposed to play in the first place. The conclusion is that countries will not set minimum wages at levels that negatively affect employment. When the unemployment rate in a country is relatively high, the minimum wage will be unenforceable, as both workers and employers will have an incentive not to comply with the law. Minimum wages in the Philippines are determined by two agencies, the National Wages and Productivity Commission (NWPC) and Regional Tripartite Wage and Productivity Boards (RTWPB) (see Box 7.4). The latter determine and fix minimum wage rates applicable in their regions, provinces, or industries, subject to the guidelines set by the former. The NWPC reviews the regional minimum wage rates, to determine whether these are in accordance with prescribed guidelines and national development plans. For reference, the minimum wage legislation is detailed in Appendix Table A7.7. Minimum wages are set for different occupations and also for 16 different regions. Data are shown in Appendix Tables A7.8 and A7.9. Table A7.8 indicates that there are significant variations across occupations, and that, across time, increases have been fairly gradual. On the other hand, by regions (Table A7.9), significant variations are found for 2003 and 2004. Note that the highest minimum wage is found in the National Capital Region (NCR), and that although in nominal terms minimum wages increased in 2004, in real terms they actually declined (in the case of the NCR, there was a 1.36% decrease in real wages in 2004, despite a recent 7% increase in nominal terms). The decline in real minimum wages is not a new phenomenon. Balisacan (1996a, p. 510) indicates that “legislated minimum wages declined for the most part of the 1970s, rose in the early 1980s, and fell again until 1987.” As indicated by Freeman above, in countries like the Philippines, both employers and employees tend to have incentives not to comply with the minimum wage law. Indeed, Balisacan (1996a, pp. 510–11) indicates that the minimum wage rates have not been effectively enforced and they have only affected formal,

415 Unemployment, Labor Laws, and Economic Policies in the Philippines Box 7.4 Minimum Wage Setting in the Philippines

Before 1989, the minimum wage was set by Philippine Congress, with no variation by region or by industry. This wage was set after public hearings and consultations with employers, unions, and government agencies, to protect workers from exploitation, and provide them with basic living requirements, thereby bringing about more equity in the distribution of national income. Wage adjustments were implemented irregularly, depending on public pressure for an increase. In 1989, the Regional Tripartite Wage and Productivity Boards (RTWPBs) were established to take over the task of setting the minimum wage, in an effort to make this wage reflect better regional and industry variations in economic conditions. The RTWPBs have eight members—two from the labor sector, two from management, and four from the Government. This, in itself, is a weakness since tied votes cannot be broken easily. The Congress, nevertheless, can still legislate minimum wages, in particular when imposing an overall increase for the country. The RTWPBs are meant to take into consideration four major criteria in determining regional minimum wages, namely: (i) (ii) (iii) (iv)

Needs of workers, Comparable wages and incomes, Capacity to pay, and Requirements of economic development.

These broad criteria are then translated by the National Wages and Productivity Commission (NWPC) into 11 specific criteria, which are: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi)

Demand for living wages, Wage adjustment vis-à-vis the consumer price index, Cost of living and changes therein, Needs of workers and their families, Need to induce industries to invest in the countryside, Improvements in the standards of living, Prevailing wage levels, Fair return on the capital invested and employers’ capacity to pay, Effects on employment generation and family income, Equitable distribution of income and wealth, and Productivity.

The frequency of the adjustments is usually not more than once a year (usually in October–December). Adjustments are often made as a response to above-normal increases in petroleum prices or basic necessities like rice. The regional boards are also authorized to exempt certain firms from paying the minimum wages. These will often include new establishments, distressed firms, and establishments with fewer than 10 workers.

416 Jesus Felipe and Leonardo Lanzona, Jr.

large establishments in urban areas, especially in Metro Manila, and the reason is not that government bureaucracy is not capable of enforcing the rates. Rather, both workers and employers have negotiated salaries below the minimum wage. Employees have been willing to accept a job, even for a salary below minimum wages, and employers have resorted to practices effectively circumventing the law, such as hiring on a casual basis. The setting of minimum wages for sectors and regions leads to a number of complications. The first is the plethora of different wages around the country, inducing perhaps greater mobility toward the urbanized regions. Because minimum wage rates tend to be higher in urban areas, migration into the NCR and other large urban areas is an unintended outcome of this mechanism. Second, wage adjustments always attempt to restore real wages and take into account some other considerations (e.g., fair return on capital invested). Thus, by keeping real wages more or less constant, the system disregards the fact that relative wages may have changed on the basis of variations in factor endowments. However, it has never been clear why different industries require different minimum wages. Finally, aside from the mandatory minimum wage, employers are forced by law to provide other benefits, such as the 13th month pay (Presidential Decree no. 851, as amended) and holiday pay (Article 94 of the Labor Code). One would expect the minimum wage to already reflect these benefits. The Bureau of Working Conditions sends out inspection teams to establishments with more than 20 workers to determine whether the establishments are complying with the prescribed labor standards, including payment of minimum wages. Inspectors cover about 80,000 establishments a year, excluding enterprises in the informal sector. Compliance with minimum wage legislation is regularly compiled by DOLE and provides a guide to the importance of minimum wages compared with actual wages. Figure 7.32 shows the percentage of surveyed firms found committing violations of labor standards, including minimum wages. After falling in 1987 to 43%, noncompliance with general labor standards by establishments inspected increased to 55% in the 1990s. Close to half of these violations result from noncompliance with the minimum wage law. In the 1990s, an average of 23% of the establishments surveyed did not comply with the law.24 This noncompliance rate is relatively high; this may suggest that minimum wages could be out of line with the wage rate that the market, if let alone, would determine.25 Whether minimum wages are above “market” wages at the lower end, and whether this has a significant impact on unemployment; whether minimum wages are necessary to preserve the living conditions of workers; and whether increases in minimum wages lead to inflation, are all moot points that need empirical evidence. The main conclusion is that the RTWPB should monitor and analyze regularly the link between changes in minimum wages and market wages, and

417 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.32 Percentage of Firms with Violations of Labor Standards and Noncompliance with the Minimum Wage, 1980–2003 100 90 80

Percentage

70 60 50 40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Establishments with Violations Source:

2002

Establishments not Complying with Minimum Wage

Bureau of Labor and Employment Statistics, Yearbook of Labor Statistics.

between the latter and changes in productivity. The RTWPB should also monitor the effects of changes in the minimum wage on average and median wages in the respective industry sectors, and also examine the effect on overall labor costs. On the other hand, the antipoverty effects of minimum wages should also be included in the equation. The link from wage increases to inflation has been negligible or small in recent years. On the other hand, the link to unemployment is not clear (see Box 7.5. Against the mainstream view that wage increases lead to lower employment, it could be argued that wage increases translate into increases in the overall wage bill and since workers have a high propensity to consume out of wages, this will translate into higher overall demand and, hence, higher employment. This is what the literature refers to as a wage-led economy (Felipe and Hasan 2006a, Chapter 3 in this volume). Whether the Philippines is a wage-led economy or not is an empirical issue. Using the idea of a wage-led economy, Dumlao (2002) has advocated an increase in the minimum wage in the Philippines. This would increase the overall wage bill and, hence, demand. For reference, we estimated an annual minimum real wage rate and compared it with the real average wage rate. Given that in the Philippines there is no single minimum wage rate, we used the rate for the NCR and converted it into an annual rate by assuming 300 working days per year. Figure 7.33 plots both this minimum wage rate and the average wage rate.

418 Jesus Felipe and Leonardo Lanzona, Jr. Box 7.5 Do Minimum Wages Cause Unemployment in the Philippines?

Brooks (2002, p. 21), in his study of unemployment in the Philippines, concluded that a key policy implication of his analysis was “that higher economic growth and moderate increases in the real minimum wage are required to reduce unemployment.” The conclusions were derived from the results of a regression of the logarithm of employment (lnL) on the logarithms of real GDP (lnY) and the real minimum wage (lnw*), i.e., lnL = c+ DlnYElnw*. This specification is very close to the marginal revenue product of labor curve, derived by differentiating the CobbDouglas production function and assuming the first-order condition (Felipe and McCombie 2006). The difference in this case is that Brooks’ specification uses the minimum wage rate. This, however, does not undermine the argument. Brooks’ regressions for different sectors show invariably that D is positive and statistically significant, in most cases around unity. On the other hand, E is negative (in some of the regressions it is not significant). However, the policy conclusions Brooks derived from this type of work are problematic because there is no other way he could have obtained different results, i.e., the regression specified above must always yield a positive Dand a negative E without implying any causality from the two right-hand variables to employment. In other words, no data set can reject statistically the relationship embedded in this regression. Hence, as a potentially refutable theory it is not of much use. To see this, note that, by definition, one can write the identity for the labor share in output (sL) as sL (w L) / Y, where w is the average wage rate. We use the symbol to denote that this expression is an accounting identity, not a behavioral equation. This identity can be rewritten as L sL (Y / w), which in logarithms becomes lnL c + y1lnY + y2lnw, where c ln(sL) . It is obvious that this regression must provide suspiciously good results, with y1 = 1, y2 = –1, and a perfect statistical fit (R2 = 1). It is an identity and hence it does not explain anything. The negative relationship between employment and wage rate is embedded in the identity. Using this framework, it is impossible to refute statistically the null hypothesis that employment and wage rate are negatively related. Note that the identity lnL ln(sL) + y1lnY + y2lnw holds whether the labor share (sL) is constant or not. What the argument says is that if the labor share (sL) is perfectly constant (and thus it is well approximated by c), then the identity explains the results. But what if the labor share is not perfectly constant (as it is in real data)? The argument still applies. Suppose the labor share varies a bit. In this case, nothing changes for practical purposes. If, on the other hand, the variation is large, it is true that results will deviate substantially from the identity. But this will simply indicate that the labor share varies too much to be approximated by the constant c (hence one will need to approximate the labor share through a different form, for example, a trend if it is increasing), and not that the argument is incorrect. The difference between this regression and Brooks’ is, as noted above, that he used the minimum wage rate instead of the average wage rate. This is what induces in his results the deviation from the (perfect) results embedded in the labor share identity specification, and it continued.

419 Unemployment, Labor Laws, and Economic Policies in the Philippines Box 7.5 Do Minimum Wages Cause Unemployment in the Philippines? (cont'd.)

is easy to accommodate this issue into the accounting identity argument. The negative sign of the wage rate variable remains, as well as the positive sign of output (with an estimate close to unity). This must indeed be the case since minimum wage rate and average wage rate are positively correlated. In the extreme, suppose the minimum wage rate is a constant fraction of the average wage rate. Then the two regressions are identical. If Brooks ran his regression to “test” a behavioral model, the problem is that such a regression would not be able to reject the alleged model: the signs of the two variables are a foregone conclusion and the magnitudes of the coefficients would be relatively close to what the identity predicts. The conclusion is that this type of analysis has no policy implications.

The data show that the average real annual minimum wage caught up with the average real annual wage in 1989. Since then, they have moved together. This suggests two things. First, a significant number of employers have violated the minimum wage law. As Figure 7.32 indicates, the percentage of firms not complying with the minimum wage law increased from 13.7% in 1987 to 25.9% in 1989, after which the percentage has ranged from 15.9% to 30.2%. If the legally imposed minimum wage had been followed strictly, the average wage would have been higher. Second, the late 1980s saw the formation of new tripartite institutions that paved the way for the greater enfranchisement of both labor and employer groups in the determination of minimum wages (Teodosio 2001, p. 167). The formation of tripartite channels of cooperation subsequently ensured that minimum wages would not conflict with economic and industrial policies and programs in response to the requirements of economic restructuring. The equal consideration of labor and management interests meant that minimum wages follow the general trend of average market wages. The setting of minimum wages is popular among low-paid workers. Minimum wages will remain since no government can do away with them and survive. However, political economy aside, it can be argued that minimum wages do help improve the distribution of income and help poorer families. Indeed, to ensure that minimum wages reflect local market conditions and are noninflationary, there is a case for decentralizing minimum wage setting to an even lower level—the firm level rather than the current regional level. Such a suggestion needs to be examined.26 Finally, Appendix Table A7.10 provides data on minimum wages for the Philippines and six other Asian countries for comparison. The table provides minimum and maximum minimum wage rates in US dollars as well as in PPP

420 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.33 Average Real Annual Wage and Average Real Annual Minimum Wage, 1980–2003 (base 2000) 120,000 100,000

Pesos

80,000

60,000 40,000 20,000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Average Real Annual Wage Source:

2002

Average Real Annual Minimum Wage

Authors' computations.

terms. India, the Philippines, and Thailand set daily minimum wages, while the PRC, Indonesia and Viet Nam set monthly minimum wages. Though comparisons are not simple, it appears that the Philippines has the highest maximum minimum wage rate among the six countries, $117.12 ($4.88 times 24 working days in a month). 7.4.4 Labor Laws in the Philippines in Relation to Those in Other Countries What is perhaps more relevant is to consider how the country’s labor regulations compare with those in other countries. The reason is that it may be found that other countries with similar labor market policies can create employment and generally perform better than the Philippines. If this is so, then perhaps labor market policies are not the problem underlying the country’s incapacity to create employment. Compared with other countries in the region, the Philippines has fared relatively well in employment creation in recent years. Brooks (2002) notes that, with the exception of Malaysia, employment grew faster in the Philippines than in other East Asian countries in the last decade. Employment growth was almost 30% in the 1990s compared with growth of less than 20% in Indonesia, Korea, and Thailand over the same period. This growth, however, has not been enough to reduce unemployment, given the increase in population and the rise in labor force participation. Hence, the unemployment rate of the Philippines is about twice the unemployment rate of other countries in the

421 Unemployment, Labor Laws, and Economic Policies in the Philippines

region. More importantly, as already noted, the type of employment generated in the Philippines is found in the low-productivity informal-service sector. The question we address in this section is whether labor regulations in the Philippines are more restrictive than elsewhere. This is a difficult question that does not have a clear-cut answer. Botero et al. (2003) have constructed a series of measures to identify the level of market suppleness in selected countries.27 From a group of 85 countries, a comparative analysis is shown in Appendix Table A7.11, which contains a subset of 50 of all the policies compiled by the authors. The table shows the score (mode or average) of the Philippines and those of other countries in Asia, Latin America, Africa, and the developed nations. In the case of the mean, a t-test for the significance of the difference with the Philippines is performed. Labor market policies are divided into four major groups, and each of them is further divided into subcategories: (i) employment laws (employment contracts, cost of increasing work time, cost of dismissal, rules on dismissal; (ii) collective relations laws (refer to labor union power); (iii) collective disputes; and (iv) social security laws (old age, disability, and death benefits, sickness and health benefits, unemployment benefits). The scores seem to show that the Philippines has been quite restrictive in certain specific legal areas, relative to other countries in Asia as well as to other areas of the world. However, in other areas, the Philippines does not seem to be different from the rest of the world. Regarding employment laws, the picture is mixed.28 While the Philippines has a higher protection than the Asian countries and the rest of the world, in terms of the maximum duration of fixed-term contracts (Appendix Table A7.11, #4) and in terms of a higher number of paid mandatory holidays expressed in weeks of pay (#7), other indicators of the cost of increasing work time, such as the number of days of annual leave without pay in manufacturing (#6), the premium for overtime (#8), the premium for work on the primary rest day (#9), and the cost of increasing hours worked (#16), are lower for the Philippines. Moreover, workers in the Philippines work more hours and days than workers in other parts of the world, including Asia (#10, #11, #12, #13, #14). In the Philippines there are no penalties for retrenchment (#19) and the cost of firing workers (#20) is higher than in the developed world but statistically not different from the cost in the three developing regions. Likewise, the Philippines is not different from the three developing regions in terms of minimum wage (#5). The exception here is the developed world, where countries are divided (mode is zero, indicating that most developed countries do not have a mandatory minimum wage). Of course, this is not to dismiss the issue of minimum wages in the Philippines. This result simply means that mandatory minimum wages exist in many other places. Where the Philippines does not score well is in the cost and rules of dismissal. The legally mandated severance payment (#18) is higher than in the

422 Jesus Felipe and Leonardo Lanzona, Jr.

rest of the world, including the rest of Asia, although the Philippines is not any different in other costs of dismissal measures (#19, #20). Moreover, the legally mandated notice period (#17) is by far the lowest—1.4 weeks (5.4 in the rest of Asia). Regarding the rules on dismissal (approvals and notifications) (#22, #23, #24), the Philippines is more restrictive than the rest of the world. Likewise, the law in the Philippines mandates retraining or replacement before dismissal and there are priority rules applying to dismissals (#25, #26). These do not apply to the other regions.29 Regarding collective relations laws, the Philippines is clearly different from the rest of the world in the policy of allowing closed shops (#32). These are agreements providing for mandatory union membership, which are binding on nonsignatory and new employees. On the other side of the balance, union density (#35) is substantially lower in the Philippines. The Philippines is no different from the rest of the world in most of the other policies in this area. For example, the rights to unionization and collective bargaining (#28, #29) are in the constitution, but so are they in Latin America and Africa in the first case (i.e., unionization), and in Latin America in the second (collective bargaining). However, neither one applies to the rest of Asia. Moving now to collective disputes, the results indicate that, overall, the Philippines is not any different from the rest, i.e., there is at least one region in the world that has the same score as the Philippines. The right to industrial action (#37) is granted by the Philippine constitution, the same as in Latin America, but not in the other regions. Wildcat strikes are legal in the Philippines (#38) as they are in Latin America (but not in the other regions). Political strikes are also legal (#39), the same as in Latin America and Africa. The interesting difference here is between the Philippines and the rest of Asia, where in most cases these strikes are not allowed. Interestingly, unlike in most countries in Asia, a strike is considered illegal if a CBA is in force (#42). And unlike the developed countries, the Philippines, as well as the rest of Asia and the other developing regions, mandates conciliation or dispute resolution arrangements before a strike (#43). This means that employers can easily avoid strikes by properly establishing dispute resolution mechanisms if the CBA is not yet completed. Moreover, as indicated above, the number of strikes in the country today is very low.30 Finally, regarding the social security laws, the Philippines has laws similar to those of other countries in the areas of old age security, disability, death, and sickness. Of course, this does not imply that the quality of the system is as good as that of the developed countries. The Philippine social security system covers the risk of old age, disability, and death (#46), but the number of months of contributions or employment legally required for formal retirement (#47) is higher than in the other regions. The same occurs with the risk of sickness (#48). It is covered, but the number of months required to contribute in order

423 Unemployment, Labor Laws, and Economic Policies in the Philippines

to qualify (#49) is higher than in most other regions (statistically not different from the value for the developed countries). Finally, in the Philippines, as in the rest of Asia, the social security system does not cover the risk of unemployment (#50). The analysis in this and the previous sections leads to the following main conclusions about the role of labor market policies in the Philippines: (i) The importance of a series of supposedly rigid labor market policies as responsible for the lack of job creation is overstated; the number of nonregular workers has increased, the level of conflict is reduced, and violations of the Labor Code are relatively high; (ii) While some labor market policies might constrain job creation, in many areas the labor laws of the Philippines do not seem to be significantly different from those of other countries; research is needed particularly in areas such as minimum wages and the cost of dismissal; and (iii) The conclusion is that the lack of job creation, despite the trade reform, cannot be attributed, at least as the main or exclusive cause, to the supposedly restrictive labor market policies. 7.4.5

Social Security and Active Programs

Regarding social protection, the move toward universal protection has not gained ground. While the number of persons covered by some sort of social insurance policy has increased, the percentage of persons employed covered by social insurance has been quite limited, and in recent years it has even declined. Figure 7.34 indicates that the percentage of employees given some form of social insurance has been limited to roughly 5% in the last two decades. “Social insurance” refers to insurance benefits automatically extended to all employees upon their assumption to duty in the service of an employer pursuant to a valid appointment of insurance, i.e., compulsory life insurance, retirement insurance, funeral benefits, and special insurance. On the other hand, the percentage of workers covered by the Social Security System (SSS) and the Government Service Insurance System (GSIS) is slightly above 80%.31 Social security usually takes the form of an old-age insurance and pension scheme, the funding of which is built up jointly by the employee and the employer, be it the government or private industry. Coverage is compulsory for all employees not over 60 years of age (taking effect on the date of his or her employment) and their employers. The social security memberships include the self-employed workers. According to Section 9-A of RA 8282 (New Social Security Act: Compulsory Coverage of the Self-Employed), coverage in the SSS shall be compulsory upon such self-employed persons as may be determined by the Commission under such rules and regulations as it may prescribe, including but not limited to the following:

424 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.34 Percentage of Workers with Social Security and Social Insurance, 1980–2003 90 80 70

Percentage

60 50 40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Social Security Source:

2002

Social Insurance

Bureau of Labor and Employment Statistics, Yearbook of Labor Statistics.

(i) Self-employed professionals; (ii) Partners and single proprietors of businesses; (iii)Actors, actresses, directors, scriptwriters, and news reporters who are not under an employer-employee relationship; (iv) Professional athletes, coaches, trainers, and jockeys; and (v) Farmers and fisherfolk. The Philippine social security system consists of two main programs— one for government employees and the other one for workers in the private sector. The program for government workers falls under the GSIS, a system created by Commonwealth Act No. 186, which was passed on 14 November 1936. The private system program is the SSS, created under Republic Act 8282 of 1949. Section 2 of this law states that it is the policy of the State to establish, develop, promote and perfect a sound and viable tax-exempt social security system suitable to the needs of the people throughout the Philippines which shall promote social justice and provide meaningful protection to members and their families against the hazards of disability, sickness, maternity, old age, death and other contingencies resulting in loss of income or financial burden.

These two systems were mandated to provide and administer the following social security benefits to all employees: compulsory life insurance, optional

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life insurance, retirement benefits, health benefits, disability benefits for workrelated contingencies, and death benefits. Members can participate in liberal loan programs with lower interest rates. The programs do not include any unemployment insurance, but the GSIS offers some form of unemployment benefits. Under this program, the benefit is paid when a permanent government employee who has paid the required 12 months’ integrated contributions under RA 8291 is involuntarily separated from the service as a result of the abolition of his office or position, usually resulting from reorganization. The benefit is in the form of monthly cash payments equivalent to 50% of the average monthly compensation. The duration of the benefit depends on the length of service, and ranges from 2 months to a maximum of 6 months.32 Hence, these benefits do not cover long-term unemployment. Furthermore, the terms of borrowing against retirement contributions under these programs are not flexible. Although, as mentioned above, the risk of unemployment is not covered by the social security system, a number of active DOLE programs designed to support unemployed workers exist (Lanzona et al. 2003, Santo Tomas 2004). These include the following: (i) Promotion of Rural Empowerment through Self-Employment and Entrepreneurship Development Program (PRESEED). The objective is the promotion of self-employment among rural workers who have entrepreneurial potentials by providing resources for human and institutional development. Program components include Training-cum-Production, Enterprise Development, and Accreditation of Co-Partners Development Program. (ii) Micro-Finance Assistance Project to Filipino Workers. A replication of the Grameen banking strategy, which is aimed at creating income and employment for workers or workers’ organizations/ associations through the development of local micro enterprises. (iii)DOLE-SSS-PS Bank Social Protection for Workers in the Informal Sector. A joint undertaking of the DOLE, SSS, and Philippine Savings Bank that provides social protection for the vulnerable sectors in the informal economy. It provides a facility where the informal sector deposits a nominal amount daily with the bank to meet his or her monthly SSS premium contribution, which in turn is remitted monthly by the bank to the SSS. Nonetheless, a study of the impact of these programs needs to be undertaken, especially since they are heavily dependent on financial resources, as well as stable and effective management. The protection offered by the social security system is, of course, wellliked since it provides security for workers. Yet, this security means additional

426 Jesus Felipe and Leonardo Lanzona, Jr.

cost for the firm, and according to the NAIRU theory (Felipe and Hasan 2006a, Chapter 3 in this volume), it may translate into lower future performance and therefore lower employment. Thus, this security tends to work in favor of a few at the expense of the many, thereby worsening the distribution of income, increasing poverty, and reducing employment opportunities. The empirical evidence provided by Freeman (1993) and Buchele and Christiansen (1992, 1995, 1999a, 1999b) appears to indicate that a protective labor market policy, measured in terms of greater labor market regulations and standards, does not result in poor economic and employment conditions. It has also been found that workers’ rights have a generally positive effect on the growth of output per hour worked. The argument is that all the basic determinants of productivity growth (e.g., pace of innovation in technology, rate of growth of the capitallabor ratio, development of human capital) depend crucially on the cooperation and effective participation of workers. The reason is that workers hold the key to the success of the production process (they carry it out), so they are in a unique position to contribute improvements in technology and work organization that increases labor productivity. When will workers cooperate the most? When they feel that they have a secure stake in the long-run success of the company they work for; when they feel that they are treated fairly and trust that their employer will continue to treat them fairly in the future. How is this accomplished? By guaranteeing workers’ rights, including collective bargaining, and by implementing measures with a view to reducing workers’ vulnerability against the loss of their jobs. The result is that strengthening workers’ rights encourages labor-management cooperation and workers’ active involvement in improving productivity and product quality. In conclusion, while the Philippine labor market may require higher flexibility to hire and dismiss workers, it will be difficult to move in this direction without at the same time having a well-developed social protection system for the unemployed, as well as a system to get these workers back into the job market as quickly as possible. How the social protection system can be improved to increase labor flexibility and how this can be financed are areas worth looking into. 7.4.6

Educational and Training Programs

The Philippine higher educational system is unique. In the Philippines, the share of private institutions imparting tertiary education is substantially higher than in the rest of the world. About three quarters of students in the Philippines are enrolled in private colleges and universities. This is the highest rate in the world. The prevalence of relatively inexpensive but poor-quality private institutions, and the lack of high-quality alternatives, makes it difficult for families to provide their children with good-quality education (Tan 1997).

427 Unemployment, Labor Laws, and Economic Policies in the Philippines

In view of the incidence of poverty in the Philippines, relatively few students can freely choose the best tertiary education available (James 1991). The lack of high-quality institutions and options is mostly due to the country’s lack of resources. It can also be attributed partly to the inability of capital markets to fully evaluate the value of human capital. This results in limited human capital investment. Many students can pursue only low-quality, inexpensive fields of study, in institutions that their families can afford. There have been relatively few students availing of loan schemes because of the high interest rates, short repayment periods, and lack of access to the credit system—a significant problem for low-income families. Other research (e.g., Johnstone and ShroffMehta 2000, Orbeta 2004), however, acknowledges the willingness of lowincome students (and their families) to pay for private higher education, yet, because of imperfections in the capital market, a large number of students are forced into the low-quality, low-cost programs and institutions (Gulosino 2002). More importantly, since private institutions do not receive financial assistance from the Government, they are subject to less rigorous control, and they enjoy considerable freedom in formulating their own financial policies— in generating revenues and in their spending. It is worth noting the flexibility of government regulation in setting tuition fees, although there are rules against charging excessive fees, or requirements for a ceiling on tuition increases. This measure of autonomy also extends to the allocation of resources, to the flexibility in the implementation of curricular programs, and to the selection of teachers and students, which is mostly left to the institutions (Tullao 1993). The passage of the Education Act of 1992 allowed private institutions to set their own rates for tuition, although, as mentioned above, increases in private fees are not done at will and must comply withy the minimum regulatory procedures issued by the Commission on Higher Education (CHED). This freedom has been granted recently to top private higher education institutions with Level 3 accreditation in three program areas, high overall performance in licensure examinations, and strong academic reputation. Overall, CHED adopts a minimum standard policy as part of its quality control function. It is also important to note that enrollment figures are high only in some tertiary fields such as teacher education, business and management studies, and engineering. Some private institutions have targeted more costly fields with a guaranteed market, such as computer sciences and health-related areas (e.g., medicine and nursing). Tullao (2001) points to the limited government funds for skills training institutions as a reason for the failure of the educational system. For instance, more than three fourths of public spending in higher education goes to the operation and maintenance of 107 state colleges and universities. These institutions have lately been given permission to expand, in direct competition

428 Jesus Felipe and Leonardo Lanzona, Jr.

with the private sector, while the correct policy is to have more integration and cooperation. Moreover, the limited access to continuing professional education has restricted the further upgrading of teachers’ skills, including the lack of funds for research and development. Clearly, there is a need to improve continuing professional education. This refers not only to formal education (i.e., schools) but also to vocational and on-the-job training education for workers (i.e., firms). The poor quality of the educational system and the lopsided enrollment in certain courses explain partly the presence of a firm-level mismatch, defined as gaps between the actual skills of a worker and the expected abilities that firms require for their operations. Tan (1997, p. 86) concludes that the high unemployment rates among college graduates (14.5% in 1992) in the Philippines implies that there is an oversupply of graduates, especially in the low-cost, low-quality, and nonscientific and nontechnical programs. From a survey of personnel and other managers, Amante (2003) cites a number of indicators of skills and attitudes to measure the differences in expectations and actual skills and attitudes in the Philippines, for various levels of workers. For rank-and-file or nonmanagerial employees, the worst mismatches were noted in creative and innovative skills and communication. From a list of attitude problems, being ethical and responsible were mentioned as areas of mismatch. For technical workers, the biggest problems related to work attitudes (lack of ethics and responsibility, low motivation, and lack of positive values and self-control), and not skills or abilities. For the managerial level, there was no mismatch noted for general knowledge, but problems were noted in the skills related to creativity and innovation, decision making, and problem solving, and in attitudes, particularly in being positive, motivated, and self-controlled. Amante (2003) ascribes this mismatch to globalization, which has resulted in rising expectations that current educational institutions and training systems cannot meet. Furthermore, he attributes the workers’ failure to acquire proper skills and attitudes to a distorted job and pay structure that does not reward productivity, and thus reduces the incentive to invest in skills and capabilities. In other words, households, and perhaps financial institutions, do not invest enough in human capital because the returns to these investments, in the form of wages, are quite low. Once again, institutions—this time the companies themselves—are not able to properly evaluate the true value of human capital investment, thereby leading to its low level. In this vein, Snower (1996) has argued that countries that try to exploit their comparative advantages based on low labor costs by restricting wages end up getting stuck in a vicious circle of low productivity, deficient training, and a lack of skilled jobs, preventing the sector in question from competing effectively in the markets for skill-intensive products. This situation is referred to as a “low-skill, bad-job trap.” “Bad jobs” are associated with low wages and

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little opportunity to accumulate human capital. “Good jobs,” on the other hand, are the ones that demand higher skills and command higher wages. A second trap derives from the complementarities between capital and labor. The problem is referred to as a “low-skill, low-tech trap.” If workers do not have enough skills to operate modern machines, the machines will be underutilized and firms will have little incentive to invest in the latest technology. This will reduce workers’ productivity even more. A third problem emerges from the interaction between innovation and skills. Innovation is crucial for developing technological capabilities, but it requires well-trained workers. Economies can get caught in a vicious circle in which firms do not innovate because the labor force is insufficiently skilled, and workers do not have incentives to invest in knowledge because there is no demand for these skills. The conclusion is that there is no doubt that the Philippine Government needs to develop the country’s human resource system to compete in an increasingly globalized world. Tan (1997, p. 81) argues that “the appropriate role of the government in this largely market-driven educational system is not to make large macro plans but to solve specific problems of market failure.” Until the reorganization of the education/training authority in 1994, the Department of Education, Culture, and Sports was responsible for all educational institutions, except state universities and colleges. Responsibility for vocational training education was dispersed among several departments, e.g., trade and industry, agriculture, and science and technology. Authority over higher education has been transferred to CHED, and control over the public vocationaltraining schools was given to the Technical Education Skills Development Authority (TESDA), created in 1994. TESDA is the highest authority for technical and vocational education and training (TVET) in the Philippines. It has oversight to set standards for all TVET as well as competency requirements for faculty and for tools and equipment. It provides training through its 63 training centers, which organize both short-term courses (3–6 months) and more formal longer-term courses (1–4 years). TESDA receives only about 3% of the national budget for education, with the bulk of training carried out in around 1,300 privately run schools. Training courses designed by TESDA are taught by privately run schools, as well as by TESDA-accredited companies. However, it is not known how closely monitored these establishments are. Both private schools and TESDA-accredited companies carry out information technology (IT) training, secretarial courses, etc. Although there is a growing tendency to introduce the German-style dual training system (DTS), a large part of the training is done within the firm. The DTS was also introduced in 1994 to strengthen manpower education and training in the Philippines and ensure an ever-growing supply of educated and skilled manpower with appropriate skills and desirable work habits and attitudes. “Dual training” refers to an instructional system of technical and vocational education and training

430 Jesus Felipe and Leonardo Lanzona, Jr.

that involves two parties: the vocational/training institution and the firm. The system combines in-plant and in-school training, with both the establishment and the educational institutions sharing the responsibility for providing the trainee with the best possible job qualifications. The DTS system offers benefits to all involved parties. For students, it provides quality training as well as allowances for transportation and other expenses. Companies are assured of a supply of skilled workers in addition to the savings from tax incentives. Finally, schools benefit in terms of an enhanced public image. Figure 7.35 shows the number of persons engaged or registered in a government-accredited apprenticeship program from 1980 to 2003, as well as the number of persons who completed the program and the number of those who were absorbed into the establishment. Two points are worth mentioning here. First, with significant government support, culminating in the establishment of the TESDA in 1994, there was an increase in the number of registered apprentices starting in 1992. Although the number declined in 1996/ 97, it increased again in 2000 as more government assistance became available. Second, despite the support of the Government, the rate of completion remained low and the rate of absorption of the apprentices was even lower. These findings indicate that the program may need to be redesigned with greater thoroughness and emphasis on skill transfers before it can be seen as an avenue for employment. While TESDA has an elaborate program procedure for the approval, implementation, and monitoring of apprenticeship programs, these processes do not include standards of competence. Related theoretical instruction and practical exposure are expected to be undertaken by the firm or by an appointed training agency (Article 69 of the Labor Code). Firms, on the other hand, do not seem to view the program seriously as a hiring mechanism, but simply as way of acquiring cheaper labor and obtaining tax incentives. Firms that employ apprentices are only required to pay at least 75% of the prevailing minimum wage (Article 61 of the Labor Code), and are allowed to deduct 50% of their training costs from their taxable income (Article 71 of the Labor Code). One solution to the problem of the poor quality of the apprenticeship programs is the DTS. As already mentioned, this program combines in-plant and in-school training based on a plan jointly designed by an accredited educational institution/training center and an accredited establishment. While the DTS gets the support of all the sectors involved, it continues to be operated on a fairly low scale. From a total number of 2,524 registered students in 1997, at the early stages of the program, available data from TESDA show that the total number of registered students in 2003 was 9,275, with the majority coming from the TESDA schools and with only a few regions participating in the program. Further, only 5,394 of the DTS trainees graduated in 2003. Appendix Table A7.12 shows the data.

431 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.35 Number of Apprentices, Program Graduates, and Those Absorbed into Establishment, 1980–2003 70 60

Thousands

50 40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Registered Source:

Completed Program

2002

Absorbed in the Establishment

TESDA and Bureau of Labor and Employment Statistics, Yearbook of Labor Statistics.

So far, TESDA has no study on the effectiveness of DTS training in improving labor productivity, nor does it follow up systematically whether the trainees obtain jobs commensurate with the training they have received. TESDA claims that its main future role will be in accreditation and stricter standard setting.33, 34 Manton (1997) attributes the failure of the DTS to increase the scale of its trainees to the lack of incentives given to firms and students to participate actively and to meet their obligations. He cites three potential legal impediments to the DTS. First, the provisions in the Rules and Regulations of the DTS Act provide an escape route for firms from developing quality programs, making these programs less attractive to students. For instance, Rule X, Section 2, of the Implementing Rules and Regulations (IRR) of the DTS Act of 1994 states that during the initial stage of the implementation of this Act, it is possible that an establishment is not yet accredited upon its initial participation in the Dual System: Provided, that the provision of the sections of this Rule are taken into consideration, such that accreditation may be preferably granted prior to the end of the training program.

432 Jesus Felipe and Leonardo Lanzona, Jr.

Second, firms are not only expected to pay the trainees’ daily allowances but must also bear the expense of the training itself, such as the cost of the training officer. These costs can be only partially offset by a tax incentive, which allows the firm to deduct 50% of its training costs from its taxable income (Section 9 of the DTS Act). According to Manton (1997, p. 203), while Rule III, Section 1(m), of the DTS Act IRR prescribes the proportions of in-school and in-plant training (40:60), a number of highly reputable training institutions, such as Meralco Foundation and the Center for Industrial Technology and Enterprise (CITE), do not follow this prescribed proportion. Third, the program is not financially attractive for the student since he will only receive a daily allowance. Section 14 of the DTS Act states that the establishment shall pay to the institution/training center the trainer’s allowance, which should not be less than 75% of the prevailing minimum wage. However, as already noted, not all of this trainee’s allowance goes to the student since part of it will be used to pay for the training costs of the institution. According to Manton (1997, p. 208), the student receives only a daily allowance, defined as “the amount he receives from the institution to defray for part of his daily expenses” (Rule III, Section 1(z), of the DTS Act IRR). To sum up, in our view the DTS cannot be reasonably scaled up unless the program is supported with sustained external funds or with greater government subsidies. Because of the absence of adequate funds, quality requirements and the monitoring system are below standards and the reputation of the system is compromised by this weakness. Amante (2003, p. 278) cites a position paper by the Employers Confederation referring to contradictions in the policies on apprenticeship and on-the-job training. An apprentice is “a person undergoing training for an approved apprenticeable occupation during an established period assured by an apprenticeship agreement.” (Section 4 of the TESDA Act). As noted above, wage payments to apprentices must be at least 75% of the minimum wage (Article 61 of the Labor Code). However, Article 72 of the Labor Code provides for “apprentice without compensation”: the law authorizes “the hiring of apprentices without compensation whose training on the job is required by the school or training program curriculum or as a requisite for graduation or board examination.” Amante refers to the said position paper where employers argue that these laws dilute, if not confuse, the concept of apprenticeship as a process of learning and skill formation. And, moreover, this rule conflicts with the main justification for apprenticeship, which is to meet the needs of the economy for trained manpower (Article 57 of the Labor Code). Article 61 of the Labor Code also indicates that apprenticeship agreements shall not exceed 6 months. This time limitation is also inconsistent with the objective of assisting in the development of human resources. Finally, the law appears to discriminate against small and medium firms when it argues that

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“only employers in the highly technical industries may employ apprentices” (Article 60 of the Labor Code). In the long term, TESDA has to develop a proactive program to respond to worker retrenchments in a firm, in an industry, and in a community or locality. This program should incorporate or combine the key elements required for “safety nets”—training/retraining and the provision of timely labor market information on available jobs and vacancies in the various localities for public information (Amante et al. 1999). To address the problem of retrenched, dismissed, and laid-off workers, a coordination mechanism between the SSS, DOLE, the Department of Trade and Industry, TESDA, and other related government agencies is needed. At present, labor market information assistance is being extended mostly through employment centers known as PESOs (Public Employment Service Offices of DOLE) whose purpose is to provide information on job vacancies. These centers, however, receive applications for employment from only four main types of workers. These are the unskilled unemployed people, the long-term unemployed, the young workers with some training but no work experience, and the workers who may be employed but may be simply looking for information about other jobs. Employers rarely post vacancy notices in these offices since they have many other channels, such as newspapers, and because they feel that the PESOs deal with the least employable workers, whom they would be reluctant to employ. Employers also complain, at the local level, that there are shortages of the types of workers they require. More information can be gathered from different agencies and be useful for both employers and workers.

7.5 Labor Market Policies and the Problem of Job Creation in the Context of Globalization There are three major areas of analysis that are related to the question of job creation. These involve: (i) the overall program of international labor migration, a controversial issue; the number of deployed Philippine workers has almost tripled during the last decade (is migration a solution to the unemployment problem?); (ii) the effects of persistent protectionism; ex post, it appears that trade liberalization and the alleged transition to an export-led growth model with foreign capital during the 1980s and 1990s did not lead to employment creation; and (iii) the impact of overconcentration of ownership in the manufacturing sector and the competitiveness challenge. Despite trade liberalization, the degree of monopolization of the economy has increased.

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7.5.1

Labor Migration Policies

Migration policies are important because an excess supply of labor contributes to the increase in unemployment. Even though the rate of employment generated from overseas migration is substantial, the unemployment level and the annual addition to the labor force are so high that the current levels of migration are not enough to reverse the present patterns of unemployment. Soriano (1998, p. 96) notes that overseas employment has offered the country a relief from its unemployment problem, and that this can very well mean “the difference between collapse and survival.” With more than seven million Filipinos abroad, it is important to understand what has driven them to leave. The situation seems to be worsening since it has been documented that professionals like medical doctors are also leaving the country. It could be argued that globalization is behind this process and that it should not be seen as a reflection of the Philippine Government’s failure to provide opportunities.35 However, the Filipino diaspora started before so-called globalization, sometime in the 1980s. Moreover, when medical doctors decide to go back to school to be retrained as nurses so that they can get nursing jobs in Europe or the United States, one must consider seriously the argument that a large part of migration responds to the lack of opportunities at home. The present structure of migration is not “a one-way road” since migrant workers return to the Philippines as soon as their short-term or medium-term contracts expire or if some life-threatening political event occurs. For example, the Gulf War in 1990 demonstrated that massive return migration could be equivalent to importing unemployment. In the event of these counterflows, the country faces serious dislocations, particularly if the returning workers are not absorbed into the domestic labor market immediately. The country’s employment policies are thus linked to the design of policies on overseas worker migration. The basic policies of the Government with regard to overseas employment can be stated in the following principles (Santo Tomas 2004): (i) As a strategy for labor migration management, the Government shall explore and develop more and better markets for overseas employment; (ii) The Government shall ensure that overseas foreign workers (OFWs) are qualitatively at par with, if not superior to, their foreign counterparts through technical education and training programs; (iii) The Government will ensure that OFWs are protected from the perils of overseas employment, stemming from the Government’s deep appreciation of its moral responsibility over them, aside from its earnest recognition of their monumental importance as partners in nationbuilding.

435 Unemployment, Labor Laws, and Economic Policies in the Philippines

Beneath these general policy premises on overseas migration lies the Government’s general philosophy on overseas migration, namely, a phenomenon that is filled with “opportunities” and which occurs as a result of the migrant’s personal decision to seek greener pastures offshore. In the 1970s, the Government initiated the management of the migration of contract workers. During this period, Middle East countries became affluent because of the oil bonanza. Philippine contract workers were hired for various infrastructure development projects. Today, the Philippines has a basic policy framework on overseas employment, Republic Act 8042 (the Migrant Workers and Overseas Filipinos Act of 1995). While previous policies on labor migration were contained in the Philippine Labor Code, RA 8042 was mainly a reaction to the hanging of Flor Contemplacion in Singapore in 1995, pointing to increased calls to provide protection to overseas Filipinos and their families.36 Its formulation, however, is filled with confusion—particularly two items under the law’s Declaration of Policies: (i) The state does not promote overseas employment as a means to sustain economic growth and achieve national development, and the existence of the overseas employment program rests solely on the assurance that the dignity and fundamental human rights of the Filipino citizen shall not, at anytime, be compromised or violated (Section 2c). (ii) However, at the same time, the law states that the deployment of Filipino overseas workers, whether land-based or sea-based, by local service contractors and manning agencies employing them, shall be encouraged (Section 2i).

The conclusion is that the law is extremely ambiguous in its reference to migration. On the one hand, migration has been a response to global market conditions. The globalization process has shown that the country cannot compete effectively in merchandise goods. Snower (1996) argues that the relatively low demand for and supply of skills in a country derives from rational decisions made by both firms and individuals in the context of the particular legal and institutional framework within which they operate. Countries with a less skilled workforce have greater incentives to produce nontraded services rather than tradables like manufactured goods because the former are relatively protected from foreign competition. This pattern of specialization creates and perpetuates the demand for less-skilled labor. On the other hand, because of the failure to create new jobs at home, overseas employment has become a permanent fixture of the Government’s labor policy. The desire to have better incomes and the lack of jobs in the local economy have driven workers abroad, even to war-stricken areas. This suggests that the Government’s policy to boost migration is, fundamentally, a secondbest response to ease the labor market situation, and most importantly, to increase foreign exchange reserves and remittances (Box 7.6).

436 Jesus Felipe and Leonardo Lanzona, Jr.

7.5.2

Effects of Persistent Trade Protectionism

One expected indirect effect of the trade reforms of the 1980s was the increase in employment. There is plenty of evidence showing that openness matters, i.e., more open economies tend to grow faster (Edwards 1993). In Asia, the performance of countries like the Republic of Korea and Singapore has corroborated this. International trade has dynamic effects that can provide a strong stimulus to economic growth. As Bautista and Tecson (2003, p. 137) note it improves a developing country’s access to new production technologies, to international capital, and to labor skills (including management)— leading to an outward shift of the production possibility frontier. Moreover, foreign trade overcomes the limitations of a small domestic market, enabling the country to take advantage of specialization and scale economies. It helps promote the growth of national income without being subject to a binding demand constraint.

Box 7.6 Government Programs for Overseas Filipino Workers

Various programs for the overseas Filipino workers (OFWs) reflect the Government’s overall intent of providing incentives to international migration. These programs have three specific objectives: (i) to provide economic support; (ii) to improve security and protection; and (iii) to upgrade skills and career building. The programs under each category are the following: Economic Support Expanded Livelihood Development Program (ELDP). The ELPD is a lending program for OFWs and their dependents. This program affords capital to returning OFWs and their families who plan to open up small businesses or improve their own existing businesses. Chattel Mortgage. This refers to the mortgage of equipment/machinery/tools, transport vehicles, or appliances used in the overseas project or at the workers’ residence. The appraised value of the equipment will not be lower than the amount loaned. Family Assistance Loan Package. This is a program of the Overseas Workers Welfare Administration (OWWA) that offers an emergency loan of up to P5,000 depending on the worker’s salary within the scale of the OFW salaries. There are different loan packages given to the newly hired OFW and to the returnee worker (Balik-Manggagawa) on vacation. continued.

437 Unemployment, Labor Laws, and Economic Policies in the Philippines Box 7.6 Government Programs for Overseas Filipino Workers (cont'd.)

Security and Protection Legal Assistance. OWWA members/contributors are provided legal assistance either at the jobsite or upon their arrival in the Philippines. Repatriation of Workers. Members may avail themselves of repatriation services whenever necessary. As stated in the Migrant Worker and Overseas Filipinos Act of 1995, the primary responsibility for repatriating the OFW lies with the employer, who is expected to advance the cost of plane fare and to immediately send the worker home should the need arise, without prior determination of the cause of the termination of the worker’s employment. However, after the worker has returned to the country, the employer may recover the cost of repatriation from the worker if the termination of the employment was due to solely to his or her fault. In case of conflict, the National Labor Relations Commission (NLRC) will determine the outcome of the dispute. Insurance Coverage of OFWs (such as Medicare program for OFWs and their dependents, disability assistance, and life insurance) Skills and Career Development Seaman’s Course Upgrade (SUP). The SUP intends to provide job-related skills training in priority maritime courses identified by the Maritime Training Council (MTC) to upgrade knowledge and skills, develop expertise, and update skills in accordance with technological advancements and international maritime standards. Training assistance ranges from P1,200 to P7,500. Skills-for-Employment Scholarship Program Phase II (SESP-II). The SESP-II provides scholarship grants at the college level to deserving and qualified dependents of OFWs. It covers degree courses not exceeding 5 years of curriculum studies. Congressional Migrant Workers Scholarship Program. This scholarship program is intended for deserving migrant workers and their immediate descendants who plan to pursue courses in priority fields in science and technology. The sustainability of these programs nevertheless depends on the Government’s financial position and overall strategy for human resource development. In the light of the increasing deployment of overseas workers, an evaluation of these programs in terms of their costs and benefits will be vital to their continuation . Furthermore, migration policies have focused only on the protection of migrant workers. Migration policy should also be directed to the supply of high-quality workers who can maximize the returns to foreign employment (Tan 2005). The agencies in charge of overseas workers (like the OWWA, the Philippine Overseas Employment Authority, and DOLE) should coordinate with the Department and Education and CHED in planning not just for domestic labor demand but also for world demand. Sources: OWWA (2005), Tan (2005).

438 Jesus Felipe and Leonardo Lanzona, Jr.

As mentioned above, an expected indirect effect was the creation of employment. This is especially important in a country like the Philippines, where previous trade policy biases against agriculture can have important repercussions for employment. This is because labor is the most important income-generating asset of the poor. Indeed, any policy that hinders labor use is going to have important effects. Imposing restrictions on trade serves to inhibit the expansion of labor-intensive industries that are expected to reflect the country’s comparative advantage in producing for the world market. A number of studies in the Philippines indicate that the country’s protracted import-substitution policies have effectively held back the industry sector’s output growth as well as overall output growth (Bautista and Tecson 2003). Philippine postwar industrialization has two phases (Balisacan 1996b). In the first one, spanning the 1950s and 1960s, the Government imposed comprehensive import and foreign exchange controls as well as highly protective tariffs. These controls led to a rise in the domestic prices of imported goods. This system of protection created a strong bias in favor of the domestic production of import-substituting, finished industrial consumer goods. And simultaneously, imported raw materials, intermediate products, and capital goods were made artificially cheap by an overvalued currency. The result was a system that penalized the primary export sector, mining, export-oriented industries, and the intermediate and capital goods sector. Moreover, the system encouraged large-scale, capital-intensive production and industrial concentration around Manila. In conclusion, trade industrialization policies in the Philippines in the first two decades after independence were biased against labor use and penalized agriculture. Although the Philippines is a labor-surplus economy, the contribution of labor-intensive manufactured products to total exports was insignificant in the 1950s and the 1960s. Partly because of the nature of the political decisions made during this period, export industries with low labor content increased their share in total exports relative to the more labor-using sectors (Bautista 1975). The second phase of industrialization spanned the 1970s and 1980s. These two decades were marked by a major effort of the Government to adopt outwardlooking policies. The two main policies were the introduction of a flexible exchange rate in 1970s and the extension of the fiscal incentives granted to preferred firms through the 1970s Export Incentives Act. These two measures partly offset the country’s biased protection system against exports. However, the highly protective tariff system remained. While labor-intensive exports started to expand in the 1970s, the incentive structure favored the import of inputs, thereby reducing the possible intersectoral backward linkages. Had foreign trade policy been less biased against labor use, labor employment and the use of locally produced inputs would have been greater. According to Bautista and Tecson (2003, p. 154), a less protective trade policy “would have

439 Unemployment, Labor Laws, and Economic Policies in the Philippines

increased the employment of unskilled labor, and in the process, reduced poverty and income inequality.” The 1980s brought a decade of emergency measures and structural adjustments with financial and technical support from the World Bank, e.g., restructuring of the tariff system, import liberalization, rationalization of fiscal incentives, exchange rate adjustments, and financial liberalization (deregulation of the financial market, including the removal of interest controls on both deposits and loans). As mentioned above, the Omnibus Investment Code of 1987included incentives for labor use. The overall result is that, “while these reforms were consistent with the administration’s employment oriented, ruralbased development strategy, they were insufficient to change substantially the structure of the economy” (Balisacan 1996, pp. 533–34). Balisacan (1996b, Table 5.1) analyzes the average effective protection rates (EPRs) on the major sectors for 1965, 1974, 1985, and 1988.37 The most important conclusions are: (i) the structure of relative sectoral protection remained biased against agriculture, fishing, forestry, and mining; and (ii) the average EPR for the export-oriented sectors shifted from 4% in 1974 to –7% in 1985 and–4% in 1988. This was the result of a combination of export taxes on primary and agriculture sectors together with tariffs and import controls on imports. Simultaneously, the average EPR for the nonexportable sectors increased from 61% in 1974 to 102% in 1985 before it dropped to 75% in 1988. This led Balisacan (1996, pp. 535–536) to conclude that considering that the export-oriented sectors are more labor-intensive than the importable sectors, these trends suggest that the system of protection has likewise conflicted with the government’s goal of promoting employment opportunities for the rapidly growing labor force. The bias of the protection regime against agriculture., in particular, implies a weakened ability of the sector to absorb the large pool of unemployed and underemployed within the sector, thereby accentuating the tremendous downward pressure of the labor force growth on wages in agricultural as well as in the nonagricultural activities.

So far, there have been four major programs that have resulted in substantial tariff reduction.38 The reality, however, is that, despite the substantial progress made in trade liberalization over the last decade, unemployment has increased and the Government has continued protecting a number of key industries. This means that the country has not been shackled by globalization as much as is commonly believed. The data show that the Philippine tariff structure significantly favors a number of industries. Many of the highly protected sectors are categorized as sensitive agricultural and food products. However, in some cases they are very inefficient, e.g., processing of agricultural and food products. These have significantly higher rates of nominal protection.

440 Jesus Felipe and Leonardo Lanzona, Jr.

A number of manufacturing industries, such as garments, transport equipment, and furniture, have also enjoyed high effective rates of protection. Recent data clearly indicate some degree of protection given to the agriculture and manufacturing sectors. These have high EPRs, i.e., high protection. For some selected industries in the service sector, the pattern is mostly the opposite, i.e., lower protection. This suggests the presence of heavily protected sectors as well as the discriminatory nature of this type of trade liberalization This discussion points to the great difficulty in liberalizing trade. While it is accepted that a high degree of protection is harmful to the economy, the Philippine industry sector is characterized by a lack of understanding of the economic costs of such protection as well as by the presence of powerful political-social forces that strongly oppose any change in the status quo. This system of protection creates substantial rents for the producers of importcompeting goods, for the importers that benefit from the allocation of (nonmarketed) import rights, for the organized labor that is sharing part of the monopoly rents resulting from the protection, and for the government bureaucracy that is administering the restrictive trade policies. On the other hand, consumers at large are the great losers. 7.5.3 Decline of the Manufacturing Sector and Overconcentration of Ownership As documented above, the agriculture and service sectors of the Philippines account for four fifths of total employment, while manufacturing accounts for about 10% (see Figure 7.14). In the 1990s a number of concerns arose regarding the transition to the export-oriented industrialization strategy with foreign capital involvement. Apart from limited value added, employment creation, and net trade, trade liberalization has not resulted in a reduction in the degree of monopolization of the economy, as might have been expected. The World Bank Poverty Report of 2000 noted that the corporate sector of the country remains highly concentrated. According to the World Bank’s survey conducted in 1997, 757 of the 1,000 largest corporations (ranked by sales) were Philippine-owned, and 216 of these belonged to only 39 corporate groups. The total sales of these 216 group-owned companies composed 51% of the total sales of the largest Philippine-owned corporations. The study also found that in 1997, among publicly listed nonfinancial companies, one dominant shareholder controlled on average 41% of the equity, while the top five shareholders had majority control of three out of every four listed companies. The report surmised that these figures actually underestimated the phenomenon, as less than 10% of the 1,000 largest corporations are listed on the Philippine Stock Exchange. Felipe (2005b) has measured the degree of monopoly of the economy using the price-markup ratio. The rationale is that firms set prices according to

441 Unemployment, Labor Laws, and Economic Policies in the Philippines

a markup on unit labor costs. Defined this way, the markup is simply the ratio of the capital to the labor shares in output. This is taken to be an indicator of the firm’s capacity to enforce a certain claim on profits against laborers and competitors, or of the relative distribution of power, and hence of the potential for distributive conflict. This can also be indirectly interpreted as an index of the capacity of firms to impose anticompetitive practices. Figure 7.36 shows the labor share of the Philippine economy for 1980–2003 (capital’s share is one minus this figure). This labor share includes the portion of the operating surplus that is estimated to be effectively labor income (income of unincorporated enterprises, registered under profits in the National Accounts). The figure indicates that labor has lost more than 10 percentage points vis-à-vis capital in the last two decades, from around 75% to about 65%. Figure 7.37 shows the markup, measured as the ratio of the capital to the labor shares. The upward trend indicates that even during the period when trade liberalization was being implemented and enforced, the degree of monopolization of the economy was increasing. The variable displays an increasing trend, from a value of 0.35 in 1980 to a maximum of 0.58 in 1996— an increase of over 50%—and then a slight decrease. This is interpreted as evidence of the increasing market power of capital vis-à-vis labor during the 20-year period considered. Bardhan (2001) argues that distributive conflicts constitute an important factor behind the persistence of dysfunctional institutions. Beneficial institutional change is prevented in many poor countries by distributive conflicts and asymmetric bargaining power (e.g., vested interests and the differential capacity of different social groups for mobilization and coordination). This seems to be very much one of the problems of the Philippines. Bardhan (2001, p. 280) indicates that If distributive conflicts constitute an important factor behind the persistence of dysfunctional institutions, they also make collective action difficult at the level of the central state agency (for example, in its coordination of macroeconomic policy) and at the level of local governments and community organizations (for example, in the provision and management of local public goods).

High market power could indicate one of two things: either (i) a firm is efficient (in adopting technological innovations, efficient managerial techniques, and other legitimate business practices); or (ii) it is able to exert market power because it holds a dominant position in the market. Most likely, a low-growth country like the Philippines displays a high markup because of the absence of competition in product markets (Felipe 2005b). These results corroborate what is well known about the Philippines, namely, that the country is characterized by a lack of “culture of competition”; monopolies and cartels are accepted as part of the normal course of doing business. Lewis (2004, pp. 279–84) argues that this malaise is worldwide but

442 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.36 Labor Share in GDP, 1980–2003 90 80 70

Percentage

60 50 40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Source:

2002

National Statistical Coordination Board, National Income Accounts.

Figure 7.37 Price Markup, 1980–2003 0.7 0.6

0.5 0.4 0.3 0.2

0.1 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Source:

2002

Felipe (2005b).

affects particularly developing countries, where rent-seeking activities and the link between the special interests of the elites and lobbying and corruption is a very serious problem. This behavior runs very much against the very essential fact of capitalism, namely, competition—an idea that can be traced back to the classical economists, and in particular to Adam Smith. Schumpeter’s (1942) idea of creative destruction, also a consequence of competition, reflects the

443 Unemployment, Labor Laws, and Economic Policies in the Philippines

need to incessantly revolutionize from within with a view to destroying old methods of production, transportation, and markets, and creating new ones. Creative destruction is a complex and uncertain process that involves trial and error. This requires an environment where competition can flourish for it is the constant competitive pressure of a well-developed market mechanism that encourages firms to adopt technological and organizational best practices (on this see Parente and Prescott 2000). Rent-seeking activities, competition, and growth are closely related in the sense that growth depends negatively on the existence of rent seeking. The dynamics of technological change and productivity growth are strongly connected to the reallocation of production inputs and output across establishments. The ease of entry and exit of establishments, and competition policies in general, play an important role in this reallocation (ADB 2003, Figure 1). Thus, distortions in market structure, institutions, and government policies that affect the reallocation adversely affect productivity growth. Market imperfections like imperfect capital markets can distort the reallocation. Such market imperfections are very likely to be more important for small businesses, many of which in the Philippines are single establishments with an ownermanager, providing self-employment. It is very likely that the presence of an owner-manager in a firm yields a lower probability of exit (Holmes and Schmitz 1992). The Philippines clearly suffers from this business climate. Thus, one must conclude that the substantial economic reforms that have opened up the economy to foreign trade and investment since the 1980s have not had much success. It has been argued that it has become more and more difficult in the last decade to implement flexible policies with a view to reducing the cost of labor and making it more competitive. Unions have fought the flexible labor arrangements that businesses have used more often recently. To businessmen and government officials, these changes have often been attributed to the need to remain competitive in a global economy. Since the country hopes to provide a minimum wage policy and generous benefit levels, and since it apparently chooses to pay the costs, the stakes in the form of higher unemployment levels have been raised.39 However, the arguments above are not entirely compelling. For investors (both foreign and domestic) who want to invest in the Philippines to serve the domestic demand, the cost of labor is probably offset by the demand effect. On the other hand, for investors who intend to export, countries like the PRC offer substantially lower wages. These investors would have already left long ago if only wages determined their preference for the Philippines. Most likely, there are other considerations (e.g., efficiency wages) behind their decision. Felipe (2005a) argues that from an economic point of view what matters in measuring the competitiveness of labor is not the wage rate but the unit

444 Jesus Felipe and Leonardo Lanzona, Jr.

labor cost, that is, the ratio of the nominal wage rate to labor productivity. The standard argument is that the lower the unit labor cost, the more competitive the economy is, in the sense that it will grow faster or will gain export market share. The problem with the concept of unit labor cost, for empirical purposes, is that it can be calculated in different ways. Felipe (2005a) also argues that just as one can define unit labor costs as a measure of competitiveness, one can construct what he terms unit capital costs—the ratio of the nominal profit rate to capital productivity. The interpretation and analysis of unit capital costs should be similar to that of unit labor costs, i.e., the lower it is the more competitive firms will be. However, now the burden of competitiveness shifts from labor to capital. Figure 7.38 shows estimates of unit labor and capital costs, both calculated with the own GDP deflator. The results indicate that both have clearly increased. Figure 7.39 shows estimates of the two costs, but now calculated with the ratio of the PPP to the market exchange rate, the preferred method for intercountry comparisons. The calculations now indicate that both costs have remained approximately constant throughout the two decades. One interesting feature of the Philippine economy is that while the average real wage rate underwent a severe decline in the 1980s (see Figure 7.22) and today is still below the level of 20 years ago, the average profit rate of the economy (i.e., the ratio of total profits to the stock of capital, or the ratio of capital’s share to the capital-output ratio) has been stable during the whole period and even exhibits a slight upward trend, as Figure 7.40 shows. It is Figure 7.38 Unit Labor and Capital Costs (with GDP deflator), 1980–2003 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Unit Labor Cost Source:

Felipe (2005b).

Unit Capital Cost

2002

445 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.39 Unit Labor and Capital Costs (with relative exchange rates), 1980–2003 0.25

0.20

0.15

0.10

0.05

0.00 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Unit Labor Cost Source:

Unit Capital Cost

Felipe (2005b).

puzzling that in an economy that has performed relatively poorly in the last 20 years and has been subject to so many political shocks, the profit rate has not declined. This relative stability is the result of the fact the increase in the capital share has been compensated by the increase in the capital output ratio (i.e., a slight decline in capital productivity). Rowthorn (1995) has argued that an economy’s markup is a function of the existing capital stock. A higher capital stock leads to a lower markup because of excess capacity. And conversely, a lower capital stock increases firms’ desired markup, which can be realized in a noninflationary way only if unemployment increases to restrain wage claims. Thus, an insufficient capital stock (resulting from lack of investment) will necessitate a higher unemployment rate to equilibrate the income claims of workers and capitalists. Figure 7.41 shows the investment-to-GDP ratio. Moreover, capital productivity (Figure 7.42) is stagnant. The combination of a low investment share and stagnant capital productivity leads to a low growth rate of the capital stock (Figure 7.43). In Rowthorn’s words: “Unemployment reduces the ability of workers to push up wages, while excess capacity limits the ability of firms to raise prices (Rowthorn 1995, p. 28). It is possible to show within the Lewis model (see Felipe and Hasan 2006b, Chapter 2 in this volume) that the accumulations of profits by capitalists need not always raise the level of employment in the industry sector (Ghatak 2003, pp. 94–5). If in the context of this model capitalists decide to shift to a more

446 Jesus Felipe and Leonardo Lanzona, Jr. Figure 7.40 Profit Rate, 1980–2003 14 12

Percentage

10 8 6 4

2 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Source:

2002

Felipe (2005b).

Figure 7.41 Investment Share, 1980–2003 35 30

Percentage

25 20 15 10

5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Sources:

2002

Authors' computations; National Statistical Coordination Board, National Income Accounts.

447 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.42 Capital Productivity, 1980–2003 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

2002

Source: Felipe (2005b).

Figure 7.43 Growth Rate of Capital Stock, 1981–2003 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 1981

1983 Source:

1985

1987

Felipe (2005b).

1989

1991 1993

1995

1997

1999

2001

2003

448 Jesus Felipe and Leonardo Lanzona, Jr.

capital-intensive (labor-saving) technique of production, labor productivity will rise (i.e., the marginal product curve becomes steeper) but neither wages nor employment will increase. This is because in this model the wage rate is a horizontal line (i.e., infinitely elastic, implying that the supply of labor is unlimited at the subsistence level of wage). What happens under these circumstances is that capitalists’ profits increase. If this were happening in the Philippines we should observe an increase in the capital–labor ratio. Figure 7.44 shows the Philippine capital–labor ratio. The graph indicates that today the Philippine capital–labor ratio is at the same level it was in the early 1980s. Moreover, between 1984 and 1997 it underwent a significant decrease.

7.6 The Employment Challenge and the Objective of Full Employment: Making Employment Central to Macroeconomic Policy To speed up employment creation, the Philippine Government should give priority to the objective of attaining full employment in the sense of making it central to macroeconomic policy. Moreover, if employment creation is a paramount objective of the new Philippine administration, then this objective should take center stage in the Government’s agenda. Full employment in a developing country consists in maximizing the absorption and utilization of labor (i.e., minimizing unemployment), as well as in minimizing underemployment. For this it will be necessary to: (i) create the conditions under which the high-wage segments of the economy generate more jobs; and (ii) improve the earnings prospects in the informal sector.40 A policy tool to measure the achievement of the objective of full employment in the Philippines is the index of labor underutilization (Figure 7.7). Unless the Philippine Government takes this objective seriously, unemployment will not be reduced and eventually eradicated. As indicated in Section 2, the need for labor market reform has been the result of policy makers’ belief that competitiveness is the key problem facing the country and that it must be solved through labor market reforms to make the labor market more flexible. This view puts the blame for the Philippine unemployment problem on labor market institutions, that is, the array of wage-push factors that have presumably increased the cost of labor. However, the evidence is not all that clear-cut. Although we showed above that the data seem to indicate that the Philippines has the highest (maximum) minimum wage in the region, it is hard to square the explanation of unemployment in the Philippines in terms of wages being “too high.” This is because the real wage in the Philippines today is below what it was in 1980, and labor’s share has lost about 10 percentage points in the last two decades. The sharp drop in real wages proves that wages

449 Unemployment, Labor Laws, and Economic Policies in the Philippines Figure 7.44 Capital-Labor Ratio, 1980–2003 350,000 340,000

Pesos (base 2000)

330,000 320,000 310,000 300,000 290,000 280,000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Source:

2000 2002

Felipe (2005b).

have been flexible when required. What may be argued is that institutional interventions produced a “suboptimal rate of reduction” with accompanying unemployment. However, Freeman (1993, p. 133) argues, to contend that greater real wage reductions are still necessary seems excessive because it puts the entire burden of adjustment to macroeconomic distress on wages and the labor market […] when the reduction in real wages necessary to eliminate open unemployment exceeds the huge reductions observed in many developing countries, I would look beyond the labor market for the root cause of the economic disaster.

Moreover, the higher minimum wages in the Philippines do not imply that higher wage costs. To determine this, one would have to compare the actual wages paid, not the minimum wage. It is difficult to believe that actual wages paid in Manila are higher than in Bangkok or Kuala Lumpur. In Section 7.2 we also argued that the current economic and political situation of the Philippines is very complicated. We do not want to send a fatalistic message, however. There are things that can be done. In the short run, the key to job creation is to increase growth in conjunction with a reduction in the depth and duration of recessions.41 This calls for a critical role of macroeconomic policy (i.e., the Government has to use monetary and fiscal policies)—institutional coordination and an improvement in the political environment (see Box 7.7) Contrary to recent conventional wisdom in macroeconomic theory, the effects of fiscal and monetary policies on aggregate demand seem to matter a lot for both short- and long-run trends in

450 Jesus Felipe and Leonardo Lanzona, Jr. Box 7.7 Policies for Full and Productive Employment in the Philippines: A Checklist

(i) (ii)

Immediate Priority Implement a population policy to control fertility and the labor supply. This policy will have impact in the long run but must be implemented immediately. Devise and implement a Public Service Employment program of direct job creation funded by the government.

Highest Impact: Growth-Promoting Policies (iii) Develop an industrial policy framework to coordinate the activities of the private and public sectors. The objective is to encourage restructuring, diversification, and technological dynamism. Be creative! (iv) In conjunction with the above, develop strategies for the manufacturing and service sectors. (v) Put forward a big-push rural development in terms of targeted investments to reduce migration from the countryside. This big push will have to be enough to place a sufficiently large number of people in a situation where migration offers no attraction. (vi) Address the tax collection problem so as to increase tax revenues and release resources for public investment, especially in infrastructure. (vii) Develop policies to increase productivity and incomes in the informal urban sector (e.g., technical assistance, improvement of management capacity, facilitation of business linkages, including this in the formal sector). This sector is small in scale, labor-intensive, and rather competitive. Often, it has been neglected by government and discriminated against by a range of measures that favor the modern sector. (viii) In conjunction with the above, develop policies to increase the proportion of workers in the formal sector to absorb workers from the informal sector (e.g., promotion of small enterprises, improvement of the legal framework). (ix) Develop policies that encourage the use of labor-intensive methods of production and the development of intermediate technologies that do not entail reductions in employment.

(x)

Intermediate Impact: Education Implement an education policy that places less emphasis on the quantitative link between occupation and formal education (to eliminate mismatches) and more attention to the structure and content of education, making it more appropriate for the environment in which most students will live. Emphasize workers’ trainability.

Other Policies for Consideration (xi) Address labor market reforms where necessary. (xii) Review the role of monetary policy to study if it can be used more broadly to encompass development objectives.

451 Unemployment, Labor Laws, and Economic Policies in the Philippines

unemployment (Ball 1999). In a world were prices adjust slowly to equilibrium following a shock (because of uncertainty and incomplete information), the argument that economic policy is ineffective need not be true, especially in the presence of unemployment.42 This slow-adjustment scenario is particularly realistic in the labor market because of the conflict between firms and workers over the distribution of income. Monetary policy can be used to speed up the adjustment process by causing nominal demand to grow. This will be inflationary, but only when the economy works at full capacity.” Akerlof (2002) has pointed out that real-world aggregate demand matters and that to understand unemployment one has to go beyond the issue of labor market rigidities. The point of the New Classical models that dominate macroeconomic discourse is that monetary policy, as long as it is fully perceived, can have no effect on output or employment. This “conflicts, however, with empirical evidence on the impact of monetary policy and the widespread popular belief in the power of central banks to affect economic performance” (Akerlof 2002, p. 416). Blanchard (2002) has also argued that monetary policy does affect the natural rate of unemployment. Likewise, maintaining strong aggregate demand appears to be particularly effective if tax, spending, and monetary policies are appropriately coordinated with both wage bargaining and social policy. This, in turn, requires high levels of social consensus and a stable political environment, something that the Philippines lacks today. The Federal Reserve Board of the US actively manages interest rates, pushing them down when it thinks employment is too low. In the Philippines, however, the main (and seemingly exclusive) concern is inflation.43 While we do not want to deny that this is and should be a concern of the BSP, it is difficult to believe that monetary policy cannot contribute more than it does to alleviating the country’s most pressing problem.44 At least, a serious debate on the possible broader role of monetary policy and employment is necessary. On the other hand, solving the fiscal problem is truly a priority in order to release public resources for investment. It is accepted that the fiscal problem is due to low revenue collection and inefficiency of the tax-collecting agencies. This demands swift measures. However, the slow pace at which this problem is being addressed is annoying. It is also important to emphasize that the high population growth rate puts pressure on the unemployment problem from the supply side. Indeed, as the MTPDP 2004–2010 (p. 112) acknowledges employment in the Philippines is largely labor-supply driven as persons who cannot find jobs in the formal labor market end up creating their own employment or land jobs overseas. Over the three-year period, the share of own-account workers has been considerable at 37.7 percent and those who are unpaid family workers at 12.9 percent.

