workforce planning

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.

Consumer info not commandos needed

It was reported a while back that the Commission on Higher Education (CHED) would go “commando” on institutions producing sub-standard outcomes for their students. The newly appointed CHED Chairwoman Patricia Licuanan was quoted as saying

(w)hen I [was] appointed to the CHEd, he (referring to President Aquino) said, ‘Dr. Licuanan, close down all these substandard nursing schools,’ …So, how clear can you get, right?

Of particular concern to the chairperson are institutions “that were very, very strong with the previous administration.” As graduation season approaches, many programs that are poorly performing (i.e. have failed to bring at least 30% of their graduating class above the line in board exams) particularly in the nursing field, will be targeted by a “crack team” to be formed by the Commission.

While the operators of such schools are liable for their poor performing students, the Commission by implication is also at fault for issuing permits to them to begin with. Either their criteria for approving these programs must be re-examined or somewhere in the organization, some form of graft and corruption exists and needs to be dealt with.

Which makes the fulfillment of this ‘mandate’ quite doubtful. Promises to close down opportunistic higher education providers have been made in the past. Cases tend to get tied up with the courts as temporary restraining orders (TROs) are issued that maintain the status quo. Operators find their way of ingratiating themselves with the authorities and the powers that be in the mean time. In the end it is a losing battle as agencies suffer more losses than wins.

Rather than waging a costly war in the courts with school operators, why not allow public access to information to bring about informed choice?

As an alternative, it would be more cost-effective and constructive for the CHED to publish information regarding the performance of schools in print and on the internet. Such information is already available, but not readily accessible. Empowering the public with information to make an informed choice would enforce a kind of market discipline.

While they are at it, the CHED should also take the lead role in publishing career information regarding future labor demand for various professions. For this it might have to team up with the Department of Labor and Employment (DOLE). The information should cover occupational and industry data and the qualifications both in higher education and vocational training that will be required to meet the prospective demand. Certain vocations or occupations that are expected to be of high demand among employers should be promoted, while those of low demand should be discouraged. To do this quantitative economic modeling of labor markets as well as consultations with industry and employer groups must first take place.

The CHED could easily get side-tracked with the issue of closing down schools when it should be more focused on the larger picture of matching skills with demand. Rather than waging a costly war in the courts with school operators, why not allow public access to information to bring about informed choice? The tools and information are already at their finger tips.

Rather than taking a ‘shot-gun’ approach to employment, training and higher education policy, the relevant agencies need to work together to work out a long-term, comprehensive solution to our labor market requirements.