Labor Market and Social Consequences of the Crisis

It is important to emphasize that the labor market and social impacts of the crisis will differ by economy depending on their context and, within each economy, by household and group. A detailed analysis of each economy and group is beyond the scope of this paper, but a few common patterns and particularly vulnerable groups emerge from the data.

3.1 Job Losses

The first of these patterns is worsening job losses. Despite efforts to avoid retrenchment, there has been a significant increase in job losses, particularly in terms of a reduction in wage employment. The most recent national data indicate a significant employment impact in the manufacturing sector for a number of economies. As expected, millions of workers in key export industries in the region have been retrenched. Many of these workers were employed in small and medium-sized enterprises that supply larger firms in national, regional, and global production chains.

In the PRC, job losses from large factory closures—caused not only the crisis but also by industrial restructuring to higher value-added production prior to the crisis—have forced more than 20 million retrenched workers to return to the countryside in pursuit of rural employment.² In Malaysia, the number of retrenched workers totaled 12,600 in the first quarter of 2009 (Ministry of Human Resources 2009).³ While the absolute number of retrenched workers may be small, it is nearly a fourfold increase from the 2008 average quarterly number of retrenched workers of 3,460. More than three-fourths of the retrenched workers in the first quarter of 2009 were in manufacturing.

The Indonesian Ministry of Manpower and Transmigration reported that job losses exceeded 51,000, while the Indonesian Employers Association reported over 237,000 layoffs between October 2008 and March 2009, with the textile and garment sector accounting for the bulk of them, followed by palm oil plantations, automotive and spare parts, construction, and footwear (Tempo Interactive 2009; Jakarta Post 2009). In Cambodia, employment in the garment sector contracted by 15% between September 2008 and February 2009 (Jalilian 2009). In Thailand, the number of people on unemployment insurance rose by 17.2% in January 2009 alone, after rising by 38.3% in 2008 over the previous year (Thailand Office of National Economic and Social Development Board 2009b).

Job losses in different industries combined with stalled new recruitment are pushing unemployment rates up in some Asian economies (Table 1 [ PDF 16.3KB | 1 page ]). In the Philippines, the unemployment rate increased to 7.7% in January 2009 from 7.4% in January 2008, representing a 6.7% rise in the number of unemployed people. Meanwhile, the number of unemployed increased by 28.7% in Singapore between March 2008 and March 2009 and a staggering 73.3% in Thailand in the same period. By contrast, the Indonesian unemployment rate in February 2009 was lower than a year earlier. This apparently favorable trend is more nuanced, however, if one takes into the account the accompanying trend of a shift to informal and vulnerable employment—another major pattern that is discussed in section 3.2.

Subcontract, casual, and temporary workers are often the most vulnerable to initial factory job cuts. Shedding these workers is easier and less costly than laying off regular staff. Occasionally, regulations relating to the termination of employment are not observed. More importantly, many non-regular female and male workers do not receive or qualify for the severance pay or unemployment benefits to which their regular counterparts are often entitled (Charoensuthipan 2009; Pitsuwan 2008).

Gender-disaggregated analyses indicate that women are likely to be harder hit by rising unemployment than are men. In Thailand, female employment in manufacturing decreased by nearly 130,000 in the fourth quarter of 2008 from the previous year, representing 63.2% of total job contraction in that industry (Thailand National Statistics Office 2009). This reflects in part the large share of women workers in key sectors that are hit by the crisis. Many of the export industries such as textiles, garments, and electronics are labor intensive and use mostly women workers, making them extremely vulnerable. Prior to the current crisis, there were 2–4 times more women than men in the textiles and garments industries in the Philippines, Thailand, and Viet Nam, and 5.3 times more women than men in the electronics industry in the Philippines (Dejardin and Owens 2009).