452 Jesus Felipe and Leonardo Lanzona, Jr.

For this reason, the country must implement a sound population management policy. This, however, will not have visible effects in the short run; but the longer it takes the administration to address the problem, the worse it will become. In the long run, the key is for government to minimize the barriers to matching workers and skills to productive employment. Some measures should focus on how to design unemployment, disability, welfare, health insurance, and tax programs so that they protect those in need while still providing incentives to work. At the same time, the Government has to design programs to support workers through job search. Finally, it is necessary to understand the incentives that businesses have to hire, making sure that they do not face unnecessarily large regulatory or bureaucratic obstacles to starting or expanding operations. The same applies to the rules that protect workers excessively and make employers reluctant to hire new employees. It must also be added that the Philippines has to implement sensible population management policies. These have to be introduced as soon as possible because it takes years for them to pay off. 45 From a different point of view, as noted in Section 6.3.3, addressing the unemployment problem requires an in-depth analysis of what occurs in the three sectors of the economy. On the one hand, it is of paramount importance to reduce the fluctuations in the agriculture sector and increase nonfarm income. Second, it is important to understand the mechanisms of the transfer of workers from agriculture into services. And finally, an understanding of why the manufacturing sector contributes so little to employment creation is also required. 7.6.1

Why Previous Employment Generation Programs Failed

Employment generation programs in the Philippines can be classified into two groups. First are those programs aimed at directly influencing the level of employment. These are public works employment programs, programs favoring certain groups, minimum wage legislation or overseas employment programs (Balisacan 1996a). The second type refers to programs that affect employment indirectly. These are industrialization programs, trade (discussed above) and exchange rate policies, among others (Balisacan 1996b). The Philippines has had for a long time a variety of direct employment creation programs, in particular for the promotion of employment in rural areas. In the early 1970s, the Government adopted the integrated area development approach (IAD). An IAD package would include rural infrastructure, agricultural services, rural industries, and a variety of social services. However, planning and implementation problems affected the programs. In some cases, the problem was due to the fact that the programs

453 Unemployment, Labor Laws, and Economic Policies in the Philippines

were excessively complex, effectively hindering their effectiveness. The other major problem was the inadequate attention paid to the implications of other government programs and policies for the effectiveness of IAD programs. Indeed, Balisacan (1996a, p. 513) has noted that trade and exchange rate policies, and the government’s capital-intensive, import-dependent industrialization program, generally tended to depress economic incentives in agriculture and the rural areas. This not only stunted the growth of output and employment in rural areas but also prevented the integration of the rural economy with the rest of the economy.

The Aquino administration initiated a series of programs specifically directed at generating employment, the main one being the Community Employment and Development Program (CEDP), aimed at creating employment opportunities for about 1.2 million workers by the end of 1987 (later extended to 1988). It was intended to benefit the unemployed and underemployed. However, the CEDP also suffered problems (e.g., delays in project implementation, distortion of priorities in project selection due to political pressure, and corruption) that affected its effectiveness. In 1990, the Aquino administration reiterated its firm commitment to fight poverty and introduced two new measures. The first one was the acceleration of the delivery of physical infrastructure. The second one sought to provide assistance directly to targeted poor families. Under this set there were three programs: (i) the Program to Refocus Orientation for the Poor (PROPoor), which was aimed at accelerating the delivery of services to 450 lowincome municipalities; (ii) the Samar Island Development Program (SIDP), specifically designed to support the development needs of Samar Island, an area of extreme poverty and rural insurgency; and (iii) the Special Development Assistance Program (SADP), a program specifically directed at areas affected or threatened by insurgency, and including training and infrastructure. The second new measure of the Aquino administration was the Poverty Alleviation Program, launched in 1990. This was a program aimed at directly assisting the poor. This assistance took the form of capability-building, credit, livelihood, and technical support. Balisacan (1996a, p. 519) summarizes the main lessons that can be drawn from three decades of implementing programs aimed at generating employment: (i) While the objectives of intervention programs were laudable, their benefits were frequently captured by the nonpoor, partly because of poor targeting. (ii) Direct interventions could not overcome the negative effects of distorted pricing policies (e.g., exchange rate).

454 Jesus Felipe and Leonardo Lanzona, Jr.

(iii)Many programs lacked sufficient community involvement. As a consequence, they were often irrelevant to the actual needs of the supposed beneficiaries. The conclusion is that many government programs have not been maintained over the long term. Designing and implementing a more comprehensive and consistent employment program that integrates microeconomic and macroeconomic levels issues is desirable. 7.6.2

The Medium Term Philippine Development Plan 2004–2010

As indicated above, the MTPDP 2004–2010 approved in 2004 makes specific references to the labor market and labor policies with a view to creating employment, in particular decent and productive employment. In quantifiable terms, the MTPDP 2004–2010 aims at creating about 10 million jobs between 2004 and 2010. These objectives are detailed in Table 7.5. Table 7.5 Employment Prospects, 2004–2010 (’000) Net Job Creation Year 2003 (actual) 2004 (Jan, Apr, Jul) 2005 2006 2007 2008 2009 2010 2004–2010 (Total) 2004–2010 (Average) Note: Source:

Agriculture

Industry

Services

Total

81 187 290–331 298–340 297–342 309–355 321–370 320–371 2,021–2,295 289–328

144 237 174–212 249–291 265–312 299–351 333–391 366–431 1,923–2,225 275–318

341 810 565–713 717–896 818–1,016 894–1,114 941–1,184 1,009–1,279 5,753–7,012 822–1,002

566 1234 1,029–1,256 1,263–1,527 1,380–1,669 1,502–1,821 1,594–1,945 1,695–2,081 9,697–11,532 1,385–1,647

Employment targets were based on the following 1993–2004 elasticities (defined as the percentage increase in employment level for every 1% increase in GDP level): agriculture 0.34; industry 0.75; services 1.04. MTPDP 2004–2010, Introduction, Table D.

It is worth quoting the original text (MTPDP 2004–2010, p. 112): Labor policies shall be guided by the principles of providing decent and productive employment. Decent and productive employment means that adequate income is generated, rights at work are protected, social protection is provided for, and participation in the democratic process is guaranteed

455 Unemployment, Labor Laws, and Economic Policies in the Philippines through tripartism and social dialogues. It also means sufficient employment, where all workers have full access to income earning opportunities. Decent employment also entails the continuous improvement of workers’ personal capabilities through a buildup in competitive skills and positive work ethics to make them more productive. This will enable workers to fully participate in both economic and social activities, and maximize their human development potential even with the challenges posed by globalization. Government, committed in the pursuit of decent and productive employment, shall pursue more vigorously the four major employmentpromoting strategies: employment generation, employment preservation, employment facilitation and employment enhancement.

In what follows we summarize these four employment-promoting strategies (MTPDP 2004–2010, Chapter 9): (i) Employment generation. This involves creating, directly or indirectly, new employment opportunities in the domestic labor market. To support the efforts in job creation, the Government shall: (i) issue administrative guidelines and (ii) propose legislative amendments to the Labor Code to recognize flexible work arrangements (e.g., subcontracting, flexiwork, flexiwage) especially in business process outsourcing and cooperatives. However, this shall take into consideration the promotion of decent work and respect for core labor standards. (ii) Employment preservation. This involves enhancing harmonious workeremployer relationships and maintaining existing jobs with remunerative terms and conditions. Industrial peace, which significantly contributes to the preservation of employment, shall be achieved through freedom of association and free collective bargaining, continuing social dialogue, mediation and voluntary arbitration of conflict, and shared decision-making mechanisms at the firm, industry, sector, and national levels. To achieve these, government shall: (i) ensure 24-hour, 7daysaweek action on labor cases, promote alternative dispute settlement mechanisms in the workplace for both unionized and non-unionized establishments, and continuously educate labor and management on workers’ rights, dispute prevention, and settlement; (ii) promote efficiencyenhancing measures, including arrangements or human resource strategies that minimize

456 Jesus Felipe and Leonardo Lanzona, Jr.

employment losses, pursue the establishment of a tripartite assistance and supervising committee, and administer an industrial peace and stability fund to assist displaced workers on a tripartite basis; (iii) install an electronic labor case tracking and management system to support overall efforts to improve case resolution; and (iv) sustain social dialogue as a central element of labor policies, and a means to secure sustainable decent work outcomes. (iii)Employment enhancement. This involves improving workers’ competencies, productivity and work values, work conditions and occupational safety and health, remuneration, and welfare. To enhance labor productivity and competitiveness, government shall: (i) showcase productivity improvement programs in micro, small, and medium enterprises (MSMEs), inducting barangay micro business enterprises (BMBEs); (ii) promote a culture of selfregulation and voluntary compliance with labor standards through the full implementation of the new labor standards framework; (iii) continuously review its wage policy framework vis-à-vis emerging labor and industry requirements. (iv) Employment facilitation. This involves facilitating the access of Filipino workers to employment opportunities and alternatives, whether locally or abroad. Overseas employment remains a legitimate option for the country’s workforce. As such, government shall fully respect labor mobility, including the preference of workers for overseas employment. Protection shall be provided to Filipinos who choose to work abroad, and programs for an effective reintegration into the domestic economy shall be put up on their return. To address the apparent mismatches in jobs and skills, the major Public Employment Service Offices (PESOs) shall be interconnected to strengthen the labor market information system. Alternative job search modes, such as the use of short messaging services (SMS) technology shall also be set up to give workers better access to information on job vacancies. Policies and procedures for overseas employment shall continue to be streamlined. One cannot help contrasting the shift in employment generation strategies laid out in the MTPDP 2001–2004 with those in the MTPDP 2004–2010. While the previous development plan (MTPDP 2001–2004, pp. 36–40) emphasized (i) modernization of agriculture and fisheries, (ii) tourism development, (iii) upgrading of airports, seaports and roads, (iv) development of ICT capabilities, (v) promotion of labor-intensive activities such as construction of mass housing,

457 Unemployment, Labor Laws, and Economic Policies in the Philippines

and (vi) self-employment, the latest development plan (MTPDP 2004–2010) focuses on amending the Labor Code to recognize flexible work arrangements. In our view, it is not clear that this shift in emphasis will solve the employment generation problem of the Philippines. Finally, recall that in the Introduction we briefly discussed the objective of MTPDP 2004–2010 to create about 1.5 million jobs a year. Felipe (2005b) has argued that achieving this objective will be very difficult for it depends on achieving the growth objectives also set forth in the MTPDP 2004–2010, an increase from the current rate to about 7–8% by 2009–2010. The growth objective, in turn, depends on an increase in the investment rate from the current 20% to about 28%. Felipe (2005b) argues that what matters for growth is not the investment rate but the growth rate of the capital stock. Of course, the two are related, but there is a third variable that matters, namely, the productivity of capital. Felipe (2005b) argues that achieving growth rates in output of 7–8% requires growth rates in the capital stock of at least 10%. Currently, the growth rate of the capital stock is about 3% (Figure 7.43). Felipe (2005b) shows that the projected increase in the investment rate is not enough to lead to a growth rate of about 10% in the capital stock. This is because it would require a huge increase in capital productivity (Figure 7.42) from the current levels. Felipe (2005b) concludes that, given current policies and circumstances, it will be difficult for the Philippines to grow by more than about 5.5%. And with this growth rate, it will be difficult to expect substantial creation in employment and reductions in unemployment.

7.7 Final Remarks and Future Research As stated in the Introduction, this chapter is a comprehensive stocktaking exercise of the data and literature on Philippine labor markets. The exercise has covered labor market trends and outcomes, as well as a review of labor market policies and key issues affecting the labor market. The implicit question behind the exercise has been the discussion of whether the supposed rigidities in the Philippine labor market are the cause of unemployment and whether they are preventing the creation of employment. All this has been done in the context of the new MTPDP 2004–2010. It has been argued that the main problem of the country, and the cause of increasing unemployment and underemployment rates, is the lack of capacity to generate sufficient employment for all those who enter the labor market. Because of the nature and character of the chapter (i.e., it is a stocktaking exercise) a definite answer cannot be provided. However, our analysis indicates that, except in some areas, Philippine labor market policies cannot be seen as the main culprit for the existence of four million unemployed and five million

458 Jesus Felipe and Leonardo Lanzona, Jr.

underemployed. It is perhaps worth summarizing the findings of Forteza and Rama (2001), who evaluated the impact of labor market rigidity in growth rates over the decade preceding the adoption of a serious reform effort and the decade immediately after. The empirical analysis compares the annual growth rates of 119 countries over the period 1970–1986. The indicators of labor market rigidity they used are minimum wages, the cost of mandated benefits, the strength of the labor market movement, and the size of government employment. The authors argue that the firs two variables reflect the extent to which the Government directly interferes in the adjustment of labor costs. On the other hand, the other two variables capture the ability of potential losers from reform to convey their grievances. The results of their empirical analysis show that: (i) labor market rigidity is a determinant of the success or failure of economic reforms; (ii) countries with more rigid labor markets experienced declines in growth rates before they adopted the adjustment programs and weaker recoveries afterward; and (iii) labor market reforms matter more for political reasons. Minimum wages and mandated benefits do not appear to hinder economic growth. This result is consistent with the evidence for the industrial countries, reviewed below, where labor market policies arguably have modest hard-to-uncover effects on economic efficiency. The authors conclude that “the possible irrelevance of minimum wages and mandated benefits for the success of economic reforms questions the wisdom of efforts to deregulate the labor market” (Forteza and Rama 2001, p. 29). Moreover, they argue that abolishing minimum wages or curtailing social security benefits might not contribute much to economic performance. In sum, labor market deregulation might be effective at reducing rigidity “on paper” but not necessarily in practice (e.g., repealing ILO conventions would be a futile effort). Thus, they conclude: “it seems preferable to concentrate reform efforts on issues such as taxation, government spending, trade barriers, financial regulations and enterprise ownership, rather than on re-drafting the labor code” (Forteza and Rama 2001, p. 30). On the other hand, unionization and government employment are associated with deeper recessions before adjustment and weaker recoveries afterward. The authors interpret this result as implying that organized interest groups that stand to lose from the reforms may succeed in delaying their adoption and diluting their content.46 An important question (implicitly) posed by this chapter is whether it is possible to design labor market institutions that are good simultaneously for equity (i.e., they promote inclusiveness) and for efficiency (i.e., wages are fair in the sense that they reflect scarcity) considerations. Recent work by the World Bank (World Development Report 2006) addresses this question. First, it is important to look at what has worked and what has not worked. There is a wide variety of country experiences (i.e., different labor market models) with

459 Unemployment, Labor Laws, and Economic Policies in the Philippines

a good track record of solid growth and high employment-to-population ratios and, simultaneously, with a significant degree of protection to workers. The examples certainly refer to the developed countries, but this is where the developing countries must look. Although their situation is very different, this does not mean that lessons cannot be learned. The labor markets of the Nordic countries and of the United Unites are different cases that have produced good results following very different approaches. The World Bank indicates that the successful cases share three factors: (i) policy and institutional choices are consistent with each other and are part of a coherent market-friendly policy package; overall, product and factor markets are competitive; (ii) government is accountable to its citizens and these have a voice; and (iii) institutions and policies change as social conditions evolve. On the other hand, the World Bank points out that it is possible to design a set of labor market institutions that lead to undesirable outcomes, in the sense of being highly unequal. The main problem for the developing countries is that one segment of the labor market (a group of formal sector workers) benefit from protection, while another large group of workers do not have any. Governments can also do a poor job when they intervene excessively in the labor market and product markets are not competitive. In highly monopolistic sectors (e.g., some government-controlled sectors), workers can be getting high wages because of protection. This probably comes at the expense of lower employment. Therefore, the important question to be addressed is how governments can get it right and achieve a balance between protection and flexibility. Here the answer is that specifics, history, and traditions matter a lot. The labor market institutions that countries have developed throughout time are the result of these factors. Overhauling them is complicated and perhaps not necessary. The process of redesigning labor market institutions must be a process borne out of consensus and after careful consideration of the policies that are harmful. The rest of the Labor Code should be left as it is as long as it does not pose serious problems. Labor unions, for example, can play a very positive role in improving working conditions while supporting productivity growth. This will be most effectively achieved when product markets are competitive so that unions cannot raise wages at the expense of other parts of society. A final question is how governments can introduce reforms when they have a set of “bad” labor market policies. As the World Bank indicates, experience suggests that effective change involves a combination of factors: (i) designing and implementing a consistent and comprehensive policy package; (ii) tackling vested interests; (iii) broadening societal accountability; and (iv) compensating the losers.

460 Jesus Felipe and Leonardo Lanzona, Jr.

7.7.1

Future Research

The chapter has raised a number of issues that must be explored further. The following seem to be priorities: (i) Labor market policies. This is the central question of the chapter. It has been concluded that some labor market policies might pose a real constraint on employment creation. On the basis of the comparative analysis with the labor market policies in other countries, it has been concluded that the Philippines has restrictive practices in two main areas. First, paid mandatory holidays and severance payment for redundancy dismissal are significantly higher in the Philippines, possibly making them restrictive practices. Second, the rules on dismissal make the process more complicated in the Philippines. We would add to these two the controversial issue of the minimum wage. It must be clearly concluded if the minimum wage in the Philippines is “too high” and thus discourages employment. The question of whether labor market interventions impair investment or growth has to be sorted out. The recent work of Besley and Burgess (2004) for India is important for it tries to provide evidence linking indicators of institutional rigidity to unemployment rates and growth. Linked to the above is the consideration of the speed and magnitude of job creation and destruction in the country, the specifics of labor markets, labor market search and matching institutions, and the shape and shift of the Beveridge curve, which defines the relationship between vacancies and unemployment. (ii) Macroeconomic policies. Are there other alternative explanations for the Philippines’ unemployment problem? Most likely, the lack of capacity of the industry sector to generate employment in connection with low capital accumulation must be considered. In a Keynesian framework, demand determines employment via investment. In the Philippines, the lack of investment is a wellknown problem. The most important ramification of this problem is its impact on employment. It is possible that the Philippines’ low capital stock per worker, due to lack of investment, has led to higher markups and unemployment. Thus, the policy prescription to reduce unemployment would be investment and not labor market reforms. This does not mean that the latter are not important; rather, that they are not to blame for unemployment. It is also perhaps worth considering the possible connections between

461 Unemployment, Labor Laws, and Economic Policies in the Philippines

the BSP’s monetary policy, anchored in inflation targeting, and unemployment, although recent monetary policies (post–Asian crisis) have been rather lax. Another component of this research proposal is the consideration of the link between growth and employment. This link has been studied in the literature under the topic of Okun’s Law, which refers to the empirical observation that the growth rate of the economy should be above some threshold to reduce unemployment. If unemployment in the Philippines is still on the rise when the economy grows by 6%, what is the threshold of annual growth rate above which unemployment will start decreasing? (iii)The urban–rural differential. What policies can be implemented to induce a big-push rural development? (iv) The informal sector. The empirical evidence suggests that the Philippine informal economy is large and that not much is known about how it works. It is well known that the informal sector consists of more than one tier. Hence, it is important to look at each tier separately. What determines who goes into each tier? What are the determinants of income in each? (v) Methodology. We believe that more can be learned about which interventions are excessive and disastrously implemented from detailed case studies than from cross-country time series regressions with possibly weak data. Indeed, research on labor policies and institutions would benefit from more detailed investigations of how specific interventions and institutions work in particular countries as opposed to aggregate statistical analyses. A country study will have to take into account the history and traditions of the Philippines. This is because the labor market is in itself a country-specific institution.

Table A7.1 Sources of Job Creation, 1991–2002 1991

1992

1993

1995

1996

1997

1998

1999

2000

2002

0.0544 0.0539 0.0277 -0.0079 0.0135 0.0130 0.0482 -0.0397 0.0328 0.0325 0.0150 -0.0087

0.1700 0.0600 0.1503

0.1625 0.0604 0.1514

0.1665 0.0634 0.1588

0.1587 0.0650 0.1651

0.1459 0.0605 0.1602

0.1455 0.0610 0.1682

0.1331 0.0582 0.1675

0.1392 0.0604 0.1743

0.1400 0.0591 0.1793

0.4470 0.1578 0.3952

0.4342 0.1613 0.4045

0.4284 0.1630 0.4086

0.4083 0.1671 0.4246

0.3980 0.1651 0.4369

0.3884 0.1628 0.4489

0.3708 0.1623 0.4669

0.3722 0.1616 0.4662

0.3700 0.1561 0.4739

0.3804 0.3742 0.0076 -0.0164

0.3887 0.0388

0.3888 0.3666 0.0002 -0.0569

0.3747 0.3588 0.0221 -0.0424

0.3739 0.0420

0.3783 0.0118

2.5908 2.5190 0.0041 -0.0277 3.8832 3.9489 0.0052 0.0169 4.9720 5.0350 0.0199 0.0127

2.5661 0.0187 4.1581 0.0530 5.2558 0.0438

2.5958 2.3845 2.4918 2.5156 2.5596 0.0116 -0.0814 0.0450 0.0096 0.0174 4.3724 4.3212 4.2774 4.5101 4.4654 0.0515 -0.0117 -0.0101 0.0544 -0.0099 5.4364 5.0018 5.1159 5.1828 5.3129 0.0344 -0.0799 0.0228 0.0131 0.0251

2.5949 0.0138 4.5451 0.0178 5.5116 0.0374

15.2360 15.5041 15.4100 16.3518 16.3426 17.1212 0.0209 0.0176 -0.0061 0.0611 -0.0006 0.0476 64.6908 65.4252 65.6249 67.3067 71.3784 70.1329 -0.0189 0.0114 0.0030 0.0256 0.0605 -0.0174 33.0702 33.2650 33.0912 32.9359 31.2235 30.4143 -0.0092 0.0059 -0.0052 -0.0047 -0.0520 -0.0259 -0.0075 -0.0197 0.0038 0.0009 0.0115 0.0027 0.0078 -0.0160

18.9036 0.1041 77.4503 0.1043 30.9332 0.0171

18.3934 18.5396 -0.0270 0.0080 73.8890 76.9423 -0.0460 0.0413 30.4769 30.7435 -0.0148 0.0087

0.0106 -0.0202 -0.0322 -0.0010 -0.0350 0.0081 0.0043 -0.0119 0.0012 -0.0081 0.0200 0.0166 -0.0122 0.0219 -0.0019 0.0388 0.0007 -0.0563 0.0220 -0.0450

0.0165 0.0022 0.0058 -0.0037 0.0186 0.0136 0.0410 0.0121

462 Jesus Felipe and Leonardo Lanzona, Jr.

0.0656 0.0645 0.0649 0.0612 0.0612 0.0584 0.0529 -0.0205 -0.0173 0.0061 -0.0576 0.0006 -0.0455 -0.0943 0.0154 0.0153 0.0152 0.0148 0.0140 0.0142 0.0129 0.0193 -0.0112 -0.0030 -0.0250 -0.0570 0.0178 -0.0945 0.0302 0.0301 0.0302 0.0304 0.0320 0.0329 0.0323 0.0093 -0.0058 0.0052 0.0047 0.0548 0.0266 -0.0168

2001

Appendixes

Sectoral Labor Requirement bi Agriculture 0.0638 0.0664 0.0670 Growth rate 0.0409 0.0083 Industry 0.0151 0.0154 0.0152 Growth rate 0.0240 -0.0169 Services 0.0292 0.0300 0.0300 Growth rate 0.0277 -0.0004 Sectoral Employment-Population Ratio φi Agriculture 0.1677 0.1715 0.1729 Industry 0.0604 0.0602 0.0586 Services 0.1433 0.1457 0.1461 Sectoral Employment λi Agriculture 0.4515 0.4544 0.4579 Industry 0.1626 0.1596 0.1552 Services 0.3859 0.3859 0.3869 TOTAL EMPLOYMENT-POPULATION RATIO φ 0.3715 0.3774 0.3775 GROWTH RATE 0.0161 0.0002 Sectoral Output-Population Ratio xi Agriculture 2.6271 2.5812 2.5801 Growth rate -0.0174 -0.0004 Industry 4.0102 3.9056 3.8629 Growth rate -0.0261 -0.0109 Services 4.9150 4.8601 4.8751 Growth rate -0.0112 0.0031 Sectoral Labor Productivity εi Agriculture 15.6640 15.0479 14.9234 Growth rate -0.0393 -0.0083 Industry 66.3779 64.8240 65.9402 Growth rate -0.0234 0.0172 Services 34.2899 33.3643 33.3768 Growth rate -0.0270 0.0004 SECTORAL CONTRIBUTION TO EMPLOYMENT-POPULATION RATIO Agriculture 0.0099 0.0036 Industry -0.0004 -0.0044 Services 0.0061 0.0010 TOTAL 0.0156 0.0003

1994

Table A7.2 Economically Active Population—Labor Force, Employment, and Unemployment Rates, by Sex, 1980–2003 Male

Female

Year

Population (15 years and above)

Labor Force

Labor Force Participation Rate

Employment Rate

Unemployment Rate

Labor Force Participation Rate

Unemployment Rate

Labor Force Participation Rate

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

28,967 29,501 30.414 31,278 32,261 32,889 33,469 34,462 35,478 36,520 37,636 38,599 39,831 41,004 42,213 43,156 44,599 45,770 46,963 46,321 47,640 48,742 50,344 51,793

17,268 18,202 18,551 19,856 20,416 20,743 21,362 22,563 23,449 24,120 24,244 25,631 26,290 26,879 27,654 28,380 29,733 30,354 29,674 30,758 30,911 32,809 33,936 34,571

59.6 61.7 61.0 63.5 63.3 63.1 63.8 65.5 66.1 66.0 64.4 66.4 66.0 65.6 65.5 65.8 66.7 66.3 65.9 66.4 64.9 67.1 67.4 66.7

92.1 91.2 90.6 89.6 89.6 87.4 88.2 88.8 90.4 90.8 91.6 89.4 90.1 90.7 90.5 90.5 91.4 91.3 89.7 90.2 88.8 88.9 88.6 88.6

7.9 8.8 9.4 10.4 10.4 12.6 11.8 11.2 9.6 9.2 8.4 10.6 9.9 9.3 9.5 9.5 8.6 8.7 10.3 9.8 11.2 11.1 11.4 11.4

77.9 79.6 79.1 80.9 81.4 82.0 82.1 83.2 84.2 83.8 81.9 83.9 83.9 83.0 83.0 83.0 83.5 83.5 83.3 82.2 81.6 81.2 81.3 80.6

7.1 8.4 8.8 9.7 10.3 12.5 11.8 10.5 8.7 8.1 7.4 9.3 8.9 8.4 8.8 8.9 7.9 8.1 9.7 9.0 9.4 11.4 10.1 10.6

41.6 44.0 43.2 46.5 45.8 44.8 45.9 48.0 48.3 48.7 47.2 49.3 48.5 48.4 48.2 48.5 49.8 49.3 49.2 48.6 48.6 49.9 51.5 50.9

Sources: National Statistics Office, Labor Force Survey; Bureau of Labor and Employment Statistics.

Unemployment Rate 9.4 9.5 10.5 11.7 10.7 12.7 11.9 12.4 11.1 11.0 10.1 12.8 11.5 10.7 10.6 10.7 9.7 9.8 10.9 8.9 9.1 11.3 10.4 10.5

463 Unemployment, Labor Laws, and Economic Policies in the Philippines

Both Sexes

464 Jesus Felipe and Leonardo Lanzona, Jr. Table A7.3 Real and Nominal Daily Wages in the Philippines, 1980–2003 Nominal Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Agriculture 11.15 12.38 13.90 16.33 21.24 27.26 29.66 31.62 35.96 41.72 50.53 57.74 65.16 72.51 80.55 92.27 101.16 112.76 122.17 131.25 132.50 132.55 136.87 141.52

Real (1995 Prices)

Nonagriculture

Agriculture

Nonagriculture

24.19 26.33 29.92 31.67 37.55 49.30 57.92 63.88 71.42 85.08 100.15 117.96 124.38 131.46 151.73 160.38 165.00 185.00 198.00 223.50 233.03 250.66 252.57 268.98

57.95 60.04 61.83 69.02 61.21 63.77 69.61 72.01 72.97 76.02 81.34 78.44 81.51 84.87 87.00 92.27 92.78 97.70 96.48 97.14 93.96 88.59 88.73 88.06

125.75 127.71 133.10 133.84 108.22 115.33 135.92 145.48 144.93 155.03 161.22 160.25 155.59 153.86 163.87 160.38 151.33 160.30 156.36 165.41 165.26 167.53 163.74 167.38

Sources: Bureau of Agricultural Statistics and Current Labor Statistics (BLES-DOLE) (basic data).

465 Unemployment, Labor Laws, and Economic Policies in the Philippines Table A7.4 Monthly Average Earnings, by Industry (Pesos), 1991–1998 Industry

1991

1992

1993

1994

1995

1996

1997

All Industries

4,375

4,794

5,087

5,663

5,982

5,969

6,528 7,189

3,377 4,917 4,564

3,888 5,802 5,018

3,663 5,691 5,175

3,961 7,135 5,846

4,108 8,197 6,222

3,952 7,641 6,118

3,995 4,174 8,493 8,487 6,514 6,994

8,124 3,564

8,662 4,004

8,352 3,929

10,480 5,002

3,194

3,627

4,001

4,444

7,393

7,890

8,624

10,047

6,792

7,238

8,238

8,605

9,228

9,247 11,007 12,230

3,046

3,357

3,583

3,869

4,271

5,310

Agriculture, Fishery, and Forestry Mining and Quarrying Manufacturing Electricity, Gas, and Water Construction Wholesale and Retail Trade Transportation, Storage, and Communication Financing, Insurance, Real Estate, and Business Services Community, Social, and Personal Services Analysis of Variance Source of Variation Across Industries Across Time within Industries Total Source:

SS 4.75E+08

df MS 8 5.93E+07

1.26E+08 6.01E+08

63 2.00E+06 71

1998

12,212 12,591 12,958 15,219 5,154 5,463 5,886 6,008 4,235

3,729

4,018 4,558

10,480 10,518 11,447 12,193

F P-value 29.63 1.4E-18

National Statistics Office, Annual Survey of Establishments.

5,838 6,026

466 Jesus Felipe and Leonardo Lanzona, Jr. Table A7.5 Monthly Average Earnings, by Region (Pesos), 1994–1998 1994

1995

1996

1997

1998

6,817 8,192 6,829 4,752 4,885 4,942 6,005 4,456 4,456 4,832 6,463 3,862 5,344 4,787 5,906 – 3,998

6,926 8,188 7,332 5,190 5,399 5,359 6,677 4,675 4,437 5,277 6,428 4,002 6,191 5,202 6,506 4,557 3,717

7,592 8,988 7,253 5,449 5,835 5,613 7,050 5,244 5,186 6,043 6,162 4,347 6,137 5,414 7,325 5,361 4,417

8,306 9,933 7,990 5,704 6,465 6,063 7,623 5,711 5,509 6,370 6,811 4,604 6,610 5,737 7,467 5,375 5,137

8,935 11,255 7,889 6,244 7,510 6,534 8,075 5,749 5,094 6,187 6,359 4,740 6,273 5,704 7,368 5,693 4,430

Analysis of Variance Source of Variation SS Across Regions (excluding Caraga) 1.18E+08 Across Time, Within Regions 26516293 Total 1.44E+08

df 14 60 74

MS 8421202 441938.2

PHILIPPINES National Capital Region (NCR) Cordillera Administrative Region (CAR) Region I Ilocos Region Region II Cagayan Valley Region III Central Luzon Region IV Southern Tagalog Region V Bicol Region Region VI Western Visayas Region VII Central Visayas Region VIII Eastern Visayas Region IX Western Mindanao Region X Northern Mindanao Region XI Southern Mindanao Region XII Central Mindanao Caraga ARMM

Source:

National Statistics Office, Annual Survey of Establishments.

F P-value 19.05516 4.98E-17

467 Unemployment, Labor Laws, and Economic Policies in the Philippines Table A7.6 Labor Market Laws in the Philippines Subject

Labor Code Article No./Labor Laws

Employment laws: Dismissal of Article 278/Rule I Workers of Book VI of Rules implementing Labor Code

Main Features

In cases of regular employment, the employer shall not terminate the services of the employee except for just and authorized causes and subject to requirements of due process.

Workers’ retrenchment and retrenchment compensation

Article 283

The employer may terminate the employment of any worker following the installation of labor-saving devices, redundancy, retrenchment to prevent losses, or the closing or cessation of operation of the establishment, after serving notice to the workers and the Department of Labor and Employment (DOLE). Workers affected are entitled to separation pay equivalent to at least 1 month’s pay for every year of service.

Regularization

Articles 279 and 281

After 6 months of probationary employment, the worker qualifies as a regular employee in accordance with the reasonable standards made known by the contract between the employer and employee.

Subcontractor

Article 106

While subcontracting is allowed, the DOLE may restrict or prohibit the contracting out of labor. Distinctions are made between labor-only contracting and job contracting as well as differentiations within these types.

Holiday pay

Article 94

Every worker shall be paid his or her regular daily wage during regular holidays, except in retail and service establishments regularly employing less than 10 workers.

Wage supplements

R.A. 6971

The State encourages the provision of appropriate incentives to both labor and capital for undertaking a sharing of profits. The productivity bonuses shall not be less than half the percentage increases in the productivity of the firm.

Minimum wages

Article 127

No wage order issued by the Regional Tripartite Wages and Productivity Boards shall provide for wage rates lower than the minimum prescribed by Congress.

13th-month pay

P.D. 851

All employers are required to pay a 13th-month salary.

Security of tenure

Article 279

In case of regular employment employer cannot terminate the services of employee except for just cause.

Probationary employment

Article 281

Shall not exceed 6 months form the date the employee started working unless it is covered by apprenticeship agreement stipulating longer period.

Collective laws: Right to form Article 234 unions Right to strike

Articles 263 and 264

Any applicant labor organization, association or groups of unions shall acquire legal personality and shall be entitled to the rights and privileges granted by the law. Workers shall have the right to engage in concerted activities for the purpose of collective bargaining or for their mutual benefit and protection. However, no labor organization shall declare a strike without first having bargained collectively or without having filed a notice with the DOLE.

Collective Article 253-A bargaining agreements (CBAs)

Any CBA shall be enforced for a period of 5 years. Provisions of CBAs shall not be renegotiated for 3 years.

Arbitration

Parties to a CBA shall name in advance a voluntary arbitrator or panel of voluntary arbitrators, who will establish a machinery for the adjustment and resolution of grievances arising from the interpretation and implementation of the CBA.

Source:

Article 260

Institute of Labor Studies, Integrated Labor and Labor-Related Laws (2000).

468 Jesus Felipe and Leonardo Lanzona, Jr. Table A7.7 Legislation on Minimum Wage Fixing Procedure

Legislative Sources

Organs to be Consulted

Scope

Two main bodies determine minimum wage rates: the National Wages and Productivity Commission and the Regional Tripartite Wages and Productivity Boards. Regional Tripartite Wages and Productivity Boards determine and fix minimum wage rates applicable in their regions, provinces, or industries subject to the guidelines set by the National Wages and Productivity Commission. The National Wages and Productivity Commission reviews the regional minimum wage rates, in order to determine whether these are in accordance with prescribed guidelines and national development plans. Labor Code of the Philippines, Book II, Chapter II, Art. 99; and Book III, Chapter V, Art. 125; Art 121 Labor Code of the Philippines Presidential Decree No. 442, 1974, as amended by Act No. 6725 dated 2 March 1989 Omnibus Rules Implementing the Labor Code, 1976, as amended in 1989 Republic Act No. 6727 (Wage Rationalization Act), dated 9 June 1989 as amended by Republic Act No. 8188, dated 7 June 1996 Rules Implementing Republic Act No. 6727 (Wage Rationalization Act), dated 7 July 1989 [No official reference available—document available in DOC Normes] Revised Rules of Procedure on Minimum Wage Fixing, NWPC Guidelines No. 00195, dated 29 November 1995 Rules on Exemption from compliance with the Prescribed Wage Increases/Cost of Living Allowances Granted by the Regional Tripartite Wages and Productivity Boards, NWPC Series of 1996, dated 18 November 1996 Issuance No. WO 09, dated 10 October 2001, and Issuance No. WO ARMM-05, dated 10 October 2000, according to the National Wages and Productivity Commission Web site Government—Represented on both the National Wages and Productivity Commission and the Regional Tripartite Wages and Productivity Boards. Labor Code of the Philippines, Book II, Chapter V, Art.121 and Art. 122 Workers’ Representatives—Represented on both the National Wages and Productivity Commission and the Regional Tripartite Wages and Productivity Boards. Labor Code of the Philippines, Book II, Chapter V, Art.121 and Art. 122 Employers’ Representatives—Represented on both the National Wages and Productivity Commission and the Regional Tripartite Wages and Productivity Boards. Labor Code of the Philippines, Book II, Chapter V, Art.121 and Art. 122 Independent Persons—Any party can make an appeal against a wage order, and the National Wages and Productivity Commission must make a decision on an appeal within 60 days of the appeal being filed. Labor Code of the Philippines, Book II, Chapter V, Art.121 and Art. 122 Others—Public consultations, notifications to employers’ and employees’ groups and officials should all be a part of the wage-determination process Labor Code of the Philippines, Book II, Chapter V, Art.123 The general provisions of the Labor Code regarding wages, as set forth in Title II of the Code, do not apply to domestic workers, home workers carrying out needlework, or workers in any registered cottage industry. However, the minimum wage rate for domestic workers is provided separately in the Labor Code. In addition, the legislation provides that the Secretary of Labor and Employment or a representative may establish the minimum wage rate for home workers and those employed in cottage industries. Labor Code of the Philippines, Book II, Chapter I, Art. 98 and Book III, Chapter III, Art. 143 continued.

469 Unemployment, Labor Laws, and Economic Policies in the Philippines Table A7.7 Legislation on Minimum Wage Fixing (cont’d.) By Sector

By Region

Different Categories

Piece-Rate Workers

Workers Excluded

Criteria Used to Set Minimum Wage

The minimum wage rates set by Regional Boards are divided into at least two categories: rates for agricultural workers and rates for nonagricultural workers. Additionally, current wage orders have specific rates for: • Hospital workers—In 7 regions • Retail/Service workers—In 12 regions • Cottage/Handicraft workers—In 10 regions • Workers in Schools—In 3 regions Each of the 16 regions in the Philippines has its own Regional Tripartite Wages and Productivity Board setting minimum wage rates for the region. Labor Code of the Philippines, Book II, Chapter V, Art.121 and Art. 122 Trainees—All workers employed in accordance with a learnership or apprentice agreement are automatically covered by the relevant minimum wage determination for their region and industry. However, for the first 6 months of an apprenticeship, the apprentice shall receive at least 75% of the applicable minimum wage. Thereafter, the apprentice shall receive at least the full minimum wage including the full cost-of-living allowance. Omnibus Rules Implementing the Labor Code, 1976 as amended to 1998, Rule VI, Section 29 and Rule VII, Section 4 Disabled—The wage a disabled worker receives shall be at least 75% of the legal minimum wage. Omnibus Rules Implementing the Labor Code, 1976 as amended in 1998, Rule VII, Section 3 Other Categories—Domestic workers—specific wage rates are set forth in the Labor Code. Labor Code of the Philippines, Book III, Chapter III, Art. 143 Workers paid by results, including those paid on a piece-work basis, must not receive less than the applicable minimum wage rates prescribed in the Regional Wage Orders. A formula is provided in the legislation for calculating wage rates for these workers. Rules Implementing Republic Act No. 6727, Section 9 Retail or service establishments regularly hiring fewer than 10 workers may apply to the appropriate Regional Board to be excluded from the applicability of the Wage Rationalization Act, and hence the requirement to pay the statutory minimum wage. Exemptions may be granted if an establishment is experiencing temporary financial difficulties, in order to assist with the establishment of new businesses and to ease the burden on micro establishments that have a limited ability to pay. Rules on Exemption from compliance with the Prescribed Wage Increases/Cost of Living Allowances Granted by the Regional Tripartite Wages and Productivity Boards, NWPC Series of 1996, Section 2 Needs of workers and their families—Demand for living wages, improvements in the standard of living, effects on the generation of employment and family income. Labor Code Title III, Chapter III, Article 124 Cost of living Labor Code Title III, Chapter III, Article 124 Level of wages and incomes in the country—Prevailing wage levels. Labor Code Title III, Chapter III, Article 124 Capacity of employers to pay—and return on invested capital. Labor Code Title III, Chapter III, Article 124 Other provisions—Inducements to countries to invest in the countryside, the equitable distribution of income and wealth. Labor Code Title III, Chapter III, Article 124 continued.

470 Jesus Felipe and Leonardo Lanzona, Jr. Table A7.7 Legislation on Minimum Wage Fixing (cont’d.) Level of the Minimum Wage

Date of Introduction In-Kind Allowances

Rate of Payment

Frequency of Adjustment

Enforcement

Fines

Source:

Minimum—P 102 per day (US$1.88 in 2003; PPP$ 8.24 in 2003) for workers in Sulu and Tawi-Tawi in the ARMM Region working in the retail/service sector, employed by an enterprise employing not more than 10 workers. Issuance No. WO ARMM-05, dated 10 October 2000 Maximum—P 265 per day (P 250 Basic Wage + P 15 Cost-of-Living Allowance for nonagricultural workers in the National Capital Region (US$4.88 in 2003; PPP$21.41 in 2003). Issuance No. WO 09, dated 10 October 2001 The wage orders currently in force were issued between 2000 and 2002. Certain regions introduced staggered minimum wage increases, prescribing increases at 6– to 12-month intervals. For all workers other than domestic workers, wages can include the provision by the employer of board, lodging, or other facilities customarily furnished by the employer to the employee, provided that a fair and reasonable value has been assigned to these services. The minimum wage rate for domestic workers is the minimum cash wage. Domestic workers must also be provided with lodging, food, and medical attendance free of charge. Labor Code, Title II, Chapter 1, Article 97 (f); Labor Code, Title III, Chapter III, Article 144 Daily—The current wage orders for workers other than domestic workers set minimum wage rates per day. Monthly—For domestic workers, statutory minimum wage rates are monthly rates. Labor Code, Title III, Chapter III, Article 144 The Wage Rationalization Act provides that wage orders should be determined whenever conditions in the region so warrant. Once a wage order has been issued by the board, it may not be revised for 12 months, unless circumstances (such as extraordinary increases in the price of petroleum and basic services) demand that rates be revised. Wage Rationalization Act dated June 9, 1989, Section 3 and Revised Rules of Procedure on Minimum Wage Fixing, NWPC Guidelines No. 001-95, dated 29 November 1995, Section 3 Inspections are carried out by the Department of Labor and Employment. These inspections will include examination of payrolls and other financial records kept by the company to determine whether workers are paid the prescribed wage rates. Wage Rationalization Act dated 9 June 1989, Section 9 Failure to pay prescribed minimum wage rates is punishable by a fine of between P25,000 and P100,000 or imprisonment of not less than 2 years but not more than 4 years, or both, at the discretion of the court. Wage Rationalization Act dated 9 June 1989, as amended by Republic Act No. 8188, Section 12

ILO (2005).

Sector

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Nonagriculture a Lowest Highest

89.00 118.00

89.00 118.00

79.00b 135.00

89.00 145.00

92.20 145.00

94.00 165.00

101.00 185.00

111.00 198.00

121.00 200.00

129.00 250.00

151.00 265.00

151.00 280.00

175.00 300. 00

Retail/Service Lowest Highest

59.00 118.00

59.00 118.00

59.00 135.00

59.00 145.00

59.00 145.00

74.00 165.00

79.30 172.00

89.30 198.00

101.00 198.00

120.00 213.00

144.00 213.00

144.00 198.00

167.00 263. 00

Cottage/Handicraft Lowest 67.00 Highest 106.00

67.00 106.00

67.00 123.00

67.00 133.00

67.00 133.00

82.00 153.00

89.00 164.00

99.00 182.00

109.00 198.00

120.00 108.00

139.00 198.00

139.00 198.00

147.00 263. 00

Private Hospitals Lowest Highest

89.00 118.00

89.00 118.00

89.00 135.00

89.00 145.00

89.00 145.00

104.00 165.00

102.00 172.00

112.00 198.00

131.00 198.00

129.20 213.00

155.00 213.00

155.00 228.00

182.00 263. 00

Agriculture Plantation Lowest 72.50 Highest 103.00

72.50 112.00

73.30 125.00

73.30 135.00

76.05 135.00

90.00 144.00

89.50 167.00

110.00 186.00

120.00 198.00

130.00 213.00

149.00 213.00

149.00 228.00

166.00 263. 00

Agriculture Nonplantation Lowest 58.50 Highest 97.50

58.50 97.50

58.50 114.50

58.50 124.50

62.10 124.50

77.50 155.00

77.50 158.50

89.85 179.50

105.00 198.00

110.00 213.00

133.50 213.00

133.50 228.00

147.00 263.00

a b

Source:

Nonagriculture excludes retail/service establishments, cottage/handicraft industries and private hospitals. For establishments with not more than 20 workers and capitalization of not more than P500,000. Before 1993, such establishments were exemptedfrom the minimum wage. National Wages and Productivity Commission.

471 Unemployment, Labor Laws, and Economic Policies in the Philippines

Table A7.8 Minimum Wages (Pesos), by Selected Sector, 1991–2003

472 Jesus Felipe and Leonardo Lanzona, Jr. Table A7.9 Minimum Wages (Pesos) by Region, 2003–2004 2003 Region

2004

Nominal Wage

NCR 280 CAR 190 I 190 II 185 III 229 IV 237 V 182 VI 180 VII 200 VIII 188 IX 175 X 192 XI 195 XII 180 CARAGA 179 ARMM 150 Mean 195.72 Standard Deviation 909.07

Real Wage 160 116 114 112 137 137 100 112 109 108 104 110 118 113 107 76 114.57 336.60

Nominal Wage 300 205 200 193 244 255 194 190 208 195 180 202 195 200 189 150 206.22 1,176.50

Real Wage

Fall in Real Wages (%)

158 110 109 110 132 132 96 108 105 105 100 106 109 110 102 73 110.30 335.90

1.36 5.03 4.86 2.05 3.52 3.52 3.72 3.11 3.25 3.56 3.06 3.98 7.78 3.00 4.79 3.95 3.73

Note: Base year is 1994. Source: National Wages and Productivity Commission (2005).

Table A7.10 Minimum Wage Levels in Some Asian Countries Country

Date of Introduction

Minimum

Maximum

China, People’s Rep. of

Shanghai—1 July 2004; Jianxi region—1 March 2000

CNY190 per month (in certain towns in the Jiangxi region) (US$22.95—2003) (PPP$104.80—2003)

CNY635 per month (In Shanghai city) (US$76.69—2003) (PPP$350.21—2003)

India

The minimum wage rates included applied as of 1 October 2001

The following minimum/ maximum rates are taken from the minimum wage rates set by the central Government. Rs52.00 per day—Unskilled workers in most rural areas, working in the construction sector (US$1.10—2003) (PPP$5.85—2003)

Rs92.71 per day— Unskilled workers in Metropolitan cities and Ahmedebad, Lucknow, Nagpur, Kanpur and Greater Bombay, working in the agriculture sector (US$2.00— 2003) (PPP$10.43— 2003)

continued.

473 Unemployment, Labor Laws, and Economic Policies in the Philippines Table A7.10 Minimum Wage Levels in Some Asian Countries (cont’d.)

Country

Date of Introduction

Minimum

Maximum

Indonesia

1 February 2003

PRp281,750 per month in East Java (US$32.80—2003) (PPP$113.88—2003)

PRp631,550 per month in the province of Jakarta (US$73.60—2003) (PPP$255.06—2003)

Malaysia

No minimum wages. Only for cinema workers and Penang stevedores, cargo-handlers and lightermen sectors—1989, shop assistants sector— 1982, catering and hotel sector—1983

Cinema workers: RM155.00 per month for unskilled workers in cinemas normally showing four films a day (US$40.79—2003) (PPP$94.98—2003)

Shop assistants: RM250.00 per month for workers aged 21 and above in certain urban districts (US$65.79—2003) (PPP$153.19—2003)

Philippines

The Wage Orders currently in force were issued between 2000 and 2002. Certain regions introduced staggered minimum wage increases, prescribing increases at 6–12-month intervals.

P102 per day (US$1.88— 2003) (PPP$8.24—2003) for workers in Sulu and Tawi-Tawi in the ARMM region working in the retail/ services sector, employed by an enterprise employing not more than 10 workers.

P265 per day—P250 basic wage plus P15 cost of living allowance for nonagricultural workers in the National Capital Region (US$4.88— 2003) (PPP$21.41— 2003).

Thailand

1 August 2003

B133 per day (US$3.20— 2003) (PPP$10.53—2003) for all provinces other than Samut Prakarn, Nakorn Pathom, Pathum Thani, Samut Sakorn and Phuket; Chonburi, Chiang Mai, Nakorn Rachasima, Phang Ngar, and Saraburi.

B169 (US$4.07— 2003) (PPP$13.38— 2003) per day for the following provinces: Bangkok, Samut Prakarn, Nakorn Pathom, Pathum Thani, Samut Sakorn.

Viet Nam

Laborers working in enterprises operating under the State Enterprises and the Enterprises Law—January 2003;Vietnamese employees working in foreign-invested enterprises—June 1999

D290,000 per month (US$18.70—2003) (PPP$96.97—2003) (for laborers working in enterprises operating under the State Enterprises and Enterprises Law)

D626,000 per month (US$40.36— 2003) (PPP$209.32—2003) (for laborers working in foreign-invested enterprises in Hanoi City and Ho Chi Minh City urban districts)

PPP = purchasing power parity. Source: ILO (2005).

Table A7.11 Comparative Analysis of Labor Market Policies

Variable a

Description

Philippines

Asiab

Developedc

Latin Americad

Africa e

Employment Laws Employment Contracts Equals 1 if a part-time worker working half the time of a full-time worker enjoys at least half of the benefits enjoyed by the full-time worker. The variable is also equal to 1 if part-time employment is prohibited by the labor laws. The variable equals 0 if part-time workers are not entitled to: (i) at least half of the maximum hours of work, leaves, and overtime premiums; (ii) social security coverage (pensions, health, unemployment); or (iii) if there are entitlement thresholds of more than half of the legally mandated regular work week for premiums, leave, or social security coverage. In countries where there are minimum-earnings thresholds to obtain benefits (rather than time-based thresholds), the analysis is done considering a salary equal to half of the country’s gross national product per worker.

1

1

1

1

1

It is not easier or less costly to terminate part-time workers than full-time workers (# 2)

Equals 1 if part-time workers working half time enjoy at least half of the legal rights to advance notice and separation fees for the termination of the employment contract of full-time workers. Equals 0 otherwise.

1

1

1

1

1

Fixed-term contracts are only allowed for fixed-term tasks (# 3)

The term “fixed-term contract” refers to workers employed for fixed periods of weeks, months, or years. In many countries a person working for 2 or 3 days per week is considered a fixed-term, rather than a part-time, worker. This variable equals 1 if fixed-term contracts are allowed only:

1

0

0

0

0

474 Jesus Felipe and Leonardo Lanzona, Jr.

Part-time workers are not exempt from the mandatory benefits of full-time workers (# 1)

Variable a

Description

Philippines

Asiab

1

0.28 ** (-7.46)

1

1

Developedc

Latin Americad

Africa e

0.27** (-9.62)

0.24** (-8.24)

0.37** (-6.55)

0

1

1

(i) for jobs that are temporary by nature; (ii) for temporary vacancies to replace a permanent worker in maternity or sickness leave; (iii) for training contracts; (iv) for seasonal work; and/or (v) if the law expressly states that the will of the parties involved in the contract is not a good enough reason for entering into a fixed-term contract. Equals 0 otherwise. Maximum duration of fixed-term contracts

Measures the maximum cumulative duration of fixed-term contracts. The variable is

(# 4)

normalized from 0 to 1, where higher values mean a lower allowed duration of fixed-term contracts (higher protection). If there is no legally mandated ceiling or if fixed-term contracts can be renewed without limit, the variable equals 0. The highest observation in the sample is 96 months and the lowest observation is 0.

Mandatory minimum wage (# 5)

Equals 1 if: (i) there is a mandatory minimum wage defined by statute; or (ii) there is a minimum wage established by mandatory (administratively extended) collective agreement, which is legally binding for most sectors of the economy. Ignored are variations in the minimum wage laws stemming from: (i) reduced or subminimum rates for youth, apprentices, students, and disabled employees; (ii) adjustments for regional costs of living; (iii) exemptions for public employees and those serving in the armed forces; (iv) experience and marital status of the employee; and (v) specific exemptions for certain groups. The variable

475 Unemployment, Labor Laws, and Economic Policies in the Philippines

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Variable a

Description

Philippines

Asiab

Developedc

Latin Americad

Africa e

Cost of Increasing Work Time Days of annual leave with pay in manufacturing (# 6)

Measures the length of annual paid leave in manufacturing after 20 years of employment. If annual leave entails less than full pay, the number of days are discounted proportionally. The highest observation in the sample is 30 days and the lowest is 0.

5

14.29** (5.51)

19.10** (8.07)

21.46** (12.48)

19.13** (6.67)

Paid mandatory holidays (# 7)

Measures the number of mandatory paid holidays in a year. If only half a day is granted for particular holidays, each is counted as 0.5 days and is rounded off to the nearest whole. The highest observation in the sample is 18 and the lowest is 0.

12.00

10.00* (-2.70)

7.43** (-4.41)

10.23 (-1.87)

8.87* (-2.68)

Premium for overtime (# 8)

This variable measures the ratio of the overtime wage over the normal wage. The overtime premium is often two-tiered, which means it pays a certain premium for the first set of overtime hours a week. The threshold between both rates is the maximum number of overtime hours per week that can be worked under the lower premium.

1.25

1.50** (3.47)

1.34* (2.11)

1.51* (2.93)

1.32 (1.182)

476 Jesus Felipe and Leonardo Lanzona, Jr.

equals 0 otherwise. The coding of this variable follows the principles laid down in the classification of minimum wages by OECD (1998).

Developedc

Latin Americad

Africa e

1.95** (13.00)

1.76** (9.68)

2.06** (4.35)

1.80** (5.09)

48.00

45.00** (-3.24)

40.81** (-12.06)

46.15* (-2.14)

44.47** (-3.31)

Measures the maximum number of work days per week. Legal limits may be defined either as a number of mandatory rest days per week or as a mandatory minimum of consecutive hours of rest. If nothing is specified, we assume the maximum is 7 days. For limits expressed as a number of consecutive hours of rest, we code 36 or more as 2 days off, less than 36 hours but more than 12 as 1 day off, and less than 12 hours as 0 days off.

7.00

5.71** (-10.26)

6.10** (-6.64)

6.15** (-8.12)

5.93** (-16.00)

Measures the maximum number of hours of work per day. Legal limits may be defined either as a mandatory maximum regular and overtime working hours per day or as mandatory minimum rest hours

24.00

18.64** (3.11)

19.57** (8.74)

16.08** (-4.34)

20.93* (-2.25)

Variable a

Description

Philippines

Asiab

Premium for work on the primary rest day (# 9)

Measures the ratio of wages paid for work on the primary rest day over the normal wage rate. The primary rest day is usually Sunday, but for some countries it may be Saturday or Friday.

1.30

Maximum number of hours per week (# 10)

Measures the maximum duration of the regular work week (excluding overtime). The highest observation in the sample is 52 hours and the lowest observation is 37 hours.

Maximum days of work per week (# 11)

Maximum hours of work in a day (# 12)

477 Unemployment, Labor Laws, and Economic Policies in the Philippines

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Variable a

Description

Asiab

49.57

47.74** (5.68)

2,379.42

2,148.93** (-4.73)

1

0

Developedc

Latin Americad

Africa e

47.77** (4.95)

46.82** (10.91)

47.27** (-6.06)

1,941.35** (-12.86)

2,160.17** (-5.78)

1

0

per day. If nothing is specified in the law, we use 24 hours. If restrictions are expressed as a number of consecutive hours of rest, we subtract this number from 24 hours. The highest observation in our sample is 24 hours and the lowest is 10 hours. Weeks worked in a year (# 13)

This variable measures the number of weeks worked in a year. It is calculated as 52 minus the number of weeks off; where the latter is calculated as the sum of “Days of annual leave with pay in manufacturing” and the number of “Paid mandatory holidays” divided by the “Maximum days of work per week.”

Maximum number of hours of work in a year before overtime (# 14)

This variable measures the maximum number of regular (no overtime) hours of work allowed over the course of a year. It is calculated as the “Maximum hours of work per week” multiplied by the number of “weeks worked in a year.”

Is it possible to do everything with overtime (# 15)

Equals 1 if it is not possible to increase production for the “Cost of increasing hours worked” scenario without violating some restrictions. Equals 0 otherwise. This variable includes restrictions on “maximum overtime (weekly)”; “maximum overtime

2,102.38** (5.10)

0

478 Jesus Felipe and Leonardo Lanzona, Jr.

Philippines

Variable a

Philippines

Asiab

Developedc

Latin Americad

Africa e

Measures the cost of increasing the number of hours worked. The starting point is calculating the “maximum number of hours of work in a year before overtime” per year in each country (excluding overtime, vacations, holidays, etc.). Normal hours range from 1,758 in Denmark to 2,418 in Kenya. Then it is assumed that firms need to increase the hours worked by their employees from 1,758 to 2,418 hours during 1 year. A firm first increases the number of hours worked until it reaches the country’s maximum normal hours of work, and then uses overtime. If existing employees are not allowed to increase the hours worked to 2,418 hours in a year, perhaps because overtime is capped, it is assumed that the firm doubles its workforce and each worker is paid for 1,758 hours, doubling the wage bill of the firm. The cost of increasing hours worked is computed as the ratio of the final wage bill to the initial one.

0.0088

0.24* (2.59)

0.67** (6.93)

0.24* (2.44)

0.32* (2.84)

Measures the length of the mandatory notice period for the dismissal of one redundant worker in manufacturing after 3 years of employment. The variable is expressed in weeks. For countries

1.4

5.40** (4.34)

5.25** (5.90)

3.77* (2.58)

5.04** (3.83)

Description (yearly)”; “maximum days of work per week”; and “Maximum hours of work in a day.”

Cost of increasing hours worked (# 16)

Costs of Dismissal Legally mandated notice period (Redundancy dismissal) (# 17)

479 Unemployment, Labor Laws, and Economic Policies in the Philippines

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Variable a

Description

Asiab

Developedc

Latin Americad

Africa e

12.9

10.43 (-1.15)

3.71** (-7.49)

11.29 (-0.77)

4.20** (-4.81)

that code their legally mandated notice period in days or months, we transform to weeks assuming 7 days per week and 4.3 weeks per month. Legally mandated severance payment (redundancy) (# 18)

Measures the amount of mandatory severance payment for the dismissal of one redundant worker in manufacturing after 3 years of employment. The variable is expressed in weeks of pay. For countries that code their legally mandated severance pay in days or months of pay, it is changed into weeks, assuming 7 days per week and 4.3 weeks per month.

Legally mandated penalty (Redundancy dismissal) (# 19)

Measures the amount of mandatory penalty payment for the dismissal of one redundant worker in manufacturing after 3 years of employment. The variable is expressed in weeks of pay. For countries that code their legally mandated penalty in days or months of pay, we transform them to weeks assuming 7 days per week and 4.3 weeks per month.

0

0.14 (1.00)

0.00 (0.00)

3.73 (1.71)

0.59 (1.47)

Measures the cost of firing 20% of the firm’s workers (10% are made redundant and 10% are fired without cause). The cost of firing a worker is calculated as the sum of the notice period, severance pay, and any mandatory penalties established by law or

0.57

0.54 (-0.80)

0.38** (-4.07)

0.50 (-1.16)

0.42 (-1.98)

Cost of firing workers (# 20)

480 Jesus Felipe and Leonardo Lanzona, Jr.

Philippines

Variable a

Description

Philippines

Asiab

Developedc

Latin Americad

Africa e

mandatory collective agreements for a worker with 3 years of tenure with the firm. If dismissal is illegal, the cost of firing is set as equal to the annual wage. The new wage bill incorporates the normal wage of the remaining workers and the cost of firing workers. The cost of firing workers is computed as the ratio of the new wage bill to the old one. Rules on Dismissal The employer must notify a third party prior to a collective dismissal (# 21)

Equals 1 if, by law or mandatory collective agreement, the employer must notify a third party (labor union, workers’ council, government agency) before dismissing more than one worker. Equals 0 if the employer may dismiss more than one worker without notifying a third party, or if the employer may contract out of the prohibition.

1

1

1

1

1

The employer needs the approval of a third party prior to a collective dismissal (# 22)

Equals 1 if, by law or mandatory collective agreement, the employer needs the approval of a third party (labor union, workers’ council, or government agency) prior to a collective (more than one worker) dismissal. Equals 0 if the employer may dismiss more than one worker without third party approval, or if the employer may contract out of the prohibition.

1

0

0

0

0

The employer must notify a third party

Equals 1 if, by law or mandatory collective agreement, the employer must notify a third

1

0

0

0

1

481 Unemployment, Labor Laws, and Economic Policies in the Philippines

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Description

before dismissing one redundant employee (# 23)

party (labor union, workers’ council or government agency) before dismissing a redundant worker. Equals 0 if the employer may dismiss a worker without notifying a third party, or if the employer may contract out of the prohibition.

The employer needs the approval of a third party to dismiss one redundant worker (# 24)

Developedc

Latin Americad

Africa e

0

0

0

0

1

0

0

0

0

1

0

0

0

1

Philippines

Asiab

Equals 1 if, by law or mandatory collective agreement, the employer needs the approval of a third party (labor union, workers’ council, or government agency) to dismiss a redundant worker. Equals 0 if the employer may dismiss a worker without the approval of a third party, or if the employer may contract out of the prohibition.

1

The law mandates retraining or replacement before dismissal (# 25)

Equals 1 if, by law or mandatory collective agreement, the employer must provide relocation or retraining alternatives for redundant employees prior to dismissal. Equals 0 otherwise.

There are priority rules applying to dismissals or lay-offs (# 26)

Equals 1 if, by law or mandatory collective agreement, there are priority rules applying to dismissals or layoffs, i.e., in order to fire redundant employees, the employer must follow a specific order of seniority, marital status, number of dependents, or other objective priority criteria. Equals 0 otherwise.

482 Jesus Felipe and Leonardo Lanzona, Jr.

Variable a

Variable a

Description

There are priority rules applying to reemployment (# 27)

Collective Relations Laws Labor union power Right to unionization (# 28)

Right to collective bargaining (# 29)

Developedc

Latin Americad

Africa e

0

0

0

0

1

0

0

1

1

1

0

0

1

0

Philippines

Asiab

Equals 1 if, by law or mandatory collective agreement, there are priority rules applying to reemployment. Equals 0 if former redundant employees need not be considered for new positions (i.e., there are no priority rules for reemployment).

0

Measures the protection of the right to form labor unions in the country’s constitution. Equals 1 if a right to form labor unions is expressly granted by the constitution. Equals 0.67 if labor unions are described as a matter of public policy or public interest (or mentioned within the chapter on rights). Equals 0.33 if labor unions are otherwise mentioned in the constitution. Equals 0 otherwise. Measures the protection of the right to collective bargaining or the right to enter into collective labor contracts in the country’s constitution. Equals 1 if a right to collective bargaining is expressly granted by the constitution. Equals 0.67 if collective bargaining is described as a matter of public policy or public interest (or mentioned within the chapter on rights). Equals 0.33

483 Unemployment, Labor Laws, and Economic Policies in the Philippines

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Variable a

Description

Philippines

Asiab

Developedc

Latin Americad

Africa e

Employers have the legal duty to bargain with unions (# 30)

Equals 1 if employers have the legal duty to bargain and/or to reach an agreement with unions, workers’ councils, or other organizations of workers. Equals 0 if employers may lawfully refuse to bargain with workers. The variable only measures the duty to bargain, as opposed to the duty to bargain in good faith.

1

1

1

1

1

Collective contracts are extended to third parties by law (# 31)

Equals 1 if the law extends collective contracts to third parties at the national or sectoral level. Extensions may be automatic or subject to governmental approval. Equals 0 if collective contracts may not be extended to nonsignatory workers or unions, or if collective contracts may be extended only at the plant level. Mandatory administrative extensions of collective contracts are coded as equivalent to mandatory extensions by law.

0

0

1

0

0

Law allows closed shops (# 32)

Equals 1 if the law allows closed shops, and 0 otherwise. Closed shops are agreements providing for mandatory union membership, which are binding on nonsignatory and new employees. Union security legislation in general includes the following measures: (i) pre-entry closed shops, where workers

1

0

0

0

0

484 Jesus Felipe and Leonardo Lanzona, Jr.

if collective bargaining is otherwise mentioned in the constitution. Equals 0 otherwise.

Variable a

Description

Philippines

Asiab

Developedc

Latin Americad

Africa e

have to belong to a union before taking up a job; (ii) post-entry closed shops (or union shops), where workers are forced to join a union after taking up a job; and (iii) absolute preferences, where an employer has to give a job to a union member if as qualified as another nonunion candidate. We do not consider post-entry closed shops. Workers and/or unions have a right to appoint members to the boards of directors (# 33)

Equals 1 if the law gives workers and/or unions the right to appoint members to the boards of directors of individual companies, and 0 otherwise. This arrangement is usually associated with the “German” model of co-determination.

0

0

0

0

0

Workers’ councils are mandated by law (# 34)

Equals 1 if workers’ councils, committees, or equivalent bodies are mandated by law. Equals 0 if workers’ councils are not regulated by law or if their creation is voluntary for the employer. Workers’ councils are institutions of employers and workers created for the discussion of company policies affecting workers at the company level. This arrangement is sometimes called the “Swedish” model. The employer still has the sole right to decide on the operations of the company, but must negotiate and decide all matters affecting workers within the framework of workers’ councils.

0

1

1

0

0

485 Unemployment, Labor Laws, and Economic Policies in the Philippines

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Description

Union density (# 35)

Measures the percentage of the total work force affiliated to labor unions in 1997. Sources: ILO (n.d., LABORSTA), and World Bank (2001).

Philippines

Asiab

Developedc

Latin Americad

Africa e

0.12

0.22 (1.68)

0.42** (5.52)

0.21 (2.12)

0.20 (1.63)

Collective Disputes Employer lockouts are not allowed (# 36)

Equals 1 if employers’ lockouts (strikes by employers) are not allowed, and 0 otherwise. Lockouts may be offensive (when they are not provoked by workers) or defensive.

0

0

0

0

0

Right to industrial action (# 37)

Measures the protection of the right to industrial action (i.e., strike, go-slow, or work-to-rule) in the country’s constitution. It equals 1 if a right to industrial action is expressly granted by the constitution. Equals 0.67 if strikes are described as a matter of public policy or public interest (or mentioned in the chapter on rights). Equals 0.33 if strikes are otherwise mentioned in the constitution. Equals 0 otherwise.

1

0

0

1

0

Wildcat strikes are legal (# 38)

Equals 1 if wildcat strikes are legal, and 0 otherwise. Wildcat strikes are strikes not authorized by the labor union or the assembly of workers.

1

0

0

1

0

486 Jesus Felipe and Leonardo Lanzona, Jr.

Variable a

Developedc

Latin Americad

Africa e

0

0

1

1

0

0

1

1

1

Equals 1 if by law there is no mandatory waiting period or notification requirement before strikes can occur, and 0 otherwise.

0

0

1

0

0

Equals 1 if a strike is not illegal even if there is a collective agreement in force, and 0 otherwise.

0

1

0

0

0

Variable a

Description

Philippines

Asiab

Political strikes are legal (# 39)

Equals 1 if political strikes are legal, and 0 otherwise. Political strikes are defined as strikes for political reasons or to protest government’s policy, i.e., nonwork-related issues.

1

Sympathy / Solidarity / Secondary strikes are legal (# 40)

Equals 1 if the law allows sympathy, solidarity, or secondary strikes used to force decisions affecting workers other than those joining the strike, and 0 otherwise. Sympathy or solidarity strikes are strikes by union members or workers who have no grievances against their employer, but who want to show solidarity with another union or workers. Secondary strikes are those against another employer who has business dealings with the employer involved in a dispute with the union or workers.

There is no mandatory waiting period or notification requirement before strikes can occur (# 41) A strike is not illegal even if there is a collective agreement in force (# 42)

487 Unemployment, Labor Laws, and Economic Policies in the Philippines

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Description

Laws do not mandate conciliation procedures before a strike (# 43)

Developedc

Latin Americad

Africa e

0

1

0

0

1

1

0

1

1

1

1

1

1

1

1

1

1

1

1

Philippines

Asiab

Equals 1 if laws do not mandate conciliation procedures or other alternative dispute-resolution mechanisms (other than binding arbitration) before the strike, and 0 otherwise.

0

Compulsory third party arbitration during a labor dispute is mandated by law (# 44)

Equals 1 if the parties to a labor dispute are legally required to seek third-party arbitration or the government is always entitled to impose compulsory arbitration on them. Equals 0 otherwise. The term “compulsory arbitration” refers to arbitration of private disputes against the will of the parties. It may protect workers by granting them an alternative to costly strikes in case of deadlocks in the negotiation process, but it may also limit workers’ right to strike.

Employers are not allowed to fire or replace striking workers (# 45)

Equals 1 if the law prohibits employers from firing striking workers or from hiring replacement labor to maintain the plant in operation during a nonviolent and nonpolitical strike. Equals 0 otherwise.

Social Security Laws Old age, disability and death benefits The social security Equals 1 if the social security system covers system covers the risk the risk of old age, disability, and death,

488 Jesus Felipe and Leonardo Lanzona, Jr.

Variable a

Variable a

Description

of old age, disability, and death (# 46)

and 0 otherwise.

Months of contributions or employment required for normal retirement by law (# 47)

Measures the number of months of contributions or employment legally required for normal retirement. The variable is normalized from 0 to 1, where higher values mean less contribution (higher protection). The highest observation in our sample is 540 months and the lowest is 0. Normal retirement is the legally defined age for retirement with standard pension, and it excludes voluntary early or late retirement schemes. If the law requires the worker to have a combination of a certain number of months of work and a different number of months of contributions, we use the higher of the two figures since this is the one that is binding. Lump-sum and private pension systems do not define the number of months of contributions for normal retirement by law. In such cases, the amount of the pension depends solely on the number of months of contributions; thus, we assume 20 years of contributions for normal retirement.

Philippines

Asiab

Developedc

Latin Americad

Africa e

0.78

0.66* (-2.49)

0.75 (0.48)

0.51** (-5.48)

0.68* (-2.79)

1

1

1

1

0

Sickness and Health Benefits The social security system covers the risk

Equals 1 if the social security system covers the risk of sickness, and 0 otherwise.

489 Unemployment, Labor Laws, and Economic Policies in the Philippines

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Table A7.11 Comparative Analysis of Labor Market Policies (cont’d.)

Variable a

Philippines

Asiab

Developedc

Latin Americad

Africa e

Measures the number of months of contributions or employment legally required to qualify for sickness benefits. The variable is normalized from 0 to 1, where higher values mean less contribution (higher protection). The highest observation in our sample is 12 months and the lowest is 0. If the law requires the worker to have a combination of a certain number of months of work and a different number of months of contributions, we use the higher of the two figures since this is the one that is binding. The highest observation in our sample is 12 months and the lowest is 0 months.

0.75

0.62 (-1.11)

0.80 (0.77)

0.67 (-0.85)

0.20** (-6.22)

Equals 1 if the social security system covers the risk of unemployment, and 0 otherwise.

