Economics Society

[2930] The biggest losers in this recession: the young

All recessions have its losers and to claim so is to state the obvious. It is more interesting to know who the losers are. Data from the Department of Statistics shows that the biggest losers in this recession are the young.

From the chart below, it is quite clear the job market for 35 years old and younger is doing badly relative to the market for older cohorts:

The chart is drawn by comparing total employment by age for each quarter relative to a pre-pandemic benchmark. In this case the benchmark is the final quarter of 2019, the last quarter before the pandemic. To illustrate:

  • there were 31,800 fewer employed persons among 15-24 years olds in the first quarter of 2020, relative to the last quarter of 2019
  • there were 202,600 fewer employed persons among 15-24 years olds in the second quarter of 2020, relative to the last quarter of 2019

So, if the number goes down, then it is bad because it shows fewer people are employed relative to the benchmark. If the number goes up, then it is good because it shows more people employed.

The data is from the Quarterly Report of Labour Force Survey. The 2020 fourth quarter report, which is the latest report, was released on February 8 2020.

Increased underemployment among younger cohorts

The change in total employment does not indicate change in employment quality. Here, I am referring to underemployment. Once again, the young are the most badly affected:Unlike in the first chart, an increase here suggests more people working less than 30 hours per week, which could be considered as a definition of underemployment (there are other underemployment definitions). They work less than 30 hours because they are likely unable to work fulltime. Therefore, an increase in this chart points to a worsening situation.

This is relevant because a person is considered employed in official statistics if he or she works for at least an hour per week. As you can see, it is a loose definition. During normal times, it is alright to use it because it works. But the situation we are in are quite abnormal and it challenges our traditional definitions.


[2911] RM600 wage subsidies too small to prevent massive layoffs

I am happy with the inclusion of wage subsidies in the larger cushioning/protection policy announced by the government today. I use cushioning/protection because the supply-side context makes the definition of stimulus irrelevant. As announced, the government will implement RM600 per month wage subsidies for 3 months.

However, there is a big but. Is the RM600 per worker per month enough to prevent massive layoffs?

No. It is hard to say yes.

It is so small that it risks becoming irrelevant at preventing layoffs. It fails to protect minimum wage jobs fully, never mind those earning median wages.

In contrast, the government announced a big cash transfer program. From the perspective of protecting jobs and potential, prioritizing cash transfers over wage subsidies seems folly to me. Why?

Three factors I think:

  1. Wage subsidies are the first line of defense, while cash transfers are a safety net
  2. Wage subsidies depend on recent data, while cash transfers on last year’s data (recognition lag)
  3. Wage subsidies protect potential now and allows for faster recovery later

Wage subsidies are the first line of defense, cash transfers are a safety net

When wage subsidies and cash transfers work hand-in-hand, the former functions as a first line of defense with the latter a safety net. If the first line of defense fails, the safety net will kick in. Both need to be sufficiently big to be credible and effective.

To put it another way, the first line of defense (wage subsidies) is a proactive measure designed to protect jobs so that you do not have to rely on safety net. You want your first line of defense to work so that you do not have to suffer bigger and bigger demand for safety net.

Unfortunately from the policy design of the set of measures announced, it feels like we are skipping the first line of defense and going straight towards the safety net.

With only RM600 wage subsidies, I fear companies would have the incentives to fire even workers at the minimum wage. When the lowest earners not protected from job loss, I fear for the rest.

We have a specific statistics to measure the success or failure of this policy: the unemployment rate.

Wage subsidies depend on recent data, cash transfers on last year’s data (recognition lag)

And then there is a question of recognition lag.

When it comes to the labor market, wage subsidies rely on current data. If you have a job now, you will get the subsidy and this will encourage companies not to let you go because employing you is costless during this crisis of cash flow.

In contrast, cash transfers depend on last year’s data. Cash transfers have a one-year worth of recognition lag because it depends on yearly Internal Revenue Board data. If you lost your job this month but was paid wages above cash transfer qualifications, you would not qualify for the cash. This is purely a data and bureaucratic issue. This means cash transfers will be unable to help those in the need now, unlike wage subsidies.

