Unemployment in Asia (Routledgecurzon Studies in the Growth Economies of Asia)

Unemployment in Asia

The rate of economic change in East Asia over the past two decades has been astounding. High levels of growth have been experienced by a number of the region’s developing economies, centralized systems have developed large market sectors, Japan has suffered a prolonged downturn and the 1997 crisis plunged the region into economic turmoil. This edited volume is the first work to comprehensively examine the effects of these changes on employment in the region. Chapters are devoted to market restructuring in China and Vietnam, the Asian Crisis and recovery and Japan’s business doldrums. The unique case of Malaysia – one regional economy that needs to import workers – is also brought into play, as is the example of high-tech Taiwan. Underpinning these case studies is a common theoretical framework and a strong structure for understanding. With its solid research and focus on a relatively unexplored aspect of one of the world’s most dynamic economic regions, Unemployment in Asia will interest students, academics, trade unionists, research bodies, government departments and international organizations. John Benson is a Reader in the Department of Management, University of Melbourne. Ying Zhu teaches international human resource management at the Department of Management, University of Melbourne.

Routledge Studies in the Growth Economies of Asia

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Studies in the Economic History of the Pacific Rim Edited by Sally M. Miller, A. J. H. Latham and Dennis O. Flynn

Financial Reform in China Edited by On Kit Tam

11

Women and Industrialization in Asia Edited by Susan Horton

Workers and the State in New Order Indonesia Vedi R. Hadiz

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Japan’s Trade Policy Action or reaction? Yumiko Mikanagi

The Japanese Foreign Exchange Market Beate Reszat

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Exchange Rate Policies in Emerging Asian Countries Edited by Stefan Collignon, Jean Pisani-Ferry and Yung Chul Park

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Chinese Firms and Technology in the Reform Era Yizheng Shi

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Japanese Views on Economic Development Diverse paths to the market Kenichi Ohno and Izumi Ohno

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Technological Capabilities and Export Success in Asia Edited by Dieter Ernst, Tom Ganiatsos and Lynn Mytelka Trade and Investment in China The European experience Edited by Roger Strange, Jim Slater and Limin Wang

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The Changing Capital Markets of East Asia Edited by Ky Cao

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The Japanese Election System Three analytical perspectives Junichiro Wada

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The Economics of the Latecomers Catching-up, technology transfer and institutions in Germany, Japan and South Korea Jang-Sup Shin

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Industrialization in Malaysia Import substitution and infant industry performance Rokiah Alavi

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Economic Development in Twentieth Century East Asia The international context Edited by Aiko Ikeo

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The Politics of Economic Development in Indonesia Contending perspectives Edited by Ian Chalmers and Vedi Hadiz

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Technology and Innovation in Japan Policy and management for the twenty-first century Edited by Martin Hemmert and Christian Oberländer Trade Policy Issues in Asian Development Prema-chandra Athukorala

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Japanese Economics and Economists since 1945 Edited by Aiko Ikeo

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China’s Entry into the World Trade Organisation Edited by Peter Drysdale and Ligang Song

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Hong Kong as an International Financial Centre Emergence and development 1945–1965 Catherine R. Schenk

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Impediments to Trade in Services: Measurement and Policy Implication Edited by Christoper Findlay and Tony Warren

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Economic Integration in the Asia Pacific Region Ippei Yamazawa

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Japan’s War Economy Edited by Erich Pauer

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Industrial Technology Development in Malaysia Industry and firm studies Edited by K. S. Jomo, Greg Felker and Rajah Rasiah

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Technology, Competitiveness and the State Malaysia’s industrial technology policies Edited by K. S. Jomo and Greg Felker

The Japanese Industrial Economy Late development and cultural causation Ian Inkster

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China and the Long March to Global Trade The accession of China to the World Trade Organization Edited by Alan S. Alexandroff, Sylvia Ostry and Rafael Gomez

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Capitalist Development and Economism in East Asia The rise of Hong Kong, Singapore, Taiwan, and South Korea Kui-Wai Li

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Corporatism and Korean Capitalism Edited by Dennis L. McNamara

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Japanese Science Samuel Coleman

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Capital and Labour in Japan The functions of two factor markers Toshiaki Tachibanaki and Atsuhiro Taki

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Asia Pacific Dynamism 1550–2000 Edited by A. J. H. Latham and Heita Kawakatsu

Women and Work in Globalizing Asia Edited by Dong-Sook S. Gills and Nicola Piper

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Financial Markets and Policies in East Asia Gordon de Brouwer

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Developmentalism and Dependency in Southeast Asia The case of the automotive industry Jason P. Abbott

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The Political Economy of Development and Environment in Korea Jae-Yong Chung and Richard J. Kirkby

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Law and Labour Market Regulation in East Asia Edited by Sean Cooney, Tim Lindsey, Richard Mitchell and Ying Zhu

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The Korean Economy at the Crossroads Edited by Moon Joong Icha and Chung-Sok Suh

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The Economy of the Philippines Elites, inequalities and economic restructuring Peter Krinks

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Ethnic Business Chinese capitalism in Southeast Asia Edited by K. S. Jomo and Brian C. Folk

51 41

China’s Third Economic Transformation The rise of the private economy Edited by Ross Garnaut and Ligang Song

Exchange Rate Regimes in East Asia Edited by Gordon De Brouwer and Masahiro Kawai

52 42

The Vietnamese Economy Awakening the dormant dragon Edited by Binh Tran-Nam and Chi Do Pham

Financial Governance in East Asia Policy dialogue, surveillance and cooperation Edited by Gordon De Brouwer and Yunjong Wang

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Restructuring Korea Inc. Jang-Sup Shin and Ha-Joon Chang

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Designing Financial Systems in East Asia and Japan Edited by Joseph P. H. Fan, Masaharu Hanazaki and Juro Teranishi

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State Competence and Economic Growth in Japan Yoshiro Miwa

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Understanding Japanese Saving Does population aging matter? Robert Dekle

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The Rise and Fall of the East Asian Growth System, 1951–2000 International competitiveness and rapid economic growth Xiaoming Huang

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Service Industries and Asia-Pacific Cities New development trajectories Edited by P. W. Daniels, K. C. Ho and T. A. Hutton

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Unemployment in Asia Edited by John Benson and Ying Zhu

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Development and Structural Change in the Asia-Pacific Globalising miracles of end of a model? Edited by Martin Andersson and Christer Gunnarsson State Collaboration and Development Strategies in China The case of the China-Singapore Suzhou Industrial Park (1992–2002) Alexius Pereira

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Capital and Knowledge in Asia Changing power relations Edited by Heidi Dahles and Otto van den Muijzenberg

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Southeast Asian Paper Tigers? From miracle to debacle and beyond Edited by K. S. Jomo

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Manufacturing Competitiveness in Asia How internationally competitive national firms and industries developed in East Asia Edited by K. S. Jomo

Unemployment in Asia

Edited by John Benson and Ying Zhu

First published 2005 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” © 2005 selection and editorial matter, John Benson and Ying Zhu; individual chapters, the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-415-34318-6 (Print Edition)

ISBN 0-203-48293-X Master e-book ISBN

Contents

Tables and figures Contributors Preface 1 Unemployment in Asia: influences and issues

ix xi xiv 1

JOHN BENSON AND YING ZHU

2 Globalisation and unemployment: East Asia and the OECD

11

MICHAEL WEBBER

3 Unemployment in Japan: globalisation, restructuring and social change

39

JOHN BENSON

4 Unemployment and labour markets in South Korea: globalisation, social impacts and policy responses

58

CHRIS ROWLEY, KIL-SANG YOO AND DONG-HEON KIM

5 Unemployment in Taiwan: globalisation, regional integration and social change

79

YING ZHU

6 Unemployment in the People’s Republic of China

97

GRACE LEE AND MALCOLM WARNER

7 The impact of economic reforms on unemployment in Indonesia

115

POPPY ISMALINA AND SARI SITALAKSMI

8 Malaysia: unemployment in the midst of full employment RAGAYAH HAJI MAT ZIN AND WENDY SMITH

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Contents

9 Unemployment in Thailand: social issues, challenges and opportunities

159

VIMOLWAN YUKONGDI

10 Economic reform and unemployment in Vietnam

176

NGAN COLLINS

11 Unemployment in Asia: implications of globalisation, regional integration, and social and economic transformation

194

YING ZHU AND JOHN BENSON

Index

205

Tables and figures

Tables 1.1 1.2 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2 4.3 4.4 4.5 4.6 4.7 5.1 5.2 5.3 5.4 5.5 5.6 5.7

6.1 6.2

Breakdown of employment in case study economies, 2002 3 Real GDP growth and unemployment in case study economies, 2002–2003 4 Changes in Japanese employment by industrial sector, 1991–2002 41 Real GDP growth, industrial output and unemployment, Japan, 1980–2003 42 Labour strategies: decreased demand for major product 48 Determinants of employment reduction (regular employees) when product demand has decreased (probit analysis) 49 Labour strategies: increased demand for major product 49 Determinants of employment expansion (regular employees) when product demand has increased (probit analysis) 50 Real GDP growth, industrial output and unemployment, 1980–2003 60 Major employment indicators, aged 15 and over 61 Employment by status 63 Unemployment by gender, age and educational attainment 64 Nominal and real wage growth, 1991–2001 65 Urban family income inequality, 1990–2003 67 UB recipiency rate, 1997–2002 68 Real GDP growth, industrial output and unemployment between 1989 and 2003 81 Employment by sector 82 Unemployment rate by age and gender 84 Unemployment by educational attainment 85 The demand for labour force in the labour market, February 2003 86 Unemployment by reasons (2003) 87 The trend of changing employment among low skilled labour force due to industrial restructuring and technology improvement between 1981 and 2000 92 Gross industrial output value in China, 1980–2002 98 Employment by sector 100

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Tables and figures 6.3 6.4 7.1 7.2 8.1 8.2 8.3

8.4 8.5 8.6 8.7 9.1 9.2 9.3 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8

Gross domestic product (GDP) and GDP growth in China, 1980–2002 Institutional changes in Chinese labour market GDP shares by sector at current prices Sectoral distribution of the workforce, 1986–1999 Retrenchment of workers according to sector, 1996–1998 Percentage distribution of inter- and intra-state migrants by migration direction, 1986–2001 Growth rate of the GDP, population, employment and labour, 1980–2003 Educational attainment of the labour force Output of skilled and semi-skilled workers by course, 1980–2005 Educational attainment and gender of the unemployed Distribution of legal foreign workers by industrial group, March 1998 Structure of output as percentage of GDP Growth of GDP Unemployment rate GDP growth, industrial output and unemployment in Vietnam since 1986 FDI status in period 1996–2002 Workers employed by DPEs from 1996 to 2000 The number of workers in reorganised SOEs from 2000 to 2002 Unemployment rates, 1993 and 1998 Unemployment rate of labour force by working ages in urban areas Unemployment rates, 1997–2002 Rate of used working time of labour in rural areas

105 106 118 125 136 138 142 143 144 146 149 161 162 164 177 178 180 181 184 185 185 185

Figures 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 4.1 4.2 6.1 7.1 7.2

