When bigger problem is employment, not unemployment

Between 2003 and 2016 the Bangladesh economy generated more than 1.15 million net jobs per year, on average, among the working age (15-64) population, with overall employment growing 2.4 per cent annually. The ready-made garments (RMG) sector has been a critical catalyst of job-creating industrialization and urbanization. A large inflow of remittances from migrants has likely contributed to boosting job creation in domestic market based industries. Within these 13-year period, the trends differ markedly before and after 2010. Employment grew at a rapid annual rate of 3.1 per cent in 2003-10, leading to lower unemployment and higher labor force participation. These trends were reversed subsequently in 2010-16, with jobs growth falling to just 1.8 per cent annually, below the 2.1 per cent growth in labor force. This slowdown in employment growth in 2010-16 happened despite accelerated manufacturing driven economic growth (annual per capita growth rate at 5.2 per cent in 2010-16 compared to 4.5 per cent in 2003-10). One major factor contributing to the slowdown was stagnating jobs growth in the RMG sector, with the average number of jobs added per year in the RMG and textiles sectors declining from over 300,000 in 2003-10 to only around 60,000 since 2010. This slowdown in jobs growth in RMG sector is likely to have contributed to the stagnating female labor force participation (LFP) rate since 2010. Yet the unemployment rate declined to 4.2 per cent in 2016 from 4.5 per cent in 2010, thanks to outflow of an annual average 0.5 million labor abroad during FY10-16.

Why is open unemployment so low? Technically speaking, open unemployment is a state of affairs when there are many able-bodied persons of working age who are willing to work but cannot find work at the prevailing wage levels. There is always some minimum amount of unemployment that prevails in the economy among workers who have voluntarily quit their previous jobs and are searching for new better jobs or looking for employment for the first time. They are between jobs or searching to enter for the first time. They are not able to get jobs immediately because of frictions such as lack of market information about availability of jobs and lack of perfect mobility on the part of workers.Structural unemployment is another type of unemployment which always exists in a growing economy. Structural unemployment refers to the mismatch between the unemployed persons and the demand for specific types of workers for employment. Note that frictional and structural types of unemployment together constitute what is called natural rate of unemployment which may be of the order of 4.0 to 5.0 per cent of labor force in market economies.Bangladesh's open unemployment rate is in this range. Does this mean Bangladesh has full employment? Most certainly not. This low rate only reflects the pressure of livelihood because of which most people, who only have their labor to live on, can ill afford to do nothing. Thus, mere engagement in some productive occupation does not necessarily mean absence of unemployment. People, who are only partially employed or are engaged in inferior jobs, though they can do better jobs, are not adequately employed.

Who are the unemployed? But then what about those 4.5 per cent?Could they be described as labor not at work because of frictional and structural reasons? A deeper consideration of the composition of the openly unemployedsuggests most probably not.Of the total 2.6 million openly unemployed in 2016,1.8 million were in 15-29 age group, of which 55 per cent were males.In recent years, youth unemployment rates, particularly for females, have spiked while those of older adults remained relatively stable, suggesting that youth may be disproportionally affected by the pressures associated with the recent slow-down in job creation. Over 67 per cent of the unemployed had secondary or higher education.Poorly functioning Technical and Vocational Education and Training (TVET) systems and lack of intermediation or employment services, combined with entrenched inefficiencies in the functioning of labor markets, likely hinders educated youth from accessing job opportunities. School-to-work transitions continue to be a challenge as relatively better educated young workers tend to remain unemployed. These observations based on formal unemployment statistics cover only part of the story because of problems in measurement related to high levels of informality and underemployment. The latter-low-income employment, under-utilization of skills, and lack of full-time job opportunities-are particularly widespread.

Labour underutilization is much higher. A major objective of monitoring labour markets is to assess the extent to which the economy is providing opportunities to employ its population to its full potential. This is better captured by measures of labour underutilisation which go beyond the conventional unemployment measure. It includes the conventionally defined unemployed plus those employed whose working time is insufficient relative to alternative employment in which they are willing to engage (time related unemployed) plus those not in employment because existing conditions limit their active job search and availability for work (potential labour force). The number of unemployed in 2016 was 2.6 million, the number of time related unemployed was 1.8 million and the number of potential labour force was 2.8 million. Thus, the size of underutilized labour was 7.2 million, constituting 6.7 per cent of the working age population. Over 62 per cent of them were in the 15-29 age group and 60.3 per cent of underutilised labour (4.3 million) had secondary or post-secondary education.