So, it is quite clear wage subsidies address the now in terms of protecting potential.

Wage subsidies protect potential now and allow for faster recovery later

Wage subsidies are important because the labor market is a slow moving animal. The market can suffer immediate shocks, but recovery from the shock will be slow. And the labor market has a big influence on the economy. A post-shock slow-moving labor market will mean prolonged weak economic growth (if it could be called growth) for all of us. A prolonged weak economy means prolonged demand for safety net as jobs are hard to come by. And massive job losses can affect potential negatively in a big way.

Wage subsidies is supposed to preempt that shock and address it now in the short term immediately. It protects the potential now and removes big demand for safety net demand later. With potential protected now, there will be less ground to cover during recovery. That means there will be no need for many to suffer unemployment, and the time needed to find new jobs, go to interviews — all in all the long readjustment period. If wage subsidies are successful, it will allow for faster recovery without having to go thru the painful readjustment period.

But for it to be successful, it has to be meaningful for companies under pressure. Maximum RM600 wage subsidies do not even begin to work.

Meanwhile, cash transfers do not protect those potentials as much. It is designed to help if those potentials have collapsed. But our objective should be to prevent collapse in the first place, not wait for it.

Bigger wage subsidies needed

I have suggested for the government to provide 25%-50% subsidies for workers with wages up to RM4,600 with a joint statement that I wrote.[1] In retrospect (the statement was rushed out and I came on board at the very last minute), it should bigger: minimum subsidy of RM1,200, and beyond that, 25%-50% additional subsidy relative to income in excess of the minimum wage up to RM4,600.

This way, there is less incentive for companies to fire a lot of people. The subsidy size probably could grow bigger, but it may require more analysis to balance other needs.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — Kabinet Rakyat calls on the government to provide larger direct cash transfers worth at least RM1,000 per month to all B40 households, and 25-50 per cent wage subsidies relative to total wages for SME employees earning up to RM 4,600 monthly (roughly 200 per cent of national median salaries) during the April-June 2020 period.

The large cash transfer programme will protect irregular job holders and those in the informal sectors unable to work due to the Movement Restriction Order (MRO), while the wage subsidy will lessen the temptation for SME companies to lay off its workers.

Urgent action must be taken to address the ongoing health and economic crisis. According to a Malaysian Institute of Economic Research (MIER) study, Malaysia’s real GDP may shrink by 2.9 per cent this year, with 2.4 million people losing their jobs. Massive job loss will exert prolonged adverse effects on the economy, as well as the social stability of the country, long after the health crisis is over.

The government has already announced some measures to cushion the impact of COVID-19 and the MCO. This includes cash transfer policies like the Employment Retention Program (ERP) providing RM 600/month up to six months for employees forced to take unpaid leave and a one-off additional RM 150 in Bantuan Sara Hidup (BSH). Meanwhile, Bank Negara Malaysia has introduced a massive monetary stimulus in the form of loan moratorium to address cash flow issues among companies, that hopefully will lessen the need for layoffs.

While these measures are welcomed, they are still inadequate.

The need for cash transfers is clear. Groups working directly with low-income communities have been overwhelmed by requests for cash assistance since the start of the movement control order (MCO).

Furthermore KRI, IDEAS, ISIS Malaysia dan REFSA as well as individuals including Nungsari Ahmad Radhi, Hamdan Abdul Majeed, and Muhammed Abdul Khalid have all argued that the cash transfer measures introduced so far (the ERP and the small increase in BSH) are insufficient. They all recommend additional cash transfers in some forms, by expanding coverage or increasing the amount of ERP or BSH, or both.

Other countries and jurisdictions have also responded to the crisis with substantial direct cash transfers. Hong Kong, Singapore, and Australia for example, have already done so. Concurrently, Denmark and the United Kingdom have introduced massive wage subsidies to protect jobs.

Our response to this crisis must include and prioritise those hit the hardest.