Average rates of real GDP growth, East Asian sample of countries, 1990–2001 Rates of growth of population and labour force, OECD countries, 1990–2001 Age distribution of the population, OECD countries, 2001 Average annual rate of GDP growth, OECD countries, 1990–2000 Rate of growth of productivity, OECD countries, 1990–2001 Rate of growth of employment, OECD countries, 1990–2001 Regional patterns of unemployment, OECD countries, 1990–2001 Unemployment rates in groups of OECD countries, 1990–2001 Female labour force participation rate by age, 1999 Female labour force participation rate (college and over) by age, 2001 Chinese labour market model GDP annual growth Unemployment rate

13 16 18 20 21 22 23 24 72 72 111 117 118

Contributors

John Benson is a Reader in the Department of Management, University of Melbourne. From 1994 to 1997 he was Professor of Economics and Management at Hiroshima City University, Japan. His major research interests are Japanese management and unions, the restructuring of Chinese industry, outsourcing and knowledge work. John has recently completed with Chris Rowley (City University, London) an edited volume titled Changes and Continuities in Asian Human Resource Management: Convergence Revisited (Frank Cass, London, 2004). Ngan Collins is a PhD Candidate in International Human Resource Management, Management Department, University of Melbourne. Her major area of research is the transformation of human resource management in transitional economies. Poppy Ismalina is a staff member of the Department of Economics and Development Studies and the Coordinator of the Executive Development Programme (EDP) at Gadjah Mada University, Indonesia. She holds a Master degree from the National Centre for Development Studies at the Australian National University. Her specializations are development economics, macroeconomics, labours and industrial relations, and environmental economics. Dong-Heon Kim is Professor of Economics at Dongguk University at Gyeongju, Korea. Prior to this appointment he served as a Research Fellow at the Korea Labour Institute. In 1999 he was a member of the Task Force on Unemployment Policy Planning and Evaluation, Office for Government Policy Coordination, and has participated in the design of the medium-term unemployment policy in Korea. His main research areas are employment policy, employment relations and social security system. Special interests in recent years have been comparative social policy, with a focus on North America. Grace Lee is Associate Professor of Public and Social Administration at the City University of Hong Kong. Her research interests include labour markets, employment policy and executive government. Ragayah Haji Mat Zin is Professor of Development Economics and Director

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Contributors of the Institute of Malaysian and International Studies at the Universiti Kebangsaan, Malaysia. She is also Director of the Malaysian APEC Study Centre and Malaysian Country Coordinator for the East Asian Development Network. She has published on income distribution, poverty and social safety nets, as well as on industry, employment and trade-related areas. Her current research focuses on employment and unemployment, high-tech industrialization as well as urban poverty and social safety nets in Malaysia.

Chris Rowley is Reader in Human Resource Management and Employee Relations at Cass Business School, City University, London. He has published widely on Asia and in particular on Korean human resource management. Chris co-edited Globalization and Labour in the Asia Pacific Region (2001), Managing Korean Business (2002) and The Management of Human Resources in the Asia Pacific Region (2003). He also wrote The Management of People: HRM in Context (2003). He was an ESRC AIM International Study Fellow in 2004. Sari Sitalaksmi is a staff member of the Faculty of Economics, Gadjah Mada University, Indonesia. She is currently pursuing her doctoral degree in management at The University of Melbourne, Australia. Her dissertation topic is the transformation of Indonesian State-owned Enterprises. Her research interests include human resource management, organizational behaviour and strategic management. Wendy Smith is Director of the Centre for Malaysian Studies, Monash Asia Institute and a Senior Lecturer in the Department of Management, Monash University. An anthropologist by training, she has lived and researched in Malaysia for over ten years and has published on management in Malaysia, Malaysian business, Japanese management transfer, Islamic work ethics and globalized Japanese new religions. Her current research focuses on social protection in Malaysia and Malaysian women managers. Malcolm Warner is Professor and Fellow, Wolfson College and Judge Institute of Management, University of Cambridge. He is the Editor-in-Chief of the International Encyclopedia of Business and Management, the author of a number of books on Asian management, and co-editor of Asia Pacific Business Review. Michael Webber is Professor of International Development at Melbourne University Private. A geographer who has worked at universities in Canada, the UK and USA as well as Australia, Michael’s long run research interests have involved the relationship between economic change and the working lives of people. He has pursued this interest through research on regional change in Canada, industrial restructuring in Australia and rural development in China. He has written ten books and about a hundred journal articles. Kil-Sang Yoo is a Senior Fellow of the Korea Labor Institute and Chief Vice Chair of the Korean Social Security Association. He served as Director General of the Employment Research Center, Director General of the Labor Market Policy Evaluation Center, and Director of the Research Planning and Coordination

Contributors

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Division at the Korea Labor Institute. He has served as a Vice Chair of the Korean Labor Economics Association and as an Assistant Director of the Economic Planning Board of the Korean government. Vimolwan Yukongdi is a Lecturer in Human Resource Management in the Department of Management at the University of Melbourne. Vimolwan has worked in the oil and consultancy industries and has held previous academic appointments in Thailand, New Zealand and Australia. Vimolwan has conducted cross-national studies examining employee participation in decisionmaking in Australia and Thailand. Her current research focuses on the role of women in management in Asia, unemployment in Thailand, and HR practices and organizational performance. Ying Zhu is a Senior Lecturer in the Department of Management, University of Melbourne. His research focuses predominantly on East Asian economies, including China, Japan, Taiwan and Vietnam. His publications include books, book chapters and journal articles on human resource management, employment relations, labour law and labour market regulation, and economic development in East Asia.

Preface

Much has taken place in East Asia over the past two decades. High levels of economic growth has been experienced by a number of developing economies, centralized command economies have developed market-based business systems, Japan has suffered a prolonged period of economic downturn, and a financial crisis affected a number of East Asian economies in 1997 and subsequent years. These events have taken place in, and indeed illustrated, the increasing globalized world in which we live. As a consequence much of what we know about these economies may well be out of date. This was particularly the case with issues surrounding employment and unemployment. This book we hope will fill this gap and provide the reader with a clearer understanding of the unemployment situation in East Asia. We have focused on a range of economies that provide a mix of industrialized and industrializing economies. The choice of economies to be included is always a difficult decision in an edited volume such as this. Our decision was based on providing a variety of contexts which represented the issues referred to above. China and Vietnam were obvious choices given their market-based economic restructuring. Korea, Thailand and Indonesia were most affected by the Asian Crisis, although their recoveries took different trajectories. Japan’s transition to a low-growth economy after four decades of substantial growth presented a new context for Japanese business. Malaysia has for many decades experienced labour shortages, and this coupled with the high number of immigrant workers made their experiences with unemployment unique. The final case study was Taiwan, an advanced industrialized economy that with the opening up of China saw high levels of FDI and the relocation of much of its manufacturing activities to China. Underpinning the eight case studies were two key objectives. First, we wanted to provide the reader with an update on unemployment in each of the economies and for this reason we have included a range of statistics and references that provide a broad, but detailed coverage of unemployment. Second, we wanted the individual case studies to utilize a common theoretical framework and structure. While we wished to encourage wide-ranging discussion on this important area we also recognized the need for each author to address the fundamental themes underpinning unemployment in East Asia. The framework is included as Chapter 2 and provides a structure that allows for the nature, causes and impacts of

Preface

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unemployment to be explored. As part of this, comparisons with OECD countries can be drawn. The adoption of this framework for each individual case study has meant that the book explores the central issues concerning unemployment and is able to provide a basis to integrate the findings of each case study. These are presented in the concluding chapter. The contributing authors in this volume are all specialists in the economies they examine. They have access to both the English and domestic literature, statistics and government reports. We would like to thank them for their dedication and their contributions to the workshop that was held at the University of Melbourne in 2003. This workshop and the overall project were funded by the Centre for Human Resource Management at the University of Melbourne for which we are extremely grateful. Finally, we are grateful for the support we have received from Routledge and their willingness to publish on this important issue. We hope that this volume will create further interest in employment and unemployment in East Asia. If it does our objective will have been achieved. John Benson and Ying Zhu September 2004

1

Unemployment in Asia Influences and issues John Benson and Ying Zhu

Introduction and key questions The last two decades have witnessed major economic restructuring in China, Taiwan and Vietnam, a prolonged recession in Japan, and the Asian Crisis that particularly affected Thailand, South Korea, Indonesia and Malaysia. These events have all taken place within an increasingly globalised world and have had a significant impact on business activities in these economies, which in turn have impacted on employment. Yet, while much attention has been focused on the restructuring and development of these economies1 (World Bank 1993; Leipziger 1997; McLeod and Garnaut 1998) and the accompanying changes in business structures, management practices and global competitiveness, surprising little attention has been placed on how such transitions have impacted on employment opportunities and unemployment. Taken collectively unemployment represents a severe loss of skills and productive capacity from society (Sinclair 1987; Kuruvilla 1995). Governments respond to the pressures created by unemployment by instituting short-term training programmes, income support mechanisms, and a range of job creation activities. Unemployment thus becomes a part of an overall strategy of economic management. For most people, however, employment represents a central concern and a key feature of their lives (Bakke 1940; Bradbury 1993). A major reason for this is that the income from employment supports individuals and families and allows people the opportunity to function effectively, to a more or less degree, in society. Being unemployed means that individuals and families face uncertain futures and that many opportunities to participate in society are denied (Bakke 1940; Fineman 1987). Being unemployed may well be seen by large numbers in the community as an individual problem. Yet, increasingly, behind these individual and collective views is the realisation that employment, and hence unemployment, is not equally distributed throughout society but discriminates on the basis of age, gender, education, and status (Fineman 1987; Eatwell 1996; Jackman 1997; Mugtada and Basu 1997). The pace of change in Asia and the absence of current research have meant that much of what has been written on employment and unemployment over the past two decades no longer applies.2 Moreover, the recent transitions of China

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John Benson and Ying Zhu

and Vietnam to market-based economies means that unemployment, in these cases, is a relatively new concept and problem. It is thus timely to revisit the issue of employment and unemployment in Asia, and in particular, in the fast growing economies of East Asia. Given the complexities involved in any discussion of unemployment, the differing stages of economic development, and the various policy positions of the countries of this region, it was deemed that the best way of examining unemployment would be by undertaking case studies of a number of East Asian economies. This volume represents the outcome of these case studies and addresses three questions. First, how have the transitions of the past two decades impacted on the levels of employment and unemployment? Second, what are the likely prospects for unemployment and what are the key factors that will impinge on these trends? Third, are these trends and factors similar to what is happening elsewhere (for example in non-Asian OECD countries) or are they unique? By addressing these questions this volume will provide details on the dynamics of unemployment from a macro-economic perspective, an assessment of how governments have responded to unemployment and, a consideration of how unemployment is affecting workers, families and societies. As a consequence, by studying unemployment we can learn much about the economic and political strategies adopted by governments as well as improve our understanding of the impacts of globalisation, economy-wide and company-level restructuring, internal migration, the changes and development of labour markets, and the impact of law and labour regulation. While general lessons can be learnt from the experiences of individual economies it must be remembered that each economy represents a unique set of attributes.

