Categories
Economics Education

[2915] Temporarily lowering labor force growth through massive government-funded tertiary education program

I do not think Malaysia has done enough in stabilizing our labor market. Policies introduced so far are inadequate in size, and have been implemented so late that its effectiveness is suspect. Each progress report by the Ministry of Finance feels irrelevant because even if all the measures recorded 100% implementation, it would still be insufficient. And the most relevant existing government countermeasures are progressing slowly.

We need to do much, much more to address the big problem we face in the labor market.

Our problem is massive unemployment

We are staring at a high likelihood of mass unemployment happening unlike anything we have seen in the recent past.

In 1998, the worst recession Malaysia has ever experienced yet, unemployment rate rose by about 70 basis points from 2.5% to 3.2%. For 2020, Bank Negara expected it to increase by about 60 basis point to 4.0%. But the projection was made well before anybody had an idea the lockdown would last more than 2 weeks. Hence, the central bank’s official view as recorded in its 2019 Annual Report is dated and any projection should be worse than what was published earlier.

Based on early indication from an unrepresentative survey by the Department of Statistics done later in late March, naïve extrapolation suggests unemployment rate could rise significantly higher. So much higher that mentioning the possible level of unemployment feels unreal. Yet, it is June now and the lockdown is still in effect though with looser restrictions.

The heightened risk of massive unemployment was the reason why we needed a much, much bigger wage subsidy program earlier. But we have failed to do so and the time for that has come and passed.

The bigger the hole, the more radical we need to be

The result: we now have a bigger hole to fill. We as a society are and will be experiencing more pain than necessary.

This comes to a minor point I want to make: the bigger the hole we need to fill, the more radical our policy response will need to be. And we have let the hole grew bigger unnecessarily due to political maneuvering and ministerial inexperience during a time of economic crisis. Make no mistake: the learning curve during crisis for a newbie will always be too steep that the optimal response will be almost impossible.

Passing the job hoarding stage

We have passed the job hoarding stage. Pass here refers to leaving the stage behind, and not in the “with-flying-colors” sense. We failed. We have failed to protect a huge number of jobs through a bigger and timelier wage subsidy program.

There is still some value to having wage subsidies. But the damage has been done and wage subsidy efficacy is weak at this point. You cannot subsidize jobs that have been lost.

We now have to move on and focus on other policies. Job creation programs are the obvious ones. There are other policies that could be implemented but I think the less obvious would be to move people out of the labor market temporarily. Call it the workforce reduction program if you like.

Brief explanation of jargons

To understand the need for workforce reduction program, one has to understand the way labor statistics works at the macro level. I promise, this will not be too technical as I myself am uninterested in explaining the technicalities.

Unemployment rate is the number of unemployed people over the labor force.

Meanwhile, the labor force is the sum of all those with a job or actively looking for a job. Those who are actively looking for a job and at the same time without a job are classified as unemployed.

The crucial part is that, the definition of the labor force does not include everybody. The too young and the too old are excluded. Those unemployed and not looking for jobs are excluded. Students are not part of the labor force. Technically, military personnel are not counted. You can argue whether these people should be included or not, but the point is, there are people outside of the labor force however you slice and dice the problem.

Here, I would like to focus on students in the tertiary level.

Minimizing unemployment given the crisis

We want to minimize the unemployment rate. To do so, we could increase the number of employed relative to the labor force to outpace the growth of the overall labor force. In common parlance, job creation. But creating more jobs is easier said than done.

Alternatively, we could reduce the labor force growth temporarily and then return the labor taken off from the equation back at a time when the labor market is healthier in a year or two years down the road. I think might be easier.

(I feel the need to say that both job creation and labor force reduction exercise are not mutually exclusive)

Massive expansion of tertiary education opportunities

This is my (radical?) policy proposal to help fill the hole.

I think one of the better ways to reduce labor force growth temporarily is for the government to embark on a massive publicly-funded program to get unemployed Malaysians and those suffering a high unemployment risk to go back to school. Specifically, enroll those interested in programs offered by public universities.

This program should include diploma, bachelor’s and graduate degrees. I think less for doctorate, and more for masters and below. PhDs generally serve a different purpose and the number of PhD placing in the country for a year is so low that it probably means nothing to the objective of reducing the labor force growth temporarily. This means we could give ourselves between roughly between 6 months and 2 years to repair the labor market.