Further, youths are likely to be disproportionately affected by rising unemployment. Even in 2008, youths in Asia were more than three times as likely as older adults to be unemployed. In Southeast Asia, the youth unemployment rate stood at 15% in 2008. This figure could rise sharply, as young workers with little job tenure are likely to be among the first to be let go, while first-time jobseekers are likely to find themselves at a substantial disadvantage when competing against a rising pool of more experienced (and recently unemployed) jobseekers for increasingly scarce jobs. In the Philippines, the number of unemployed youths in January 2009 increased by 5.9% to 1.4 million more than in the previous year (Philippines National Statistics Office 2009). Similarly, in Japan, the year-on-year increase in the number of unemployed youths in April 2009 soared by 23.4%, or an increase of 110,000 (Japan Statistics Bureau).

Moreover, in the PRC, an estimated 6.1 million new college graduates will enter the labor market in 2009, joining the 4 million from previous years who are still seeking employment (Economist 2009; Lawrence 2008). Rising and/or longer-term unemployment among youths not only causes the immediate waste of productive potential, it threatens to stymie the youths’ productivity at later stages in their careers and thereby constrain productivity and output growth in the medium and long term.

The bleak economic outlook for 2009 means there is very little chance that a sufficient number of new jobs will be created in the region this year to keep up with expected labor force growth. Over 2009 and 2010, an estimated 51 million additional jobs will be needed to absorb Asia’s growing labor force, with the largest numbers of jobs needed in Asia’s most populous economies: 20.3 million in India, 10.9 million in the PCR, and 3.6 million in Indonesia. The largest rates of labor force growth in 2008–2010 are expected in Pakistan (6.1%), Cambodia (4.9%), and Philippines (4.9%) (Figure A.4 [ PDF 14.5KB | 1 page ]). As the crisis is likely to substantially decelerate economic growth in these economies, labor market pressures will intensify.

Another vulnerable group that has been severely affected by the global crisis are international migrant workers, who are often among the first to be dismissed during an economic downturn (Abella and Ducanes 2009).⁴ Many overseas migrant workers are not retained upon the expiration of their contract and are expected to return home. However, migrant workers and local nationals often fill different segments of the labor market, and thus repatriating migrants may simply leave certain types of jobs unfilled despite economic contraction. Further, the combination of returning migrant workers and decreased demand for migrant workers from developing Asia can exacerbate the challenge of mitigating job losses and generating new employment in labor-exporting economies.⁵

Rather than laying workers off, some companies have resorted to reducing working hours or placing employees on unpaid leave. For some groups, however, such changes can be even more detrimental as they do not qualify for unemployment benefits or other government programs for the retrenched, and their incomes fall below the minimum wage.

3.2 Vulnerable and Informal Employment

A larger adjustment to retrenchments in developing Asia is the shift to informal and vulnerable employment. Where poverty is high and social safety nets are inadequate, workers who lose formal wage employment frequently are left with few alternatives except lower paying and informal work. One useful indicator that is likely to capture this potential shift from more formal, wage employment to less formal economic activities is “vulnerable employment,” which is defined as the sum of own-account workers and unpaid family workers (ILOb 2009).⁶ Many such workers in developing economies—and sometimes in developed economies as well—do not enjoy social protection in case of job loss, personal or family illness, or other difficulties. They are less likely than formal wage employees to receive adequate income or have their fundamental labor rights respected.

Recent official data in Indonesia and Thailand corroborate the expansion of vulnerable employment. In Indonesia, the number of employees expanded by only 1.4% from February 2008 to February 2009, while the number of employers did not change much. On the other hand, growth in the number of workers whose employment status is considered vulnerable outpaced growth in wage employment during the same period. In particular, the number of casual workers not in agriculture increased by 7.3%. In Thailand, first quarter 2009 figures indicate that the number of wage employees grew by 104,000, or 0.6%, solely as a result of expanded government employment. Meanwhile, the number of own-account and contributing family workers combined increased by an astounding 566,000 over the previous year, or by 3.2% for own-account and 3.3% for contributing family workers.