[Tharma Pillai, Yu Ren Chung, Hafiz Noor Shams. More direct cash transfers and wage subsidies needed to assist vulnerable and protect jobs. Malay Mail. March 26 2020]


[2803] Troubling tales from Uber drivers

Unlike cabbies whose occupation is mostly driving (save for the minority), most Uber drivers drive part-time. I have had engineers, civil servants, doctorate students and advertising people as my Uber driver.

That occupational diversity makes conversation during an Uber ride much more interesting than that during a typical taxi journey. I have heard fascinating tidbits across industries as Uber transports me around Kuala Lumpur. This makes Uber a gold mine for economic anecdotes, giving colour and warmth to hard cold data.

These conversations have turned depressing lately.

The economy is going through a rough patch and official data tells you just as much. No citing of how well Malaysia ranks in the WEF Global Competitiveness Index — an index that does not measure economic cycles — can overcome concerns over the economy at the moment.

We are not in a recession but recession as a concept can be a statistical abstract. I would suppose in personal terms, you are in a recession if you lose your job and then struggle to meet your financial obligations. It is within this context my Uber conversations took place.

The worst stories almost always come from oil and gas professionals. With low petroleum prices and spending cuts by Petronas, the whole Malaysian oil and gas sector is in a recession of their own.

This has led one geologist to drive Uber. He used to spend months at sea and all around the world on lucrative contracts looking for oil and gas for big companies. But he has not been out of Kuala Lumpur for a while now. There is no new contract to sign. Nobody is exploring anymore.

Petroleum professionals like him are used to big pay and those in the industry did appear to be among the best paid compared to the rest. And this geologist in particular was used to big spending. He bought a property in a good neighbourhood along with a car last year through bank borrowings. Then, the repayment seemed insignificant.

But the times are changing. With no job on the horizon and no money coming in, his personal finances are not in a great shape currently. He is not alone. ”My friends are trying to rent out their places. They did not need the money before but now every cent counts,” he insisted.

I fear what this portends. These are highly qualified and well-paid members of the middle class. Upper middle class perhaps but they are now at risk of losing that status.

There has always been somebody struggling with their finances even during good times. But the idea a person with a fine education such as the geologist could fall so far down so rudely because of something out of his control made me shrink in my seat as he drove me towards my destination.

There might be some comfort the petroleum industry employs just a small segment of the Malaysian labour force.

Yet, it is not the only one in trouble. Retail is not doing well too. It is unclear if the tough time there is temporarily caused by the GST or due to something bigger and more lasting. Meanwhile, euphemisms like downsizing, voluntary separation scheme and ”having to let you go” are making its rounds in the banking sector.

Another sector I have had anecdotes to share is advertising.

One person running a small production house told me he drove Uber because there were fewer and fewer advertising jobs available for grabs these days. ”In tough times,” he said when the lights were red, ”businesses would cut advertising spending first. It is the easiest thing to do for them.” Indeed advertising expenditure has fared badly so far, contracting 9 per cent in the first eight months this year compared to 2014.

Before we parted ways, he joked driving was his full-time job now judging by the hours he spent on the road instead of at the desk doing creative work.

I only hope these are mere anecdotes.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on October 29 2015.

Economics Society

[2669] Why does he not get a job?

I fancy myself as an economist. After more or less of six years of economic traning and several more years working as an economist, I think I can call myself as such without too much pretension. While I do like to claim that I know more economics than a typical layperson, I have to admit that sometimes, I do wonder about basic stuff that economists supposedly know like the back of your hand. When I see an unemployed begging on the streets or scouring the trash for something to sell, I really do wonder, why is he or she not working.

One can be absolutely optimistic and assert that begging or scouring the trash is a kind of employment. It is not a pretty thing to say and much less do but the person is doing something. Employment can be defined as something that one does to earn a living. One can earn a living by doing just so. There are even professional beggars too these days although the profession is not something one would put down in his or her tax return forms.

It all comes down to definitional matters and it is a matter of how tightly one wants to define the term unemployment. Truly, it is hard to imagine why unemployment exists in a very efficient economy. There is no bill on the sidewalk so-to-speak where everybody can be an entrepreneur. Begging and scouring the trash are a type of entrepreneurship if one thinks of it, however ridiculous it sounds. Those who beg on their own (discounting the professional beggars) are doing something for a living and it brings them income.

