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Asian Economic Review
3rd Quarter 2000
Underemployment in ASEAN countries and future issues
Hiroshi Imai, Senior Economist

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I. Employment situation remains serious

In the four ASEAN nations of Thailand, Malaysia, Indonesia and the Philippines, against a backdrop of economic recovery since early1999, the unemployment rate has continued to fall, and the general opinion of most is that the employment situation, once aggravated by economic crisis, has turned around and begun to improve. However, while the unemployment rate is falling, the underemployment rate is going up and the employment situation is just as serious as ever it was. According to recent employment statistics from these countries, the impact of the economic crisis on employment was relatively light. For example, in Indonesia, where the impact of the economic crisis was most deeply felt, real GDP in 1998 had fallen dramatically by 13.3%, but the increase in the unemployment rate was comparatively slight, from 4.7% to 5.5%.

The unemployment rates in these four ASEAN nations have continued to fall after that. Each quarter, the unemployment statistics published by Thailand, Malaysia and the Philippines, respectively, showed that the unemployment rate in Thailand was down from its peak of 5.3% in May, 1999, to 4.2% in February, 2000, while that of Malaysia was down from 4.5% in March, 1999, to 3.0% in December of that year, and that of the Philippines from 13.3% in April, 1998, to 9.3% in January, 2000.

However, the numbers of underemployed are actually increasing. Immediately after the economic crisis, there was an evident labor surplus, which pushed up the unemployment rate, but many of the unemployed then began to filter into agriculture and the urban informal sector. These laborers are often only able to find work of a few hours per week, and for pitifully low wages, so that, while their actual situation is virtually the same as that of the unemployed, the labor statistics show them as part of the employed labor force. Though the ASEAN nations are on the path to economic recovery, they are suffering from surplus production capacity, and since there is little they can do to increase the numbers of the regularly employed, there seems little doubt that the trend will be for the numbers of underemployed to increase.

While there are only limited statistics that deal directly with the underemployed, the conditions in each country may described as follows.

Firstly, in the Philippines, as of April, 2000, the number of underemployed stood at around 7.11 million, some 25.1% of the total employed workforce. In addition, the number of laborers working fewer than 40 hours per week had reached 9.5 million, 33.7% of the total employed workforce. This figure includes the majority of the underemployed. Further, in Thailand, while there are no statistics that indicate the numbers of underemployed clearly, one characteristic of Thailand's labor statistics is that the proportion of unpaid family workers is very high. As of February, 2000, the number of unpaid family workers was around 5.89 million, or 19.4% of the employed workforce. These may all be regarded as underemployed.

In actual fact, in the early '90s, the increasing numbers of laborers in the tertiary industries (the majority being employed in the urban informal sectors) in these countries, until just before the economic crisis, foretold the rise in the number of underemployed.

II. Problems associated with the increase of the underemployed

The rise in the number of underemployed, in addition to having the same negative impact on the economy as the completely unemployed, actually poses a much greater threat as the numbers of underemployed overtake those of the unemployed. The following three additional problems are associated with the increase in the underemployed.

Firstly, since the economy is not making full and effective use of its labor resources, the actual growth rate falls below the potential growth rate and possible income levels are not achieved. Further, even across industries, the productivity of the underemployed is poor and their wages, as a result, remain at a relatively low level. For example, in Thailand, according to statistics, the average annual wage for August, 1999, across all industries, was 6,700 baht, compared to 3,038 baht in agriculture and 4,824 in construction, both of which industries include many of the underemployed.

Secondly, an increase in the numbers of those living on low wages or in poverty, in urban areas, puts a greater strain on social security and contributes to the deterioration of public order. In the cities, there are no local support communities and the foundations of the lives of the underemployed are really quite vulnerable. If such a situation is left un-addressed, there will inevitably be a deterioration in public order. When the urban informal sector is compared with the agricultural sector, we find that a) it is comparatively easier to find jobs but the competition is fiercer and the wages low, and b) prices of commodities and the cost of living are high. Therefore, many laborers who work in the urban informal sectors find themselves struggling with low wages and high expenses and belonging to a low wage/ impoverished class. Moreover, this class of people is growing in number year by year. Once people's dissatisfaction turns to criticism of the government, it can quickly contribute to increased social unrest.

Thirdly, this set of circumstances brings on a deterioration in the quality of labor resources. Over the long term, a high number of underemployed means that a) more and more workers miss out on the chance to receive training through regular employment, and b) families have less and less to spend on their children's education, leading to an increase in the numbers of uneducated laborers, all of which adversely affects the quality of the workforce and causes foreign investment in the mid to long term to dry up, and hinders attempts to improve the level of industry.

Once laborers become underemployed, since the work itself often does not require a high degree of knowledge or experience, it is very difficult to instill in the workers any desire to improve their skills. Also, since many of the underemployed in the urban areas are living on low wages and/ or in poverty, they have nothing to spare on the education of their children. As a result, many young laborers work for day wages and only lip service is paid to children's education, leading to an increase in the numbers of uneducated children and those who have dropped out at the first levels of schooling.