Table 2: Recent trends in employment status, Indonesia and Thailand [ PDF 18.9KB | 1 page ]

Although the main transmission channels have primarily affected urban labor markets, the consequent effect on the rural economy, employment, and household income should not be ignored. In many parts of developing Asia, job losses in export manufacturing have affected rural-to-urban migrants and their ability to support their rural families. For those retrenched workers unable to find new urban employment, seeking rural work is often the only remaining option. Reverse migration has taken place throughout the region, most notably in India and Viet Nam. The PRC, the factory of the world, has experienced unprecedented labor market pressures, as approximately 20 million migrant workers who lost jobs in factories and cities have returned to their home villages. To support themselves and their families, many of these returnees are likely to take informal work, given their lower skills and educational qualifications.⁷

Overseas migrant workers face the same circumstances or even worse. These workers, particularly newly arrived migrants, have in many cases invested heavily in getting recruited, traveling to a foreign country, and establishing themselves there Abella and Ducanes 2009). As a consequence, returning to their home country is often not an option, and they may accept almost any terms just to retain their jobs. In cases where they have lost their jobs and work permits, they become undocumented and may turn to the informal or shadow economy.

Even before the crisis, women were a disproportionately represented among vulnerable workers throughout the region, as illustrated in Figure 3 [ PDF 18.4KB | 1 page ].⁸ Further, given structural gender differences including less access to education and disadvantaged job-search experience, it may be more difficult for women to gain or regain access to formal employment, suggesting that women may lag behind men in moving out of vulnerable employment during an economic recovery.⁹

The expansion of informal and vulnerable employment is likely to take place in the lower tiers of the informal economy, where earnings and working conditions are particularly bad (Fields 1990).¹⁰ This was evidenced in Thailand during the Asian financial crisis of 1997 and 1998. At that time, the number of household businesses in rural and peri-urban Thailand nearly tripled, but the heads of these businesses tended to be less educated and businesses had a median start-up capital of B1,250 (approximately US$50), or a mere 3.4% of the median start-up capital for businesses started before the crisis (Paulson and Townsend 2008). Moreover, businesses founded after the crisis, in 1999–2001, had median profits close to zero, which was notably lower than the profits of those founded before the crisis (1992–97) and during the crisis (1998), suggesting that adverse effects on the most vulnerable are likely to linger even after economic recovery.

3.3 Falling Incomes, Rising Working Poverty

As many workers in vulnerable employment are more likely to be at the lower end of the income spectrum, trends in vulnerable employment are very much linked to trends in working poverty. A great deal of uncertainty remains as to how the current crisis will affect overall levels of poverty and working poverty in Asia, but some possible scenarios are presented in the next section. A tremendous impact will likely be felt by workers and households who have climbed just barely above the poverty line in recent years with new formal employment and are now very vulnerable to falling back into poverty as a result of the crisis. More than 52 million workers currently live just 10% above the extreme poverty line of US$1.25/day, while more than 140 million live just 20% above that line (ILO 2008d).

There is already evidence of falling incomes and increasing vulnerability to working poverty in Asia. In India, prices for recyclable waste that unskilled workers collect and sell to scrap shops fell in many cases by 50% between October 2008 and January 2009 (Table 3 [ PDF 19.6KB | 1 page ]). A survey of unskilled workers in Phnom Penh, Cambodia, revealed that real earnings have decreased considerably in 2009 compared with 2007, falling by over 20% for cyclo drivers, small traders, motor-taxi drivers, and other unskilled workers (Jalilian 2009). Another study on the impacts of the crisis in Cambodia projected the potential loss in real income due to the crisis to reach US$677 million in 2009, affecting the incomes of 217,000 households, or over 1 million people (Chandararot et al. 2009). Given the large number of people clustered around the poverty line in many Asian countries, income and wage reductions of the magnitude witnessed for the specific jobs described above will have hugely detrimental effects on working poverty if they broaden to other parts of the economy.