Structure and framework In attempting to assess the impacts of economic, political and social factors on unemployment it is necessary to take into consideration the different stages of economic development of the economies represented in this volume. One way to do this is to examine the distribution of employment between the agricultural, industrial and service sectors. Where there is significant employment in agriculture this can be taken as a proxy for lower levels of industrialisation and development. The distribution of employment for the three sectors, in each of the economies considered in this volume, is presented in Table 1.1. From these statistics the economies represented in this volume can be divided into two groups. The first group includes the developed economies of Japan, South Korea and Taiwan. In these economies there has been a shift way from agriculture and a move to more urban living and work. Clear sets of institutions and regulations have been developed to guide employment and regulate labour markets, and a degree of protection and support for workers exists. The second group are the developing and more agrarian-oriented economies of China, Indonesia, Malaysia, Thailand and Vietnam. In these economies much of the population resides in rural areas, although increasing migration to cities is occurring. Labour

Unemployment: influences and issues

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Table 1.1 Breakdown of employment in case study economies, 2002 Employment (%) Economy

Agriculture

Industry

Services

Japan South Korea Taiwan China Indonesia Malaysia Thailand Vietnam

1.4 4.4 2.0 15.2 17.0 12.0 11.0 24.0

30.9 41.6 31.0 51.2 41.0 40.0 40.0 37.0

67.7 54.0 67.0 33.6 42.0 48.0 49.0 39.0

Source: globalEDGE, Michigan State University. (http://globaledge.msu.edu/ibrd/CountryStats. asp). Accessed 13 July 2004.

market institutions and regulations are poorly developed and often little support is provided to unemployed workers. Such a breakdown is essential to understand the dynamics and ‘uniqueness’ of unemployment in each economy. In particular, it will help to analyse the differing impacts of globalisation and regional economic integration on unemployment, the unique labour markets that exist in each economy, and the possible approaches and policies adopted to combat unemployment. This division will also help to identify the similarities and differences between these East Asian economies and the OECD countries referred to in Chapter 2. The current economic health of the eight case study economies varies significant and cuts across the developed/developing division. An examination of the situation of these economies in 2002/2003 illustrates this point. South Korea, China, Taiwan and Vietnam had economic growth exceeding 6 per cent in this period, and with the exception of Vietnam all experienced relatively low levels of unemployment. On the other hand, Japan, Taiwan and Indonesia all experienced modest economic growth and had higher than average unemployment rates. Details are provided in Table 1.2. Yet it cannot be assumed that a clear relationship exists between high growth and low unemployment. Intervening in this relationship are the sectoral shifts taking place in employment as economies move from an agricultural base to a more industrial and service structure. The economies represented in this volume are typical of those that have undertaken economic restructuring, or have been affected by wider economic events. They all have a unique set of conditions underpinning employment and have addressed the social and economic impacts of unemployment in a variety of ways. These differences call for the adoption of a more holistic and multidisciplinary approach to the study of employment and unemployment. While economic factors will undoubtedly be important, an understanding of political factors, the particular social and cultural attributes, and the institutions and legal

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Table 1.2 Real GDP growth and unemployment in case study economies, 2002–2003 Economy

Real GDP growth

Unemployment

Japan South Korea Taiwan China Indonesia Malaysia Thailand Vietnam

2.7 6.3* 3.2 8.0* 4.1 4.5 6.3 7.2

5.3 3.4 5.1 4.0* 9.5 3.5 1.5 5.8

Source: Case study chapters 3 to 10. Note: * 2002 data; all other data relates to 2003.

framework of each economy will be essential if the key questions outlined earlier are to be answered. The structure adopted for each case study consisted of six sections. Each chapter commences with a brief introduction and background information for the particular economy. This is then followed by a more detailed discussion on the key contextual factors and influences. These include external influences such as globalisation, regional integration and the Asian Crisis, as well as internal influences such as economic restructuring, political, and social factors, population shifts and demographics, and the development and regulation of key institutions. The third section explores the relationships between society and unemployment focusing on factors that affect labour supply and demand, and the social impact of these factors. This is then followed by a consideration of labour markets, and the implementation of policies, such as social security, income support and job creation, to protect those who become unemployed. The fifth section of each chapter attempts to establish trends in unemployment and to make some predictions concerning future unemployment prospects. The final section of each chapter considers the key policy issues as well as how their findings contribute to a fuller understanding of unemployment. The complexity of the issues surrounding employment and unemployment in the context of economic restructuring and globalisation called for a more general chapter canvassing the key conceptual issues. Chapter 2 therefore provides the foundations for the case study chapters by considering a variety of issues necessary for a more complete understanding of unemployment in East Asia. The chapter commences by considering ‘how globalisation as a process of homogenisation and differentiation might intersect with processes of regionalisation’. This goes to the core objective of this book in attempting to compare and contrast the various approaches to unemployment in the selected economies. In short, as Webber points out, this will allow the research to ascertain whether unemployment in this region has the same attributes and whether such attributes are similar to the characteristics of unemployment elsewhere, such as in OECD countries.

Unemployment: influences and issues

5

This chapter then considers how unemployment is measured, pointing out the difficulties of this task, especially where differences in population growth, labour force participation, gross domestic product (GDP) growth, and productivity changes exist. This is made more complex by the differences in the social definitions of work and the divisions between formal and informal work. Where differences in unemployment exist, the issue of causes and policies becomes central to any discussion. This, in turn, leads on to a discussion of the effects and costs of unemployment. This framework of measurement, causes, remedies, effects and costs, leads Webber to suggest eight questions that underpins the general discussion in each chapter. The answers to these questions we hope will not only allow for the central themes of this volume to be considered but will allow the reader to reach their own conclusions on a range of associated issues.

The case study economies The recent economic histories of the eight case studies followed similar trajectories. The three developed economies all industrialised rapidly from the 1960s, although Japan was a little earlier. High levels of GDP growth were achieved in this time and unemployment was low. The manufacturing sector drove much of this growth and only in the 1990s did this growth falter due in the Asian Crisis in the case of Korea or the rationalisation of production to offshore sites in the case of Taiwan. Japan’s fall was more complex and continued through much of the 1990s and the early part of the twenty-first century. In contrast, the five developing economies have all experienced rapid growth over the past two decades. China and Vietnam undertook major restructuring of state-owned enterprises and moved to a more market-based economy. The Asian Crisis had little impact on these economies. In a similar fashion, Indonesia, Malaysia and Thailand all instituted a series of economic reforms, deregulated their economies and promoted foreign direct investment (FDI) during this period. These economies suffered badly with the onset of the Asian Crisis, although Thailand and Malaysia were to recover more quickly than Indonesia. Steady economic growth is now occurring in these economies. The social, political and institutional contexts of these eight economies did, however, differ and it is these aspects that will now be considered. Japan represents the most developed and economically successful of the case study economies, experiencing four decades of significant economic growth from the early 1950s. In the 1990s this pattern came to an end with the collapse of the ‘bubble economy’, the emergence of a number of Asian manufacturing competitors and the ‘hollowing out’ of Japanese domestic manufacturing. During this period unemployment more than doubled and was particularly high amongst the young and older workers. The ageing population has highlighted the plight of older unemployed workers who often do not have adequate pension cover and so rely on paid employment. Despite a slight fall in unemployment over the past year, unemployment is expected to continue to rise over the next few years. Much of the unemployment has occurred in the manufacturing sector,

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although these losses were more than accounted for by the rise in employment in the services sector. These service sector jobs were often, however, temporary and part-time. This has, as pointed out by Benson in Chapter 3, led to a rapid increase in non-regular employment in Japan. This means that, to some degree, unemployment is understated as many peripheral workers would prefer to have full-time employment. These workers are often denied training, and with most companies still committed to internal training the unemployed are often trapped into a life of part-time work with little opportunity to retrain and advance into full-time employment. The poorly developed external labour market only serves to consolidate these problems. South Korea represents a similar trajectory to the early post-war development of Japan. South Korea’s early success commenced with the manufacturing sector and the economy increasingly became integrated into world markets. This global integration was to take its toll with the onset of the Asian Crisis. The government was forced to turn to the International Monetary Fund (IMF) for emergency credit which, in turn, imposed significant structural reforms in the financial, corporate and labour sectors. Unlike Japan, however, South Korea recovered quickly and unemployment has fallen significantly, although not quite to pre-Crisis levels. Yet, these macro-statistics conceal important characteristics of the South Korean labour market. Nearly half of all wage and salary earners are either temporary or daily workers, and nearly a third of total employment consists of those who are self-employed. This means that the majority of workers have little job security, poor pension cover, and little chance to gain long-term permanent employment. It also means that the real level of unemployment may be seriously understated. Youth unemployment, since the Crisis, has defied the overall trend and is, according to Rowley, Yoo and Kim in Chapter 4, one of the most serious social issues facing Korean society. The ageing population and the prospects of immigrant labour being brought in to counter the shortage of skills are further issues that will need to be confronted in the future. Taiwan, in a similar fashion to South Korea, commenced its industrial development in the 1960s and enjoyed two decades of high economic growth accompanied by low levels of unemployment. By the late 1980s the growth rate of industrial production had commenced to fall, although much of the excess labour generated was absorbed by the growth in the service sector. Nevertheless, from the mid-1990s unemployment has steadily risen as Taiwanese companies rationalised their domestic production and relocated offshore, particularly to mainland China. Contributing to these problems has been political instability in the relationship between Taiwan and mainland China, as well as uncertainty over a number of major national projects. These problems, Zhu in Chapter 5 argues, have led to business uncertainty and a fall in confidence of foreign investors and local consumers. In addition, Taiwan has, like Japan and South Korea, an ageing population and a mismatch of skills that has led to long-term structural unemployment. This has caused a growing disparity of income and although the government has

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responded with various job creation programmes and changes to social security they appear to have had minimum effects and will need to be revisited in the future. The first of the developing economies to be considered in this volume is China. China represents an economy in transition as it continues with the restructuring of state-owned enterprises (SOEs) and the reform of many of the key state institutions. According to Lee and Warner in Chapter 6, the Asian Crisis had a minimum impact on China, although it did affect rural industries and reduced demand for China’s exports. Overall, China has experienced substantial economic growth since 1980 and the official unemployment figures have remained remarkably low. Yet, the large number of employees retrenched from SOEs and the migration of rural labour would suggest a substantially higher unemployment rate. One of the most serious problems facing China is the large number of unskilled workers unemployed. This is further exacerbated by the limited training opportunities available and the under-developed nature of the external labour market. This has meant that retrenched workers are likely to experience long periods of unemployment on minimum income support. China’s entry into the World Trade Organisation in late 2001 may, in the next few years, lead to further unemployment. A major concern, according to Lee and Warner, is the loss of jobs in agriculture that will result in the migration of a substantial number of unskilled workers to urban areas. This will not only increase unemployment in urban centres but place downward pressure on wages, particularly in labour-intensive industries. Indonesia, like many of the developing economies represented in this volume, experienced rapid economic growth over the past two decades. According to Ismalina and Sitalaksmi, in Chapter 7, a series of economic reforms and deregulation were the major drivers of this growth, although the diversification of the economy was also important. Indonesia, like Korea, was affected significantly by the onset of the Asian Crisis and the economy was plunged into a severe recession. Unlike Korea, however, recovery was to be slow, although by 1999 the economy was expanding again, albeit at levels substantially less than the preceding decade. Nevertheless, unemployment has continued to rise. The increase in unemployment is a result of the political and social instability that followed the Crisis as Indonesia sought to democratise and increase regional autonomy. This situation was further exacerbated by the high levels of youth unemployment, the declining employment in the agricultural sector and the high levels of urban unemployment. This has led to a higher than average employment growth in the informal sector. Jobs in this sector are, however, less secure, often part-time and lower paid. There currently exists little protection for these workers and access to income support is limited. These conditions serve to create an environment where social instability becomes the norm. Malaysia has, from the late 1970s, imported labour from neighbouring countries to meet the demand in certain sectors. As the economy grew over the past two decades foreign labour became more important to sustain this growth. By the

