Predicting the coming labour shortage

When will the Philippines reach its tipping point?

Suck! That was the sound of jobs and investments being plucked out of the West and sunk into China. That was then.

As the world economy gradually recovered from the global financial crisis in 2010, there was talk of the People’s Republic finally having reached a tipping point that would see it transitioning from being a predominantly labour-surplus economy to one that suffers from labour-shortages.

Last week as the Benign One appealed to employers to give modest pay increases as a way of quieting labour groups following the May Day celebrations, authorities in China were for the first time entertaining the possibility of allowing their currency the Renminbi to appreciate to increase worker purchasing power and tamp down inflation.

Wages as a share of GDP in the People’s Republic had peaked in 1985 at 57% and then dropped to 37% in 2007 (making it one of the most capitalist big economies of the world). They are expected to rise steadily from now on. By 2020, a dramatically different picture will emerge. The words ‘cheap labour’ and ‘China’ may not hold together for very long; good news to the Western world which has been suffering enormous trade deficits with this manufacturing powerhouse from the East.

The shift from a predominantly young to an increasingly aging work force is the result of family planning policies instituted in the early-80s with the famously draconian one child policy enforced in urban centres being the most prominent among them. As the number of jobs available continues to outstrip their capacity to fill them, the Chinese communist party has increasingly allowed unions to exert their bargaining power in several sectors of the economy to prevent social unrest.

Today rising wage inflation and a demographic transition have some talking of a significant slow down in growth of the world’s second largest economy (from the 10 to 12 per cent experienced in the last decade to 7 or 8 per cent). Chinese wages are going to rise significantly over the course of the next decade. This will cause it to shift from an export driven economy to one that is mostly consumption driven.

The Philippine case for a tipping point

Because of the uneven distribution of human capital in the Philippines, comparatively higher wages and skills shortages in some areas exist alongside a substantial labour surplus. There are patches of skills shortage while large swathes of the populace are unable to find employment.

The record of job generation over the last twenty years has not been all that bad though. As I previously stated (in a piece entitled Jobless Growth: Fallacies part 2 posted last year in this space but no longer available): nearly twelve and a half million net new jobs were created compared to twenty five million in the US which has close to four times our population.

This led me about a year ago (in another piece entitled The Coming Labour Shortage posted in this space but no longer available) to predict when the country might approach a tipping point of its own. Using modest economic growth figures and a steady slowing of growth in the labour force (which have been observed over the past two decades) my optimistic forecast was for our transition to a labour shortage situation to begin as early as 2015/16.

The more realistic scenario I came up with is for the two to be in balance around 2020/21. Beyond that I predict that labour demand will outstrip supply (see graph right). Incidentally, the value of labour supply that I predicted for 2009 was off by 30 thousand from the actual growth that was recorded (it sounds big, but it represents only one tenth of one percent margin).

Had we consistently adopted a set of sound family planning policies as late as the 1990s, we would have seen a more balanced labour market. Unfortunately, reproductive health and family planning have not found traction in our country. It would be good if our leaders started focusing on the big picture rather than the daily to-ing and fro-ing over who wins in the daily 24 hour news cycle. I would much rather prefer a discussion about how to hasten the day when we no longer need to export our work force.

The good news is that even under the “do-nothing” scenario, we seem to be heading for a tipping point within a decade. The bad news is that this might lead us to think that we can sit back and literally, “do nothing.” A complacent administration might be content with maintaining current policy settings and engaging in populist rhetoric to gain short-term political wins. Unfortunately, this is too often the case.

As I mentioned last week in a three part series on the eve of the anniversary of his election into office, the presidency of the benevolent one has so far suffered from a lack of strategic focus. I laid out a case for the following:

As a result, the public that voted him into office has been experiencing what social scientists call cognitive dissonance or noise created by a deficit between what they were made to believe would come to them and what they ultimately experienced after buying into his candidacy.

The Employment Plan

The Employment Plan 2010-2016 released a few weeks ago aimed to create a net increase of one million jobs per year. It was a carbon copy of the past administration’s often missed policy goals. Unfortunately, we do not yet have a Freedom of Information Act that would allow us to scrutinize in minute detail the manner by which the government came up with this figure.