Between 2001 and 2007—a period of tremendous economic growth in Asia and the Pacific—average annual real wages in a sample of economies in the region grew at a rate of 1.8%, far below the average annual growth in labor productivity over the same period (ILO 2008a). Current evidence suggests that wages could remain stagnant or even fall during the crisis in some Asian economies. Relatively weak labor market governance in many economies in the region—the overwhelming majority of which have rates of collective-bargaining coverage of less than 15%—exacerbates the challenge of reaching negotiated solutions to support wages during the crisis (ILO 2008a). However, maintaining wage so that purchasing power and consumer demand do not deteriorate is essential for recovery (Wilson 2009).

The situation in the labor market is compounded by relatively low public investment in social protection in developing Asia. Social expenditure as a share of GDP is only 2.2% in Asia and the Pacific, lagging behind other regions (Figure 4 [ PDF 37.7KB | 1 page ]). As discussed in the next section, the shift to informal and vulnerable employment and the rise in working poverty are likely to be long lasting. Further, during times of economic crisis, poor households often cut back spending on health and pull children from school as education becomes less affordable. Children may be sent to work to supplement household income (Mosel and Sarkar 2009). While income alone is not the sole determinant of the decision to send a child to school or work, its influence is real. During the Asian financial crisis, the Philippines saw a drop in enrolment rates and a rise in child labor among 10–14 year olds (Lim 2000). More recently, rapid inflation and macroeconomic instability in Pakistan brought a rise in child labor as families have found few alternative coping mechanisms (IRIN News 2008).

Importantly, studies have shown that, when poor families have to choose between sending a boy or a girl to school, even under pre-crisis conditions, parents often choose to invest in educating their sons and retain their daughters’ important household contributions. Further, from a medium- and long-term perspective, providing both girls and boys access to basic education is an absolute necessity to ensure that the future labor force has the foundation needed to engage in productive employment and help drive national growth and development.

The crisis and the treatment of workers, including migrants, have revealed many shortcomings in employment regulations, labor-relations regimes, and social-protection systems that deserve more attention in some economies. For these workers vulnerable to the crisis, the main concern must be upholding their rights at work and ensuring fair treatment and access to social protection.

3.4 Delayed Adjustment in the Labor Market

Having examined the labor market and social impacts to date, it is important to bear in mind that the full impacts may yet to be realized and that the consequences for Asia’s workers may be deep and protracted. In past economic and financial crises, various indicators in the labor market returned to pre-crisis levels on average only 4–5 years after output recovery (ILO 2009d). This section reviews this delayed recovery in the labor market by looking back at the Asian financial crisis.

The Asian financial crisis delivered a tremendous shock to numerous economies in the region. GDP plummeted in Indonesia by 13.1%, Malaysia by 7.4%, and Thailand by 10.5% in 1998 (Table 4 [ PDF 21.8KB | 1 page ]).

Although not at the epicenter of the crisis, the Philippines was not spared, as its economy also contracted by 0.6%. By 1999, the crisis-affected economies began to stabilize and recovery was underway, thanks in part to an upturn in exports. Growth in the Korea reached 9.5%, while Malaysia’s economy expanded by 6.1%. By 2000, GDP in the Philippines grew at 6.0%, faster than the rate of growth in the several years prior to the crisis, while Indonesia achieved 5.4% GDP growth and Thailand 4.8%.

Despite the relatively rapid economic upturn, recovery in the labor markets of crisis-affected economies was not as swift. Figure 5 [ PDF 52.7KB | 1 page ] illustrates the unemployment trend that took place before, during, and after the crisis. In Korea, the unemployment rate remained below 3.0% from 1993 to 1997 and skyrocketed to 7.0% at the peak of the crisis in 1998. It did not drop to pre-crisis levels until 2002, or 3 years after the quick and remarkable economic recovery in 1999. Similarly, the unemployment rate in Thailand averaged 1.2% from 1993 to 1997 but nearly tripled to 3.4% in 1998 and fell below 2.0% only in 2002. In the Philippines, unemployment reached a 10-year low of 7.4% in 1996 but rapidly increased to 9.8% in 1998 and, by 2004, had yet to fall back to pre-crisis levels. In the case of the Philippines, the unemployment trend was also shaped by rapid labor force growth of 15.8% from 1998 to 2004 (ILO 2009a), which exerted tremendous pressure on new employment creation after the crisis.