A much bigger problem is informal employment. Of the 59.5 million employed in 2016, 86.2 per cent of workers were engaged in informal, unpaid or low paid work. Paid employees accounted for 39.7 per cent of total employment in 2016, of which only 21.8 per cent were females. Their average earnings per month was Tk 12,897, which is barely 1.42 times the upper poverty line on a per capita basis (assuming a household size of 4). Average earnings of male workers exceeded that of females by 8.7 per cent. The share of unpaid workers, close to 40 per cent for women and 5.0 per cent for men, also highlights the gender discrepancy in job quality, although women are far less likely to work as day labourers. Informality, even among wage employees, is also commonplace, with 33.2 per cent of paid employees having a written contract, of which only 10.9 per cent have access to social insurance such as pensions. Significant gender gaps remain in LFP, employment status, as well as sector of work and occupation, with a higher gender gap in LFP in urban areas but a larger gap in access to wage employment in rural areas.

Continued predominance of agriculture. Agriculture contributed 15 per cent to GDP in FY16 but accounted for 42.7 per cent of the employed labour force. Agriculture continues to draw so many workers because it plays the role of residual employer. When people lose their jobs in other sectors, many of them move to the farms rather than staying unemployed. It is thus not at all surprising that while female employment in industry and services declined by 1.28 million between 2013 and 2016, it increased in agriculture by 2.2 million. The alternative to farming might often be no job at all rather than a city job, and involvement of such people in agriculture raises GDP even if it lowers average productivity. There is also a question of whether those who grew up in rural areas are ready to take up city jobs. The Labour Force Survey shows that agricultural workers have lower educational attainment than those in manufacturing. Moreover, the quality of instruction tends to be poorer in rural areas, resulting in less knowledge and skill for the same level of schooling. Thus, one of the reasons for the high percentage of population being confined to low-productivity agriculture is their low education and skill level.

Firms and farms are too small and too old to offer good jobs. Despite the prominence of large-scale manufacturing in the RMG sector, permanent microenterprises, along with household enterprises and temporary establishments, account for 98 per cent of all economic units in the country and half of all jobs. Over 72 per cent of the enterprises were established in 2009 or earlier, per the Economic Census 2013 of BBS. Thus, Bangladeshi firms tend to be micro and old, failing to either grow or exit. What is missing is growth and job creation from small and mid-sized enterprises. Both regulatory barriers and access to finance constrain the ability of micro-enterprises to improve earnings and to grow.

What is not right with informal employment? According to the recently released Jobs Diagnostics of the World Bank, low levels of technology, outdated management practices, and lagging skills of the workforce especially among microenterprises, perpetuate the creation of low quality jobs. Power operated machinery is used in only 23.8 per cent of all establishment, per Economic Census 2013. Less than one per cent have Tax Identification Number (TIN) while only 9.8 per cent have VAT registration. Firms tend to lack knowledge and technology for competitiveness, but face financial constraints to make investments in productivity-enhancing technology and practices. Moreover, despite rapid increases in formal education, particularly for females, the Bangladeshi work force, has limited opportunities to develop labour market relevant skills. The result is that most workers are stuck in low productivity jobs, while high productivity industries struggle to find competent employees, particularly in technical and management levels, and often outsource foreign workers.

Job creation prospects depend on addressing major urban infrastructure gaps. Dhaka division is home to around 30 per cent of Bangladesh's population, but accounts for 45 per cent of all industry jobs and 37 per cent of all services jobs. Congestion is becoming a major constraint to firm productivity and expansion in Dhaka, and firms are forced to shift to the urban periphery. This is clear from the declining urban share of firms, especially large ones. New investments and expansions in all parts of the country are constrained by lack of access to land. Second-tier cities are not emerging outside Dhaka and Chittagong as alternative locations for industrial investment. This is due to similar land constraints, shortfalls in the critical physical infrastructure such as transport and electricity, and to gaps in healthcare and education service delivery, which act as barriers to attracting skilled workers. Improved infrastructure in cities would likely increase incentives to migrate from rural to urban areas, which can facilitate access to formal wage employment.

The jobs policy agenda is vast and cross cutting. Economic growth is not a linear process of capital accumulation combined with exogenous technological progress but, rather, a process of structural transformation, where old activities are replaced by new ones and resources move from low-productivity to high-productivity sectors. Policies to transform the investment climate will be necessary to diversify the manufacturing sector and expand high-productivity services to accelerate job creation. On the supply side, promoting the quality and relevance of education and skills of workers, providing services to link workers to job opportunities in both domestic and international markets, and facilitating entrepreneurship are needed. These must be delivered while also expanding worker protection and social insurance. In addition, policies will be needed at the sectoral and regional levels to strengthen firm capabilities, extend domestic supply chains, and encourage innovation.

The author is an economist.

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