III. Background to the increase in the numbers of underemployed

The increases in the numbers of underemployed in these four ASEAN nations have their direct causes in the drop in the level of economic activity, resulting from the economic crisis. However, another important factor is the excess labor supply caused by the adoption of foreign capital led and export oriented industrial policies, since the mid '80s. A study of the processes by which this excess labor supply was caused reveals the following three characteristics.

A. Limited employment absorption in the industrialization of 'enclaves'.

The first characteristic is that the employment absorption capacity of the export oriented industrialization process undertaken by foreign owned firms was limited. Serious industrialization of the four ASEAN countries began in the late '80s, with successful efforts to attract foreign owned firms to mainly export oriented industries. Enterprises from the developed nations, principally yen-rich Japan, began to invest in the ASEAN nations with a view to capitalizing on cheaper labor, in order to improve international competitiveness.

This kind of industrialization to attract foreign investment was characterized by the fact that the foreign corporations set up production facilities around which economic zones formed. However, these economic zones tended to be 'enclaves' that formed part of the industrialized nations' production networks, but were really divorced form the economies of the host nations. As a result, there was not the expansion of the employment base in the host nations. In actual fact, this indicates that the manufacturing industries account for a comparatively small proportion of new employment absorption in these countries and that the manufacturing industry actually has limited employment absorption capacity.

Economic 'enclaves' were formed at three levels, inter-industry, intra-industry and intra-corporation.

1. Inter-industry 'enclaves'

Let us take a look at the enclaves that exist among industries. The industrialization programs adopted by these countries in order to attract foreign investment targeted a very limited range of industries, such as food processing, textiles and clothing, rubber products and electrical goods; labor intensive, export oriented industries that would allow the advantage of cheap labor to be utilised to the full.

While the employment absorption of individual companies in these industries was developing, from the perspective of a limited number of foreign enterprises wanting to invest in a limited range of industrial sectors, the employment absorption capacity was not sufficient to meet the needs of a labor market with an expanding workforce.

2. Intra-industry 'enclaves'

There were also enclaves formed within intra-industry pyramids. Foreign firms' investments tended to concentrate on labor intensive assembly work, and there was little active investment in the parts and components and other supporting industries. In other words, investment in the industrial pyramid concentrated in the rather limited field of assembly. As regards the supply of raw and intermediate materials, the materials and supporting industries in the four ASEAN countries had been underdeveloped to start with and there were serious problems with domestically produced products with regard to cost and quality, so that they were forced to rely on imports overall. This meant that the domestic materials and supporting industries did not have the wherewithal for development. Within industries also, assembly operations were transplanted as enclaves, having no relation to other sectors within the host country.

3. Intra-corporation 'enclaves'

Within corporations also, labor intensive operations were shifted to the labor-cheap ASEAN countries. The result was that the workers employed by foreign firms were limited to very simple jobs, creating enclaves of jobs also. These job enclaves lacked opportunity for movement into executive, managerial and technical positions.

B. Large scale drift of labor from agriculture to the urban sectors

The second characteristic is that of the large scale movement of the labor force away from agriculture and toward the urban sectors, with the momentum of the introduction of foreign investment. One of the most influential incentives in this movement has not been the 'attracting power' of the cities as places with increased employment opportunities, but rather the 'repelling power' of the rural areas with their thoroughly exhausted employment absorption capacity. Behind the depleted employment absorption capacity of the agricultural sector lie factors such as the long term stagnation of prices for primary commodities since the early '80s, and sluggish agricultural productivity.

In the four ASEAN countries, there have always been seasonal drifts of the labor force into the cities during slack periods. From the mid '80s onward, these seasonal drifts gradually became a normality, regardless of the time of year. Originally, these workforce drifts responded to increased employment opportunities in the cities, brought about by industrialization. However, in addition to dissatisfaction with the low wages afforded by agricultural work, many were attracted by the urban lifestyle, and the depopulation of rural areas began to accelerate. The numbers of laborers flooding into the cities far outstripped available employment opportunities and large numbers of laborers went into the urban informal sectors.

Very few of the laborers who migrated to the cities were able to move into regular employment through temporary work in manufacturing industries, or other areas. For practically all of them, the urban informal sectors became their source of work. According to an ILO survey, for instance, in 1971, some 61.4% of the laborers working in the urban service sectors were working in the informal sectors.

C. Asymmetrical labor supply and demand

As for the third characteristic, a relative comparison of the four countries shows that the larger the population, the greater the pressure of underemployment. While there is a strong trend for employment opportunities to be even among the four countries, there is an asymmetry at work in the supply and demand of labor, in that the labor supply is proportionate to the size of the potential unemployed labor force in the rural areas.

Part of the reason for the even spread of employment opportunities is that there was no great difference in the business results of foreign investment. In order to attract foreign capital, the export oriented industrialization adopted by each country featured policies based on two main points, (1) the provision of industrial zones with sufficient industrial infrastructure, and (2) the granting of preferential treatment to foreign investment. However, since there were no appreciable differences among the countries, they were not able to stand out among each other. The aggregate value of direct foreign investment in 1994 was 23 billion dollars for Indonesia, 12.3 billion dollars for Thailand, 11.7 billion dollars for Malaysia and 6.4 billion dollars for the Philippines. If we take into account the fact that the investment into Indonesia also includes much that was resource related, and the fact that investment into the Philippines had suffered as a result of the uncertainty during the time of the transition from the Marcos regime to the new Aquino government, we can see that there is really little significant difference in the levels of investment in each country, with the result that employment opportunities tended to be spread more or less evenly.