0

0

1

1

0

Description

of sickness (# 48)

Unemployment Benefits The social security system covers the risk of unemployment (# 50) Note:

Source:

a

Values of 1 or 0 represent the mode; otherwise, the value represents the average. Figures in parenthesis are t-values, indicating statistical difference from the score of the Philippines. **,* indicate 1 and 5% significance level. b Includes the PRC; Hong Kong, China; India; Indonesia; Kazakhstan; Republic of Korea; Kyrgyz Republic; Malaysia; Pakistan; Singapore; Sri Lanka; Taipei,China; Thailand; and Viet Nam. c Includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, and the United States. d Includes Argentina, Bolivia, Brazil, Chile, Columbia, Dominican Rep., Ecuador, Jamaica, Mexico, Panama, Peru, Uruguay, and Venezuela.e Includes Burkina Faso, Ghana, Kenya, Madagascar, Malawi, Mali, Mozambique, Nigeria, Senegal, South Africa, Tanzania, Tunisia, Uganda, Zambia, and Zimbabwe. Botero et al. (2003).

490 Jesus Felipe and Leonardo Lanzona, Jr.

Months of contributions or employment required to qualify for sickness benefits by law (# 49)

491 Unemployment, Labor Laws, and Economic Policies in the Philippines Table A7.12 Enrollment and Graduates of Dual Training System, 2003 Enrollment Region

TESDA

Public

NCR CAR Region I Region II Region III Region IV-A Region IV-B Region V Region VI Region VII Region VIII Region IX Region X Region XI Region XII CARAGA Total

419 1,012 168 657 316 299 2,495 281 133 5,780

82 1,898 15 1,995

Source:

Graduates Private 112 295 640 333 120 1,500

Total

TESDA

Public

112 419 1,389 2,706 657 316 333 299 2,495 281 268 9,275

419 37 657 180 149 1,414 137 130 3,123

167 1,445 15 1,627

Private 243 281 120 644

Total 419 204 1,688 657 180 281 149 1,414 137 265 5,394

Technical Educational and Skills Development Authority (TESDA).

Notes 1. Certainly the problem has long been acknowledged. The Medium Term Philippine Development Plan 2001–2004 (MTPDP 2001–2004) acknowledged that output growth does not guarantee employment growth. It stated that “the employment policy challenge to the Macapagal-Arroyo administration […] is to formulate effective strategies and identify employment-generating lead sectors under a unified policy framework to promote decent and productive employment for every Filipino worker as a means to alleviating poverty. Employment generation shall be enhanced through the modernization of agriculture, the strengthening of information and communications technology (ICT) and the revival of tourism” (MTPDP 2001–2004, p. 31). Chapter 2 of the MTPDP 2001–2004 acknowledged in its title (“Promoting Full Decent and Productive Employment”) the need to achieve full employment. 2. This is not to deny the importance of fiscal consolidation. The country’s debt situation must improve to release resources for productive investment. But unemployment continues to increase, and the policies to combat it are not all that clear. By now it is obvious that growth is not taking care of unemployment. 3. Canlas (1997, p. 65) indicates that in 1970–1974, the Philippine labor market appeared to have responded positively (i.e., the unemployment rate declined) to the countercyclical policy actions taken in the 1970s after the first oil-price shock. However, in the second half of the 1970s and the first half of the 1980s, the unemployment rate increased. Canlas argues that “These observations invite doubts about the ability of an

492 Jesus Felipe and Leonardo Lanzona, Jr. activist monetary policy to produce sustainable employment gains” (Canlas 1997, p. 65). 4. Certainly this statement must be qualified. The average growth rate of employment for 1980–2003 was 2.85%. The highest growth rate in the period was about 6% (in 1986/87 and 2000/01). Since 1998, there have been two episodes of negative growth, 1997/98 and 1999/2000. The growth rate of employment for 1997–2003 was a much lower 1.70%. 5. Figures released in early 2005 indicated that the Philippines was able to create about 87,000 new (net) jobs in January 2005 and about 684,000 in April 2005. However, the Presidential Management Staff office announced in June 2005 that the economy had created about 1,090,000 new jobs in January–May 2005. This, however, was not an official figure. For the full year, the Philippines’s net employment creation was positive. 6. Balisacan (1996a) gives a comprehensive review of labor market outcomes during the 1970s and 1980s. 7. In the Keynesian and Marxian frameworks, however, involuntary unemployment is a normal phenomenon of the capitalist system. 8. The Organisation for Economic Co-operation and Development (OECD), for example, has insisted for a number of years that, to accelerate growth, Europe has to make its labor markets more flexible, following US-style labor markets. 9. In simple terms, when a capitalist economy is growing rapidly enough so that the reserve army of unemployed decreases, then workers will use their increased bargaining power to raise wages and shift the distribution of income in their favor. Profits will be correspondingly squeezed. As a result, capitalists’ animal spirits will be dampened and they will reduce investment spending. This then will lead to a fall in job creation, higher unemployment, and a replenishment of the reserve army. In other words, the reserve army is the instrument capitalists use to prevent significant wage increases and thereby maintain profitability. 10. Agriculture had more workers in 2003 (11.2 million) than in 1980 (8.5 million). 11. The unemployed in the Philippines are those persons in the labor force who did not work or have jobs/business during the reference week but were available for work and actively looking for it. In April 2005, the National Statistics Office (NSO) approved a definition of unemployment in line with international standards. Thus, the NSO has statistics of unemployed based on a definition that excludes people unavailable for work, or who are available for work but not looking for work. These are stricken off the unemployment and labor force statistics. Under this definition, the unemployed numbered about 2.909 million in June 2005, for an unemployment rate of about 8.3%. Without the availability criterion, the number of unemployed was 4.786 million. 12. The MTPDP 2004–2010 indicates that: “[Underemployment] is more of a rural phenomenon as 61.2 percent of the underemployed are in the rural areas mainly because of the seasonal nature of farm employment that prompts workers to ask for more labor hours” (MTPDP 2004–2010, p. 111). 13. This index could be further refined by including the number of poor parttime and low-paying jobs. 14. MTPDP 2004–2010 notes that: “The incidence of unemployment also tended to increase with the years of education. In 2002, only 6.7 percent of those with at least elementary education were unemployed followed closely by those without formal

493 Unemployment, Labor Laws, and Economic Policies in the Philippines education (9.3%), with at least high school education (13.2%) and with college education (15.4%). Meanwhile, employed professionals and technicians and associate professionals who are considered most valuable to a developing nation, constituted a mere 4.5 percent and 2.7 percent, respectively” (p. 111). 15. The MTPDP 2004–2010 (Introduction, Table D) provides estimates of the employment elasticities for 1993–2004. However, they are different from our estimates: 0.34 for agriculture, 0.75 for industry, and 1.04 for services. See also Felipe and Hasan (2006b, this volume) and Kapsos (2006, this volume). 16. About 55% of informal sector employment is in agriculture, fishery, and forestry (the rest is outside agriculture). This percentage has been decreasing since 1998, when it was 59% (which implies that the share of nonagriculture in informal employment increased from 40% in 1998 to 45% in 2003). We are thankful to BLES (Bureau of Labor and Employment Statistics)-DOLE’s (Department of Labor and Employment) Manuel L. Laopao for this information. 17. The last annual survey of establishments was conducted in 1998. 18. Edralin (2001, pp. 98–99), however, summarizes the views of employers, government, and labor, expressed at a 1994 meeting as follows. Employers were against the social clause because it diminishes developing countries’ competitive position visà-vis the developed countries. They did not support the linking of labor standards with international trade agreements. Government was committed to the upliftment of labor standards, but universal labor standards should pertain only to minimum and basic standards. Government also did not support the linking of labor standards with international trade agreements. Finally, labor completely supported the social clauses because it helps improve labor standards and productivity, and proposed to link compliance with labor standards to international trade agreements. 19. According to the MTPDP 2004–2010: “From 2001–2003, a total of 117 strikes were declared, equivalent to an average of 39 strikes per year, one of the lowest experienced in the country. Disposition rates of cases significantly improved, from 94 percent in 2001 to 100 percent in 2003. Settlement rates also improved. It is noteworthy that neither a reported establishment closed down nor an untoward incidence or violence occurred on account of a strike” (p. 112). 20. This specific definition of “legitimate subcontracting” does not appear in Article 106. It was downloaded from a government Web site, http://www.gov.ph/faqs/ labor_contract.asp. Here it is explained that the Labor Code does not contain a specific definition for subcontracting. 21. Section 7, Rule XXIII, Book V, of the Rules and Regulations Implementing the Labor Code and Related Laws states that “the employer shall submit a monthly report to the Regional Office having jurisdiction over the place of work all dismissals effected by it during the month, specifying therein the names of the dismissed workers, the reasons for their dismissal, the dates and commencement of termination of employment, the positions last held by them and such other information as may be required by the Department for policy guidance and statistical purposes.” 22. According to the same survey, less than 10% of the sample establishments were engaged in subcontracting between 1994 and 1997. Between these 2 years, however, the proportion of establishments relying on outside contractors for particular services rose slowly, from 5% to 8.7% (Bureau of Labor Employment and Statistics [1998]).

494 Jesus Felipe and Leonardo Lanzona, Jr. 23. The revised figures are slightly different: the number of part-time workers in 1998 was 9,062,000. On the other hand, the number of full-time workers was 17,101,000. 24. Freeman (2003, p. 127, footnote 7) indicates that the noncompliance rates for minimum wages are 25% in Mexico, 20% in Costa Rica, and 70% in Jakarta (Indonesia). These data are taken from a 1990 ILO study. 25. According to Section 12 of the RA 6727 (which seeks to rationalize wage policy determination by establishing the mechanisms and proper standards; it is an amendment to the Labor Code of the Philippines): Any person, corporation, trust, firm, partnership, association or entity which refuses or fails to pay any of the prescribed increases or adjustments in the wage rates made in accordance with this Act shall be punished by a fine not exceeding twenty-five thousand pesos (P25,000.00) and/or imprisonment of not less than one (1) year nor more than two (2) years: Provided, That any person convicted under this Act shall not be entitled to the benefits provided for under the Probation Law. If the violation is committed by a corporation, trust or firm, partnership, association or any other entity, the penalty of imprisonment shall be imposed upon the entity’s responsible officers, including, but not limited to, the president, vice president, chief executive officer, general manager, managing director or partner.

26. Effective 16 June 2005, the minimum wage rate of the National Capital Region was set at P275 per day, plus food and other allowances of P50, that is, a total of P325. 27. The sources for the variables are the laws of each country. The study also relied on secondary sources to confirm the data, including the International Encyclopedia for Labor Law and Industrial Relations, the International Handbook on Contracts of Employment, the ILO’s Conditions of Work Digest (1994, 1995), and the US Social Security Administration’s Social Security Programs Throughout the World. 28. Freeman (1993, p. 129) argues that the evidence on the effects of provisions on job security and other employment regulations for developed countries, where they are strictly enforced, is mixed. For developing countries, there are only a few studies. He cites a study for Zimbabwe, according to which the authors found little evidence that the introduction of these provisions reduced employment in relation to output. The experience of Spain with job security regulations, on the other hand, provides a strong case in which relaxation of regulations spurred job growth, although in this case it must be pointed out that the reduction in the unemployment rate has been at the expense of a high number of temporary contracts. 29. The 2006 World Development Report of the World Bank (Box 8.6) indicates that the evidence on the importance of job security regulations, which requires firms to obtain the approval of government or other institutions for layoffs and in some cases severance pay (thus raising the costs of reductions in staff), is not compelling. In some studies these costs seem to be important, while in others they are not. Likewise, the World Development Report indicates that the evidence on employment protection legislation (EPL) indicates that it appears to be strongly associated with more stable employment. However, EPL reduces job destruction at a significant cost as the expectation of high separation costs makes firms more reluctant to expand employment,

495 Unemployment, Labor Laws, and Economic Policies in the Philippines and makes it less profitable to start new ventures or create new firms. In this sense, employment protection reduces job creation. The result is that the net effect on employment is ambiguous. 30. The success of the East Asian countries in the 1980s raises the question of the role of unions. This is because these were largely suppressed or severely restricted. This may lead some to believe that suppressing unions contributes positively to economic growth. Freeman (1993, pp. 133–4) indicates that there is no empirical evidence verifying this issue and that the experience of a wide variety of countries, both developed and developing, indicates that unions do not seem to hamper growth. He mentions, however, that empirical evidence for Korea shows that suppression of labor was associated with a high rate of work-related accidents and produced a very unhappy labor force, despite significant increases in real wages. 31. According to the schedule of contributions published by the Social Security System (SSS), the total contribution to the SSS is equivalent to 9.5% of the worker’s salary, 65% of which is paid by the employer. 32. The benefit duration is 2 months for contributions made for 1 year but less than 3 years; 3 months for 3 years to less than 6 years; 4 months for 6 years to less than 9 years; 5 months for 9 years to less than 11 years; and 6 months for 11 years to less than 15 years. 33. Feedback on training needs is introduced into TESDA in two ways—first, through its 24-member board, which consists of six members from the private sector, six from labor organizations, eight members from government, two from the financial sector, and two from the academe; second, through ground-up consultations through its local offices (there several hundreds around the country), known as PSALM (for Policy Sector Area-Based Labor Market), which assess the critical skills that are in short supply because of insufficient training. 34. In January 2006, The National Statistical Coordination Board cleared the 2005 Impact Evaluation study of Technical Vocational Education and Training Programs, to be carried out by TESDA. The survey aims to evaluate the relevance and effectiveness of these programs. 35. This is a position stated by Secretary of Labor Patricia Santo Tomas in several interviews. 36. The Government provides services to protect overseas Philippine workers from fraudulent placement agencies and work-related risks. Two such bodies are the Philippine Overseas Employment Administration and the Overseas Workers Welfare Administration. 37. The effective protection rate (EPR) is a commonly used measure of the net effect of trade policies on the incentives given to domestic producers. It is defined as the percentage excess of protected value added over nonprotected value added. EPRs take into account the changes in the domestic prices of both inputs and outputs arising from tariffs and import controls. A positive EPR implies that the sector is accorded protection by the system of tariffs and import controls. On the other hand, a negative EPR indicates that the system penalizes the activity or sector. Naturally, since protection is a relative term, if all sectors are uniformly offered high EPRs, then none of them is actually protected. 38. The first phase of the Tariff Reform Program (TRP-I) was implemented in 1981 and covered a 5-year period. It was aimed at leveling off protection rates across

496 Jesus Felipe and Leonardo Lanzona, Jr. industries and at achieving effective protection rates (EPRs) within the range of 30– 80%. The second phase of TRP took effect in August 1991 (Bautista and Tecson 2003). Under TRP-II (EO 470) imported raw materials that were also locally produced were subject to a rate of 10%, while imported raw materials not produced in the country paid a duty of 3%; intermediate goods were levied a 20% tariff, and finished goods, 30%. TRP-II was supposed to be completed by December 1995, but was overtaken by the third phase of the TRP in August 1995. TRP-III liberalized further the trade environment by reducing the level and spread of tariffs toward a uniform level of EPRs across all sectors, to promote global competitiveness, simplify the tariff structure and facilitate customs administration, and provide a level playing field for local manufacturers vis-à-vis foreign competitors. Finally, because TRP-III drew objections from the business sector, the Government considered a tariff reduction scheme of 30-20-10-3 as a framework for TRP-IV, to follow the pace of liberalization in the other ASEAN countries. The next round of tariff adjustments, carried out under TRP-IV, provided a slower tariff reduction scheme of 30-25-20-15-10-7-5-3 , instead of the previous one under TRP-III, in response to the business sector’s clamor for further protection to assist it in competing globally. The country actually committed to reduce 64% of all tariff lines during the Uruguay Round. A schedule of tariff reductions could be adjusted yearly up to 2004. The effect of a variable schedule of reductions is that the Government could pass temporary policies to deal with specific shocks. In 2000, some 3,880 tariff lines, or 68% of a total of 5,673, were subject to a tariff reduction schedule. However, in 2001, some of the previously agreed reductions were removed for a substantial number of tariff lines, so that only 45% of all tariff lines were scheduled for tariff reduction between 2001 and 2004. The main source of the problem is the wide range of tariff bounds, from a minimum of 0% to a maximum of 66%. Clearly, bound rates of 0% denote a commitment to trade liberalization for the products concerned, but for a large range of products, bound rates are above actual tariff rates. This means that the Government can even raise some current tariff rates should it choose to do so. Since the average bound rate for 2000 was 27.2%, higher than the unweighted average of the tariffs for the same year, it means that the Government could actually continue setting higher tariff rates. 39. Some have referred to this as a “race to the bottom” as countries try to attract foreign investment by lowering wages (Felipe 2005b). 40. See Asian Development Bank (2005b). Here it is argued that there are three types of underemployment and that statistics only refer to one of them, namely, a worker working less than full time. The other two types—skilled workers forced to take up a job that requires low skills and workers who have very few complementary inputs to work with, especially capital, can also be estimated and added to the policy tool— although with more difficulty. 41. See also Asian Development Bank (2005b). 42. Canlas (1997, p. 78) indicates that preliminary evidence seems to indicate that an activist monetary policy is not effective in reducing the unemployment rate in the Philippines. He argues that unanticipated money movements matter but these cannot be counted on to yield a sustainable decline in unemployment. An activist monetary policy can produce a temporary decline in unemployment but at the cost of triggering

497 Unemployment, Labor Laws, and Economic Policies in the Philippines permanent inflation. But Canlas reaches this conclusion working within the framework of the natural rate of unemployment (i.e., a positive unemployment rate that is consistent with equilibrium rate in the labor market, in the sense that unemployment below this rate will cause prices to rise because of demand pressures), which is assumed to exist, though no estimate is provided. Indeed, after documenting the increase in unemployment in the second half of the 1970s and early 1980s in the face of activist monetary policy, he concludes: “The above behavior of unemployment in the ’70s suggests that money’s main effect on unemployment is to cause a deviation from the natural rate”( Canlas 1997, p. 67). The most important conclusion of this theory is that money is neutral (which also implies a long-run vertical Philips curve). This implies that monetary policy cannot influence the natural rate of unemployment. Only the unanticipated component of the increase in money supply can have some effects on unemployment fluctuations. Hence, Canlas advocates the use of “real,” as opposed to monetary, instruments to deal with unemployment. These are investments in training, education, and other forms of human capital. He also calls for an increase in firms’ productivity and competitiveness. 43. On 7 April 2005, the BSP raised its key interest rates by 25 basis points in response to rising inflationary pressures due to the rise in oil prices—its first policy change in nearly 2 years. It was described as a preemptive step against inflation. 44. The problem is that the New Central Bank Act (Republic Act No.7653, June 1993) prohibits the BSP from engaging in development banking or finance. It requires the BSP to focus on purely central banking functions, i.e., ensuring price stability. This does not mean, however, that the BSP cannot have other functions (e.g., promote balanced and sustained growth, employment), but these must be secondary to price stability. This is referred to as “flexible inflation targeting.” The act states that the BSP may consider a host of economic objectives provided that it attaches greater weight to price stability than to other economic objectives (Lamberte 2003). 45. Certainly, monetary and fiscal policies also play a role in growth. For example, the BSP may promote more efficient savings mobilization through banking regulations that lead to competition among financial institutions and prudent practices. 46. However, as documented above, unionization in the Philippines today is low. Government employment (including government corporations) represents about 8% of total employment.

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499 Unemployment, Labor Laws, and Economic Policies in the Philippines ———. Various years. Current Labor Statistics. Department of Labor and Employment (BLES-DOLE), Manila. ———. Various years. Employment, Hours, and Earnings Survey. Manila. ———. Various years. Yearbook of Labor Statistics. Manila. Canlas, D. 1997. “Unemployment and Monetary Policy in the Philippines.” In E. F. Esguerra and K. Ito, eds., Employment, Human Capital and Jobs Security: Recent Perspectives on the Philippine Labor Market. Institute of Developing Economies, Tokyo. ———. 2003. “Economic Growth in the Philippines: Theory and Evidence.” Journal of Asian Economics 14:759–69. Department of Agrarian Reform. 2002. Agrarian Reform Accomplishments. Department of Agrarian Reform Planning Service, Quezon City. Domingo, E. 2004. Measuring the Non-observed Economy: The Philippine Experience. National Statistical Coordination Board, Makati City. Dumlao, L. 2002. “Lowering Unemployment by Hiking Minimum Wage.” Business World 7 May. Edralin, D. M. 2001. “Factors Influencing the Observance of the Core ILO Labor Standards by Manufacturing Companies.” In L. Lanzona, ed., The Filipino Worker in a Global Economy. Philippine APEC Study Center Network and Philippine Institute of Development Studies, Makati City. Edwards, S. 1993. “Openness, Trade Liberalization, and Growth in Developing Countries.” Journal of Economic Literature 31(3, September):1358–93. Employers Confederation of the Philippines (ECOP). 2003. Collective Bargaining Agreements. Survey Report 2003. Makati: Lodestar Press. ———. 2004. Corporate Compensation Survey. Makati: Lodestar Press. Esguerra, E., and D. Canlas. 2001. “Raising the Quality of Life through the Workplace in the New Millennium.” School of Economics, University of the Philippines, Quezon City. Mimeo. Felipe, J. 2005a. “A Note on Competitiveness, Unit Labor Costs and Growth: Is Kaldor’s Paradox a Figment of Interpretation?” Economics and Research Department, Asian Development Bank. Mimeo. ———. 2005b. “Competitiveness, Income Distribution, and Growth in the Philippines: What Does the Long-Run Evidence Show?” Updated version of Felipe, J., and G. Sipin. 2004. Competitiveness, Income Distribution, and Growth in the Philippines: What Does the Long-Run Evidence Show? ERD Working Paper Series No. 53, Economics and Research Department, Asian Development Bank, Manila. Felipe, J., and R. Hasan. 2006a. “Labor Markets in a Globalizing World.” In J. Felipe and R. Hasan, eds., Labor Market Issues in Asia: Issues and Perspectives. This volume. London: Palgrave Macmillan for the Asian Development Bank. Felipe, J., and R. Hasan. 2006b. “Labor Market Outcomes in Asia.” In J. Felipe and R. Hasan, eds., Labor Market Issues in Asia: Issues and Perspectives. This volume. London: Palgrave Macmillan for the Asian Development Bank. Felipe, J., and J. S. L McCombie. 2006. What can the Labor Demand Function Tell Us about Wages and Employment? The Case of the Philippines. Working Paper, Centre for Applied Macroeconomic Analysis, Australian National University, Canberra.

500 Jesus Felipe and Leonardo Lanzona, Jr. Fields, G. 2004. “A Guideline to Multisector Labor Market Models.” Paper prepared for the World Bank Labor Market Conference, 18–19 November 2004, Washington, DC. Forteza, A., and M. Rama. 2001. Labor Market “Rigidity” and the Success of Economic Reforms across More than One Hundred Countries. World Bank Policy Research Working Paper Series No. 2521, Washington, DC. Freeman, R. 1993. “Labor Market Institutions and Policies: Help or Hindrance to Economic Development?” In Proceedings of the World Bank Annual Conference on Development Economics 1992. World Bank, Washington, DC. Ghatak, S. 2003. Introduction to Development Economics. 4th ed. London and New York: Routledge. Gulosino, C. 2002. Evaluating Private Higher Education in the Philippines: The Case for Choice, Equity and Efficiency. Occasional Paper No. 68, National Center for the Study of Privatization in Education, Columbia University, New York. Habito, C., R. Briones, and E. Paterno. 2003. “Investment, Productivity and Land Market Impacts of the Comprehensive Agrarian Reform Program.” In CARP Impact Assessment Studies. Vol. 4. Department of Agrarian Reform, Quezon City. Heckman, J. J., and Carmen Pagés. 2004. Law and Employment. Lessons from Latin American and the Caribbean. Chicago: The University of Chicago Press. Herrin, A., and E. Pernia. 2003. “Population, Human Resources, and Employment.” In A. Balisacan and H. Hill, eds., The Philippine Economy: Development, Policies and Challenges. Quezon City: Ateneo de Manila University Press. Holmes, T., and J. Schmitz. 1992. Managerial Tenure, Business Age and Small Business Dynamics. Working Paper No.92-11, Center for Economic Studies, Bureau of Census, Washington, DC. Institute of Labor Studies. 2000. Integrated Labor and Labor-Related Laws. Department of Labor and Employment, Manila. International Labour Organization. 2005. Minimum Wages Database. Available: http:/ /www.ilo.org/travaildatabase/servelet/minimumwages (downloaded 11 May ). James, E. 1991. “Private Higher Education: The Philippines as a Prototype.” Higher Education 21:189–206. Johnstone, B., and P. Shroff-Mehta. 2000. Higher Education Finance and Accessibility: An International Comparative Examination of Tuition and Financial Assistance Policies. Center for Comparative and Global Studies in Education, School of Education, University of Buffalo, New York. Kapsos, S. 2006. “The Employment Intensity of Growth: Trends and Macroeconomic Determinants.” In J. Felipe and R. Hasan, eds., Labor Market Issues in Asia: Issues and Perspectives. This volume. London: Palgrave Macmillan for the Asian Development Bank. Lamberte, M. B. 2003. Central Banking in the Philippines: Then, Now and the Future. Philippine Institute of Development Studies, Makati City. Lanzona, L., R. Briones, and P. Turingan. 2003. “Inventory and Review of Poverty Reduction Programs: Towards an Integrated and Sustainable Framework for the KALAHI Project.” Report prepared for the Department of Social Welfare and Development, Quezon City. Leogardo, V. 2005. “Labor Standards and Self-Regulation in Business.” Business World 18(202).

501 Unemployment, Labor Laws, and Economic Policies in the Philippines Lewis, W. W. 2004. The Power of Productivity. Chicago: The University of Chicago Press. Llanto, G., and M. Ballesteros. 2003. Land Issues in Poverty Reduction Strategies and the Development Agenda: Philippines. Discussion Paper Series No. 2003-03, Philippine Institute of Development Studies, Makati City. Manton, C. 1997. Apprenticeship and the Dual Training System in the Philippines. Technical and Vocational Education and Training Sector Studies, Pasig. Mapa, D. S., and A. M. Balisacan. 2004. “Quantifying the Impact of Population on Economic Growth and Poverty: The Philippines in an Asian Context.” Paper presented at the 9th Convention of the East Asian Economic Association, 13–14 November, Hong Kong. Medium Term Philippine Development Plan (MTPDP) 2001–2004. National Economic and Development Authority, Pasig City. Medium Term Philippine Development Plan (MTPDP) 2004–2010. National Economic and Development Authority, Pasig City. Mellor, J. 1998. “The Effect of Family Planning Programs on the Fertility of Welfare Recipients: Evidence from Medicaid Claims.” Journal of Human Resources 33(4):866–95. National Statistical Coordination Board. Various years. National Income Accounts. Makati City. National Statistics Office. Various years. Annual Census of Establishments. Sta. Mesa. ———. Various years. Family Income and Expenditure Surveys. Sta. Mesa. ———. Various years. Labor Force Surveys. Sta. Mesa. ———. Various years. Philippine Statistical Yearbook. Sta. Mesa. National Wages and Productivity Commission. 2005. “Wage Statistics.” Department of Labor and Employment. Available: http://www.nwpc.dole.gov.ph/statistic.html (downloaded April). Orbeta, A. 2004. Education, Labor Market and Development: A Review of the Trends and Issues in the Philippines for the Past 25 Years. PIDS 25 Years Perspective Papers Series, Philippine Institute of Development Studies, Makati City. Overseas Worker Welfare Administration. Programs and Benefits 2005. Department of Labor and Employment, Manila. Available: http://www.owwa.gov.ph. Philippine Overseas Employment Administration. Various years. Overseas Filipino Workers Statistics. Mandaluyong City. Parente, S. L., and E. C. Prescott. 2000. Barriers to Riches. Cambridge and London: The MIT Press. Rowthorn, R. 1995. “Capital Formation and Unemployment.” Oxford Review of Economic Policy 11(1):26–39. Sardaña, M. C. 1998. “Globalization and Employment Relations: The Philippine Experience.” Philippine Labor Review 22(1, January–June):57–92. Schultz, T. P. 1994. “Human Capital, Family Planning and Their Effects on Population Growth.” American Economic Review 84(2):255–60. Schumpeter, J. 1942. Capitalism, Socialism, and Democracy. New York: Harper and Brothers. Sicat, G. 2004. Reform of the Philippine Labor Market. School of Economics Discussion Paper, University of the Philippines, Quezon City.

502 Jesus Felipe and Leonardo Lanzona, Jr. Snower, D. 1996. “The Low-Skill, Bad-Job Trap.” In A. L. Booth and D. J. Snower, eds., Acquiring Skills: Market Failures, Their Symptoms and Policy Responses. Cambridge: Cambridge University Press. Soriano, M. T. 1998. “Implications of International Migration: A Focus on the Philippine Experience.” Philippine Labor Review 22(1):93–107. Soriano, M. T., and M. C. Sardaña. 1998. “The Informal Sector in RP: Assessment of Needs and Available Resources for Development.” Philippine Labor Review 22(1, January–June):25–56. Santo Tomas, P. 2003. Overseas Filipino Workers in the National Development Agenda: The Government’s Perspective. Monograph Series 2, OFW Journalism Consortium, Manila. ———. 2004. “Government Social Welfare Programs and Services for Women.” Speech given at the National Conference on Women’s Solidarity: Towards Social Protection for All, 24 March, Sulo Hotel, Quezon City. Tan, E. 2005. “The Wage Structure of Overseas Filipino Workers.” Paper presented at the 42nd Annual Meeting of the Philippine Economic Society, 4 March, Bangko Sentral ng Pilipinas Assembly Hall, Manila. ———. 1997. “Macro versus Strategic Planning for Education/Training.” In E. F. Esguerra and K. Ito, eds., Employment, Human Capital and Jobs Security: Recent Perspectives on the Philippine Labor Market. Institute of Developing Economies, Tokyo. Teodosio, V. A. 2001. “Tripartism and the Role of the State in a Period of Restructuring Under Flobalization.” In L. Lanzona, ed., The Filipino Worker in a Global Economy. Philippine APEC Study Center Network and Philippine Institute of Development Studies, Makati City. Thirlwall, A. P. 2003. Growth and Development. 7th ed. New York: Palgrave Macmillan. Tullao, T. 2001. “An Evaluation of the Readiness of Filipino Professionals to Meet International Competition.” In L. Lanzona, ed., The Filipino Worker in a Global Economy. Philippine APEC Study Center Network and Philippine Institute of Development Studies, Makati City. ———. 1993. “Streamlining the Bureaucracy: Education Sector.” Philippine Institute of Development Studies, Makati City. Mimeo. World Bank. 2001. Philippines: Growth with Equity—The Remaining Agenda. A World Bank Social and Structural Review. World Bank Office, Manila. ———. 2005. World Development Report 2006. World Bank, Washington, DC.

CHAPTER 8 The Labor Market in the People’s Republic of China: Development and Policy Challenges in Economic Transition RAN TAO

8.1 Introduction

T

he market-oriented reforms launched in 1978 have dramatically changed the economic landscape of the People’s Republic of China (PRC). In the past 25 years, the country has transformed itself from a centrally planned economy to an emerging market economy, while achieving an average annual growth rate of more than 9% (Lin et al. 2003). The benefits of growth were also shared by the people on a broad basis: using the World Bank’s $1-aday poverty measure, the number of poor is estimated to have dropped from about 490 million to 88 million over the same period, a decline in poverty incidence from 49% in 1981 to 6.9% in 2002 (World Bank 2003). The PRC’s growth has been the result of continuous reforms and structural changes that include shifts from central planning to markets and from agriculture to manufacturing and services, and opening up to international trade and knowledge transfer. During this process, the development of labor markets has been associated with large-scale transfers of the labor force from agriculture to nonagriculture sectors and a significant reallocation between stateowned and nonstate-owned sectors. With more than two and a half decades of market-oriented reform, the PRC’s labor force has experienced fundamental changes. When the PRC started the economic reform of the rural sector in

Ran Tao, Institute for Chinese Studies, University of Oxford, and Center for Chinese Agricultural Policy, Chinese Academy of Sciences. The author thanks Jesus Felipe and Rana Hasan for their comments and suggestions on an earlier draft of the chapter.

504 Ran Tao

1978, there was almost no labor market in the country (in the sense of demandand supply-determined wages and employment levels). An overwhelming majority of the labor force was either employed in urban state-owned enterprises (SOEs) or as agricultural farmers in rural communes. Labor mobility across sectors and regions was extremely low. After 25 years of transition, an incipient well-functioning labor market has emerged with half of rural labor having offfarm work and more than 60% of urban jobs provided by the more marketoriented nonstate-owned sector (Fleisher and Yang 2003). A rapid increase in rural–urban migration has been one of the strongest forces of change both for rural incomes and a booming urban economy (Knight and Song 1999, Rozelle et al. 1999, Zhao 1999). However, compared with other transitional economies, the PRC adopted an unconventional gradualist approach (Lin et al. 2003). Such an approach to reform has also been reflected in the PRC’s labor market developments. With incomplete reforms, the labor market still faces a number of problems. Due to large-scale restructuring of the state sectors, rising urban unemployment has emerged as a pressing policy issue in many cities. Though the economic reforms of the past two and a half decades have gradually loosened rural–urban labor mobility restrictions, the old institutional arrangements established in the prereform era have not been fundamentally reformed and remain as obstacles to permanent migration both from rural to urban areas and across administrative regions. Without adequate labor legislation and effective enforcement, labor protection is still very poor. In rural areas, significant underemployment still exists and new forms of unemployment are beginning to emerge because of fast urbanization, rural collective enterprise privatization, and local government restructuring. For the PRC to achieve high employment growth, the economy must be able to realize sustainable economic growth through continuous economic reforms. One important aspect is to establish a well-functioning labor market to create high-quality jobs in the urban manufacturing and services sectors while facilitating the shift from a largely rural population to an urban one. Without a well-functioning labor market, it will be difficult for the country’s labor force to shift from rural-based agriculture to manufacturing and services. At the same time, as the risks of being unemployed increase in a market economy and a higher share of the population enters and exits the labor force, it becomes essential for the country to construct a more effective social security system to provide sustenance for the weak and the elderly. Based on a growing body of literature, this chapter intends to provide an overview of the PRC’s labor market developments and labor policies. By exploring the implications of the PRC’s past economic reforms of labor-market institutions and labor force allocation, we will illustrate how the labor market trends relate to the process of economic transition and pinpoint the major

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policy challenges the PRC is facing as it develops a well-functioning labor market in the ongoing economic transition. The rest of the chapter is organized as follows. Section 8.2 reviews the PRC’s economic reforms and how they have affected its labor market. Section 8.3 discusses labor market trends with an indepth analysis of unemployment and underemployment, both in urban and rural areas. Section 8.4 discusses two aspects of labor policies: labor protection and social security. Section 8.5 analyzes the key challenges in the labor market and the policy choices that PRC policy makers face today. Section 8.6 concludes.

8.2 Economic Transition and Labor Market Development 8.2.1

Before 1978: Central Planning System and Absence of a Labor Market

During the period of central planning, the PRC adopted a development strategy that prioritized capital-intensive heavy industrial growth. Such a strategy was inefficient since it did not make full use of the country’s cheap labor force. To maximize resource mobilization for its capital-intensive industrialization, a system of central planning was established, while markets for capital, labor, and other factors of production were forbidden. Resource mobility was highly restricted across regions and sectors through an integrated set of institutional arrangements. The arrangements that specifically targeted labor mobility included a household registration (or hukou) system that required individuals to register with local authorities to gain residency, thereby determining where people lived and worked;1 a food and basic necessities rationing system that allowed people to buy food and major consumption goods only in the places of their household registration; and an urban employment and social security system that targeted only urban workers. Under these arrangements, it was almost impossible for any rural individual without an urban residence permit to move into the cities. This was because without the coupons allocated by the state to urban residents, no food of any kind could be bought at official prices. Such methods were imposed to ensure full employment in the cities. With small farmers effectively shut out of the urban sector, the PRC achieved almost full employment of urban workers during the central planning period, and the urban population, less than 20% of the national total, was able to enjoy a wide range of welfare benefits, from subsidized food (via the rationing system), housing, and health care, to pensions provided through state work units (such as state enterprises, the public service sector, and government agencies). Lacking an active urban labor market, the urban state work unit was characterized by a system of centrally fixed wages and lifetime employment. Employment inflexibility was present for both sides of the employment relationship: employers were not allowed to dismiss workers, and employee rights (if employees decided

506 Ran Tao

to quit their jobs) were also highly restricted. Firms had no right to decide the number of workers and who specifically should be hired. The Ministry of Labor and the local labor bureaus set an annual employment plan that all firms were to follow (White 1987). Under central planning, state work units occupied center stage in the economic and social lives of state workers by providing them with a job for life, as well as subsidized housing, education, health care, and retirement pensions. There was a uniform social security system based on the Labor Insurance Regulations of the People’s Republic of China, issued in 1951, by which all PRC workers engaged in (urban) enterprises were insured for retirement, work injury, sickness, childbirth, and widowhood, and were entitled to housing, as well as children’s day care and education. Because wages and employment of state enterprises were determined by the central Government, wage structures of state enterprises were compressed both within and between enterprises (Korzec 1992). In rural areas, the labor force was governed by a system of rural collectives (People’s Communes and Production Brigades), which received production targets from the planning authorities and delivered procurements at low, statedictated prices (Fleisher and Yang 2003). The rural collectives were responsible for organizing rural laborers for agricultural production and for allocating resources among rural laborers, who received part of their work-points in grain and part in cash. The difference in income received from work between the strongest member and the weakest member of the team was very limited (Lin 1992). The collectives also took care of those members who had no children or were unable to work due to disease, injury, or old age. At the same time, there was a system of cooperative medical care that provided basic medical assistance to almost all rural residents. Overall, during the period of central planning, both the rural and urban labor forces were heavily controlled, respectively through People’s Communes and state work units. Rural to urban migration, or even migration between urban centers, was impossible without approval from the state agency. Therefore, no well-functioning labor market existed in either the urban or rural areas, and jobs were all allocated through the state planning system. 8.2.2

1978 to the Mid-1990s: Emergence of Rural and Urban Labor Markets

In 1978, the PRC initiated its market-oriented economic reforms that gradually loosened labor mobility restrictions across sectors and regions. Such policy changes first occurred within rural areas as rural industries boomed in the 1980s, and then extended beyond these areas as more laborers moved across rural–urban boundaries and across different administrative regions.

507 The Labor Market in People’s Republic of China

Township and Village Enterprise Development and Rural–Urban Migration During the late 1970s and early 1980s, the PRC transformed its collective farming system into a “household responsibility system,” in which rural households could essentially plan production and dispose of labor as they liked. At the same time, the state also raised agricultural prices to provide incentives for agricultural production (Carter et al. 1996, Findlay et al. 1993). These policies led to spectacular agricultural growth in the early 1980s and provided the necessary economic surplus for the subsequent boom in rural industries, starting in the mid-1980s. Between 1978 and 1984, agricultural output increased by 42.2%, almost half of which could be attributed to higher work incentives as a result of shifting from collective farming to household farming (Lin 1992). With the introduction of the household responsibility system, farmers now had more freedom to allocate their labor to off-farm work. The Government responded by relaxing its rigid regulations on labor use in rural areas. In 1983, it issued a policy document that encouraged the emergence of specialized households in nonagricultural activities, including long-distance transport and marketing of commodities; it also permitted cooperative ventures and employment of labor (Ash 1988). In 1984, the Government outlined a new development strategy that targeted industries as the focus for future rural development, in which the absorption of rural labor was one of the main objectives (Findlay et al. 1994). In 1985, another policy document issued by the central Government permitted farmers to work and establish businesses in nearby towns, conditional on proving that they had the financial means and that they could provide their own food grain. Significant changes in government labor and industrial policies paved the way for the fast growth of rural industries. Stimulated by the newly obtained economic resources and the right to allocate their labor, township and village enterprises (TVEs) developed quickly to meet a pent-up demand for consumer goods and to take advantage of a pool of cheap rural labor (Brooks and Tao 2003). It was during this period that an increasing number of the PRC’s farmers began to seek off-farm employment in TVEs, and rural labor markets began to develop very fast (Putterman 1992, de Brauw et al. 2004). In 1980, TVEs employed 30 million rural workers, a figure that increased to 92.7 million by the end of 1990, and further increased to 128.6 million by 1995 (NBS, China Labour Statistical Yearbook, various years). As the PRC’s economic reforms started affecting the urban sector in the mid-1980s, the demand for labor in urban areas also began to increase. During this period, the creation and development of special economic zones, the expansion of the nonstate sector, and the loosening of the urban employment policy created a demand for migrants (Meng and Zhang 2001, Cai 2000). Between 1984 and 1988, the Government started to allow farmers to enter urban

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areas on condition that they provided their own food (Huang and Pieke 2003). During the mid-1980s, the food rationing/coupon system was gradually dismantled and individuals could buy food at market prices. This meant that rural migrants could now survive in urban areas if they could find a job. As a result, the number of rural migrants working in urban areas began to increase (Meng and Zhang 2001). In 1988, there were already about 25 million migrants working in urban areas, despite the fact that rural migration was still very low during the 1980s due to relatively low labor demand in urban areas, and to the existence of many institutional barriers to employment. The policy implemented in the 1980s was that of “leave the land but not the village,” so that the rural sector could industrialize. Rural–urban migration accelerated when economic growth in the cities took off in the 1990s and when further policy changes in urban labor markets were implemented. It is in this period that central and local governments began explicitly to encourage temporary migration so that cities could utilize cheap workers from rural areas. Since 1992, the central and local governments have adopted various measures to encourage labor mobility both between rural and urban areas and across regions. For example, cities of different sizes have issued blue-stamp hukou identities to those who migrated to them and paid a certain amount of money, invested in a local business, or bought an expensive house. As a result, rural migration increased significantly, reaching 64 million in 1994 and 80 million in 1995. By the mid-1990s, rural migrants already accounted for about 18% of the total rural labor force and 34% of the total urban labor force. Gradual SOE Reform and Urban Labor Market Development The PRC’s economic reforms in urban areas started after those affecting rural areas, and have been very closely associated with reforms in the stateowned sector. To improve the labor flexibility of enterprises, state enterprises were allowed to hire workers on short-term contracts instead of having to provide them with permanent employment. In 1980, the PRC’s first national conference on labor market issues adopted a more flexible labor market strategy. Urban job seekers were allowed to find work in the state, collective, or newly recognized private sectors, and enterprises were granted more autonomy in their hiring decisions. The adoption of the “three channels of employment combined” was the first deviation from the traditional planning employment mode. The authorities, however, continued to formulate an employment plan, but instead of unilaterally allocating workers to enterprises, labor bureaus began to introduce workers to hiring units (Brooks and Tao 2003). This new mechanism for allocating the labor force combined employment through government directive, “spontaneous organization” employment, and self-employment under the general guidance of the state plan.

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A labor contract system that applied to new entrants to the state and collective enterprises was first introduced in 1983. These reforms transferred some autonomy in hiring decisions from planners to enterprises (Meng and Kidd 1997). This signaled a marked shift away from the system of lifetime tenure with its potentially distorted work incentives. The initial steps were modest and resulted in only moderate growth in the share of employees under contract, but further reforms in 1994 gave new impetus to labor contracts. As a result, the share of workers on such contracts almost doubled between 1994 and 1997, accounting for about one third of all urban workers. Wage reforms introducing various profit-sharing arrangements were also implemented from the early 1980s. Under the newly installed managerial responsibility system, state enterprise managers began to acquire additional wage discretion, and wage flexibility increased gradually (Xu 2000). Firms were allowed to reinstitute bonuses (subject to ceilings) and piece-rate wages. In 1994, the introduction of a new Labor Law also gave management more discretion over wage determination. As a result of these reforms, the share of bonuses in total wages for all enterprises rose from 2% of the total wage bill at the start of the reforms in 1978 to about 16% in 1997. Restrictions on the movement of workers across firms were also gradually removed in an attempt to reduce the labor mismatch that existed during the prereform system. However, before the mid-1990s, SOEs still provided many jobs and provided a wide range of social services for employees (including housing, health care, education, and pensions). Though the SOEs were reformed with a view to improving incentives, hardening budget constraints, and creating competition through entry of nonstate enterprises, no privatization was conducted until the mid-1990s. As a matter of fact, insolvent SOEs were supported by direct and indirect subsidies in order to avoid bankruptcies and widespread layoffs that might have given rise to social tension. Generally speaking, the labor markets in urban formal sectors (i.e., the state-owned sector) were still heavily regulated before the mid-1990s, and the formal sectors were also segmented from the newly emerging informal urban labor markets that consisted of a growing number of migrants from rural areas. Arguably, the slow transformation of labor markets and employment conditions, especially in cities and in the state sector, is the prime example of the gradualist approach adopted by the PRC authorities in the transition from central planning to a market economy. As late as the mid-1990s, the rigid systems associated with state-sector employment—employee tenure, narrow wage differentials, and extensive employer-provided benefits—continued to dominate the urban labor scene, so much so that reviews of the PRC’s first reform decade referred to the retardation in labor market development and decried the “failure” of labor reform (Korzec 1992, Rawski 2002).

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8.2.3

Mid-1990s to the Present Stagnating TVEs and Accelerating Rural–Urban Migration

Starting in the mid-1990s, the TVEs encountered stronger competition from urban industries, including private and foreign-funded enterprises, as well as from the reformed SOEs. The economic performance of the TVEs deteriorated as the overall economy slowed, product market competition intensified, and the advantages derived from the involvement of local leaders in TVE management declined. TVEs were forced to improve their technologies and the quality of their products through more intensive capital investment rather than through employing more workers. As a result, employment in TVEs began to stagnate, and even experienced some decline after it reached a peak of 135 million in 1996. It was precisely during this period that new off-farm job opportunities in the rural areas dried up and more farmers began to seek jobs in the cities. Therefore, in the late 1990s the PRC’s pattern of labor mobility started taking the shape of a massive floating population, primarily engaged in temporary urban jobs. Migrant workers from rural areas began to enter lowend urban jobs such as street cleaning, retail services, housekeeping services, and construction work.2 Higher rural–urban labor mobility has also been associated with further relaxation of migration policies. In 1998, the Ministry of Public Security issued new regulations that loosened control under the household registration system, allowing those who joined their parents, spouses, and children in cities to obtain an urban hukou. After years of experimentation in some regions, the Ministry of Public Security started reforming the hukou system in small cities in 2001. In most small towns, the minimum requirement for receiving the local hukou is that the applicant has a permanent source of income and legal housing in the locality. Some medium-sized cities also began relaxing permanent migration restrictions. During the same period, marketization of the urban housing system and fast expansion of the urban private sector also made it more feasible for rural migrants to make a living in the cities. As a result, migration replaced other off-farm activities as the fastest growing share of the off-farm labor market during the 1990s (de Brauw et al. 2002). Remittances from migrants also rose with the outflow of labor from villages, reaching 9% of rural income in 2001 (Deininger et al. 2003). Accompanying the rapid growth of migration was an increasing reverse flow of labor, and with it, of resources, back into the country’s villages (Murphy 2002). Fast labor shifts from the low productivity sector (agriculture) to higher productivity sectors (outside agriculture) became a major source of economic growth in the PRC in the postreform period. Estimates by the World Bank (1997) suggest that labor mobility contributed about 1.5 percentage points to

511 The Labor Market in People’s Republic of China

the annual GDP growth rate of 9.4% over the period 1978 to 1995, representing 16% of the GDP growth of that period. This result was corroborated by Cai and Wang (1999) who concluded that labor reallocation, including labor transfers among regions, had up to that time accounted for 21% of annual GDP growth in the postreform years. SOE Restructuring and Emerging Urban Unemployment It was also in the mid-1990s that SOEs began to obtain more freedom to lay off permanent workers. Noncontract employees had lifetime tenure with SOEs, but from the mid-1990s such tenure stability was dismantled with restructuring in SOEs. The PRC Government finally realized that the soaring losses of SOEs, necessary to keep the SOEs alive, were not financially sustainable and therefore it had to move forward with long-delayed plans to diversify ownership of SOEs, and to allow inefficient firms to reduce employment or go bankrupt. Such large-scale SOE privatization and restructuring led to an increasing number of laid-off workers from SOEs. In 1994, the Government began a policy of privatization of small and medium SOEs, while protecting larger enterprises, or “seizing the large and letting go of the small” (Cao et al. 1999). With the passage of the Company Law in 1997, ownership reform began in earnest. The goal was as follows: to gradually shift all enterprises to modern forms of corporate governance with clearly defined shareholders and boards of directors; shut down unprofitable enterprises; diversify ownership; and delink the provision of social services from individual employers by privatizing housing, and shifting responsibility for the provision of health insurance and pensions to city or provincial governments. However, when the PRC initiated its large-scale displacement of workers in the second half of the 1990s, an adequate social safety net was lacking. Worrying that such displacement could cause considerable hardship for the affected workers, and as a consequence lead to social and political instability, the Government took various steps to provide financial assistance and labor reemployment services for displaced workers. In the late 1990s, it established “reemployment centers” to provide basic living expenses as well as retraining services and job search assistance for laid-off workers. In recent years, the reemployment centers have been gradually phased out, and more formal unemployment insurance and social assistance schemes have been implemented (Giles et al. 2005). Aggressive economic restructuring led to the laying off of 45 million workers between 1995 and 2002, including 36 million from the state sector. The number of state sector workers fell from a peak of 113 million in 1995 to 71 million in 2002 (Giles et al. 2005). There was an even larger percentage reduction in urban collective sector workers. By the end of 2000, the official,

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accumulated figure for the number of workers laid off had reached 41.1 million, representing 28% of the total number of workers in the state and collective sectors. By then, 9.1 million workers remained laid off (xiagang in Chinese), implying that 32.0 million had, after 3 years, ceased to enjoy xiagang status (thus becoming officially unemployed or retired), or had been reemployed— mainly in the private sector and through self-employment, which grew by 18.5 million over the period. The number of xiagang remaining in reemployment centers declined from a peak of about 9.5 million at the end of 1999 to about 6.4 million by the end of 2002, as workers found jobs, became registered as unemployed, or dropped out of the workforce (Brooks and Tao 2003). Generally, the PRC’s enterprise reform in urban labor markets has outpaced the social reform that would have facilitated worker reallocation from declining to growing enterprises. In recent years, the PRC Government began to provide living support payments to laid-off state and collective sector workers, in the form of xiagang subsidies, unemployment benefits, or early retirement benefits, so as to cushion the blow felt by workers lacking the education or experience necessary to find employment in the private sector. While benefits arguably create a disincentive to reenter the workforce, they have provided an important safety net for the individuals who gained access to them (Giles et al. 2005). Serious reforms in the areas of pensions, health care, housing, and social assistance also began to be implemented from the late 1990s in an attempt to transfer the responsibility of social services and protection from enterprises to the state, community, and individuals. It is clear, therefore, that by the late 1990s and the early 2000s, employment arrangements involved less segmentation and fewer rigidities, while far greater market influence began to emerge in urban labor markets. Two major changes— the collapse of urban tenure arrangements and large-scale migration of villagers into the cities—contributed to the dramatic changes in the labor market (Rawski 2002). It is also during this period that the central and local governments began to actively promote small and medium nonstate enterprises, especially in the labor-intensive urban services sectors. These sectors, which used to be artificially depressed by the Government, are now encouraged both politically and financially. As a result, the PRC’s employment structure is becoming more diversified. Employment in foreign-funded enterprises and domestic private enterprises rose rapidly in this period, due to further labor market reforms and the opening of the economy to foreign and private investors.

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8.3 Labor Market in the PRC: Trends and Outcomes 8.3.1

Population and Urban–Rural Distribution

The PRC is the most populous nation in the world, with a population of 1.3 billion at the end of 2003. Partly due to the demographic transition during economic development and partly due to rigid implementation of the state’s population control policy, annual population growth has declined dramatically since the late 1980s.3 The growth rate was around 1–1.5% during the 1980s and the early part of the 1990s, but declined to 0.5–0.9% from the middle 1990s. According to the fifth National Census, published in 2000, the proportion of children (0–14 years old) was 22.9%, the proportion of the working age population (15–64 years old) was 70.2%, and the proportion of the aged population (65 years old and above) was 6.9% (NBS, China Labour Statistical Yearbook, 2001). The sex ratio has also been relatively distorted at 1,060 males for every 1,000 females. The PRC’s population remains predominantly rural, despite a strong trend toward urbanization. Around 60% of the population is classified as rural by the National Bureau of Statistics, which represents a significant decrease from around 82% in 1978. However, if we look at Table 8.1 carefully, we can see that within 1 year, between 1999 and 2000, the urban population share rose by more than 5 percentage points. This is largely due to the change in statistical definition. In fact, at present, the PRC’s “urban” population in the official statistics includes Table 8.1 Population Statistics, 1978–2003

1978 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source::

Total Population (million)

Annual Growth (%)

Sex Ratio (100 males /100 females)

Urban Population Share (%)

962.59 987.05 1,058.51 1,143.33 1,211.21 1,223.89 1,236.26 1,248.10 1,259.09 1,265.83 1,276.27 1,284.53 1,292.27

1.23 1.35 1.52 1.17 1.05 1.01 0.96 0.88 0.54 0.82 0.65 0.60

106.16 105.98 107.04 106.27 104.21 103.34 104.36 104.00 104.00 106.74 106.00 106.06 106.20

17.92 19.39 23.71 26.41 29.04 29.37 29.92 30.40 30.89 36.22 37.66 39.09 40.53

NBS, China Statistical Yearbook (various years).

Labor Force (million)

Labor Share (%)

406.82 429.03 501.12 644.83 687.37 696.65 705.80 720.87 727.91 739.92 744.32 753.60 760.75

42.26 43.47 47.34 56.40 56.75 56.92 57.09 57.76 57.81 58.45 58.32 58.67 58.87

514 Ran Tao

not only the urban residents with an urban hukou, but also 90 million–95 million migrants, as well as 20 million–25 million dispossessed farmers whose land was expropriated for urban expansion. Neither of these two latter groups has permanent urban residence permits, and thus are ineligible for urban welfare, including equal access to school education, housing subsidy, and social assistance provided by city governments. In addition, serious problems existing in the definition of the PRC’s official “urban population share” statistics imply that it has an upward bias of at least 3–4 percentage points. According to Tao and Xu (2005), since the 1990s many counties surrounding the prefecture-level and higher-level core cities have been turned into districts directly under city administration.4 Although in the regulation for collating urban population statistics it is required that only the population in such districts with a population density over 1,500 persons per square kilometer be all included, in practice, such a rule has not been closely followed. Furthermore, such a rule itself is difficult to defend since even for districts with a population density higher than this, a significant share of the population within the district may still be farmers and so are excluded from the calculation of the urban population share. Tao and Xu (2005) estimate that at least 40 million farmers are included because of such problems in statistical definition. Overall, though in official statistics the PRC’s urban population share has reached over 40%, problems of definition mean that it suffers from an upward bias. Even if we take the figure of 36–37% after correcting for such definitional bias, the remaining urban population still includes 90 million–95 million migrant farmers and 20 million–25 million dispossessed farmers who do not have an urban hukou. These 110 million–120 million workers, therefore, have no access to the social assistance, subsidized public housing, or urban public schools that are provided to urban permanent residents. Even if we assume that the rural migrants and the dispossessed farmers can be counted as “urbanized”, the present urban population share of the PRC would be around 36–37%, significantly lower than that of many other developing countries at a similar level of development. Table 8.2 lists the projected population and working age population (15– 60 years) provided by the China Population Information Center. At current trends, the population is expected to stabilize at around 1.54 billion by the year 2040, 220 million—230 million more than the current total. Given the asymptotic growth pattern, most of this increase will take place within the next 20 years and will be accompanied by a significant increase of the old age group. However, over the next decade, there will continue to be a large number of entrants into the workforce, since the largest single age cohort in the PRC today is the 15–19-year-old group. After 2015, the supply of young workers will gradually diminish, but the overall working age population will still be enormous and will continue to increase to over 100 million until 2025.

515 The Labor Market in People’s Republic of China Table 8.2 Projected Population and Working Age Population

Year

Total Population (100 million)

Working Age Population (15–60 years) (100 million)

Elderly (>60 years) (100 million)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2015 2020 2025 2030 2035 2040 2045 2050

12.59 12.69 12.80 12.91 13.01 13.12 13.22 13.32 13.43 13.54 13.65 13.77 14.30 14.72 15.04 15.25 15.38 15.44 15.38 15.22

8.52 8.61 8.74 8.88 9.01 9.13 9.25 9.36 9.46 9.55 9.65 9.73 9.99 10.04 10.18 10.09 9.38 9.58 9.50 9.39

1.28 1.32 1.34 1.36 1.40 1.43 1.46 1.51 1.55 1.60 1.66 1.73 2.15 2.45 2.97 3.55 3.96 4.10 4.19 4.38

Source:

China Population Information Center (2002).

According to Kroeber (2005), there are now 125 million people aged 15– 19 in the PRC, the biggest single 5-year age cohort. This bracket represents people who are entering the workforce right now. The bulk of people born between 1986 and 1990 are partly an “echo effect” of the 1960s’ population boom (those now in their late 30s and early 40s), and are partly the result of a significant relaxation in enforcement of the one-child policy that took place in the late 1980s. The next younger group is smaller, but still large enough to mean that the entry-level labor force will remain high during the next decade. Overall, the young workforce (those aged 15–24) will remain at over 200 million people until 2015, and will decline gradually thereafter. There will be plenty of low-cost young workers available for the PRC’s factories for quite a few years to come. 8.3.2

Employment

The PRC’s total working age population increased relatively fast from less than 600 million to around 900 million between 1980 and the early 2000s, and is expected to continue growing (though at a slower rate) over the next

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two decades (Table 8.2). The labor force (those people who have both the ability and the willingness to work within the working age population) has increased even faster, from around 330 million in 1980 to 760.8 million in 2003 (58.9% of the total population). Therefore, the labor participation rate also steadily increased, from 72.2% to 84.9% in the same period. With the fast growth of the economy in the past two and a half decades, the PRC’s total employment has increased by over 320 million since 1980. This means that, compared with 1980, official unemployment grew only by 10 million during this period, making the number of unemployed 16.5 million by the end of 2003. Out of the 320 million new jobs created between 1980 and 2003, the urban sector created 151.1 million of them. Given that in the PRC the rural collective land system grants almost every farmer access to a piece of land so that he is not unemployed, the growth of rural employment naturally follows the growth of the rural labor force. For example, if a farmer loses his or her job at a rural TVE, he or she can resort to the allocated agricultural land and still be counted as employed. Therefore, the growth of urban employment is a more meaningful concept when we talk about the quality of job creation. As a matter of fact, job growth since 1990 has been concentrated mainly in urban areas. Jobs there increased at an average rate of more than 3% (or over 6.6 million) per year between 1980 and 2003. Since 1990, rural employment has been relatively stable, with an increase of fewer than 10 million workers. As total employment rose from 647.5 million in 1990 to 744.3 million in 2003, the share of rural employment declined from 74.7% to 65.5%. During the same period, urban employment experienced strong growth, despite a significant number of laid-off workers due to SOE downsizing. As shown in Table 8.3, employment in SOEs dropped by 41.4 million during the period 1990–2003.5 Employment in urban collectives also declined sharply from 1990. In 1990, urban collective enterprises employed 35.5 million workers, but by 2003 this type of employment had dropped by 26 million to fewer than 10 million. However, the total number of jobs lost in SOEs and collectives, 66.4 million, was, over this period, more than offset by: (i) job growth in the private sector, foreign-funded enterprises, and enterprises with joint ownership, which created 71.1 million new jobs; and (ii) an unexplained 78.1 million job increase. The latter can be largely attributed to jobs in the informal sector (such as construction, catering services, street vending, and household services), largely consisting of migrant workers from rural areas. Unfortunately, these migrant workers are not well covered by the current statistics.6 Further discussion on rural migrant workers is presented in Section 8.3.4. In rural areas, the 1990s brought a continued decline in the share of workers engaged in farming and other primary production work. In contrast to earlier data, the absolute number of workers engaged in the primary sector

517 The Labor Market in People’s Republic of China Table 8.3 Labor Force and Employment by Ownership (millions) 1980

1990

1995

2000

2001

2002

2003

Working-Age Population (15-64) Labor Forcea Participation Rate (%)b Total Employmentc

594.1 429.0 72.2 423.6

763.1 653.2 85.6 647.5

829.0 687.4 82.9 680.7

888.0 739.9 83.3 720.9

894.3 744.3 83.2 730.3

903.0 753.6 83.5 737.4

896.1 760.8 84.9 744.3

Urban Employment State units of which SOEs Institutions Governments Collective-owned Joint units Foreign-funded Private units Residual

105.3 80.2 67.0 22.0 4.7 24.3 0.0 0.0 0.8 0.0

170.4 103.5 73.0 21.6 8.9 35.5 1.0 0.7 6.7 23.1

190.4 112.6 76.4 26.1 10.1 31.5 3.7 5.1 20.6 16.9

231.5 81.0 43.9 26.4 10.7 15.0 13.4 6.4 34.0 81.6

239.4 76.4 39.5 26.2 10.7 12.9 15.2 6.7 36.6 91.6

247.8 71.6 33.8 26.4 10.4 11.2 18.3 7.6 42.7 96.4

256.4 66.2 30.6 25.1 10.5 9.5 20.7 9.6 49.2 101.2

Rural Employment TVEs Rural private-owned Self-employed Residual

318.4 30.0 … … 288.4

477.1 92.7 1.1 14.9 368.4

490.3 128.6 4.7 30.5 326.4

489.3 128.2 11.4 29.3 320.4

490.9 130.9 11.9 26.3 321.8

489.6 132.8 14.1 24.7 318.0

487.9 135.7 17.5 22.6 312.1

a

b

c

Note: Source:

From the labor force survey, defined as economically active persons 16 years and older, either working one hour or more in the reference week or looking for work. Labor force as percent of working age population. Data for the working age population defined consistent with the labor force (16 years and older) are not available. From the labor force survey, defined as those working for 1 hour or more in the reference week. … means data is unavailable. NBS, China Labour Statistical Yearbook (various years).

since 2000 shows a modest downward trend. Pure agricultural employment (Table 8.3) grew by 80 million between 1980 and 1990, but then experienced a 56 million decline between 1990 and 2003.7 Though employment in TVEs experienced fast growth of 98.6 million workers between 1980 and 1995, its growth has significantly slowed since then, expanding by only 7 million in 8 years because of large-scale restructuring in the TVE sector. Many of the TVEs were privatized in the late 1990s and early 2000s (Table 8.3). Rural private enterprises in 2003 employed 12.8 million more workers than they did in 1995. However, this increase has been largely offset by a decline of 7.9 million in rural self-employment during the same period. Overall, between 1995 and 2003, rural employment experienced a slight drop of 2.4 million. Overall, the locus of job expansion since the 1990s has shifted from SOEs, urban collectives, and TVEs, which had absorbed the largest numbers of workers during the 1980s, to firms under “other” ownership, a mixed group that includes domestic shareholding firms and enterprises with partial or full foreign

518 Ran Tao

ownership, and to domestic private business. Employment at SOEs and urban collectives has dropped sharply. As a result, growth of nonagricultural employment during the 1990s and early 2000s is primarily attributable to the expansion of job opportunities provided by domestic private and shareholding firms and by foreign-invested enterprises. Table 8.4 shows the employment distribution among different sectors between 1980 and 2003. The primary sector comprises the agricultural, forestry, fishery, and animal husbandry activities, while the secondary sector comprises Table 8.4 Employment by Industry (millions) 1980 Farming, Forestry, Animal Husbandry, Fishery 291.2 Mining and Quarrying 7.0 Manufacturing 59.0 Electricity, Gas, and Water 1.2 Construction 9.9 Geological Prospecting, Water Conservancy 1.9 Transport, Storage, Post, and Telecommunication 8.1 Wholesale, Retail Trade, and Catering Services 13.6 Banking and Insurance 1.0 Real Estate, Social Services, 18.5 Health, and Education. Government, Party Agencies, and Social Organizations 5.3 Others 5.9 Residual 1.1 Total 423.6 Primarya 291.2 Secondary 77.1 Tertiary 55.3 Nonagricultural 132.4 Percentage Primary 68.7 Secondary 18.2 Tertiary 13.1 a

Note: Source:

1990

1995

2000

2001

2002

2003

341.8 8.8 86.2 1.9 24.2

330.2 9.3 98.0 2.9 33.2

333.6 6.0 80.4 2.8 35.5

329.7 5.6 80.8 2.9 36.7

324.8 5.6 83.1 2.9 38.9

… … … … …

2.0

1.4

1.1

1.1

0.98

…

15.7

19.4

20.3

20.4

20.8

…

28.4 2.2 26.3

42.9 2.8 27.0

46.9 3.3 30.7

47.4 3.4 31.5

49.7 3.4 34.3

… … … …

10.8 18.0 81.2 647.5 389.1 138.6 119.8 258.4

10.4 44.9 58.3 680.7 355.3 156.6 168.8 325.4

11.0 56.4 92.8 720.9 360.4 162.2 198.2 360.4

11.0 58.5 101.4 730.3 365.1 162.8 202.3 365.1

11 62.5 99.4 737.4 368.7 157.8 210.9 368.7

… … … 744.3 365.5 160.8 218.1 378.9

60.1 21.4 18.5

52.2 23.0 24.8

50.0 22.5 27.5

50.0 22.5 27.5

50.0 21.4 28.6

49.1 21.6 29.3

Employment in the primary sector is derived from the National Bureau of Statistics’ (NBS) quarterly labor force sample survey of almost 1 million persons and it includes some migrating farmers who seek off-farm employment in cities. Employment in other sectors is based on the NBS establishment survey, which excludes much of the informal sector employment that has emerged with economic transition. This is why employment for farming, etc. in the first row and employment for “primary” sector is identical in 1980, but not so in any other year since economic transition began. … means data is unavailable. NBS, China Statistical Yearbook (various years).

519 The Labor Market in People’s Republic of China

manufacturing, mining and quarrying, electricity, gas, and water, as well as construction. All other activities are classified as part of the tertiary (or services) sector. As Table 8.4 shows, the pace of job creation was much faster in the tertiary sector than in the other two sectors. Between 1990 and 2003, employment in the services sector grew by around 100 million, while that in secondary industries grew by only 22.2 million workers. Though the PRC manufacturing sector experienced robust growth in output and exports over this 13-year period, most of the off-farm job growth has taken place in the tertiary sector. Large inflows of foreign investment, mostly in manufacturing, did not prevent a sharp decline in employment growth among the PRC’s secondary industries, dominated by manufacturing. Relatively slow growth in this subsector was partly due to restructuring and the privatization of state-owned and urban collective-owned factories in the cities during the late 1990s and early 2000s. As a result, the proportion of workers in the secondary sector remained unchanged between 1990 and 2003.8 Table 8.5 indicates that job growth from 1990 to 2003 was mainly concentrated in the coastal provinces (especially Guangdong, Jiangsu, Shandong, and Zhejiang). In those provinces, the private sector has flourished, thanks to the large flow of foreign direct investment and to the Government’s encouragement of private sector development. 8.3.3

Urban Unemployment

In the PRC, the most commonly used concept of unemployment is urban registered unemployment. According to the National Bureau of Statistics (NBS), “the registered unemployed persons in urban areas refer to the persons who are registered as permanent residents in the urban areas, engaged in nonagricultural activities, aged within the range of working age (16–50 for male and 16–45 for female), able to work, unemployed but willing to be employed and (who) have been registered at the local employment service agencies” (NBS, China Statistical Yearbook, 2004). As Table 8.6 shows, the registered unemployment rate over the last two decades, having peaked at 4.9% in 1980 as a result of the return to cities of young people sent to the countryside during the Cultural Revolution, stayed below 3% for many years and rose very little—from 2.9% in 1995 to 2.9% in 2002 and 3.0% in 2003, during a period of widespread retrenchment of urban workers. However, official statistics count as unemployed only those individuals who register for the purpose of receiving unemployment benefits with local governments, and thus are not based on representative sample surveys (Solinger 2001). Therefore, they underestimate the PRC’s true unemployment rate. According to Xue and Knight (2004), the official definition of registered

520 Ran Tao Table 8.5 Urban Employment by Province, 1990 and 2003 Total Urban Employment (millions)

National

1990

2003

Change 1990-2003

Share in State-Owned Units (%) 1990

2003

Change 1990-2003

170.4

256.4

86.0

59.5

29.8

–29.7

North Beijing Tianjin Hebei Shanxi Inner Mongolia

22.6 4.6 2.9 6.7 4.5 3.9

23.9 6.9 2.5 6.4 4.6 3.5

1.3 2.3 –0.4 –0.3 0.1 –0.3

75.2 77.6 74.9 74.6 75.7 73.0

46.1 30.9 36.9 58.2 55.8 47.9

–29.0 –46.7 –38.0 –16.3 –19.9 –25.1

Northeast Liaoning Jilin Heilongjiang

25.4 10.8 5.6 9.0

19.1 8.4 3.8 6.9

–6.3 –2.4 -1.8 -2.1

65.0 62.0 65.2 68.5

45.5 37.6 55.3 49.9

–19.5 –24.4 –10.0 –18.5

East Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong

40.1 5.4 9.0 5.1 5.2 3.4 4.1 7.9

47.7 5.2 9.6 7.4 5.5 4.7 3.8 11.3

7.6 –0.2 0.6 2.4 0.3 1.4 -0.3 3.4

65.3 73.4 59.4 55.5 63.2 63.9 74.0 70.2

36.4 31.4 33.0 24.1 40.1 32.2 53.2 43.9

–28.9 –42.0 –26.4 –31.4 –23.2 –31.6 –20.7 –26.3

Central and South Henan Hubei Hunan Guangdong Guangxi Hainan

28.6 7.3 8.3 … 8.5 3.4 1.1

39.4 8.4 7.0 6.0 12.9 3.9 1.1

10.8 1.1 –1.2 … 4.4 0.4 0.0

82.0 71.7 63.3 … 61.9 75.9 83.4

42.9 47.4 48.4 52.1 29.1 52.2 51.6

–39.2 –24.2 –14.9 … –32.8 –23.7 –31.8

Southwest Chongqing Sichuan Guizhou Yunnan Tibet

13.6 … 7.2 2.5 3.1 0.9

16.3 3.2 6.9 2.4 3.5 0.3

2.6 … –0.3 –0.1 0.4 –0.6

69.4 … 68.9 74.3 81.6 17.1

49.4 39.0 47.5 60.9 54.1 59.5

–20.0 … –21.4 –13.4 –27.5 42.4

7.8 4.0 2.4 0.7 0.7 …

12.6 5.2 2.5 0.7 0.8 3.4

4.9 1.2 0.1 0.0 0.1 …

… 78.6 81.0 79.8 80.3 …

53.6 49.4 62.9 46.8 48.7 55.7

… –29.2 –18.1 –33.0 –31.7 …

32.4

97.5

65.1

…

…

…

Northwest Shaanxi Gansu Qinghai Ningxia Xinjiang Unexplained residual Note: Source:

… means data is unavailable. NBS, China Labor Market Yearbook (1991 and 2004).

