The first article (on November 28, 2018) in this series on macroeconomic indicators to assess economic development covered aggregate production and income or real sector indicators. All economic activities are contributed by the labour market that supplies various types of labour. No production activity can take place without labour. Therefore, almost all macroeconomic theories present views on how the momentum of economic activities interact with the labour market and the level of employment. Also, almost all economic policies target creation of more employment opportunities including new entrepreneurs.
The population becomes a burden to a country if the economy is unable to create employment opportunities to all working age population or labour force. Countries with low income and poor standards of living are the countries whose economy is unable to provide better employment opportunities. The objective of all state policies to attract foreign investment is to create more and better employment opportunities. Once the production structure is able to mobilize resources including labour, people will find employment opportunities suitable to their skills. Therefore, rather than granting living subsidies to unemployed or low-income segments at cost to income earners, pro-capitalist countries prefer policies to encourage investments, skill development, entrepreneurship and better business environment that create more employment opportunities through innovations, increased productivity and mobilization of untapped resources.
In general, growth of the economy or production should raise the level of employment over the period. The negative economic growth accompanies reduction in employment or increase in unemployment. The business cycles, i.e., ups and downs in economic growth, are considered unfavourable as they are directly associated with cycles of employment which are not healthy for people. The living standards become better if all in the labour force are able to find better employment.
The labour force participation rate, unemployment rate and wages are the key macroeconomic indicators relating to the labour market in the economy. In Sri Lanka, Quarterly Labour Force Survey of the Department of Census and Statistics (conducted since 1990) is the source of information on labour force and unemployment. The Labour Department and Central Bank provide some statistics on wage movements. As the major source of labour market information is the country-wide surveys conducted periodically, the aggregate information over a long period should be used cautiously due to controversial changes in definitions and lapses in data collection.
Labour Force
The labour force is the percentage of economically active people in the working age population. Working age population consists of persons who are aged 15 years and above. In surveys before 2012, 10 years was the age limit. Persons who are working and willing to work for income/economic gain are the labour force. Employees working for wage income are only one category of labour. Entrepreneurs and capital owners also are important part of labour. Full-time students, old aged persons, physically disabled persons and persons who are not interested in working due to various personal reasons are the persons not in the labour. They are the dependents.
Therefore, the labour force is the human resource base which manages the economy. In Sri Lanka, labour force has increased to 54.1% of working age population by 2017. The female labour force rate is about a half of it for male. However, both rates have increased in the past. Expansion of education and economic activities generally contribute to higher labour force, especially for females.
Unemployment
The labour force consists of employed and unemployed. Employed persons are those who work for income/earnings. Paid employees, employers/entrepreneurs, own account workers/self-employees and family members contributing to family work for gain are the employed. Persons who worked at least one hour and persons who have a job but did not work during the reference period of the survey are considered as employed. The reference period is the four weeks prior to the date of the survey of the household.
* Definition of Unemployed
Persons who did not work at least one hour during the past month but were available and looking for work during the month and are ready to accept a job within next two weeks, if the opportunity is given, are the unemployed. The percentage of unemployed persons in the labor force is the unemployment rate which is the most important economic indicator that represents the labour market conditions in response to economic activities. Economic growth and buoyancy are expected to reduce the unemployment rate and vise-versa.
* Level and Trend of Unemployment
Economic recessions are primarily reflected by rising unemployment rate to very high levels. For example, unemployment rates in the countries hit by the global financial crisis 2008/09 rose to 10%-25% in Europe and the US. Historically high unemployment also was reported during the Great Depression in 1930s, for example 14%-25% in the US. However, unemployment rate in the US has now declined to thirty-year low of 3.7% in October 2018.
A considerable decline in unemployment in Sri Lanka is shown from data although data are not strictly comparable due to differences in definitions and coverage of households. In general, unemployment rate has declined from around 10%-15% in 1970s-1990s to about 4%-5% in 2010s.
Relatively higher level of unemployment among the youth (18.6% among the aged 15-24) and educated persons (8.1% among GCE A/L and above) is reflective of the education system not being able to produce immediately employable persons to cater to new needs of the economy. Female unemployment (6.5%) being twice the male unemployment is reflective of relatively less employment opportunities for female.
* Underemployment
The relaxed/broad definition of employed as working at least one-hour for income/gain during the past month has a bias towards a lower unemployment rate. Therefore, highly underemployed persons also fall under the employed. The underemployment is a concept to identify those who do not have jobs for normal hours of work. In Sri Lanka, those who work less than 35 hours a week are considered as underemployed persons.
The underemployment rate stood at 2.8% of labour force in 2017. If the underemployed are considered as almost unemployed because they do not find regular jobs, the unemployment rate will increase to about 8%. While underemployment rate for female rose from 3.4% to 3.9% between 2004 and 2017, it for male fell from 2.7% to 2.4%.
* Natural Rate of Unemployment
It is natural to have a certain rate of unemployment in any economy even at the full employment. This rate reflects unemployment resulting from delays involved in transfer between jobs and filling job vacancies as well as unemployment created by wage and labour regulations such as minimum wages. Firms will reduce hiring when the minimum wage is higher than profitable. This natural rate of unemployment will vary across countries depending on differences in labour market structure and rigidities. In the US, the present estimate for the natural unemployment rate is around 4%. Authorities or economists in Sri Lanka do not estimate such a natural rate of unemployment.