But let us make an exception. Let us just take begging, scouring the trash and the likes minus the professional kind as not employment but only something one does when one is desperately and involuntarily out of work instead. I am sure, if I was to lose my job and forced to beg on the streets, I would call myself involuntarily unemployed. I would consider it as an insult to be called employed if I was reduced to a beggar.

It is with the exception that I find it odd that somebody can be unemployed especially in an economy that Malaysia has, which enjoys pretty strong long-term growth and (very) low unemployment rate. Are the unemployed who exist really that lucky that they are one of those few involuntarily unemployed in the country?

Perhaps it is unrealistic to expect anybody can be an entrepreneur. Entrepreneurship requires ideas and not everybody can come up with an idea, regardless whether it is brilliant, unoriginal or just plain stupid. So the unimaginative mind discounts the case of no unemployment based on the idea that everybody can be an entrepreneur. Never mind that not everything imaginable in this world is profitable. So instead of continuously making a loss, the state of unemployment can be the right situation to be in as it limits those losses.

That may create an opportunity for unemployment to exist especially within the mainstream economics way of understanding it: that unemployment exists because of insufficient aggregate demand in the economy. That particular understanding of the phenomenon explains the issue of involuntary unemployment. In a recession, the cause of unemployment can be painfully clear. But that is at the macroeconomic level. I am more interested in the microeconomic explanation. Maybe the macro-micro differentiation is unclean here but I hope I get to send across what I mean.

Notwithstanding the point on macro-micro dichotomy, we are far from being in a recession. That makes it hard for me to comprehend why some involuntary unemployment exists, especially those who beg on the streets and is suffering while begging. The Malaysian reality for these unemployed is such a way that begging is not the best option available, or at least if I were put in shoes of the unemployed with all of my savings and the necessary support structure that I currently enjoy were unavailable to me, I would find my hypothetical state of unemployment as insufferable. If having a paying job is always superior to being unemployed, then there are low-skilled jobs everywhere that I look and I would take it.

I see everywhere eateries dotting the streets and these eateries are always busy. Surely, they do need some extra hands. Some small effort of enquiring the operators of those eateries can be a great start to getting out of employment. And when one goes to fast-food restaurants, these restaurants are perpetually hiring. Every time I pass by McDonald’s, KFC, Pizza, whatever, the fact of vacancy is hard to be ignored. I am unsure about other industries but looking at recent manufacturing production, at the very least, it is hard to think that they are retrenching people (although in the fourth quarter of 2013, retrenchment spiked and there are reports that manufacturing plants are closing down and moving away due to minimum wage policy).

There are job search costs obviously in temporal, pecuniary and effort terms. But low-skilled, low-paying jobs do not require too much of that cost and certainly, not insider information that is typically needed for high-skilled, high-paying jobs. Maybe, the desperate cannot travel to search for job and that creates unemployment in the specific kind that I am referring to. Indeed, one needs to travel wide in Kuala Lumpur to see these vacancies and witnesses also some beggars on the streets. Still, I have seen a business advertising vacancy and there was a homeless man across the street. The cost of crossing the street cannot be so great that that street cannot be crossed. If it was in the affirmative, it would be the height of ridiculousness.

The state of homelessness may complicate the scenario because many employers need to an applicant’s contact details if the employers need to get back to the applicants. A begging homeless person has not contact details in the traditional sense. That may be the barrier to employment and it may be the inflexibility of businesses that cause unemployment in this sense. I think I can support some state action to help any homeless persons to get a job. Effort is important and if a homeless person is applying to a job, then someone and unfortunately the state, should find a way to help the homeless apply for the job while employers should be more flexible in their requirement so that the unemployed homeless do not find themselves in a conundrum: I can only get a job if I have contact details but I can afford contact details only if I have a job. Somebody needs to be break the cycle.

Being an illegal alien may also contribute to employment because the law does discriminate against illegal immigrants.