521 The Labor Market in People’s Republic of China

unemployment understates the true figure, for several reasons. First, the current registered urban unemployment rate only covers the age ranges 16–50 for men and 16–45 for women, so excluding men over 50 and women over 45; second, laid-off workers are not regarded as unemployed, but are treated instead nominally as still employed by their former enterprises; third, unemployed persons have an incentive to register at their local employment service agencies if they expect to derive some benefit such as social security payments or improved job prospects, but many would neither qualify for social security nor expect to find employment by this means; fourth, unemployed persons without urban resident status, i.e., rural migrants, are excluded.9 Not surprisingly, the official, or registered, unemployment rate is widely believed to significantly understate the true unemployment rate. A potential improvement can be made by including laid-off workers. As shown in Table 8.6, when this is done, the total registered unemployed and laid-off workers Table 8.6 Urban Unemployment, 1980-2003 (millions, end of year) 1980

1990

1995

2000

2001

2002

2003

Total Labor Forcea 429.0 423.6 Total Employmentb Unemploymentc 5.4 As % of total labor force 1.3 As % of urban labor force 4.9 Urban Labor Force 110.7 Employment 105.3

653.2 647.5 5.7 0.9 3.3 174.2 170.4

687.4 680.7 6.7 1.0 3.4 195.6 190.4

739.9 720.9 19.1 2.6 7.7 246.6 231.5

744.3 730.3 14.1 1.9 5.5 253.6 239.4

753.6 737.4 16.2 2.1 6.2 261.9 247.8

760.8 744.3 16.5 2.2 6.2 267.0 256.4

5.4 …

3.8 …

5.2 …

6.0 9.1

6.8 7.4

7.7 6.4

8 2.6

…

…

…

15.1

14.2

14.1

10.6

4.9

2.2

2.7

2.4

2.7

2.9

3.0

…

…

…

6.1

5.6

5.4

4.0

Unemployment Registered Xiagangd Registered Unemployed and Xiagang Unemployment rate (%) Registered Registered Unemployed and Xiagange

From the labor force survey, defined as economically active persons 16 years and older, either working one hour or more in the reference week or looking for work. b From the labor force survey, defined as those working for one hour or more in the reference week. c Defined as difference between labor force and employment. d Those xiagang remaining attached to remployment centers at the end of the year. e Calculated as percent of the urban labor force. Note: … means data is unavailable. Sources: NBS, China Statistical Yearbook (various years) and author’s estimates. a

522 Ran Tao

reached 6.1% of the urban labor force at the end of 2000 and declined to 4.0% in 2003. However, such an approach is still problematic since it only addresses the second of the four issues mentioned above. Another approach that potentially constitutes an improvement is to use the household-based Sample Survey Population Changes (SSPC) by the NBS, which started in 1996. The unemployment rate thus calculated can be considered a relatively accurate rate since it follows the International Labour Organizationrecommended definition of employment/unemployment.10 The procedure is as follows: first, the economically active population in urban areas is calculated by subtracting rural employment from the national economically active population; second, the difference between the economically active population and employed population is calculated and considered as total urban unemployment; finally, the urban unemployment rate is the ratio of urban unemployment to the urban economic active population. As shown in Table 8.6, the urban unemployment rate rose from 3.4% in 1995 to 7.7% in 2000, and then slightly declined to over 6% in 2002 and 2003. Recent surveys by the Institute of Population and Labor Economics, Chinese Academy of Social Sciences, may provide the best picture of actual employment conditions among urban residents. These surveys find that between 1996 and 2002, the jobless rate “in five major cities—Fuzhou, Shanghai, Shenyang, Xi’an and Wuhan averaged about 8% between September 1996 and January 2002”, while subsequent figures in some localities “have even topped 14 percent” (Giles et al. 2004). After some adjustment for national averages, they estimated a 6–7% unemployment rate from 2000, which is quite close to the unemployment rate calculated from NBS-published data as shown in Table 8.6. 11 8.3.4

Migration

The PRC’s labor mobility has increased very rapidly since the start of the 1990s owing to a fast-growing urban economy and to relaxation of labor-mobility restrictions. During the 1990s, the slowdown in TVE growth, the creation of networks linking would-be village migrants to urban employment, the rapid improvement of interregional transport and communications, the erosion of urban control systems that had formerly obstructed migrants’ access to grain and housing, and the further expansion of urban-rural income differentials, all channeled growing numbers of migrants to urban destinations (Rawski 2002). The scale of domestic labor movement has been enormous, perhaps the largest in human history. Even in the early 1990s, Hein Mallee asserted that “a consensus seems to have emerged that the number of rural migrants is probably between 50 and 60 million” (cited from Solinger 1999). Recent figures are considerably larger. Goodkind and West (2002) report that “By 1997, the Ministry of Public

523 The Labor Market in People’s Republic of China Table 8.7 Long-Distance Migration and Average Annual Working Months

Sample (persons)

As a Share of Sample (%)

Inferred National Total (10,000 persons)

Income Per Month (CNY)

Working Months (number)

All Off-Farm Labor Within home county Outside home county Outside home province

1,122 459 264

23.2 9.5 5.5

18,778 7,684 4,419

233 626 611

8.7 8.6 8.9

Labor with Over 3-month Off-Farm Employment Within home county Outside home county Outside home province

1,007 411 241

20.9 8.5 5.0

16,855 6,880 4,034

227 602 567

9.5 9.4 9.5

Labor with Over 6-month Off-Farm Employment Within home county Outside home county Outside home province

825 348 209

17.08 7.2 4.3

13,807 5,825 3,499

218 602 577

10.6 10.3 10.4

Number of Sample Rural Households 1,199 Number of Sample Rural Population 4,829 Rural Labora 3,445 As a Share of Rural Population (%) 71.3 Rural Labor with Off-Farm Labor 1,581 As a Share of Rural Labor (%) 45.9 Total Rural Population, 2000 (million persons) 808.37 Share of Age 15–64 (%) 67.2 Total Rural Employmentb (million persons) 489.34 Rural labor in the sample is defined as the population aged 15–64. Total rural employment does not include rural migrant labors employed in cities. Sources: Data from CCAP Survey and NBS, China Statistical Yearbook (2001). a

b

Security estimates that the floating population had grown to 100 million.” According to the 2000 National Population Census, there were already 121 million migrants (defined as all individuals who had migrated out of their place of residence and looked for employment for at least 6 months in the past year) by 2000, of whom 90 million were found in urban areas (88.4 million of these had originated in rural areas) (NBS, China Labour Statistical Yearbook, 2002). Utilizing a nationally representative rural survey data set of 2000 collected by the Center for Chinese Agricultural Policy (CCAP survey hereafter) at the

524 Ran Tao

Chinese Academy of Sciences that covered 1,199 randomly selected households distributed across 60 villages in 6 provinces, Tao and Xu (2005) find that among 3,445 rural workers surveyed, 1,581 had off-farm employment, while 459 obtained off-farm employment outside their home county.12 As shown in Table 8.7, these 459 workers earned an average of CNY626 per month with an average of 8.6 months off-farm work per year. Of these 459 workers, 57.5%, or 264 workers worked outside their home province; they earned an average of CNY611 per month and worked an average of 8.9 months per year. If we consider the migrants with off-farm employment over 6 months, 348 had offfarm employment outside their home county and earned an average of CNY602 per month and worked an average of 10.3 months per year. The 209 who had off-farm employment outside their home province earned an average of CNY577 per month and worked 10.4 months per year. Given that the sample is nationally representative, it can be inferred that in 2000 there were 76.84 million rural laborers who had off-farm employment outside their home county and 44.19 million who obtained off-farm employment outside their home province. If we limit ourselves to migrants with annual off-farm working periods of over 6 months, the corresponding numbers were 58.25 million and 34.99 million, respectively. If the migrants who obtained off-farm employment outside their home county can be considered as long-distance rural to urban migrants, the analysis above implies that in 2000, 70 million–80 million migrant workers were long-distance migrants, and of these, 50 million–60 million worked in the cities for more than 6 months a year. Not only did migration increase in the 1990s, but the demographic structure of migrants also changed significantly. As the PRC economy became more integrated into the world economy, migrants from rural areas have become younger and more educated. De Brauw et al. (2002) found that the age structure of migrants has become younger over time. In 1981, the off-farm labor participation rate in rural areas for all age groups was about 18–19%. In 2000, this rate for the age group 16–20 was as high as 75.8%, more than three times that in 1990 (23.7%). The off-farm labor participation rate for the age groups 21–25 and 26–30 doubled between 1990 and 2000. The rate for those above 30 also increased from 37.6% in 1990 to 20.6% in 2000. For all rural migrants less than 30 years old, the off-farm labor participation rate increased from 31% to 45%. Tao and Xu (2005) also found that most of the new migrants from rural areas had an education level of or above junior high school and earned a decent income in their off-farm employment. Table 8.8 indicates that in 2000, for all migrants working outside their home county (defined as long-distance migrants here) and working for more than 6 months per year (defined as longterm migrants here), the average age was 25.2 years. The average number of years of education for these migrants was 8 years (it takes 9 years to obtain a

525 The Labor Market in People’s Republic of China Table 8.8 Demographics of Long-Distance, Long-Term Migrants

Headcount (persons)

Migrants with Off-Farm Employment over 6 Months outside Home County Total number 348 Monthly income over CNY1,000 47 Monthly income over CNY800 85 Migrants with Off-Farm Employment over 6 Months outside Home Province Total number 209 Monthly income over CNY1,000 24 Monthly income over CNY800 45

Income Per Month (CNY)

Working Months (months/ year)

Age (years)

Education (years)

Share Share Male Married (%) (%)

602

10.3

25.2

8.0

63.2

37.9

1339

9.9

28.6

9.1

87.2

57.4

1120

10.3

27.5

8.9

72.9

55.3

577

10.4

25.0

7.7

64.1

38.8

1266

10.1

28.1

9.0

83.3

54.2

1070

10.2

27.6

8.6

68.9

62.2

Sources: Data from CCAP Survey and NBS, China Statistical Yearbooks.

junior high school degree in the PRC). Among these long-term, long-distance migrants, 62.1% were single and 63.2% were male. For those with monthly incomes higher than CNY1,000, the average age was 28.6 years, with an average education of 9.1 years. Male labor was the dominant group (87.2%) among high-income earners; 42.6% were unmarried. With respect to the regional patterns of interprovincial migration in the PRC, according to population surveys and censuses, the overwhelming trend is for increasing migration to coastal provinces, regardless of location of origin. In 1987, 44.2% of the total number of western migrants went to eastern provinces; 61.7% of the total migrants from central provinces went to eastern provinces; and finally, 49.7% of migrants from eastern provinces went to other eastern provinces. The corresponding figures for 2000 were 68.3%, 84.3%, and 64.4% (Cai and Wang 2003). Microeconomic studies of migration also find that rural migrants have become increasingly willing to travel to distant provinces in pursuit of employment opportunities. They also find that migrants predictably respond to wage differentials in choosing destination locations (de Brauw et al. 2002). 8.3.5

Underemployment and Emerging Unemployment in Rural Areas

Even though an increasing number of rural workers have been seeking off-farm work either in local TVEs (around 130 million workers or 28% of the

526 Ran Tao Table 8.9 Sectoral Distribution of GDP and Employment, 1990–2003 GDP

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source:

Total (CNY billion) 1,854.8 2,161.8 2,663.8 3,463.4 4,675.9 5,847.8 6,788.5 7,446.3 7,834.5 8,206.8 8,946.8 9,734.2 10,517.2 11,725.2

Employment

Agriculture Nonagriculture (%) (%) 27.0 24.5 21.8 19.9 20.2 20.5 20.4 19.1 18.6 17.6 16.4 15.9 15.3 14.6

Total (million persons)

73.0 75.5 78.2 80.1 79.8 79.5 79.6 80.9 81.4 82.4 83.6 84.1 84.7 85.4

647.5 654.9 661.5 668.1 674.6 680.7 689.5 698.2 706.4 713.9 720.9 730.3 737.4 744.3

Agriculture (%)

Rural (%)

60.1 59.7 58.5 56.4 54.3 52.2 50.5 49.9 49.8 50.1 50.0 50.0 50.0 49.1

73.7 73.3 73.0 72.7 72.3 72.0 71.1 70.2 69.4 68.6 67.9 67.2 66.4 65.6

NBS, China Statistical Yearbooks (1990–2003).

total number of rural workers) or cities through migration (120 million or 23% of the total number of rural migrants), considerable surplus labor still exists in rural areas. At present, the PRC’s agricultural productivity is less than 20% that of nonagricultural productivity, a very low level compared with even Indonesia, where agricultural productivity is 25% of nonagricultural productivity (Brooks and Tao 2003). This means that there is still a huge stock of surplus labor in rural areas. The term often used to describe this situation is “hidden unemployment,” or underemployment. This “unemployment” is hidden because rural people have access to land, which means that there is at least some outlet for their labor and some way for them to obtain a livelihood, no matter how meager. As shown in Table 8.9, the share of agricultural employment in total employment has been constantly and significantly higher than the share of agricultural GDP in total GDP. In 1990, the agriculture sector employed 60.1% of the labor force and produced about 27.0% of GDP. In 1995, the share of agricultural employment declined slightly to 59.7% while that of agricultural GDP dropped to 20.5%. By 2003, the agriculture sector employed slightly less than half of the nation’s labor force, while it produced less than 15% of GDP. This implies that agricultural productivity is only around 17% that of nonagricultural productivity. Although the level of urban unemployment in PRC is similar to that of other countries in Asia, rural hidden unemployment

527 The Labor Market in People’s Republic of China

appears to be higher because of the low productivity of the PRC’s agriculture sector compared with Asian standards (Brooks and Tao 2003). A high degree of hidden rural unemployment denotes pressures to obtain decent and productive work in both the rural sector and the low-end urban sector in which farmers seek work. Therefore, despite increasing migration and increasing rural nonagricultural employment, considerable surplus labor remains present in the country’s agriculture sector. One useful way to understand “hidden unemployment” involves comparing the average productivity of nonagriculture to that of agriculture. If the average productivity of nonagriculture is used as a benchmark, rural hidden unemployment can be estimated to represent around 275 million (where hidden unemployment is defined as low-productive employment regardless of working time). If the benchmark were to be set more modestly at one third of the productivity of nonagricultural workers, in line with that in other Asian countries, rural hidden unemployment would be around 150 million workers (OECD 2002). Besides the more commonly used concepts of “surplus labor” or “rural underemployment,” explicit rural unemployment has also emerged since the late 1990s. This includes farmers who become dispossessed through land requisitions, workers who are laid off from TVEs, and rural cadres and teachers who are laid off on account of ongoing tax reforms and local government restructuring. The first major source of unemployment in rural PRC arises from the process of requisitioning land in the course of urbanization and transportation construction. Each year about 2 million–3 million farmers lose their land to requisitions associated with urban expansion and infrastructure development. A frequently cited estimate is that between 1987 and 2001, legal land requisitions (that comply with the law and have been approved by higher-level governments) for urban and infrastructure development reached 2.26 million hectares, with at least 34 million farmers losing at least half of their land. If illegally expropriated land is added, the number of dispossessed farmers may reach 40 million–50 million. Among the dispossessed farmers, those who were relatively young and more educated were generally better able to find off-farm jobs. However, most of the dispossessed farmers who became unemployed tended to be middleaged workers with relatively low education and skills levels.13 Because of this and poor access to training and labor market information, many dispossessed farmers are particularly vulnerable to becoming unemployed. A survey carried out in 58 villages across the country by the Research Center of Rural Economy (RCRE) at the Ministry of Agriculture found that among the 13,554 working age workers whose land had been requisitioned between 1999 to 2002, 8,771 found employment in both formal and informal sectors; but there were 4,783 workers (35.2% of the total) who had the willingness and intention to work

528 Ran Tao

but could not find any off-farm employment. The same survey also found that male workers aged 45–59 and female workers aged 35–54 constituted 42.3% and 44.1%, respectively, of all the unemployed dispossessed farmers. For these farmers, even training and job information services were insufficient to help them find employment (Tu 2004). Another category of unemployed rural people are the laid-off workers from TVEs. In the late 1990s and early 2000s, local governments across the country found themselves trapped by huge debts owed to local banks and rural credit cooperatives; they had to close most of the TVEs. With the TVE restructuring and closures across the nation, staff downsizing became inevitable. As a result, TVE employment declined slightly from a peak of 135 million in 1996. By 1998, TVE employment had suffered a decline of 10 million, to 125 million workers, though it gradually recovered to 135 million by the early 2000s. In the process of TVE restructuring, most workers who had been farmers prior to their employment were simply laid off without any monetary compensation. But given the temporary nature of work in these enterprises and the lack of employment contracts, many of these workers had not assumed the existence of any guarantees in their labor relationships with the TVEs. The impact of being laid off from TVEs differed depending on whether the redundant workers lived in the developed coastal regions or in the agricultural interior provinces. In the former, the TVEs employed a large proportion of the workforce. For example, in Suzhou, Jiangsu Province, in 1994, 1,290,000 people worked in TVEs, but by 1997 the number had declined to 900,000, a reduction of 30%, and by 2000 52% of them remained unemployed (Murphy and Tao 2005). Owing to a high population density and a low per capita allocation of land, and the fact that the TVE jobs in Jiangsu were often part of the settlement for requisitioned land, most of the laid-off workers had only a little “subsistence” land to fall back on. By contrast, in most agricultural provinces, TVE employees usually had both subsistence land and contract land, which they continued to farm after gaining their off-farm jobs. In fact, in the poorer localities it was often precisely because agriculture contributed a sufficient portion to the subsistence of the workforce that these enterprises had been able to pay minimal wages and so afford to operate in the first place. For laid-off workers in the poorer regions, the usual recourse following retrenchment has been to return to full-time farming or to migrate to the cities in search of temporary work. A more recent source of rural unemployment derives from the ongoing rural tax reform and local government restructuring. It is widely agreed among PRC scholars that local governments are overstaffed and have expanded too rapidly, particularly since the mid-1990s. The PRC has witnessed significant increases in both formal and informal government staff numbers since the late 1990s. Much of the increase has arisen from the transfer of staff who had been made redundant on account of local SOE and TVE restructuring. In formal

529 The Labor Market in People’s Republic of China

posts, most of the increase went to the relatively independent public service units, the “public service posts” (as compared with the “administrative posts”) within government administration. In 1994, the number of employees on the government payroll was 22.5 million, but by 2000 the number had increased to 29.6 million. At present, there are 12.85 million employees on the government payroll at the township level alone, and of these, 6.9 million are school teachers (Zhao 2005). In 2002, the PRC initiated a rural tax reform that was intended to gradually phase out all agricultural taxes and fees on farmers. According to the tax reform, local governments cannot levy money from farmers, while they receive only limited funds from upper level transfers. From the very beginning, the restructuring of rural governments and staff reductions were core components of the rural tax reform, because the central authorities realized that downsizing had become essential for making the savings needed to offset the revenue lost through bans on local government fee levies. Under the huge fiscal pressure arising from the fiscal shortfalls stemming from the rural tax reform, local governments had to downsize the bureaucracy and cut personnel. Many villages, townships, and school districts were merged to achieve greater scale efficiency for the provision of services. As a result, significant numbers of local cadres and teachers became redundant. Some were laid off by township governments and schools, and others were simply asked to go home while receiving 60–70% of their salaries. The Ministry of Civil Affairs reported that 876 townships in 20 provinces had been dissolved or merged in the first 9 months of 2004, bringing cuts of some 86,400 jobs and budgetary savings of CNY864 million (Murphy and Tao 2005). In the long run, a full restructuring of local government at township and even county level needs to be carried out, and the downsizing of millions of existing fiscal dependents will be inevitable. Although some of the more able, younger, or more educated staff cut from the township government agencies and local schools may find jobs by themselves, a significant number of redundant staff will find it difficult given their age, education, and limited working experience. 8.3.6

Wages

In the PRC, wage statistics are incomplete. The Government only publishes wages for formal sector employees. Table 8.10 lists average wages and its indexes for different types of ownership between 1980 and 2003, as provided by the NBS. It can be seen that the average real wage gains for all types of ownership were relatively low between 1995 and 1997, but then accelerated after 1998. Such a trend has continued into the current decade despite slow job growth, extensive layoffs, and a modest deflationary trend. Wage behavior in the state sector is particularly noteworthy because its real growth has outpaced those of

Table 8.10 Average Wage and Indexes of Staff and Workers by Ownership Indices (preceding year=100) Average Money Wage (CNY)

Year

762 1,148 2,140 2,340 2,711 3,371 4,538 5,500 6,210 6,470 7,479 8,346 9,371 10,870 12,422 14,040

Source:

803 1,213 2,284 2,477 2,878 3,532 4,797 5,625 6,280 6,747 7,668 8,543 9,552 11,178 12,869 14,577

Units of Other Types of Ownership

623 967 1,681 1,866 2,109 2,592 3,245 3,931 4,302 4,512 5,331 5,774 6,262 6,867 7,667 8,678

1,436 2,987 3,468 3,966 4,966 6,303 7,463 8,261 8,789 8,972 9,829 10,984 12,140 13,212 14,574

Average Real Wage

Total

StateOwned Units

Urban CollectiveOwned Units

Units of Other Types of Ownership

114.1 117.9 110.6 109.3 115.9 124.3 134.6 121.2 112.9 104.2 106.6 111.6 112.3 116.0 114.3 113.0

113.9 117.3 111.1 108.5 116.2 122.7 135.8 117.3 111.6 107.4 106.1 111.4 111.8 117.0 115.1 113.3

114.9 119.2 108.0 111.0 113.0 122.9 125.2 121.1 109.4 104.9 102.5 108.3 108.5 109.7 111.6 113.2

137.0 110.3 116.1 114.4 125.2 126.9 118.4 110.7 106.4 97.7 109.6 111.8 110.5 108.8 110.3

NBS, China Statistical Yearbook (various years).

Total

StateOwned Units

Urban CollectiveOwned Units

Units of Other Types of Ownership

106.1 105.3 109.2 104.0 106.7 107.1 107.7 103.8 103.8 101.1 107.2 113.1 111.4 115.2 115.5 112.0

106.0 104.8 109.7 103.2 107.0 105.7 108.7 100.4 102.6 104.2 106.7 112.9 110.9 116.2 116.3 112.3

106.9 106.6 106.6 105.6 104.1 105.9 100.2 103.7 100.6 101.7 103.1 109.7 107.6 108.9 112.7 112.2

122.5 108.9 110.5 105.3 107.9 101.5 101.4 101.7 103.2 98.3 111.0 110.9 109.7 109.9 109.3

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1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Total

StateOwned Units

Average Money Wage

Urban CollectiveOwned Units

531 The Labor Market in People’s Republic of China

the urban collective sector and other sectors (including the private sector) by a significant margin since 1998. It is precisely during this period that huge layoffs were made in SOEs. Here the wage behavior of SOEs shows a pattern of considerable, but incomplete, transition to a system governed primarily by market forces visible in the institutions surrounding the determination of employment. Given that the wages in the urban private sector, and to a less extent, urban collectives, are more marketized, wage increases in these sectors can be considered as roughly consistent with productivity growth in these sectors. A much higher growth in average wages in the state sector means that wage determination in this sector is still not fully marketized. On the one hand, excessive wage increases in the state sector imply an inability or unwillingness of SOE managers to control labor costs; on the other hand, they are a reflection of government intervention in the state sectors in wage determination. In fact, since 1998 state sector pay increases have become an instrument of expansionary macro policy. Official statements attribute declining growth momentum to insufficient aggregate demand, to which the Government has responded with large pay increases for state employees, specifically intended to boost consumption spending (Rawski 2002). Using household survey data from six provinces for 1996, Zhao (2002) found that controlling for worker characteristics, SOEs paid higher cash wages than urban collectives, but less than domestic private enterprises and foreignfunded enterprises. However, after accounting for payments in the form of employee benefits (pension, health care, and housing), Zhao concluded that state-sector workers earned significantly more than workers in urban collectives and domestic private enterprises; and that unskilled workers in foreign-invested enterprises earned significantly less than in the state sector. However, skilled workers earned more in foreign-funded enterprises than in the state sector. The existence of a wage premium implies that SOEs have higher labor costs and a wage system that does not reflect worker productivity. This may have contributed to large financial losses in the sector. Cai and Du (2004) also find evidence that sectors with a large state presence had increasingly higher manufacturing wages relative to other sectors during the 1990s, after controlling for regional wage differences. It should be noted that official wage statistics focus only on the upper strata of urban labor markets and therefore “cannot reflect changes in wages and labor cost conditions for labor-intensive industries in the PRC’s developed regions” (Rawski 2002). However, there is widespread duality in urban labor markets, with a formal sector consisting of labor in SOEs as well as in foreign and high-end private enterprises, and an informal sector consisting primarily of rural migrant workers. There is even an argument that the survival of lowwage labor-intensive industries in the entire coastal region depends on this duality, which effectively decouples the (low and stable) wages paid to migrant

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laborers from the (much higher and steadily increasing) pay scales attached to formal employment for regular urban residents (Luo 2003). Although official statistics do not cover the wages of those migrant laborers, various studies have provided valuable information. According to Chan (2005), in real terms migrant workforce incomes have been progressively falling. One survey shows that migrants account for only a third of the local population’s wages (He and Cheng 2004). The Ministry of Labor and Social Security recently recognized this in an official release stating that “Studies show the salary of a migrant worker in the Pearl River Delta area has grown by a mere CNY68 (US$8.20) over the last 12 years, far behind the increase in living expenses, and in real terms, wages are declining”(MOLSS 2004). In Guangdong, for example, the province with the largest number of migrant workers in the country, between 1992 and 2002 real wages actually fell, even though the local economy grew at double-digit rates. In the city of Dongguan (Guangdong province) GDP increased more than tenfold; yet, wages paid to several hundred thousand migrant workers had hardly risen (Qin 2003). At present, the PRC’s hourly labor cost in manufacturing at current exchange rates is about one thirtieth that in Europe and the US, one tenth that in Korea and Taipei,China, and one quarter that in Brazil and Mexico (Banister 2005). 8.3.7

Labor Market Segmentation

According to the World Bank (2005), though the PRC’s labor market has made great progress toward liberalization in the past two decades, there are still serious labor market distortions related to the hukou system, pensions, medical and unemployment benefits, as well as education for children. Under the hukou system and other labor-market-distorting policies, the labor market is still highly segmented with obvious boundaries between the urban and the rural, and the formal and the informal sectors. In the 1990s, migrant workers were required to apply for various permits and documents issued by governments in the departing and receiving regions to be legally eligible to move out of their hometown and search for a job in the urban sector (Cai 2000). By levying a fee on each permit and document, the Government artificially raises the costs of migrant labor leaving the countryside and coming to work in the cities. The governments in many large and medium cities have also issued regulations prohibiting enterprises to hire migrants in certain jobs and positions, further distorting the labor market. Cities face enormous employment pressure to employ laid-off workers from SOEs. The influx of rural migrant labor is viewed as adding to job pressure in the cities. With the hukou system still limiting permanent migration, labor market segmentation between urban and rural areas is still notable. Several studies have found that the marginal productivity of labor in state industries far exceeds that in rural industries, which in turn exceeds that in agriculture. Yang and

533 The Labor Market in People’s Republic of China

Zhou (1999) present estimates of the marginal productivity of labor for agriculture, industry, and services using PRC provincial data for the period between 1987 and 1992. The findings show that within this period, the marginal productivity of labor in state industries was 15–16 times that in agriculture; and the marginal productivity of labor in rural industries was 25–100% higher than in agriculture. These results are corroborated by other studies using more recent data. For instance, based on data covering the period 1987–1998, Cai et al. (2002) present evidence that the ratio of agricultural labor productivity to that in industry ranged between 12% and 17% across the eastern, central, and western regions, in 1998. Productivity differences across sectors are also very large. The greatest distortion in the labor market is the lack of mobility between agriculture and urban industry. The ratio of the marginal product of labor between urban industry and agriculture has risen steadily from 11.7 in 1978 to 23.6 in 1990 and to 33.9 in 2000 (World Bank 2005). Evidence of large productivity differences across sectors implies the existence of serious labor mobility barriers that fragment sectoral markets. Labor market segmentation is also reflected in an increasing wage disparity across regions. Based on a survey covering 60 cities and 10 provinces in 1989 and 1996, Knight et al. (2003) report strong evidence of interprovince divergence in earnings and income levels for the period 1988–1995. In the case of earnings, they find that a 10% higher initial income is associated with a 6 percentage point higher growth rate over that period. Analysis of the 60 cities also shows no sign of convergence in mean earnings and incomes in the period between 1989 and 1996. Within the urban sector, there is also empirical evidence of fragmentation between state and nonstate employment and segregation among different worker types within firms. Workers in PRC cities can be divided between those who work for the state sector (enterprises and government), the nonstate sector (e.g., urban collectives, foreign and private firms), and rural migrants. Empirical studies have shown that significant barriers still exist when changing jobs between the state and nonstate sectors; and that within a sector, rural migrants are seriously segregated from urban residents. A study by Zhao (2002) on six provinces and Beijing municipality finds that in 1996, SOE workers received an average total of CNY3,431 in nonwage benefits in the form of pension, housing, and health care, which amounted to 42.4% of their total income. This package of state-allocated earnings was surely an important factor explaining the reluctance of SOE workers to leave the state sector for private sector employment, despite the pressure on SOEs to lay off their workers. Using data from two urban household surveys conducted by the Chinese Academy of Social Sciences and the State Statistical Bureau in 1995 and 1999, respectively, Knight and Li (2003) found that interfirm wage differences increased during the period among all workers, and more so among low-paid workers than high-paid workers. They infer that interfirm mobility of workers was low.

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Employees of loss-making firms evidently preferred to hang on to their jobs, accepting wage cuts, rather than change jobs. Labor market segmentation in the urban labor market is more serious for migrants from rural areas. At present, migrant workers can only take up those jobs characterized by poor working conditions, with low pay and insecurity. Without permanent residence permits, migrants are a floating population.14 The floating population and local urban residents participate in segmented labor markets. A survey of the floating population in Shanghai found a clear division between that floating population and local residents in terms of occupational composition, living conditions, and income and benefits (Feng et al. 2002). It is common for the floating population to perform jobs that the urban workers refuse to do (Yang and Guo 1996; Feng et al. 2002). These jobs are often dirty, dangerous, and demeaning, common in industries such as construction and mining for males and sanitation and textiles for females.15 The floating population is not only disproportionately represented in the jobs that local workers do not want, but receive lower income and poorer benefits than urban workers. As Meng and Zhang (2001, p. 487) noted: “Not only do migrants take low-end jobs, but when they work in the same enterprise as do urban workers and perform the same kind of work, they also appear to be paid less.” In addition, few migrants have been able to access the forms of social security that accrue as a right to urban registered citizens (Solinger 1995, 1999). The floating population is often denied access to basic services enjoyed by permanent urban residents such as subsidized housing, subsidized medical care, and schooling for their children. In the construction sector where workers from the floating population are recruited by private contractors, those recruited are often not even registered for urban work or temporary residence. These workers are afforded no protection or benefits (Solinger 1999). In another study of occupational segregation and wage differentials between urban residents and rural migrants in Shanghai, Meng and Zhang (2001) find that rural migrants are treated differently from their urban counterparts in terms of occupational attainment and wages, after controlling for productivity-related characteristics, such as education, gender, and work experience. They also found that around 22% of urban residents who would have been better suited for blue-collar jobs were given white-collar employment, while 6% of rural migrants who would have been suitable for white-collar jobs were relegated to blue-collar positions.

8.4 Labor Market Policies 8.4.1

Labor Law and Labor Protection

As the PRC’s labor market develops, the issue of labor protection has become an increasingly important one and labor disputes have taken place

535 The Labor Market in People’s Republic of China

between workers and management over a wide range of issues, including contracts, wages, benefits, pensions, unemployment compensation, and working conditions. As a response, the state has made great efforts to institutionalize conflict resolution through legislation and institutional building. In the PRC, there are now three main labor-related laws—the Enterprise Law passed in 1988, the Trade Union Law of 1992, and the Labor Law of 1994—which provide a legal framework for the development of industrial relations at a time of economic restructuring and for the transition of many state enterprises to private ownership. They all contain clauses that potentially could empower workers through a number of important labor protection articles. The Trade Union Law stipulates that trade unions need to be established in firms to protect workers’ rights. The PRC has established industrial labor dispute procedures, and the law includes clauses on the right to a democratically elected union—statutes on a par with international standards. One provision in the Enterprise Law stipulates that state-owned and collectively owned enterprises are to contain a Staff and Workers’ Representative Congress, which has been given the legal power (on paper, at least) to supervise management and to codetermine or to veto certain management decisions. There is now a national labor dispute arbitration system, which is composed of some 3,000 labor dispute arbitration committees at county, city, and province levels. The Trade Union Law also stipulates that official unions must participate in the mediation of labor disputes that occur in the areas of their jurisdiction. Specifically, as related government regulations go further, union representatives chair mediating committees in enterprises, and are members of tripartite arbitration committees at county, city, and province levels. In practice, there is growing evidence that unions are willing to confront management to protect workers’ rights so long as workers’ claims do not go beyond state-sanctioned procedures. However, under current legislation, workers do not have the freedom to organize independent trade unions, nor do they have the right to strike (Chan 2005).16 In fact, the right to strike was removed from the Constitution in 1982 on the grounds that the political system had “eradicated problems between the proletariat and enterprise owners.” Work stoppages and slowdowns are deemed to be legal. The Trade Union law stipulates that in the event of any work stoppages, the primary goal of the union is to “assist the enterprise or institution in making proper preparations for resuming work and restoring work order as soon as possible”, regardless of whether or not the workers’ demands have been met. The Labor Law stipulates the maximum number of work hours, minimum wages, and minimum age to enter the workforce. A special section deals with normal working hours, mandatory rest periods, limitations on overtime, and overtime pay. The Labor Law provides for a normal work week of 44 hours (Article 36) and at least one rest day per week (Article 38). A State Council

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decree in March 1995 further reduced the official work week to 8 hours a day, 5 days a week. The Labor Law also has sections on the guaranteed minimum wage (Articles 48–49). The Law states general factors to be taken into account by local governments in setting minimum wages, such as the local cost of living for a worker and his dependents (Article 49).17 Furthermore, one of the core international labor rights, the right of collective bargaining, is guaranteed by the Labor Law (Taylor et al. 2003). In dealing with layoffs and redundancies, the Labor Law reflects a strong commitment to job security, at least for workers employed under fixed-term contracts or contracts of unlimited duration. An employer can only lay off workers if it is experiencing serious economic difficulties, has solicited the views of the company’s trade union, and has “submitted a report” to the labor authorities (Article 27); workers cannot be terminated simply to improve productivity and efficiency. Though those laws have helped define workers’ rights more clearly, it is critical to distinguish between laws and regulations as they are written on the books and their implementation and degree of compliance (Ohnesorge 2003). Notwithstanding the increasing legislative activity defending employees’ rights, there has been a relative lack of enforcement of the law and there are constant violations of workers’ rights, even in some state-owned factories. Workers in both the state and nonstate sectors are laid off with impunity, for instance, without regard for the legal procedures (Chan 2005). As economic restructuring steamed ahead at a rapid pace in the 1990s, and as labor violations became more serious and widespread, workers’ protests had by the mid-1990s increased in scale and frequency. The number of labor disputes that went to arbitration under legal provisions leaped from 19,000 in 1994 to 184,000 in 2002 (Fu and Choy 2004). The pro-labor clauses that had been inserted into the laws helped channel some grievances. The majority of these cases involved serious labor abuses, such as arrears in workers’ wages (both in state and nonstate enterprises), state workers being laid off, irregularity in pension payments, excessively long work hours, a lack of compensation for industrial injuries, and contraction of work-related diseases (Chan 2005). When the legal channels fail to resolve problems, protest activities escalated into collective street action. In the state sector, workers continued to hark back to “collective memories of state socialism” (Lee 2000), and were often motivated by a crisis of subsistence among workers caused by managerial corruption (Chen 2000). Overtime work is at present very pervasive for many workers in the informal sector. The provisions on the maximum number of work hours are implemented only in the public sector and large companies. There are, however, many reports of long hours for many migrant workers in the informal sector where a vast amount of overtime is often imposed in violation of national laws—

537 The Labor Market in People’s Republic of China

at its worst, up to 100 hours or more a week, especially in export firms that compete mainly on price (Rawski 2002). In addition, there are numerous reports of employer abuse, particularly in the south and in rural areas. Detailed accounts from PRC sources, many reproduced in Chan (2001) and Thireau and Hua (2003), show that PRC workers often face hazardous conditions, harsh discipline, and financial malpractice on the part of employers. In extreme cases, these reports describe circumstances tantamount to indentured servitude. Many migrant workers hired by foreign-invested firms have protested their working conditions, including 14- to 18-hour workdays with no overtime pay, paltry and unnourishing meals, a rigid workplace regime of enslaving regulations, physical brutality, and the nonpayment of wages (Chan 2001). Another serious issue is an increasing amount of unpaid wages. According to Chan (2005), reports on migrant workers not being paid were regarded as isolated incidents in the mid-1990s, but the issue has become endemic in recent years. Every year just before the New Year, local governments would launch “chasing after wage-arrears campaigns.” By 2004, even the central Government began to see a need to intervene, though new wage arrears still became evident. According to one survey, 72.5% of migrants have suffered from varying degrees of wage default. There is little legal protection against unpaid wages. Firms can easily default by closing down the factory and opening another (Lai and Huang 2004). The situation has become so serious that one PRC newspaper report has declared “Owing wages has become a ‘custom’ ” (Jian 2001). To take the figures on the construction industry as a guide to the enormity of the problem, estimates of unpaid wages in the state-regulated construction sector in the past few years amount to CNY27.8 billion in 2001, CNY33.7 billion in 2002, and CNY36.7 billion in 2004 up to August (State Council 2004). Yet these are figures for only one part of one industry sector comprising 38 million migrant workers. Reports about migrant workers in export-oriented factories indicate that the problem is possibly even more serious there, and the cumulative amount of unpaid wages is higher. According to the All-China Federation of Trade Unions (ACFTU), the total amount of wage arrears reached CNY100 billion by the end of 2003 and remained at this level through 2004.18 A long-standing problem in labor protection in the PRC is industrial safety. Wonacott (2003) offers one of many reports that confirm a high incidence of accidents and workers’ injuries in specific enterprises and localities. Between January and November 2003 alone, more than 120,000 people died in workrelated accidents. In the first half of 2004, total work-related accidents reached 439,391, with a death toll of over 60,000 and daily deaths of 350 (NBSP 2004). Safety concerns have figured prominently in the recent closure of large numbers of small-scale coal mines. In 2002, the State Council was in the process of drafting legislation on industrial safety for submission to the National People’s Congress (Rawski 2002).

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In short, with the aim of increasing productivity, economic growth, and revenues, local governments often side with firms, and lack incentives to protect workers’ rights, so as to ensure that labor costs remain low and social peace and order are guaranteed. For at least a decade local officials have turned a blind eye on malpractices in foreign-invested firms in their regions in an effort to attract as much foreign capital as possible. 8.4.2

Social Security

Consistent with labor market segmentation, the PRC’s social security system is also segmented. It consists of two separate subsystems, urban and rural, with different organizations and benefits. Furthermore, until the reform of the past few years, the urban system, as a carryover from the prereform period, was also segmented, by the ownership status of the work unit (state/nonstate) (Hussain 1993). Under such a system, employees of the Government, SOEs, and of some foreign-funded enterprises, almost all in urban areas, have traditionally benefited from subsidized housing and comprehensive labor insurance, disability and old-age pensions, maternity and sickness benefits, medical care and, since 1986, unemployment benefits. However, those in rural areas and in the urban informal sector have enjoyed almost no, or very limited, social security coverage and benefits. As generally recognized in the PRC, work-unit-based social welfare comprising subsidized housing and labor insurance is no longer sustainable. After a period of piecemeal reforms to stop the system from collapsing, as well as localized experiments, the State Council has over the past few years promulgated a number of regulations to institute an urban social security system to replace the inherited work-unit-based welfare system. According to Hussain (2000), a number of significant changes have occurred: (i) Extending social security schemes, previously confined to state and urban collective sector employees, to all urban wage workers regardless of the ownership status of the work unit, but not to wage employees in rural counties. (ii) Centralizing the oversight and administration of social security schemes in the Ministry of Labor (renamed the Ministry of Labor and Social Security) and its territorial subsidiaries, the provincial and municipal Bureau of Labor and Social Security (BLSS). Gradually transferring the management and administration of social security schemes from work units to the BLSS. (iii) Replacing the financing of social security by work units alone with a joint financing system by employers, employees, and the Government. The introduction of employee contributions is

539 The Labor Market in People’s Republic of China

accompanied by the introduction of individual accounts for oldage pensions and, yet to be implemented, health insurance. Further, at some future date the financing of social security schemes is to be shifted from the municipal to the provincial level so as to ensure adequate risk pooling. (iv) Introducing a social relief scheme for urban households falling below the poverty line. Unemployment Insurance The huge layoffs in the late 1990s and early 2000s have created a number of immediate challenges to facilitate the shift of dislocated workers to productive jobs elsewhere. Given that some of the laid-off workers have few prospects of finding new positions requiring their old skills or offering the pay and benefits provided by their former employment, government policies to provide an effective safety net for dislocated workers to prevent poverty are necessary (Cai et al. 2004). The decline of uncompetitive industries has turned some localities, particularly in the northeast and northwestern regions, into depressed areas with very high rates of unemployment and little hope of rapid recovery (Rawski 2002). To alleviate the negative consequences of labor force adjustment, the Government has established various social welfare programs. After initial experiments in Shanghai as early as 1993, a special policy to support newly laid-off (xiagang) workers was formally implemented nationwide beginning in 1998. Intended for permanent workers employed before labor contracts began in 1986, or for contract workers whose jobs were ended before their contracts expired, the policy provided 3 years of basic living subsidies, as well as benefits (e.g., health care and pension contributions) based on 60% of the worker’s final wage (Cai et al. 2004). The Government initially required restructured SOEs to establish reemployment centers for laid-off workers to provide retraining services and job search assistance. They were also responsible for paying the pension insurance and a basic living allowance (usually lower than the previous wage) for laid-off workers. These workers could stay in the reemployment centers until they found a job, or for up to a maximum of 3 years. If the laid-off worker remained unemployed for more than 3 years, the employer could sever the relationship and then the worker became explicitly unemployed. The xiagang subsidies drew upon unemployment insurance funds as well as central and local budgetary expenditures and enterprise contributions, and were intended as a temporary policy to end on 1 January 2001. Official documentation of the implementation and history of the xiagang program, summarized in Zhang (2003), portrays something of a success story; most workers received mandated benefits while retraining centers had a high success rate with job referrals.

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However, Giles et al. (2004) find significantly poorer performance in terms of both benefit coverage and reemployment. The Government began to standardize its unemployment benefits program in 1999. The program is financed by payroll charges and provides subsidies for up to 2 years depending on how long the worker and/or the work unit has participated in the unemployment benefits program. Workers whose 3 years of xiagang subsidies expired become immediately eligible for unemployment benefits. Thus, some workers laid off from the state sector had access to 5 years of unemployment benefits. Since 2002, newly laid-off workers receive only unemployment benefits, and the reemployment centers were phased out by 2004. This means that further market-oriented reforms will essentially eliminate the traditional work unit system that combined employment ties with the delivery of a broad array of social services. In other words, in the future employers will hire and fire workers in line with the dictates of market forces. Workers, whether employed or temporarily idle, will have access to health, pension, unemployment, and other social benefits from public agencies, rather than through their employers. Worker–employer relations will move in the direction of simple contractual exchanges of labor services for wage payments. At present, all unemployed staff and workers of urban enterprises (i.e., SOEs, urban collective enterprises, foreign-funded enterprises, urban private enterprises, and other urban enterprises) are covered by unemployment insurance. However, rural workers, small farmers, and civil servants working for national institutions are excluded. Unemployed individuals may receive unemployment benefits, provided they and their enterprises have fulfilled their respective responsibilities to pay the premium for at least 1 year, the termination of employment was not voluntary, they have registered as unemployed, and they want to become employed. The unemployment insurance payment is set at a level lower than the local minimum wage but above the level of the minimum living standard of urban residents. The unemployment insurance premium to be paid by an enterprise and an individual is 2% of the total payroll and 1% of the individual’s wage, respectively. Where the premium has been paid for an aggregate period of at least 1 year but less than 5 years, the entitlement period for unemployment benefits is 12 months. Where the premium has been paid for at least 5 years but less than 10 years, the entitlement period is 18 months. Where the premium has been paid for 10 years or more, the entitlement period is 24 months. If the unemployed individuals still fail to secure employment after the expiry of the entitlement period, they can apply for social relief from the Ministry of Civil Affairs. Social Assistance Unemployed workers who have not obtained new employment on expiry of the entitlement period of unemployment benefits may apply for social relief

541 The Labor Market in People’s Republic of China

in accordance with the relevant provisions. Social relief is protection provided by the nation in the form of social subsidy to those facing difficulties due to accidents or natural disasters, etc. Usually, the beneficiaries are people who are not entitled to social insurance. They are individuals and families who, for various reasons, have never participated in social insurance programs or who are still living below the poverty line after receiving social insurance benefits. Social relief includes disaster relief, special relief, poverty relief, “Helping the Poor” programs, and unemployment relief. The main difference between social relief and unemployment benefits concerns the nature of the recipient. The recipients of the former are mainly the elderly, the infirm, the sick, and the disabled in cities and villages who do not have a regular income and are unable to provide a bare living for themselves. Most of these people have lost or do not have the capacity to work. A second difference is the entitlement period: social relief has no fixed entitlement period, while unemployment benefits are granted for a set period. If the unemployed person finds a job, or has failed to find one when the entitlement period expires, he or she cannot access the unemployment benefits any more. Unemployment benefits amount to 120–150% of social relief payments. By 1998, most cities had also begun providing relief through the Minimum Living Standard Guarantee (MLSG) program to households whose income per capita fell below designated urban poverty lines. This is a type of urban social assistance program. The minimum living standard is decided primarily on the basis of the urban residents’ average income and consumption level per capita; the price level of the previous year; the consumption price index; the local cost necessary for maintaining a basic livelihood; other connected social security standards; the materials for the basic needs of food, clothing, and housing; and expenditure on children’s compulsory education. The MLSG is now financed mainly by local budgets, though there has been some central subsidy to poor regions. For local governments that have very tight budgets, the central Government provides financial support. This financing began in 1999 and expanded significantly in 2001, when expenditures reached CNY542 million and the number of beneficiaries reached 1.17 million (Zhang 2003). In recent years, the coverage of MLSG has been extended very rapidly. By the end of 2003, 22.47 million urban low-income residents were already recipients, with an input of CNY15.6 billion and monthly benefits per capita of CNY58 (Ministry of Civil Affairs 2004). The MLSG, however, provides a much lower level of support than that available to involuntary early retirees, xiagang workers, and those eligible for unemployment benefits. In rural areas, there is a very limited relief system directed to those who are considered truly destitute, who lack any means to support themselves. This targets those with no children, no work ability, and no reliable sources of income (“Three-Nos”) with “Five Guarantees” (guarantees for food, clothing, housing, medical care, and burials) in rural areas. Funding comes mainly from local

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community fee collections as well as local government funding. Nonetheless, financial constraints mean that the system is limited in its coverage to around 3% of the rural population, compared with 90% coverage in urban areas (Cook 2002). Pensions In the late 1990s, unable to shed redundant workers, the Government continued to inject resources into money-losing SOEs to keep them alive. In the meantime, making pension benefits transferable across firms became a prerequisite for enterprise reform. Setting up individual accounts represents a possibility since it means that when workers change employment, they will be able to take their past contributions with them. In 1995, a major step was taken by the State Council to deviate from a pure pay-as-you-go system by establishing individual pension accounts (State Council 1995). Each pension pool would comprise two components: a pay-as-you-go portion and a funded portion. In 1997, the Government unified the basic old-age insurance system for enterprise employees in urban areas across the country by implementing a “social pool plus personal accounts” scheme. Employees who have reached the legal retirement age (60 for male employees, 55 for female cadres, and 50 for female workers) and who have paid their share of premiums for 15 years or more, are entitled to a basic old-age pension every month after retirement. The old-age pension consists of two parts: a base pension and a pension from the personal account. A retiree will not only receive a monthly sum of the base pension that is about 20% of his or her average monthly wage in the previous year. He will also get a monthly payment from his personal account that is 1/120 of the total accumulated sum in his personal account. At present, the pension regulations require that 11% of an employee’s wage be deposited every month in his/her personal account for future delivery of the pension from his/her personal account. The state adjusts the level of the basic old-age pension by following the changes in the price index of living expenses for urban residents, as well as average wage increases. The PRC’s basic old-age insurance covered only SOEs and collectivelyowned enterprises in urban areas and their employees. With more laid-off workers emerging in the second half of the 1990s, workers worry that they would lose social security benefits upon leaving the state sector. It has thus become an urgent task to set up a pension program in the nonstate sector so that the social security clock for former state workers continues after they shift to the nonstate sector (Zhao and Xu 2002). Furthermore, a serious financial crisis began to surface in the government-sponsored pension programs. Between 1993 and 1998, while the number of system participants grew by 15.5%, the number of retirees went up by 67.5%. The system dependency ratio rose by 10

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percentage points in merely 5 years. A rising system dependency has been accompanied by a shrinking pension surplus and the emergence of deficit after 1998. Many areas experienced payment delays and protests by pensioners. In response, the Government expanded pension coverage to include foreigninvested, private, and other types of enterprises in urban areas, as well as their employees. All provinces, autonomous regions, and municipalities directly under the central Government can make provisions to include persons engaged in individual businesses of industry or commerce in the basic old-age insurance in accordance with the specific conditions in their localities. In 2002 the PRC further expanded its basic old-age insurance coverage to all those who were employed in the informal urban sector. In 2003, the number of people participating in the basic old-age insurance scheme across the country reached 155.06 million, 116.46 million of whom were employees. However, up to now, government efforts to establish a unified pension system across the nation and expand its coverage to the private sector have only met with very limited success. The reason is that the pension obligations for the existing retirees from SOEs have been so large that fees collected from the existing workforce are not even sufficient to cover payments to existing retirees, making the system a typical pay-as-you-go one. There are also difficulties in expanding the pension system to the informal sector (Zhao and Xu 2002). According to regulations, employers and employees should contribute jointly to a forced savings account (an individual account). Rural workers are no exceptions. Nevertheless, the current methods of contribution, working together with the prevailing labor market conditions, make it almost impossible for rural workers to be covered properly. According to the regulation on individual accounts, a worker should pay 10% of his or her salary to the individual account and the employer should pay 34% of the salary once the worker has paid his or her contribution. However, in practice, employers are reluctant to contribute to social insurance for rural employees. Many urban employers find their contribution of 34% an unbearable burden. Moreover, rural workers should be able to encash their social insurance contributions once they decide to move on. However, the regulation requires employers to apply for termination of the social insurance account on behalf of the rural workers. These workers, however, seldom stay at one job for a very long time. Since employers have to handle the application for withdrawal of social insurance contributions, they are reluctant to incur these extra administrative costs. As a result, it is very likely that rural workers will leave their job without encashing their contributions. In 2001, the Government implemented a pension reform plan on a pilot basis to explore the feasibility of a transition from the pay-as-you-go system to a system combined with individual accounts. The reform includes: (i) gradually establishing personal accounts so that funds can be accumulated; (ii) probing

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ways of preserving and increasing the value of the funds; (iii) changing the way in which the base pension is calculated and paid, whereby the amount of the base pension is more closely linked to the duration of payment of the premium; (iv) if an employee has participated in the basic old-age insurance program and paid the premiums for 15 years, entitling the employee to a higher rate of pension for every additional year of payment; and (v) unifying the procedures of premium payment by those who are employed in a flexible manner, whereby the base of their premium payment is uniformly set at 20% of the average wage of local employees. The pilot project was first conducted in Liaoning Province, and was expanded to Jilin and Heilongjiang provinces in 2004. Given the huge deficit in the pension account, the central Government also began to increase the subsidy outlays from the government budget to support basic old-age insurance funds. The state has called upon governments at all levels to increase the momentum of restructuring their financial expenditures and to raise their input into social security. In 2003, state budgets at all levels contributed CNY54.4 billion toward basic old-age insurance funds, of which CNY47.4 billion came from the central budget. In addition, the central Government created a national social security fund in 2000. Its sources include: funds acquired from reducing state shareholding, stock ownership assets, funds from the central budget, funds raised by other means approved by the State Council, and investment returns. The national social security fund is administered by the National Social Security Fund Executive Council and has provided an important financial reserve for the implementation of old-age insurance and other social security programs. By the end of 2003, it had accumulated over CNY130 billion.

8.5 Key Research Issues The economic reforms of the past two and a half decades have gradually loosened labor mobility restrictions across sectors and regions. An increasing number of workers from rural areas and state sectors are now seeking employment in cities and the private sector. However, given a still sizable rural surplus labor, emerging urban and rural unemployment, and increasing income disparities between urban–rural regions and within urban areas, the country still faces serious challenges in generating good and decent employment opportunities for the poor and in constructing an effective social safety net for the weak. To meet these ends, government policies will need to further encourage private sector job growth through industrial deregulation and small and medium enterprise development; reduce barriers to labor mobility through hukou reform;

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improve worker skills through labor training programs; and strengthen livelihood security through construction of a social safety net. 8.5.1

Private Sector Growth and Policy Changes

The PRC’s booming private sector, especially the services sector, has been the major source of job growth in the past decade. Given the declining capacity of the state sector to create new jobs, the private sector will continue to be the major source of economic development and job creation in the short and medium term. Since there is already significant overcapacity in manufacturing, the services sector will have to be the major source of job growth. The potential for growth is still significant in areas such as financial and insurance services, business management, technical consulting, telecoms, law, distribution, sales, marketing, advertising, public relations, accounting, computer programming, e-commerce, logistics, travel, and tourism. There are also great employment opportunities in the rapidly developing urban informal services sector, such as restaurants, retailing, construction, repair, housing, and delivery services. The central Government has stressed employment generation as one of its main policy priorities, and emphasized the need to support private sector development. However, nonstate firms still face numerous hurdles to growth. Access to capital remains difficult for them because tight ceilings on bank lending rates limit the ability of banks to price in the added risk of lending to private enterprises, and the number of new stock market listings is strictly limited by the authorities, as is private corporate bond issuance (Brooks and Tao 2003). To enable small and medium private firms to borrow more easily from the financial sector, the Government needs to gradually deregulate the entry of new private banks so that the latter can channel more resources to the private sector. Moreover, private firms face significant regulatory barriers to entry. Despite the beneficial impact of two decades of reform, the economy remains burdened by a vast array of unproductive regulation. Reform is complicated by the regulators’ desire to preserve their own power and authority and by the need to identify and preserve (or expand) the beneficial regulations that effective markets require. Unproductive regulation, including the costly and corrupt system of examination and approval as well as the vast web of semi-legal fee collection, imposes immense costs on businesses, and extracts a high price in terms of forgone employment opportunities (Rawski 2002). Removing such restrictions and promoting a better environment for further employment growth in urban private sectors and service industries are essential steps to which future policy should be directed. In Beijing and Shanghai, the municipal governments are now helping surplus workers from SOEs set up new small businesses on their own by easing registration procedures and offering tax holidays.

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8.5.2

Promoting Labor Mobility and Hukou Reform

To encourage greater labor mobility, restrictions on internal migration need to be further reduced to allow surplus rural workers to move into the cities and to allow unemployed and laid-off workers in regions of low employment growth to relocate to regions of higher employment growth. Though the hukou reform has progressed in some small and medium cities, larger cities where most jobs are located still put very high entry barriers for permanent migration from rural areas and from other cities. Even as the urban hukou-linked benefits have been declining as the country’s economic reforms have progressed, the hukou system still excludes rural migrants from enjoying some key urban public services such as social assistance, city-level housing subsidy through locally funded public housing schemes, and equal access to urban public schools. Though recent years have witnessed developments to provide social assistance and housing security for urban residents on a broader basis, most rural migrants who have already lived in cities and derived most of their incomes from urban sources as well as local dispossessed farmers are still largely ignored. Therefore, gradually extending such public services to more migrants will be essential to promote urbanization. 8.5.3

Improving Workers’ Skills

Expanding migration from rural to urban areas is essential to raise farmers’ incomes and reduce rural poverty. More migration may mean higher incomes both for migrant farmers and for those who stay in rural areas since urban jobs bring higher incomes for migrants; those who stay in rural areas can also benefit from increasing farm size by cultivating larger plots. However, in the context of the PRC’s rapid industrialization, urbanization, and globalization, human capital gained from both formal education and learning by doing is more and more important for a worker to adapt to modern technologies, in both the urban and rural sectors. The central Government has initiated a range of vocational training programs that aim to help migrants obtain decent jobs that would enable them to settle permanently in the cities—thereby accelerating urbanization and releasing rural land for mechanized-scale farming. In 2003, a national vocational training program took the form of an ambitious government-initiated plan to provide free or subsidized training for rural people who were either preparing to migrate or who were already in the cities. This plan is being financed by funds allocated by central and local governments; in 2004, the central Government allocated CNY300 million (US$36.1 million) to this project (Murphy and Tao 2005). Under the plan, over 7 years, an estimated 70 million migrant workers will receive training or additional professional training.

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In the cities, the central Government has also launched several retraining programs to help laid-off workers reskill themselves and enhance their reemployability. A pilot “Reemployment Project” was initiated by MOLSS in 30 municipalities in 1994 and then expanded to 200 cities in 1995–1996. Following the success of this pilot project, MOLSS in 1998 launched another reemployment project called “Ten Million in Three Years”, which intends to provide reemployment training and job counseling services for 10 million laidoff workers for 3 years. In 2001, a second round of this project was launched by MOLSS for 2001–2003. Although the objectives of the various training programs targeting rural migrants and urban laid-off workers are very positive developments, the implementation of these programs has experienced difficulties. One problem is that, in some regions, the money designated for training courses has been redirected toward the alleviation of county-level governments’ fiscal pressures. Following the rural tax reform, funds have sometimes been used to supplement cadres’ wages. Another problem is that some training courses are not tailored to the real needs of the workers being retrained. Therefore, further expansion of such programs need to be tailored to the job opportunities and to the ages and backgrounds of the workers concerned. In addition, more market research needs to be paired with the provision of training, so that people are prepared to offer the types of skills on demand in their own areas. 8.5.4

Strengthening Social Security

The PRC faces serious challenges for strengthening its social security system. Considering the current and foreseeable future large unemployment affecting the country, establishing a nationwide social security system and appropriate social safety net is essential for the PRC’s long-term development and stability. Given the urban-rural segmentation in social security provision, the immediate priorities are different in rural and in urban areas. Rural areas are unaffected by the collapse of the inherited social security system, which did not apply to them. The principal task there is establishing income maintenance schemes and health care insurance systems, almost from the ground. In urban areas, the priority is to establish a social security system with higher-level pooling (at the province level) in order to address the growing problem of urban poverty. State and urban collective enterprises that have been the mainstay of social welfare in urban areas are increasingly unable to carry on with their traditional social welfare role. With a series of reforms in recent years, the blueprint of the alternative to the work-unit-based social security system in urban areas is almost complete. However, there are still significant administrative and financial constraints that hinder effective implementation.

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The current social security system is characterized by its limited funding (insurance funding per unemployed worker is about CNY210 in early 2003), small coverage (less than 15% of the total population and the rural areas are barely covered), lack of detailed macro policy analysis and coordination among relevant ministries, as well as deficiencies in implementation. All these issues have to be addressed through concerted, well-coordinated effort across government agencies (such as ministries of labor, personnel, finance, civil affairs, and State Development and Reform Commission), public and private sectors, and urban and rural areas. According to Hussain (2000), municipal governments lack the administrative structure that is needed for a socialized (government-managed) social security system given the long history of reliance on work units for administering the labor insurance schemes for their employees (and indirectly for most of the urban population). Therefore, strengthening the administrative capacity of social security agencies is now becoming urgent. Furthermore, there is a need to heighten the scope and level of social pooling—the state has aimed at enhancing the social pooling level of old-age insurance (pension provision) up to province level and to introduce a multipillar scheme of social security, choosing a combined fundraising program of individual accounts, social pooling, enterprise annuity, and commercial insurance, which intends to cover as many beneficiaries as possible at a relatively low level of benefits, termed “wide coverage, low level.” Finally, given the large deficit on the social security account, government financing through budget allocation and selling state assets is necessary for the current pension system to realize a smooth transition from pay-as-you-go to a system more oriented to individual accounts.

8.6 Conclusions With incomplete transition, the PRC’s labor market is still highly segmented with obvious boundaries between urban and rural areas, as well as between formal and informal sectors. Though job growth in the past has been impressive, a sizable surplus of labor still exists in the rural sector. Increasing rural–urban migration, along with restructuring of the urban sector, is generating huge pressure on employment growth. Therefore, the main challenge facing the labor market in the coming years is to become increasingly integrated across the nation, so that it can effectively create more good jobs for both rural surplus underemployed workers and for laid-off workers, while providing them with better labor protection, social security, and public services. The PRC Government realizes that it faces a difficult situation on the employment front and that the current challenges arise from long-standing and deeply rooted structural imbalances that are not easy to resolve. The Government has made it clear that accelerating the growth of job opportunities

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while extending the social safety net to cover a larger proportion of the population are at the top of the economic and political agenda. Although during the past two and a half decades the PRC’s economic reforms have been praised for the approach of “crossing the river by groping for stones”, the upheavals produced by various institutional changes have now reached the stage where this piecemeal strategy is no longer sufficient. There need to be well-designed and implemented policy packages that take cognizance of the interrelationships, mutual dependencies, and causes and effects among the various facets of institutional restructuring. The first example is job creation. The biggest challenge facing the PRC is how to productively employ its labor force of over 700 million workers as it shifts from an agricultural to an industrial, and soon a services-based, economy; and especially how to absorb or reemploy the tens of millions of laid-off workers and hundreds of millions of rural migrants. It is estimated that the PRC will have to create around 100 million–300 million new jobs in the coming decade. A high rate of GDP growth is necessary, but this is far from enough. To achieve high employment growth, reforms in the financial sector that both send the right price (interest rate) signals to firms to make full use of the country’s cheap workers and provide credit to small and medium enterprises are necessary. Furthermore, deregulating entry to the services sector and removing various administrative measures and fees are also important for private enterprises to start up and grow smoothly. A second example is the need for coordinated reforms in SOEs, social security, and the financial sector. It was precisely due to the lack of independent institutions for social security that SOE reforms lagged behind as the SOEs themselves were needed to continue their role in providing social welfare. When the SOEs continued to be given low profit incentives, their financial performance remained poor (Bai et al. 2000). This, in turn, delayed reforms in the financial sector since the state-owned banking system and the heavily regulated stock market are utilized to provide cheap funds to feed unprofitable SOEs (Lardy 1998). Therefore, without a functioning social security system, SOE restructuring and privatization were not in a position to proceed well, nor financial reforms to be deepened. As a result, rather than establishing a social safety net first and then reforming the SOEs as well as the financial system, the Government waited until the SOEs deteriorated and banks could no longer sustain the situation, toward the mid- to late 1990s, and then started reforming these sectors. Thorough social security reform started even later as a response to the huge number of laid-off workers, which emerged as a consequence of large-scale privatization. Therefore, accelerating social security reforms is the key to push forward reforms in SOEs and state banking. Another example is the coordinated reform of the hukou system and of the rural land system. A measure of policy reform coordination can be achieved if the Government can collect some revenue on land value appreciation in the

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process of land requisition, and use this revenue to fund social security for migrant workers. It should be possible to implement a marketized land requisition system whereby farmers can negotiate requisition prices with land developers, accompanied by a land value-added tax on land use change. This would not only help protect the interests of dispossessed farmers by giving them larger shares of the appreciation in land values, but would also help mobilize more fiscal revenue to aid migrant farmers in obtaining access to social assistance and to public housing and schooling, thereby facilitating their permanent migration to the cities (Tao and Xu 2005). This could potentially address not only the lack of social security for migrants and dispossessed farmers, but could also help promote breakthroughs in the hukou system and the land requisition system. A final example is the need to provide a nationally coordinated solution to the unemployment problem. Policy makers already share a growing concern that the current localized system of dealing with unemployment fails to provide people with the social security and protection needed for maintaining a stable society. There is also an increasing awareness that the job training and search services provided to urban laid-off workers should be extended with equal comprehensiveness to migrant and dispossessed farmers. However, the PRC still needs to implement feasible policy packages that integrate rural people into a wider system of unemployment protection. Only through integrated systemic changes will rural people receive the rights that are needed to complement the current responsibilities that the state has shifted onto them for improving their livelihoods through their own efforts.

Notes 1. The hukou system in the PRC is in effect an internal passport system. A person’s local “citizenship” and residence are initially determined as a birth right, traditionally determined by the mother’s place of legal residence. Legal residence in a city entitles one to local access to permanent jobs, regular housing, public schooling, and public health care in that city. Until the early 1990s, it also entitled urban people to “grain rations”—rations of essentials such as grain and kerosene. Legal residence in a village entitles residents to land for farming and residential land for housing, and access to local health and schooling facilities in rural areas. To permanently migrate to cities and be eligible for urban benefits, one had to change the legal residence status (see Chan 1994 for a detailed description). 2. Rural labor movement is not restricted to local jobs. In fact, rural-to-rural mobility, defined as employment of the labor force in rural villages other than the workers’ home villages, has been growing rapidly in recent years. According to a study by Lohmar and Rozelle (forthcoming), based on a nationally representative survey of 215 villages, rural-to-rural migrant workers accounted for 1% of the rural labor force in 1988 (about 2 million), but grew quickly to 5% in 1995 (about 12.9

551 The Labor Market in People’s Republic of China million). In 1995, the proportion of rural workers from other villages accounted for 62% of the employment in rural private enterprises and 46% in collective enterprises. 3. This is similar to the US rate, half of that in India, and a third lower than the average rate of 1.5% in middle-income economies (World Bank 1999). By international standards, the process of demographic transition in the PRC has been exceptionally rapid, with associated changes in the age structure of the population compressed into a much shorter period than elsewhere (Feeney 1996). The fertility rate is already down to 1.5 children per woman (NBS, China Labour Statistical Yearbook, 1999). 4. The PRC has five levels of government. Below the central Government are 31 province-level units (each with an average of 42 million people); 331 prefecturelevel units (3.7 million people on average); 2,109 counties (580,000 people on average); and 44,741 townships (27,000 people on average) (World Bank 2002). 5. Some of these jobs were not lost, however, but simply reclassified to joint ownership as SOEs were reorganized into shareholding units or formed partnerships with other entities. 6. In general, limitations of the employment statistics make analysis of these data difficult. The aggregate labor market data is derived from the NBS quarterly labor force sample survey of almost 1 million people, benchmarked to the 1990 and 2000 population censuses. The detail by industry sector is based on the NBS establishment survey, which excludes much of the private sector, hence the large difference between aggregate employment and the residual. Due to the household registration (hukou) system that socially and statistically divides rural and urban residents, there is a lack of overall statistics on the number of migrant workers in urban job markets and the role they play (Brooks and Tao 2003). The increasing difference between employment as computed from the NBS labor force survey (total employment) and employment as computed from NBS establishment surveys (formal employment) reflects the fact that as unemployment pressure intensifies and, at the same time, the labor market develops, employment outside registered units (i.e., informal employment) tends to increase (World Bank 2005). 7. For the PRC, as for other low-income nations, there are no precise estimates of the number of workers engaged in farming. Here we calculate it as the residual derived by subtracting employment in TVEs and private businesses, and selfemployment in off-farm sectors, from the estimate of the economically active population. 8. However, the official figure of 83 million manufacturing workers may exclude millions of migrant manufacturing workers and does not take full account of the over 70 million TVE manufacturing workers reported by the Ministry of Agriculture (Banister 2005). On the other hand, the TVE statistics compiled by the Ministry of Agriculture seem to be inflated (Rawski 2002). 9. The PRC’s urban workforce also includes a considerable number of jobless migrants from rural villages. Under the current system, migrants who come to cities in search of employment either find work or leave. In a 1999 survey of 14,561 rural workers in Anhui and Sichuan provinces, Bai and He (2002) found that 22% had experienced migration; of these, 28.5% had resettled at home, and over half of them had returned because of unemployment. Similarly, in a rural survey conducted by the Center for Chinese Agricultural Policy at the Chinese Academy of Sciences in 2004,

552 Ran Tao it was found that out of 317 workers who had attempted to find employment in cities in 2003, 103 returned to the countryside and among those who returned, over two thirds had gone back due to the impossibility of finding a job with decent pay or of securing acceptable living and working conditions. For many migrants, the act of leaving the village and working in factories cause a change in their identities. They start to see themselves as workers rather than as farmers and even though the factory regime is grueling, they are happy to escape a “back to the sky, face to the soil” existence. Over time they forget their farming skills and the youngest migrants often have no exposure to farming at all. When the migrants are dismissed from the factories they therefore see themselves not as people who can turn their hand to farming but as “unemployed” workers (Murphy 2002). 10. A person of working age between 16 and 64 is considered unemployed only if his or her labor market state meets all of the following criteria. First, he or she did not have paid work for more than 1 hour in the week prior to the survey period. Second, he or she is available to take a job within 2 weeks if a job is provided. Third, he or she has been actively searching for a job in the past 3 months. If the person fails to meet the first criterion, he or she is actually in a position of employment; if the person does not meet the second and third criteria, he or she is out of the labor force. 11. An article by Appleton et al. (2002) reports that by the end of 1999, xiagang workers laid off from SOEs, urban collectives, and local governments far outnumbered the “official” (registered) unemployed, contributing to a de facto urban unemployment rate of more than 8%. Those most likely to be laid off and to experience the longest unemployment spells are the less educated, older workers, and female workers. The median unemployment spell (including noncompleted spells) was 10 months, and the mean was 18 months. 12. The provinces are Hebei, Liaoning, Shaanxi, Zhejiang, Hubei, and Sichuan. The data collection effort involved students from the Center for Chinese Agricultural Policy, Renmin University, and China Agricultural University. To reflect accurately upon the varying income distributions within each province, one county was selected randomly from within each income quintile for the province, as measured by the gross value of industrial output. Two villages were selected randomly within each county. The survey teams used village rosters to choose randomly 20 households, from among those with their residency permits (hukou) in the village and from among those without them. For further information regarding the data set, refer to de Brauw et al. (2002). 13. During the centrally planned economy period and in the early years of economic reforms, the problem of dispossessed farmers facing unemployment was not serious because the central authorities stipulated that the work units which requisitioned agricultural land had to provide jobs for these farmers. As a result, it was relatively easy for most farmers to become workers in SOEs. However, in the 1990s as state sector reforms deepened, job recruitment in work units became more marketized and local governments found it increasingly difficult to force work units to employ the dispossessed farmers. Even in regions where local governments could force local SOEs to accommodate these farmers, they usually belonged to the group hit in the first rounds of retrenchments that came with enterprise restructuring. In most regions, the current policy involves paying a one-off lump sum to compensate the dispossessed farmers without any obligation to allocate new jobs to them. In places such as Jiangsu, which had a developed TVE sector, local governments passed

553 The Labor Market in People’s Republic of China the responsibility of reemployment on to village collectives by requiring them to allocate jobs such as security guards, gardeners, and street cleaners to dispossessed farmers. Frequently, these TVEs soon became overstaffed. 14. As Yang and Zhou (1999) observed, the PRC’s rural-urban labor mobility pattern is unique with a massive floating population primarily engaged in temporary urban jobs, while in most other developing countries permanent and family migration of rural residents into urban areas has played a central role in the process of urbanization. According to a report on the Fifth National Population Census (NBS 2002), only 7% of rural-urban migrants move with their families. Though some richer migrants have permanently settled in cities, an overwhelming majority of rural migrants have not obtained an urban hukou. 15. In some cases occupational stratification has been institutionalized. Some municipal governments have implemented regulations to protect urban workers by reserving specific job categories for urban workers and by making explicit suggestions that urban residents not be underpaid compared to outsiders. For instance, in the late 1990s, according to a report in the Beijing Daily (10 April 1997), the Labor Bureau of one of Beijing’s districts stipulated that at least 35 types of jobs should not be open to the floating population. Migrants without a local hukou are often expelled by urban authorities simply because they are outsiders and, therefore, considered to be potential elements of instability and crime. 16. Under the Trade Union Law, the All-China Federation of Trade Unions (ACFTU) is the only trade union recognized in the PRC. It exercises a legal and heavily protected monopoly over all subsidiary union organizations and trade union activities. It remains under the control of the Communist Party, which appoints its officials. This means that by law there is no possibility of forming a truly independent union. 17. According to the law, local governments are required to report actual minimum wages to the State Council “for the record.” The central Government has, in effect, the power of oversight. 18. Though the Government has taken many steps in the past several years to solve the problem of unpaid wages, all it has been able to do is to help a minority of lucky workers to “chase back” wages before the New Year. According to Chan (2005), it looks like migrant workers have found their own solution—by simply not working and staying at home in the villages, causing a crisis of a “shortage of migrant workers.” Unable to collectively bargain at the workplace, the rural population of the PRC, without organizing itself, is engaging in a form of spontaneous collective action and inducing changes in the PRC’s macro labor market.