I think for people wanting a second same-level degree could be given a chance to join the program.

Participants of the program could receive a reasonable stipend above minimum wage.

Other factors

While the objective of the program is to reduce the labor force temporarily, it has other factors at play:

  • Taking a portion of workers off the labor market helps balance bargaining power between workers and employers. At a time when there are a lot of workers looking for jobs and few job opening, workers are at a disadvantage.
  • The program would need massive funding into our universities, which itself could create more jobs, be it teaching assistants, lecturers or whatever positions there are associated with universities. In order words, pushing unemployed Malaysians or Malaysians at risk of unemployment could be job creating too. In any case, our universities are underfunded especially since the mid-2010s and this is a chance to address the problem.
Categories
Economics

[2738] The growth of the Malaysian labor force explained, maybe

I am pretty taken aback by the expansion of the Malaysian labor force in the past year or so. The rise has made me skeptical about the utility of the labor market numbers to ascertain the health of the economy. Whenever I look at it, I tell myself, wait until it normalizes. When? If you look at the first chart below, it seems like soon because for the “outside of the labor force” number, it is sort of reverting to its old mean.

The number of workers increased by more than 0.9 million people in 2013 alone and you can see in this in the first chart below. That is about 7% of the total labor force. It is huge. Concurrently, there was a drop of number for those outside of the labor force:

20140611 Msian labor force

I did not really know why it increased in a big way in a very short time frame. Previously, I had read three points explaining the drastic increase. None was satisfying enough to me, but it explained something nonetheless.

The first was the minimum wage. The argument goes that the implementation of the minimum wage caused a lot of people joining the labor market (technically, joining means looking for jobs, not necessarily getting them). The drop in the number of those outside of the labor force strengthened the minimum wage argument (see the red line in the first chart). It made sense, until you realized the unemployment rate itself did not remain elevated for too long. It spiked back in October-November 2013 at 3.5% but it then stabilized at around 3.0%-3.1%:

20140612ueMalaysia

It would make sense that the unemployment rate did not change much, if all of those attracted to minimum wage jobs would find placement immediately, but I am having problem believing that. Sounds way too outrageous. And data on this is a bit hard to find to prove anything conclusively. (p/s – looking at the data again, the spike in unemployment rate of 3.5% happened when the number for those outside of the labor force was at its lowest. So, the minimum wage may have some explanatory power. The V-shape can be explained by discouraged workers, who entered the job market only to find it was harder than expected to find a job, and left it altogether soon after. This makes the minimum wage narrative very promising but getting a hard number to test it out is hard.)

The second was the legalization of undocumented migrants. This was my favorite explanation, until recently. There was an amnesty program for these workers that began in October 2011 and ended in September 2013. Jason Ng at the Wall Street Journal reported about 0.5 million workers were legalized.[1] The figure sounds right except the program ran for 2 years. Why would the labor force size increased significantly only in 2013? Was it the case of last minute legalization? Was all of the 0.5 million registered only in 2013? There was a renewed effort by the government in July and August 2013 to get all those undocumented foreign workers to register with the authorities but I think it would take guts to say yes and be all confident about it. Also, the increase in labor force was 0.9 million, which is far, far higher than the number of amnesty given out. So, there is a hole there. And… it cannot explain the drop of those outside of the labor force. The legalization, I think, should not affect that number. They are already working and their legalization would only increase the labor size. For these workers, it is merely a transfer from the underground economy to the “above ground” economy, not from outside to inside of the labor force.

The third possible reason was a population boom and this is my least favorite because it is a bit convoluted. If you look at Malaysia’s demographics, there is a bulge for cohort aged 20-24 in 2010.

Malaysia demographic projection by Department of Stastistics

There were close to 3 million of them and the year 2013 was about the right time these people graduated out of schools. But here is the thing. There were about 1.1 million students in Malaysia’s higher ed institutions, doing diplomas, bachelors and higher level degrees. It cannot be there the 0.9 million graduated in just one year. There is also a V-shape that cannot be explained by graduating students because it suggests these graduates leaving the labor market after joining them, which I do not think it is the case.

So, the three possible explanations come short in their own ways.