Is it plucked from thin air? Is it just one of those “stretch targets” as I suspect it is? Do they have detailed industry, occupational and regional breakdowns of these projections? If so, is there a coherent strategy for building the skills base in the right areas to avoid serious skills shortages as is already apparent in some occupations?

There is an oversupply of college educated graduates and not enough vocationally trained ones. The K-12 expansion of basic education hopes to address this imbalance by introducing school based training in the trade occupations by 2015-16. The lessons from advanced economies tell us that such training has to be continued by employers through an apprenticeship or on-the-job training program supported by the government.

Meanwhile programs to reduce school attrition like the cash payments to poor parents need to be put in place so that more and more primary students stay in school and are able to acquire enough skills to be gainfully employed. The upgrade of teachers, educational facilities and resources also requires funding. The role of former state polytechnics to provide a pathway from vocational education into higher education has to be defined.

Not enough energy has been spent explaining what these reforms would mean. Instead the president has been parrying allegations about his poor work ethic. Ten to twenty years from now, this will all seem so petty and meaningless. Today however it is on top of the agenda.

The year 2020 might seem so very far away, but it isn’t really. It is less than two presidential terms away. In the final analysis, if the Philippines were to follow in the footsteps of its East Asian counterparts in reaching a tipping point by then, it will only be because its leaders were willing to do the heavy lifting today.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • J_ag8

    Using once again measuring standards of more advanced economies our expert say’s that we will experience a labor shortage in less than 10 years.

    Right now our labor force market participation rate is at 63%. Nowhere in the world are unpaid family workers counted as employed. Only in the Philippines. They constitute a growing part of our labor participation group. The same goes for those who are self -employed – Fish ball vendors and the like including those involved in jueteng.

    Then you have the jeepney drivers, tricycle drivers and conductors. Another growth industry as more urbanization takes place around the country. Off course don’t forget the GRO’s, PR girls and househelp. Plus you have part time workers and seasonal workers all counted as employed.

    This man is insane.

    The U.S.. created over 200,000 jobs last month. Their unemployment rate based on non-farm payrolls went up to 9%. In the Philippines a large part of the labor force both participating and non participating are in the country side.

    We have a structural developmental problem and not a structural employment problem

    • GabbyD

      in a sense, i share jag’s concerns… without his hystrionics.

      how do we know that the labor pool is shrinking? what about LFParticipation? what about discouraged workers? inputting either/both of these factors should shift the “labor supply” projection UP, pushing the time for labor shortage up by years.

      from what i got from your explanation of the curves, the labor supply curve is essentially the size of the labor force (which if i recall, counts the number of people looking for a job and either has one, or is actively looking).

      the labor demand curve, is actual employment levels. so the difference between the two curves is the unemployment rate?

      tama ba? then you are saying indeed that unemployment rate would be zero by 2010? not the 5% you mentioned earlier.

      • I didn’t say the labor force was shrinking. I said the rate at which it was growing was slowing down. The curve clearly shows that both demand and supply are rising.

        Yes, you are right in assuming that the gap is unemployment, although I already built in a 4% frictional unemployment. Again it’s an extrapolation.

        With the gap between demand and supply, there are ways to fill it like increasing participation rates (getting more women into the labor force, increasing retirement age, getting those chronically unemployed due to lack of education, skills, social disadvantage into the workforce).

        • GabbyD

          yeah, sorri, i meant shrinking relative to demand.

          ah, so its built in? when the graphs meet, it really ought to have a gap where the lower line is (1-x)% of the upper line, where x is the unemplyment rate.

          if you present this (in published work, or in a blog), perhaps it would be better to plot unemployment rates with it.

          i think everyone can believe that there’s alot of slack in this labor force, beyond the unemployment rate. however…

          the question is: would we see/require an increase in the wage rate to get more labor force participation?

          the answer is: it depends. if there are structural mismatches, then you’d require a larger increase in wages to coax more labor out. (structural mismatch is kinda like lower productivity)

          but the more you raise wages, the more you move up along the labor demand curve, and kill some of that increase in employment.

          hence, the two curves will tend to separate, the closer you get to the “equilibrium” structural unemployment rate. (aka, the natural rate) this feature isnt in the extrapolation. technically, if its the natural rate, then after 2020, the two curves should move at the same rate, all other things unchanged.