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early 1990s, Ragayah and Smith argue in Chapter 8, Malaysia had reached full employment. The Asian Crisis dampened demand and led to a three-fold increase in retrenchments from the previous year. Yet, many of these retrenched workers were employed in the informal sector or were foreign workers who returned home after losing their jobs. This coupled with the tight labour meant that the Crisis had only a minor effect on unemployment. With the relocation of some labour-intensive industries to China further retrenchments have occurred. Yet, the rapid increase in urbanisation in Malaysia over recent years meant that many of the retrenched workers were former rural workers who then sought temporary work in agriculture or became self-employed. This was necessary for many of these workers as the level of income support and social security is insignificant. As a consequence these retrenchments had a minimal impact on the official unemployment figures which remain low compared to other economies in this volume. In recent years a number of schemes have been introduced to improve the skill base of Malaysian workers as this is seen as important to attract FDI and to reduce the reliance on foreign workers. The high level of economic growth over the past two decades has transformed Thailand from an agrarian economy into an export-oriented developing nation. The demand for urban labour exceeded supply and this, according to Yukongdi in Chapter 9, led to a shortage of skilled labour as the majority of workers are unskilled with only primary level education. The Asian Crisis, which began in Thailand, caused a substantial retraction in the economy, although by 1999 the economy had begun to grow again. Unemployment rates have been relatively low in Thailand over these decades and peaked immediately after the Crisis. Like many of the developing economies represented in this volume a sizeable proportion of the Thai labour force are employed on a part-time or self-employed basis. These workers, along with agricultural labour, are not covered by any unemployment benefits or social security. As a consequence, the official unemployment figures probably significantly understate the real level of unemployment. More emphasis has been placed on training and skill development, and social security coverage has also been recently expanded. These programmes have, at least in part, targeted young and rural workers as these are the groups most affected by unemployment. In Vietnam the reform agenda, known as Doi moi, commenced in the mid1980s and has transformed the economy into a socialist market-driven state in a similar fashion to that of China. As pointed out by Collins in Chapter 10 this transformation has had serious ramifications for workers and led to the emergence of an independent labour market. The reform of the SOEs has led to large numbers of workers being retrenched and unemployment, a previously unknown concept, has emerged as a major economic and social problem. Yet, while FDI has brought considerable job opportunities to Vietnam, it has also changed the nature of the employment system. Job guarantees no longer exist and more qualified and skilled employees are in demand. Moreover, rural migration to the cities, particularly those in the south, has seen downward pressure placed on wages. For those unable to gain employment there is little in the way of

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income support or social security. This has led to a widening income gap between skilled and unskilled workers. While increased emphasis is now being placed on vocational training, this must be placed in the context of an increase in the export of labour and the increasing numbers of self-employed and informal sector workers.

Conclusion The economies represented in this volume have undergone economic restructuring, due to the loss of competitiveness, a wider transformation of the economy brought on by globalisation, closer regional integration, or external factors such as the Asian Crisis. The eight economies are at various stages of economic development. For convenience, Japan, Korea and Taiwan were classified as developed economies while China, Indonesia, Malaysia, Thailand and Vietnam were classified as developing economies. The developing economies have seen rapid economic growth over the past two decades, a major restructuring of their economies with a marked decline in the agricultural labour force, and a subsequent increase in urbanisation. In these economies there remains, or has developed, a significant informal work sector which has absorbed many of those displaced through the restructuring process. This is not, however, only a characteristic of these economies; Korea has nearly half of its labour force located in this sector. Developing economies such as Vietnam and China have fostered the development of an independent external labour market, although this labour market remains underdeveloped. Again, an embryonic external labour market is not restricted to these economies as Japan’s labour market remains firmly tied to the company. The institutionalisation of employment and social security through legislative and other means remains under-developed in many of the developing economies, but exceptions such as Malaysia exist. What is clear, however, is that all economies see unemployment as a major economic and social problem and that governments have a major role in both improving the demand for, and supply of, labour. As a consequence, while we have conveniently split the eight economies in terms of their level of industrial development, the situation is considerably more complex and that each economy must be analysed with these issues in mind. It is these issues that underpin the final contribution to this volume, Chapter 11.

Notes 1 2

The term economy is used so as to avoid debate about the status of Taiwan. An excellent study on employment and unemployment is that by Khan and Mugtada (1997). Most of the data for this volume is, however, limited to the period up to about 1992. As such it does not consider most of the recent events occurring in Southeast Asia such as the Asian Crisis and the rising unemployment in Japan.

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References Bakke, E. (1940) The Unemployed Worker. New Haven CT: Yale University Press. Bradbury, B. (1993) Working Families: Age, Gender and Daily Survival in Industrialising Montreal. Toronto: McClelland & Stewart. Eatwell, J. (ed.) (1996) Global Unemployment: Loss of Jobs in the ’90s. Armonk, NY: M.E. Sharpe. Fineman, S. (ed.) (1987) Unemployment: Personal and Social Consequences. London: Tavistock Publications. Jackman, R. (1997) ‘Unemployment and Wage Inequality in Advanced Industrial (OECD) Countries’, in A. Kahn and M. Mugtada, (eds) Employment Expansion and Macroeconomic Stability Under Increasing Globalization, Basingstoke, UK: Macmillan Press. Kahn, A. and Mugtada, M. (eds) (1997) Employment Expansion and Macroeconomic Stability Under Increasing Globalization. Basingstoke, UK: Macmillan Press. Kuruvilla, S. (1995) ‘Economic Development Strategies, Industrial Relations Policies and Workplace IR/HR Practices in Southeast Asia’, in K. Weaver and L. Turner (eds) The Comparative Political Economy of Industrial Relations, Madison, WI: Industrial Relations Research Association (USA). Leipziger, D. (ed.) (1997) Lessons from East Asia. Ann Arbor: The University of Michigan Press. McLeod, R. and Garnaut, R. (eds) (1998) East Asia Crisis: From Being a Miracle to Needing One? London: Routledge. Mugtada, M. and Basu, P. (1997) ‘Macroeconomic Policies, Growth and Employment Expansion: The Experience of South Asia’, in A. Kahn and M. Mugtada, (eds) Employment Expansion and Macroeconomic Stability Under Increasing Globalization, Basingstoke, UK: Macmillan Press. Sinclair, P. (1987) Unemployment: Economic Theory and Evidence. Oxford: Blackwell. World Bank (1993) The East Asian Miracle: Economic Growth and Public Policy, New York: Oxford University Press.

2

Globalisation and unemployment East Asia and the OECD Michael Webber

Introduction Since at least the second world war, there has been a tendency toward what many commentators have called globalisation. This tendency includes several facets: the integration of production and trade within corporations that operate across national borders (Dicken 2003); increasing flows of capital over boundaries of states (Daly and Logan 1989); increasing salience of a variety of forms of global governance, spanning such diverse arenas as economy, environment, human rights and law (Gill 2003); and a trend to the development of market forms of valuation to replace other ways of organising social life (Hinkson 1996). In effect, globalisation is the tendency for societies in many parts of the world to adopt a common system of valuation: commodities, including labour, are increasingly valued through markets that are themselves becoming more interdependent sectorally and spatially (Webber 2000). This tendency has been uneven in space (it is far less well advanced in Africa than in Europe, for example) and in time. This new characteristic of the world’s societies has been widely debated, for it impinges on many arenas of policy and of daily life.1 It is, however, widely agreed that globalisation – in the sense in which we have used the term – has an ambiguous relationship to homogenisation (see, for example, Martin 1994). On the one hand, the pressures on different states to make policy in the same way are increasing; the pressures to which states must respond are becoming more similar; the societies in different states are becoming more closely linked through trade, finance, and decision-making. It is possible that globalisation, then, implies that different states both exemplify similar social trends and adopt similar policy responses to those trends. In the arena of human resource management, this might mean that labour market trends are becoming more similar in different countries and that labour market policies are likewise becoming more similar. If both of these things happen, then we can say that labour markets in different countries are becoming more integrated. On the other hand, there are forces that resist homogenisation and even promise increasing differentiation. Local cultures and local institutions – local definitions of work and of unemployment, for example – continue to resist global pressures for uniform ways of doing things; local groups (like trade unions and small scale enterprises) persist in seeking bases for difference; and local

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difference can itself become the basis for valuing forms of production that provide employment, such as tourism and niche products. It is thus an open question whether labour markets in different countries are becoming more integrated in this sense: globalisation provides a source of pressures to converge, but there are sources of persistence or even increasing differentiation (compare Massey and Jess 1995). This chapter examines the conceptual foundations for an empirical study of this proposition within the region that is conventionally known as East Asia. The chapter begins by discussing how globalisation as a process of homogenisation and differentiation might intersect with processes of regionalisation. This discussion underpins the method of this book, namely to study whether unemployment in selected East Asian countries shares common attributes and whether those attributes are similar to the characteristics of unemployment elsewhere. (The Organisation for Economic Cooperation and Development – OECD – is taken as the ‘elsewhere’.2) The remaining sections of the chapter introduce the principal lenses through which unemployment has been studied as a social phenomenon: its history and statistical characterisation; its causes and policy responses to it; and its effects. These sections introduce unemployment within the OECD and indicate some of the directions through which subsequent chapters approach unemployment in East Asia.

Globalisation and regionalisation We can examine the question of globalisation as homogenisation or differentiation at a variety of spatial scales, for the social life of people is conducted at a variety of scales (Brenner 2001; Marston and Smith 2001). The body and the household are the most localised of these. We also live our lives in communities – villages, suburbs, and the like. Within countries are also to be found cities and regions, sometimes institutionalised in federal-state arrangements. The state is itself a central scale on which social life is organised. But above the state (and below the global scale), there is a variety of forms of region. Some are institutionalised (the European Community, North American Free Trade Agreement; Association of South East Asian Nations; and the like). Others are not institutionalised – East Asia, for example. These non-institutionalised regions have a variety of sources, including colonial histories, European and American imaginations, teaching arrangements in universities, and even the discursive strategies of map makers (see van Schendel 2002). Such places are regions either because the actors within them behave in common ways – which might reflect common cultures, common views on issues and the like – or because people outside them treat them in the same way – as, perhaps, some financial operators treated East Asia as a region during the Asian Crisis. To some extent, these regions are bound together by material flows – of capital investment, of people, and the like. East Asia, and its subsidiary regions, Southeast Asia and North East Asia, is such a non-institutionalised region. Our question thus essentially means that we focus explicitly on regionalisation processes that operate through the economy and through policy responses to economic conditions.