I was researching on something else recently until I re-discovered that Malaysia raised its mandatory retirement age in July 2013, from 55 years old to 60. I remember reading about this a long time ago but it completely went through my head within the context of labor size. That is an embarrassing thing to admit because it was such a big thing that I forgot. So, the raising of the retirement age sounds like a promising possible factor behind the increase in labor force. First, there were about a million of them. That is a good number because again, remember, the increase of the labor force in 2013 was about 0.9 million. Now, it is likely that not all of them are in the labor force. This is a number that needs some researching.

There is a problem with the explanation, though I think it is not as bad that it completely rules out the retirement age point. The problem the retirement age factor faces is not as big as those faced by the amnesty and population boom factors. The problem is that the labor force size markedly increased around January 2013, six months earlier than the implementation of the new retirement age. This requires a bit of a research but a possible explanation is that those nearing the old retirement age in 2013 just before the implementation date were given the choice to continue working. A sort of grace period for them. Since the retirement age act was gazetted in December 2012, the market knew of the details pretty early in the game. This can easily explain the rise of the labor force. The new retirement age might even attract those outside of the labor force who had retired to rejoin, and this can explain the descending slope of the V-shape for those outside of the labor market. I am unsure how to explain the rising slope however.

So, here is my explanation for the drastic increase in the labor force.

The retirement age increase drastically reduced the outflow of labor from the market for one time. The inflow of remained about the same, or maybe slightly bigger than before because of the amnesty program, minimum wage introduction and the (minor) population boom.

Summary? The raising of the retirement age is the main cause of the drastic increase in the labor force.

The new problem now is to explaining why the labor force has contracted since it peaked in October 2013 and why the number for those outside of the labor force rose after September 2013.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved

[1] — About 1.3 million of an estimated two million undocumented foreign workers had registered with the amnesty program, which started in October 2011 and ended in September of last year, according to government data. However, only about 500,000 received legal documentation, while around 330,000 were repatriated. The program that ended on Monday was an extension of the one that ended last September. [Malaysia Gets Tough on Illegal Immigrants As Amnesty Program Expires. Jason Ng. The Wall Street Journal. January 21 2014]

Categories
Economics Society

[2634] Any Malaysian welfare system may encounter some problems 30 to 50 years from now

An ageing population is a major economic problem to a number of developed countries. It is not ageing itself that is the issue or even slower economic growth. An aged society usually has an advanced and rich economy. Further economic growth does not mean much if the society is already extremely rich. The problem comes when there is a social welfare system that depends on the young to support it. With an aged society, the system would have to distribute its resources to the aged majority with the young minority supporting contributing to the system.

Malaysia does not the demographic problem yet because the country has a very young population. The median age is approximately 26 years old. In fact, Malaysia’s baby boomer generation has just entered or just about to enter the Malaysian labor market. With a high proportion of productive population, Malaysia is set to grow in a meaningful way in the long run.

Population growth, specifically labor force growth, is important to the sustainability of a social welfare system, including the Employees Provident Fund. The EPF is a retirement fund for those working in the private sector in Malaysia. It is not a comprehensive welfare system but it is still susceptible to demographic changes nonetheless.

At the moment, words on the streets have it that the EPF has more money than it can invest in Malaysia: there are not enough Malaysian sovereign bonds for EPF to buy (this probably leads to a conclusion that I dislike: the Malaysian government can comfortably raise more debt, especially in this environment of low yield without much economic repercussion). That is a testament of how favorable Malaysian demographics is at the moment.

This is the latest population profile for Malaysia from the Department of Statistics:[1]

You can see the baby boomer generation in the lower part of the chart.

What may be of concern — some far distant future, probably in 30, 40 or even 50 years — is when the Malaysian baby boomers begin transitioning into their golden years. I give the 30 to 50 years range because the current boomers are below the age of 30; remember the population median is 26. Assuming that they will retire at 60 years, you will get an estimate. My guesstimate is somewhere between 30 and 50.

Already the 0-4 years old, 5-9 years old and 10-14 years old cohorts are individually smaller than the 15-19 year old and 20-24 years old cohorts. The profile of a boom is clearer when one compares the population profile in year 2000 against that in year 2010.