Moreover, the Asian financial crisis impacted labor markets in the region in terms of not only the level of unemployment but also of a shift in the type of jobs held by employed workers. In Indonesia, unemployment increased from 4.7% in 1997 to 5.5% in 1998 (ILO 2008b). The larger impact, however, was on the number of workers in vulnerable employment; in 1 year alone, from 1997 to 1998, formal wage employment shrank by 1.5 million (4.9%) while the number of workers categorized as own-account or contributing family workers increased by 3.7 million (6.8%). In addition, despite the economic recovery that began in 1999, the share of own-account and contributing family workers continued to increase (Figure 6 [ PDF 52.7KB | 1 page ]). The economic upturn did not translate into an equivalent rise in the share of formal wage employment, and the share of own-account or contributing family workers approached the pre-crisis level only in 2006.

After the crisis, labor productivity in Indonesia dropped by 15.4% and returned to pre-crisis levels only in 2003 (Figure 7 [ PDF 46.2KB | 1 page ]). Similarly, productivity in Thailand peaked in 1996 before falling by 9.2% and gradually recovering to surpass the pre-crisis level in 2003. Real manufacturing wages also remained depressed for several years (ILO 2009d).

A larger concern was the increase in poverty and working poverty. Despite Indonesia’s tremendous progress in reducing poverty in the decades prior to the crisis, poverty levels increased by over one-third during the crisis and fell back to pre-crisis levels only in 2003 (World Bank 2006). In Thailand, the share of those living below the US$2/day poverty line grew during the crisis and dropped below pre-crisis levels only in 2002 (World Bank 2008).

3.5 Estimates of Impact on Regional Labor Markets

Following a major downward revision of global economic growth forecasts in 2009, the International Labour Organization (ILO) recently released updated projections of the impact of the global economic crisis on the world’s labor markets, focusing on projecting unemployment, vulnerable employment, working poverty, and labor productivity according to three scenarios (ILO 2009c).¹¹

With the economic growth outlook for the Asia and the Pacific having deteriorated, has the labor market outlook also deteriorated further compared with prior expectations? In January 2009, the ILO projected that total unemployment in Asia and the Pacific could increase by between 8.7 million and 28.3 million from 2007 to 2009. On the basis of updated economic growth projections and newly available labor market data, this range has been slightly narrowed to between 9.1 million (scenario 1) and 26.3 million (scenario 3), with a central scenario 2 of 13.8 million. The ILO’s current projection for unemployment in 2009 in Asia and the Pacific is between scenarios 2 and 3. Significant volatility and uncertainty in economic growth forecasts and insufficient data for many economies in the region make more precise projections of the increase in unemployment impossible at this time.

As the current global crisis represents a break in historical unemployment series for many countries, however, the lowest unemployment scenario, obtained by applying the historical relationship between GDP growth and unemployment, is no longer viewed as realistic. At the same time, large fiscal policy stimuli and other responses taken by many governments in the region reduce the likelihood of unemployment increasing towards the upper range given by scenario 3.

In terms of subregional projections, the unemployment rate in the developed economies in Asia is projected to rise to 4.9%–5.7% in 2009, up from 3.9% in 2007 and 4.0% in 2008. East Asia’s unemployment rate may increase to 4.6%–5.8%, up from 3.9% in 2007. Unemployment rates are not currently expected to rise by as much in Southeast Asia and the Pacific or South Asia as in other parts of Asia. In Southeast Asia and the Pacific, the current projection is for an unemployment rate of 5.4%–6.2%, compared with 5.4% in 2007 and 2008, and in South Asia the current projection is for an unemployment rate of 5.1%–5.8%, versus 5.2% in 2008.