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East Asia, in the most basic form, is a collection of states linked by location. It comprises a set of countries that can be represented on a common map. As such it includes a complex variety of places, ranging from the very poor (Myanmar) to the very rich (Japan, Brunei), from the ethnically homogeneous to the most ethnically diverse, from those with a long independent history to those with only a recent political identity, from liberal democracies to state totalitarian. One subset of the states within the region has had a common orientation to economic development – the late industrialisers. These states are quite different in location, in levels of development, in political identity, in homogeneity, in government structure. But they have tried to pursue a roughly similar form of development over the recent past. It is this collection of states that we study in this book. However, these late industrialisers are themselves diverse and numerous. We have chosen to focus on some examples of each type of country. Some of the late industrialisers of East Asia are already rich and active members of the clubs of powerful countries: Japan is the principal example of such a country. Others began industrialising later than Japan, but have already attained mythological status in the annals of economic development: these are Korea and Taiwan. Finally, the category includes a set of countries that began to industrialise even later; some of these started from a more or less market-oriented economy (Indonesia, Malaysia and Thailand), others are in transition from a more or less command economy (China and Vietnam). Apart from the island state of Singapore, none of the countries in the region has approached the status of these countries as exemplars of late industrialisation, its successes and its pitfalls; Figure 2.1 illustrates rates of economic growth experienced by these eight countries. Our empirical examples are thus drawn from a set of states that have (or have

Figure 2.1 Average rates of real GDP growth, East Asian sample of countries, 1990–2001. Source: World Bank World Developmental Indicators World Development Report 2000 New York: Oxford University Press; World Bank Data Query, available at http://devdata.worldbank.org/data-query/, accessed on 8 March 2004; Monthly Bulletin of Labor Statistics, Taiwan Area, ROC., May 2003; Monthly Statistics, ROC, February 2004.

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had) similar general orientations to development policy (summarised in the notion of late industrialisation) and have been successful, at least in the terms of that policy. These states could thus be candidates for inclusion in a non-institutionalised region that might be identified if their labour markets are becoming integrated because of forces of globalisation or regionalisation. To become such a region, the states would need (a) to exhibit similar labour market trends and policies and (b) to exhibit different labour market trends and policies from countries that are not in the region. Given what we have stated above, our question can thus be interpreted to mean: has globalisation been associated with the emergence of common labour market trends and policy responses in East Asia? and are those labour market trends and policy responses different from those found in other parts of the world (especially in the OECD)? It is the task of this book to try to answer these important questions and this chapter provides a basis for those answers. It can be argued that countries are not the most appropriate spatial units from which to address these questions. Certainly in the larger countries and the less developed ones, there is a wide variety of conditions internally. Perhaps it is coastal China or even southeastern China that is most appropriately labelled a late industrialiser. Similarly, there are wide variations in working conditions within Malaysia – between, for example, peninsular Malaysia and eastern Malaysia. It is equally true that there are wide variations in working conditions within any single OECD country, much less within the OECD as a whole. At one level, then, this argument simply says that our chosen unit of analysis conceals regional differences; but that is true of any spatial scale. At another level, though, this particular unit of analysis – the state – is an appropriate unit from which to examine interactions between policy formation and the global political economy.

Accounting for unemployment Unemployment is difficult to define and even more difficult to measure. It depends on the social definitions of work as well as on customs that delineate those who have and those who do not have work. The tasks are even more difficult when comparing societies in which formal and informal work comprise vastly different proportions of the total. From the point of view of individuals, work is performed in order to reproduce the household or to secure the means to do so. As the feminists remind us, work occurs in a variety of social settings – on farms, in households, in family and individual businesses, in government departments and enterprises, and in capitalist enterprises. In some of these settings, that work is performed for income – either

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directly through the wage relation (as in a factory) or indirectly through sales of the produce of that work (as on a farm or in a family business). Since subsistence farming is insignificant in the OECD, the exclusion of household work leaves work performed for income, which is called employment. (The meaning of work is much debated; for a variety of recent critical views about the meaning of work and employment, see Donati 2002; Stiglitz 2002; and Fleetwood 2001.) Unemployment is then the total amount of additional work for income that people would like to do but, for a variety of reasons cannot. The labour force is the sum of these two measures of work, employment and unemployment; and the unemployment rate is the ratio of unemployment to the labour force. In principle, these variables should be measured in hours, a standard unit of work, but in practice they are measured in persons, as employed, unemployed and their sum, the labour force. In many parts of East Asia, subsistence farming is significant. Some farmers are pure subsistence producers in such countries as China and Vietnam; but many farmers produce significant quantities of food for subsistence purposes, even if they market other portions of their production. This fact breaks the neat distinction between employment (as work performed for income) and household work. In such countries, rural work has characteristics of both household work and employment – including the degree to which farmers self-regulate the amount of work they perform. Meaningful comparisons of employment and unemployment between the OECD and East Asia thus require the exclusion of rural production from East Asian calculations. By definition, the unemployment rate, u, is u = U / LF, where U is the level of unemployment and LF the size of the labour force. But U = LF − E and LF = r P, where E is the level of employment, r is the participation rate and P the population. In other words, u = [LF − E] / r P = 1 − E / r P. Thus, as a matter of statistical fact (rather than causality), the unemployment rate (measured in terms of individuals) and changes in that rate depend on three groups of variables:

•

the size and rate of expansion of the population;

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• •

the amount and rate of expansion of employment; and the institutional and other social conventions that determine how the available employment is divided up between workers (which determine r).

In most OECD countries, populations are growing rather slowly (Figure 2.2). In some countries the rate of growth of the population exceeds 1 per cent per annum – the traditional settler societies, but also Turkey, Luxembourg and

Figure 2.2 Rates of growth of population and labour force, OECD countries, 1990–2001. Source: OECD Corporate Data Environment, at http://www1.oecd.org/scripts/cde/members/ LFSDATAAuthenticate.asp, accessed on 8 August 2003. Notes: Data refer to the period 1990–2001, except Belgium (1990–1999), Switzerland and Germany (1991–2001), Hungary and Poland (1992–2001), Slovak Republic (1994–2001) and USA (1990–2000).

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Iceland. On the other hand, in Italy and the transitional economies of eastern Europe, populations are growing at less that 0.25 per cent a year (or are even declining). These growth rates reflect natural increase and migration. By contrast rates of growth of the population in East Asia average about 1.5 per cent a year, and are higher in Malaysia and Vietnam. In many countries of East Asia, urbanisation increases the rate of growth of the urban population. In turn, population is one of the principal controls over the size of the labour force. In the OECD, the correlation between the rates of growth of the population and of the labour force is r = +0.64 (see Figure 2.2). However, population is only one of the controls over the rate of growth of the labour force. The other principal control is social – the manner in which work is divided up between individuals so that some work for income and others do not. This division is measured by the participation rate, the ratio of the labour force to the population. In countries such as Luxembourg, Iceland, Ireland, Netherlands, Spain and Slovak Republic, the participation rate has been growing very rapidly – both because the working age population is growing relative to the total population and because higher and higher proportions of working age people (especially women) transfer from household work to employment. In other countries, the ageing of the population (and perhaps other forces, including even the rate of unemployment itself) is leading to declines in the rate of participation; Turkey, Denmark, UK, Finland, Sweden, Italy and Hungary all exhibit this characteristic. Debates over employment and unemployment thus range across arguments about the participation of women in paid employment and dependency ratios (proportion of the population that is of working age). In East Asia, rates of participation are higher than in any of the OECD countries (apart from Malaysia, where the participation rate is only 39 per cent, slightly above the rate in Turkey); but in Japan and Korea the rate has been falling back to a level near that in such countries as Sweden. The participation rates of men and women differ widely across the OECD (OECD CDE 2003; see, too, Ahn and Mira 2002). In Luxembourg, the male participation rate is over 78 per cent (much of the employment is taken by commuters from outside the borders) and in both Iceland and Switzerland it is over 60 per cent. In many countries, the male participation rate hovers in the range of 55–60 per cent. At the opposite extreme, male participation rates in Turkey, Hungary and Belgium are less than 50 per cent. In all OECD countries, the participation rates of women are lower than those of men (and this is true of East Asia, too3): in Ireland, Greece, Luxembourg, Spain and Italy, women’s participation rates are less than two-thirds of men’s rates; and in Turkey the female rate is about one-third of the male rate. Nowhere in East Asia are rates for men and women that different. The age distributions of populations within the OECD also differ. As Figure 2.3 illustrates, the proportion of the population that is of working age (defined here as between 15 and 65 years) varies from just over 60 per cent in Turkey to nearly 70 per cent in the Czech Republic. (These proportions are comparable to the proportions in East Asian countries, where over three-quarters of the population is of working age.) In some countries, a high proportion of the population is below

Figure 2.3 Age distribution of the population, OECD countries, 2001. Source: OECD Corporate Data Environment, at http://www1.oecd.org/scripts/cde/members/ LFSDATAAuthenticate.asp, accessed on 8 August 2003. Notes: Data are for 2001, except USA and UK (2000), Belgium and Greece (1999).

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working age – over 30 per cent in Turkey, and over 25 per cent in Iceland, Sweden and Norway; these people will be entering the group of working age in the next few years (as in Malaysia and Vietnam). Of greater concern for public policy makers, however, is the proportion of those who are older than this. More than 15 per cent of the population is now beyond working age in France, UK, Belgium, Denmark, Germany, Spain, Switzerland, Italy, Greece, Austria and Portugal. In these countries, the ageing of the population seems likely to reduce the size of the available labour force in the coming decades. Only Japan, among the East Asian countries, is near this situation. The rate at which employment expands also depends on a variety of factors. It depends first on the rate of growth of demand within the country (which is, of course, also dependent on the rate of growth of incomes). Imports and exports translate that demand within the country into demand for the products and services of that country. And finally, productivity translates demand into employment. Thus debates about employment and unemployment range over measures to raise demand in relation to incomes (which is the job of credit), globalisation and trade, investment and capital formation, and the determinants of productivity. The growth of output within an economy is most commonly expressed in terms of Gross Domestic Product (GDP). Figure 2.4 illustrates rates of growth of GDP in the OECD, in units of constant currency. These rates vary widely. At the low end, both the Czech Republic and Switzerland exhibited average annual rates of growth of GDP in the 1990s that were less than 1 per cent a year. At the other end of the scale, Australia and Poland exhibited rates of growth of over 4 per cent a year and Ireland of over 7.3 per cent a year. Apart from Ireland, the OECD growth rates are about a half of rates in East Asia (apart from Japan). In this framework, productivity is measured as the ratio of GDP to total employment, and the rate of growth of productivity is the rate of growth of GDP less the rate of growth of employment (compare OECD Employment Outlook 1988, Chapter 6). Figure 2.5 contains the relevant data. Productivity growth is strongly correlated with GDP growth (r = +0.93). Thus the growth of productivity is high in Ireland, Poland, Australia, Turkey, Norway, Finland and the USA (over 3 per cent a year); and low in Switzerland, Czech Republic, France, Germany and Italy (less than 2 per cent a year). In some East Asian countries (China and Vietnam), rates of growth of productivity are far higher than those in the OECD; in Korea, Malaysia and Thailand are comparable to the high end of the OECD scale; but in Japan is quite low. The result of GDP and productivity growth is the rate of growth of employment (see Figure 2.6). In several countries, employment fell over the decade – Poland, Hungary, Sweden, Finland, Czech Republic and Germany. On the other hand, in Ireland and Luxembourg, employment grew by over 1 per cent a year, and by nearly that in Iceland, Netherlands, New Zealand and Spain. In East Asia, only in Japan are rates of growth of employment below 1.5 per cent a year. The result of employment levels and the growth of employment on the one hand, and of the labour force and its growth on the other is the history of unemployment in the countries of the OECD. Average rates are quite different