But really, even counting homelessness into account, there are many business establishment, those eateries by the streets in KL, even those restaurants by the streets under the trees, are not really much into bureaucracy. I even doubt those establishments even fully disclose their tax information. So contact information and illegal status are hardly a consideration for very small businesses.

But beyond homelessness (I have a feeling that homelessness is a small factor in the state of unemployment) and illegal aliens, within the context of Kuala Lumpur, that of a relatively strong economy and low unemployment rate, I struggle to understand why a person can be unemployed when clearly, being unemployed is undesirable to a person. Unless the person fakes his condition, some beggars that I spotted looked miserable it appeared to me that the beggars needed jobs.

I have been thinking about this for a long time now, ever since that man came up to me at a gas station and asked me for money. I refused him and I felt bad as I thought myself, maybe it was in a tough spot. I began to felt less bad when I saw him again some weeks later, and again after that multiple of times.

Why does he not just get a job?

He has no disability, physically and mentally. Clearly he is capable of work.

Is there some kind of psychological explanation?


[2334] Sabah, immigration and unemployment

There is a popular allegation that illegal immigration, or even immigration as a whole, is the culprit behind the level of unemployment Sabah is experiencing. I am unsure how accurate that is.

First of all, while the unemployment rate of Malaysia nationwide was about 3.6% in 2009, the unemployment rate in Sabah was 5.5%. The difference is not too big.

Secondly, I think the allegation is mostly due to bias against immigrants in Sabah. Immigrants are simply easy scapegoats.

I recently came across statistics pertaining the labor market of Sabah. Here is a simple graphical representation of the behavior of labor force size and unemployment rate from 1982 to 2009.

The labor force is measured in thousands.

Here is a graph with change in labor force instead of just labor force size.

Note what happens to the unemployment rate each time there is a spike in change of the labor force.

The only edit I did to the data was to fill in two data points into the series, which are absent from the original dataset. The edit is innocent: I took the average of the year before and after for the missing points, which are year 1991 and year 1994.  The data is publicly available at the Department of Statistics.[1]

I drew the particular period because those are the years available in the document. There are not too many data points to play with.

I admit that that is unscientific but the graph shows that the increase in labor force corresponds with a noticeable drop in the unemployment rate. Something happened there. Was it the roaring nineties? Maybe but I really do not know.

The increase in labor for is likely due to immigration (legal immigration, by definition, I would guess). It is highly unlikely the nearly 300,000 or 35%  increase in labor force between 1995 and 1996 was due to natural factors. It was likely due to increase in immigration. There has been allegation that immigrants were granted citizenship status liberally in Sabah. This might be a smoking gun.

In that way, I am using the change in labor force as a very imperfect proxy. Nevertheless, I think the change in labor force is a somewhat good proxy. A sudden change is likely to be caused by immigration, given the history of Sabah.

I ran a simple regression just to see if preliminary results (i.e. no cointegration tests although the model did pass a structural test; simple reading of the results also suggests that there relationship is not spurious but residuals are not normally distributed) would go against the conclusion one would get from the graph above.

I found a significant relationship between the labor force and the unemployment rate: An increase in labor size reduces unemployment rate. Through the proxy I mentioned, the conclusion might be that immigration reduces unemployment rate, on average given all else constant.

One reason this might be true is that there are more economic activities with larger working population. I do not think that is controversial at all.

So, it does not support the allegation that immigration adversely affects the unemployment rate in Sabah. I would assume that the conclusion would hold for illegal immigration.

A better model would probably include the periods of economic expansion and recession as well as the GDP in one way or another. Having actual number of immigrants would be great. Looking for the GDP of Sabah up to 1982 might a little bit time consuming for a blog entry. If any of you have it, do send it my way. I might do a more kosher regression model with it.

Of course, it is quite possible that the relationship is reversed but again, given the history of Sabah where massive immigration was welcomed due to political consideration, I think this is more of a case where immigration affecting unemployment rate.

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

[1] — see Principal statistics of the labour force, Sabah, 1982-2009 by the Department of Statistics Malaysia.