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554 Ran Tao Bai, N., and Y. He. 2002. “Returning to the Countryside versus Continuing to Work in the Cities: A Study on Rural Urban Migrants and their Return to the Countryside of China.” Shehui Xue Yanjiu (Sociological Research) 6(3):64–78. Banister, J. 2005. “Manufacturing Earnings and Compensation in China.” Monthly Labor Review August:22-40. Beijing Review. 2003. “Laboring Over Workers’ Rights.” 46(52, December):46–7. Brooks, R., and R. Tao. 2003. China’s Labor Market Performance and Challenges. IMF Occasional Papers No. 03/210, International Monetary Fund, Washington, DC. Cai, F. 2000. The Mobile Population Problem in China (Zongguo Liudong Renkou Wenti.) Zhengzhou: Henan People’s Publishing House. Cai, F., and Y. Du. 2004. “Labour Market Integration: Evidence from Wage Convergence in Manufacturing.” In R. Garnaut and L. Song, eds., China: Is Rapid Growth Sustainable. Australia: Asia Pacific Press. Cai, F., and D. Wang. 1999. “Sustainability and Labor Contribution of Economic Growth in China (in Chinese).” Journal of Economic Research 10:62–8. ———. 2003. Migration As Marketization: What Can We Learn from China’s 2000 Census Data? Working Paper Series No.26, Institute of Population and Labor Economics, Chinese Academy of Social Sciences. Cai, F., D. Wang, and Y. Du. 2002. “Regional Disparity and Economic Growth in China: The Impact of Labour Market Distortions.” China Economic Review 13: 197–212. Cai, F., Y. Zhao, and A. Park. 2004. “The Chinese Labor Market in the Reform Era.” In L. Brandt and R. Rawski, eds., China’s Economic Transition: Origins, Mechanism, and Consequences. Draft chapter. Cao, Y., Y. Qian, and B. Weingast. 1999. “From Federalism, Chinese Style, to Privatization, Chinese Style.” Economics of Transition March 7(1):103–31. Carter C. A., F. N. Zhong, and F. Cai. 1996. China’s Ongoing Agricultural Reform. San Francisco: 1990 Institute. Chan, A. 2001. China’s Workers Under Assault: The Exploitation of Labor in a Globalizing Economy. Armonk, NY: M.E. Sharpe. ———. 2005. “Recent Trends in Chinese Labour Issues: Signs of Change.” China Perspectives 57(Jan–Feb):2-6. Chan, K. W. 1994. Cities With Invisible Walls. Hong Kong, China: Oxford University Press. Chen, F. 2000. “Subsistence Crises, Managerial Corruption and Labor Protests in China.” The China Journal 44(July):41–63. China Population Information and Research Center. 2002. Projection of China’s Population up to 2050. Beijing. Cook, S. 2002. “From Rice Bowl to Safety Net: Insecurity and Social Protection during China’s Transition.” Development Policy Review 20:615–635. de Brauw, A., J. Huang, and S. Rozelle. 2004. “The Sequencing of Reform Policies in China’s Agricultural Transition.” The Economics of Transition 12(3):427–65. de Brauw, A., S. Rozelle, L. Zhang, J. Huang, and Y. Zhang. 2002. “The Evolution of China’s Rural Labour Markets during the Reforms: Rapid, Accelerating, Transforming.” Journal of Comparative Economics 30(2):329–53.

555 The Labor Market in People’s Republic of China Deininger, K., S. Jin, and S. Rozelle. 2003. Land Rentals, Migration and the Transition of Rural China. Working Paper, World Bank Research Department, Rural Development Group. Washington, DC. Feeney, G. 1996. “Fertility in China: Past, Present, Prospects.” In W. Lutz, ed., The Future Population of the World—What Can We Assume Today? London: Earthscan Publications for International Institute for Applied Systems Analysis. Feng, W., X. Zuo, and D. Ruan. 2002. “Rural Migrants in Shanghai: Living Under the Shadow of Socialism.” International Migration Review 36(2):520–45. Findlay C., W. Martin, and A. Watson. 1993. Policy Reform, Economic Growth and China’s Agriculture OECD Development Centre, Paris. Findlay, C., A. Watson, H. X. Wu. 1994. Rural Enterprises in China. New York: St. Martin’s Press. Fleisher, B. M., and D. T. Yang. 2003. “China’s Labor Market.” Paper prepared for the Conference on “China’s Market Reforms” organized by Stanford Center for International Development, Stanford University, 19-20 September 2003. Fu, H., and D. W. Choy. 2004. “From Mediation to Adjudication: Settling Labor Disputes in China.” China Rights Forum 3(September):17–22. Giles, J., A. Park, and F. Cai. 2005. “Re-employment of Dislocated Workers in Urban China: The Roles of Information and Incentives.” Michigan State University, East Lansing, Michigan. Unpublished. Giles, J., A. Park, and J. Zhang. 2004. “What is China’s True Unemployment Rate?” University of Michigan and Michigan State University. Processed. Goodkind, D., and L. A. West. 2002. “China’s Floating Population: Definitions, Data and Recent Findings.” Urban Studies 39(12):2237-50. He, B., and H. Cheng. 2004. “Di Gongzi Jingzai: Laodongzhe Mengyan” (Wages Racing to the Bottom: A Migrant Worker’s Nightmare).” Nanfang Gongbao (Southern Labour News). 29 July. Huang, P., and F. N. Pieke. 2003. “China Migration Country Study.” Paper presented at the Conference on Migration, Development and Pro-Poor Policy Choices in Asia, 22-24 June 2003, Dhaka. Hussain, A. 1993. Reform of the Chinese Social Security System. China Programme Discussion Papers, No. 27, London School of Economics. ———. 2000. Social Welfare in China in the Context Of Three Transitions. Center for Research on Economic Development and Policy Reform Working Paper No. 66, Stanford University. Jian, C. 2001. “Tuoqian Gongzi Cheng Le Fengshu (Owing Wages Has Become a ‘Custom’).” Nanfang Gongbao. 22 August. Knight, J., and S. Li. 2003. “Wages, Firm Profitablility and Labor Market Segmentation in Urban China.” Department of Economics, Oxford University, Oxford. Processed. Knight, J., and L. Song. 1999. The Rural-Urban Divide: Economic Disparities and Interactions in China. New York: Oxford University Press. Knight, J., S. Li, and Z. Renwei. 2003. “Spatial Inequality in Urban China: Divergent means Convergent Inequality.” Paper presented for the UNU/WIDER Project Conference on Spatial Inequality in Asia, United Nations University.

556 Ran Tao Korzec, M. 1992. Labor and the Failure of Reform in China. London: Macmillan. Kroeber, A. 2005. “No Risk of ‘Labour Shortage’ in Southern China.” China Economic Quarterly. 17 October. Available: http://news.ft.com/cms/s/11ba0d04-3ec711da-a2cb-00000e2511c8.html. Lai, Z., and S. Huang. 2004. “Tamen Heshi Buzai Liuhan You Liulei (When Will they Stop Sweating and Crying?).” Gongren Ribao (Workers Daily). 31 July. Lardy, N. R. 1998. China’s Unfinished Economic Revolution. Washington, DC.: Brookings Institution Press. Lee, C. K. 2000. “The ‘Revenge of History’ Collective Memories and Labor Protests in Northeast China.” Ethnography 1(2):217–37. Lin, J. Y. 1992. “Rural Reforms and Agricultural Growth in China.” American Economic Review 82(1):34–51. Lin, J. Y., F. Cai, and Z. Li. 2003 The China Miracle: Development Strategy and Economic Reform. Hong Kong, China: The Chinese University Press. Lohmar, B., and S. Rozelle. “The Rise of Rural-to-Rural Labor Markets in China.” Asian Geographer. Forthcoming. Luo, H. 2003. “Unlimited Labor Supplies and Regional Cohesion of Industry in China.” Zhongguo Gongye Jingji (China Industrial Economy) 4:53–8. Meng, X., and M. P. Kidd. 1997. “Wage Determination in China’s State Sector in the 1980s.” Journal of Comparative Economics 25(3):403–42. Meng, X., and J. Zhang. 2001. “The Two-Tier Labor Market in China—Occupational Segregation and Wage Differentials between Urban and Residents and Rural Migrants in Shanghai.” Journal of Comparative Economics 29(3):485–504. Ministry of Civil Affairs. 2004. “Statistics Reports for Development of Civil Affairs in China.” Beijing. Ministry of Labour and Social Security. 2004. “MOLSS report on China’s Labor and Social Security” (in Chinese). Beijing. Murphy, R. 2002. How Migrant Labor is Changing Rural China, New York: Cambridge University Press. Murphy, R., and R. Tao. 2005. “No Wage and No Land: New Forms of Rural Unemployment and Policy Responses.” In G. Lee and M. Warner, eds., Downsizing China: Unemployment and Market Reform. London: Routledge Curzon. National Bureau of Safe Production (NBSP). 2004. “Serious Work Safety Situation in the First Half of 2004” Xinhua News Agency. 20 July. National Bureau of Statistics (NBS). 2002. Collection of Data for China’s Fifth Population Census in 2000. Beijing: China Statistical Press. ———. Various years. China Labour Statistical Yearbook. Beijing: China Statistical Press. ———. Various years. China Statistical Yearbooks. Beijing: China Statistical Press. OECD. 2002. “China in the World Economy: the Domestic Policy Challenges.” Organisation for Economics Co-operation and Development, Paris. Ohnesorge, J. K. M. 2003. “China’s Economic Transition and the New Legal Origins Literature.” China Economic Review 14(4):485–93. Putterman, L. 1992. Continuity and Change in China’s Rural Development: Collectives and Reform Eras in Perspectives. New York, NY: Oxford University Press.

557 The Labor Market in People’s Republic of China Qin, H. 2003. “Freedom of Movement and Population Segregation 2003.” (Cited 19 November 2003). Available: http://www.yangzhizhu.com/qinhui102.htm. Rawski, T. 2002. “Recent Developments in China’s Labour Economy.” Report prepared for the International Labour Office, Geneva. Rozelle, S., G. Li, M. Shen, A. Hughart, and J. Giles. 1999. “Leaving China’s Farms: Survey Results of New Paths and Remaining Hurdles to Rural Migration.” The China Quarterly 158:367–93. Solinger, D. J. 1995. “China’s Urban Transients in the Transition From Socialism and the Collapse of the Communist ‘Urban Public Goods Regime’.” Comparative Politics 27:127–46. ———. 1999.”Citizenship Issues in China’s Internal Migration: Comparisons with Germany and Japan.” Political Science Quarterly 114(3):455–78. ———. 2001. “Why We Cannot Count the ‘Unemployed’.” China Quarterly (167):671– 88. State Council. 1995. “A Circular on Deepening Enterprise Pension System Reform (in Chinese).” Beijing. ———. 2004. “China’s Employment Situation and Policies”. White paper issued by the Information Office of the State Council. Beijing. Tao, R., and A. Xu. 2005. Urbanization, Rural Land System and Social Security for Migrant Farmers in China. Working paper prepared for the Chinese Cities in Transition: The Next Generation of Urban Research: Part 4 Conference, 7-9 July 2005, Shanghai. Taylor, B., C. Kai, and L. Qi. 2003. Industrial Relations in China. Cheltenham: Edward Elgar. Thireau, I., and L. Hua. 2003. “The Moral Universe of Aggrieved Chinese Workers: Workers’ Appeals to Arbitration Committees and Letters and Visits Offices.” China Journal 50:83–103. Tu, M. 2004. “An End to Abusive Land Requisition” (Quandi Molu). In China Reform, Rural Edition (Zhongguo Gaige Zaizhi, Nongcun Ban), Vol. 7. Beijing. White, G. 1987. “The Politics of Economic Reform in Chinese Industries: The Introduction of the Labor Contract System.” China Quarterly 10(111):365–89. Wonacott, P. 2003. “Behind China’s Export Boom, Heated Battle among Factories.” Wall Street Journal. 13 November. World Bank. 1997. China 2020: Development Challenges in the New Century. Washington, DC.: World Bank. ———. 1999. Entering the 21st Century: World Development Report 1999/2000. Washington, DC.: Oxford University Press. ———. 2002. China National Development and Sub-National Finance: A Review of Provincial Expenditures. The World Bank, Washington, DC. ———. 2003. China: Promoting Growth with Equity. World Bank Country Study Report No. 24169-CHA, Washington, DC. ———. 2005. China: Integration of National Product and Factor Markets Economic Benefits and Policy Recommendations. World Bank Report No. 31973-CHA, Washington, DC. Xu, L. C. 2000. “Control, Incentives and Competition: the Impact of Reform on Chinese State-Owned Enterprises.” Economics of Transition 8(1):151–73.

558 Ran Tao Xue, J., and J. Knight. 2004. “How High is Urban Unemployment in China?” Paper presented at the International Research Conference on Poverty, Inequality, Labour Market, and Welfare Reform in China, 25-27 August, Australian National University, Canberra. Yang, D. T., and H. Zhou. 1999. “Rural-Urban Disparity and Sectoral Labor Allocation in China.” Journal of Development Studies 35(3):105-33. Yang, Q., and F. Guo. 1996. “Occupational Attainment of Rural to Urban Temporary Economic Migrants in China 1985–1990.” International Migration Review 30(3): 771–87. Zhang, J. 2003. “Urban Xiagang, Unemployment and Social Support Policies: A Literature Review of Labor Market Policies in Transitional China.” Report to the World Bank, Washington, DC. Zhao, S. 2005. Township Reform: Reflections and Perspectives—A Survey on 20 Townships across 20 Provinces in China (Xiangzhen Gaige: Jiantao yu Zhanwang—Shisheng Ershi Xiangzhen Diaocha). Research Report, Development Research Centre, State Council. Zhao, Y. 1999. “Labor Migration and Earnings Differences: The Case of Rural China.” Economic Development and Cultural Change 47(4):767–82. ———. 2002. “Earnings Differentials between State and Non-State Enterprises in Urban China.” Pacific Economic Review 7(1):181–97. Zhao, Y., and J. Xu. 2002. “China’s Urban Pension System: Reforms and Problems.” Cato Journal 21(3):395–414.

CHAPTER 9 A Stocktaking of Viet Nam’s Labor Market Policies BINH T. NGUYEN, CU CHI LOI, AND NGUYEN CHIEN THANG

T

he concept of a labor market is relatively new in Viet Nam. Not until the country started its economic reform program (Doi Moi) in 1986 did Viet Nam have a labor market in the sense of market-determined employment levels and wage rates. Before Doi Moi, Viet Nam had a centrally planned economy, where economic activities, including employment and wages, were controlled and set by the Government. With the adoption of Doi Moi, decollectivization and self-managed multiple-ownership production systems were introduced throughout the country, resulting in the diversification of rural employment and the emergence of a vibrant urban workforce. While the economic reforms introduced basic labor supply and demand, these are only the first requirements of a well-functioning labor market, and serious challenges remain. For instance, there is evidence of persistent and substantial underemployment in the agriculture sector and labor redundancy in state-owned enterprises (SOEs).1 There are growing concerns that the labor market cannot create enough jobs to absorb new entrants into the market and those retrenched in public sector downsizing programs and SOE privatization.2 Recent research shows the existence of market segmentation, reflected in the large gaps in market returns to labor between the rural and urban areas and

Binh T. Nguyen, Economics and Research Department, Asian Development Bank; Cu Chi Loi, Vietnam Institute of Economics; Nguyen Chien Thang, Vietnam Institute of Economics. The authors thank participants at the workshop, Labor Markets in Viet Nam (9 June 2005, Hanoi), and Jesus Felipe for very useful comments on an earlier draft of the chapter. They also thank Mary Jane Carangal and Ma. Rowena Cham for excellent research assistance.

560 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

positive expected gains from migration (Nguyen et al. 2005). As Viet Nam is further integrated into the global economy, its labor market must keep up with the changing skills requirement.3 Studies also show that the educational and training institutions of the Government are unable to prepare the people to take full advantage of economic integration as well as to support the workers that are made vulnerable in this process (Litvack and Rondinelli 1999). This chapter has two objectives. First, it takes stock of what is known about labor market outcomes in Viet Nam and how they have changed over the past decade, and the effects of labor market policies on these outcomes. Labor market issues are discussed in the context of Viet Nam’s transition to a market economy and the country’s further integration into regional and global markets. Second, the chapter highlights gaps in knowledge and priorities for future research on labor market development as it relates to economic growth and poverty reduction. The rest of the chapter is organized as follows. The next section presents a broad economic background including a review of Viet Nam’s economic policy reforms in the late 1980s and recent trends in the country’s population and labor force. Section 9.2 describes labor market outcomes arising from this economic context. This section focuses on structural changes in employment, unemployment, and labor productivity, and changes in the welfare of individual workers. Section 9.3 discusses recent labor market policies and government interventions and their effects on labor market outcomes. Section 9.4 suggests further research priorities and Section 9.5 concludes the chapter.

9.1 Economic Background This section presents a broad picture of Viet Nam’s economy since the start of Doi Moi. It briefly describes important economic policy reforms in the late 1980s, then gives a general overview of the population and the labor force. 9.1.1

Economic Policy Reforms

After decades of sluggish growth, high inflation, and widespread poverty, Viet Nam adopted a policy of economic reforms (Doi Moi) in 1986. The country has since undergone a transformation from a centrally planned to a market economy.4 During Doi Moi, decollectivization, redistribution of land to households, and output contracting were introduced in the agriculture sector. Farmers acquired tenurial land-use rights by virtue of the new Land Law and could choose to produce any product for personal consumption and trade.5 These reforms were particularly important because, even before 1989, agriculture

561 A Stocktaking of Viet Nam's Labor Market Policies

contributed around 40% of gross domestic product (GDP) and employed at least 70% of the labor force. The reforms not only increased agricultural production, they transformed Viet Nam from a net importer into the world’s second-largest exporter of rice in the 1990s. In the industry and services sectors, the Government implemented reforms to give more freedom and autonomy to SOEs and encourage the development of the private sector. New laws were passed to facilitate the transition to a market economy. These included the legalization of a multi-sectoral structure recognizing five forms of ownership and allowing foreign investment in all forms and with no restrictions in most sectors.6,7 Other major policy changes related to prices, foreign exchange, and international trade. For several decades the Government had controlled the setting of prices for goods and services. This system was abolished in 1989 and goods and services began to be traded at market prices. The liberalization of foreign exchange and the removal of trade barriers facilitated international trade. By 2003, only two products, sugar and petroleum, were still subject to import quotas, and quantity restrictions applied to only a few products. Import tariffs gradually decreased, with the average tariff falling from 12.7% in 1996 to 9.3% in 2003. Likewise, the abolition of state monopolies transferred decision making on trade matters from the State to the firms. The social sector, especially health and education, also underwent major reforms. Deregulation policies in the health sector, introduced in 1991, allowed private entities to provide health care and medicines, and public hospitals to collect fees for medicines and services to cover their operating costs. In education, private schools were legalized in 1989. Tuition fees were introduced at all levels except the primary level. The economy has benefited from the reforms implemented over the past decade. Overall, both agricultural and industrial outputs have improved, and the economy has grown by an average of 7.5% a year since Doi Moi. The economic structure has changed significantly, with services overtaking agriculture in output share in 1995. The incidence of $1-a-day poverty fell from 58% in 1993 to 29% in 2002 (World Bank 2003). Urban unemployment stabilized at about 6%. Inflation fell from triple-digit levels at the end of the 1980s to a single-digit level by the mid-1990s, and has since averaged 5%. Appendix Table A9.1 presents some of these statistics. 9.1.2

Population and Labor Force

Viet Nam’s population growth rate has been declining since the early 1990s. From 1.92% in 1990, it fell to 1.32% in 2002, but increased slightly to 1.47% in 2003 (ADB 2004). Overall, Viet Nam’s population has two main features. First, it is clearly divided into rural and urban, with the rural population

562 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

predominating. In 2002, Viet Nam had a population of 77.64 million, 75% of this in the rural areas (GSO Statistical Yearbook 2003). With the population growth declining, especially in the urban areas, the rural population will continue to dominate in the coming decade. According to the World Bank (http://devdata.worldbank.org/dataonline), by 2014 Viet Nam will have a population of about 90 million and the rural share will be 70%. More details on Viet Nam’s population trends are in Appendix Table A9.2. Second, the age dependency ratio has declined steadily over the past two decades and is expected to continue declining in the coming decade.8 This decline can be attributed to the sharp decline in the fertility rate in the past two decades, from five children per woman in the early 1980s to 1.87 in 2002. The child dependency ratio, as a consequence, has dropped steadily. The elderly dependency ratio, on the other hand, has remained stable over the past two decades with improvements in life expectancy, and is projected to increase from about 0.14 at the end of the 1990s to 0.17 by 2024. Figure 9.1 shows the age dependency ratio from 1990 to 2004.9 The first important characteristic of Viet Nam’s labor force is the high labor force participation rate (LFPR) by international standards. In 1989, 89.4% of men and 92.1% of women of working age were in the labor force, for a total

Figure 9.1 Age Dependency Ratio, 1990–2004 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: World Bank, World Development Indicators (various years).

563 A Stocktaking of Viet Nam's Labor Market Policies

LFPR of 90.8%. In 1999, the participation rate was 83.2% for men, 83.9% for women, and total LFPR was 83.5% (GSO 1989, GSO 1999). The high rate of female participation accounts for the high LFPR. In the late 1990s, the participation rate for women was more than 80% for Viet Nam, while it was 40–60% for countries like Bangladesh, Cambodia, People’s Republic of China (PRC), Indonesia, Philippines, and Thailand (Le et al. 2001). However, Viet Nam’s LFPR has declined over the past decade, dropping from 90.8% in 1989 to 83.5% in 1999. The Ministry of Labour, War Invalids, and Social Affairs (MOLISA) has reported that the rate decreased further to 71.4% in 2002 and 70.6% in 2003 (CFI-MOLISA 2004). Researchers estimate that in the last 10 years, the potential workforce increased by an average of 2.6% yearly, bringing about 1.3 million more people into the workforce (Le et al. 2003a). Providing employment at adequate wages to these new entrants is a great challenge to Viet Nam’s economic growth and poverty reduction. The second important characteristic of Viet Nam’s labor force is the predominance of the rural sector and the very large share of unskilled laborers.10 As shown in Appendix Tables A9.3 and A9.4, in 1996 about 80% of the national labor force was in the rural areas. By 2003, the rural share remained high, at 76%. The share of unskilled laborers is even larger, despite the high literacy of the general population.11 In 1996, almost 88% of the labor force was unskilled. Although this share has gone down over the past 10 years, unskilled laborers still made up 78.78% of the labor force in 2003. The large share of unskilled laborers in the rural areas (92.6% in 1996 and 86.5% in 2003) can be attributed partly to the migration of skilled laborers to the urban areas, and to the low demand for skilled workers in rural economic activities. But the large share of unskilled laborers in the urban areas (68.4% in 1996 and 54.5% in 2003) is puzzling. Current debates revolve around a possible mismatch between the skills demanded by the market and those that the education and training system produces. Other possible causes could be structural aspects of the urban economy. Workers’ professionalism and skills determine labor productivity, on which workers’ welfare and the overall health of the economy rest. Third, Viet Nam’s labor force is generally young. Figure 9.2 shows the age distribution of the labor force. It is skewed to the right, with a mode in the 25–34 age range. Those belonging to the three youngest groups (15–44 years) make up about 80% of the labor force. With the population growth rate declining sharply, as shown earlier, the share of the youngest group in the labor force declined from 25.95% in 1996 to 24.72% in 2003 (CFI-MOLISA 2004). Last, although most Vietnamese can read and write (literacy is above 98% in the urban areas and about 95% in the rural areas), the overall level of education is relatively low, especially in the rural areas. The education distribution in Figure 9.3 shows that most of the people in the rural areas

564 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang Figure 9.2 Labor Force, by Age, 1996, 2002, and 2003 (%) 30

20

10

0 15--24

25--34

35--44

45--54

55--59

60 and above

Age Group 1996

2002

2003

Source: CFI-MOLISA (2004).

finish only the primary and secondary levels. The urban areas are doing better, with almost half of the population graduating from high school. Over the past decade, the education gap between the urban and rural areas has been large. Nguyen et al. (2005) show a gap of about 2 years, as reflected in the two Viet Nam Living Standards Surveys (VLSS) for 1992–1993 and 1997–1998. Researchers also find a drop in school attendance, especially among secondarylevel students (Glewwe and Hanan 1998). Among the possible reasons for the decrease in enrollment are (i) new employment opportunities opened up by Doi Moi; (ii) deterioration in the quality of schools due to cuts in public spending on education; (iii) decline in job prospects of school graduates due to layoffs from the government sector and the inability of the emerging private sector to create new jobs; and (iv) introduction of school fees and charges for textbooks, making it more expensive to attend school. Figure 9.4 summarizes the relationship between the population and the labor force in Viet Nam. First, the outer circle depicts the population, which is growing at a decreasing rate. Second, the fraction of the nonworking population is shrinking as a result of the decrease in the age dependency ratio. This is the light gray area between the outermost circle and the second circle. Third, the

565 A Stocktaking of Viet Nam's Labor Market Policies

Figure 9.3 Labor Force, by Education, 1996 and 2003 (%) Urban Areas 40

30

20

10

0 Illiterate

Below Primary

Primary Graduate

Secondary Graduate

High-School Graduate

Secondary Graduate

High-School Graduate

Education Level 1996

2003

Rural Areas 40

30

20

10

0 Illiterate

Below Primary

Primary Graduate Education Level 1996

Source: CFI-MOLISA (2004).

2003

566 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang Figure 9.4 Population and Labor Force Summary 1: Population

2: Working Age

Shrinking Expanding U E

4: Employed

3: Labor Force

decline in the labor force participation rate implies that the fraction of the working-age population not in the labor force is growing. This is the white area between the second and third circles. Finally, Viet Nam’s labor force (areas U and E) is mostly young (15–44 years). But these young people are mostly unskilled and live in the rural areas. The following sections will discuss what is happening with the labor force, i.e., employed and unemployed people (areas E and U). In particular, the discussion will be on the following: (i) composition of the employed (area E); (ii) changes in its composition over time; (iii) relative changes in size between the employed (E) and the unemployed (U); and (iv) effects of labor market policies on these outcomes.

9.2 Labor Market Outcomes This section describes key features of Viet Nam’s labor markets and how these have changed over the past 10 years. It includes a descriptive analysis of employment composition (by age, economic sector, and ownership sector), unemployment, underemployment, wages, labor productivity, labor mobility, inequality, and poverty. These issues are discussed in the context of Viet Nam’s transition to a market economy and further integration into regional and global markets.

567 A Stocktaking of Viet Nam's Labor Market Policies

9.2.1

Employment Composition Employment by Age

Similar to the labor force participation rate in the early 1990s, the employment rate was highest for the 15–40 age group, in both urban and rural areas, as shown in Figure 9.5. It is important to note in the figure that the share of the young groups (15–35 years) in total employment fell between the two surveys in both urban and rural areas. One explanation is that, along with economic development and improvements in living conditions, more young people could stay outside the labor force and go to school. This could have contributed to the decline in labor force participation, as discussed in the previous section. The higher share of older groups (40–50 years) in the late 1990s was partly due to the smaller number of young workers in the labor force. It may also have been due in part to the country’s massive disarmament in the early 1990s (Le et al. 2001).

Figure 9.5 Employment Distribution by Age, 1993 and 1998 (%) 15

12

9

6

3

0 1014

1519

2024

2529

3034

3539

4044

4549

5054

5559

6064

65+

Age Groups Urban 1992-93

Source:

Rural 1992-93

Le et al. (2001, p. 200).

Urban 1997-98

Rural 1997-98

568 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

Employment by Economic Sector Overall, Viet Nam’s employment is heavily concentrated in agriculture, forestry, and fisheries (Figure 9.6). However, data show marked changes in the employment structure from 1991 to 2002: the share of agriculture declined steadily from over 73% to about 60%, and the share of services rose steadily from about 14% to over 24%. The share of industry, which includes construction, increased only modestly from about 12% to about 15%. By 2002, services had clearly claimed a larger employment share than industry to become the secondlargest sector. Employment in the public and nonpublic sectors provides additional information. First, as shown in Appendix Table A9.5, changes in total employment were mostly due to changes in nonpublic employment. Between 1995 and 2001, changes were evident in agriculture and services in the nonpublic sector. Industry’s share in employment, however, increased slightly from 9% to 10%. The structure of employment in the public sector, on the other hand, changed very little, especially in industry and services. Most of the changes in public sector employment stemmed from the drop in employment

Figure 9.6 Employment Structure, by Economic Sector, 1991–2002 (%)

14.3 14.51 15.64 16.41 17.02 18.24 18.7

18.7

23.94 24.3 25.05 24.2

12.43 12.3 12.36 12.83 13.25 12.54 12.52 12.52 12.5 13.15 14.41 15.13

73.26 73.15

72

70.76 69.7

69.2

68.8 68.78

63.61 62.65 60.54 60.67

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Agriculture–Forestry–Fisheries

Source: Le (2004, p. 55).

Industry–Construction

Services

569 A Stocktaking of Viet Nam's Labor Market Policies

in agriculture–forestry–fisheries from 9.5% in 1995 to about 6% in 2000 and 2001. Second, there is a stark difference in employment structure between the public and private sectors, as shown in Figure 9.7 below. In the public sector, the employment share of services dominated over the past decade and remains dominant, followed by industry and agriculture. The decline in the share of agriculture of about 3.3% has been offset by an increase of about 2% in the

Figure 9.7 Employment in Public and Nonpublic Sectors, 1995, 2000, and 2001 (%) Nonpublic Employment by Economic Sector 90 80 70 60 50 40 30 20 10 0 1995

2000

Agriculture–Forestry–Fisheries

2001

Industry–Construction

Services

Public Employment by Economic Sector 70 60 50 40 30 20 10 0 1995 Agriculture–Forestry–Fisheries

2000

2001

Industry–Construction

Source: GSO, Statistical Yearbook (2004).

Services

570 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

share of industry and about 1.7% in services. Conversely, in the nonpublic sector, agriculture disproportionately dominated over the decade and continues to do so, followed by services and industry. However, in both public and nonpublic sectors, industry’s share remained relatively unchanged over time. Figure 9.8 shows the number of jobs generated each year from 1996 to 2001 in each economic sector. The structure is the same as that of overall employment for the period. Jobs increased steadily in the industry and services sectors, but decreased steadily in the agriculture sector. From 1999 onward, services overtook agriculture as the leader in generating jobs. The distribution of new jobs in 2001 has two particularly interesting features. First, industry for the first time generated more new jobs than agriculture. Second, both industry and services generated markedly more jobs than they did in the previous year. One possible explanation is the passage of the Enterprise Law in 2000, which simplified enterprise registration. This allowed many new firms to enter and unregistered firms to register. The large increase in the number of new small and medium enterprises between 2000 and 2001 supports this explanation.12 However, these features warrant further investigation to answer questions like: Do these events signal the start of a new

Figure 9.8 Job Generation, by Economic Sector, 1996–2001 500

Persons ('000)

400

300

200

100 1996

1997

1998

Agriculture–Forestry–Fisheries

1999

2000

Industry–Construction

Source: Authors' computations from GSO, Statistical Yearbook (2004).

2001 Services

571 A Stocktaking of Viet Nam's Labor Market Policies

structural trend or just a one-time phenomenon? What caused the structural changes in the new jobs in 2001? Were the changes really due to the Enterprise Law or to something else? Employment by Ownership Sector Viet Nam categorizes businesses and enterprises into three groups according to ownership: (i) public services and SOEs; (ii) domestic nonstate enterprises; and (iii) foreign-invested enterprises. Enterprises in group (i) make up the public sector. Groups (ii) and (iii) together compose the nonpublic sector.13 Recent statistics show two interesting facts about the ownership composition of employment between 1995 and 2001. First, the public sector’s share in employment rose slightly from 9.2% in 1995 to 9.6% in 2001 (Table 9.1, see full data in Appendix Table A9.6). Conversely, the share of nonpublic employment declined slightly from 90.8% to 90.4%. Since Viet Nam has Table 9.1 Employment in Public and Nonpublic Sectors, 1995–2001 Sector Public Persons (’000) Share of total

1995

1996

1997

1998

1999

2000

2001

3,053.1 9.2

3,137.7 9.3

3,266.9 9.5

3,383.0 9.6

3,433.2 9.5

3,501.0 9.5

3,603.6 9.6

Nonpublic Persons (’000) 29,977.5 30,623.1 31,226.4 31,849.9 Share of total 90.8 90.7 90.5 90.4 Note: Source:

32,542.6 33,200.8 34,072.8 90.5 90.5 90.4

Shares are in percentages. GSO Statistical Yearbook (2004).

launched many measures to reduce public employment and increase nonpublic employment, the increase in the share of public employment is puzzling. Most observers attribute this to the failure of plans to reduce government staff and to privatize SOEs. Official statistics show that Viet Nam’s SOE privatization was extremely slow over the past decade. Since Doi Moi, Viet Nam has restructured around 2,230 SOEs, of which 63% have been fully or partially divested through equitization. About 4,800 SOEs remain in operation (Oxford Analytica 2005). Second, the share of the production sector in overall employment declined steadily from 88.5% in 1995 to 87.4% in 2001, whereas the share of services rose steadily from 11.5% to 12.6%. This pattern also holds true in the public and nonpublic sectors (two lower panels in Appendix Table A9.6).

572 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

The increase in the share of services in employment relative to that of the production sector can be attributed to two factors. First, during the period of central planning, Viet Nam’s economy was heavily structured toward industrial production. Services were not considered an economic activity and were underinvested. The country’s move to a market economy opened up demand for new services and changed the structure of the economy. Second, most new domestic nonstate enterprises were small in size, capital, production, and technical know-how—factors that constrained capital-intensive production from expanding. Biases in the Government’s economic policies toward state industrial enterprises also created further unfavorable conditions for new private firms hoping to compete against state firms in the industry sector. Small trade and services appeared to be an area of comparative advantage for the new firms. Figure 9.9 (data in Appendix Table A9.7) shows the distribution of new jobs generated in each ownership sector for registered enterprises in 2001 and 2002. Clearly, domestic nonstate enterprises generated more new jobs in both years, followed by foreign-invested enterprises. Together, the nonstate sector generated more than 90% of the new jobs in 2001 and about 80% in 2002. The increase in the employment share of state enterprises might have been a cause of the increase in the employment share of the public sector that was discussed earlier.

Figure 9.9 Job Generation, by Ownership Sector, 2001–2002 (%) 100 20.6

27.9

80

60 52.0

72.9

40

20 20.1 6.5

0

2001 Foreign-Invested Enterprises Note: Source:

2002 Domestic Nonstate Enterprises

Data are for registered enterprises only. GSO, Statistical Yearbook (2003).

State Enterprises

573 A Stocktaking of Viet Nam's Labor Market Policies

A related issue is informal employment, which entails all forms of unreported incomes. Viet Nam defines the informal sector to include (i) household production in rural areas; (ii) unregistered businesses in urban areas; (iii) unreported incomes; (iv) domestic services; (v) smuggling; (vi) renting of houses and furniture; (vii) secondary and unreported activities of administrative offices, army offices, prisons, reeducation camps, and orphanages; and (viii) operations of nonprofit institutions, charitable associations, and the like. From surveys conducted in 1989, 1992, 1994, 1996, the General Statistics Office estimates that the informal sector comprises about half the size of the formal sector’s GDP. Other estimates range from 15% (Schneider 2002) to 51% (Tenev et al. 2003).14 Among major sources of income in the informal sector are the secondary economic activities of agricultural households (24% of the formal GDP), unreported trade and services in urban areas (10.5%), and unreported activities of administrative offices (10%) (Tenev et al. 2003, p. 15). The informal sector absorbs a large proportion of Viet Nam’s labor force and serves millions of Vietnamese. It is predicted to remain an important part of Viet Nam’s economy in the near future. Studies estimate that around 20% of the country’s active population is in the informal sector (JAPA 2004). Recent statistics show that, besides displaced workers from state enterprises, about a million people enter the labor force each year. Around 1.1–1.3 million jobs need to be created each year for these new entrants. Because SOEs have limited absorption capacity, most of these job seekers have to be absorbed by foreignowned companies and other formal private employers, as well as informal and household businesses.15 Researchers believe that expanding the informal sector in urban and rural areas could solve this labor challenge (JAPA 2004). 9.2.2

Unemployment

Unemployment in Viet Nam is basically an urban phenomenon. In the rural areas, the lack of work is classified as underemployment rather than unemployment. From 1994 to 2003, GDP grew at an average 7.5% a year and the country’s urban unemployment rate hovered between 5.8% and 6.9% with an average of about 6.2% a year (Figure 9.10, data in Appendix Table A9.1). Unemployment is highest among young people, especially in the 15–19 and 20–24 age groups. Surprisingly, it is also highest among graduates of technical schools and universities (Table 9.2). Researchers attribute this to the fact that half a million young people enter the labor force yearly. Half of the unemployment in these age groups could be transitional, as students leave school and begin looking for jobs. Others claim that the high unemployment rate among young graduates is due to the fact that Viet Nam’s universities and technical schools equip students only with theoretical knowledge and not the specific skills that the labor market requires.

574 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

Figure 9.10 GDP Growth Rate and Urban Unemployment, 1994–2003 (%) 10 9 8 7 6 5 4 3 2 1 0 1994

1995

1996

1997

1998

1999

GDP Growth Source:

2000

2001

2002

2003

Urban Unemployment

GSO, Statistical Yearbooks (1995–2004).

Table 9.2 Unemployment Rates, by Age Group and Education, 2002 (%)

Age Group

Unskilled Worker

15–19 20–24 25–29 30–39 40–49 50–59 60–64

4.67 3.95 2.41 1.59 1.23 0.97 0.31

Source:

Elementary Skilled Worker 0.89 1.96 1.17 0.98 1.42 2.11 1.61

Noncertified Technician 1.67 1.34 1.24 0.95 1.32 1.34 0.79

Certified Technician 1.29 2.46 1.58 1.31 1.33 1.56 2.11

Technical School

University Graduate

11.99 12.62 3.48 1.31 1.35 2.47 0.27

— 13.25 4.59 1.18 0.52 0.81 0.60

MOLISA (2002).

A related issue is underemployment.16 While unemployment is mostly associated with the urban areas, underemployment is largely a rural and agricultural phenomenon. In the poor rural areas, underemployment usually takes the form of seasonal or chronic underemployment, where a number of people who want to work cannot find as much work as they are able to do.

575 A Stocktaking of Viet Nam's Labor Market Policies

Underemployment in the country declined between 1993 and 1998. During this period, the proportion of the workforce working less than 40 hours a week declined from 66% to 57% (Table 9.3). Perhaps this reduction in the underemployment rate contributed to the growth in income and expenditure of the rural population during this period. However, the decline was shortlived, and underemployment began to increase in 2000 and 2002. From an estimated 47% in 2000, 56% of the rural population was again underemployed in 2002 (MOLISA 2002). Table 9.3 Hours of Work, by Rural and Urban Workforce, 1993 and 1998 Proportion of People Employed (%) Hours Worked per Week

1993

1–15 16–39 40–50 51–60 61+ Total Source:

1998

Rural

Urban

Total

Rural

Urban

Total

14 57 17 8 4 100

12 35 22 16 14 100

13 53 18 10 6 100

12 49 18 11 9 100

10 30 27 16 17 100

12 45 20 12 10 100

World Bank (1999, p. 44).

Researchers attribute rural underemployment to the shortage of land for cultivation. Land was redistributed to private households in the late 1980s. This helped raise agricultural production throughout the 1990s. However, the land stock was so limited that more users could not be productively absorbed. Many rural areas also started to urbanize, leaving less land for the farmers to till. Figure 9.11 shows that regions with smaller agricultural area per capita tend to have a higher rate of underemployment. 9.2.3

Wages

A large fraction of Vietnamese workers work on their own farms or are self-employed. Data from VLSS 1992–1993 and VLSS 1997–1998 show that wage employment was 17.9% of total employment in 1992 (12.2% in the rural areas, 41.7% in the urban areas) and 19.5% in 1998 (13.1% in the rural areas, 45.3% in the urban areas). However, wage employment has increased steadily over the past decade. By 2002, it accounted for 30% of the workforce. Within wage employment, the share of the public sector is falling. It fell from 42% in 1998 to about 31% in 2002 (World Bank 2003). In terms of average monthly wage, Vietnamese workers were earning $35 in 1993 and about $45 in 1998. Researchers estimate that average hourly wages

576 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

Figure 9.11 Agricultural Land per Capita versus Underemployment Rate by Region, 2001 70 60 50 40 30 20 10 0

Central Highlands

South East

Mekong River Delta

North West

Rural Underemployment (%) Source:

North East

South Central Coast

North Central Coast

Red River Delta

Agricultural Land per Capita (100 sqm)

MOLISA, Statistical Yearbook (2003).

in real terms increased by 10.5% per year between the 1993 and 1998 VLSS surveys (Gallup 2004). Recent official statistics show that 100% foreign-invested businesses provide the highest average wage, while the collective sector provides the lowest. Wages from party and mass organizations, government offices, security, and defense fall in between the two.17 By industry, Table 9.4 shows that the real monthly average wage in agriculture fell from about $52.9 from 1993 to $47.8 in 1998. Conversely, real monthly average wages rose in industry and especially in services. Perhaps the fall in real wages in agriculture contributed to the steady decline in the sector’s share of employment that was discussed earlier. Similarly, the increase in real wages in industry and services Table 9.4 Monthly Average Wage, by Industry, 1993 and 1998 (constant 1998 $) Industry Agriculture Industry Services Source:

Bales (2000).

1993

1998

52.9 49.7 45.0

47.8 53.1 80.8

577 A Stocktaking of Viet Nam's Labor Market Policies

explains why the employment shares of these two sectors increased over the past decade. An interesting characteristic of Viet Nam’s wages derives from two observed opposite tendencies. The first is the overall wage inequality. The Gini coefficient decreased from 0.403 to 0.377 between 1993 and 1998. The second tendency is the simultaneous increase in wage inequality in medium and large cities, especially in Hanoi and Ho Chi Minh City (Gallup 2004).18 Researchers also find that wage inequality increased across groups with different educational attainments. Le et al. (2001) show that the wage gap between college graduates and primary-school dropouts almost doubled between 1993 and 1998. The former group earned 1.3 times more than the latter in 1993 and 2.3 times in 1998. One possible explanation for the decrease in the overall wage inequality is the decrease in wage differentials between males and females. According to Le et al. (2001), men earned 24% more than women in 1993 but only 15% more in 1998. A possible explanation for the increased wage inequality in large urban areas and across education levels may be the increase in labor market opportunities in those areas. As employment opportunities increase, labor rewards become more competitive and more accurately reflective of workers’ skills. Returns to higher education seem to have increased at a faster rate. For instance, using quantile regression decomposition techniques, Nguyen et al. (2005) show that most of the inequality among better-off groups is attributed to the differential in market returns, whereas among low-end groups it is mostly due to individual characteristics. 9.2.4

Labor Productivity

Viet Nam’s GDP structure has changed significantly in recent years. Appendix Table A9.1 shows that between 1994 and 2002 agriculture’s share in GDP declined from 27.4% to 23%, industry’s share increased from 28.9% to 38.5%, and services’ share declined from 43.7% to 38.5%. For the same period, agriculture’s employment share declined from 70.76% to 60.67%, industry’s share increased from 12.83% to 15.13%, and the share of services increased from 16.4% to 24.2% (Figure 9.6 above). These changes in GDP structure and sectoral employment shares indicate that labor productivity changed in different ways across sectors. Notably, labor productivity in agriculture was much lower than in industry and services. The average annual labor productivity in agriculture (GDP per worker) for 1995–2001 was D2.3 million, whereas in the other two sectors it was D15.6 million and D19.5 million, respectively. A prominent feature of labor productivity across the three sectors is that, while it rose in agriculture and industry, it stayed almost unchanged in services. The average annual growth rate of productivity in 1996–2001 was 2.9% for agriculture and 6.5% for industry, but only 0.8% for services (Appendix Table A9.8).19

578 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

Figure 9.12 (data in Appendix Table A9.8) shows that the economy’s overall productivity increased from 1996 to 2001 by an average of 4.6% a year. However, the yearly productivity growth rate in the same period declined from 7% to 4.1%. The rate was particularly low in 1998 and 1999, when the economy was hit by the regional financial crisis and GDP grew by a modest 5.8% and 4.8%, respectively (see Appendix Table A9.1). Labor productivity in services increased very little compared with the other two sectors and in fact declined in 1999 and 2001. The stagnation of labor productivity in services was attributed to the sharp increase in the sector’s employment share, from 18.4% to 25%, over the period while total value added did not increase proportionately. As we showed earlier (Figure 9.8), since 1999 the services sector has been the main source of job generation, absorbing more new workers than agriculture and industry. To add to the observations made earlier about the causes of the fast growth in employment in the services sector, the cost of jobs created in services was much lower than in industry.

Figure 9.12 Productivity Growth Rate, by Sector, 1996–2001 (%) 12 10 8 6 4 2 0 -2

1996

1997

1998

1999

2000

2001

-4 Agriculture

Industry

Services

Source: GSO, Statistical Yearbook (2002).

An interesting issue relates to the extent to which education and skills contribute to labor productivity in Viet Nam. With an adult literacy rate of over 80%, Viet Nam has a well-educated labor force compared with countries with the same level of GDP per capita. However, researchers have been asking if general education is enough for high productivity. For instance, Tran (2004) argues that, while general education may contribute to productivity gains

579 A Stocktaking of Viet Nam's Labor Market Policies

through smoother labor reallocation, job-specific training provides laborers with specialized knowledge to help them absorb new technologies and new business methods. He finds that job-specific training is more strongly associated with productivity gains. This insight may explain why Viet Nam’s labor productivity is low despite the generally well-educated labor force. Viet Nam has a good general education system but not a job training system that combines education and skills to meet production needs. The high labor productivity in the early 1990s may have been due to structural changes in the economy that improved labor allocation. Labor productivity growth may have slowed down in the late 1990s because the gains from smoother labor allocation had been used up while, at the same time, new skills from job-specific training were slow to emerge. 9.2.5

Labor Mobility Internal Migration

Before Doi Moi, the Vietnamese Government controlled migration strictly, especially from rural to urban areas, through the household registration system. Since Doi Moi, labor mobility has changed significantly. Dang et al. (2003) estimate that 4.5 million persons changed residence between 1994 and 1999. These people constituted 6.5% of the total population aged five and older. Among these migrants, 55% moved within a province, and 45% moved across provincial boundaries within Viet Nam. During this period, out of 61 provinces 17 experienced net gains in population through migration. The observed flows of migration were consistent with the location of economic opportunities, higher income levels, and growth patterns. The most popular destinations included Hanoi, Ho Chi Minh City, and the South East region. Regions with high population pressures on resources and with low income opportunities had the highest rates of net out-migration. These included the Red River Delta, the Central region, and almost all provinces in the North East region (Dang et al. 2003). Overall, the largest flow of recent migrants has been from rural to urban areas. For instance, from the VLSS 1997– 1998 data, almost one half of urban residents were born in the rural areas (GSO Statistical Yearbook 1999). Studies find that rural-urban migration in Viet Nam is largely linked to higher underemployment and unemployment in the rural areas, where one fifth of the population is considered to be surplus labor (Dang et al. 2003). The other large flow is from northern to southern provinces, where the business environment is more open, economic development is more vibrant, and resources are more abundant. An interesting finding in recent studies is that economic factors are not the strongest motivation for both male and female migrants. The main reasons

580 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

cited by respondents in recent surveys were war, natural disasters, and family relations. The VLSS 1997–1998 data show that around 18% of male and female migrants cited economic reasons, while almost 40% of males and 70% of females cited family relations (Table 9.5). Among rural-urban migrants, only 16.6% cited economic reasons. War and natural disasters, and family matters, were the motivation for 28.9% and 46.3% of migrants, respectively. Table 9.5 Reasons for Migration (%) Reason Gender

Economic

Disaster, War

Family

Other

Total

Male Female

18.43 18.55

35.68 5.26

37.18 68.45

8.71 7.75

100 100

Source:

GSO (2000).

Moreover, economic considerations are a key factor in migration decisions among young adults. According to the 1999 census data, 52%) of all migrants were under 25 years old, and only 10.5% were 45 and older (Dang et al. 2003). Indeed, the young adults were the largest group of migrants at that time. Researchers have also noted the following: (i) the percentage of unemployed among migrants was slightly higher than among nonmigrants; (ii) young migrants composed only a small fraction of the unemployed; (iii) among all migrants, workers in the industrial and services sectors were most mobile; and (iv) labor migration was highly selective of educated and skilled young adults. International Migration The passage of the Foreign Investment Law in the early 1990s encouraged foreign direct investment in the country. While this has increased employment, it has not resulted in an influx of foreign expatriates working in Viet Nam. Bureaucratic red tape and various rules and restrictions on foreign expatriates have turned off prospective in-migrants. To date, most foreign expatriates in the country are working for international organizations. The first large immigration resulted from the repatriation of Vietnamese laborers from the former Soviet Union and Eastern Europe. Around 80% of the workers returned to Viet Nam when the political changes occurred in these countries and even before their contracts had expired. Another source of large inward migration was the repatriation of illegal Vietnamese migrants from various Asian countries (Appendix Table A9.9). The United Nations sponsored a program to send illegal Vietnamese migrants back to Viet Nam. From 1991 to 1997, a total of 104,386 illegal migrants were repatriated to the country.

581 A Stocktaking of Viet Nam's Labor Market Policies

Viet Nam’s labor migration started in the early 1980s. In the first wave, Vietnamese overseas workers were sent to the former Soviet Union and Czechoslovakia. Their number was soon reduced, however, because of social conflicts between Vietnamese and domestic workers. The second wave of labor migration occurred in the late 1980s. Vietnamese workers, 42% of them women, were sent as contract workers to the former Soviet Union and Eastern European countries. The collapse of the Soviet Union resulted in amendments to the bilateral agreements on the employment of Vietnamese labor, and extensive repatriation took place.20 There were not many labor emigrants in the early 1990s; most of the few who left went to the Lao People’s Democratic Republic and Cambodia to work for construction companies. The third large wave of labor migration occurred in 1994. To promote its labor export policy, the Vietnamese Government started sending workers to other countries, most importantly to the Middle East (Lebanon, Kuwait, and Saudi Arabia) and to advanced economies in Asia (Japan, Korea, Malaysia, Singapore, and Taipei,China). In the late 1990s, the number of Vietnamese migrants to Asian countries rose dramatically because of labor shortages and a change in labor import policies in the destination countries that allowed even unskilled and semiskilled workers to find work in those countries. Figure 9.13 shows a distribution of Vietnamese overseas workers for 1992–1999.

Figure 9.13 Distribution of Vietnamese Emigrants, by Continent, 1992–1999 (excluding seamen) (%) 100 80 60

40 20 0 1992

1993

1994 Asia

Source:

1995 Africa

MOLISA, Statistical Yearbook (2000).

1996

1997

1998 Other

1999

582 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

The type of employment of Vietnamese overseas workers also changed. In the early 1980s only factory workers worked overseas; now some semiskilled and skilled workers are included. But most workers are unskilled and do simple jobs in construction and garment factories. The number of highly educated individuals, such as experts in education or agriculture, remains limited. In 2000, of some 347,000 Vietnamese working in over 40 countries, only 35.3% were skilled laborers (Tran 2003). In recent years, remittances from international labor migrants rank as the fourth-largest source of foreign exchange revenues after only exports of oil, garments and textiles, and seafood. From $350 million in 1996–1997, remittances reached $1.6 billion in 2004 (Appendix Table A9.10). International labor migration is expected to continue to increase as the country is further integrated into regional and global markets. Overseas laborers’ remittances are also expected to remain a large source of the economy’s foreign exchange revenues, as semiskilled, skilled, and educated individuals continue to emigrate. 9.2.6

Poverty

Viet Nam has achieved impressive results in poverty reduction in the past 10 years. A decade ago, 58% of the population was living below the poverty line.21 In 1998, the ratio was reduced to 37%, and by 2002 it had declined further to 29%. Poverty incidence was halved, with some 20 million Vietnamese rising out of poverty in a decade. Despite this achievement, however, the percentage of the poor and hungry households in Viet Nam remains high (Table 9.6). Poverty is widespread in the rural areas, where 90% of Viet Nam’s poor live. The poverty gap is highest among the rural poor, and stood at 8.7% in 2002. A majority of the rural poor get their incomes from agricultural work. The poor population is concentrated in remote or isolated areas with very poor natural resources and harsh natural conditions, which limit economic productivity and income generation opportunities. Some 64% of the poor live in the Northern Mountain, North Central Coast, Central Highlands, and Central Coastal regions. Although living standards in the urban areas are higher than the national level and urban poverty is lower than the national average, the number of urban poor is still significant. In 2002, almost 7% of the urban population was living below the poverty line. A majority of them work in the informal sector, where income and employment are unstable. They tend to live in areas with poor infrastructure and limited access to basic social services like water and sanitation, education, and health services. Poverty is particularly severe among ethnic minorities, with a poverty rate two or three times that for the Kinh and Chinese Vietnamese groups. In

583 A Stocktaking of Viet Nam's Labor Market Policies Table 9.6 Poverty Rate and Poverty Gap, 1993, 1998, and 2002 (%) Item Poverty Ratea Urban Rural Kinh and Chinese Ethnic Minority Food Povertyb Urban Rural Kinh and Chinese Ethnic Minority Poverty Gapc Urban Rural Kinh and Chinese Ethnic Minority a b c

Source:

1993

1998

2002

58.1 25.1 66.4 53.9 86.4 24.9 7.9 29.1 20.8 52.0 18.5 6.4 21.5 16.0 34.7

37.4 9.2 45.5 31.1 75.2 15.0 2.5 18.6 10.6 41.8 9.5 1.7 11.8 7.1 24.2

28.9 6.6 35.6 23.1 69.3 10.9 1.9 13.6 6.5 41.5 6.9 1.3 8.7 4.7 22.8

The poverty rate is the percentage of the population below the $1-per-day poverty line. Food poverty is the percentage of the population below the food threshold of 2,100 calories per day per person. The poverty gap is the average distance between the expenditures of the poor and the poverty line, in percentage. World Bank (2003, p. 9).

2002, on average, 69.3% of the ethnic minorities residing in all regions lived in poverty (World Bank 2003). In the Central Highlands region, more than 80% of ethnic minorities live below the poverty line. Although ethnic minorities account for only 15% of the total population, they made up 20% of the poor in 1993 and more than 30% in 2002, and could constitute up to 37% of the poor by 2010. In general, families are larger, the household head and spouse are less well educated, and endowments (housing and assets) are less bountiful among the ethnic minorities than among the Kinh and Chinese-Vietnamese majority. Further, ethnic minority communities tend to live in geographically and culturally isolated areas with minimal access to favorable economic development conditions like infrastructure and basic social services. Poverty incidence and poverty reduction rates vary greatly across regions. Poverty data in 2002 and June 2004 show that the North West Uplands was the poorest region, followed by the Central Highlands, North Central Coast, and North East Uplands (Table 9.7). Poverty rates were also high in the two deltas, but these dropped significantly compared with other regions between 1993 and 2002. The Southeast region had the lowest poverty rate for the period, with the rates falling significantly from 32.7% in 1993 to 9.9% in 2002.

584 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang Table 9.7 Regional Incidence of Poverty Poverty Rate $1-a-day per person

MOLISA Poverty Rate

Region

1993

1998

2002

June 2004

End–2004 (estimated)

North East Uplands North West Uplands Red River Delta North Central Coast Central Coast Central Highlands South East Mekong River Delta

78.6 81.0 62.9 74.5 49.6 70.0 32.7 47.1

58.6 73.3 28.7 48.1 35.2 52.4 7.6 36.9

38.8 68.1 22.7 43.6 25.6 51.4 9.9 23.0

11.6 19.1 6.6 14.2 10.8 13.2 3.0 8.9

10.3 14.8 6.1 13.2 9.5 11.0 2.2 7.4

Note:

Source:

9.2.7

MOLISA defines region-specific poverty thresholds according to expenditure per person per year. Together, these thresholds constitute the national poverty line, which is often referred to as the “MOLISA poverty line.” The Vietnamese Government uses this poverty line in official documents. GSO and MOLISA, National Steering Committee on Hunger Eradication and Poverty Reduction.

Inequality

Economic growth in the 1990s led to a gradual increase in inequality, as evidenced by the increase in the share of the richest group in total expenditures. Table 9.8 below shows that, from 1993 to 2002, the expenditure share of the poorest to the near-richest groups, which composed 80% of the population, declined slightly, while that of the richest group grew by 4% from 1993 to 1998, and by 6% from 1998 to 2002. The Gini coefficient shows that, while Viet Nam remains relatively egalitarian, inequality is rising. In 1993, the country’s overall Gini coefficient Table 9.8 Share of Expenditures, by Population Quintile, 1993, 1998, and 2002 (%) Quintile Poorest Near-Poorest Middle Near-Richest Richest Total Richest/Poorest Ratio Source:

1993

1998

2002

8.4 12.3 16.0 21.5 41.8 100.0 5.0

8.2 11.9 15.5 21.2 43.3 100.0 5.5

7.8 11.2 14.6 20.6 45.9 100.0 6.0

World Bank (2003, p. 13).

585 A Stocktaking of Viet Nam's Labor Market Policies

was 0.34; by 2002 it had risen to 0.37, a level comparable with that of other Asian developing countries. Recent studies (e.g., Glewwe et al. 2000, Haughton et al. 2001, Liu 2001) find that the rise in Viet Nam’s overall inequality is mostly due to the widening gap between the rural and urban areas. Using Theil’s L inequality index, the World Bank attributes 96% of the increase in overall inequality to increasing urban-rural inequality (World Bank 1999). It also finds that, between 1993 and 1998, while per capita expenditures increased by 30% among the rural population, it grew twice as fast (61%) in urban areas. This further widened the gap between urban and rural per capita expenditures. A similar result was found when incomes of rural and urban households were examined from 1999 to 2002. Even if rural incomes grew at a rate of 22.3%, faster than the rate for urban incomes (18.4%), urban household incomes during this period were still 2.26–2.3 times those of rural households (GSO 2004). Inequality between regions has also become prominent with the uneven patterns of growth across regions (Table 9.9). Between 1993 and 2002, inequality Table 9.9 Gini Index for Expenditures, 1993, 1998, and 2002 Region

1993

1998

2002

Viet Nam Urban Rural Northern Mountain Red River Delta North Central Coast South Central Coast Central Highlands South East Mekong Delta

0.34 0.35 0.28 0.25 0.32 0.25 0.36 0.31 0.36 0.33

0.35 0.34 0.27 0.26 0.32 0.29 0.33 0.31 0.36 0.30

0.37 0.35 0.28 0.34 0.36 0.30 0.33 0.36 0.38 0.30

Source:

World Bank (2003, p. 14).

was highest in the South East region, which includes the fastest-growing urban center, Ho Chi Minh City. However, inequality increased most significantly in the North Mountain region, where the Gini index rose from 0.25 in 1993 to 0.34 in 2002. Inequality also increased in the Central Highlands and Red River Delta regions.

9.3 Labor Market Policies and Government Programs The shift toward a market economy under Doi Moi has necessitated various reforms in labor market policies. The Government’s overall strategy is to reduce

586 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

the State’s direct involvement in economic activities and to lay the legal foundations for effective labor market transactions to take place. To reduce state employment and increase nonstate employment, the Government has abandoned collective farms in rural areas and restructured SOEs in urban areas. However, these initial steps have been viewed as “ad hoc” and dealing “with disparate areas with little regard for cohesion and clarity” (Li et al. 2003). Consequently, the Government bolstered these initial steps with the passage in June 1994 of the Labor Code, which was amended in April 2002. The Labor Code and subsequent related decrees and rules seek to establish the country’s legal framework for labor provision and use in the state and nonstate sectors. Intrinsic to all these labor policy reforms is the need for Viet Nam to maintain its recent high growth rates and create enough jobs. As mentioned in earlier sections, observers estimate that Viet Nam needs to absorb about 1.1– 1.3 million new workers annually. Moreover, despite Viet Nam’s impressive economic gains over the last two decades, income distribution is still unequal and poverty incidence remains high. To create more jobs and lessen the income disparities resulting from the transition to a market economy, the Government has put in place various employment generation programs since the mid-1990s (Shanks and Turk 2003). This section discusses how the various new labor policies have influenced labor market outcomes, in particular, how they contribute toward increasing employment, promoting income equality, and reducing poverty. It also reviews the Government’s major active labor market programs since Doi Moi in relation to the following: (i) labor restructuring in 1986–1994; (ii) implementation of the Labor Code and regulations on labor markets; and (iii) employment generation programs. 9.3.1

Labor Restructuring during 1986–1994

Reforms pursued immediately before and after Doi Moi altered Viet Nam’s labor structure. The land reforms implemented between the 1980s and the 1990s affected rural labor, while the state enterprise reforms and laws attracting foreign investment restructured urban employment. From the late 1950s to 1985, rural workers were organized into brigades that “collectively” farmed the State’s communal land. With Doi Moi, Viet Nam abandoned its collective system and relocated production and land to peasant households.22 In 1993, the Government passed a new land law (Resolution 10) that increased the term of the lease and created a market for land by ensuring that land-use rights could be inherited, transferred, exchanged, leased, and mortgaged. The law instituted a market-based agricultural economy (Do and Iyer 2002, Dollar 2002).23 Land redistribution progressed slowly because of abusive commune authorities or “self-interested cadres,” who used their local

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powers to allocate land. Redistribution was achieved much earlier in North Viet Nam, where decollectivization had been in place since the 1960s. In the South, it accelerated only after 1993. By the early 2000s, land distribution in rural areas was almost complete.24 Many observers agree that the newly assigned land rights gave farmers reasonable incentives to invest, but much remained to be done to achieve further efficiency (Ravallion and van de Walle 2004, Goletti 1998). Land reform has helped improve the situation of many farmers and contributed to a boom in rice production that has transformed Viet Nam from a rice importer to the world’s second-largest rice exporter. Average rural household incomes grew by 60% from 1993 to 1998 (Marsh et al. 2004). But the impact of these reforms on rural employment was minimal. The average number of workweeks each working household member spent on agriculture each year increased by about 4.5 weeks after 1993, but whether workweeks have gone up overall remains unclear (Do and Iyer 2002). Moreover, strict regulations on the conversion of rice land to other production activities constrained agricultural diversity and discouraged the development of a rural industry.25 As a result, rural labor productivity barely improved and agricultural underemployment persisted. Meanwhile, the failure to absorb the growing agricultural labor surplus led to rural-urban migration. State enterprise reforms after Doi Moi were based initially on giving SOEs more management autonomy, and later on privatizing the less cost-effective ones to develop private enterprises.26 Dismantling the less profitable SOEs, however, reduced state employment. Some 970,000 workers from SOEs were retrenched between 1987 and 1993 (O’Connor 1996, p. 20). State employment fell from 8.7% in 1989 to 6.2% in 1991. Fortunately, there was no huge rise in unemployment, as the private sector stepped up and created jobs for 4,369,000 workers (McCarty 1999). The effect of state enterprise reforms on urban employment was, however, limited. Reforms progressed slowly, especially in the mid-1990s, as privatization was stalled by workers’ concerns over the loss of jobs, benefits, and land tenure. In short, there were few incentives for leaving state employment. It was thus difficult to estimate whether the labor surplus in SOEs was eliminated and eventually absorbed by the nonstate sector. A survey made by the planning department of the State Planning Committee in 1994 showed that while the proportion of SOEs with surplus labor had fallen since 1991, the number remained significant. Estimates of labor redundancy ran as high as 400,000 workers (Belser and Rama 2001). Some speculate that many of those retrenched, especially the less-skilled ones, resorted to household employment. This might explain the predominance of public employment in services and industry, and the persistence of household employment (discussed in previous sections and shown in Appendix Table A9.5).

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The economic openness of Doi Moi led to the adoption of the Law on Foreign Investment in 1987. This law and its subsequent amendments established an “open-door” policy that attracted considerable foreign investment but did not create many jobs. Much of the foreign investment went to capitalintensive industries like oil-related production, heavy industry, and real estate. Until 1996, only 17% of foreign investment flowed into labor-intensive light industries (McCarty 1999). The impact of foreign investment on the labor market until the late-1990s stayed weak because the “capital intensive nature [of foreign investment] minimized both employment creation and spillovers into the rest of the economy” (Belser 2000). 9.3.2

Labor Code and Labor Market Regulations

Before Doi Moi, markets played a minimal role in the allocation of labor in Viet Nam. Labor market policies essentially focused on controlling the economic activities of SOEs to ensure that the economic profits accrued directly to the Government. This control covered, among others, the firms’ resources and assignment of jobs and wages to workers. SOE managers had no discretion to set workers’ wages nor the power to hire and fire employees (O’Connor 1996). Labor mobility across SOEs was virtually nonexistent. Labor policies and regulations did not promote a competitive and flexible labor market and provided hardly any incentive to both employers and employees to engage in efficient production and to improve labor productivity. The Government tried to rectify this by passing the Labor Code in June 1994 and its amendments in April 2002. This section gives an overall description of the Labor Code and discusses key issues related to its implementation. The following six chapters of the Code are discussed in depth: (i) Chapter IV: Labor contracts; (ii) Chapter VI: Wages; (iii) Chapter VII: Working hours and holidays; (iv) Chapter XII: Social insurance; (v) Chapter XIII: Trade unions; and (vi) Chapter XIV: Resolution of labor disputes. The Labor Code The Labor Code is a comprehensive regulatory framework for Viet Nam’s labor market. It regulates labor interactions between employees and employers, to facilitate the effective use and management of labor resources and increase productivity. To quote the fourth paragraph in the preamble: The Labour Code protects the right to work, benefits, and other rights of employees and, at the same time, protects the legal rights and benefits of employers, thereby creating conditions for harmonious and stable labour

589 A Stocktaking of Viet Nam's Labor Market Policies relations, contributing to the development of the creativity and talents of intellectual and manual workers and of labour managers in order to achieve productivity, quality and social advancement in labour, production, and services, effective utilization and management of labour, and contributing to industrialization and modernization of the country, for a wealthy and strong country, and a fair and civilized society.

The Labor Code has 17 chapters regulating the rights and obligations of employees and employers, labor standards and labor utilization, and management principles. It has specific chapters on employer-employee contracts, wage rates, working hours, occupational safety and hygiene, trade unions, social insurance, and resolution of labor disputes. There are also special provisions on female employees and junior workers, as well as details on the implementation of the Code’s labor utilization and management provisions. Appendix Table A9.11 outlines the chapter structure and main contents of the Labor Code. General Provisions. The most important provision of the Labor Code that spells the difference in the labor market before and after the Code’s inception is the legal system governing relations between employees and employers. It acknowledges that every individual in the country aged 15 and above has the right to sell and buy labor services, and legalizes labor contracts and employment relationships established voluntarily between employees and employers. It embraces the tripartite relations of the International Labour Organization (ILO) between employees and employers, with labor disputes mediated through legal authorities or through conciliation and arbitration. For instance, Article 16, Chapter II, states: 1.

2.

An employee shall have the right to be employed by any employer in any location not prohibited by law. A person who is seeking work shall have the right to make a direct approach or to register with an employment introduction agency in order to find a job which matches his aspiration, ability, trade skill, and health. An employer shall have the right to recruit labour directly or through employment introduction agencies, and to increase or reduce the number of employees in accordance with production and business requirements and in compliance with the provisions of the law.

And Article 9, Chapter I: The labour relationship between an employee and an employer is established and developed through negotiation and agreement on the principles of voluntary commitment, fairness, co-operation, mutual respect of legal rights and benefits, and full performance of undertakings.

590 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang The employee and the employer shall have the right to request a competent body or organization to resolve a labour dispute. The State encourages the resolution of labour disputes by way of conciliation and arbitration.

State Administration. In Viet Nam, labor regulations are implemented at three levels, namely: (i) ordinances issued by the National Assembly; (ii) decrees issued by the Government; and (iii) circulars issued by the Ministry of Labour, War Invalids, and Social Affairs (MOLISA). The Labor Code (Articles 180 and 181, Chapter XV) stipulates that MOLISA is responsible for overall state administration of labor in all branches of employment throughout the country. It also institutionalizes the responsible administrative authorities for labor matters at different levels. Table 9.10 presents a summary list of Viet Nam’s labor institutions and the labor issues for which they are responsible. Table 9.10 Responsibilities of Labor Institutions in Viet Nam Labor Issue

Institution or Authority Responsible

Preparation of labor standards Coordination of the application of standards Verification of standards Assessment of standards Inspection of compliance Registration of workers’ organizations Collective bargaining Expansion of the scope of collective bargaining Intervention and resolution of collective labor disputes

MOLISA, MOH, and VGCL MOLISA MOLISA, MOH, and VGCL MOLISA MOLISA Provincial trade unions Local labor offices Provincial departments of MOLISA Labor conciliators with district labor offices, the people’s court, labor arbitration council, and labor conciliation councils

Note:

MOLISA: Ministry of Labour, War Invalids, and Social Affairs, MOH: Ministry of Health, VGCL: Vietnam General Confederation of Labor.

Ratification of ILO Conventions. Viet Nam has so far ratified 15 ILO conventions, including four core conventions, all in the 1990s. The ratified conventions are in Table 9.11. While the regulatory framework looks comprehensive on paper, only parts of it can be enforced in practice (McCarty 1999). For instance, statistics show that, up to 2002, 62,000 enterprises and about 2.6 million households were hiring labor. And up to November 2004, the country had about 80,000 operational enterprises. Annually, MOLISA can inspect only about 2,000 enterprises, and most of these violate the Labor Code. The main violations include not paying social security, overtime, or timely wages, and firing workers

591 A Stocktaking of Viet Nam's Labor Market Policies Table 9.11 Ratified ILO Conventions Convention C5 C6 C14 C27 C45 C80 C81 C100 C111 C116 C120 C123 C124 C155 C182 Note:

Subject

Minimum age (industry) Night work of young persons (industry) Weekly rest (industry) Making of weight (packages transported by vessels) Underground work (women) Final articles revision Labour inspection Equal remuneration Discrimination (employment and occupation) Final articles revision Hygiene (commerce and offices) Minimum age (underground work) Medical examination of young persons (underground work) Occupational safety and health Worst forms of child labor

Effective 1919 1919 1921 1929 1935 1946 1947 1951 1958 1961 1964 1965 1965 1981 1999

C5, C100, C111, and C182 are ILO core conventions.

arbitrarily. These violations are possible because employers often do not sign the required contracts with employees.27 Difficulties in implementing the Labor Code stem from its limited coverage, its uneven applicability, and shortcomings inherent in the Government’s legal framework itself. Overall, these tend to limit the impact of the Code on labor market outcomes in Viet Nam. The section below highlights key general issues in implementing the Code, as found in previous studies. General Issues in Implementing the Labor Code Limited Coverage. In theory, the Labor Code applies to all laborers who have signed a labor contract or agreement or who have obtained a spoken employment agreement. But the Code has had a limited direct impact on the labor market because most Vietnamese workers are employed in the informal sector and are thus outside the purview of government regulations.28 Moreover, the provisions of the Code are not uniformly applied even to those employed in the formal sector—an estimated 10 million of the 41 million workers in the labor force. In particular, in the public sector, the Labor Code does not apply to civil servants; public employees; elected, appointed, or assigned officials; members of the armed forces and the police; members of mass organizations and other political and social organizations; and members of cooperatives. The Code states that these workers shall be governed by other laws and a number of the Code’s provisions, which shall be applied to particular entities (Article

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4). This means that in the public sector the Code applies only to SOEs. In the domestic nonpublic sector, since agriculture, household production, and selfemployment overwhelmingly predominate (see Section 9.2.1), the Code applies to only a small fraction of registered private enterprises. Most of these enterprises are small and many employ fewer than 10 workers. The actual coverage of the Code is therefore very limited. The only sector that is well covered by the Code is the foreign-invested sector. However, as most foreign investment has gone into capital-intensive activities rather than labor-intensive light industries, the foreign-invested sector makes up only a small part of the economy. In 1996, foreign-invested firms accounted for only an estimated 5% of the industrial labor force (McCarty 1999). Overall, the Labor Code’s coverage and application can be visualized as in Figure 9.14. Uneven Applicability. Another major problem in implementing the Labor Code stems from its uneven application to different legal forms of economic

Figure 9.14 Applications of Viet Nam’s Labor Code Public Sector (Labor Code applies only to state-owned enterprises)

Contracts Income policies Minimum wages Insurance Unions

Foreign-Invested Sector (100% foreign investment and joint ventures) Labor Code applies, as in the public sector, but with higher minimum wages

Domestic Nonpublic Sector (household production, private enterprises) Labor Code applies as in the public sector, but only in enterprises with more than 10 employees

Note: Source:

The size of the circles represents relative sector employment share. Interfaces between circles represent sector relationships. McCarty (1999) with modifications by the authors to update the information.