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Figure 2.4 Average annual rate of GDP growth, OECD countries, 1990–2000. Source: World Bank, World Development Indicators 2002, Table 4.1, available at http://www. worldbank.org/data/databytopic/gdp.html, accessed on 22 August 2003; except for Iceland and Luxembourg, estimated from OECD Corporate Data Environment, at http://www1.oecd.org/ scripts/cde/members/LFSDATAAuthenticate.asp, accessed on 22 August 2003. Note: Growth rates are calculated from constant price GDP in national currency units.

in the various countries (OECD CDE 2003). In Spain the average rate of unemployment through the 1990s was 18.0 per cent, the highest in the OECD and accompanied by a low participation rate and a high proportion of temporary contracts (Astudillo 2003). In several other countries the rate comfortably exceeded 10 per cent: Italy, Belgium, France, Poland, Finland, Slovak Republic and Ireland. At the other extreme, the average rate of unemployment in Luxembourg was less than 2 per cent; and in Switzerland, Iceland and Austria was less than 4 per cent. But those averages conceal different dynamics. Figures 2.7 and 2.8 illustrate the

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Figure 2.5 Rate of growth of productivity, OECD countries, 1990–2001. Source: Calculated from data in World Bank, World Development Indicators 2002, Table 4.1, available at http://www.worldbank.org/data/databytopic/gdp.html, accessed on 22 August 2003; except for Iceland and Luxembourg, estimated from OECD Corporate Data Environment, at http:// www1.oecd.org/scripts/cde/members/LFSDATAAuthenticate.asp, accessed on 22 August 2003. Note: Productivity is measured as GDP/employment; employment = labour force − unemployment.

relevant histories. There are five distinct groups of countries, according to these histories. First is a group comprising Australia, Canada, UK, USA, Denmark, Ireland, Netherlands, Norway, New Zealand; in these countries, unemployment rates rose slowly in the early 1990s and then fell through the remainder of the decade. Average rates of unemployment were relatively high in this group – typically nearly 10 per cent at their peak, but ranging between 4 and 7 per cent by 2001. The second large group of countries comprises Iceland, Austria, Belgium, Switzerland, Germany, Finland, France, Luxembourg, Portugal, Sweden, Greece. In these countries, unemployment rates rose sharply until about 1994 and then declined. Typically, unemployment rates in this group were lower than in the

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Figure 2.6 Rate of growth of employment, OECD countries, 1990–2001. Source: OECD Corporate Data Environment, at http://www1.oecd.org/scripts/cde/members/ LFSDATAAuthenticate.asp, accessed on 8 August 2003. Notes: Final year data are for 2001, except USA and UK (2000), Belgium and Greece (1999).

first group, though by 2000 and 2001 the rates in the two groups had converged. The third group is smaller and consists of the three transition countries of Czech Republic, Slovak Republic and Poland. In these countries, unemployment rates climbed sharply though unevenly over the decade under the influence of rapid transitions from state direction (OECD Employment Outlook 1992, 2000). Fourth, Hungary and Spain exhibited a history of unemployment characterised by very high rates in the early part of the decade (over 20 per cent in Spain), that gradually

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Figure 2.7 Regional patterns of unemployment, OECD countries, 1990–2001. Source: OECD Corporate Data Environment, at http://www1.oecd.org/scripts/cde/members/ LFSDATAAuthenticate.asp, accessed on 8 August 2003. Notes: (i) Numbers within the graph are correlation coefficients between the rates of unemployment in each pair of countries, 1990–2001. Only positive correlations significant at p < 0.05 are shown. Shading is proportion to size of the correlation. (ii) Data are for 1990–2001, except USA (1990–2000), Hungary and Poland (1992–2001), Belgium (1990–1999), Switzerland (1991–2000) and Slovakia (1994–2001). (iii) Unemployment rate is defined as the ratio of the number of unemployed to the labour force.

fell through 2001. Finally, Italy and Turkey have histories in which rates of unemployment were remarkably consistent through the decade, at 8–10 per cent. As the following chapters will demonstrate, employment (measured in persons) is not the most appropriate measure of the amount of paid employment performed in a country. Nor is unemployment, which is measured in persons, the most appropriate measure of the aggregate mismatch between the demand for and supply of paid work.4 Given the aggregate amounts of paid work that are offered and demanded within a country, a host of institutional and other social considerations determine how the available work is divided up between the available workers.5 Thus, the boundaries between paid and unpaid work are themselves fluid, different between different countries, subject to the vagaries of the regulation of unemployment and other welfare benefits and not at all as precise as has been assumed here.6 Equally, societies differ widely in the manner in which and the degree to which they exclude some social groups from paid employment –

Figure 2.8 Unemployment rates in groups of OECD countries, 1990–2001. Source: OECD Corporate Data Environment at http://www1.oecd.org/scripts/cde/members/ LFSDATAAuthenticate.asp, accessed on 8 August 2003. Notes: Groups of countries are: top left: Australia, Canada, UK, USA, Denmark, Ireland, Netherlands, Norway, New Zealand; top right: Iceland, Austria, Belgium, Switzerland, Germany, Finland, France, Luxembrurg, Portugal, Sweden, Greece; lower left: Czech Republic, Slovak Republic, Poland.

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in most places there are formal and informal exclusions that affect the participation of the young (Padoa et al. 2002), the old (Rowe and Nguyen 2003), the less healthy (Fothergill 2001), women (Golder 2001), immigrant (Longva and Raaum 2002) and different ethnic groups (Brueckner and Zenou 2003) in paid work. And finally, the mismatch between the amount of work that is offered for pay and the amount that is demanded can be managed in a variety of manners – restrictions on the total number of hours worked, job sharing, student employment, age and gender discrimination – all influence the degree to which a lack of paid employment is translated into a lack of jobs for some people. Thus, there exist wide differences in rates of unemployment between men and women in the OECD (OECD CDE 2003). In several countries female rates are twice or nearly twice male rates: in some countries of southern Europe (Greece, Spain, Italy, Portugal) but also in some northern countries (Belgium, Netherlands) and in Switzerland. On the other hand, in Hungary, UK and Sweden, the female rate of unemployment is lower than the male rate. Two different processes are driving these rates and their differences (Ettlinger 2002; Golder 2001): social exclusions of women from available forms of employment; and administrative processes that encourage or discourage people without jobs from registering themselves as part of the labour force. Likewise there are wide variations in age-specific unemployment rates across the OECD. In virtually all countries, unemployment rates for persons aged 15–24 years are commonly 2.5 times higher than the rates for people aged 25–54 years; for people nearing conventional retirement age (65 years), the rate is typically also high.7 But in Greece, Italy, Sweden and Norway, youth unemployment is three times that of prime age people. Only in Germany is the youth unemployment rate only slightly above the population average. Conversely, relatively high relative rates of unemployment of older workers are found in Slovak Republic, Germany, Finland, Sweden, Denmark and Austria. Such variations again reflect a variety of forms of discrimination in labour market practices and administrative procedures (Fothergill 2001). Indigenous and immigrant groups also typically fare relatively poorly in labour markets. For a whole variety of reasons, including discrimination, language skills, experience and qualifications, unemployment rates for minorities are often high and participation rates low (OECD 2001). In Denmark, for example, the risk of unemployment is twice as high for immigrants from non-European and nonNorth American countries as it is for Europeans and North Americans (Department of Social Studies and Organisation 2003). Aboriginal Australians as a group have unemployment rates that are 2–5 times the national average and about a half of all unemployed aboriginal Australians have been without work for at least 12 months (Hunter and Taylor 2002). Given high unemployment rates in the 1990s, debate about immigration and the role of immigrants in labour market dynamics has been vigorous (OECD 2001). Nor is unemployment evenly distributed over the spaces of OECD countries. There are variations in unemployment rates between regions (Brunello et al. 2001; Dixon et al. 2001; Feser and Sweeney 2003; Fothergill 2001) and even between

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different parts of a single city (Conley and Topa 2002). Persistent regional labour market disparities are only partly explained by the composition of the labour force and the sectoral mix of regions (OECD 2000). That is, labour markets operate in regionally specific ways. Webber et al. (1996), for example, illustrate how government labour market programmes in Australia are delivered in ways that are regionally specific, reflecting the regionally varying culture within a single government department. Importantly, spatial differences in unemployment rates interact with ethnicity, both through the labour market (Clark and Drinkwater 2002) and the housing market (Brueckner and Zenou 2003). Part-time work has (like other forms of non-standard employment) been growing as a share of total employment (OECD 1999) and now represents nearly 7 per cent of male employment and about 25 per cent of female employment (OECD CDE 2003). However, the significance of part-time employment is quite different in different countries: it is over 10 per cent of male employment in Australia, Netherlands, New Zealand and Canada and over 40 per cent of female employment in the UK, Australia, Switzerland and Netherlands (compare Teicher 1996); but conversely much lower (less than 3 per cent of male employment and 10 per cent of female employment in such central and southern European countries as Slovak and Czech Republics, Hungary and Greece. In most countries, hourly earnings and training are significantly lower for part-time than for full-time workers. Thus part-time workers suffer a double disadvantage: their hourly earnings are typically lower and so are their hours, as compared to full-time workers. Despite the fact that some workers do prefer to work part-time, nevertheless it is clear that many part-time workers are underemployed. Employment and unemployment are, thus, complex – perhaps even chaotic (Fleetwood 2001) – phenomena. There are gaps between the concepts of paid work and employment, as well as international variations in the practices through which employment and unemployment are measured. In pure accounting terms, levels and rates of unemployment depend on population growth, the participation rate (and thus the age distribution of the population), the rate of growth of GDP and the rate at which productivity change relates production to employment. There are, too, wide variations between countries in the manner in which paid work is divided up between individuals and groups of workers – men and women, age groups, ethnic groups, immigrants and locals, and different regions. All of these factors operate differently in different countries, even among the advanced industrialised countries of the OECD. There is thus a delicate task of inference to identify whether the histories of the countries of East Asia indicate a tendency to converge towards those of the OECD. However, the central questions for the following chapters are:

• •

What are the levels and forms of unemployment in the various countries of East Asia? What is the experience of particular social groups within the aggregate history of each East Asian country?