Also, when the situation is viewed from the perspective of labor supply, countries with large populations, such as Indonesia and the Philippines, have large rural areas that supply labor and also represent large potential for unemployment. As a result, the labor supply capacities of the four countries is almost proportional to the number of potential unemployed moving out of the rural areas, and the larger the population of the country, the greater number of underemployed.

IV. Efforts toward reducing the numbers of underemployed

As we have seen from the foregoing, if nothing is done about the problem of the increase in the number of underemployed, it will become a hindrance to the mid to long term development of these four ASEAN nations. For the governments of these countries, it has become of the utmost importance that they (1) provide vocational training for the underemployed, particularly those in the urban informal sectors, (2) lighten the burden of education costs for children from poor families and (3) foster local capital and attract overseas investment to receive laborers in the future.

A. Improving the quality of informal sector workers

It is clear that the improvement of the job finding skills of those workers who belong to the urban informal sectors is a top priority. The governments of these countries have attempted to address the issue by establishing and running vocational training centers or technical training centers, but sufficient results have not yet been achieved. As a background to this situation, there is a vicious cycle at work, wherein (1) the skills demanded of laborers in regular employment in most ordinary companies is far above that of the workers in the informal sectors, so that there is very little probability that a little vocational training is going to raise these workers' skill levels to those required by general industry, and (2) as workers who have received vocational training find no opportunity to put it to use and end up staying in the informal sectors, the effectiveness of such training is gradually eroded.

In order to break this vicious cycle, the conventional ideas should be left behind and a new system constructed that brings training and employment together, with government support. However, as long as general companies cannot be expected to hire workers who hail from the informal sectors, the governments will need to make jobs ready. One shortcut would be for the governments to organize the informal sectors into industry classifications such as distribution, catering, services, etc., in other words, to formalize the informal sectors. Then, by providing workers with a minimum level of occupational training, there is every possibility that a positive cycle of employment and improved worker skill level would begin. Certainly, the formalization of the informal sectors would be costly and require a great deal of effort, but since these countries are already at a loss as to how to improve the underemployment situation, such a radical solution surely deserves consideration.

B. Reducing the burden of children's education in poorer families

In the urban informal sector, the increasing numbers of uneducated children and those dropping out of formal education at lower levels is dragging down the skill level of the potential workforce. The following measures need to be implemented.

Firstly, the cost of children's education needs to be reduced. In urban areas, the scarcity of a stable income coupled with the high cost of living are the major reasons poor families do not have the wherewithal to pay for their children's education. In order to reduce the burden of educational costs directly, the government's share of such costs needs to be increased and the burden on poorer families reduced drastically.

Secondly, there needs to be indirect measures of support for poorer families. In order to secure a stable source of income, those from poorer classes need to be given priority in government public works projects. Then, in order to reduce the cost of living, it is important that a full range of social security measures such as the provision of housing and cost of living subsidies for the poor be implemented.

C. Fostering local capital and attracting overseas investment to accommodate future labor supply

In order to further advance the formalization of the informal sector, and to promote the creation of an environment to accommodate the future labor supply, industrialization needs to be pursued steadily. Specifically, this will involve the provision of export oriented industries and critical industries, with the introduction of foreign capital, as well as supplementing domestic capital and the fostering of small and medium sized enterprises and the further development of the supporting industries. For the foreseeable future, it will be impossible for these countries to accommodate future labor supply by themselves, without the assistance of foreign capital. The crucial question is how to win back foreign investment that has languished since the economic crisis. In addition to the nurturing of export industries, it is now more important than ever before to get serious about the nurturing of the supporting industries and small to medium sized enterprises. The development of the supporting industries will lessen the reliance on imported raw materials and parts and components, and may be expected to widen the employment base, by raising the domestic added value.

The support of foreign capital, in particular that of Japanese manufacturers, will be of help in building up the manufacturing sector in this way. Increased Japanese investment and technical collaboration in the four ASEAN countries will help to develop human resources and promote employment, as well as supporting local industrial development and technical transfer. And this is not a one-sided advantage; there are sizeable benefits also for the Japanese companies. In Japan, Japanese companies are faced with (1) rising personnel and land costs, (2) labor shortages and (3) the virtually structural aversion on the part of the younger labor force to so-called (in Japanese) '3K' jobs, those which are 'dirty, dangerous and demanding'. With the exception of certain high added-value industries, the shift of manufacturing industries overseas has become an almost inevitable fact of life.

Improving the skills of the labor force in the informal sector, easing the burden of education for the children of poorer families, and building the foundations of employment for the future workforce are all indispensable parts of the strategy to reduce the numbers of underemployed and work for continued economic growth. The lack of any one of these elements would undermine the effectiveness of the others and it is necessary that these three policies be pursued in a balanced fashion.