There is still possibility that the baby boomers may have more children to produce yet another population boom sometime in the future. Yet, with rising income which tends to lead to smaller families everywhere in the world, I doubt it. And average Malaysian income is set to rise (at least in the next few decades notwithstanding business cycle) — please, not because of Pemandu — it’s the population boom dividend!

I may be wrong still — we will see that within the next 40 years’ time — but I think we are seeing our only population boom. If I am proven right, then the EPF might have trouble servicing the retirees in 40 or 50 years’ time, unless Malaysia suddenly develops a greater appetite for immigration.

The problem of EPF will be the least of our concern if Malaysia institutes the so-called 1Care scheme which aims at creating a more comprehensive healthcare system, which includes universal insurance coverage.

The problem however is beyond the horizon of the current leadership, in both Barisan Nasional and Pakatan Rakyat, judging by the populism of the day.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1]Population and Housing Cencus, Malaysia 2010. Department of Statistics.

Categories
Economics

[2550] Labor shortage in the palm oil industry

I do not typically post news articles these days, but I think this news article is particularly relevant on one issue that I raised earlier.

MALAYSIA is losing billions of ringgit in palm oil exports because there is not enough foreign workers to harvest fruit bunches in the oil palm fields.

The Malaysian Palm Oil Board (MPOB) estimates that the industry need to hire another 40,000 foreign workers to harvest the riped fruit bunches in order to achieve the 19.3 million tonnes of oil output target.

[…]

“The trees are fruiting, but there’s acute shortage of harvesters and this is affecting the country’s palm oil export earnings,” he told reporters on the sidelines of MPOB seminar titled “Labour – Key Driver For Continued Sustainability of the Oil Palm Industry” held here yesterday.

“If the government approves of another 40,000 foreign workers, we can reduce wastage and surpass the 19.3 million tonne output target easily,” Lee said.

It is estimated that millions of tonnes of fruit bunches rot in the fields because planters are not able to hire enough foreign workers to harvest them. [Labour shortage hits palm oil export earnings. New Straits Times. May 15 2012]

This is the difference between debating from market knowledge with context and theorizing by reading one line in a news article.

Categories
Economics

[2548] One way which minimum wage increases unemployment rate

One impact of minimum wage is the general increase in labor supply in the market. Let us be clear and not talk too generally or loosely. Precision is key. I think if you cannot be clear, then it is very likely that you do not understand or have not thought of the issue well enough. And I think I understand it very well.

And I apologize if this appears to use a lot of jargons. I try to explain each jargon but I believe you will be able to overcome the jargons if you are really interested in the issue; if you really interested in the issue of minimum wage and not merely interested in the ideological battle, then you have to understand the mechanics. There is no short cut. Besides, the jargons are really self-descriptive.

And this is not a moral argument but rather it is the mechanics; just as explaining why the sky is blue does not make any moral argument, so is this.

So, here is the precise simplified mechanism: labor supply will increase if the newly instated minimum wage is higher than most of the prevailing wages. Higher wages attract workers into the labor market thus increasing the labor force/supply.

At the same time, minimum wage puts a limit on total jobs growth. Walter Williams has explained how that is so. Williams explains it in a specific context, but the logic can be generalized beyond the competitive context that Williams describes.

Now, combine the two effects related to labor supply and total jobs growth.

If you understand how unemployment rate is calculated, then you will realize how this will increase unemployment rate. For the uninitiated, the unemployment rate is calculated by taking the ratio of total unemployed individuals to the total labor force.

This is of course is not the general effect between minimum wage and unemployment rate, but part of that effect is explained by this particular interaction between variables.

This is how minimum wage, jobs and labor supply interact.

If total filled jobs grow faster than labor force, then unemployment rate will decrease.

If total filled jobs grow slower than the labor force, then unemployment rate will increase.

With minimum wage, there will likely be a shock to both total jobs and labor force growth. Since minimum wage puts a cap on total jobs growth and at the same time encourage more individual to join the labor force, there is a strong case to expect total jobs growth will be slower than labor force growth at the time when minimum wage is in force.

That will cause the unemployment rate to jump up. That elevated unemployment rate will remain at its new high level, discounting for other effects, until further development happens.

These other effects may increase or lower the unemployment rate on the balance. One factor that may blunt the effect of minimum wage on unemployment is inflation.