          • yes you point out a lot of good points here.

            i agree things it would have been better to show forecasts of the unemployment rate, although to do that would require more variables, and unfortunately, no one is paying me to do this.

            although during the GFC i was able to build a similar model for Australia which correctly predicted the outcome using a more sophisticated model with leading indicators.

            http://www.thecusponline.org/2008/11/unemployment-and-bumpy-ride-ahead.html

      • In other words, as the labor shortage occurs (again, I am not trying to put value judgments on the kind of work employed here), the Philippines will increasingly have to tackle problems akin to an emerging or even advanced economy.

    • Again horses for courses. The US has its own structural problems with its middle skilled jobs disappearing. They lost 8.5 million jobs during the GFC. It will take them a few more years to recover to previous levels, meanwhile their population is still growing which is why more people are adding to their unemployment problem.
      The Philippines as a developing economy has its own problems. I was not trying to gloss over these, nor was I making any value judgments with regards to the quality of the numbers. I will leave that to pundits like you. This is just a simple extrapolation of the figures. A discussion opener. Nothing more, nothing less.

  • UP nn grad

    For USA (8%-9% unemployment), hunger is at 15%.

    For Pilipinas 7% unemployment, hunger is 20%. Sampling error, I suppose (‘cuz one would think lower unemployment results in lower hunger). Or maybe it is that “social justice” that Doy mentions, and where Pilipinas gov’t revenue as percent-of-GDP is great-whoopee-doo 12% low (if you’re Makati Business Club type)… 12%-very-low BOOO!!!-BOOO!!!! if you have higher expectations of governance and that super-great “bayanihan” spirit that some Asian countries are known for.

    A good compromise… less free-food for the poor…. just build more schools in the provinces!!

    • GabbyD

      the reason is safety nets. the US has unemployment insurance, and other benefits to the poor.

      more broadly: you have 2 look at consumption not just at income.

      • UP nn grad

        also see Jag_8’s comments. Different dictionaries — 7%-unemployment-Pilipinas is not the same as 7%-unemployment-USA…. different yardsticks being used.

  • UP nn grad

    Not clear to many Pinoys-in-Pinas, but OFW-ism is one of the key reasons for Makati Business Club pushing for K-12. Pinas labor export was getting “rejected” because what Pilipinas calls a high school graduate is less than a high school graduate for other countries.

    This — that Philippine education and labor standards getting required by external forces to get elevated — has to be included in all analysis for predicting labor shortages.

  • GabbyD

    what do you mean by labor shortage? the unemployment rate would then be…?

    • Meaning labor demand would exceed supply in absolute terms but of course a certain level of unemployment consistent with people searching for work or frictional unemployment would be present (at around 4%). Also a certain level of structural unemployment or a mismatch between the type of skills people have and the demand for them would also be a barrier to their employment.

      • UP nn grad

        so by doing nothing dramatic, Noynoy will bring Pinas unemployment down just by being president. Cool!!

        And maybe Pilipinas achieves better employment and governance when Mar Roxas becomes de-facto mister persi-dente.

      • GabbyD

        how did u come up with the curves on the graphs?

        • I extrapolated from the past 20 years of data from the ADB involving the size of our labor force (supply) and the number of those employed (demand) and projected these into the future.

          This assumes that the economy’s growth of the past 20 years would remain the same (so no heroic assumptions about us averaging 7%). So a key question is, what happens if we do hit 7% growth?

          It also assumes the same participation rate (that’s a big one, since more people might join the labor force in a tightening labor market as wages rise).

    • GabbyD

      so ur saying unemployment rate would be 4-5% in 2020? from the 7% it is today?

      hope ur right.

      • UP nn grad

        7% unemployment???? If Pilipinas unemployment is 7%, how come 20% go hungry?

      • A lot can happen between now and then of course, but yeah, it looks hopeful. One reason for this is that the growth of our labor pool has gone down while the pace of economic growth has picked up.