Wages
Wages are the prices for labour of paid employees determined by demand for and supply of labour in respect of various labour categories/skills. Accordingly, wage rates vary across economic sectors, industries, firms and skill categories based on labour productivity and profit of underlying production activities. Meantime, various state policies prevail on minimum wages of public employees and various private industries/trades. Information on labour income of other employed categories such as entrepreneurs, capital owners and self-employed is not available.
* Interaction between Wages and Economy
In general, wages in public sector and organised private sector do not immediately respond to changes in production activities as these wages are fixed by formal agreements with trade unions and state policies for certain periods such as annual or several years. Wages are reviewed periodically to compensate for increase in cost of living and profit of production activities. Therefore, wages in the organised/formal sector are considered sticky.
In contrast, wages in the informal sector respond to labour market conditions, i.e., changes in demand for and supply of labour, as employment is not driven by labour laws such as minimum wages and employee protection. However, there is no reliable and consistent series of wage information on the informal sector.
The increase in wages generally shows tight labour market conditions due to high momentum of growth of economic activities. It is also an early warning of inflation possible in the immediate future when increased labour income is spent. Therefore, inflation is generally expected in periods of business growth because of resulting increase in wages.
In economics, real wages are mostly analyzed to see whether wages are adequate to offset the effects of inflation on living standards. Labour disputes arise primarily due to inflation higher than increase in wages.
* Wage Indices
Like consumer price indices, wage indices are used to show the movements of wages combined for various categories of employees as it is statistically difficult to compare wages of employee categories separately over the period. In Sri Lanka, a consistent series of wage indices from 1978 is published for central government employees and private sector employees falling under minimum wages of Wages Boards Trades (21).
According to data, monetary/nominal wages have increased between 1978 and 2017 by 84 times for government employees and 41 times for employees in wages boards trades. However, real wages (wages deflated to remove the increase in cost of living or consumer price index) have increased only about 2 times for government employees and one time for wage boards trades employees. Meanwhile, real GDP, i.e., GDP after removing the increase in consumer price index or inflation, has increased by 7 times during this period. This means that the increase in real wages has been relatively far below the increase in the country’s real production/income. Therefore, improvement in living standards of the majority public (paid employees) has been slower.
See table
Policy Priorities
All fiscal, monetary and sectoral economic policies target the promotion of both economic activities employment opportunities in order to raise the growth of production and reduce unemployment. The economic development that does not reduce the unemployment to low levels (natural rates) cannot be considered as a healthy development. The unemployment being generally high among the youth and educated persons could cause unsettled civil conditions. The male-female gap is also a social concern.
In general, economic policies are expected to drive macroeconomic activities that enable people to find regular jobs for improving living standards of their families while minimizing general consumer subsidies. Therefore, authorities must address several fundamental issues to improve human resource/labour management.
* Statistical Problem
What matters for living standards is the availability of regular jobs that enables persons to earn a level of income compatible with average household cost. Therefore, labour force information should cover definitions suitable for domestic requirements in addition to international definitions.
The delay and poor quality of information also are the bottlenecks to monitor the response of the labour market to economic policies. Therefore, certain proxies must be used to assess the movements of employment within short lags, i.e., one month. In the US, non-farm payroll and average hourly wage are used for this purpose. In Sri Lanka, employee-members and wages of employees covered in the Employees’ Provident Funds and Employers’ Trust Fund are good proxies, if member accounts can be maintained without multiple accounts for same employees when they change employment.
* Labour Market Flexibility
Most economists believe that rigid labour laws provide excessive protection to employees outside economic factors and prevent the labour market from adjusting to the performance of the economy and skill development. Therefore, firms/employers tend to have diverse arrangements to hire labour outside labour laws and, as a result, it has been difficult to adopt a formal reporting of employment and wage information. A periodical review of labour laws is necessary to facilitate both new economies and labour market efficiency.
* Globally Competitive Education System
Development of both labour skills and productivity has to come from a globally competitive education system. This will enhance employability of human resource/labour where any excess labour is easily absorbable by global markets. Therefore, education system covering school and technical has to be consistent with skill-needs of the global economy.
* Business Credit Delivery System
Credit is the spine of production and business that generate employment and income for people. Therefore, financial system should be designed to provide a wider set of credit instruments inclusive of venture capital in addition to bank credit that can finance a wider spectrum of business risks for innovation and promotion of business activities. Such a credit system should facilitate mobilization of all resources for economic development and better living standards.
To ensure better economic democracy, policymakers need to announce a time-bound policy framework for the economy to reach full employment for better living standards of population.
(The writer is a recently retired public servant as a Deputy Governor of the CB and a chairman and a member of 6 Public Boards. In his nearly 35 years’ service in the CB, he also served as Director of Bank Supervision, Secretary to the Monetary Board and Senior Deputy Governor and authored 5 economics and financial/banking books published by the CB and more than 50 published articles.)
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