As noted above, young workers are being hit hard. In the region as a whole, the youth unemployment rate is projected to increase to 11.1%–13.1% in 2009, up from 10.3% in 2007. Southeast Asia has the highest youth unemployment rate in the region, and this could rise to 15.7%–18.1% in 2009 from 14.8% in 2007.

With women often making up a disproportionate share of jobs in export-oriented manufacturing in Asia, they face a steeper rise in unemployment than do men as a result of the crisis. The unemployment rate for women in the region is projected to rise from 4.4% in 2007 to 4.9%–5.8%. For men, it is expected that the unemployment rate will rise from 4.7% in 2007 to 5.0%–5.9%. Across all three scenarios developed by the ILO to gauge the likely impact of the crisis on unemployment, women are projected to account for an larger share of the region’s total unemployed in 2009 than in 2007.

Prior to the onset of the crisis, more than 62% of workers in Asia and the Pacific were in vulnerable employment, with more than 76% of South Asia’s workers in this group. In Southeast Asia and the Pacific, 62% of workers are estimated to be in vulnerable employment, while in East Asia the share of vulnerable workers is more than 55%. Because the requisite data are not available for many countries in the region for 2008 and 2009, it is not possible to provide precise estimates of the impact of the crisis on vulnerable employment. However, the three scenarios developed by the ILO indicate that the number of workers in vulnerable employment in the region could range between 1.1 billion and 1.2 billion in 2009, versus 1.1 billion in 2007. This would represent a vulnerable employment rate of between 59.6% and 63.5% for the region as a whole (Figure 8 [ PDF 18.9KB | 1 page ]).¹²

In 2007, a year of robust growth in Asia, an estimated 890 million workers in Asia lived with their families on less than US$2 per day, with 420 million of them living in extreme poverty of less than US$1.25 per day. Subregional figures put this massive challenge in perspective. In South Asia, the number of workers living on less than US$2 per day was 15 times greater than the number of unemployed. In Southeast Asia and the Pacific, the ratio was more than 9, while in East Asia it was above 8.

The precise impact of the economic crisis on the level and degree of working poverty in the region is difficult to pin down because of the absence of reliable and timely poverty estimates and labor market information. The ILO produced three scenarios for working poverty. Scenario 1 was generated by taking the average relationship between poverty and per-capita GDP over the 1980–2006 period and projecting this forward on the basis of 2009 GDP growth projections. Scenario 2 projected working poverty on the assumption that individuals living on the fringe of poverty (5% above the poverty line in 2008 and 10% above the poverty line in 2009) would fall into poverty. Scenario 3 projected working poverty on the assumption that individuals living 10% above the poverty line in 2008 and 20% above the poverty line in 2009 would fall into poverty. Notably, across all three scenarios, the number of workers living on less than US$2 was projected to rise in both South Asia and Southeast Asia and the Pacific. In South Asia, the three scenarios produced a range of 494 million to 538 million in 2009, versus 480 million in 2007. In Southeast Asia and the Pacific, the scenarios produced a range of 146 million to 178 million in 2009, versus 144 million in 2007.

In the long run, progress towards reducing working poverty requires increases in labor productivity, since the poor typically do not suffer from lack of work but rather from low productivity and consequent low earnings. Across all three scenarios developed by the ILO for 2009, labor productivity (measured as output per worker) was projected to decline in Southeast Asia and the Pacific. In South Asia, the highest potential rate of productivity growth in 2009 is 2.8%, versus average annual growth in productivity of 5% in 2000–2007. East Asia is expected to see a substantial slowdown in productivity growth this year. While this trend is expected to reverse once economic growth resumes, the substantial reduction in labor productivity poses a threat to employment quality, including earnings, and working conditions.

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