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Causes and policies An immediate response to these histories is to ask: what drives the dynamics of unemployment? And what drives differences between countries? At one level, the causes of unemployment are the factors that drive changes in the terms of the accounting framework. These include the performance of an economy and domestic labour market policies. The employment relation lies at the heart of economic performance. However, two particular debates about economic performance and unemployment that are important for our enquiry in this book have flourished in the OECD in recent years: debates over the effects of more open economies (‘globalisation’) and over changing economic structures. Beginning in the early 1970s, the structures that constrain the interactions of nations have been radically transformed. Many tariff and non-tariff barriers to trade have fallen; transport and communication costs continue a long downward relative trajectory; the rules that restrict investment across borders have been eased; the international movement of money has become far easier; and more and more people are moving around the globe in search of work. These changes would be expected to affect the demand for labour within both OECD and East Asian countries (though migration affects supply as well). The nature and the magnitude of these effects are, however, much debated. On the one side are studies that claim broadly positive effects of foreign direct investment (Bailey and Driffield 2002), immigration (Gross 2002) and more open trading arrangements (Arnold 2002) on the growth of GDP and thus on the demand for labour.8 On the other side are historical studies of the experiences of particular groups of workers that point to redundancy, long-term unemployment and inequality of earnings and occupations as consequences of liberalisation in particular countries (see, for example, Webber and Weller (2001) on the restructuring of Australia’s textile, clothing and footwear industries and Dalziel (2002) on New Zealand). Economic structure – and changes in economic structure – also affect employment and unemployment rates, largely because they influence the demand for labour and the skill composition of that demand. Such changes in the structure of economies comprise one element of the debate over the influence of more open economies on unemployment. However, the effects of structural economic changes have also been analysed independently. The specific form of institutions within countries – such as the degree to which firms are competitive (Tse 2002), the structure of capital markets (Belke and Fehn 2001) and the size distribution of firms (Kirchesch 2001) – seem to be linked to the rate of unemployment. The relationship between technical change and the demand for labour is much debated, involving questions about short-run labour shedding in relation to indirect forms of job creation (Postel-Vinay 2002), and changing demands for skill, gender and occupation (ter Hollanders and Weel 2002). More grandly, some authors have claimed that the growth of information processing activities within countries really amounts to the emergence of a ‘new economy’ (Aoyama and Castells 2002), characterised by long hours and relatively high wages, new means

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of hiring labour and new relations between product demand and supply (for a review, see van Ark 2002) These debates about macroeconomic conditions and unemployment are paralleled by arguments about appropriate labour market policies (well indexed by the annual editions of the OECD Employment Outlook). These arguments centre on two naive questions: How best can we reduce rates of unemployment? If we cannot eliminate unemployment, how can we ameliorate its effects? However, the answers to these questions are, at least in the short term, obvious. Unemployment is reduced by increasing the amount of employment – that is, the amount of paid work performed in the society. Many of the effects of unemployment are ameliorated by providing a high level of income support to the individuals (or households) that lack paid work. The problem is that these resolutions have a price that many governments and their supporters have been unwilling to pay. Essentially, this price revolves around the assumption (common to orthodox and Marxist accounts of long-run economic dynamics) that high levels of employment and high rates of income support tend to drive up the price of labour and to reduce the incentive for people to work in poorly paid jobs.9 In many respects, therefore, a key issue for policy is to reconcile economic security (as embodied in minimum wages and employment protection legislation, for example) with flexibility and high levels of employment (OECD 1984, 1999; contrast Evans 2000 and Astudillo 2003). Typically, the ‘sclerotic’ labour markets of continental Europe are contrasted to the more flexible labour markets of North America and the UK in terms of a trade-off between employment protection and level of unemployment: North America and the UK are said to offer less protection against dismissal than continental Europe but also lower levels and durations of unemployment (Balakrishnan and Michelacci 2001; Blanchard and Portugal 2001). A similar argument is made about minimum wage legislation (Moore 2002).10 However, such comparisons assume that differences in employment protection are the key drivers of different unemployment histories; the simple Anglo-American: continental contrast is not really borne out in the history of unemployment in the 1990s (see second section of this chapter); and in theory, the relationship between employment protection and employment levels is not at all clear (Ljungqvist 2002) Thus, conventionally, governments are worried that economic growth and national competitiveness reflect working conditions, and that working conditions themselves are influenced by welfare provision and employment protection. OECD governments have tried a variety of policies that attempt to resolve the perceived contradiction between growth, employment levels and working conditions by introducing policies to raise the supply of labour. In many countries, governments are trying to raise the proportion of the population that participates in the labour force by eliminating retirement ages and making it easier for women with children to work for pay (OECD 2002a). Equally, it is commonly observed that unemployment coexists with unmet demand for skilled labour, so training programmes are a widespread form of labour market programme (Kluve and Schmidt 2002), even though their effectiveness in raising the aggregate demand for labour as

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opposed to redistributing existing demand is sometimes questioned (Bartik 2002). Recently, active labour market programmes have become an increasingly important feature of labour market programmes across the OECD. Such programmes require unemployment benefit recipients actively to seek work, participate in intensive interviews and action plans (see OECD 2001, 2001a on the variety of these programmes). Although such programmes have become popular, the effectiveness of their difference components is by no means clear (Gerfin and Lechner 2002). Just as the OECD countries have divergent levels and trajectories of unemployment and its accounts, so there are wide debates over the causes of and the appropriate policy responses to unemployment. Despite the diversity of these debates, they centre on several key questions:

• • • •

What are the implications of more open economies (open for trade, investment, immigration) for unemployment in East Asia? What are the effects of economic structure on unemployment in East Asia? In particular, how do the structures of institutions, technical change, and new forms of economy affect unemployment? What is the impact of well-being (particularly working conditions) on unemployment in East Asia? What are the appropriate labour market and other policies with which to manage East Asian unemployment?

The effects and costs of unemployment The discussion has so far treated unemployment as a macroeconomic quantity. But being unemployed is a characteristic that attaches to people. So levels of unemployment mean that some people are out of paid work. This simple fact means that questions associated with unemployment are also questions associated with people’s lives and their families. Unemployment is a social issue rather than merely an economic problem. The link between poverty and unemployment is one such concern. However, the link is not mechanical (Saunders 2002a). First, unemployment is a characteristic of individuals, whereas poverty is a characteristic of households. Thus a spouse’s income can provide some protection from poverty when one becomes unemployed (however, there is a correlation between the employment status of spouses: see Saunders 2002b: 179 and Dawkins et al. 2002; and one-fifth of working age households in the OECD have no adults in employment: see OECD 1998). Second, income from work may not be sufficient to avoid poverty (van Leeuwen and Pannekoek 2002). And third, social benefits may be sufficient to maintain unemployed persons and their households above the poverty line (as in Denmark: see Department of Social Studies and Organisation 2003). As a consequence, there exist historical examples (such as Finland in the early 1990s: see Uusitalo 2000) of rising rates of unemployment that have not been accompanied by rising rates of poverty in society. Conversely in the USA in the 1980s, poverty rates rose even though unemployment rates were falling (Mishel et al. 1999) and

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remained high in the 1990s even though unemployment rates were falling (EPI 2001); compare too, Ireland in the 1990s (NUI 2000). Likewise, cross-sectional evidence indicates no correlation between national rates of unemployment and national poverty rates (Saunders 2002b: 181). On the other hand, within countries the distribution of poverty reveals a clear link to unemployment. In Australia, for example, in 1996–1997: among households with one adult aged 25–55 years, if the adult worked at least part-time, 8.9 per cent of households were in poverty; if the adult was unemployed, 52.2 per cent of households were in poverty; among households with two adults aged 25–55 years, if at least one adult worked at least part-time, 8.8 per cent of households were in poverty; if neither adult was employed, 43.2 per cent of households were in poverty (Saunders 2002b: 182–183) The social implications of such a relationship between employment and poverty are made grave by the fact that in many OECD countries, patterns of employment in households with children have shifted dramatically. The former model of a single, male income earner has shifted towards a pair of models – one in which both adults work and another in which neither adult works (Dawkins et al. 2002). Thus, despite economic growth in OECD countries, a substantial proportion of households do not have sufficient income to support adequate living standards (OECD 2001). The majority of these households experience only a single, short spell of poverty; others are trapped for long periods in poverty. In all countries, poverty is closely associated with a lack of work (though this link is less clear in the USA). A second consequence of the fact that unemployment is a characteristic of people is that some spells of unemployment are long, while others are short (OECD 1983, 1987, 1993). Unemployment is persistent (Gil-Alana 2002): across the OECD as a whole, nearly half of all unemployed people are out of work for six months or more; and nearly a third for 12 months or more (OECD CDE 2003). In some countries – Belgium, Czech Republic, Greece and Italy – the longterm unemployed account for half of all unemployed people, more than five times the proportion that is found in Canada, Norway and the USA. (There is some evidence that these rates are underestimates – see OECD 2002). The dynamics of unemployment and employment spells depend on cyclical macroeconomic conditions; they depend too on gender (Abbring et al. 2002), wealth (Bloemen 2002) and previous employment history (Chalmers and Kalb 2001). Except in a few countries, then, the burden of unemployment is concentrated on a relatively small number of people (OECD 2002), particularly on people who find it hard to obtain another job once they have become unemployed.11 Parallel to this pattern

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of long-term unemployment is a pattern of reliance on income support: in Australia, about one-third of the population relies on income support for a short time in any one year, but one-sixth of recipients are in receipt of support continuously for over 5.5 years (Tseng and Wilkins 2002). However, third, the costs associated with unemployment are not confined to an immediate loss of income. For example, cross-sectional evidence indicates that the health status of the unemployed is lower than that of the employed in Italy (Preti and Miotto 1999) and Australia (Harris and Morrow 2001; Morrell et al. 1999); and longitudinal studies indicate that unemployment is associated with raised risk factors and mortality rates in Sweden (Stefansson 1991) and the USA (Kasl et al. 1975). There is also evidence that unemployment has adverse psychological effects, though the causal links are complex and not well understood (Headey 2002). It is possible, too, that unemployment is associated with crime: not that being unemployed turns law abiding people into criminals but that in areas of high unemployment economic stress disrupts normal social constraints on crime (Weatherburn 2002). Finally, there is evidence that unemployment ‘scars’ individuals, marking them for a future of constrained labour market opportunities that imply lower incomes and reduced chances of finding employment. Leontaridi (2002) and Arulampalam (2001) find such evidence in the UK, though Gregory and Jukes (2001) argue that the effect on wages is only temporary. Equally, it seems that the psychological impacts of unemployment on people persist beyond the specific period of unemployment (Clark et al. 2001). The effects of unemployment on people, then, do not simply disappear if and when they can find another job: there are longlasting consequences. Unemployment thus intersects with people’s lives. Individuals suffer longer or shorter spells of unemployment, and suffer the economic and social consequences for longer and shorter periods. The link between unemployment and people’s lives means that unemployment is a central matter of social policy that both affects people’s chances for a happy and secure life and reflects society’s attitudes to inclusiveness. Within the OECD, different weights are placed on the economic effects and social consequences of unemployment, giving rise to debates that centre on some general questions about the region we are studying in this book:

• •

What are the dynamics of unemployment in East Asia – the transitions that are typical, the durations, the effects on careers? What are the economic and social costs of unemployment in East Asia?

Conclusions The OECD is by no means a homogeneous group of countries. Their history of unemployment in the 1990s demonstrates that there are two broad groups of countries, that might be labelled Anglo-Nordic and continental European, together with smaller groups of transition and southern European countries. The levels of and trends in unemployment are quite different between the groups.

