With at least 500 million unemployed or underemployed in Asia, the region’s economies urgently need to put in place growth-oriented policies that generate employment on a massive scale, participants at a seminar heard yesterday.

Children of Anda, Pangasinan in the Philippinnes, whose fathers are beneficiaries of an ADB Fisheries project. Photo by Rita R. Festin

Development and business experts at an ADB seminar on Labor Market Strategies for Inclusive Growth presented different perspectives on what was driving patterns of employment and wage growth in Asian economies and what types of policies were needed.

The seminar is one of several on the challenges facing economic progress in the region, held on the sidelines of ADB’s 39th Annual Meeting of the Board of Governors in Hyderabad this week.

Covering some of the key messages from a new book produced by the ADB, Rana Hasan, an ADB Economist, argued that while economic growth was vital for generating new jobs, the recent experience from the region showed disappointing employment trends and, reflecting weak growth in wages for many, worsening income and expenditure distributions.

Regarding the former, Mr. Hasan pointed out that in the 1990s in many countries in the region, each percentage-point increase in economic growth created fewer jobs than a decade earlier. This phenomenon was also experienced by the very rapidly growing People’s Republic of China (PRC). During the 1980s, a 3% growth rate of output in the PRC was needed to induce a 1% increase in employment. In the 1990s, a growth rate of almost 8% was needed to achieve the same result.

The challenge of generating jobs in many countries is particularly acute in the formal sector where employment entails higher earnings, a degree of job security, and social benefits. The share of formal employment in many Asian countries has declined or stagnated in recent years despite economic growth.

Hasan noted that although in some country contexts, there were specific labor regulations which could constrain employment growth in the formal sector, these regulations were unlikely to be the binding constraint they have been made out to be in many quarters. He also called for more attention to adverse effects that the adoption of new technologies may be having on the demand for labor, especially unskilled labor. He was careful to point out though that he was not recommending that new technologies not be adopted. Instead what was required was to focus on designing and implementing appropriate human capital policies and social protection systems.

While William Lewis, Director Emeritus at the McKinsey Global Institute, agreed that labor regulations were not the constraint they have been made out to be, he did not see a necessary tradeoff between productivity gains derived from new technologies and employment growth. He stated that the historical experience of today’s developed economies showed that productivity and employment could definitely go hand in hand. An increase in informal sector employment was also natural, according to him, as the many workers coming off farms could not be immediately accommodated in the formal sector. The key issue to him was how the productivity of the informal sector would evolve.

On this, Lewis argued that all too often, governments have put too many regulatory barriers on the private sector and to their entry into new fields. These barriers have constrained both the formal sector as well. He gave the experience of the Indian automobile industry which when unshackled from various regulations saw output growth of 280% between 1992-93 and 1999-2000. Productivity increased by 256% over this period while employment grew by 11%. Similar gains could be had in other sectors once the business environment was improved.

Duncan Campbell, Director of the Policy Integration Department, International Labour Office, discussed the role of labor regulations in explaining the recent, adverse trends in labor markets, including weak growth in formal sector employment. Campbell pointed out that countries with diverse labor regulations and institutions were seeing similar patterns in their labor markets. Thus the drivers of labor market outcomes would have to be found elsewhere. He suggested that the improved mobility of capital and intense international competition were putting a lot of pressure on labor markets. Admitting the possibility that the case for more flexible labor regulations was in some specific instances robust, he argued that “the central policy for many countries is to move the societal objective of social protection off of the micro level.” In other words, ways would have to be found to balance firms’ need for flexibility with the need for security among workers through social insurance type mechanisms.

Chris Manning of the Australian National University, examined the links between labor regulations and labor market outcomes in Southeast Asia, with a special focus on the case of Indonesia. He noted that there have been large increases in minimum wages and severance pay and new restrictions on contract work since the economic crisis of 1997-1998. Although conclusive evidence is difficult to obtain, there are good reasons to believe that the new regulations have dampened employment opportunities in a few labor-intensive sectors where output flexibility is a key to success. Examples were the textiles, footwear, and garments industry. Raising employment opportunities required rationalizing the new regulations.

T.C.A. Anant, Director General/Member Secretary of the Indian Council of Social Science Research and Professor of Economics at the Delhi School of Economics, University of Delhi, focused on the design of labor regulations. Drawing upon the Indian experience, he noted that regulations which tried to dictate outcomes were unlikely to be efficient or serve the goal of equity. Outcomes are the result of interactions between firms and workers reacting to the particular economic contexts they found themselves in. Outcomes, such as levels of employment in firms, should not be determined by the state or by regulations. Instead, the state should define and protect specific rights of workers and the processes through which workers and firms could address their differences through regulations.

One area in which much reform was needed, according to Anant, was in collective bargaining. Various aspects of India’s current regulations worked against the development of a healthy system of collective bargaining. Moving away from dictating outcomes to firms, India’s labor regulations should be reformed in the direction of putting in place appropriate processes to ensure meaningful collective bargaining. This would be better for both workers and firms. Anant also noted that: “Labour is both an input into production as well as a constituent of society. Recognizing this dichotomy and its implied tradeoffs is at the heart of successful Governance.”

Labor Markets in Asia: Issues and Perspectives consists of five chapters examining cross-cutting issues and five country studies. It includes in-depth discussions of labor markets across the region; the links between the forces of globalization, technical change, and competition, and their impact on labor markets; and provides a framework intended to guide policy action. Country studies are presented for the PRC, India, Indonesia, Philippines, and Viet Nam. The book was edited by ADB economists Jesus Felipe and Rana Hasan and published by Palgrave Macmillan.