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organization. For instance, the minimum wage is based on the local cost of living. The Viet Nam General Confederation of Labor (VGCL), in consultation with local governments and representatives of employers, determines a general minimum wage, a minimum wage for each region, and a minimum wage for each industry (Article 56). As a result, different regions, different economic sectors, and enterprises of different ownerships have different minimum wages. The Code must also be implemented in conjunction with many other laws, regulations, and implementing decrees that apply separately to different economic agents and businesses. For instance, different income taxes apply to workers in the domestic and foreign sectors and to workers in different regions (see Appendix Table A9.12). Mandatory provisions, e.g., labor contracts, working hours, and labor unions, apply only to formal sector enterprises. Such provisions are disincentives to enterprise formation and growth, as firms find these provisions costly. For existing enterprises, such regulations increase the costs of expanding and creating jobs, thereby encouraging circumvention of the law. This is counterproductive in a country that is trying to establish a market economy with a robust formal wage sector (Riedel and Comer 1997). Below we review some specific chapters in more detail. Labor Contracts (Chapter IV) The Labor Code formalizes the institution of the labor contract as the basis for employer-employee relationships. The Code provides that all workers in enterprises of more than 10 workers must have contracts with specific terms and conditions of employment. Article 26 defines the employment contract as an agreement between employee and employer on the paid job and specifies the conditions of work, and the rights and obligations of each party. An employment contract is entered into directly between the employer and the employee. Most contracts must be in writing; however, an employment contract may be oral for employments of less than 3 months or in the case of agreements with domestic helpers. Furthermore, an employee may sign more than one labor contract, provided that he or she agrees to meet all the obligations stipulated in the contracts (Article 30). Usually, the employment contract is with individuals, but in certain situations an employment contract may be entered into by a duly authorized representative of a group of employees on behalf of an employee in the group. This contract will have the same effect as if it was entered into with each worker individually. Individual contracts can be for an indefinite term, or for a definite term of 1 year to three years, or for seasonal employment of less than 1 year (Article 27). The Code prohibits the use of short-term or seasonal labor contracts for

594 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

permanent jobs except for the temporary replacement of an employee. The labor contract stipulates the work to be performed, working hours and rest breaks, wages, location of job, social insurance, and duration of contract. It may not contain less favorable terms and conditions than those stipulated in the Code, collective agreement, or internal rules and regulations of the enterprise (Li et al. 2003). An individual contract is enforceable against any subsequent owner or manager after a merger, consolidation, or transfer of ownership, until the contract is amended or terminated (Article 31). Workers can ask for an amendment of their contract, provided that they give at least 3 days’ notice to the other party. If the other party refuses the request, the contract cannot be amended. In principle, employees are not bound to do work that is different from their assigned task as stipulated in their contract (Li et al. 2003). Workers can, however, be temporarily assigned to another job in certain circumstances, provided that the temporary assignment’s duration will not exceed 60 days, the employee is given advance notice of the assignment, the assignment is suitable to the health and gender of the employee, and the wage to be paid is at least 70% of the previous wage but will never be below the minimum wage. An employment contract may contain provisions relating to a probationary period. The probationary period for jobs that require secondary education and some technical skills must not be more than 30 days. For a task requiring highly technical skills, the probationary period shall not exceed 60 days. During the probationary period, each party shall have the right to terminate the trial job agreement without need of a notice, and payment shall not be made if the job is found to be unsatisfactory to the employer (Article 32). An employment contract can be suspended in certain cases: if the worker is called to military service or other public service, if the employee is detained or sentenced to temporary imprisonment, or when agreed on by both parties. However, the employer must reinstate the employee upon the return of the latter from citizen’s duties or as agreed on with the employer. The Government, on the other hand, will decide on the reemployment of the employee who was temporarily detained or imprisoned (Article 35). The Code also provides for collective labor agreements. SOEs, domestic enterprises having 10 or more employees, and all foreign-invested enterprises should have collective agreements with their employees. The collective labor agreement or contract is negotiated by an equal number of employees and employers in the presence of representatives of the executive committee of the local trade union (Article 45). Usually, the collective labor agreement can apply for 1–3 years, after which it must be renegotiated. The agreement can, however, be extended with the consent of both parties. A collective agreement can be ratified only if more than 50% of the union members are in favor of it. It must

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also be submitted to the provincial labor office and presented to the executive of the local trade union committee. The Labor Code provides for the termination of employment contracts in a number of ways. Usually a contract is automatically terminated when the contract expires or when the work as stipulated in the contract has been completed. When a worker dies, is declared missing by the courts, or has been sentenced to imprisonment for a long period, the contract is also deemed terminated. Both parties can also agree to end the contractual agreement. An employee with a fixed-term contract or hired for a seasonal job can unilaterally terminate the contract under the following circumstances: (i) the employee is not assigned to the correct job or is not given the agreed working conditions; (ii) wages paid are below the agreed rate and are not paid on time; (iii) the employee is appointed to public office; (iv) the female employee is pregnant and has been advised by her doctor to stop working; (v) personal or family reasons prevent the employee from performing his or her duties; (vi) the employee is maltreated or made to do forced labor; or (vii) the employee has been absent for 3 consecutive months because of illness for those with fixed-term contracts, or one quarter for those with seasonal jobs (Article 37). An employer may not terminate a worker in the following cases: (i) the employee is under treatment because of sickness, work-related accident, or occupational disease; (ii) the worker is on annual leave for personal or other reasons permitted by the employer; or (iii) the female worker is pregnant, on maternity leave, or breastfeeding a child less than 12 months old. The employer can, however, terminate a contract when the employee fails to fulfill his or her obligations in the contract, or a disciplinary issue arises, or the employee has been on sick leave for 1 year with no chance of recovery. The termination of a labor contract due to poor performance or disciplinary reasons requires the agreement of the trade union. When an employer unlawfully terminates an employment contract, the employer must reinstate the worker and pay back wages for the period during which the worker was not allowed to work. An employee who does not wish to be reinstated will be paid a severance allowance on top of the back wages due. When the employee agrees not to be reinstated, he or she shall receive additional compensation for the purpose of terminating the labor contract (Article 41). A worker who unlawfully terminates the employment contract shall not be entitled to any severance allowance. The worker will also have to pay for any training costs incurred by the enterprise for the worker’s professional development. Finally, any party that unilaterally terminates an employment contract and does not give proper notice must pay the other party compensation equal to the amount of wage corresponding to the days of notice not given. In Viet Nam, the informal sector constitutes a large percentage of the economy; cases of missing labor contracts are understandably widespread. Data

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from the MOLISA Statistical Yearbook indicate that, in the mid- to late 1990s, there was poor compliance with the provision of the Code for employers and employees to enter into contracts. And those who saw to it that most of their workers were on contracts were foreign investors. A survey in 1996 showed that 92% of laborers in joint ventures (foreign-investor and state-owned) and 79% of workers in SOEs had employment contracts (McCarty 1999). Between SOEs and domestically owned enterprises, the SOEs, being central government institutions, were more likely to comply with the provisions of the Code. Aside from absent employment contracts, some contracts were not duly prepared and signed because most employers preferred to keep workers’ compensation at a minimum and tried to avoid paying additional expenses like social insurance, in deliberate violation of the Labor Code. Workers, on the other hand, particularly those employed in agriculture and household work, lacked the proper education and understanding of the importance of an employment contract. This low compliance is being perpetuated by the employers’ and workers’ adherence to long-held customs, traditions, or norms. Foreign-owned enterprises come from a culture where the law is obeyed and enforced and noncompliance results in legal action against the employer. The perceived absence of legal consequences also encourages employers not to enter into employment contracts with workers. Foreign-owned companies, moreover, do not have the network or the protection enjoyed by SOEs in resolving alleged violations of the Code. In the case of SOE employees, they resist employment contracts because of fear of losing the benefits and privileges that they received as civil servants before the implementation of the Code. The introduction of labor contracts has also discouraged labor mobility from state to nonstate employment. Since a contract implies fixed work tenure, workers are discouraged from leaving the SOEs, where they are guaranteed lifetime employment. Moreover, contracts introduce rigidities that deter job creation and reduce the flexibility of firms in dealing with changing labor market conditions. Despite explicit provisions to the contrary in the Labor Code, many formal private sector establishments pursue fixed-term contracts of relatively short duration. Often, the absence of signed contracts leads enterprises to violate the Labor Code, particularly by not providing social security, delaying the payment of monthly wages, or carrying out arbitrary terminations (McCarty 1999, O’Connor 1996). Wages (Chapter VI) The Labor Code requires that wages be paid by agreement between the employers and employees involved, in consideration of the production, quality, and result of the work performed. The Code also provides that the minimum

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wage shall be based on the cost of living and serve as reference for the calculation of wage rates for other categories of work (Article 55). The Code prohibits labor contracts that set a wage rate below the minimum level. The Government, after consultation with the VGCL and representatives of employers, determines and publishes the general minimum wage rates for specific periods and the minimum wage rates for different areas in the country and for various occupations. It shall also adjust the minimum wage when the price index increases, to ensure that the minimum wage meets the cost of living (Article 57). Employers have the option of selecting the method of paying wages. Wages can be hourly, daily, or monthly, or in some instances they can be accumulated or paid on the basis of completed pieces, provided there is an agreement to that effect between the employer and the employee (Article 58). Articles 59 and 69 stipulate how employers should pay employees their wages. In general, wages should be paid in full, in cash, and directly to the employees. All deductions from wages shall be discussed first with the executive committee of the trade union and may not exceed 30% of the monthly wage of the employee. If there is a delay in the payment of wages, the delay must not exceed 1 month and the employer still has to contribute to the compensation fund. Wage payment partly in check or money order is allowed, provided both parties have a prior agreement and that the worker incurs no losses or inconvenience (Article 59). Workers who do overtime work will be paid at least 150% of their regular normal daily wage on normal working days, 200% on weekly days off, and 300% on holidays and paid leaves. Night-shift workers shall be paid an additional amount of at least 30% of the wage calculated on the basis of the wage unit price or day shift wage. If an employee is granted some time off for the additional hours worked, the employer shall only be required to pay the amount of additional wages beyond the normal wage (Article 61). Employees are also entitled to allowances, bonuses, wage increases, and other incentives agreed on in employment contracts or collective bargaining agreements, or in the rules and regulations of the enterprise (Article 63). In cases where the employee has stopped working because of the fault of the employer, the employee shall be entitled to payment of his or her full wage. However, if the work stoppage is due to the fault of the employee, the employee shall not be entitled to payment of wage. In case of natural force incidences or situations beyond the control of the employer, i.e., breakdown in electricity or water supply, the level of wages shall be discussed and agreed by both parties, provided that it shall not be less than the minimum wage. If the enterprise experiences a change or transfer of ownership due to mergers, consolidation, etc., the new employer will be responsible for the payment of wages and other benefits. If on the other hand, the enterprise

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becomes bankrupt and is forced to close down, the payment of wages, retrenchment allowances, social insurance, and other benefits, as agreed on in the employment contract, shall be the first priority in the order of payment (Article 66). Article 67 entitles employees to an advance payment of at least 1 month of his or her wage in the following circumstances: (i) the family of the employee is facing financial difficulties; or (ii) employee goes on temporary absence to perform civic obligations. Wage reforms and the minimum wage policy were instituted even before the Labor Code was passed in 1995. For instance, before Doi Moi, the wages of workers in Viet Nam were paid on a piece-rate basis, a way to link performance to basic pay and bonuses under a system of wage employment. And after the implementation of the Foreign Investment Law in 1992, the Government instituted a minimum wage for workers in foreign-invested enterprises based on a perception of what Viet Nam could reasonably charge, given wage rates in similar countries. In general, the introduction of wage employment immediately before and after Doi Moi led to a rapid transformation of Viet Nam’s labor market. Average real hourly wages grew by 10.5% between 1993 and 1998, faster than the growth of income per capita in the country. While wage employment did not worsen income inequality despite the resulting wage differentials across sectors and locations, some would caution that Viet Nam’s dual-wage system, which serves to protect the domestic industry, can lead to pervasive government control of the labor market and endanger efforts to bring about a smooth transition toward a market economy (Gallup 2002, Brassard 2004). The introduction of the minimum wage, on the other hand, has given rise to a number of issues. One stems from the monthly minimum wage differentials between domestic and foreign-owned enterprises.29 Since the minimum wages for foreign enterprises were three to four times the domestic minimum wages in the 1990s, violations of the minimum wage were prevalent among foreign-invested enterprises engaged in garments, leather tanning, paper production, and agriculture (MOLISA 1999). Researchers have warned that the strict reinforcement of large minimum wage differentials between the domestic and foreign-owned sectors has reduced Viet Nam’s attractiveness for export-oriented foreign investors and hinders the country’s road to laborintensive growth (Belser, 2000). This probably explains why most foreign investors did not venture into the more labor-intensive industries. Foreign investors may have been further discouraged from employing skilled domestic workers by the wage differentials caused by the Government’s income tax policy. Viet Nam’s current regulations require high-income individuals to pay income taxes (Appendix Table A9.12). Because many firms in Viet Nam pay the workers’ income tax, foreign investors were probably

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dissuaded from hiring Vietnamese skilled labor, preferring instead to employ nonresident foreign skilled workers. Second, wage distortions resulting from subsequent increases in the minimum wage and correspondingly in state sector wages made it more difficult for publicly owned enterprises and SOEs to operate efficiently. In some instances, SOEs needed to adjust their wages to retain their highly trained personnel. The direct links between the minimum wage rate and incomes throughout the state sector (including the pensions paid by the Social Insurance Fund) weighed heavily on the Government’s finances. Some people believe the wage distortions had significant adverse impact on employment (McCarty 1999). And, lastly, the requirement to pay the minimum wage and to provide other benefits, i.e., 13th-month pay or bonuses, holiday pay, etc., is very costly to an enterprise. Violations of the minimum wage provision are common among small domestic household enterprises. Workers, meanwhile, would choose to have a job that pays below the minimum wage instead of being unemployed. Enforcement is a problem, and efficient monitoring can address this. At present, the Government does not have the manpower to send out inspection teams to all establishments to determine if they are complying with the prescribed labor standards. Resources are required to undertake this task. Matters are not helped at all by the fact that the education of workers regarding their rights as provided for in the Labor Code is also found to be wanting, an issue that must also be addressed. Working Hours and Holidays (Chapter VII) Articles 68 and 69 of Chapter 7 of the Labor Code spell out the number of hours or days workers are entitled to. The regular working hours should not exceed 8 hours per day, or 48 hours per week. Workers employed in hard, harmful, or dangerous work, as identified by the Government, are entitled to work 1 to 2 hours less daily. Female workers employed in areas that pose a threat to reproductive safety and their ability to raise children are also entitled to work 2 hours less daily. Elderly workers—i.e., males over 60 years of age and females over 55 years of age—may work up to 4 hours less daily (Article 13). The State shall determine the working hours of workers working offshore, in mines, or other jobs with special characteristics, while the employer determines the working hours for casually hired workers or employees. There is, however, also a provision for overtime, but it is limited to 4 hours a day, or a maximum of 200 hours a year. If working hours are calculated per day, overtime may not exceed 50% of the daily regular hours. If the hours are calculated per week, the total hours should not exceed 12 hours a week. There is always an exception to this, for instance, time needed to make up for

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hours lost due to the interruption of operation caused by natural disaster. The employee’s consent should be secured in this case. The Code also has some provisions for rest hours. It stipulates that workers are entitled to a break of at least 30 minutes if they work for 8 consecutive hours, and night-shift workers to a break of at least 45 minutes. For workers with jobs of a special kind, i.e., offshore work, work in mines, etc., the Government determines the number of minutes or hours. As for casually hired workers or those whose work is based on completed pieces, the employer stipulates the rest breaks. All workers are also entitled to at least 1 day of rest a week (Article 72). The employer shall ensure that each employee has an average of 4 days off each month. The five-day workweek for state employees was introduced by the Government in October 1999. This covers all administrative employees, including cadres, civil servants, and those working in the sociopolitical organizations of the State. All workers are entitled to holidays and annual leaves under Article 73 of the Code. There are now eight public holidays in Viet Nam and all employees are entitled to these, with full pay. If one of these holidays falls on a rest day, the workers shall be given the next day off in compensation. Employees are also entitled to annual leave with full pay after 1 year of employment in an enterprise or with the same employer. Those who have worked for less than 1 year shall be entitled to annual leave calculated as a proportion of the period of employment, or they may opt to receive payment instead, based on the number of days they are entitled to. The number of fully paid annual leaves depends on the type of work of the employee.30 The duration of annual leave shall be increased according to the length of service of the employee in an enterprise, at the rate of one additional day for every 5 years of employment (Article 75). The timetable of the annual leave of an employee shall be determined by the employer in consultation with the trade union. The annual leave can also be taken in installments, or if an employee lives in a remote region he or she can opt to combine two or three annual leaves, provided the employer approves it. Annual leaves not availed of by employees who are up for retirement, termination, or some other reason can also be monetized. Apart from annual leaves and public holidays, employees are also entitled to take a leave with full pay in the event of the following: (i) marriage (3 days’ leave); (ii) marriage of son or daughter (1 day); or (iii) death of a parent (including parents-in-law), spouse, or child (3 days). An employee can likewise take a leave of absence without pay, with consent from his employer. The Code provides rest days and paid holidays, as well as other benefits, to workers. When the Government declares other public holidays during the year, the enterprise’s costs increase further, since all rest days and public holidays are already paid for and yet there is no production output. Moreover, the

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enterprise must compensate for the lost person-days and would require workers to do overtime work. In some instances, more manpower will be required, and these again translate into additional expense to the enterprise. Social Insurance (Chapter XII) Chapter XII of the Labor Code mandates all enterprises to provide social insurance to their employees. The social security system covers a wide range of benefits. It pays workers in the event of injury, termination, or retirement. It also covers maternity, occupational diseases, and death. The payment of social insurance is linked to the period over which insurance premiums have been paid, and the rate of pay. Viet Nam has two social security systems: a compulsory system and a voluntary system (Li et al. 2003). The former applies to enterprises employing 10 or more employees. Employers are to provide insurance to their workers, except when they are employed for less than 3 months (Article 141). The compulsory system requires obligatory premium payments by both the employer (15% of wages) and the employee (5% of wages) (Article 149). The voluntary system applies to enterprises that employ less than 10 workers and workers in jobs with a duration of less than 3 months, i.e., casual, seasonal or occasional jobs. In these circumstances, the social insurance allowance is already included in the salary paid by the employer, to allow the worker to voluntarily avail himself or herself of insurance or to pay for it (Article 141.2). As stated earlier, the social insurance fund not only provides pensions for workers, it also provides benefits for childbirth, sickness, and disabilities arising from work-related accidents or occupational diseases. The pension, however, has the greatest share in the fund. Workers become eligible for pensions at the age of 60 for men and 55 for women if they have paid social insurance premiums for at least 20 years (Article 145). An employee with at least 15 years of coverage is entitled to benefits equal to 45% of the insured employee’s average earnings, plus 2 % for men and 3% for women for every additional year beyond 15 years of service. The maximum pension an insured worker can receive is 75% of the worker’s average earnings in the last 5 years before taking the pension. The minimum benefit, on the other hand, is equal to the minimum wage, and this varies depending on whether the worker is employed in the public or the private sector. In the private sector, it could vary according to profession. Workers who do not satisfy the requirements to receive a monthly pension shall, however, be entitled to a lump-sum allowance or one-time payment to be determined by the Government (Articles 145.3 and 145.4). Noncompliance with social insurance payments is prevalent in Viet Nam. Recent MOLISA data show that, of the estimated 41 million workers, 9.6 million are subject to compulsory social security payment, but only 5.4 million, or

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56%, are covered by social insurance. While noncompliance is widespread in both foreign and domestic enterprises, as well as in state-owned and nonstateowned domestic enterprises, nonpayment is most prevalent among domestic private enterprises. The coverage of the social insurance system in Viet Nam is limited by the unwillingness of many employers and employees to make the required payments. Despite the issuance of Decree No. 01 in 2003, requiring compulsory payments even by enterprises employing less than 10 workers, compliance remains low. This is because many of these domestic enterprises are small, distantly located, and usually engaged in agriculture, fisheries, or provision of domestic services, making it difficult for the Government to monitor them.31 Another issue that has emerged is the low level of confidence of Vietnamese workers in the social security system and its ability to provide the expected benefits. The long-term financial viability of the social security fund remains a concern, given the proportion of benefits relative to the contributions made by the members. Most workers are also unfamiliar with risk insurance, and this limited knowledge makes them hesitant to participate in the system. Besides, the pension fund does not adjust for inflation, in contrast to the increasing average wage, so workers are more determined not to opt for future pension payments. The Government in certain cases also does not comply with the criteria or requirements for the computation of pensions. For example, instead of the average wage over the last 5 years before retirement, the average wage over the entire term of employment was used as the basis for computing the pensions of workers in state enterprises that had entered into joint ventures with foreign investors, as the wages in these joint ventures were much higher than SOE wages. Obviously, there is lack of trust in the ability of the State to repay the monies paid to the fund at a rate that will keep pace with the current inflation. Since the fund is run by the State, it can decide how it will invest or use the surplus funds. The State is also not as aggressive as private fund managers in investing surplus funds. The system is likewise vulnerable to false employee claims, since validating every claim submitted to the fund would be too difficult and costly. Job mobility, especially from state to nonstate enterprises, and the growth and expansion of small privately owned firms, are other related issues that have emerged from the operation of the social insurance system. Participation in the fund is seen as a disincentive by workers, especially those who recently joined nonstate enterprises. Since employees are entitled to a pension only if they have worked for at least 15 years before retirement, state employees have no incentive to move to nonstate enterprises unless they are still young and a long way from retirement age. Further, state workers wishing to join the private sector cannot readily transfer their pension and health insurance coverage.

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This situation has encouraged nonstate and foreign-invested enterprises to “lease” SOE workers, so that they may enjoy the benefits of dual employment. With the surplus in the SOE labor force, much labor remains underutilized (O’Connor 1996, McCarty 1999). Moreover, social insurance has made job creation costly for smaller enterprises, i.e., those with fewer than 10 workers, mainly in agriculture, fisheries, and private sector operations. Trade Unions (Chapter XIII) The Code provides an impetus for formalizing and strengthening the role of labor unions in Viet Nam. It requires that unions be formed in all enterprises within 6 months from the effectivity date of the law on amendments and additions to the Labor Code, or, in the case of new enterprises, within 6 months from the start of operation. The trade unions are mandated to represent and protect the rights and interests of employees and the labor union (Article 153). The Law on Trade Unions serves as the basis for the establishment of a trade union in an enterprise. Employers are required to recognize and create a conducive environment for the trade unions and their members to carry out their activities. The Code also stipulates that employers shall not discriminate against workers who form trade unions or participate in trade union activities. Employers are required as well to pay the employee’s full wage, even to union members carrying out union activities part time, and to provide the same rights, benefits, and privileges enjoyed by other workers in the enterprise to workers who carry out union activities full time. An employer cannot unilaterally terminate an employee who is a member of the executive committee of the trade union. The consent of the executive committee shall first be obtained before any steps are taken toward retrenchment or termination (Article 155). While the Code has paved the way for the mandatory establishment of trade unions for enterprises with at least 10 employees, a large number of enterprises are still not unionized. Only 10% of the labor force in Viet Nam is unionized and most are in the public sector and SOEs. Further, only the SOEs continue to have high levels of union membership. Workers in medium and small privately owned enterprises still do not see the advantage of union involvement, despite the provisions of the Labor Code. For one, there is lack of true freedom of association, since all trade unions in Viet Nam are controlled by the Communist Party and have nominal independence. All trade unions should be approved and affiliated with the VGCL, and workers are not free to form or join any trade union of their choosing.32 The Code requires employers to facilitate the establishment of trade unions, including providing the necessary working conditions and facilities. For enterprises with fewer than 10 workers, establishing a trade union is not economically viable. In Viet Nam, a large number of the labor force is engaged

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in agricultural or household entrepreneurial activities. Given the small number of employees of such enterprises, employers and employees alike do not see the value of a trade union, considering that direct negotiation will facilitate the resolution of any issue raised by an employee. The absence of labor unions is a leading cause of labor strikes, especially in foreign-invested enterprises. From January to October 2004, some 740 foreign-owned firms went on strike, while in domestic enterprises or SOEs, strikes were negligible. The pressure not to strike and the perceived futility of striking is indicative of the State’s ambivalence with regard to the role of unions in protecting workers’ rights as stipulated in the Labor Code. Strikes occurred mainly because of violations of the terms and provisions of the contract, social insurance payments, overtime work, and the minimum wage (Appendix Table A9.14). Ignorance of the Labor Code, particularly among less-educated workers, is often used by enterprises in their favor. The excess supply of labor tends to weaken workers’ bargaining power and capacity to petition for better working conditions. While trade unions represent workers, their activities are constrained because they are directly under the VGCL. Resolution of Labor Disputes (Chapter XIV) In any labor-related dispute, whether individual (between employee and employer) or collective (between the labor union and the employer), all parties have the obligation to negotiate and resolve the dispute in good faith and on the basis of mutual respect of rights and benefits, respect for the common interest, and compliance with the law (Article 158). If the negotiations fail or if one party lodges a request for a third party to resolve the dispute, the parties resort to a dispute resolution body or organization (Article 159). In the case of individual disputes, the resolution body can be any one of the following: (i) labor conciliatory council of an enterprise that comprises an equal number of employers and employees, whose number shall be agreed on by both parties, or the labor conciliator of the body in charge of the state administration of labor of the district, town, or city; or (ii) people’s court. When an employee is in dispute with an employer, the matter first goes before the labor conciliatory council. In cases where no labor conciliatory council has been established, i.e., in enterprises with fewer than 10 employees, the matter is referred to the conciliator of the district labor office. If no agreement is reached within a specified period of time after the dispute has been heard through the council or the conciliator of the labor district, the matter is then referred to the district people’s court. There are also disputes that can be referred directly to the people’s court. These include: (i) termination for breach of labor rules or disputes arising from unilateral termination of a labor contract; (ii)

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payment of compensation or allowances upon termination of a labor contract; (iii) household-related disputes; (iv) social insurance-related disputes; and (v) payment of compensation between an employee and a labor export enterprise. The institutions tasked to resolve collective disputes include: (i) labor conciliatory council or the labor conciliator of the district level if the council does not exist; (ii) provincial labor arbitration council (PLAC); and (iii) people’s courts. Similar to its responsibility in settling individual disputes, the council has the authority to resolve collective disputes. The PLAC is headed by the staff of the provincial labor office and its members include employees, trade unionists, labor office personnel, employers, and lawyers within the province. The procedure for settling collective labor disputes is similar to that for individual disputes. When a collective dispute arises, the first step is to try to resolve it through negotiations with the labor council. If this fails, arbitration through the PLAC will be requested. If the labor collective is still not satisfied with the decision of the arbitration council, the dispute is submitted to the people’s court for review. Articles 172 and 173 set out the circumstances for the labor union to go on strike. The Code stipulates that if the labor union is not satisfied with the decision of the arbitration council, it can either request the people’s court to settle the dispute or go on strike. If, on the other hand, the employer is not satisfied with the decision of the arbitration council, it can request the people’s court to review the decision, but this does not affect the right of the labor union to strike. Neither party shall be allowed to take any unilateral action against the other party while the collective dispute is under review by the labor conciliation council or the arbitration council. The Code does not allow a strike while attempts are being made by the labor conciliation council to resolve a dispute. Further, a strike can be legal only when it has been declared by the executive committee of the trade union and the majority of the members have endorsed it through a secret ballot. Before a strike begins, the executive committee of the trade union sends three representatives to present the written request of the labor union to the employer and, at the same time, sends notice to the provincial labor office and the provincial federation of labor. Included in the written request and notices are the issues of disagreement, proposed courses of action, results of the secret ballot to go on strike, including the signatures of the workers endorsing the strike, and the time the strike is to start. The Code provides the legal basis and mechanism for labor collective action at a reduced scale, given the number of prohibitions. Article 174 strictly prohibits strikes at enterprises that serve the public interest or those crucial to the economy or national security and defense. These enterprises or sectors include electricity production, post and telecommunication, railway, maritime and air transportation, banking, public works, and the oil and gas industry.

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The Government likewise has the power to suspend or end a strike in the interest of the national economy. A strike is also considered illegal in the following circumstances: (i) it does not result from a collective labor dispute and is considered to be beyond the scope of labor relations; (ii) it goes beyond the scope of the business; or (iii) it violates conditions set out in Articles 173 and 174 of the Labor Code. The people’s court is authorized to decide on whether a strike is lawful or unlawful and to settle labor disputes. Ultimately, the standing committee of the National Assembly is responsible for resolving strikes and other labor-related matters (Article 179). There are very limited data on the number of cases that have been heard by the Vietnamese Labor Court since the implementation of the Code in 1995. Usually, the issue between employer and employee is the unilateral termination of employment. Unless all possible avenues have been exhausted, the issue will then be brought to court. The resolution of disputes through the court takes time and could be costly to both employers and employees. Thus, it will be to their advantage to negotiate and arrive at an agreement, since the decision of the court might not be acceptable to both parties. With the number of labor disputes in the public and private enterprises in Viet Nam, and its own limited manpower and resources, the people’s court is also constrained in coming up with timely decisions. Daily wage earners cannot afford to wait a long time for the decision. Besides, given the large number of Vietnamese laborers in agricultural or household enterprises, and entrepreneurial activities, most workers are not aware of their rights as provided for in the Code, and will opt to any issue at hand negotiate directly with employers. This only shows the low usefulness to workers of labor market regulations and many provisions of the Labor Code. While labor strikes have been legalized by the Labor Code as a means for labor unions to voice out their demands or disagreement with the decision of the arbitration council, they are rarely used by domestic firms and SOEs to challenge management. It is mostly the workers in foreign-owned firms who go on strike to raise their demands to management. Often, they get no support from the labor or people’s court because such institutions cannot support strikes and the judges are state officials. In sum, the introduction of the Labor Code in 1994 and its subsequent amendment indicate that Viet Nam has made clear progress toward a flexible, efficient labor market. Nevertheless, certain labor distortions and rigidities remain. And while the latter could have resulted from labor-market imperfections in the prereform era, other distortions could have emerged following the labor-market reforms. The labor-market imperfections may have been due to the lack of incentives, labor mobility, or information in a centrally planned economy. The continuing desire of the Government to influence the

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terms of employment relations during the transition toward a market economy may also have contributed to these imperfections. Distortions are most evident in the maintenance of a dual minimum wage system, which considerably discourages labor mobility across sectors. And while private job creation has been impressive, the fact remains that the overwhelming number of new jobs has been generated by small household businesses, with relatively low productivity. 9.3.3

Employment Generation Programs

Given the limited impact of Viet Nam’s labor policy framework so far, many analysts believe that more labor-intensive growth is essential to sustain Viet Nam’s economic gains and further reduce poverty. After all, Viet Nam’s major comparative advantage is its abundant labor supply. This has prompted the Government to pursue job creation programs in parallel with the ongoing reforms in labor policies. Appendix Table A9.15 gives a brief summary of these Government’s job creation initiatives and below we review some of the most important programs that were introduced since the early 1990s. National Employment Generation Program (NEGP) The Government established the NEGP in 1992.33 This program is aimed at promoting employment opportunities by providing laborers with subsidized credit, severance payments, and skills training. The implementation of the NGEP is funded through the National Job Generation Fund (NJGF) with commitments from the State and from official development assistance (ODA). The fund prioritizes and provides soft loans for projects in the rural areas, programs that create employment, or labor-intensive undertakings.34 Estimates dating back to 1992 show that the NJGF has lent D5,500 billion and created about 4 million jobs.35 MOLISA estimates show that the NJGF lent D1,015 billion in 2004, generating some 350,000 jobs, or about 22.5% of the jobs created that year. For 2005–2010, the NJGF plans to spend some D6,000 billion to create 1.5–1.6 million jobs. Some observers claim the NGEP has contributed to the success of poverty alleviation programs in Viet Nam. Despite the NGEP’s success, concerns remain over the efficiency and eligibility of loan disbursements, following an increase in bad loans.36 Moreover, access to NJGF funds is difficult, given the cumbersome loan requirements. Generating Jobs in the Urban and Rural Sectors The Government’s commitment to create more jobs has led to continuing reforms in investment policies. The Enterprise Law of 1987, revised in 2000,

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seeks to provide an improved business environment for enterprises. This law encourages the generation of some 300,000 new jobs in the private sector (World Bank estimates based on GSO data, cited in Edmonds and Turk 2002). Estimates from the Ministry of Planning and Investment (MPI) show that between early 2000 and September 2003, 75,000 new enterprises were registered (1.7 times more than in 1991–1999). These enterprises had a total registered capital of $10 billion, higher than the total foreign-invested capital for the same period. They generated about 2 million new jobs, or about 17% of the country’s total labor force.37 To boost job creation in the countryside, the Government has pursued a number of initiatives aimed at giving the poor better access to credit. These included the Program on Provision of Credit to the Poor to support productive activities of poor households. In 1990, the Government established the Agricultural and Rural Development Bank to provide credit in rural areas. It is estimated that by 2000, this Bank would have provided more than D40,000 billion (about $2.6 billion) to about 7 million households (i.e., about $380 per household). The Government also established in March 2003 the Social Policy Bank (SPB) based on the operation of Viet Nam Bank for the Poor. This bank provides loans with favorable monthly interest of 0.6–0.7% (compared with the market interest of 0.8–0.9%) to poor households in both urban and rural areas. SPB’s records show that between January 2002 and January 2003, there were 953,885 poor households that borrowed capital for business promotion or other ventures that enhance family income. By mid 2003, the bank had a total of 5,480,106 clients with outstanding loans and the number of poor households alleviated from poverty increased from 644,035 in 2002 to 1,294,035 in 2003. National Poverty Reduction Programs In practice, Viet Nam’s poverty reduction programs usually have a job creation component through means such as micro credit aimed at employment generation. Immediately before 2000, there were two major such poverty reduction programs: Program 133 and Program 135. Program 133 was introduced in 1998 with the overall objective of reducing the country’s poverty level to 10% by 2000. The major contents of this program included rural infrastructure, farm and nonfarm employment opportunities, social services, and micro credit and savings for rural poor. Program 135 used the experience of Program 133 and had a specific target of 1,715 very poor communes in remote mountainous areas. Its two major components are (i) general poverty reduction (e.g., income generating activities for the poor, infrastructure, and others), and (ii) microfinance for employment (e.g., farm and nonfarm small

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and medium enterprises, vocational training centers, and others). In 2001, the Government classified these poverty reduction programs as one of five national programs. There has as yet been no substantive evaluation of the impact of active labor market programs in Viet Nam. The general impression is that these programs have in fact furthered job creation and improved the people’s welfare. For instance, trends indicate that after the passage of the revised Enterprise Law in 2000, urban unemployment fell steadily from 6.74% in 1999 to 5.78% in 2003 (GSO Statistical Yearbook 2003). The country’s Comprehensive Poverty Reduction and Growth Strategy (CPRGS) for 2002 evaluates these programs overall as follows: Despite budget constraints, the State has financed national programs for poverty reduction through a program on development of infrastructure in poor communes (Programs 133 and 135.) Between 1992—when the program on hunger eradication and poverty reduction was introduced— and 2000, the State has made a total investment of approximately VND21,000 billion through national programs directly related to hunger elimination and poverty reduction objective. The figure for the two years 1999 and 2000 alone was nearly VND9,600 billion (of which VND3,000 billion came from the State budget, over VND800 billion from joint financing programs and projects, more than VND300 billion were mobilized from the community, and over VND5,500 billion cam from concessional credits to poor households.) The Bank for the Poor was established to provide concessional credit to the poor. The amount of funds mobilized from the population, domestic organizations, and individuals has also increased considerably. The total amount of funds lent to the poor reached VND5,500 billion. In addition, the State provided considerable support to ethnic minority people living in especially disadvantaged areas. This includes a total grant of VND70 billion and zero interest rate loans provided to nearly 90,000 households for production purposes. (p. 27) Using international poverty reduction standards, the overall poverty incidence declined from over 70% in 1990 to approximately 32% in 2000 (or the percentage of poor households declined by more than half compared to that in 1990.) By these measures, Viet Nam has achieved the Millennium Development Goal set by the international community, which is to reduce the poverty incidence by half during the 1995–2015 period. (p. 27)

However, a number of analysts have pointed out some weaknesses in these programs. Dufhues et al. (2001) find that access by the poor to entrepreneurial loans from the Social Policy Bank (SPB) or the Job Creation Fund, for instance, is hampered by complicated procedures. Because these loans require “social” collateral (e.g., approval by the commune’s head) rather than

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physical or financial collateral, loan processing has become quite cumbersome. Borrowers could also be subject, in some instances, to lengthy project approvals by the provincial people’s committee. Another matter is the design of these loans. In one instance, an officer of the SPB in Hai Duong province raised concerns about loan terms. Because most of the loans were short term, many loans were overdue or became bad loans.38 Further, in many cases, loans were given to the users indirectly (e.g., through the head of the group) and were therefore misused or used ineffectively.

9.4 Suggestions for Further Research Despite the considerable economic progress achieved over the past two decades, poverty remains a major concern for Viet Nam. There are also signs of rising inequality across different population groups. These concerns will become even more pressing as the early gains from Doi Moi run out and the economy is integrated further into the global economy. It has become imperative to sustain high growth rates, reduce further poverty, and keep inequality under control. In this regard, we propose research on the factors that constrain job creation and labor productivity. Some possible topics are given below. 9.4.1

Job Creation

The discussions in previous sections suggest that creating enough jobs for 1.1–1.3 million job seekers yearly is the great challenge facing Viet Nam today. Viet Nam’s labor force is highly segmented. Rural workers are in agriculture or in small commercial, service, and production enterprises, while urban workers are engaged in formal sector enterprises or work as self-employed or casual wage laborers in the informal sector. Following Fields (2004), we suggest future research to add to our knowledge of labor market opportunities in a multi-sectoral labor market. Possible study topics include nonfarm production in rural areas, small and medium enterprises in urban areas, and the informal economy. We discuss these topics below. Nonfarm Production in Rural Areas Recent studies in developing countries suggest that rural industry, or the rural nonfarm economy as it is commonly called, plays a crucial role in job creation and income generation for poor families in rural areas. For instance, a survey of 55 developing economies reveals that the rural nonfarm economy provides about 40–60% of incomes and jobs in the surveyed countries and is a significant source of opportunities for rural poverty alleviation (Davis 2003).

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Viet Nam’s experience shows that, although Doi Moi expanded nonfarm economic activities in rural areas, nonfarm production still makes only a modest contribution at best to job creation. Researchers attribute this to factors such as lack of education; lack of access to credit, finance, and markets; poor infrastructure; rural culture; and institutional bottlenecks (Brassard 2004, DFID 2004, Marsh et al. 2004, Jamal and Jansen 1998, Le et al. 2003b). These factors are certainly important. However, the development of a nonfarm economy also depends a great deal on matters like the nature of the local economy, local social conditions, and the match between nonfarm jobs created and workers’ characteristics. A good understanding of the determinants of the nonfarm economy will help in formulating relevant policies to promote its development. Moreover, while the literature often points to a close association between rural production diversification and poverty reduction, there has been little analytical work about their joint determinants (van de Walle and Cratty 2003). A particular topic of research could be agribusiness. Rural businesses absorb agricultural surplus labor and at the same time contribute to the growth of the rural economy and to poverty reduction through value-adding activities. The Chinese Town and Village Enterprises (TVE) model could provide important insights. Small and Medium Enterprises The significance of SMEs in Viet Nam’s social and economic development since Doi Moi is recognized in recent studies. The Vietnamese Government stresses the importance of SMEs in its development strategy for 2001–2010.39 Many studies suggest that SMEs are more cost-effective in creating employment and generating incomes and savings for the employees. These studies reveal, however, that the policy and legal environment and the implementation of SME development policies have not been cohesive. While statistics suggest steady SME development, much more could be done. It is important to understand how institutional and policy matters (e.g., tax regulations, minimum wages, and intermediary and support organizations) and SME promotion programs (e.g., access to financial resources and markets, and capacity building) facilitate or hinder the entry of firms and the development of the SME sector (Cyhn 2002, Pham 2002, Pham 1999, Nguyen 2002, http://www2.gtz.de/ Vietnam/projects/projects_refpriv_sme_eng.htm). It is also important to understand how firms set wages and hire workers, and how workers respond. Informal Sector Employment As in many other developing economies, informal economic activities are common and pervasive in Viet Nam.40 The discussion in earlier sections

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mentioned that about half of the official GDP goes unrecorded and about 80– 85% of the urban labor force is employed in the informal sector. Empirical studies around the world show that, in general, the informal sector offers relatively unattractive terms and conditions of employment. As Fields (2004) describes it, workers seemingly enter the informal sector only as a last resort. Another view is that the informal sector is desirable and a large number of the workers who are in it are there by choice. Maloney (2003) cites a number of reasons. Many informal workers can indeed earn more in informal self-employment and feel happier. They do not value the protection offered in the formal sector or simply do not trust the Government to deliver on the future pension benefits promised. They would rather take care of these themselves. A third view, developed by Fields (1990), combines the first two by asserting that the informal sector has its own internal duality. Fields (1990) calls the two segments “upper-tier” and “easy-entry” informal activities. It would be interesting to examine these views with regard to job creation and poverty reduction in Viet Nam. 9.4.2

Labor Productivity

Much of the economic growth and poverty reduction achieved during Doi Moi has been associated with the removal of the Government’s control over the economy and the liberalization of the factors of production. Measures that directly target productivity have been minimal. Thus, it is not surprising that labor productivity in Viet Nam increased at a very modest 4.6% a year over the past decade. Analysts believe that earlier gains from Doi Moi have mainly been reaped by now (World Bank 2003). Therefore, improving labor productivity is now the priority for the economy to sustain economic growth in the long run. Labor Allocation across Sectors and Establishments Although labor mobility across geographical regions and economic activities has become much more common, studies suggest that Viet Nam’s labor market is still very much segmented. Severe dualism exists between the rural and urban areas, the informal and formal sectors, the public and private sectors, and the foreign-invested and domestic sectors. Studies also show large gaps in wages and productivity across sectors, and the potential economic gains from greater labor mobility (Belser 2000, McCarty 1999, Nguyen et al. 2005, O’Connor 1996). There has been very little analytical work on the determinants of labor allocation. Since workers in different sectors are heterogeneous, it is useful to understand how workers’ individual characteristics affect their choice of

613 A Stocktaking of Viet Nam's Labor Market Policies

employment and occupation. For instance, using VLSS 1992–1993 and VLSS 1997–1998 data, Nguyen, B. T. (2004) estimates that the likelihood that a farmer has a nonfarm sector job increases with each added year of schooling. Similarly, DFID (2004) reports that improving access to education in the rural areas could generate greater off-farm employment and higher economic growth in the rural economy. The new VLSS 2002 and recent enterprise surveys and firm censuses could be used to find out more about these issues. Education, Training, and Skills Requirements A recent survey of companies in education and training indicates that the country’s education system can no longer provide employers with the needed qualified personnel, nor does it prepare students for the jobs they might hope to have in the future (Guillaume 2003). Some argue that the education system’s bias for formal university education results in the neglect of programs for jobspecific training. On the other hand, there are issues related to market returns of skill and education. Some economists find that the private rate of return to education in Viet Nam is low compared with international standards (Moock et al. 2003). This could be a reason why workers are not inclined to improve their skills. Nguyen, B. T. (2004) finds that the returns from private education are especially low for primary levels, which might explain why very poor families with little hope for higher education for their children are reluctant to send their children to primary school. Studies linking education and economic returns suggest that, while the relationship between literacy and growth is weak, it remains strong for job training. For instance, Tran (2004) finds that the economic returns from education in Viet Nam are not equal across different types of education, and that job training remains crucial in raising productivity. New VLSS data, firm censuses, and enterprise surveys could help find out more about these issues.

9.5 Conclusion This chapter has been an attempt to document labor market trends in Viet Nam in light of the implementation of Doi Moi. From available statistics, Doi Moi has contributed to Viet Nam’s impressive economic growth and poverty reduction in the past two decades. The transition, however, has had relatively limited influence on the transformation of the country’s labor market structure. Reforms aimed at reducing state involvement in economic activities have failed to alter the distribution of employment. State employment has continued to increase in recent years. Traditional agriculture is still the predominant source

614 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

of employment, but its importance has been declining over time, with services gaining importance in job creation in recent years. There are encouraging trends nevertheless. The increase of wage employment in the past two decades has been fairly rapid. The share of wage workers has grown amid the decline of the shares of self-farming and nonfarm self-employment, reflective of a transition toward a formal economy. The rise in wage employment has correctly been lauded as contributing to the alleviation of poverty in Viet Nam. The passage of the Labor Code and its related policies are important milestones for Viet Nam, particularly in laying the foundation for a wellfunctioning labor market. However, the Code has met resistance from employers and employees whose long-held traditions lead them at times not to comply with its provisions. This is evident from the increasing number of Labor Code violations and labor strikes. This chapter draws a couple of important observations. First, the legal framework embodied in the Labor Code is crucial for initiating reforms in the labor market. But labor reforms per se have offered only a limited solution to the problems of weak job creation and high poverty incidence. Policies introduced under Doi Moi continued to retain some level of state control over the labor market. This tended to create labor distortions that hindered efficiency and delayed the implementation of poverty-mitigating measures. The distortions include the large wage differentials that may have resulted from the hampered mobility of labor. Moreover, while wage employment, on the one hand, could have contributed to the rise in workers’ welfare, on the other, it is suspected to have helped widen income disparities. Second, the transition to a market economy led to the displacement of many workers. Mitigating the losses from such displacements necessitated parallel government interventions through job creation and income maintenance programs. Recent studies warn that the gains from the early reforms under Doi Moi are about to be exhausted. Meanwhile, high unemployment persists, particularly among the youth and the highly educated, while income inequality is worsening. Viet Nam’s high population density creates immense pressures for the economy to generate enough jobs each year to accommodate the labor force entrants. Moreover, as Viet Nam is further integrated into the global economy, it will face tougher international competition. To sustain high growth rates, the economy will inevitably demand more productive and high-quality workers. This chapter proposes further research on factors constraining job creation and labor productivity improvement, to improve our understanding of these challenges.

615 A Stocktaking of Viet Nam's Labor Market Policies

Appendixes Table A9.1 Macroeconomic Indicators, 1994–2003 Item

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

GDP per capita (1994 $)

228

289

337

364

361

375

402

415

440

465

GDP share (%) Agriculture Industry Services

27.4 28.9 43.7

27.2 28.8 44.1

27.8 29.7 42.5

25.8 32.1 42.2

25.8 32.5 41.7

25.4 34.5 40.1

24.5 36.7 38.7

23.2 38.1 38.6

23.0 38.5 38.5

21.8 40.0 38.2

GDP growth (%) Agriculture Industry Services

8.8 3.4 13.4 9.6

9.5 4.8 13.6 9.8

9.3 4.4 14.5 8.8

8.2 4.3 12.6 7.1

5.8 3.5 8.3 5.1

4.8 5.2 7.7 2.3

6.8 4.6 10.1 5.3

6.9 3.0 10.4 6.1

7.0 4.1 9.4 6.5

7.3 3.3 10.4 6.6

Export growth (%) Import growth (%) Inflation rate (%) Urban unemployment (%)

35.8 48.5 14.4

34.4 40.0 12.7

33.2 36.6 4.5

26.6 4.0 3.6

1.9 -0.8 9.2

23.3 1.1 0.1

25.9 21.6 -0.6

3.8 3.7 0.8

11.2 21.7 4.0

20.8 27.8 3.0

6.1

6.4

5.9

6.0

6.9

6.7

6.4

6.3

6.0

5.8

Note: Source:

GDP shares in 2002 and 2003 are estimates, except GDP per capita, GDP growth rate, and inflation. GSO, Statistical Yearbooks (1995–2004).

Table A9.2 Population and Labor Force, 1996–2003 Total

Year 1996 1997 1998 1999 2000 2001 2002 2003

Population Population Growth (million)a Ratea 73.16 74.31 75.46 76.60 77.64 78.69 79.73 80.90

1.6 1.6 1.5 1.5 1.4 1.4 1.3 1.5

Male

Female

LFP Rateb

Unem. Ratec

LFP Rated

Unem. Ratec

LFP Rated

Unem. Ratec

48.09 47.89 48.90 49.22 49.46 50.07 53.80 51.80

2.7 2.9 2.3 2.3 2.3 2.8 2.1 2.3

49.40 49.75 46.64 50.64 50.99 51.51 49.60 53.90

3.1 3.2 2.4 2.3 2.4 2.3 1.9 1.9

48.67 47.98 48.79 48.06 48.60 48.91 49.60 49.70

2.3 2.6 2.2 2.4 2.1 3.2 2.3 2.6

Note: LFP = Labor Force Participation. Sources: aADB (2004); bAuthors’ estimates: LFP Rate = 100 x LF/Total Population; 2002–2003 LFP data from ADB (2004); 1996–1997 data from MOLISA, Employment Survey Statistics (1996–2000); cLABORSTAT, ILO; dAuthors’ estimates from MOLISA, Employment Survey Statistics (1996–2001).

616 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang Table A9.3 Labor Force, by Urban and Rural Areas, 1996–2003 Item

1996

Number (million) Whole country 35.19 Urban 7.16 Rural 28.03 Share (%) Whole country 100.00 Urban 20.35 Rural 79.65 Growth rate (%) Urban N.A Rural N.A Source:

1997

1998

1999

2000

2001

2002

2003

35.59 7.85 27.74

36.58 8.21 28.37

37.78 8.42 29.36

38.64 8.73 29.92

39.49 9.19 30.30

40.72 9.70 31.01

41.31 10.02 31.30

100.00 22.07 77.93

100.00 22.45 77.55

100.00 22.29 77.71

100.00 22.58 77.42

100.00 23.26 76.74

100.00 23.83 76.17

100.00 24.24 75.76

9.67 (1.04)

4.56 2.28

2.55 3.51

3.62 1.89

5.30 1.28

5.62 2.35

3.20 0.92

CFI-MOLISA (2004).

Table A9.4 Labor Force, by Professional Skills, 1996–2003 Item Whole Country Unskilled Skilled With certified professional skill Urban Areas Unskilled Skilled With certified professional skill Rural Areas Unskilled Skilled With certified professional skill Note:

1996

1997

1998

1999

2000

2001

2002

2003

87.69 12.31

87.31 12.69

86.60 13.40

85.86 14.14

84.57 15.43

83.24 16.76

80.30 19.70

78.78 21.22

8.50

8.72

9.57

10.10

11.68

11.76

12.59

11.84

68.41 31.59

70.63 29.37

66.30 33.70

65.52 34.48

63.19 36.81

60.35 39.65

56.00 44.00

54.54 45.46

23.52

20.65

24.63

26.58

30.66

30.01

34.33

30.58

92.61 7.39

90.7 9.3

91.94 8.06

92.2 7.8

90.73 9.27

89.80 10.20

87.90 12.10

86.53 13.47

5.30

5.10

6.21

6.22

5.79

5.84

4.66

6.69

Unskilled workers = those with no professional training, skilled workers = those with some professional training. Sources: CFI-MOLISA (2004); MOLISA, Employment Survey Statistics (1996–2003).

617 A Stocktaking of Viet Nam's Labor Market Policies Table A9.5 Employment, by Economic Sector, 1995–2003 Item Overall (%) Agriculture–Forestry–Fisheries Industry-Construction Services Public Sector (%) Agriculture–Forestry–Fisheries Industry-Construction Services Nonpublic Sector (%) Agriculture–Forestry–Fisheries Industry–Construction Services

1995

2000

2001

2002

2003

71.3 11.4 17.4

68.2 12.1 19.6

67.2 12.5 20.3

61.14 15.05 23.81

58.35 16.96 24.69

9.50 34.40 56.00

6.40 36.10 57.50

6.20 36.10 57.70

5.87 37.07 57.06

6.20 36.34 56.96

77.50 9.00 13.40

74.80 9.60 15.70

73.60 10.00 16.40

N.A. N.A. N.A.

Sources: GSO, Statistical Yearbook (2004); 2003 overall data are from CFI-MOLISA (2004).

Table A9.6 Employment, by Ownership Sector, 1995–2001 Item

1995

Total Persons (’000) Growth rate Production share Service share State Sector Persons (’000) Share of total Growth rate Production share Service share Nonstate Sector Persons (’000) Share of total Growth rate Production share Service share Note: Source:

1996

1997

1998

1999

2000

2001

33,030.6 33,760.8 34,493.3 35,232.9 35,975.8 36,701.8 37,676.4 2.2 2.2 2.1 2.1 2.0 2.7 88.5 88.4 88.2 88.1 87.9 87.7 87.4 11.5 11.6 11.8 11.9 12.1 12.3 12.6 3,053.1 9.2 44.0 56.0

3,137.7 9.3 2.8 42.7 57.3

3,266.9 9.5 4.1 42.9 57.1

3,383.0 9.6 3.6 42.9 57.1

3433.2 9.5 1.5 42.9 57.1

3,501.0 9.5 2.0 42.5 57.5

3,603.6 9.6 2.9 42.3 57.7

29,977.5 30,623.1 31,226.4 31,849.9 32,542.6 33,200.8 34,072.8 90.8 90.7 90.5 90.4 90.5 90.5 90.4 2.2 2.0 2.0 2.2 2.0 2.6 86.6 86.3 85.9 85.4 84.9 84.3 83.6 13.4 13.7 14.1 14.6 15.1 15.7 16.4

Rates and shares are in percentage. GSO, Statistical Yearbook (2004).

618 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang Table A9.7 Job Creation, by Ownership Sector, 2001–2002 Item

2001

Total Employment (number) Number of New Jobs State sector (%) Nonstate sector (%) Foreign sector (%) Growth (%) Overall State sector Nonstate sector Foreign sector Note: Source:

2002

3,933,226 396,228 6.5 72.9 20.6

4,657,803 724,577 20.1 52.0 27.9

11.2 1.2 27.7 20.1

18.4 6.9 28.3 41.2

These are only for new jobs in enterprises. GSO, Statistical Yearbook (2003).

Table A9.8 Productivity Growth Rate, by Sector (%), 1996–2001 Year 1996 1997 1998 1999 2000 2001 Average Note: Source:

Overall

Agriculture

Industry

Service

7.0 5.9 3.5 2.6 4.7 4.1 4.6

2.9 2.9 2.2 4.0 3.6 1.9 2.9

10.6 8.9 4.8 4.1 6.5 4.1 6.5

4.1 2.4 0.4 (2.4) 0.5 (0.1) 0.8

Productivity is obtained by dividing sector’s value added (1994 prices) by sector’s employment. Authors’ estimates from GSO, Statistical Yearbook (2002).

Table A9.9 Number of People Repatriated, 1991–1997 Economy Hong Kong, China Indonesia Japan Malaysia Philippines Singapore Thailand Others Total Source:

1991

1992

1993

1994

1995

1996

1997

7,753 1,305 0 355 71 1 2,691 20 12,196

12,612 1,002 0 756 130 0 2,719 12 17,231

12,752 1,434 213 1,425 357 1 3,499 3 19,684

5,938 2,009 550 1,268 761 0 2,322 60 12,908

2,643 2,121 359 709 143 0 611 0 6,586

15,103 4,506 171 4,296 955 99 4,659 0 29,789

5,846 6 127 0 0 7 6 0 5,992

MOLISA, Statistical Yearbooks (1996 and 1997).

619 A Stocktaking of Viet Nam's Labor Market Policies Table A9.10 Vietnamese Laborers’ Remittances, 1996–2004

Year

Remittances ($ million)

1996 1997 1998 1999 2000 2001 2002 2003 2004

350 350 547 1,000 1,250 1,300 1,450 1,500 1,600

Source:

Le (2003).

Table A9.11 Main Contents of the Labor Code (revised in 2002) Chapter

Title

I II

General provisions Employment

III

Trade apprenticeship

IV

Labor contract

V

Collective labor contract

VI

Wages

VII

Working hours and holidays

VIII

Labor rules and responsibility for damage

IX

Occupational safety and hygiene Separate provisions on female employees

X

Main Content Scope, subject, principles, and application of the Code Definition of employment, rights of worker and employer, role of government and other entities in job generation Rights and responsibilities of entities that provide job training services Definition and types of labor contracts, rights and responsibilities of each party in the contract, conditions and circumstances wherein contracts can be suspended or terminated Definition and conditions for collective contracts, including rights and responsibilities of each party Principles in setting up the wage rate based on minimum wage set by the State, including overtime pay and wage increases Length of daily, monthly, yearly, and extra working time, including entitlement to rest breaks, paid annual and special leaves, and holidays in a calendar year Need for internal labor regulations governing working hours, rules and order, occupational safety and hygiene, protection of assets, and confidentiality of technology and business secrets including breach of labor rules, penalties and damages for breaches including the procedure for suspension and termination Minimum or basic required working conditions to ensure safety in workplace Right of women to be employed including the responsibilities of employer in hiring female workers and list of benefits women workers are entitled to continued.

620 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang Table A9.11 Main Contents of the Labor Code (cont’d.) XI

Special provisions on junior workers and a number of other labor activities

XII

Social insurance

XIII

Trade unions

XIV

Resolution of labor disputes

XV

State administration of labor

XVI

State inspection of labor and dealing with breaches of labor laws Implementation provisions

XVII

Conditions in employing underage workers (under 18), senior employees, disabled and high-skilled employees, including workers of foreign organizations, foreign employees, and conditions and rights of Vietnamese working abroad Forms of compulsory and voluntary social insurance due to employees of an enterprise Principles and scope of a trade union including responsibilities of the employer, employee, and State in its operation Principles, authority, and procedure to be followed in the resolution of individual and collective labor disputes List of responsibilities of the State in the administration of the labor sector, including the appropriate ministry or body assigned to carry out identified tasks Government inspection of compliance with provisions of the Labor Code, including courses of action for breaches of labor laws Effective date and retroactive application of code to “unfavorable” contracts or those inconsistent with the provisions of the Code

Table A9.12 Income Tax Rates for High-Income Individuals in Viet Nam

Tax Rate (%) 0 10 20 30 40 50

Vietnamese Citizens (Dong million per month) Up to 3 3+ to 6 6+ to 9 9+ to 12 12+ to 15 15+

Source:

Nonresident Foreigners (Dong million per month) Up to 8 8+ to 20 20+ to 50 50+ to 80 80+ to 120 120+

Ministry of Finance (2002).

Table A9.13 Minimum Wage Decrees for Domestic State and Nonstate Sectors Year Legislated 1992 1997 1999 2000 2000 2003

Minimum Wage Level (Dong per month) 120,000 144,000 157,000 180,000 210,000 290,000

Regulation

Decree No. 10-2000/ ND-CP Decree No. 77-2000/ND-CP Decree No. 03-2003/ND-CP

Sources: Foreign Labor Trends, US Embassy in Hanoi (2002), O’Connor (1996), McCarty (1999), Belser 2000.

621 A Stocktaking of Viet Nam's Labor Market Policies Table A9.14 Leading Causes of Strikes in Viet Nam Rank 1 2 3 4 5 6

Cause Wage or premium not paid on time or insufficient Irrelevant extra working time Social security and health insurance not paid by firms Labor contract not signed Layoff allowance not paid Conflicts over collective labor contract

Source:

Vietnamnet (2004a).

Table A9.15 Labor Market–Friendly Policy Initiatives in Viet Nam Type

Policies

Active labor market policy

Job creation policy: The national program for employment generation was established in 1992 and has largely functioned as a safety net targeting alleviation of the negative effects of restructuring of state-owned sector, as well as promoting employment opportunities by providing severance payment, subsidized credit, and skills training Investment promotion policy: Laws on investment promotion Policies targeting promotion of nonfarm activities Rural credit schemes: Widely used to support productive activities of poor households; the schemes are carried out by Vietnam Bank for Agriculture and Rural Development and the Vietnam Bank for the poor

Passive labor market policies

Severance payment scheme applied to redundant workers in SOEs Early retirement scheme

Policies to encourage demand for labor

Job creation program Financial support and assistance to self-employed Preferential credit schemes for female-led businesses

Policies to influence supply of labor in the labor market

Various population and migration policies Community health care policy: National programs against malaria and goiter, vaccinations, maternal and child care Educational, training policies: (i) to ensure that there is a good primary school in each commune (basic administrative level in Viet Nam); (ii) to provide informal education for out-of-school children and illiterate adults; and (iii) to improve vocational training to meet market requirements Employment service development policiesa

Other regulations

Minimum wage: Applies to both domestic and foreign enterprises and varies across regions b Income tax c

a b c

More than a hundred employment services centers have been established since this policy was implemented and are currently operating. The minimum wage rates, in practice, are nonbinding, since most enterprises pay rates higher than the minimum. The income tax was formulated in the mid-1990s. Its special feature is the very low rate subject to income tax ($150); this has since been increased to $350. This type of policy is subject to debate because it tends to encourage the use of foreign instead of local workers to avoid paying the tax.

622 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang

Notes 1. See for instance, Vu (1994) and Belser and Rama (2001). Using enterpriselevel data Belser and Rama show that labor redundancy in state-owned enterprises is about 50%. 2. Recent government statistics show that about 1.1–1.3 million people enter the labor force every year (GSO 2004). 3. In 2003, about 78% of Viet Nam’s labor force—55% of workers in the urban sector and 86% of those in the rural sector—was unskilled (MOLISA Statistical Yearbook 2004). 4. For more detailed descriptions of this economic reform program, see World Bank (2002). 5. The Land Law passed in 1993 gives farmers the right to use land for 20 years, and to renew, sell, or mortgage the land-use rights. 6. The five forms of ownership are: state, collective, private, private-capitalist, and state-capitalist. 7. Key new laws are the Foreign Investment Law (1987) and its various amendments in the 1990s, the Enterprise Law (introduced in 1987, revised in 2000), and the Labor Code (introduced in 1994, revised in 2002). 8. In Viet Nam, the working age is defined as 15–60 for men and 15–55 for women. 9. The child dependency ratio is the number of children (0–14 years) per 1,000 people of working age (15–60 years). The elderly dependency ratio is the number of the elderly (60 years and older) per 1,000 people of working age. The age dependency ratio combines the two. 10. Unskilled laborers are those with no vocational or professional training. 11. In 2003, 95.7% of the population was literate, 15.5% had had some primary education, 31.5% had finished the primary level, 30.4% had finished the secondary level, and 18.4% had finished high school (CFI-MOLISA 2004). 12. According to the Vietnam Institute of Economics, about 13,500 new enterprises were established in 2000, creating 250,000–280,000 new jobs within the year. This number of jobs is equivalent to the number of jobs created by foreign direct investment enterprises in the previous 10 years. This institute further reported: “For less than 3 years after introduction of the Enterprise Law (1/2000-8/2002) more than 40,000 new enterprises were established (mostly private ones), creating about 800,000 new jobs” (Economic Report, November 2002). 13. The public and nonpublic sectors are also referred to as the state and nonstate sectors, respectively. 14. Calculations made for other parts of the world (using the electricity–GDP elasticity indicator) show that in 1989–1993 the informal sector contributed 44% to GDP in Africa, 39% in Central and South America, and 35% in Asia (Friedman et al. 2000). 15. According to GSO statistics, the formal sector generated about 400,000 jobs in 2001 and 700,000 in 2002 (GSO Statistical Yearbook 2003). The informal sector is assumed to generate the rest. 16. In Viet Nam, underemployment is defined as working less than 40 hours per week. Severe underemployment is defined as working less than 15 hours per week.

623 A Stocktaking of Viet Nam's Labor Market Policies 17. This ranking, however, does not take into account the fact that, in addition to wages, government employees receive many side incomes and benefits, which together are much more than their wages. This explains why most Vietnamese people prefer to work in the public sector. 18. Gallup (2004) shows that between 1993 and 1998 the Gini coefficient for wage employment in Hanoi increased from 0.332 to 0.355. For Ho Chi Minh City the Gini coefficient increased from 0.312 to 0.378. 19. Productivity is obtained by dividing a sector’s value added (constant 1994 prices) by its employment. 20. At peak times, the number of Vietnamese workers in the former Soviet Union and Eastern European countries was estimated to be 200,000 (Le Xuan Ba et al. 2001). 21.This is based on the poverty line of $1 of expenditure per day per person. 22. See Ravallion and van de Walle (2004) for a more thorough discussion of Viet Nam’s land reforms. 23. Since its passage in 1993, the Land Law has been amended several times, most recently in 2004. 24. “By end of 1994, about 24% of households in a province had been issued land-use certificates. In 1997, 44% of land users had been granted certificates. By 1998, certificates had been issued to 71% of rural households. At the end of 2000, 90% of land users in rural areas had been granted land-use certificates, and the process was expected to have been completed at the end of 2001. In urban areas, however, only 16% of land users have been issued certificates and the process is not expected to be completed before 2005" (Do and Iyer 2002). 25. Nonconversion of forest land, for instance, deprived farmers who were practicing swidden agriculture of opportunities (http://www.wrm.org.uy/countries/Asia/ Vietnam2.html, World Rainforest Movement). 26. “Historically, the process of economic development has always brought about a transition out of small farms and household enterprises into wage employment as worker productivity increases and non-household enterprises dominate the economy” (Gallup 2004). 27. See Vietnamnet (2004b). 28. Out of 41 million workers in the labor force, less than 10 million are in the formal sector. The employees in the informal sector include laborers below the age of 15, laborers who have not signed a formal labor contract or agreement or spoken agreement, laborers who work in unregistered businesses or in household production, and the self-employed. They are not covered by the Labor Code (Brassard 2004). 29. Domestic: For the domestic sector—state and nonstate—the monthly minimum wage is set at D290,000 in 2003 (Appendix Table A9.13). In the state sector, the minimum wage is used as the basis for calculating actual salaries. Therefore, any increase in the minimum wages led automatically to an increase in all public sector wages. In the domestic sector, wage differentials resulted also from the different regional and sectoral characteristics in the labor market (e.g., wage discrepancy between genders is higher in the South than in the North (Bassard 2004). Foreign: In foreign companies and joint ventures, the monthly minimum wage is higher. Until July 1999, the minimum wage was denominated in US dollars. The dollar cost of wages in foreign companies was not affected by the currency slide in the

624 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang previous years. Under Decision No. 708/1999/QD-BLDTBXH, the Government began to quote the monthly minimum wage in domestic currency and set it at D626,000 for the inner districts of Hanoi and Ho Chi Minh City, D55,000 for other large cities, and D487,000 elsewhere. For foreign-invested companies in difficult geographical areas with poor infrastructure, the minimum wage level was set at no less than D417,000 a month. 30. Those working in normal conditions are entitled to 12 working days; persons engaged in hard, harmful, or dangerous work in areas with hard living conditions and persons below 18 years of age are entitled to 14 days; persons working in extremely heavy, dangerous, or toxic jobs or in places with harsh living conditions are entitled to 16 working days. 31. Such low compliance is typical in developing countries, where too few inspectors with too few means cannot do much to enforce labor laws on a broad scale. At the central level, Vietnam Social Security (VSS) currently has 15 inspectors to make sure companies and workers pay their contributions. At the district level, VSS has on average only six full-time employees to monitor compliance (Belser 2000). 32. Vietnam: US Department of State’s Country Reports on Human Rights Practices, February 2004 (http://www.asianlabour.org/archives/001050.php). 33. See Resolution No-120/HDBT, dated 11 April 1992, on “The main directions and solutions for employment problems in the years to come.” 34. These projects are charged soft interest rates of about 0.5% per month (0.3% for projects of the handicapped), as against the 0.7% to 1.0% interest charged by commercial banks. 35. Bao Tiep Thi Saigon, No. 5, 2005. 36. Bao Hai Duong, 31/01/2005. 37. Ministry of Planning and Investment, Summarized Report on Implementation of the Enterprise Law. 38. http://www.haiduong.gov.vn 39. In its Socio-economic Development Strategy, 2001–2010, Viet Nam has set ambitious goals for economic growth, employment creation, and poverty reduction. Private small and medium enterprises (SMEs) will play a crucial role in achieving these objectives: they will be an important part of new investment and contribute to a rapid growth of exports, and are expected to create the lion’s share of new, productive, and well-paying employment, also in rural areas. SMEs are thus considered vital if the country is to maintain its rapid economic growth, absorb the more than one million new entrants into the job market each year, and succeed in its poverty alleviation strategy (http:// www2.gtz.de/vietnam/projects/projects_refpriv_sme_eng.htm). Decree No.90/2001/ND-CP (23 November 2001) officially defines SMEs as independent registered business and production establishments with a registered capital of less than D10 billion, or averaging fewer than 300 employees in a year. 40. See the definition of the informal sector in the section on employment by ownership sector.

625 A Stocktaking of Viet Nam's Labor Market Policies

References Asian Development Bank (ADB). 2004. Key Indicators 2004: Poverty in Asia: Measurement, Estimates, and Prospects. Manila. Bales, S. 2000. “Vietnam’s Labor Situation and Trends: Analysis Based on 1992–93 and 1997–98 Vietnam Living Standards Data.” Background paper for Vietnam Development Report 2000. Hanoi. Becker, K. 2004. “The Informal Economy: Fact-Finding Study.” SIDA Department for Infrastructure and Economic Co-operation, Stockholm. Belser, P. 2000. Vietnam: On the Road to Labor-Intensive Growth? Policy Research Working Paper 2389, World Bank East Asia and Pacific Region, Vietnam Country Office, Hanoi. Belser, P., and M. Rama. 2001. State Ownership and Labor Redundancy: Estimates Based on Enterprise-Level Data from Vietnam. Policy Research Working Paper 2599, World Bank Development Research Group. Washington, DC. Brassard, C. 2004. Wage and Labor Regulation in Vietnam within the Poverty Reduction Agenda. National University of Singapore. Center for Informatics, Ministry of Labour, War Invalids, and Social Affairs (CFIMOLISA). 2004. Labor-Employment in Vietnam 1996–2003. Labor and Social Affairs Publishing House, Hanoi. Central Institute of Economic Management. 2001. Report on Vietnam’s Economy in 2000. Hanoi. ———. 2004. Report on Vietnam’s Economy in 2003. Hanoi. Cyhn, J. 2002. Technical Assistance to the Socialist Republic of Vietnam for Preparing the Small-and Medium-Sized Enterprise Sector Development Program. Asian Development Bank, December. Dang, N. A. 2003. Internal Migration Policies in the ESCAP Region. Asia-Pacific Population Journal, September. Dang, N. A., C. Tacoli, and H. X. Thanh. 2003. Migration in Vietnam: A Review of Information on Current Trends and Patterns, and their Policy Implications. Paper presented at Regional Conference on Migration, Dhaka. Dapice, D. 2003. Economic Policy for Vietnam in a Period of Economic Turbulence. Paper for Fulbright Economics Teaching Program, Ho Chi Minh City, Vietnam. Davis, J. R. 2003. The Rural Non-farm Economy, Livelihoods and their Diversification: Issues and Options. NRI Report Number 2753 (Rural Non-Farm Economy). Natural Resources Institute, DFID, and World Bank. July. Department for International Development (DFID), UK, Rural and Urban Development. 2004. Case Study: Vietnam. Oxford Policy Management. June. Do, Q. and L. Iyer. 2002. Land Rights and Economic Development: Evidence from Vietnam (Draft). Department of Economics, MIT. July. Dollar, D. 2002. Reform, Growth and Poverty in Vietnam. Policy Research Working Paper No. 2837. World Bank Development Research Group, Marcoeconomics and Growth. May. Dufhues, T., T. M. D. Pham, T. T. Ha, and G. Buchenrieder. 2001. Fuzzy Information Policy of the Vietnam Bank for the Poor in Lending to and Targeting of the Poor in Northern Vietnam. Stuttgart: Grauer Verlag, Research in Development Economics and Policy Discussion Paper, No. 3.

626 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang Edmonds, E. and N. Pavcnik. 2004. Product Market Integration and Household Labor Supply in a Poor Economy: Evidence from Vietnam. Policy Research Working Paper No. 3234. World Bank Poverty Reduction and Economic Management Network, Gender Division. March. Edmonds, E. and C. Turk. 2002. Child Labor in Transition in Vietnam. Policy Research Working Paper No. 2774. World Bank Development Research Group. February. Fields, G. S. 1990. Labour Market Modeling and the Urban Informal Sector: Theory and Evidence. In The Informal Sector Revisited. Edited by D. Turnham, B. Salome, and A. Schwarz. Paris: Development Centre of the Organisation for Economic Co-operation and Development. ———. 2004. A Guide to Multisector Labor Market Models. Paper prepared for the World Bank Labor Market Conference, Washington, DC, 18 to 19 November. Friedman, E., S. Johnson, D. Kaufmann, and P. Z. Lobaton. 2000. Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries. Journal of Public Economics. Vol. 76, Issue 3: 459-493. Gallup, J. L. 2004. The Wage Labor Market and Inequality in Vietnam. In P. Glewwe, N. Agrawal, and D. Dollar, eds., Economic Growth, Poverty and Household Welfare in Vietnam. World Bank, Washington, DC. General Statistical Office (GSO). 1989. Population Census. Hanoi: Statistical Publishing House, Hanoi. ———. 1999. Population Census. Hanoi: Statistical Publishing House. ———. 2000. Vietnam Living Standards Survey 1997–1998. Hanoi: Statistical Publishing House. ———. 2004. Results of Living Standards Survey of Households in 2002. Hanoi: Statistical Publishing House. ———. 1995–2004. Statistical Yearbook. Hanoi: Statistical Publishing House. Glewwe, P., and J. Hanan. 1998. “School Enrollment and Completion in Vietnam: An Investigation of Recent Trends.” In D. Dollar, P. Glewwe, and J. Litvack, eds., Household Welfare and Vietnam’s Transition. World Bank Regional and Sectoral Studies. World Bank, Washington, DC. Glewwe, P., M. Gragnolati, and H. Zaman. 2000. Who Gained from Vietnam’s Boom in the 1990’s? An Analysis of Poverty and Inequality Trends. Policy Research Working Paper No. 2275, World Bank, Washington, DC. Goletti, F. 1998. “Trade Distortions and Incentives in Agricultural Trade: The Case of Rice, Sugar, Fertilizer and Livestock-Meat-Feed Sub-Sectors in Vietnam.” Background paper for the World Bank Vietnam Rural Development Strategy. International Food Policy Research Institute, Washington, DC. Guillaume, D. M. 2003. “Education and Employment in Vietnam: Transition and Adjustment.” Translated by N. Flay. In Scientific Bulletin. Institut de Recherche pour le Développement, Paris. Haughton, D., J. Haughton, and P. Nguyen, eds. 2001. Living Standards During an Economic Boom. UNDP and Statistical Publishing House, Hanoi. International Labour Organization–Ministry of Labour, War Invalids, and Social Affairs (ILO-MOLISA). 2003. Equality, Labor, and Social Protection for Women and Men in the Formal and Informal Economy in Vietnam: Issues for Advocacy and Policy Development. Hanoi: Labor and Social Affairs Publishing House.

627 A Stocktaking of Viet Nam's Labor Market Policies Jamal, V., and K. Jansen. 1998. Agrarian Transition in Vietnam. Sector paper SAP 2.74/ WP.128, International Labour Organization, Geneva. Japanese Group of Private Assistance to Vietnam (JAPA). 2004. The Informal Sector in Vietnam. Tokyo. Le, D. D. 2004. “The Development of Market Institutions and Poverty Reduction in Vietnam.” In Which Institutions Are Critical to Sustain Long-term Growth in Vietnam? Asian Development Bank, Manila. Le, T. Q. 2003. “Labor Export: Historical Periods.” Economic Studies Review 302:63–73. Le, X. B., N. T. K. Dzung, and T. H. Han. 2003a. Some Issues Relating to the Development of the Labour Market in Vietnam. Central Institute for Economic Management, Hanoi. ———. 2003b. “Off-Farm and Non-farm Employment in Vietnam.” In Off-farm and Non-farm Employment in Southeast Asian Transitional Economies. Development Analysis Network, Phnom Penh. Le, X. B., C. C. Loi, N. T. K. Dzung, and N. V. Tien. 2001. “The Labour Market in Vietnam: Growth, Poverty Reduction and Adjustment to Crisis.” In Labour Markets in Transitional Economies in Southeast Asia and Thailand. Development Analysis Network, Phnom Penh. Li, Q., B. Taylor, and S. Frost. 2003. Labour Relations and Regulation in Vietnam: Theory and Practice. Working Paper Series No. 53, Southeast Asia Research Center, City University of Hong Kong. Litvack, J. I., and D. A. Rondinelli. 1999. Market Reform in Vietnam: Building Institutions for Development. Westport, CT: Quorum Books. Liu, Y. C. A. 2001. “Markets, Inequality and Poverty in Vietnam.” Asian Economic Journal 15(2):217–35. McCarty, A. 1999. “Vietnam’s Labour Market in Transition.” Draft paper presented at Law and Labour Market Regulation in Asia Conference, 12 November, University of the Philippines, Quezon City. Maloney, W. F. 2003. “Informal Self-Employment: Poverty Trap or Decent Alternative.” In G. S. Fields and G. Pefeffermann, eds., Pathways Out of Poverty. Boston: Kluwer. Manalili, N. M. 2001. “Part II–2. Enhancing Rural Non-Farm Employment Opportunities Through Agro-Industries And Rural-Urban Linkages.” Asian Productivity Organization paper. Non-Farm Employment Opportunities in Rural Areas in Asia. (ICD-SE2-01) Report of the APO presented at the Seminar on Non-farm Employment Opportunities in Rural Areas, 24–29 September, Manila. Marsh, S. P., P. V. Hung, N. Q. Chinh, and T. G. MacAulay. 2004. “Farm Income and Income Diversity on Vietnam’s Small Household Farms.” Paper presented at the 48th Annual Conference of the Australia Agricultural and Resource Economics Society, 11–13 February, Hanoi Agricultural University. Ministry of Finance. 2002. “Circular on Income Tax of High-Income Earners (Circular No. 015/2002/TT-BTC).” Government of Viet Nam. Hanoi. Ministry of Labour, War Invalids, and Social Affairs (MOLISA). 1996–2003. Employment Surveys Statistics. Hanoi: Statistical Publishing House. ———. 1996–2004. Statistical Yearbook. Hanoi: Statistical Publishing House. ———. 2002. Status of Labour and Employment in Vietnam. Hanoi: Statistical Publishing House.

628 Binh T. Nguyen, Cu Chi Loi, and Nguyen Chien Thang Mitter, S. 1995. “Who Benefits?” In Missing Links: Gender Equity in Science and Technology for Development. Gender Working Group of the United Nations Commission on Science and Technology for Development. Available: http://web.idrc.ca/es/ev69150-201-1-DO_TOPIC.html. Moock, P. R., H. A. Patrinos, and M. Venkataraman. 2003. “Education and Earnings in a Transition Economy: The Case of Vietnam.” Economics of Education Review 22: 503–10. Nguyen, B. T. 2004. “A Prediction of Labor Allocation in Vietnam Using Household Survey Data.” Paper submitted to Oxford Development Studies. December. Nguyen, B. T., J. Albrecht, S. Vroman, and M. D. Westbrook. 2005. “A Quantile Regression Decomposition of Urban-Rural Inequality in Vietnam.” Paper submitted to Journal of Development Economics. August. Nguyen, C. T. 2004. “Rural Labor Market Participation and Relationship Between NonFarm Household Self Employment and Poverty Alleviation.” Consulting paper for World Bank, Hanoi. Nguyen, T. T. M. 2002. Strengthening Public-Private Partnerships to Promote and Create Urban Employment in Vietnam. Vietnam Chamber of Commerce and Industry, People’s Committee of Hai Duong, and International Labour Organization. Case study prepared for the Fourth Asian Mayors’ Forum and Regional Workshop on Good Urban Governance for Poverty Alleviation and Social Development, 9 to 11 July, Bangkok. Nguyen, V. K. 2000. “The Development Situation of Population, Labor and Employment of Vietnam.” Ministry of Planning and Investment, Hanoi. O’Connor, D. 1996. “Labor Market Aspects of State Enterprise Reform in Vietnam.” Research Programme on Economic Opening. OECD Development Centre Working Papers No. 117, Organisation for Economic Cooperation and Development, Paris. Oxford Analytica. 2005. Vietnam: Government Rethinks its Divestment Strategy. Available:http://www.oxan.comdisplay.aspx?StoryDate=20050214&Product Code =APDB& StoryNumber=1&StoryType=DB Pham, T. K. N. 1999. “Small Enterprises and Medium Enterprises: Which Are More Efficient for the Socio-Economic Development in Vietnam?” Hanoi University of Technology. Processed. Pham, T. T. H. 2002. “Creating a Conducive Policy Environment for Employment Creation in Small Enterprises in Vietnam.” In Focus Programme on Boosting Employment through Small Enter Development, Job Creation and Enterprise Department. International Labour Organization, Hanoi. Ravallion, M., and D. van de Walle. 2004. Breaking Up the Collective Farms: Welfare Outcomes of Vietnam’s Massive Land Privatization. Economics of Transition 12 (2):201–36. Riedel, J., and B. Comer. 1997. “Transition to a Market Economy in Vietnam.” In W. T. Woo, S. Parker, and J. Sachs, eds., Economies in Transition: Comparing Asia and Europe. Massachusetts Institute of Technology. Schneider, F. 2002. “Size and Measurement of the Informal Economy in 110 Countries around the World.” Paper presented at the Workshop of the Australian National Tax Center, 17 July, Australian National University, Canberra.

629 A Stocktaking of Viet Nam's Labor Market Policies Sethnuraman, S. V. 1998. “Gender, Informality and Poverty: A Global Review—Gender Bias in Female Informal Employment and Incomes in Developing Countries.” Draft version of a study with the World Bank (Poverty Reduction and Economic Management Department) and WIEGO. Poverty Reduction and Economic Management Network, World Bank, Washington, DC. Shanks, E., and C. Turk. 2003. Refining Policy with the Poor: Local Consultations on the Draft Comprehensive Poverty Reduction and Growth Strategy in Vietnam. Policy Research Working Paper No. 2968, East Asia and Pacific Region, Poverty Reduction and Economic Management Sector Unit, World Bank, Washington, DC. Tenev, S., A. Carlier, O. Chaudry, and Q. T. Nguyen. 2003. Informality and the Playing Field in Vietnam’s Business Sector. International Finance Corporation, World Bank, and MPDF, Washington, DC. Tran, V. H. 2003. “Labor Export: Current Situation and Solution.” Journal of Labor & Social Issues 226:16–7 Tran, T. D. 2004. “Vietnam.” In Total Factor Productivity Growth: Survey Report. Asian Productivity Organization, Tokyo. US Department of Labor, Bureau of International Labor Affairs, and US Embassy. 2002. Foreign Labor Trends: Vietnam. Hanoi. Van de Walle, D. and D. J. Cratty. 2003. Is the Emerging Non-farm Market Economy the Route Out of Poverty in Vietnam? Policy Research Working Paper 2950, Development Research Group Public Services, World Bank, Washington, DC. Vietnam Development Report. 2001. Vietnam 2010: Entering the 21st Century Pillars of Development. World Bank, Asian Development Bank, and United Nations Development Programme. Asian Development Bank, Manila. Vietnam Institute of Economics. 2001a. Vietnam’s Economy in 2001. Annual Report on Vietnam’s Economy. Hanoi. ———. 2001b. Report on Labor-Employment–Income in 2000. Hanoi. ———. 2002. Vietnam’s Economy in 2002: A New Policy Thinking for New Development Stage. Annual Report on Vietnam’s Economy. Hanoi. Vietnamnet. 2004a. “Leaders of Illegal Strikes Go to Court (in Vietnamese).” 28 May. Hanoi. Available: http://www.vnn.vn/xahoi/laodong/2004/05/155360/. ———. 2004b. “Signing Contracts through Verbal Agreements” (in Vietnamese). Available: http://www.vnn.vn/xahoi/laodong/2004/11/341344/. Vijverberg, P. M., and J. Hayghton. 2004. “Household Enterprises in Vietnam: Survival, Growth, and Living Standards.” In P. Glewwe, N. Agrawal, and D. Dollar, eds., Economic Growth, Poverty and Household Welfare in Vietnam. World Bank, Washington, DC. Vu, V. T. 1994. Issues of Utilization of Labour in Rural Vietnam. Hanoi. World Bank. 1999. Vietnam Development Report 2000: Attacking Poverty. World Bank, Hanoi. ———. 2002. Vietnam Development Report 2003: Delivering on Its Promise. World Bank, Hanoi. ———. 2003. Vietnam Development Report 2004: Poverty. World Bank, Hanoi.

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PART III Policy Issues

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CHAPTER 10 Policies to Achieve Full, Productive, and Decent Employment in Asia JESUS FELIPE AND RANA HASAN

A

s argued in Chapter 1, governments across Asia must give maximum priority to promoting full, productive, and decent employment if they are to make a serious dent in the large-scale unemployment and underemployment that exists in Asia’s labor markets. What government policies and actions will promote such employment? In this final chapter, we focus on addressing this question. However, before we get to the specifics, it is useful to reiterate what we mean by full, productive, and decent employment. In a developing country context, where a large proportion of the labor force is underutilized, full employment is about reducing unemployment as well as reducing underemployment; it is about employment creation. Moreover, the employment that is created must be productive. Creating jobs without regard to their productivity, as may be attempted by governments for the sake of reducing unemployment, is at best a short-term solution. Finally, employment must be decent. This entails that employment provide workers with basic rights (such as the freedom of association, protection from forced or compulsory labor, and elimination of discrimination) and security. In what follows, we first discuss the policies and actions required for attaining full and productive employment. Those required for ensuring that employment is decent are provided after that.

Jesus Felipe, Economics and Research Department, Asian Development Bank; Rana Hasan, Economics and Research Department, Asian Development Bank.

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Given the definitions of full, productive, and decent employment, an important question that arises is that of whether there may be some contradictions among the three objectives. The answer is perhaps, yes. As indicated in Chapter 1, achieving these objectives, even considered in isolation, is a difficult task for policy makers. Moreover, the possibility of tensions among objectives is unavoidable and is inherent to policy making in the context of a multi-objective function. Also, we noted in Chapter 3 that the neoclassical, Keynesian, and Marxian theories have different views of the causes of unemployment and, consequently, of the role of economic policy in dealing with the problem. In the standard neoclassical model, unemployment is the result of wages being set above market-clearing levels. Labor market flexibility is the correct policy to address the problem. In Keynesian theory, unemployment is the result of insufficient effective demand. Correct government economic policies can reduce, if not eliminate, unemployment. Finally, Marxian theory suggests that the continual generation of unemployment is not a product of disequilibrium. Nor is it a dysfunctional outcome of the capitalist system that can ultimately be rectified by good economic policy. On the contrary, it is functional to the process of capitalist accumulation for it serves two purposes. First, the reserve army of labor provides capital with a critical mechanism for regulating movements in the wage rate; and second, it provides capitalism with an indispensable degree of flexibility. In this context, Marx argued that even in exceptional periods of accelerated accumulation, there is no guarantee that full capacity utilization will imply full employment. This is even more so in developing countries, where underemployment is the norm despite government efforts to eradicate it. We also noted in Chapter 3 that today’s modern technologies adopted by developing countries are capital intensive. This is because they have been designed in developed countries. When they are adopted by developing countries, they have the important and positive effect of raising the productivity of labor. The downside is that often they lead to small, if any, increases in employment (see the recent model by Roberts 2002). This means that the standard picture of the development process is probably one characterized by increases in the capital–labor ratio, decreases in capital productivity, and increases in labor productivity (Fan and Felipe 2005). What is the overall impact on the labor market of this type of development process? The demand for labor will be positively affected by the rate of capital accumulation, while it will be negatively affected by the ensuing higher productivity of labor. The result is that the demand for labor is an indeterminate outcome of these two contradictory but unavoidable effects of the increasing mechanization and rising capital intensity of production. The fact that trade-offs may exist between the goals of full, productive, and decent employment should not, however, be taken as a license by policy

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makers to abandon any of the three goals. The goal of full employment—i.e., reducing unemployment and underemployment—is crucial because the economic and social costs of unemployment and underemployment are staggering. Unemployment causes permanent losses in potential output of goods and services, not to mention the misery and social injustice that it causes, in particular in developing countries, as well as the myriad related problems that derive from it (e.g., crime and social instability, psychological problems, deterioration of skills). Indeed, it is more rational to assume that countries cannot “afford” any unemployment, rather than to suppose that they cannot “afford” full employment. The case for decent employment is similar. In the first place, the extension of basic rights to all workers—the first component of decent employment—is necessary on purely ethical grounds. Moreover, implemented sensibly, it is not only unlikely to be particularly costly, but it can induce gains in productivity as well. Second, as is argued in more detail below, providing better social protection for all workers so as to provide them with security—the second component of decent employment—can allow workers to accept more risks (for example, in adopting new types of crops in which there is some probability of crop failure) and, more broadly, can enable labor markets to function better. Finally, especially for a number of countries in developing Asia where unemployment and underemployment are widespread, the trade-offs that can exist between the different goals, especially achieving full employment and productivity growth, may not be particularly stark. Put differently, these economies can be seen as having so much “slack”—or underutilized resources— that a carefully designed set of policies should be able to generate both increases in employment as well as in productivity. In what follows, we discuss such types of policies.

10.1 Toward Full and Productive Employment Attaining full and productive employment entails creating the conditions under which the formal sector generates more jobs and improves earnings prospects in the informal sector. To achieve these aims, it is important to make employment and productivity growth central to macroeconomic policy. However, this is by no means easy. As argued in Chapter 3, the dilemma of wage-led economies, which are often adversely affected by productivity improvements because they are not well prepared to absorb technological change, is how to shift productivity gains to higher real wages and aggregate demand. What policies should governments implement to achieve full and productive employment? Chapter 3 examined the role of labor market policies in facilitating or enabling better labor market outcomes consistent with full

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employment, and concluded that labor market reforms aimed at making labor markets more flexible are not a panacea. Figure 1.1 in Chapter 1 argued that growth-promoting and human capital policies are fundamental to achieving full and productive employment. Specifically, growth-promoting policies are split into: (i) policies directed at improving productivity and incomes in rural areas, and in the urban informal sector; (ii) export push; and (iii) industrial policies for public-private coordination, diversification, and restructuring. The following subsections review these policies.1

10.2 Growth-Promoting Policies Policies that generate economic growth are of vital importance. However, this does not mean that all that countries need to do is to focus on growth exclusively and accept unquestionably the labor market outcomes that result. This view is simplistic and ignores two issues. First, high economic growth rates should not be viewed as an end in themselves. Growth that takes place without making a serious dent in poverty (especially in countries where poverty is widespread) or that creates too few productive and rewarding jobs (in a country where such jobs are seriously lacking) is failing to improve the welfare of a large proportion of its population. Second, there are good reasons for believing that a growth process that is highly inequitable will be difficult to sustain. Indeed, a widely held view on the results of India’s national elections held in 2004 is that an incumbent party, which had presided over a fast-growing economy, lost because of the perceptions of voters in rural areas that they were being left behind. Moreover, inequality may even impede a growth process from igniting in the first place. As noted by Bowles and Gintis, for example, “the relationship between inequality and economic performance is mediated by the structure of economic governance: inequality impedes economic performance in part by obstructing the evolution of productivity-enhancing governance structures” (Bowles and Gintis 1995, pp. 410; italics in the original). They offer three arguments in support of a positive relationship between efficiency and equity, and a source of equality-productivity complementarity: institutional structures supporting high levels of inequality often prove costly to maintain; more equal societies may be capable of supporting levels of cooperation and trust unavailable in more economically divided societies; and economies with highly unequal asset distribution face more inefficient incentive structures. Thus, the real challenge for policy makers is how to put in place a growth process that is wholly compatible with and delivers the goals of full and productive employment. In the context of developing Asia, this would require that the growth process be characterized by increasing incomes in the nonwage

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sector (self-employed workers, unpaid family workers) and the informal wage sector; and by increases in the proportion of workers in the wage (formal) sector.2 The types of specific policies discussed below take as their starting point the idea that employment is determined by investment expenditures and other autonomous types of expenditures, such as exports and government investment. The key to employment creation is to increase the rate of capital accumulation of the economy. 10.2.1 Policies to Improve Productivity and Incomes in the Rural Economy and Urban Informal Sector Rural Economy As noted earlier, the rural economy is where the majority of Asia’s poor work and is also a sector characterized by a high degree of underemployment and low productivity. Unfortunately, the rural economy is also one that has suffered the relative neglect of policy makers. In part, this neglect has been the flip-side of the attention paid to developing modern/formal industrial economies in urban areas—after all, economic development is about the contraction of the traditional rural economy and the expansion of modern industry and services sectors, and growth of urban centers. Yet from the point of view of generating full employment, the pursuit of a package of policies mainly focused on expanding the modern sector with a heavy urban bias has limitations. A critical issue is how large the (surplus) labor pool is in the rural economy. If it is very large (as in India) it is unlikely that the modern sector of the economy will be able to absorb it to the point that wages in the rural sector will increase significantly. For this reason, it is necessary to pursue a complementary policy of increasing the supply price of labor directly in the rural sector by increasing productivity in agriculture. When a large portion of the labor force is employed in the primary sector, it is the productivity of this sector that sets the supply price of labor in the rest of the economy, and unless the external sector of the economy is large relative to GDP, wages in the economy will not increase unless the supply price increases through an increase in physical productivity in agriculture (e.g., increasing yields per acre) (Mazumdar 1999). Increased public investments of different types will have a critical role to play in enabling farm productivity and incomes to improve. Consider first the provision of rural infrastructure, including irrigation, rural transport, and rural electrification, and the provision of new technologies through agriculture extension services. Irrigation, aside from having a powerful impact on farm productivity, increases the frequency of cropping and therefore the demand for farm labor. The presence of rural roads cuts down on transport costs in a

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significant way and allows for the development of markets and trade for all types of inputs and outputs. Rural electrification allows the usage of new farming inputs—for example, the operation of electric pumps. Finally, agriculture extension services are critical to enabling farmers to move from traditional farming techniques to high-yield modern techniques. Significantly, increased productivity on the farm also brings benefits for the nonfarm rural economy. In the first place, rural roads and rural electrification also benefit the expansion of the nonfarm sector. In the second place, increased incomes from improved farm productivity will typically have a beneficial impact on the nonfarm economy by raising demand for its output. At the same time, investments in physical infrastructure need to be complemented by public investments in basic health care (including family planning services) and education. There are a variety of benefits to be had from these investments. First, longitudinal studies of rural households clearly show the dramatic impact that illness can have on a household’s poverty status over long periods of time. For example, a study of a number of villages in rural India demonstrates that the illness of a key earning member as long as 25 years ago can drive a family into the poverty trap, as a result of the loss of that member’s earnings, as well as into a debt trap, in order either to meet consumption needs at the time of illness or to meet expenses to treat the illness. Second, basic education has been found to have a causal link with the ability of farmers to switch from traditional farming techniques to modern ones based on, for example, use of high-yield variety seeds (Foster and Rosenzweig 1996). Some evidence also suggests that education makes it easier for farm workers to move to nonfarm activities. Finally, growing evidence shows that access to both basic education and health care can lead to improved maternal health care and the decision to have fewer children. In the short to medium term, a smaller portion of the household budget needs to go into looking after young dependents. In the longer term, not only does this imply fewer entrants to an already crowded labor market, but also that entrants will be better educated. Admittedly, public finances in many Asian countries could seriously constrain the ability of governments to invest in the rural economy (as noted above). However, if these countries are to make a dent in the serious amounts of underemployment and poverty that exist today, they will have to find the required political will and financial resources. The former is especially important in the context of wasteful subsidies that are given for various political economy reasons (for example, poorly targeted subsidies for power, water, and fertilizer in India). Additionally, raising farm productivity will also require that infrastructure inputs be combined with private assets, especially land (or land-use rights in the context of the transition economies). If land is inequitably distributed, improving the productivity of land may be associated with only minor increases in farm incomes of the poor, leaving the supply price of labor essentially

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unchanged. In such situations, there is a case for pushing land reforms aimed at improving the poor’s access to land. There is considerable evidence, including that from the experience of Korea and Taipei,China, of the beneficial impact that land reforms can have on incomes of marginal farmers. Land reforms can be of various types. It can involve redistribution of land, but this is not all. For example, where property rights are ill-defined, land reform can take the form of a clearer definition of use and access rights, which can dramatically alter investment behavior. In the People’s Republic of China (PRC) for example, the introduction of the household responsibility system, whereby land-use rights were allocated to individual small farmers, was a major boost to the productivity of land (Lin 1992), and perhaps to farm self-employment as well. The fact that land-use rights were allocated equitably meant that marginal farmers benefited considerably. Land reform may also take the form of, for example, legislating ceilings on landholdings and improving tenurial security. Evidence from India indicates that changes in the terms of land contracts rather than actual redistribution can reduce poverty and raise agricultural wages (Besley and Burgess 1999). Similarly, a province-level analysis for the Philippines by Balisacan and Fuwa (2004) finds that implementation of land reform is a significant and positive factor for growth. Ultimately, of course, the political capital required to push through such reforms needs to be there. Moreover, land reform programs, where they can be implemented, need to be designed carefully. For example, they need to ensure that the redistributed land leaves farming households with plots that are viable in the context of improved modern methods, and not just traditional farming methods. It has already been noted that improvements to rural infrastructure will benefit not only the farm economy but also the rural nonfarm economy. But much more needs to be done for the rural nonfarm economy, given its tremendous potential. This potential, and the benefits of realizing it, are perhaps best seen in the light of the PRC’s experience with township and village enterprises (TVEs). From 1978 to 1996, their number increased from 1.5 million to 23.4 million (Lin 2004), while the number of workers employed by them rose from 9.5% of the total rural labor force to 29.8%. Crucially, the TVEs are widely seen to be a key driver of the PRC’s excellent growth record (e.g., Lin 2004). The case of the TVEs is important in demonstrating the benefits that can accrue from a dynamic rural nonfarm sector. Credit is an area in which rural-based enterprises may be severely rationed owing to a variety of market failures. In a survey of rural nonfarm entrepreneurs, access to credit appeared as the top-ranked business need, ahead of market access, skills, raw material supply, infrastructure, or social stratification (Som et al. 2002). While previous generations of rural credit programs have been disappointing, improved modalities for credit delivery have emerged. The most prominent example has been microfinance schemes, which have stimulated considerable interest due to their specialization toward a poor clientele, their

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high repayment rates, and their low subsidy levels relative to earlier supervised credit programs. Loan sizes are kept small (though perhaps graduating in size over time). Collateral requirements are typically eliminated, though other incentive features are introduced, the most important of which is group liability. Often these programs are targeted toward women, thus improving their command over household resources as well as accelerating their participation in commercial activities. While the case for microfinance is often overstated, these features are solidifying into a list of good practices by which to widen access to credit for the poor. The provision of producer services is another crucial need of enterprise development. For farms, the most familiar form of service is technology extension; counterpart services for nonfarm enterprises would be technical assistance, training, and support programs for the gamut of small-scale enterprises in rural areas. Assistance in terms of management capacity building (business plan formulation, financial management, etc.), as well as market assistance (price information, trade fairs, business matching, etc.) is also common among small enterprise programs. While governments have been engaged in providing such services and assistance, these programs have been traditionally delivered by top-down, supply-driven formats determined by the government, under a subsidy regime. Such an approach has proven largely ineffective (Briones 2005). The sheer diversity of technical and managerial needs of farm and nonfarm entrepreneurs has overwhelmed the capacities of these systems, which have little incentive to attempt to match their supply to actual needs. A new market-oriented paradigm has therefore emerged as an alternative (Marr 2004). Subsidies are being phased out, and cost-recovery schemes phased in. This forces public (or nonprofit) service providers to compete with their private counterparts, to prioritize the range of services provided, and to operate on a financially sustainable footing. Another important type of producer service is the facilitation of business linkages. The private sector has shown a robust capacity to forge these vertical linkages along the supply chain. Moreover, private contractual arrangements often have desirable efficiency or feasibility features that deal with the problems of coordination, strategic opportunism, and risk sharing that are inherent in these supply chains. However, there is no presumption that the market can provide linkage-forming services at optimal levels. Public (or nonprofit) provision may need to supplement their activities. Legal and institutional support for contracts, dispute resolution, and enforcement mechanisms should also be in place, though invasive regulation of contract provisions should be avoided. Urban Informal Sector Many urban workers in developing countries must look for work in the informal sector, for two reasons: the actions that governments take to hinder

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entrepreneurship and growth (de Soto 1989); and the actions that governments fail to take to promote entrepreneurship and growth (de Soto 2001). The costs of informality are summarized in Box 10.1. Box 10.1 National Economic Consequences of the Costs of Informality

The division of economic activities into formal and informal has adverse effects on the economy in general. These effects include declining productivity, reduced investment, inefficient tax system, increased utility rates, limited technological progress, and difficulties in formulating economic policy. Declining Productivity. Compliance with excessive government regulations by formal businesses affects the flexibility of decision making and leads to an inefficient use of resources. It is difficult to be productive when government restrictions hamper the pooling of resources, when taxes and tariffs distort the price of materials and products, and when price controls distort production incentives. Also, the concept of “red tape,” accounting requirements, and other procedural rules increase costs for businesses. More important, some labor laws render the mobility of labor difficult, making it extremely costly to engage new staff. When labor and social regulations increase the cost of labor excessively, formal companies respond by using less labor and more capital. This implies that formal businesses do not effectively utilize labor resources. Meanwhile, the costs of engaging in informal business, including more expensive capital and the absence of facilitating legal instruments, also generally result in lowered productivity. Since formal businesses are more capital intensive and the informal sector is more labor intensive, an arbitrary and inefficient distribution of resources is created. For an optimum level of productivity to be reached, the appropriate combination of employment and capital must be applied. Reduced Investment. The presence of informal activities reduces aggregate investment as there is less long-term investment in production in view of the high rate of return required by informal investors and the difficulties that informal businesses experience in enforcing contracts. Inefficient Tax System. The existence of informal businesses generates a smaller tax base. This causes formal businesses to pay more taxes than they would if informality did not exist. To some extent, this discourages formal companies from expanding. More important, formal activities become less and less attractive and informality continues to grow. Meanwhile, tax evasion becomes widespread, prompting the government to spend on strategies to detect tax evaders and less on much-needed infrastructure and social services. Increased Utility Rates. Informal businesses sometimes tap the water and electricity supplies illegally to avoid paying for them. Since the full use of continued.

642 Jesus Felipe and Rana Hasan Box 10.1 National Economic Consequences of the Costs of Informality (cont’d.)

utilities should be accounted for, formal businesses are charged with higher utility rates to subsidize the part consumed by informal businesses. Limited Technological Progress. Technological progress is hampered by the existence of informal businesses because informal companies generally engage in small-scale business, maintain a lower level of interaction in production with other companies, and are unable to protect technological innovation. Informal companies usually have small businesses due to fear of detection, the absence of property rights, and the difficulty of enforcing contracts. These companies cannot benefit from technological innovation because, in order to do so, they would have to increase their scale, which would make their detection more likely. Difficulties in Formulating Macroeconomic Policy. The macroeconomic decisions that relate to the real, monetary, fiscal, and external sectors of the economy and that a government formulates are largely dependent on the accurate measurement of the performance of the economy. The existence of informal activities renders it extremely difficult to obtain precise information on national economic performance and introduces an excessive element of speculation in decision making. If informal activities were a constant proportion of total economic activity, the margin of error might not be so great. However, informal activities, at least in some countries, have grown more rapidly than formal activities, so that the growth of economic output in these countries is underestimated. The growth of informal transactions also provides some difficulty in measuring other economic indicators, such as inflation, employment, unemployment, and underemployment. Source:

de Soto (1989).

The urban informal sector is where many urban jobs are being created. And while the sector is very heterogeneous in terms of its characteristics—so that one cannot describe all jobs in the sector as low productivity/low earnings jobs—for many employed in the sector, low productivity/low earnings are a fact of life. As in the case of rural nonfarm enterprises, the self-employed and own-account workers in micro- and small enterprises in urban areas need special assistance in becoming more productive. Like their counterparts in rural areas, improvements in access to credit, technical assistance, building of management capacity, market assistance, and the facilitation of business linkages with other firms, including those in the formal sector, are all essential parts of the policy package required by the urban informal sector.

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However, perhaps more so than rural enterprises, the urban informal sector needs a much improved legal and institutional framework in which to operate. This is because the urban informal sector often contains activities outside the law, or at least on its margins (ILO 2002a). Some aspects of the legal and institutional framework are particularly relevant: one is the business regulations that govern the procedures and costs of starting and operating an enterprise; another is the property rights regime. The importance of the legal and institutional framework for the informal sector has been emphasized forcefully by de Soto (1989, 2001). He argues that the major stumbling block that keeps most of the world from benefiting from capitalism is its inability to produce capital. Capital is the force that raises the productivity of labor and creates the wealth of nations, the lifeblood of the capitalist system, the foundation of progress, and the one thing that the poor countries of the world cannot seem to produce for themselves. This is what he refers to as the mystery of capital. Capital is the key to development because of the potential it holds to deploy new production. Since this potential is an abstract feature, it requires a conversion process from physical assets in the form of “dead capital” into the potential to deploy new production and into the force that raises the productivity of labor and creates the wealth of nations. Thus, an economy’s wealth depends on its ability to use capital. De Soto (2001) contends that there is a crucial institution that holds the key in the conversion process; and that there is a link, in terms of causality, that has been missed. The institution is the system of property rights; the missing link is that this institution has a capital-generating function. In other words, the conversion process takes place through the legal infrastructure and the system of property rights. The process and arguments are summarized in Figure 10.1. What is the problem in developing countries? According to de Soto, they have not developed a system of property rights that allows and facilitates the transformation of dead capital into potential capital.3 It is not that capital does not exist in developing countries.4 Many people in these countries have houses but no titles, crops but no deeds, businesses but no statutes of incorporation. It is the unavailability of these essential representations that explains why these people have not been able to produce sufficient capital to make their domestic capitalism work. For de Soto, developing countries lack the world of legally enforceable transactions, and the institutions that give rise to capital. In developing countries, it can be difficult to trace and validate the ownership of assets. This affects mostly poor people. What the poor lack is easy access to the property mechanisms that could legally fix the potential of their assets so that they could be used to produce, secure, or guarantee greater value in the market. Developing nations need to recognize and protect the property that many poor people have created, but that is currently of uncertain legal provenance, and

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thus of little use in securing the loans necessary to invest in personal or business development. The process of converting a physical asset (say, a house) into generating capital (say, an enterprise) is very complex. The problem is not that developing countries do not have an adequate legal system. It is that this legal system is chaotic and not conducive to the transformation process. Thus, it is imperative that developing countries update and simplify their legal systems so that these systems can play the capitalgenerating role that they perform in industrial countries.5 This system protects ownership and secures transactions. It encourages citizens to respect titles, honor contracts, and obey the law—that is, it helps avoid corruption. Moreover, often the problem goes beyond the fact that the legal system is inadequate for the purpose of realizing the existing potential capital. The legal systems of developing countries do not acknowledge that property can go beyond

Figure 10.1 The Mystery of Capital: Developing Countries’ Inability to Produce Capital

Assets Houses without titles Crops without deeds Businesses without statues of incorporation

They have slipped out of the legal registry but are there: dead capital

Entrepreneurship

Conversion Process of Dead Capital into Productive Capital

+ Labor

Legal Infrastructure • Ownership and property system • System of property rights and institutions that give rise to capital Source: Based on de Soto (2001).

Capital as potential to deploy new production. Force that raises the productivity of labor and creates the wealth of nations

Representation of assets with titles: (capitalgenerating function of the property rights system)

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ownership. This means that in many of them the system functions purely as an ownership inventory of deeds and maps standing in for assets, without allowing for the additional mechanisms required to create a network through which people can recombine their assets into more valuable goods and services. Once this system is enforced, citizens will have an interest (i.e., they will have incentives) in maintaining the “capitalist game” since a great part of the potential value of legal property is derived from the possibility of forfeiture. Thus, they will commit themselves to playing by the rules of the game. A wellintegrated legal property system does two things: it reduces the costs of knowing the economic qualities of assets by representing them in a way that our senses can pick up quickly; and it facilitates the capacity to agree on how to use assets to create further production and increase the division of labor (so that more people participate). The challenge of many developing countries is to understand the legal institutions and gather the political will necessary to build a property system that is easily accessible to the poor, in the process articulating a legal system that allows millions of people (at present outside the realm of the formal economy) to participate legally and formally in a modern economy. This increases the division of labor and increases productivity. 10.2.2 Export Push Ultimately, attaining the goals of full and productive employment will require significant increases in the demand for labor in the modern/formal industry and services sectors. This requires not only that formal industry and services expand in terms of their contributions to aggregate value added (driven by private-sector decisions for all practical purposes),6 but also that the expansion of formal industry and services be sufficiently labor intensive to generate the large numbers of formal sector jobs that are required to meet the goals of full and productive employment. An export push as well as public-private coordination, diversification, and restructuring policies (in short, industrial strategies and policies) have a key role to play in making both happen. This and the following subsection review these areas. In order to expand the modern sector, Asian countries will have to rely on policies that lead to an expansion of exports. This is especially true for the economically lagging countries in Asia, such as the South Asian countries and the Philippines. Moreover, for the expansion of exports to have its largest and most direct impact on employment opportunities, it should be driven by laborintensive sectors. Thus, while India’s exports have grown considerably in recent years, a major driver has been the information technology sector. It is unlikely that the employment opportunities generated by this expansion would match that which would be generated by an export boom driven by the agro-processing or light-manufacturing industries.

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An export push can be induced by lower unit labor costs. This can be achieved in one of two ways: by lowering wages or raising productivity. The first option is extremely difficult for the obvious reason that workers are unwilling to accept it. Moreover, countries that try to exploit their comparative advantages based on low labor costs by restricting wages may end up stuck in a vicious cycle of low productivity, deficient training, and lack of skilled jobs, preventing the sector in question from competing effectively in the markets for skillsintensive products. The second option, that of raising productivity, is the one that economies should try to pursue. Korea and Taipei,China, succeeded in following this road. Ways to improve productivity include increases in the capital-labor ratio, training and reorganization of the shop floor, and the introduction of competition policies. Of course, in a dynamic setting, this option leads to the question of how gains in productivity are shared between capitalists and workers, i.e., the functional distribution of income.7 In any case, not every country will be able to emulate these two economies. The above considerations lead to the next important question: What is the role of the state, if any, in developing policies that promote an expansion of exports and more generally affect the creation of new employment? In general terms, Asian countries dealt with the labor surplus question following two different industrialization strategies as means of economic growth: (i) import substitution (IS), followed by the South Asian countries; and (ii) export orientation, followed by the East Asian and Southeast Asian economies (after an initial phase of IS). Although countries throughout the region today are not implementing IS policies, it is worth making a brief reference. As is well known, IS ended up not providing an acceptable solution to many of the problems that developing countries had (and still have). In particular, the domestic market for manufactured products tends to be small in developing countries and the proportion of employment in large-scale manufacturing firms (the firms that IS targets) is too low to provide a basis for a large expansion of effective demand. In the face of this problem, developing countries have two options. Either they raise significantly per capita incomes in agriculture and services, which provide the bulk of their employment, so that the purchasing power of workers in these sectors increases and they can buy manufactured goods; or the country has to open up and export. A second problem of the IS strategy leads to problems of inefficiencies of all sorts (managerial, use of wrong techniques, etc.) due to lack of competition, and prevents transfers of better and more up-to-date techniques. Finally, the IS strategy induces the creation of vested interests. The costs of rent seeking are high. The South Asian countries spent a long time following this strategy, and it was only in the early 1990s that India began opening its markets. The results, as documented, have been positive and the country continues to implement important reforms.

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The East Asian and Southeast Asian economies switched early on to the export orientation strategy and they were able to deal efficiently with the problems of IS, including the achievement of full employment. In recent times, it has been argued that the export-led strategy of these countries has resulted in other problems, such as excessive dependence on industrial countries to absorb exports and a fallacy of composition, i.e., that while it is possible that one or several countries may have significant export expansion, it is not possible for all of them to expand exports significantly (Palley 2002). In fact, it has been suggested that the Asian economic and financial crisis could have had its roots in the real side of the economy, namely, the lack of capacity to react to problems of the export-led growth model when it came under strain in the mid-1990s. Felipe (2003) reviews this literature and concludes that although some of these criticisms are valid, export orientation still offers tremendous benefits to countries in the region.8 Further evidence is presented in ADB (2005c). But implementing an export orientation strategy successfully is not easy. Indeed, not all developing countries have been as successful as those in East Asia and Southeast Asia at increasing labor productivity and transferring this increase into increases in wages and demand. Most countries are severely constrained and have very few policy options to successfully implement output and employment policies. The reason is that most developing countries operate in the shadow of two constraints or gaps between available and desired levels of resources (Taylor 1994): savings and foreign exchange. The first indicates that investment must be financed out of available savings. The second results from the fact that developing countries require imported capital goods, hence they need to export to pay for full-employment imports (i.e., the value of imports that is seen when resources are fully utilized), which support investment. This imposes a tradeoff between short-term employment and investment for long-term growth. In these circumstances, the range of maneuver of most developing countries is rather limited.9 What is therefore needed is a policy package involving a certain degree of government intervention, and this is elaborated on in the next subsection. 10.2.3 Industrial Policies for Public–Private Coordination, Diversification, and Restructuring While market forces and private initiative are today widely acknowledged as potent drivers of economic activity, “it is increasingly recognized that developing societies need to embed private initiative in a framework of public action that encourages restructuring, diversification, and technological dynamism beyond what market forces on their own would generate” (Rodrik 2004, p. 1). Policies for economic restructuring—which Rodrik points out, are essentially what industrial policies are—need not be restricted to the industry

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(or narrower, manufacturing) sector. They also apply to the development of nontraditional activities in agriculture or services. Additionally, the use of industrial policies should not imply that governments make production and employment decisions. Instead, it requires that governments play a “strategic and coordinating role” in the development of nontraditional activities—activities where the underlying costs and opportunities are unknown to begin with and unfold only when such activities start. Industrial strategies and policies defined in this way have a special significance in so far as meeting the goals of full and productive employment. Consider the case of India’s food processing industry—a labor-intensive sector as far as manufacturing activities go and one that has strong direct linkages with the agriculture sector. Less than 2% of fruit and vegetable production in India is processed, compared with 30% in Thailand and 80% in Malaysia (Sundaram and Tendulkar 2002). Several market analysts have identified food processing as an industry with significant potential to expand both domestically and internationally. So the question must be: What has constrained the expansion of India’s food processing industry? Sundaram and Tendulkar (2002) suggest that the answer lies in the cultivation of traditional varieties of fruit and vegetables unsuitable for processing; lack of infrastructure for postharvest preservation and quality control and testing; lack of storage facilities including silos, warehouses, and cold-storage facilities; and lack of air-conditioned transport. Modern processing and packaging facilities are also required. It is certainly possible that some of these constraints are themselves the result of policies and regulations governing the production, movement, and sale of agricultural produce around the country; and of restrictions on the entry of large-scale firms both in certain product categories and in distribution and retailing. But the constraints go beyond these “government failures.” Coordination failures are likely to abound in preventing the growth of the sector in which there are so many inputs and players. Similarly, not just government failures, but market failures as well, have limited the productivity and quantity of employment in India’s services sector. Sectors such as travel and tourism, housing and real estate development, retailing and distribution, and education and health are all sectors where relatively large numbers of productive jobs could be created. The importance of promoting productive jobs in the services sector takes on added significance in the context of new technologies. In particular, new technologies appear to be increasingly capital and skills intensive. There are several reasons for this. First, and as noted in Chapter 3, new technologies are invariably developed in today’s industrial economies where factor prices call for technological change to be labor saving. Second, in today’s globalized world, high levels of product quality have become the norm. While in principle, there are products where high quality requires highly specialized work (branded

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shoes and watches, etc.), for the most part, high-quality products require more automation. The increasingly capital- and skills-intensive nature of new technologies can be seen at work in the retooling that is taking place at leading Indian manufacturing firms. As reported in Merchant et al. (2005), 810 workers used to produce 244,000 motorbikes a year at a plant of one of India’s leading scooter and motorbike manufacturers. After introducing greater automation, as well as improved shopfloor practices, the plant started producing nearly 3 times as many motorbikes with just 90 more workers. A similar thing has happened at a leading manufacturer of vehicles: a decade or so ago, 5,000 workers worked to assemble 60 vehicles a day at one of the manufacturer’s plants. Today 2,000 workers produce 160 vehicles a day. As the executives at these plants explain, the introduction of labor-saving techniques is deemed to be essential for achieving international competitiveness. As a result of changes in technology, for today’s developing countries that are trying to industrialize, the techniques available for all practical purposes are much less labor intensive than those available 20–30 years ago when, for example, Hong Kong, China; Korea; Singapore; and Taipei,China were industrializing. It therefore seems unlikely that an expansion of the industry sector will be able to generate, by itself, as many good jobs as would have been possible before. But certainly, many countries have room for the secondary sector to expand and create more jobs (Box 10.2). The rest of the jobs to employ growing labor forces will have to come from the services sector. The question here is whether services will be able to generate enough productive jobs, and not to be a mere residual sector that employs all those workers who move from rural to urban areas. More generally, it is certainly true that developing countries must rely on private initiative and market forces to drive growth and employment in the modern sector. Policies that constrain private investment—such as inordinately high start-up costs, cumbersome and time-consuming procedures for starting and registering businesses, barriers to entry in particular lines of business—are prime candidates for review. So are policies that in reality, as opposed to just on paper, serve to reduce the demand for labor. Eliminating such practices will probably be good both for business and for employment generation. However, eliminating such cumbersome and counterproductive regulations is unlikely to serve as a “magic bullet.” Policy makers must not lose sight of the fact that spurring the private sector is unlikely to be driven by the elimination or reduction of “government failures.” Spurring private investment will also require the elimination or reduction of market failures through an appropriately designed partnership between the state and market as well as the building-up of institutions. This partnership consists of a series of tasks and responsibilities assigned to each (ADB 2003a, pp. 224–37). The critical challenge for private sector development is getting this design correct, especially so in many

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Box 10.2 The Role of Economies of Scale and the Importance of Industry: Can Call Centers Provide the Growth and Employment Impetus Needed in the Philippines?

Over the last few years, the communications subsector in the Philippines, especially in terms of the development of call center activities, has registered very high growth rates. At the same time, industry has stagnated. This has led some commentators to ask if the Philippines can somehow develop, bypassing the traditional stages that other countries went through—i.e., the transition from agriculture to industry and then to services—and directly jump from an agricultural to a services economy. Most likely call centers, and in general most service activities, cannot provide the impetus that the country needs to generate sustained growth (though see below). Research has shown that there is a close association across countries between the growth of industry and the growth of GDP; or more precisely, that GDP growth is faster the greater the excess of industrial growth relative to GDP growth, that is, when the share of industry in total GDP is rising the fastest. This strong empirical association has led industry to be referred to as “the engine of growth.” What is special about industry and particularly manufacturing industry? Since differences in the growth of GDP are largely accounted for by differences in the rate of growth of labor productivity, there must be an association between the growth of industry and the growth of labor productivity. This is indeed to be expected for two main reasons. The first is that there are increasing returns to scale in industry, which are of two types: (i) those derived from large-scale production, which induce lower average costs; and (ii) those derived from the fact that output growth has an effect on capital accumulation and the embodiment of new technological progress in capital. Labor productivity also increases as output grows through “learning by doing.” The second main reason is that if activities outside industry are subject to diminishing returns, with the marginal product of labor less than the average product, if resources are drawn from these activities into industry as the latter expands, the average product of labor will rise in nonindustrial activities. These relationships between industrial growth, productivity growth, and GDP growth are known as Kaldor’s Growth Laws. Kaldor (1961) argued that the faster the rate of growth of manufacturing output, the faster the transference of labor from other sectors of the economy where there are either diminishing returns or where no relationship exists between employment growth and output growth. A reduction in the amount of labor in these sectors (agriculture, for example) will raise productivity growth outside manufacturing. As a result of increasing returns in the latter, on the one hand, and continued.

651 Policies to Achieve Full, Productive, and Decent Employment in Asia Box 10.2 The Role of Economies of Scale and the Importance of Industry (cont’d.)

induced productivity growth of manufacturing output, on the other, one would expect that the faster the rate of growth of manufacturing output, the faster the rate of growth of productivity in the economy as a whole. As the scope for transferring labor from agriculture (diminishing returns on activities in general) diminishes, or as output comes to depend on employment in all sectors of the economy, the degree of overall productivity growth induced by manufacturing growth is likely to diminish, and so will the overall growth rate of the economy. There are two fundamental questions in this analysis. The first is: What determines the rate at which industry (manufacturing) grows in the first place? In the early stages of development, it must be demand coming from the agriculture sector, i.e., the growth of manufacturing output is constrained or determined by demand from agriculture. In the later stages of development, it is probably export demand that drives the system. In many developing countries (though certainly not all), the internal market is too small to reap economies of scale, and selling to the domestic market does not provide the foreign exchange to pay for necessary imported inputs. As is well known, the most successful developing countries are those that managed to implement export-led growth policies. A fast rate of growth of exports and output will tend to set up a cumulative process, or virtuous cycle of growth, through the link between output growth and productivity growth. The lower costs of production in fast-growing countries make it very difficult (though not impossible) for other industrializing economies to establish export activities with favorable growth characteristics. The other fundamental question is: How do developing countries bring about structural change in favor of industrial activities (if growth and development are to be accelerated)? This question is left open. History seems to tell us that today’s industrial countries developed on the basis of protection and promotion of their infant industries (Felipe and Vernengo 2004). Of course it is a myth that the highly successful economies of East Asia and Southeast Asia grew and developed by allowing markets to work freely. Government intervention, industrial policy, and the development of infant industries were all at work. In summary, while the creation of employment by call centers is something that cannot be dismissed in a country like the Philippines, it is difficult to believe that these centers will provide the country with the solution to the unemployment and underemployment problems. It must be added that only about 4% of the applicants are taken. This is because the large majority of the applicants do not meet the basic requirement for the positions, namely, to be able to speak very good English. This requirement refers to the ability to speak without committing grammatical mistakes and to speak with a client’s accent. Although English is widely spoken in the Philippines, the reality is that only a small proportion of people speak very good English. A large number of these people are university graduates for whom a job in a call center is a form of underemployment.

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developing countries, where markets and institutions are less advanced than in industrial countries. More research in uncovering the nature and processes that can lead to more effective public-private partnerships is likely to be a high value-added activity. It is also one that is likely to require in-depth countryspecific studies. In this context, Rodrik (2004) lists some general “design principles” that could have a high pay-off. First, public support and incentives should be provided only for activities and not sectors. Moreover, the activities in question should be new ones, including products that are new to the local economy or new technologies for existing products. They should also have the potential to “crowd-in other, complementary investments or generate informational or technological spillovers” (Rodrik 2004, p. 23). Second, to make sure that public support is not abused or wasted, clear benchmarks for success and failure must be adopted. Public support should not be indefinite. The use of sunset clauses to phase out support could help in this regard. Third, agencies that implement industrial policy must be competent, have good communication with the private sector, and be monitored by the highest level of leadership possible.

10.3 Human Capital Policies The more a person studies, the more foolish he becomes. –Mao Zedong

Countries that try to exploit their comparative advantages based on low labor costs by restricting wages (or through devaluations), as noted earlier, may end up in a vicious cycle of low productivity, deficient training, and a lack of skilled jobs, preventing the sector in question from competing effectively in the markets for skills-intensive products. This situation is referred to as the “low-skill, bad-job trap” (Snower 1996).10 “Bad jobs” are associated with low wages and little opportunity to accumulate human capital; “good jobs” demand higher skills and command higher wages. A second trap derives from the complementarities between capital and labor. The problem is referred to as a “low-skill, low-tech trap.” If workers have insufficient skills to operate modern machinery, it will be underutilized. Consequently, firms will have little incentive to invest in the latest technology. This keeps workers’ productivity from improving. A third problem emerges from the interaction between innovation and skills. Innovating is crucial for developing technological capabilities, but it requires well-trained workers. Economies can get caught in a vicious cycle in which firms do not innovate because the labor force is insufficiently skilled; and workers do not have incentives to invest in knowledge because there is no

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demand for these skills. For example, Amante (2003) documents the problems of the Filipino educational system and argues as follows: “The low level of benefits derived from the Philippine education, especially at the secondary and tertiary levels, is traceable to the unemployability and low productivity of Philippine labor. In turn, these could be attributed to inadequate investments and low levels of technology utilized by business establishments and the very thin economic base of the country” (Amante 2003, p. 275). Snower (1996) argues that the relatively low demand for and supply of skills in a country derives from rational decisions made by both firms and individuals in the context of their particular legal and institutional framework. Countries with a less skilled workforce have greater incentives to produce nontraded services rather than tradables (such as manufactured goods) because the former are relatively protected from foreign competition. This pattern of specialization creates and perpetuates the demand for less skilled labor. For example, the Philippines Presidential Commission on Educational Reform 2000 Report lamented that: “The country has too long suffered the imbalance of an overly credential-conscious society, which puts a premium more on diplomas than knowledge or skills, and values prestige institutions granting degrees more than the competence that the degree itself embodies.” The report also made the observation that “Education obtained in a typical Philippine college or university may only be equivalent to a secondary education from the better high schools in the country, or from a typical high school in Japan or Europe.” Filipinos prefer a white-collar profession and look down on vocational and technical education.11 Continuing with the Philippines, Amante argues that there is a substantial mismatch between the expectations of the competencies of the workforce arising from industry restructuring and the spread of information technology. In particular: “In an environment of global competition, organizations must focus upon skills and competencies” (Amante 2003, p. 282). Today’s world demands organizations designed on skill-based systems, which adapt quickly to the new circumstances and which react to the fact that, with globalization, the nature and content of jobs and the skills required are changing at a tremendously fast pace. However, the widespread belief that changing conditions of the industrial and office work require an increasingly better trained and better educated labor force does not command universal consent, as Box 10.3 notes. This apparent mismatch between the skills that firms demand and the practical knowledge that workers bring to the workplace has led to a cycle of lack of skills (the source of the mismatch), unemployment (underemployment), and poverty (Figure 10.2). Where does the mismatch come from? On the one hand, the type of business, level of investment, and scale of operations determine the competencies expected from employees. The prevailing circumstances of global competition

654 Jesus Felipe and Rana Hasan

Figure 10.2 Breaking the Cycle: Reducing Poverty through Skills Training

Lack of skills

State intervention Skills training Educational reforms

Unemployment and Underemployment

Other state interventions e.g., antipoverty measures, investments in rural areas and human capital

Poverty

Source: Adapted from Amante et al. (1999, Figure 1).

and the spread of new technologies such as the Internet affect those expectations. On the other, the knowledge, skills, and attitudes of the workforce are shaped by existing social institutions, including the quality of education, support services, and government policy. One of the most important consequences of the deficiency in training is the effect on the composition of goods produced in a country: a lack of skilled workers adversely affects product quality. And skill deficiencies lead to production and export of relatively poor-quality and low-value products. A businessperson with only an unskilled labor pool available may well consider that any attempt to produce high-value goods will be subject to errors and poor quality. Thus, the labor force will be more suited to the production of low-value products. The manufacture of products of high quality requires highly trained workers. But if the country does not generate enough of these workers, firms will be forced to produce low-quality goods; and likewise, workers will acquire little training because few high-quality goods are produced. This leads to a vicious cycle because the choices made by employers reflect the availability of a skilled workforce. Different outputs require different types of training. A businessperson aware that his or her workers are not highly skilled (and thus, more likely to make mistakes) will tend to specialize in the production of lowvalue products. This can happen because the market does not lead to the best possible outcome. The reason is that there are differences between private and social

655 Policies to Achieve Full, Productive, and Decent Employment in Asia Box 10.3 Do Changing Conditions of Industrial and Office Work Require an Increasingly Better Trained and Better Educated Labor Force?

It is a universally accepted proposition in academic discourse that today there is a generalized increase in the average level of skills required for most jobs. With the development of technology and the application of fundamental science to many jobs, the labor process of society has come to embody a greater amount of scientific knowledge. Thus, it is argued, the average skill content of many jobs is much greater now than in the past. This, however, is a somewhat tautological argument. The question is whether the educated content of labor tends toward averaging, or, on the contrary, toward polarization. If the latter is the case, then to say that the average skill has been raised is meaningless (it is like having one foot in the ice and the other one in the fire and then to argue that, on average, one feels good). According to Braverman (1998), there is a clear tendency toward polarization. The reality is that what is happening today is that many workers gain very little from this supposed upgrading; and it is only a very small group of qualified workers that enjoys the benefits of technical change incorporated into the work process. The more science is incorporated into the labor process, the less most workers understand; and the more sophisticated and intellectual products and machines become, the less control and understanding of the machine the average worker has. What is referred to as the “upgrading thesis” seems to rest on two apparently clear trends: first, the shift of workers from some major occupational groups into others; second, the prolonging of the average period of education. With respect to the first trend, the key point is that often it is buried in the assumption that the occupational skill of jobs in the secondary sector is higher than that of jobs in the primary sector; and that the occupational skill of jobs in the tertiary sector is the highest. This is, however, not true as a general principle, for there is no reason to suppose that an assembly line worker has greater skills than a fisherman; or that a sales person in a department store has higher skills than a factory operator. Not everybody in the services sector is a well-paid and well-trained finance expert! The weight of the prejudice that rates “white collar” above all “blue collar” work is such that the growth of the former at the expense of the latter is taken as evidence of an increasing skill in training for which no real factual backing seems to be required. With respect to the lengthening of the average period spent in school before entry into the labor force, the other common ground for assuming that a better educated working labor force is needed by modern industry and services, this is an argument that needs to be dissected. It is true that the average number of years of schooling completed in many developing countries (certainly across East Asia and Southeast Asia) has increased during the last three decades, and plays two continued.

656 Jesus Felipe and Rana Hasan Box 10.3 Changing Conditions of Industrial and Office Work (cont’d.)

functions. One is to satisfy the need for basic literacy. The ability to read, write, and perform simple arithmetical operations is demanded by the urban environment, not just at the workplace, but also for consumption, for conforming to the rules of society, and obedience to the law. Beyond this need for basic literacy there is also the function of the schools in providing an attempted socialization to city life. Thus, the average length of schooling is generally higher for urban populations, and the shift of a population from farm to city brings with it, almost as an automatic function, an increase in the term of education. These two factors, which tend to define educational requirements from an occupational standpoint, obviously explain some of the increase in mass schooling, but clearly not all. A complete picture of the functions and functioning of education in developing countries requires a thorough historical study of the manner in which the present standards came into being, and how they were related, at each step of their formation, to the social forces of the society at large. This goes well beyond the rather simplistic analyses undertaken by many researchers using data on average length of schooling in growth regressions. What has happened in many developing countries? As a result of the generalization of secondary education, employers have tended to raise their screening requirements for job applicants, not because of educational needs, but simply because of the mass availability of high school graduates. In other words, diplomas are simply used as a screening device, often for employers seeking people with higher levels of education even when job content is not necessarily becoming more complex of requiring higher levels of skill. This is clearly the case of many of the rapidly growing job categories in the clerical, sales, and service fields. continued.

returns to knowledge. Individuals are not fully rewarded for the social contribution they make when they invest in knowledge, a process in which they increase the stock of knowledge available to everyone. They get no reward for this spillover, and so contributions to social knowledge will be underprovided. In the end, firms’ decisions about what type of products to produce depend on the degree to which skilled labor is available. The result is that “in countries that offer little support for education and training and that contain a large proportion of unskilled workers, the market mechanism may reinforce the existing lack of skills by providing little incentive to acquire more; whereas in countries with well-functioning educational and training institutions and large bodies of skilled labor, the free market may do much more to induce people to become skilled” (Snower 1996, p. 112). (See, however, Box 10.4 on the potential for international migration to encourage the accumulation of skills in countries

657 Policies to Achieve Full, Productive, and Decent Employment in Asia Box 10.3 Changing Conditions of Industrial and Office Work (cont’d.)

The conclusion is that the continuing extension of mass education for the nonprofessional categories of labor has increasingly lost its connection with occupational requirements. It follows that the growing recognition among corporate managers and educational researchers that the commonly made connection between education and job content is, for the mass of jobs in most developing countries, a false one; this however, will not necessarily result in a reversal of the educational trend. The educational establishment is a social institution with very important functions. Yet the recognition of how little is accomplished in the years of high school attendance in the way of job preparation (i.e., the job mismatch), and how little in the way of educational preparation these jobs require, is spreading. As mentioned above, the educational achievements have already exceeded requirements in most job categories, and the demand for better educated labor therefore cannot be explained by technological and related changes attending most jobs. Finally, on the related issue of whether many jobs created (e.g., the so-called “McJobs”) are truly unsatisfying from a personal point of view, in the sense that they affect the quality of the working life of workers (which ends up affecting productivity and lowering workers’ commitment to their work, for example), it was noted that there seems to be a contradiction. On the one hand, the literature often emphasizes that modern work, as a result of the scientific-technical revolution and automation, requires ever higher levels of education, training and the greater exercise of intelligence and mental effort in general. On the other hand, mounting dissatisfaction among workers with the conditions of industrial and office labor appears to contradict this view. The reason for this is that work has become increasingly subdivided into petty operations that fail to sustain the interest or engage the capacity of many workers with current levels of education. Source:

Braverman (1998).

where the domestic market does not provide incentives to acquire relatively sophisticated education and skills.) The market, if left to itself, will not necessarily create the incentives that induce the accumulation of knowledge and skills, and thus growth. A poor economy might be stuck forever in a vicious cycle and immersed in a poverty trap. Therefore, lifting it out of this dilemma may require government intervention so as to create the incentive to accumulate capital. Perhaps what is required is an initial injection, a push from the government, in terms of, perhaps, subsidizing the acquisition of knowledge so as to achieve the minimum rate of return, and in this way lay the first stone until increasing returns set in. Certainly, this is easier said than done since there is no guarantee that a government will correct market failure. It is difficult for the government to know all the aptitudes needed by every single firm and worker. Likewise,

658 Jesus Felipe and Rana Hasan Box 10.4 Labor Migration, “Brain Effect,” and “Brain Drain”

Globalization and trade liberalization have resulted in the freer flow of goods, services, and capital among countries. Industries increasingly feel the need to adopt advanced technologies to remain competitive. This heightens the demand for a more skilled and technology-literate workforce. Thus, the demand pattern for migrant workers shifts toward employing workers with higher skills. However, for a developing economy, this poses a major problem as the highly educated and trained people are attracted to much higher paying jobs in other countries, contributing to the “brain drain” phenomenon. The attraction in receiving countries of skilled and educated foreign workers has led to claims of deskilling of professional and highly skilled workers in developing countries. Indeed, a large number of migrants hold college degrees or are established professionals. Often, they tend to find lower-end jobs in the services sector as, for example, domestic helpers, caretakers, or cleaners. The problem is that the sending developing country incurred the cost of educating these people. Soriano (1998), for example, indicates that a 1988 survey conducted by the Department of Labor and Employment of the Philippines showed that more than 50% of migrant workers had a tertiary education, when, at the time, only 17.2% of the total labor force and 19% of the total employed had reached this level. The survey also revealed that 4 out of 10 overseas workers had at least 5 years of work experience in the Philippines prior to working abroad, and 6 out of 10 were employed when they applied for an overseas job. In addition, 8 out of 10 claimed that the skills they had acquired in the Philippines were helpful in their overseas jobs. In contrast, half of those who reported that they had acquired skills while overseas perceived that such skills would not help in their search for local jobs when they returned home because they were either not in demand or not applicable in the Philippines. These results support those of a previous survey, which reported that at least 75% of overseas workers fully utilized their skills when abroad. Moreover, some even reported that they taught foreign workers from other countries. What is the impact of migration on long-term development? One view is that international migration selects the best educated and the most skilled in the labor force. As such, it can undermine the country’s potential for development through the brain drain effect. A different view is that overseas employment continued.

government support for training is not cheap and must be financed by imposing taxes or cutting other expenditures. Indeed, such support will not help the economy get out of a trap through substantial public investment if it is financed by a punitive tax on private investment. This implies that the subsidies should be financed by taxes that do not discourage the acquisition of knowledge accumulation, such as taxes on consumption.

659 Policies to Achieve Full, Productive, and Decent Employment in Asia Box 10.4 Labor Migration, “Brain Effect,” and “Brain Drain” (cont’d.)

presents economic benefits, particularly in terms of foreign exchange earnings. It also helps ease the pressures from unemployment. At the microeconomic level, overseas remittances affect positively the level of income and savings of the receiving family. These savings are eventually translated into investments, which translate into higher capital accumulation. Finally, it is also argued that remittances tend to reduce income inequality. Research by Beine et al. (2001) has questioned the traditionally accepted detrimental growth effect stemming from the brain drain. The rationale is that in a poor economy with inadequate growth potential, the return to capital is likely to be low, which leads to a limited incentive to acquire human capital. However, the world at large values education, hence, allowing migration to take place increases the educated fraction of the population. Given that only a proportion of the educated would migrate, it could well be that the average level of education of the remaining population increases. Therefore, one could distinguish two effects of the brain drain on growth. First, an ex ante “brain effect.” This follows from the fact that migration prospects foster investments in education because of higher returns to education abroad. Secondly, an ex post “drain effect,” which follows from the fact that some of the educated workers migrate. The case for a “beneficial brain drain” occurs when the first effect dominates. Using cross-sectional data for 37 developing countries, Beine et al. (2001) conclude that the possibility of a beneficial brain drain cannot be rejected. Some tentative policy implications from their work are as follows: (i) from the perspective of the source countries, the imposition of barriers to the international mobility of skilled labor could end up having opposite effects and result in a decrease in the long-run level of human capital; (ii) the critical issue is that of the appropriate pricing of human capital in terms of tax and subsidy policies that would allow the human capital that is necessary for growth to be retained at home; (iii) subsidies to education are likely to be inefficient if the probability of leaving is high for the educated, but also if wage differentials are important—and, since the expected return to education is high, no subsidy is needed to foster human capital formation; and (iv) from the perspective of the destination countries, selective immigration policies could be reconsidered in the light of their impact on growth in the source countries. Sources: Beine et al. (2001) and Soriano (1998).

Sectors with “good jobs” are not predetermined. New sectors with increasing productivity and earnings are constantly emerging. Although securing a foothold in the growing sectors is sometimes a matter of chance selection, preparing workers with the requisite skills is an essential element for enhanced opportunity. It also needs to be stressed that training in specific skills is best done within individual enterprises. What general employment policy can do

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is to provide workers with a broad spectrum of general skills that enables them to move around the range of emerging opportunities in the labor market. This underlines the importance of the type of education policies, which are often cited as part of the economic success of East Asian and Southeast Asian economies with their emphasis on strong primary and secondary education, and which might have been deficient in South Asia. Thus, the low-skill, bad-job trap can be addressed through training vouchers, for example. These would be financed by government revenues, and would aim at compensating the firms for providing training and the workers for acquiring the resulting skills. Investment tax credits and depreciation allowances can help overcome the investment problem derived from the complementarities between capital and labor. Breaking the cycle of mismatch and unemployment/underemployment requires a mobilization of resources. Yet those people who have the resources and access to correct training tend to be those in the urban sector in developing countries. Thus, governments need to make efforts to redress this imbalance, and ensure that their policies do not reinforce the problem by favoring the urban core. The pernicious link between the lack of skills and unemployment or underemployment must be tackled via state interventions, skills training, and labor market reforms, to lead to the employability of the labor force. Such interventions should also take into account the structural roots of the gaps between actual and expected competencies of the workforce. See Boxes 10.5 and 10.6 on vocational education efforts from around the region and policies to reduce mismatches in the labor market. Several East Asian economies, in particular Korea and Singapore, have undertaken a range of training programs since the 1970s. For example, in 1976, Korea introduced the Basic Law for Vocational Training that requires private firms with 150 or more employees to conduct in-house training for a portion of its employees, or to pay a training levy equivalent to no less than 6% of its wage bill. This levy is used to promote vocational training via governmentsponsored vocational training schools. Likewise, Singapore has a series of programs such as the Vocational and Industrial Training Board, set up in 1979 and financed with a levy of 1% on wages, to subsidize efforts to upgrade the skills and expertise of employees or retraining of retrenched workers. Other initiatives are the Basic Education and Skills Development program to teach basic skills in arithmetic and literacy to workers, and the creation of the National Productivity Board in 1972, and the National Productivity Council 1982, to promote productivity consciousness. Elsewhere, in Malaysia, training costs can be subsidized, and the Penang Skills Development Center puts together training courses contributed by multinational corporations to upgrade their suppliers’ skills. Thailand grants a 150% tax deduction for training expenses. Finally, it must be added that Lewis (2004) has argued that the importance of education as a cause of success (development) or failure (underdevelopment)

661 Policies to Achieve Full, Productive, and Decent Employment in Asia Box 10.5 Vocational Training and Human Resources Development

The rapid pace of technological change demands workforces that can cope with significant social and economic change. Human resource development policies in the form of general education, vocational/technical education or training, and on-the-job or off-the-job training are effective means to develop the quality of workers and to promote economic growth. Vocational/Technical Education Asian countries are making efforts at increasing the number of workers who receive basic general education in an attempt to improve the quality of the labor force through increased literacy rates. All countries offer vocational/technical education in addition to general education. In Thailand, for example, general education provides work-oriented education to elementary school children, allowing them to gain work experience. Work-oriented education and vocational education are offered as elective and compulsory courses at both lower and upper secondary levels. In Nepal, technical schools have been established to produce basic and middle-level technical human resources locally for various development projects. In India, private and voluntary organizations have been involved in setting up diploma-level polytechnics, degree-level engineering colleges, and degreelevel management institutes. In Singapore, the Institute of Technical Education is a postsecondary institution that equips secondary school leavers and adults with technical skills and knowledge to meet the staffing needs of various sectors of industry. The Institute of Technical Education provides full-time institutional training and apprenticeship programs for school leavers as well as continuing education and training programs for the employed. Problems in Vocational/Training Institutions In Sri Lanka, as school education emphasizes academic knowledge, the supply of vocational training is relatively low. In Taipei,China, workers opt to receive general education because vocational/technical schools do not have sufficient facilities. Moreover, these types of schools are regarded as institutes for those who fail to pass the entrance exams for upper secondary school. Also in Taipei,China, job training programs are offered by the authorities to improve unskilled workers’ qualifications in the labor market. However, a college degree or high school diploma is more favored in Taipei,China than certificates from job training programs, especially in the information technology and computer industry. In Thailand, most vocational graduates tend to study further after graduation because they believe that their vocational education does not provide them with the required skills. In Viet Nam, it is easier to enroll in technical colleges than in universities. However, many high school students choose not to go on to technical colleges because the skills that they impart are of a lower level than those required by employers. Source:

Muta (2003).

662 Jesus Felipe and Rana Hasan Box 10.6 Policies to Reduce Mismatches in the Labor Market

Mismatches in the labor market can occur for two main reasons: (i) mismatch due to low labor demand and high labor supply; and (ii) mismatch due to the imbalance in the demand for skilled workers. To minimize the labor mismatch derived from the increase in the labor force, it is necessary to increase employment opportunities. One measure to expand labor demand is to generate large amounts of employment opportunities in rural areas. In Indonesia, economic policies focus on the development of small and medium enterprises in rural areas in an attempt to expand labor demand. Nepal has given tax preferences to firms in rural areas. Countries where the primary sector plays a major role are trying to expand labor demand by reforming the sector. Bangladesh, Philippines, Sri Lanka, and Thailand, where the domestic labor market cannot absorb the increasing labor force, have been exporting their excess labor supply. Countries like Nepal and Viet Nam have invited foreign investments in an attempt to develop their industries, thus increasing job opportunities in the private sector. Measures to address the mismatch due to the imbalance in the demand for a skilled workforce include the development of abilities useful in work through school education and training after employment. General education plays an important role in enhancing knowledge and abilities. However, the knowledge and skills gained through school education often fail to match the needs of many firms. To solve this problem, many countries are establishing vocational/technical schools, integrating vocational training in formal education, and setting up training centers. In the Philippines, for example, under the Technical Education and Skills Development Authority, public and private sectors cooperate in offering skills training in an attempt to produce a high-quality workforce. In India, a joint council of vocational and academic circles supports the vocational education program in the country. It is proposed to start an industry needs-driven program with trade and commerce associations for vocational/technical courses. Sri Lanka and Viet Nam are improving foreign language education in a move to increase labor demand by seeking foreign investment and business. Some specific measures that require an active government role are as follows: (i) Stimulating the private sector (ii) Improving the agriculture sector by raising its productivity through the introduction of new technologies and development of domestic resources (iii) Creating jobs for experienced workers (iv) Improving curricula and teaching methods in vocational education (v) Developing short-term training courses to meet the needs of industry (vi) Encouraging the private sector to operate training centers and training schools (vii) Establishing training centers in rural areas (viii) Conducting trainers’ training (ix) Providing general education (x) Developing an international network of training institutes that results in better methods for teaching new skills and adoption of cuttingedge technologies. For this, support from industrial countries is necessary. Source:

Muta (2003).

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has been overrated. Education is not the way out of the poverty trap in which many developing countries are immersed; more education does not mean more growth. Lewis’ important point is that, regardless of the institutional educational level, workers around the world can be adequately trained on the job for high productivity. He makes an important distinction between education and trainability. The former is defined as the means through which societies acquire political philosophies based on individual rights. In developing countries, education facilitates workers’ mobility not only across sectors but also across classes. The latter, trainability, is defined as the capacity to understand how to use a given technology. Without denying the role of education in any society, it is trainability that matters for quick increases in productivity. A modern society needs people with a broad range of skills—not just engineers, chemists, and doctors, but millions of people who can write letters, fill in forms, explain insurance policies, interpret statistical data from machines on factory floors, and understand new technologies. This is what trainability is about. The skills of engineers, chemists, and doctors can be learned only at university as they fall into the realm of education; other skills, however, are mastered with only a basic education as the basis on which they become trainable for carrying out the many different types of tasks required in a modern society.

10.4 Toward Decent Employment Two factors underscore the importance of making decent employment a key goal of public policy. First, the majority of Asia’s workers are employed in the informal sector where the reach of labor regulations, particularly those protecting the basic rights of workers, is minimal, and where workers have scant protection from the many risks they face to their incomes and livelihoods. Second, the nature of employment in the formal sector is changing. As noted in Chapter 2, there is evidence of declining shares of regular employment. This suggests that workers in the formal sector will increasingly face greater economic uncertainties, especially in the context of globalization, competition, and technological change. Old forms of social protection that covered formal sector workers may no longer apply. Governments must, therefore, find ways both to provide all workers with basic rights and to encompass the strengthening of systems of social protection. This is essential for ensuring decent employment. In the remainder of this chapter we consider these issues in more detail.

10.4.1 Promoting Basic Rights for Workers in the Informal Sector While the labor codes of Asian countries protect and promote the welfare of workers through regulation of the conditions of employment, industrial and

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collective relations, and provision of social insurance, one group of workers typically benefits—those belonging to the formal sector. For the large majority of workers in Asia, i.e., those in the informal sector, many welfare-protecting regulations do not apply, either because workers are employed in small or unregistered enterprises or enforcement of such regulations is weak or nonexistent. While certain elements of labor regulations may be controversial in terms of their impact on the efficiency and fairness with which labor markets function in some countries, there is little disagreement over the importance of labor regulations that protect the basic rights of workers. Important basic rights include freedom of association, protection from forced or compulsory labor, and elimination of discrimination at the workplace. Promoting and protecting these basic rights is not only valuable in terms of improving workers’ own welfare; there is also evidence that basic rights improve productivity at the workplace (ILO 2002a). Providing workers with basic rights is especially important from the perspective of women. As has been pointed out by many studies, women can receive significantly lower wages for their work than men. For example, Seguino (2000) notes that the ratio of women’s to men’s earnings in the manufacturing sector of nine Asian countries (mostly from East Asia and Southeast Asia) ranged from around 50% (Korea and Malaysia) to a high of 87% (Philippines). Some of the gender differential in wages can be explained by differences in educational attainment, but as Seguino (2000) points out, the latter is itself a reflection of gender inequality. Women are also often underrepresented in formal employment relative to their share in the labor force (ILO 2002b). In India, for example, women workers accounted for 31% of all workers in 1999/2000, yet only 18% of all formal sector workers (World Bank 2004). By being in the informal sector, a greater proportion of women workers are exposed to worse working conditions, or do not have the benefits and protection accorded to formal sector workers. Moreover, gender gaps in earnings tend to be even higher in informal employment than in formal employment (ILO 2002b), suggesting that the elimination of discrimination at the workplace will be particularly important for improving the welfare of women workers. In order to provide basic rights to informal sector workers, a critical step is a process of legalization, which would bring both workers and enterprises in the informal sector within the legal framework. For workers, it will be essential for the labor code to be extended to cover workers in all enterprises, large or small, in so far as basic workers’ rights are concerned. At the same time, largescale information campaigns and promotion of forums for dialogue between the various stakeholders, including workers, employers, and government staff involved in the administration of labor issues, will be required to build awareness of the importance and benefits of basic workers’ rights both for the workers themselves and for society at large. Including government staff in information

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campaigns and dialogue is crucial, given their role in making sure that laws on basic rights are enforced. Why limit the extension of the coverage of the labor code only to basic rights? A key reason is feasibility. First, it is doubtful whether the small enterprises where informal sector workers are employed have either the financial or administrative capacity to meet the types of regulations that larger firms could meet. Second, enforcement of labor regulations is a tricky issue even when it comes to the formal sector. It is a virtual nonstarter to expect labor administrations in most Asian countries to be able to implement the whole gamut of labor regulations across all enterprises, formal and informal, large and small, even if they wanted to. Just as workers in the informal sector need to be brought under the umbrella of labor legislation, informal sector enterprises, too, need legal recognition (as also noted in our earlier discussion on the importance of improving the regulatory and institutional environment in which the informal sector works). Moreover, analogous to the case of workers, the regulations and procedures for informal sector enterprises need to be simple. 10.4.2 Strengthening Social Protection From the perspective of workers, social protection embraces policies and programs that, on the one hand, diminish workers’ exposure to job-related risks and, on the other, enhance workers’ capacity to protect themselves against loss of income. Loss of income may be due to layoffs or other factors, including ill health, disability, and old age. Box 10.7 describes the components of social protection as defined by ADB. The definition used is a broad one and encompasses the need for social protection not only for workers, but for the population at large. Labor market policies and programs can play a critical role in providing social protection to workers. For example, labor regulations requiring safe working conditions can minimize the health and disability risks that workers face, especially when they work in a hazardous environment. Similarly, regulatory requirements to provide laid-off workers with severance pay provide some protection against loss of income. Labor market programs also provide protection to workers. For example, skills development programs can make job seekers more employable. Likewise, well-run labor exchanges can improve the speed and quality of matches between workers and employers. Social protection may also be provided through social insurance programs. Pensions, health and disability insurance, and even unemployment insurance are examples. As may be expected, however, social protection coverage through these means, especially as provided through labor regulations and social insurance

666 Jesus Felipe and Rana Hasan Box 10.7 Components of Social Protection as Defined by the Asian Development Bank

Labor market policies and programs aim to reduce risks of unemployment, underemployment, or low wages resulting from inappropriate skills or poorly functioning labor markets. Labor market policies and programs are further categorized into (i) active labor market programs that aim to put people to work, and (ii) passive labor market policies that extend better protection to workers. Active programs are intended to generate employment, develop employment services, and enhance workers’ skills. Such programs include direct employment generation schemes, labor exchanges or employment services, and skills development programs. Passive policies include interventions that relate to unemployment insurance, income support, and an appropriate legislative framework that balances economic efficiency and labor protection. Social insurance programs are designed to cushion risks associated with unemployment, ill health, disability, work-related injury, and old age. Pensions, health and disability insurance, and unemployment insurance are examples. Micro- and area-based schemes provide social protection to the rural and urban informal sectors on a geographic basis, to complement the more traditional national social insurance programs that target those in the formal sector. Programs under this component include micro-insurance, agricultural insurance, community-based social funds, and programs to manage the effects of natural disasters. Social assistance and welfare schemes are intended for the most vulnerable groups with no other means of adequate support, such as single-parent households, victims of natural disasters or civil conflict, handicapped people, or the destitute poor. Examples are welfare and social services (to highly vulnerable groups such as the physically or mentally disabled, orphans, or substance abusers), cash or in-kind transfers (such as food stamps and family allowances), and temporary subsidies for food in times of crisis. Child protection ensures the healthy and productive development of children. Early child development programs, school feeding programs, scholarships or school fee waivers, waiving of fees for mothers and children in health services, and provision of family allowances to assist families with young children to meet part of their basic needs fall under child protection. Programs to protect youth also include programs for street children, advocacy against child abuse and child labor, and measures to protect youth against criminality, sexually transmitted diseases, early pregnancies, and drug addition. Sources: ADB (2003b, 2004, 2005a).

667 Policies to Achieve Full, Productive, and Decent Employment in Asia

programs, is typically limited to workers in the formal sector. Nevertheless, some countries in the region are making efforts to develop social insurance programs that cover workers in the informal sector (see Box 10.8 on efforts in Thailand). For informal sector workers in both urban and rural areas, the types of social protection programs for workers of particular relevance are employmentgeneration schemes, food for work programs, and various micro- and areabased schemes such as micro-insurance and agricultural insurance to protect from crop failures. While all countries in the region provide social protection in one form or another, they face a number of challenges in improving their systems of social protection. Two of the toughest relate to (i) finding the resources to fund social protection and (ii) using those resources to target the workers who face the greatest work-related risks and have meager personal resources to deal with those risks. As may be seen from Figure 10.3, which is based on an ADB study of social protection systems in six countries (ADB 2005b), the three South Asian countries where poverty is a particularly severe problem are also the countries with the lowest social protection expenditure as a share of GDP.12 Unfortunately, the problem of low funding is compounded by even worse targeting in the sense of the extent to which social protection expenditures target the poor. The estimates of ADB (2005b) indicate that social protection programs in Indonesia and Mongolia capture 73% and 50%, respectively, of their target poor population. In contrast, social protection programs in the three South Asian countries capture only 23% in Bangladesh, 17% in Nepal, and 4% in Pakistan. This serves to illustrate the fact that both funding and targeting can be serious issues in providing effective social protection. How does one move forward in strengthening social protection for Asia’s workers? It is clearly not an easy task. Strengthening social protection can be costly, and better targeting must deal with a variety of issues, including political economy considerations in allocating scarce resources among competing groups of workers and the efficiency and honesty of the administrative machinery that provides social protection. A key step is to convince policy makers that social protection is not a luxury that can be put off until economies become richer. In addition to its intrinsic value to workers, effective social protection provides economic benefits. In particular, a well-designed system will help labor markets function better by enabling workers to cope with the risks that they face. Social protection can thereby allow workers to fully concentrate on their economic activities and take entrepreneurial risks when they see economic opportunities that may be worthwhile pursuing. In this way, social protection can lead to higher incomes and productivity.

668 Jesus Felipe and Rana Hasan Box 10.8 Extending Social Security to Nonformal Workers in Thailand

Currently, Thailand’s social security system protects only about 8 million people in the formal labor market. A study is being undertaken by the Social Security Office on the extension of social security welfare to cover people in nonformal labor groups. Nonformal workers contribute significantly to economic development, their income accounting for about 50% of the country’s GDP. Nonformal workers include home-based workers, laborers, maids, subcontractors, public transporters, fisherfolk, farmers, vendors, shop owners, and independent skilled workers, including medical doctors, engineers, lawyers, musicians, tutors, actors, tourist guides, and chefs. The study proposes funds for nonformal labor groups that would provide, among other things, some old-age benefits; sickness, accident, and disability coverage; and child care coverage. If the Government allows nonformal workers to contribute to the Social Security Fund (SSF), it is estimated that about 3 million workers will register as fund contributors on a voluntary basis, and the number could reach 8 million if it makes contributions to the SSF mandatory. Nonformal labor groups might be charged either a flat rate or different amounts based on their profession. Source:

Bangkok Post (1 May 2005).

Figure 10.3 Social Protection Expenditures as a Share of GDP (%)

12 10 8 6 4 2 0

Bangladesh Indonesia Mongolia Source: ADB (2005b).

Nepal

Pakistan

Viet Nam

669 Policies to Achieve Full, Productive, and Decent Employment in Asia

A related benefit of a well-designed system of social protection is that it can enable labor markets to match workers with jobs efficiently, especially in the formal sector. An important reason for this is that in many cases, existing mechanisms of coping with risks are provided through the worker’s job (health insurance, disability benefits, pension program, etc.). Moreover, in some countries, regulations that provide job security have been used in lieu of providing workers with social protection in the first place. In either case, it is only natural to expect workers in the formal sector to resist layoffs, even when these make solid economic sense from the point of view of the enterprises to which they belong. If, however, workers could count on systems of social protection to provide (i) some basic protection from the loss of income and other job-related benefits (such as health insurance),13 (ii) efficient labor exchanges that increased the speed and quality of matching job seekers with available jobs, and (iii) subsidized retraining programs, it is likely that the resistance of workers—not only to layoffs, but also to more flexible rules for layoffs in countries where regulations providing job security exist and are binding—would be diminished. In addition, while it is true that government finances are in a precarious situation virtually everywhere, opportunities still exist for raising resources for social protection. There are several items of government expenditure that could be channeled more usefully toward funding social protection systems. Consider the case of India where various subsidies (on electricity, fertilizer, the food distribution system, etc.) are estimated to be around 13–14% of GDP. Myriad studies have shown that the subsidies do not assist the poor primarily and that the economic benefits of the subsidies to the economy at large are tenuous at best (e.g., Srivastava 2004). However, diverting funds from such items of expenditure to strengthen social protection requires dealing with vested interests. This requires the formation of a social consensus for policy reform in general. For example, if market-oriented policy reform makes life better for the better-off, then ways must be found for them to agree to a rationalization of subsidies so as to help poorer workers cope with the risks that they face. A social consensus would also help address the problem of governance. In particular, even where the priorities of social protection are sensible on paper—for example, targeting the poor and most vulnerable—the actual delivery systems in place can have serious deficiencies. Corruption, inefficient administration, and the politicization of social protection schemes all serve to whittle away whatever resources are to be provided in the first place. Yet many of the schemes that are affected by these governance problems are vital—for example, the Maharashtra Employment Guarantee Scheme (MEGS) public works program, which in the 1980s created an average of 160 million person-days of work per year in that Indian state. MEGS has been criticized for its wieldy

670 Jesus Felipe and Rana Hasan

administrative scheme and complex wage determination process. It has also been criticized for having little impact on the reduction of poverty rates in the state. However, while many of these criticisms are fair, they cannot be grounds for dismissing similar schemes as ultimately unviable. In the case of MEGS, even if headcount ratios have not changed significantly in response to it, the scheme has clearly had a positive impact on the welfare of the poor (even if it has not lifted them out of poverty). As pointed out in Ravallion (1991), MEGS has stabilized income: income has been found to be 50% less variable in villages with a public works program than in villages without such a program. In addition, the scheme has had indirect benefits on nonparticipants. These have accrued as labor has been drawn away from other activities by the scheme, leading to higher wages in these other activities. Ultimately, the needs are important enough that governments have to do much more to improve the design and administration of social protection programs, as well as their monitoring and evaluation.14

Notes 1. See also Islam (2002). 2. Perhaps one would also like to see a reduction in the earnings gap between the formal and informal sectors. But this is secondary to the other two conditions. 3. Woodruff (2001) is very critical of de Soto’s (2001) arguments. First, he indicates that capital markets function poorly in developing countries for reasons other than title to property. He maintains that unlocking capital will require more than just recognizing existing informal property rights. At a minimum, a set of complementary reforms—for example, of bankruptcy laws and banking regulations— will be required. Second, he questions de Soto’s estimates of the value of informal land simply because de Soto is not clear at all about how he and his team produced the figures. The value of dead capital in the Philippines is estimated at $132.9 billion. This is disaggregated into $72.1 billion in urban areas (of this, $66.4 billion is concentrated in Metro Manila), and $60.8 billion in rural areas. 4. And certainly, developing countries do not lack entrepreneurship, talent, and enthusiasm à la Schumpeter. These are not scarce resources in developing countries. 5. Not all economists would agree with de Soto’s call for reforming legal systems as a means of strengthening property rights regimes in developing countries. Rodrik (2003) argues that while the goal of strengthening property rights regimes is laudable, administrative and political constraints in developing countries can often be such as to require institutional innovations that “[depart] significantly from Western norms” (p. 7). A case he puts forward is that of the TVEs in the PRC. The formal ownership of TVEs lay not in private hands but in local government ownership. As a result, local governments had an incentive in the growth of TVEs as this would generate direct revenue benefits for them. Given conditions prevailing in the PRC at that time, it is

671 Policies to Achieve Full, Productive, and Decent Employment in Asia possible that property rights were more secure with local government ownership of TVEs than under a private property legal regime. 6. In a number of Asian countries, especially in South Asia and in the transition economies, employment in the formal sector has often been driven by public sector employment. At least some of this expansion has been pushed by political considerations rather than those relating to, e.g., profitability and efficiency. 7. It is possible to encounter a situation where the wage rate increases, but the labor share in value added decreases. This would happen if wage increases, though positive, were outstripped by increases in labor productivity. 8. Mazumdar (1999) advocates the search for a “golden mean” between IS and export orientation. By this he means that Asian countries should be able to find an optimal growth-employment strategy that avoids the problems of IS as well excessive reliance on export orientation. 9. In any case, these policies may not guarantee higher employment (Bacha 1990). For example, fiscal restraint to generate savings will allow faster capacity growth and reduced inflation, but with lower capacity utilization and employment. The same occurs with increased public investment. This will affect the investment schedule, thereby accelerating capacity growth, while there is also investment “crowding-in” on private capital formation, but probably also at the cost of higher inflation and lower current output. Finally, higher exports will relieve the foreign exchange constraint. Improving exports in the short run is not easy though, especially for raw material exporters. Such a policy may be easier for semi-industrialized economies. 10. Braverman (1998) puts forward the thesis that the division of labor and the constant increases in mechanization tend to reduce the average level of skill levels for the majority of workers employed. 11. References to the Presidential Commission on Educational Reform are taken from Amante (2003, p. 272). 12. The social protection expenditures here include programs that cover workers and nonworkers. For example, expenditures made for protecting poor children from the many risks they face are included. 13. Ultimately, a movement toward unemployment insurance mechanisms needs to be contemplated in so far as protecting workers from income loss is concerned. The unemployment insurance mechanisms tend to be particularly intensive in administrative capabilities (for example, to monitor eligibility of recipients) and require a relatively large formal sector. For this reason, such systems may not hold immediate importance for low-income countries. 14. Indeed, this seems to be the lesson learned by India’s Government in introducing a nationwide scheme, the National Rural Employment Guarantee along the lines of the MEGS. See Anant et al. (2006, this volume) for more details on the new employment guarantee scheme.

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References Amante, M. S. V. 2003. “Philippines.” In H. Muta, ed., Mismatch in the Labor Market: Asian Experience. Asian Productivity Organization, Tokyo. Amante, M. S. V., R. Ofreneo, and I. Ortiz. 1999. Skills Training and Policy Reforms in the Philippines. ILO-South East Asia and the Pacific Multidisciplinary Advisory Team, Manila. Anant, T. C. A., R. Hasan, P. Mohapatra, R. Nagaraj, and S. K. Sasikumar. 2006. “Labor Markets in India: Issues and Perspectives.” In J. Felipe and R. Hasan, eds., Labor Markets in Asia: Issues and Perspectives. London: Palgrave Macmillan for the Asian Development Bank. Asian Development Bank. 2003a. Asian Development Outlook 2003. Hong Kong, China: Oxford University Press for the Asian Development Bank. Manila. Available: http://www.adb.org/Documents/Books/ADO/2003/default.asp. ———. 2003b. Social Protection. Manila. Available: http://www.adb.org/Documents/ Policies/Social_Protection/default.asp. ———. 2004. Social Protection Strategy. 2003 Progress Report to the Board of Directors. Manila. Available: http://www.adb.org/Documents/Reports/ Social_Protection/IN230-04.pdf. ———. 2005a. Social Protection: Reducing Risks and Increasing Opportunities. Manila. ———. 2005b. TA No. 6120-REG: Social Protection Index for Committed Poverty Reduction. Multi-Country Report. Manila. ———. 2005c. Asian Development Outlook 2005. Hong Kong, China: Oxford University Press for the Asian Development Bank. Bacha, E. L. 1990. “A Three-Gap Model of Foreign Transfers and the GDP Growth Rate in Developing Countries.” Journal of Development Economics 32:279–96. Balisacan, A., and N. Fuwa. 2004. Changes in Spatial Income Inequality in the Philippines: An Exploratory Analysis. Research Paper No. 34, World Institute for Economics Development Research, United Nations University, Tokyo. Beine, M., F. Docquier, and H. Rapoport. 2001. “Brain Drain and Economic Growth: Theory and Evidence.” Journal of Development Economics 64:275–89. Besley, T., and R. Burgess. 1999. “Land Reform, Poverty Reduction and Growth: Evidence from India.” Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD), London School of Economics and Political Science. Draft. Bowles, S., and H. Gintis. 1995. “Escaping the Efficiency–Equity Tradeoff: ProductivityEnhancing Asset Distributions.” In G. E. Epstein and H. Gintis, eds., Macroeconomic Policy after the Conservative Era. Cambridge: Cambridge University Press. Braverman, H. 1998. Labor and Monopoly Capital. 25th Anniversary edition. New York: Monthly Review Press. Briones, R. M. 2005. “Rural Employment in Asia.” Economics and Research Department, Asian Development Bank, Manila. Mimeo. De Soto, H. 1989. The Other Path. New York: Basic Books. ———. 2001. The Mystery of Capital. London: Bantam Press.

673 Policies to Achieve Full, Productive, and Decent Employment in Asia Fan, E., and J. Felipe. 2005. The Diverging Patterns of Profitability, Investment and Growth of China and India, 1980-2003. Paper 22/2005, Centre for Applied Macroeconomic Analysis (CAMA), Australian National University, Canberra. Felipe, J. 2003. Is Export-Led Growth Passé? Implications for Developing Asia. ERD Working Paper No. 48, Economics and Research Department, Asian Development Bank, Manila. Felipe, J., and M. Vernengo. 2004. “Demystifying the Principle of Comparative Advantage: Implications for Developing Countries.” International Journal of Political Economy 32(4, Winter):49–75. Foster, A. D., and M. R. Rosenzweig. 1996. “Technical Change and Human Capital Returns and Investments: Evidence from the Green Revolution.” American Economic Review (September):931–53. International Labour Organization. 2002a. Decent Work and the Informal Economy: Report VI. International Labour Conference 90th Session, Geneva. ———. 2002b. Women and Men in the Informal Economy: A Statistical Picture. International Labour Organization, Geneva. Islam, R. 2002. “Poverty Alleviation, Employment and Labor Market: Lessons from the Asian Experience and Policies.” In C. Edmonds and S. Medina, eds., Defining an Agenda for Poverty Reduction. Vol. 1. Proceedings of the First Asia and Pacific Forum on Poverty. Asian Development Bank, Manila. Merchant, K., P. Marsh, and J. Johnson. 2005. “A Transformation Led by Improving Factory Efficiency.” Financial Times. 30 November. Page 13. Kaldor, N. 1961. Capital Accumulation and Growth. In F. A. Lutz and D. C. Hague, eds., The Theory of Capital. London: Macmillan. Lewis, W. W. 2004. The Power of Productivity. Chicago: The University of Chicago Press. Lin, J. Y. 1992. “Rural Reforms and Agricultural Growth in China.” American Economic Review 82(1):34–51. ———. 2004. “Development Strategies for Inclusive Growth in Developing Asia.” Asian Development Review 21(2):1–27. Marr, A. 2004. Institutional Approaches to the Delivery of Business Development: A Review of Recent Literature. Report No. 2771, Natural Resources Institute, University of Greenwich, Kent. Mazumdar, D. 1999. Constraints to Achieving Full Employment in Asia. Employment and Training Papers No. 51, International Labour Organization, Geneva. Muta, H., ed. 2003. Mismatch in Labor Market: Asian Experience. Asian Productivity Organization, Tokyo. Palley, T. I. 2002. A New Development Paradigm: Domestic Demand-Led Growth. Why It is Needed and How to Make It Happen. Foreign Policy in Focus, Discussion Paper, September: 1–8. Ravallion, M. 1991. “Reaching the Rural Poor through Public Employment: Arguments, Evidence, and Lessons from South Asia.” World Bank Research Observer 6(2, July):53–75. Roberts, M. 2002. “Cumulative Causation and Unemployment.” In J. McCombie, M. Pugno, and B. Soro, eds., Productivity Growth and Economic Performance. Essays on Verdoorn’s Law. London: Palgrave Macmillan.

674 Jesus Felipe and Rana Hasan Rodrik, D. 2003. “Growth Strategies.”John F. Kennedy School of Government, Cambridge. Draft. ———. 2004. “Industrial Policy for the Twenty-first Century.” John F. Kennedy School of Government, Cambridge. Unpublished. Seguino, S. 2000. “Accounting for Asian Economic Growth: Adding Gender to the Equation.” Feminist Economics 6(3):27–58. Snower, D. 1996. “The Low-Skill, Bad-Job Trap.” In A. L. Booth and D. J. Snower, eds., Acquiring Skills: Market Failures, Their Symptoms and Policy Responses. Cambridge: Cambridge University Press. Som, R., U. Kleih, Y. Kumar, and S-K. Jena. 2002. Rural Nonfarm Employment in Madhya Pradesh: Findings of a Participatory Rural Appraisal in 8 Villages. Report No. 2694, Natural Resources Institute, University of Greenwich, London. Soriano, M. T. 1998. “Implications of International Migration: A Focus on the Philippine Experience.” Philippine Labor Review 22(1, January–June):93–107. Srivastava, P. 2004. Poverty Targeting in Asia: Country Experience of India. ADB Institute Discussion Paper No. 5, Tokyo. Sundaram, K., and S.D. Tendulkar. 2002. The Working Poor in India: EmploymentPoverty Linkages and Employment Policy Options. Issues in Employment and Poverty Discussion Paper No. 4, Recovery and Reconstruction Department, International Labour Organization, Geneva. Taylor, L. 1994. “Gap Models.” Journal of Development Economics 45:17–34. Woodruff, C. 2001. “Review of De Soto’s The Mystery of Capital.” Journal of Economic Literature 39(December):1215–23. World Bank. 2004. “Labor Markets in South Asia: Issues and Challenges.” In collaboration with the Human Development Hub. Draft. Available: http:// siteresources.worldbank.org/INTLM/Resources/390041-1103750362599/ SAR_paper.pdf.

Author Index

Agrawal, N., 364 Ahluwalia, I., 209 Ahmed, I., 363 Akerlof, G., 451 Albrecht, J., 560, 564, 577, 612 Alisjahbana, A., 317 Amante, M., 428, 432, 433, 653, 654, 671 Amin, T.M.N., 44, 45, 46, 56 Anant, T.C.A., 38, 39, 43, 67, 68, 249, 257, 259, 294, 295, 671 Andersen, B., 198 Appleton, S., 552 Ash, R.F., 507 Asian Development Bank (ADB), 32, 33, 34, 39, 41, 55, 56, 57, 64, 68, 292, 293, 304, 312, 315, 319, 359, 368, 443, 561, 615, 647, 649, 665, 666, 667, 668 Asian Productivity Organization (APO), 346 Aten, B., 115, 116, 132 Bacha, E. L., 671 Bai, C., 549 Bai, N., 551 Bakrie, A., 306 Bales, S., 39, 576 Balisacan, A., 368, 374, 383, 394, 414, 438, 439, 452, 453, 492, 639

Ball, L., 451 Ballesteros, M., 400 Banaji, J., 251 Banerjee, A., 133 Bangko Sentral ng Pilipinas, 374, 461, 497 Bangkok Post, 668 Bangladesh Bureau of Statistics, 43, 46 Banister, J., 532, 551 Bank of Indonesia, 304 Bappenas (National Planning Agency), Indonesia, 302, 305, 362, 364 Bardhan, P., 441 Barro, R.J., 28 Basu, K., 25, 52, 53, 59, 75, 372 Bautista, R., 436, 438, 496 Bean, C., 94 Beaudry, P., 168, 170 Beegle, K., 26 Beijing Daily, 553 Beine, M., 659 Belser, P., 587, 588, 598, 612, 620, 622, 624 Bertola, G., 88 Besley, T., 253, 255, 256, 460, 639 Bewley, T.F., 94, 95 Bhagwati, J., 292 Bhalotra, S., 254 Bhattacharya, D., 199 Bhattacharya, S., 293 Bhattacherjee, D., 249

676 Author Index

Bii, M., 199 Bird, K., 315 Birdsall, N., 133 Blanchard, O., 451 Blanchflower, D., 123 Blanpain, R., 135 Borch, S., 135 Botero, J., 86, 97, 103, 107, 109, 110, 390, 421, 490 Botwinick, H., 58, 84, 134, 135, 137 Bowles, S., 73, 74, 94, 117, 118, 119, 137, 636 Boyer, R., 117, 118, 119, 137 BPS-Statistics Indonesia, 46, 326, 304, 312, 348, 354, 356, 357, 358, 362 Brassard, C., 598, 611, 623 Braverman, H., 133, 137, 655, 657, 671 Briones, R., 400, 425, 646 Brooks, R., 373, 418, 419, 420, 507, 508, 512, 526, 527, 545, 551 Bruno, S.F., 169, 170 Buchele, R., 94, 426 Buchenrieder, G., 609 Bureau of Labor and Employment Statistics, Philippines, 46, 48, 375, 376, 388, 406, 408, 409, 412, 413, 417, 424, 463, 464, 493, 494, Burgess, R., 253, 255, 256, 460, 639 Cai, F., 503, 504, 507, 511, 512, 522, 525, 531, 532, 533, 539 Canlas, D., 491, 492, 496, 497 Cao, Y., 511 Carlier, A., 573 Carter, C.A., 507 Cassen, R., 39, 214, 215, 216, 217 Center for Informatics-MOLISA, 563, 616, 622

Central Bureau of Statistics, Nepal, 36, 40 Chadha, G.K., 43, 212 Chakravarty, S., 207 Chan, A., 532, 535, 536, 537, 553 Chan, K.W., 550 Chaudhry, T.D., 295, 573 Chen, F., 536 Chen, S., 68 Cheng, H., 532 China Population Information Center, 514, 515 Chinh, N.Q., 587, 611 Choy, D.W., 536 Christiansen, J., 94, 426 Clark, C., 153 Clark, D., 362 Collard, P., 168, 170 Comer, B., 593 Cook, S., 542 Corley, M., 198 Cratty, D.J., 611 Central Statistical Organisation (CSO), 212, 224 Cyhn, J., 611 Dang, N.A., 579, 580 Datt, G., 276 Datt, R., 251 Datta-Chaudhuri, M., 253 Davis, J.R., 610 De Brauw, A., 507, 510, 524, 525, 552 De la Torre, A., 133 De Soto, H., 641, 642, 643, 644, 670 Deaton, A., 68, 218, 219 Dehejia, R., 26 Deininger, K., 510 Department of Agrarian Reform, 400 Department of Census and Statistics, Sri Lanka, 46

677 Author Index

Department of Education and Culture, 362 Department of Labor and Employment, Philippines, 46 Department for International Development (DFID), 611, 613 Deshpande, L.K., 256 Directorate General of Budget, Accounting, and Statistics (DGBAS), Taipei,China, 24, 40, 43, 46, 50 Djankov, S., 86, 97, 103, 107, 109, 110, 390,421, 490 Do, Q., 586, 587, 623 Docquier, F., 659 Dollar, D., 68, 586 Domingo, E., 391 Dopke, J., 168, 169, 170, 171 Dowling, J.M., 16 Dreze, J., 68, 218, 219 Du, Y., 531, 533 Dufhues, T., 609 Dumlao, L., 417 Dutt, A.K., 119 Dzung, N.T.K., 563, 567, 577, 611, 623 Dyson, T., 39, 214, 215, 216, 217 Easterly, W., 136 Edmonds, E., 25 Edralin, D.M., 95, 404, 493 Edwards, S., 436 Elder, S., 165 Employers’ Confederation of the Philippines (ECOP), 405, 407 Fallon, P.R., 88, 253, 254 Falzoni, A.M., 169, 170 Fan, E., 634

Federal Bureau of Statistics, Pakistan, 43 Feeney, G., 551 Felipe, J., 17, 33, 34, 39, 121, 122, 124, 127, 133, 386, 395, 417, 418, 426, 440, 441, 442, 443, 444, 445, 446, 447, 449, 457, 493, 496, 634, 647, 651 Feng, W., 534 Fenwick, C., 309, 313, 362 Fields, G.S., 2, 47, 51, 68, 75, 372, 610, 612 Findlay, C., 507 Firdausy, C.M., 55 Fisher, A.G.B., 153 Fisher, F.M., 122 Foglia, G., 199 Fleisher, B.M., 504, 506 Foley, K.D., 118 Forteza, A., 72, 93, 97, 135, 458 Foster, A.D., 638 Fox, M.P., 199 Freeman, R., 64, 65, 72, 87, 88, 91, 92, 93, 96, 133, 134, 199, 405, 412, 414, 426, 449, 494, 495 Friedman, E., 622 Fu, H., 536 Fuwa, N., 639 Gaiha, R., 277 Galbraith, J.K., 2 Gallup, J.L., 576, 577, 598, 623 Gangopadhyay, S., 295 Gatti, R., 26 General Statistics Office (GSO), Viet Nam, 562, 563, 570, 571, 572, 574, 578, 579, 580, 584, 585, 608, 609, 615, 617, 618, 622 Ghatak, S., 5, 445

678 Author Index

Ghose, A.K., 57, 221, 223, 229, 250, 278, 279 Giles, J., 511, 512, 522, 540 Gintis, H., 73, 74, 636 Glewwe, P., 564, 585 Glinskaya, E., 232 Goldar, B., 257 Goletti, F., 587 Goodkind, D., 522 Gordon, D., 94 Goswami, O., 257, 259, 295 Gragnolati, M., 585 Guillaume, D-M., 613 Gulosino, C., 427 Guo, F., 534 Ha, T.T., 609 Habito, C., 400 Hanan, J., 564 Harris, J.R., 37, 51, 53, 54 Harrison, P., 2 Hasan, R., 38, 39, 43, 67, 68, 96, 97, 121, 224, 225, 233, 261, 417, 426, 445, 493, 671 Haughton, D., 585 Haughton, J., 585 He, B., 532 He, Y., 551 Heckman, J.J., 77, 87, 110, 122, 373 Helg, R., 169, 170 Hensman, R., 251 Herrin, A., 385 Heston, A., 115, 116, 132 Hill, H., 368 Himanshu, 218, 219, 220, 228 Hirway, I., 275 Holmes, T., 443 Hough, J., 362 Howell, D.R., 95, 135 Hua, L., 537 Huang, J., 507, 510, 524, 525, 552 Huang, P., 508

Huang, S., 537 Hung, P.V., 587, 611 Hussain, A., 538, 548 Institute of Labor Studies, 467 Integrated Labor and Labor-Related Laws, 467 International Encyclopedia for Labor Law and Industrial Relations, 494 International Handbook on Contracts of Employment, 494 International Labour Organization (ILO), 14, 23, 24, 25, 26, 36, 38, 46, 55, 56, 57, 66, 86, 87, 90, 96, 97, 103, 135, 136, 145, 149, 152, 154, 156, 158, 160, 163, 165, 166, 170, 173, 199, 263, 265, 295, 308, 309, 336, 404, 470, 473, 486, 494, 615, 643, 664 International Monetary Fund (IMF), 77, 135, 170 International Peace Research Institute (IPRI), 170 Irawan, P.B., 363 Islam, I., 145, 309, 313, 314, 362, 363 Islam, R., 145, 670 Iyer, L., 586, 587, 623 Jamal, V., 611 James, E., 427 Jansen, K., 611 Japanese Group of Private Assistance to Vietnam (JAPA), 573 Jena, S-K., 639 Jian, C., 537 Jin, S., 510 Johnson, J., 267, 649

679 Author Index

Johnson, S., 622 Johnstone, B., 427 Joshi, G., 56 Kahn, A., 198 Kai, C., 536 Kaldor, N., 650 Kalecki, M., 84, 85, 86, 135 Kansil, C., 309 Kansil, C.S.T., 309 Kapsos, S., 36, 37, 58, 113, 493 Karan, K., 256 Kauffman, D., 319, 622 Keen, S., 122, 123 Keynes, J.M., 80, 81, 82, 83, 84, 85, 135 Khan, A.A.U., 253 Kidd, M.P., 509 Kleih, U., 639 Knight, J., 504, 519, 533, 552 Korzec, M., 506, 509 Kraay, A., 68, 319 Krishnaraj, M., 275 Kroeber, A., 515 Kumar, Y., 639 Labor Force Survey, 389 Lai, Z., 537 Lall, S., 137 Lamberte, M.B., 497 Lanzona, L., 17, 33, 34, 39, 425 La Porta, R., 86, 97, 103, 107, 109, 110, 390, 421, 490 Lardy, N.R., 549 Layard, R., 95 Le, D.D., 568 Le, T.Q., 619 Le, X.B., 563, 567, 577, 611, 623 Lee, C.K., 536 Lee, J-W., 28 Lewis, A.W., 2, 37, 41, 43, 51, 52, 53 Lewis, W.W., 260, 441, 660, 663

Li, D., 549 Li, S., 533 Li Qi, 586, 594, 601 Li, Z., 503, 504 Lim, L., 199 Lin, J.Y., 503, 504, 506, 507, 639 Lindenthal, R., 311, 312, 313, 316, 320, 360, 364 Linsey, T., 309, 313, 362 Litvack, J.I., 560 Liu, Y.C.A., 585 Llanto, G., 400 Lobaton, P.Z., 622 Loboguerrero, A., 169 Lohmar, B., 550 Loi, C.C., 36, 39, 563, 567, 577, 611, 623 Lokshin, M., 232 Lopez de Silanes, F., 86, 97, 103, 107, 109, 110, 390, 421, 490 Lucas, R.E., 88, 253, 254 Luo, H., 532 MacAulay, T.G., 587, 611 MacLeod, W.B., 199 Magsombol, R., 224, 225, 233 Maloney, W.F., 612 Mamgain, R.P., 278, 280 Manning, C., 306, 307, 308, 309, 310, 315, 316, 317, 318 Manton, C., 431, 432 Marr, A., 640 Marsh, S.P., 267, 587, 611, 649 Martin, W., 507 Marx, K., 81, 84, 133, 135, 137 Mastruzzi, M., 319 Mathur, A., 278, 280 Mattick, P., 135 Mazumdar, D., 47, 48, 151, 637, 671 McCarthy, D., 199 McCarty, A., 587, 588, 590, 592, 596, 599, 603, 612, 620

680 Author Index

McCombie, J.S.L., 122, 136, 418 Meenakshi, J.V., 293 Mellor, J., 385 Meng, X., 507, 508, 509, 534 Merchant, P., 267, 649 Michl, T.R., 118 Ministry of Civil Affairs, 529, 541 Ministry of Finance, Viet Nam, 620 Ministry of Health, 362, 590 Ministry of Labor and Social Security, 532, 538 Ministry of Labor, Invalids, and Social Affairs (MOLISA), 563, 574, 575, 576, 581, 584, 590, 596, 598, 601, 607, 615, 616, 618, 622 Ministry of Labour and Social Security (MOLSS), 55, 532 Ministry of Labour, Government of India, 206, 229, 230, 242, 246, 248, 251, 252, 253, 262, 264, 270, 271, 272, 278, 279 Ministry of Manpower and Transmigration (MOMT), 313, 316, 327, 362 Ministry of Manpower, Singapore, 46 Ministry of National Education (MONE), 330 Ministry of Planning and Investment (MPI), 608, 624 Mitra, D., 261 Mohapatra, P., 38, 39, 43, 67, 68, 671 Moock, P.R., 613 Mourre, G., 150, 169, 170, 171 Muqtada, M., 199 Murphy, R., 510, 528, 529, 546, 552 Muta, H., 71, 661, 662 Myrdal, G., 2, 4 Nagaraj, R., 38, 39, 43, 67, 68, 209, 237, 251, 292, 294, 671

Naseem, S.M., 56 NASSCOM, 133 Nath, S., 253 National Bureau of Safe Production (NBSP), 537 National Bureau of Statistics, People’s Republic of China, 40, 43, 507, 513, 517, 518, 519, 520, 521, 523, 525, 526, 530, 551, 553 National Coordination and Mediation Board, 409 National Institute of Statistics, Cambodia, 36, 46 National Family Planning Coordinating Board, 362 National Sample Survey Organisation (NSSO), India, 33, 216, 219, 220, 221, 226, 279, 292, 293, 294 National Statistical Coordination Board, 393, 495 National Statistics Office, 382, 392, 397, 465, 466, 492 National Statistics Office, Korea, 40, 43 National Statistics Office, Labor Force Surveys, 378, 379, 380, 386, 388, 390, 413, 463 National Statistics Office, Philippines, 33, 36, 37 National Statistics Office, Thailand, 39, 56 National Steering Committee on Hunger Eradication and Poverty Reduction, 584 National Wages and Productivity Commission (NWPC), 414, 415, 471, 472 Nazara, S., 145, 314, 362

681 Author Index

Nesporova, A., 199 Nguyen, B.T., 36, 39, 560, 564, 577, 612, 613 Nguyen, P., 585 Nguyen, Q.T., 573 Nguyen, T.T.M., 611 Nickel, S., 95 O’Connor, D., 587, 588, 596, 603, 612, 620 Oey-Gardiner, M., 33, 34, 36, 39, 40, 45, 47 Ofreneo, R., 433, 654 Ohnesorge, J.K.M., 536 Orbeta, A., 427 Organisation for Economic Cooperation and Development (OECD), 77, 88, 103, 135, 527 ORC Macro, 362 Ortiz, I., 433, 654 Oswald, A., 123 Overseas Workers Welfare Administration (OWWA), 437 Pack, H., 112 Padalino, S., 150, 151, 154, 170 Pages, C., 77, 87, 110, 122, 373 Pai, G.B., 242 Palley, T. I., 647 Panizza, U., 169 Papola, T. S., 277 Parente, S.L., 443 Park, A., 511, 512, 522, 540 Pasinetti, L., 16 Paterno, E., 400 Patrinos, H.A., 613 Pavnik, N., 25 Pernia, E., 385 Pham, T.K.N., 611 Pham, T.M.D., 609

Pham, T.T.H., 611 Philippine Overseas Employment Administration (POEA), 392, 393 Pieke, F.N., 508 Piketty, T., 133 Planning Commission, India, 33, 34, 38, 46, 214, 218, 221, 222, 230, 232, 245, 292, 293, 294 Pollin, R., 135 Pongtuluran, A., 362 Prescott, E.C., 443 Putterman, L., 507 Qi, L., 536 Qian, Y., 511 Qin, H., 532 Quibria, M.G., 16 Rahman, M., 199 Rama, M., 68, 72, 93, 97, 135, 313, 314, 458, 587, 622 Ramachandran, H., 279, 280 Ramaswamy, E.A., 250 Ramaswamy, K.V., 236, 261 Rapoport, H., 659 Ravallion, M., 68, 276, 587, 623, 670 Rawski, T., 509, 512, 522, 531, 537, 539, 545, 551 Renwei, Z., 533 Reserve Bank of India, 259 Ricardo, D., 115, 136 Riedel, J., 593 Roberts, M., 137, 634 Robinson, J., 123 Rodrik, D., 261, 647, 652, 670 Rondinelli, D.A., 560 Rosen, S., 199 Rosenzweig, M.R., 638 Rowthorn, R., 445 Roy, S.D., 254, 255

682 Author Index

Rozelle, S., 504, 507, 510, 524, 525, 550, 552 Ruan, D., 534 Saget, C., 150 Sahu, P.P., 43, 212 Saini, D.S., 247 Salmon, C., 36 Sankaran, K., 295 Santo Tomas, P., 425, 434, 495 Sardaña, M.C., 75, 371, 372, 389, 412 Sarkar, S., 256 Sasikumar, S.K., 38, 39, 43, 67, 68, 256, 280, 671 Schmidt, D., 165 Schmitz, J., 443 Schneider, F., 573 Schultz, T.P., 385 Schumpeter, J., 442 Seguino, S., 664 Sembiring, R., 362 Sen, Abhijit, 218, 219, 220 Sen, Amartya, 32, 277 Shanks, E., 586 Shapiro, C., 135 Sharma, A.N., 256 Sharma, S., 218, 219 Shenoy, P.D., 246 Shliefer, A., 86, 97, 103, 107, 109, 390, 421, 490 Shroff-Mehta, P., 427 Sicat, G., 410 Simon, J.L., 199 Smeru, 315 Smith, A., 442 Snower, D., 428, 435, 652, 653, 656 Solinger, D.J., 519, 522, 534 Solow, R.M., 136 Som, R., 639 Song, L., 504, 552 Soriano, M.T., 389, 434, 658, 659

Srivastava, P., 274, 669 Srivastava, R., 293 State Council, 535, 537, 538, 542 State Statistical Committee, Tajikistan, 33, 34 Stiglitz, J.E., 135 Stockhammer, E., 95 Subbarao, K., 276 Sudjana, B., 315 Sugiyarto, G., 33, 34, 36, 39, 40, 45, 47 Summers, R., 115, 116, 132 Sundar, K.R.S., 265, 266, 267 Sundaram, K., 215, 218, 219, 223, 231, 294, 648 Sundrum, R.M., 43, 212 Sungoonshorn, S., 56 Supas, 322, 326, 362 Susenas, 331, 358, 363 Tacoli, C., 579, 580 Tan, E., 426, 428, 429, 437 Tao, R., 507, 508, 512, 514, 524, 524, 526, 527, 528, 529, 545, 546, 550, 551 Tao, Z., 549 Taylor, B., 536 Taylor, L., 118, 119, 120, 133, 647 Technical Educational and Skills Development Authority (TESDA), 431, 432, 491 Tecson, G., 436, 438, 496 Tendulkar, S.D., 212, 218, 219, 223, 224, 234, 235, 648 Tenev, S., 573 Tennekoon, R., 199 Teodosio, V.A., 403, 404, 409, 411, 419 Thang, N.C., 36, 39 Thanh, H.X., 579, 580 The Nation, Bangkok, 92 Thireau, I., 537

683 Author Index

Thirlwall, A.P., 31, 136, 381 Thurow, L.C., 123, 124 Tien, N.V., 563, 567, 577, 611, 623 Todaro, M.P., 37, 51, 53, 54 Tran, T.D., 578, 582, 613 Triaswati, N., 33, 34, 36, 39, 40 45, 47, 362 Tu, M., 528 Tullao, T., 427 Turingan, P., 425 Turk, C., 586, 608 United Nations, 24, 50, 57, 149 United Nations Development Program (UNDP), 55 US Embassy in Hanoi, 620 US Social Security Administration, 135, 494 Van de Walle, D., 587, 611, 623 Varma, U.K., 280 Venkataraman, M., 613 Vernengo, M., 651 Vietnam General Confederation of Labor (VGCL), 590, 591 Vietnamnet, 621 Vietnam Institute of Economics, 622 Visaria, L., 39, 214, 215, 216, 217 Vishwanathan, B., 293 Vivarelli, M., 150, 151, 154, 170 Vroman, S., 560, 564, 577, 612 Vu, V.T., 622 Walterskirchen, E., 168, 170 Wang, D., 511, 525, 533 Wang, Y., 549 Wasunna, M., 199 Watson, A., 507 Weingast, B., 511 Weisskopf, T., 94

West, L.A., 522 Westbrook, M.D., 560, 564, 577, 612 White, G., 506 Wolf, H., 199 Wonacott, P., 537 Woodruff, C., 670 World Bank, 16, 24, 36, 38, 40, 43, 44, 46, 57, 59, 149,170, 193, 234, 256, 293, 304, 398, 440, 458, 459, 486, 494, 503, 510, 532, 533, 551, 561, 562, 575, 583, 584, 585, 608, 612, 622, 664 World Health Organization (WHO), 170 Wu, H.X., 507 Wu, Y., 199 Xia, Q., 552 Xu, A., 514, 524, 550 Xu, J., 542, 543 Xu, L.C., 509 Xue, J., 519 Yang, D.T., 504, 506, 532, 553 Yang, Q., 534 Zaman, H., 585 Zhang, J., 507, 508, 534, 539, 540, 541 Zhang, L., 510, 524, 525, 552 Zhang, Y., 510, 524, 525, 552 Zhao, S., 529 Zhao, Y., 504, 531, 533, 539, 542, 543, Zhong, F.N., 507 Zhou, H., 533, 553 Zuo, X., 534

Subject Index

Animal spirits, 80, 84 Bad jobs; see also Good jobs, 652 Basic rights, 663-665 Brain drain, 658-659 Capital intensity, 112-113 Child labor, 25-26 China; see PRC (People’s Republic of China) Civil and political rights in Asia, 103-104, 107 Collective bargaining; see also Industrial relations, 86, 92, 95 Collective bargaining laws / Collective relations law in Asia, 101-102, 104-105, 107108 Collusive theory, 75 Competition, 64, 75 Competitiveness, 64, 124-127, 370 Costs of informality, 641-642 Decent employment, 12-14, 663670 Dualism; see also Lewis model and Harris-Todaro model, 41-49, 51 Economies of scale, 113-115, 650651 Education education versus trainability, 663 Educational attainment; see also Skills and training, 28 in India, 224-225, 227, 279

in Indonesia, 328, 330-333, 335, 337-338, 352-356 in Philippines, 380 in Viet Nam, 563-565 Effective demand, 80, 84, 120 Efﬁciency in labor markets, 65, 69, 93, 110 Efﬁciency wage, 75, 113 Employment (total) in India, 211, 229-231 in Indonesia, 341 in Philippines, 388, 390, 392 in PRC, 516-517, 521 in Viet Nam, 567-568, 618 growth, 115-116, 224 growth and real GDP per worker growth, 129-132 Employment by sector (agriculture, industry, services), 42-43 in India, 211-213, 223-224, 234 in Indonesia, 344, 346-348, 350, 353-354, 356 in Philippines, 376, 382, 386388, 454 in PRC, 518, 526 in Viet Nam, 568, 570, 617 Employment, by type in India, 226, 228, 230 in Indonesia, 348-353 in Philippines, 390 Employment elasticities, 6, 113115, 143-197 relationship with labor

685 Subject Index

productivity, 146-147 Asia and the Paciﬁc, 160-163 by age group and gender, 161, 184 by economic sector, 162, 185 deﬁnition, 145-148 developed economies, 154157 by age group and gender, 155, 179 by economic sector, 157, 180 econometric modeling, 168175, 195-197 interpretation, 147 Latin America and the Caribbean, 163-165 by age group and gender, 164, 186 by economic sector, 164, 187 shortcomings, 148149 transition economies, 157-160 by age group and gender, 159, 181 by economic sector, 159, 182 world and regional trends, 150168 by age group and gender, 151 by economic sector, 153 Employment generation programs, 649, 666-667 in India, 267, 273 in Indonesia, 306 in Philippines, 452-455 in PRC, 547 in Viet Nam, 607, 621

Employment in formal and informal sectors, 44-47, 49, 55 in India, 213, 228 in Indonesia, 315, 317, 348, 355 in Philippines, 389-390 in PRC, 516 in Viet Nam , 573, 582, 587, 591, 595, 611-612 Employment in public / stateowned enterprises / government employment, 44, 88, 91, 93 in India, 230-232, 234-235 in Philippines, 389 in PRC, 516, 518 in Viet Nam, 569, 571 Employment intensity of growth; see Employment elasticities Employment laws in Asia, 86, 97, 98-100, 104-106, 108 Employment policies, 76, 85 Engine of growth, 650 Fairness in labor markets, 65, 69, 122 Formal / informal sectors, 44-49, 55 in India, 213, 228, 230, 232, 239, 264 in Indonesia, 348-353 in Philippines, 389-391 in PRC, 509, 516, 532, 536-537 in Viet Nam, 573, 591, 593, 595-596, 611-612 Full employment; see also Full, productive, and decent employment, 12-13, 74-75, 80-81, 84-86, 117, 635-636 Keynesian theory, 76, 80 Marxian theory, 80-81, 84 Neoclassical theory, 74, 80, 84, 122

686 Subject Index

Full, productive, and decent employment, 12-13, 635-636 framework, 13 Functional ﬂexibility, 76 Functions of the labor market, 6970 income allocation, 69, 122 resource allocation, 69 risk allocation, 69-70 Gini coefﬁcient / index, 68 in India, 225, 227 in Philippines, 397 in Viet Nam, 577, 584-585 Globalization, 64-65, 110-112, 121 risks, 111 worldwide beneﬁts, 111 Golden age of egalitarian economic policy, 73 Good jobs, 649, 652, 659 Growth without employment, 4 Growth-promoting policies, 12, 1415, 636-652 Harris-Todaro model; see also Dualism and Lewis model, 53-54 Human capital policies, 12, 14, 652663 ILO conventions ratiﬁed, 96-97 Increasing returns to scale; see Economies of scale India casualization of labor, 229 contract labor, 236, 238, 247, 254, 266, 291 Contract Labour (Regulation and Prohibition) Act, 247248, 253, 291 Directorate-General of Employment and Training (DGET), 229, 231 educational attainment, 224225, 227, 279 employment (total), 211, 213-

216, 223, 229, 230-231 employment by sector (agriculture, industry, services), 211-213, 223-224, 234 employment generation programs, 267, 273 employment in formal and informal sectors, 228, 230, 232 employment in public / state-owned enterprises / government employment, 230-232, 234-235 employment, by type, 226, 228, 230 employment-unemployment survey, 292-293 formal sector, 228, 230, 232, 239, 264, 293 Gini coefﬁcient / index, 225, 227 Industrial Disputes Act, 240247, 253-256, 260, 264-266, 285 Industrial Employment (Standing Orders) Act, 240243, 249, 254, 285 industrial relations, 245, 249252, 285 Industrial Training Institutes (or ITIs), 278-280, 282 inequality, 227, 236 informal sector, 213, 228, 239, 264 Jahawar Rozgar Yojana program, 274-275 labor force estimates / size, 213216, 229 labor force participation rates, 215-216 labor market ﬂexibility / rigidity,

687 Subject Index

206, 252-262, 264-267 labor market policies / regulations, 240-249, 262, 263-265, 272-277 labor productivity, 211, 223-224 Maharshtra Employment Guarantee Scheme (or MEGS), 275-277 migration, 216-217 minimum wage / minimum wage laws, 241, 263-264, 286 National Rural Employment Guarantee (or NREG), 276277 population, 213-216 poverty, 218-220, 223 Second National Commission on Labour (or SNCL), 206, 239, 242, 262, 264-267, 272, 281-282 social insurance / security, 268269, 271-272 social protection, 267-277 trade liberalization and labor demand, 261 Trade Union Act, 240-242, 248249, 254, 285 trade unions, 246, 248-249, 267, 295 underemployment, 220-223 unemployment, 220-223 wage premium, 231-233 wages, 223-228, 232, 234-238 working-age population, 215 working poor, 219, 223 Indonesia decentralization, 311-312 discouraged job seekers, 336339 economic crisis (1997-98), 303 educational attainment, 328,

330-333, 335, 337-338, 352356 employment (total), 341 employment by sector (agriculture, industry, services), 344, 346-348, 353354, 356 employment generation programs, 306 employment in formal and informal sectors, 315, 317, 348, 355 family planning program, 320 formal sector, 352-353 ILO standards ratiﬁed by Indonesia, 310 industrial relations, 312-313 inequality, 355-357 labor market ﬂexibility / rigidity, 313 labor market policies / regulations, 306-319 labor productivity, 348 Manpower Protection Act, 308 Medium-Term Development Plan (or MTDP), 305 migration, 322, 326-328 minimum wage / minimum wage laws, 313-319 National Labor Force Survey (Sakernas), 319-320, 322, 338-339, 342, 348, 352 Pancasila Industrial Relation, 313 population, 319-323, 358 poverty, 357-358 severance pay, 313-319 structural transformation of employment, 346-348 Supas, 322, 326 Trade Union Act, 308, 313 trade unions, 313

688 Subject Index

underemployment, 339-344 unemployment, 305, 333-339 wages, 358 working-age population, 320, 324-325, 345 Industrial relations in India, 245, 249-252, 285 in Indonesia, 312-313 in Philippines, 403 in PRC, 535 in Viet Nam, 604-607 Inequality, 68 in PRC, 533 in India, 227, 236 in Indonesia, 355-357 in Philippines, 397 in Viet Nam, 577, 584 Institutional forces, 75 Investment policy, 81 Kalecki, 85-86 Keynes, 81 Job security and other employment regulations, 79, 88 Kaldor’s Growth Laws, 650 Keynes, 80, 81 effect of a reduction in nominal wages, 80-83 Keynesian theory, 76, 80, 84 Labor force, 21-31 labor force estimates / size, 21, 24 in PRC, 516-517 labor force participation rates, 21-22, 24 in India, 223 in Philippines, 386 in PRC, 516-517, 524 in Viet Nam, 562-563, 566, 615 income shares to GDP, 128 Labor force projections, 27 Labor market, functions of, 68-70

Labor market ﬂexibility / rigidity, 6, 7, 75-76, 80, 93 in India, 206, 252-262, 264-267 in Indonesia, 313 in Philippines, 367, 373, 423 in Viet Nam, 606, 618 Labor market policies / regulations, 86, 93, 96, 272 case for, 73 case against, 73 in India, 262, 264-265 in Indonesia, 306-319 in industrial countries, 94-95 in Philippines, 401-448 in PRC, 534-544 in Viet Nam, 585-610 Labor productivity in India, 211, 223-224 in Indonesia, 348 in Philippines, 386, 395 in PRC, 532-533 in Viet Nam, 563, 577-579, 612 Land reforms, 399-400, 586-587, 639 Lewis model; see also Dualism and Harris-Todaro model, 51-53 Low-value products, 654 Luddite movement, 117, 121, 136 Marxian theory, 80-81, 84 Migration, 658-659 in India, 216-217 in Indonesia, 322, 326-328 in Philippines, 434-435 in PRC, 522-525 in Viet Nam, 579-580 Millennium Development Goals, 64 Minimum wage / minimum wage laws, 75-76, 87-88, 93, 104 in India, 241, 263-264, 286 in Indonesia, 313-319 in Philippines, 91, 412-420, 423 in PRC, 535 in Viet Nam, 592-594, 597-599,

689 Subject Index

604, 619-620 minimum wage levels in Asian countries, 89-90 Mismatch in labor markets, 70-71, 653, 657, 662 Mystery of capital, 643-644 Natural rate of unemployment, 16 Neoclassical model, theoretical and empirical problems, 122-124 Nonaccelerating inﬂation rate of unemployment (or NAIRU), 76-78 Nonwage costs, 87 Numerical ﬂexibility, 76 Organized sector; see Formal / informal sectors Philippines call centers in the Philippines, 650-651 capital-labor ratio, 448 capital productivity, 445, 447 Central Bank of the Philippines (Bangko Sentral ng Pilipinas), 374, 451, 461, 497 collective bargaining agreements, 403, 405, 408, 422 education and training programs, 426-433 educational attainment, 380 Employers’ Confederation of the Philippines (ECOP), 405 employment (total), 388, 390, 392 employment by sector (agriculture, industry, services), 376, 382, 386-388, 454 employment enhancement, 456 employment facilitation, 456 employment generation programs, 452-455

employment in public / state-owned enterprises / government employment, 458 employment, by type, 390 employment-population ratio, decomposition, 377 full and productive employment, 448-457 checklist of policies for full and productive employment, 450 Gini coefﬁcient / index, 397 growth rate of the capital stock, 445, 447 ILO conventions ratiﬁed by the Philippines, 403-404 index of labor underutilization, 377, 380 industrial relations, 403 inequality, 397 investment-to-GDP ratio, 445 labor force participation rates, 386 labor laws in the Philippines in relation to those in other countries, 420-423 labor market ﬂexibility / rigidity, 367, 373, 423 labor market policies / regulations, 401-448 labor migration policies, 434435 labor productivity, 386, 395 land reform, 399-400, 639 Medium Term Philippine Development Plan (MTPDP), 368-370, 409, 412, 454-457 membership in labor organizations, 406 migration, 434-435 minimum wage / minimum wage laws, 417-420, 423, 535

690 Subject Index

minimum wage-setting, 412420 National Labor Relations Committee (NLRC), 406, 437 National Wages and Productivity Commission (or NWPC), 414 nonregular workers, 412 oveconcentration of ownership, 440-448 overseas Filipino Workers, 385393 deployed Overseas Filipino Workers, 392 government programs for Overseas Filipino Workers, 436 -437 own account workers, 390 part-time and full-time workers, number of, 413 permanent employment, 409412 population, 381-386 population policy, 384-385 poverty, 396-400 price-markup ratio, 440 probationary period, 409-412 proﬁt rate, 444, 446 public service employment, 450 Regional Tripartite Wage and Productivity Boards (or RTWPB), 414 reserve army, 367 social clauses, 404 social insurance / security, 424 social protection, 454 social security, 423-426 strikes, number of, 409 subcontracting provisions, 409412 Technical Education and Skills Development Authority (TESDA), 429

trade protectionism, 436 tripartite pacts, 405 underemployment, 375-381, 385-391 unemployment, 375-381, 516 unit capital costs, 444-445 unit labor costs, 441, 444-445 violations of the Labor Code, 416-417, 423 wages, 391-396 workers displaced for economic reasons, number of, 413 Polarization, 655 Policies to promote investment and employment; see also Policies to eliminate unemployment growth-promoting policies export push policy, 645647 industrial policy, 647652 design principles, 652 rural economy, 637-640 urban informal sector, 637, 640-645 human capital policies, 652-663 Policies to eliminate unemployment; see also Policies to promote investment and employment, 74-75, 80 Keynesian theory, 80 Marxian theory, 80 Population in India, 213-216 in Indonesia, 319-323, 358 in Philippines, 381-386 in PRC, 513-515 in Viet Nam, 561-566, 615 Population growth: costs and beneﬁts, 29-31 Poverty, 31-32, 39, 41 in India, 218-220, 223 in Indonesia, 357-358

691 Subject Index

in Philippines, 396-400 in PRC, 503, 541, 546 in Viet Nam, 582-584, 608 rural poverty in Asia, 39, 41 PRC (People’s Republic of China) Company Law, 511 economic transition, 505-512 employment (total), 515-516, 521 employment by sector (agriculture, industry, services), 518, 526 employment in formal and informal sectors, 516 employment in public / state-owned enterprises / government employment, 516, 518 Enterprise Law, 535 ﬂoating population, 510, 523, 534 formal sector, 509 hidden unemployment (estimates), 526-527 household responsibility system, 507, 639 Hukou system, 505, 510, 532, 546 industrial relations, 535 industrial safety, 537 inequality, 533 informal sector, 516, 532, 536 labor force estimates / size, 516517 labor force participation rates, 516-517, 524 labor insurance regulations, 506 Labor Law of 1994, 535 labor market policies / regulations, 534-544 labor productivity, 532-533 managerial responsibility system, 509 migration, 522-525

Minimum Living Standard Guarantee, 541 pension reform, 543 pensions, 511-512, 542 population, 513-515 poverty, 503, 541, 546 private sector growth, 545 registered unemployment, 519, 521 rural surplus labour, 526-527 rural-urban migration, 507-508, 510-511 social assistance, 511-512, 540542 social insurance / security, 533, 538-544, 547-548 social protection, 512, 534, 547-548 state-owned enterprise (or SOE), 511, 516-517, 532-533 township and village enterprise (or TVE), 507-508, 510-511, 639 Trade Union Law, 535 trade unions, 535 underemployment, 525-529 unemployment, 511-512, 519, 521, 525-529 unemployment insurance, 511, 539 wage premium, 531 wages, 529-532, 530 working-age population, 514517 Xiagang (laid-off workers), 512, 521 Productive employment; see also Full, productive, and decent employment, 12-13 Productivity; see also Labor productivity and wage-led productivity growth, 37-38, 69, 112-114, 122, 648-649 Race to the bottom, 65

692 Subject Index

Regulations affecting hiring and ﬁring, 79 Research issues in India, 283-284 in Indonesia, 361 in Philippines, 457-461 in PRC, 544-554 in Viet Nam, 610-614 Reserve army, 81, 84 Sectoral wage differentials, 87 Skills and training, 546-547, 655657 deﬁciency in training, 646, 652, 654 interaction between innovation and skills, 652 low-skill, bad-job trap, 652, 660 low-skill, low-tech trap, 652 vocational training, 660-662 Social insurance / security; see also Social protection, 271, 666, 668 in India, 267-277 in Philippines, 424 in PRC, 534 in Viet Nam, 589, 596, 598, 601-603, 620 Social protection; see also Social insurance / security, 663, 665-670 Taxes on labor and social security contributions, 79 Technical change; see also Productivity, 64, 110-115, 121, 648649 Trade unions, in India, 248, 249, 267 in Indonesia, 313 in Philippines, 405-407 in PRC, 535 in Viet Nam, 589, 590, 594, 603, 604, 620 Trainability, see also Skills and training, 15, 663 Underemployment, 3, 22, 32-41,

70-71 in India, 220-223 in Indonesia, 339-344 in Philippines, 37, 375-381, 385-391 in PRC, 525-529 in Viet Nam, 573-576 Underutilization of labor, 35-37 Unemployment, 3, 22, 32-41, 70-71, 75-76, 80, 525-529 in India, 220-223 in Indonesia, 305, 333-339 in Philippines, 37, 375-381 in PRC, 511-512, 516, 519, 521 in Viet Nam, 573-575, 609, 615 Keynesian theory, 80 Marxian theory, 80 Neoclassical theory, 80 unemployment rates, 22, 32-35, 54, 57 Unit capital costs, 124-127 Unit labor costs, 75, 113, 119-121, 124-127 Unorganized sector; see Formal / informal sectors Upgrading thesis, 655, 660 Urban labor markets; see also Dualism, 41-49 Verdoorn’s law, 113 Value added per worker; see Labor productivity Viet Nam administration of labor regulations, 590, 604, 620 Comprehensive Poverty Reduction and Growth Strategy, 609 decollectivization, 560 Doi Moi, 560-561, 586-587 employment (total), 567-568, 618 employment by sector (agriculture, industry,

693 Subject Index

services), 568, 570, 617 employment generation programs, 607, 621 employment in formal and informal sectors, 573, 582, 587, 591, 595, 611-612 employment in public / state-owned enterprises / government employment, 569, 571 Enterprise Law, 570-571, 607, 609 Foreign Investment Law, 580, 588, 598 foreign-invested enterprises, 571-572, 594, 598 Gini coefﬁcient / index, 577, 584-585 ILO conventions ratiﬁed, 590591 industrial relations, 604-607 inequality, 577, 584 Labor Code, 586, 588-596, 598599, 604, 619-620 labor contracts (introduction of), 589, 593, 619 labor force participation rates, 562-563, 566, 615 labor market ﬂexibility / rigidity, 606, 618 labor market policies / regulations, 585-610 labor productivity, 563, 577579, 612 land reform, 586-587 land use rights, 560, 586 Law on Trade Unions, 603 migration, 579-580 minimum wage / minimum wage laws, 592-594, 597599, 604, 619-620

National Employment Generation Program, 607 National Poverty Reduction Programs, 608 overseas workers, 581-582 population, 561-566, 615 poverty, 582-584, 608 redistribution of land, 560, 586587 resolution of labor disputes, 589, 590, 604-607, 620 small and medium enterprises, 570, 611 social insurance, 589, 596, 598, 601-603, 620 state enterprise reforms, 586587 state-owned enterprises (or SOEs), 561, 571, 573, 587, 593, 596, 598 trade unions, 589-590, 594, 603-604, 620 underemployment, 573-576 unemployment, 573-575, 609, 615 unskilled laborers, 563, 616 Vietnam Living Standards Survey (VLSS), 564, 575, 579-580, 613 wage inequality / wage differentials, 577, 598 wages, 575-577, 594, 596-599, 619 working-age population, 566 Wage adjustments, 91 Wage led, 119-120 wage-led economy, 117-118, 120-121, 635 wage-led employment regime, 117 wage-led employment strategies,

694 Subject Index

118 wage-led growth, 115-121 wage-led productivity growth strategies, 118 Wage-push factors, 76, 86 Wages, 39 in India, 223-228, 232, 238 in Indonesia, 358 in Philippines, 391-396 in PRC, 529-532 in Viet Nam, 575-577, 594, 596-599, 619 Wage-setting practices, 79 Working-age population in India, 215 in Indonesia, 320, 324-325, 345 in Philippines, 381, 463 in PRC, 513-517 in Viet Nam, 566