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Some argue that these differences reflect differences in economic institutions and labour market policies; others point to specific characteristics of countries – relatively low development, transition, high regional differentiation, different degrees of openness. Clearly, globalisation does not mean common levels or trends in unemployment, even among the advanced industrial countries of the OECD. Nevertheless, some of the institutions of governance do imply that the OECD countries belong to a single policy community, a group of people and institutions within which there is a debate over common issues – over, for example, the existence, extent and persistence of unemployment and its consequences (a debate that is indexed by the annual editions of the OECD Employment Outlook). To what, then, are the countries of East Asia to be compared? Though the countries of the OECD have different histories and social institutions, they do share several characteristics: 1

2

3

4

Unemployment is a policy variable: the rate of unemployment is itself something that influences government behaviour (and, indeed, sometimes the composition of the government) and is an object of policy. The social consequences of unemployment are perceived to be high. (This is one of the reasons why unemployment is important for policy.) Even so, in many countries, the economics of unemployment (its budgetary costs and its impact through working conditions on competitiveness) trump its social consequences (on people’s lives). Rates of unemployment in the 1990s have been high in all countries – relative to, for example, the 1950s and 1960s in northern and western Europe and North America. The debates over unemployment in the OECD centre on four principal issues: the effects of opening up economies; the implications of economic structure; the importance of labour market flexibility; and direct labour market policies.

This chapter has posed eight questions about unemployment in the countries of East Asia, to provide the information with which to compare East Asian experiences to those of the OECD. In summary, these questions are: 1 2 3 4 5

What are the levels and forms of unemployment in the various countries of East Asia? What are the dynamics of unemployment in East Asia – the transitions that are typical, duration, effects on careers? What is the experience of particular social groups within the aggregate history of each East Asian country? What are the implications of more open economies (open for trade, investment, immigration) for unemployment in East Asia? What are the effects of economic structure on unemployment in East Asia? In particular, how do the structures of institutions, technical change, and new forms of economy affect unemployment?

Globalisation and Unemployment 6 7 8

33

What are the economic and social costs of unemployment in East Asia? What is the impact of well-being (particularly working conditions) on unemployment in East Asia? What are the appropriate labour market and other policies with which to manage East Asian unemployment?

The characteristics of unemployment and of debates over unemployment in East Asia, as evidenced by the answers to these questions, provide a basis from which to judge the degree to which and why globalisation and regionalisation imply homogeneity as opposed to local difference.

Notes 1 Contrast, for example, the view of the institutions that encourage global integration – the IMF, World Bank, OECD – with the views of leaders of workers’ groups: ‘For a quarter of a century, the industrial nations have worshipped at the altar of conservative idols – deregulation, tight money, fiscal austerity. . . . A global market has been forged. . . . The few are prospering, but the many are not. This economy does not work well for working people. In the OECD nations, we experience the effects in different ways. In Europe, the effect is widespread unemployment, particularly among the young. In the United States, jobs are created but with stagnant or declining wages and benefits for the majority of working people – families are working harder and longer simply to keep pace. In Japan, we witness continued and deepening recession.’ (Shailor 2003; Shailor is International Affairs Director of the US AFL-CIO.) 2 The OECD is here taken to exclude Japan and Korea, which are treated separately in the chapters that follow. 3 Though in Vietnam, the participation rates of males and females are similar. 4 To be counted as unemployed, a person without paid work has to register with some agency that counts them as being in the labour force. If labour market conditions and the regulations that surround the receipt of unemployment benefits discourage people from registering in this way, they are not counted as being in the labour force and unemployed (see, for an example of this effect, Maloney 2002). Likewise, official statistics generally count as employed people who work more than a few hours a week; so underemployment is generally not counted. In New Zealand, for example, at the end of the 1990s, officially measured unemployment was 5.4 per cent; however, a statistic that includes those who are seeking work but are not registered unemployed and also the underemployed (who are working part-time but looking for more hours) measured unemployment as 14.4 per cent (NZCTU 2003). (See too OECD Employment Outlook 1987, Chapter 5.) 5 Among these social institutions is the customary length of the working year. In many countries of northern and western Europe a working year (averaged over full and parttime workers) is about 1,500 hours; in the UK, North America and Australasia, the working year averages about 1,800 hours; and in Greece and the Czech and Slovak Republics averages about 2,000 hours. A job is different things in different countries, which means that a given amount of paid employment (in hours) can result in quite different levels of unemployment in different countries, depending on how the employment is divided between individuals. 6 As Webber and Campbell (1997) argue, employment and unemployment (as measured at a moment in time by an interview) is a poor indicator of a person’s labour market experience. A person now employed may have experienced a long history of permanent, secure employment, or simply currently hold one in a sequence of insecure,

34

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8 9 10 11

Michael Webber casual and temporary jobs. Labour market experiences, then, need to be understood as histories rather than as a series of point measures. The problems associated with high unemployment rates for young people have regularly occupied the pages of the OECD Employment Outlook. Not only are unemployment rates for young people high, but there is evidence that people’s first experiences in the labour force have a continuing impact on their labour market opportunities. See for example, OECD Employment Outlook 1984, 1986, 1992, 1996, 1998, 1999. The form and the magnitude of these effects depend, of course both on the specification of the models, the institutional framework and the precise form that investment, immigration and trade take (see for example, Arnold 2002; Oslington 2002). Indeed, one of the complaints about open economies is that trade liberalisation is thought to force firms in different countries to compete, and thus forces workers in different countries to compete for jobs. Many other components of well-being have been analysed in a similar fashion, including environmental protection (for a review see Berck and Hoffmann 2002). Of all the sample of people in 11 OECD countries who were unemployed in December 1995, five out of six experienced at least 12 months unemployment in the following four years (OECD 2002). Apart from those people who became long-term unemployed are those who ‘carouselled’ in and out of short-term jobs (either temporary employment or short labour market programmes).

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Blanchard, O. and Portugal, P. (2001) ‘What Hides Behind an Unemployment Rate: Comparing Portuguese and US Labor Markets’, American Economic Review 91: 187–207. Bloemen, H. G. (2002) ‘The Relations Between Wealth and Labour Market Transitions: An Empirical Study for the Netherlands’, Journal of Applied Econometrics 17: 249–268. Brenner, N. (2001) ‘The Limits to Scale? Methodological Reflections on Scalar Structuration’, Progress in Human Geography 25: 591–614. Brueckner, J. K. and Zenou, Y. (2003) ‘Space and Unemployment: The Labor Market Effects of Spatial Mismatch’, Journal of Labor Economics 21: 242–266. Brunello, G., Lupi, C. and Ordine, P. (2001) ‘Widening Differences in Italian Regional Unemployment’, Labour Economics 8: 103–129. Chalmers, J. and Kalb, G. (2001) ‘Moving from Unemployment to Permanent Employment: Could a Casual Job Accelerate the Transition?’, Australian Economic Review 34: 415–436. Clark, A. E., Georgellis, Y. and Sanfey, P. (2001) ‘Scarring: The Psychological Impact of Past Unemployment’, Economica 68: 221–241. Clark, K. and Drinkwater, S. (2002) ‘Enclaves, Neighbourhood Effects and Employment Outcomes: Ethnic Minorities in England and Wales’, Journal of Population Economics 15: 5–29. Conley, T. G. and Topa, G. (2002) ‘Socio-economic Distance and Spatial Patterns in Unemployment’, Journal of Applied Econometrics 17: 303–327. Daly, M. and Logan, M. I. (1989) The Brittle Rim, Ringwood, Victoria: Penguin. Dalziel, P. (2002) ‘New Zealand’s Economic Reforms: An Assessment’, Review of Political Economy 14: 31–46. Dawkins, P., Gregg, P. and Scutella, R. (2002) ‘Employment Polarisation in Australia’, Melbourne: University of Melbourne, Melbourne Institute Working Paper 09/2002. Department of Social Studies and Organisation (2003) ‘Overview of Current Economic Conditions in Denmark’, Global Policy Network, available at http://www. GlobalPolicy Network.org and accessed 23 August 2003. Dicken, P. (2003) Global Shift: Reshaping the Global Economic Map in the 21st Century, New York: Guilford. Dixon, R., Shepherd, D. and Thomson, J. (2001) ‘Regional Unemployment Disparities in Australia’, Regional Studies 35: 93–102. Donati, P. (2002) ‘The Changing Meaning of Work: Implications for the New Economy’, Rivista Internazionale di Scienze Sociali 110: 333–366. EPI (Economic Policy Institute) (2001) ‘Overview of Current Economic Conditions in the U.S.’, Global Policy Network, available at http://www.GlobalPolicyNetwork.org and accessed 23 August 2003. Ettlinger, N. (2002) ‘The Difference that Difference Makes in the Mobilisation of Workers’, International Journal of Urban and Regional Research 26: 834–843. Evans, J. (2000) ‘Workers in the New Economy’, OECD Observer 11 October 2000. Feser, E. and Sweeney, S. (2003) ‘Outmigration, Depopulation and the Geography of US Economic Distress’, International Regional Science Review 26: 38–67. Fleetwood, S. (2001) ‘Conceptualizing Unemployment in a Period of Atypical Employment: A Critical Realist Perspective’, Review of Social Economy 59: 45–69. Fothergill, S. (2001) ‘The True Scale of the Regional Problem in the UK’, Regional Studies 35: 241–246. Gerfin, M. and Lechner, M. (2002) ‘A Microeconometric Evaluation of the Active Labour Market Policy in Switzerland’, Economic Journal 112: 854–893. Gil-Alana, L. A. (2002) ‘Modeling the Persistence of Unemployment in Canada’, International Review of Applied Economics 16: 465–477.

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Gill, S. (2003) Power and Resistance in the New World Order, New York: Palgrave Macmillan. Golder, S. M. (2001) ‘Labour Market Performance of First Generation Immigrants: Evidence from the Swiss Labor Force Survey’, Swiss Journal of Economics and Statistics 137: 183–197. Gregory, M. and Jukes, R. (2001) ‘Unemployment and Subsequent Earnings: Estimating Scarring Among British Men 1984–1994’, Economic Journal 111: 607–625. Gross, D. M. (2002) ‘Three Million Foreigners, Three Million Unemployed? Immigration Flows and the Labour Market in France’, Applied Economics 34: 1969–1983. Harris, E. and Morrow, M. (2001) ‘Unemployment is a Health Hazard: The Health Costs of Unemployment’, Economic and Labour Relations Review 12: 18–31. Headey, B. (2002) ‘The Psychological Impact of Unemployment’, in Saunders, P. and Taylor, R. (eds) The Price of Prosperity: the Economic and Social Costs of Unemployment. Sydney: University of New South Wales: 213–225. Hinkson, J. (1996) ‘The State of Postmodernity: Beyond Cultural Nostalgia or Pessimism’, in James, P. (ed) The State in Question. Sydney: Allen & Unwin 196–223. Hollanders, H. ter and Weel, B. (2002) ‘Technology, Knowledge Spillovers and Changes in Employment Structure: Evidence from Six OECD Countries’, Labour Economics 9: 579–599. Hunter, B. and Taylor, R. (2002) ‘An Overview of the Costs of Indigenous Unemployment’, in Saunders, P. and Taylor, R. (eds) The Price of Prosperity: The Economic and Social Costs of Unemployment. Sydney: University of New South Wales: 109–133. Kasl, S. V., Gore, S. and Cobb, S. (1975) ‘The Experience of Losing a Job: Reported Changes in Health, Symptoms and Illness Behaviour’, Psychomatic Medicine 37: 106–122. Kirchesch, K. (2001) ‘Employment and Investment of West German Industry 1968–1998: A Descriptive Analysis’, Jahrbucher fur Nationalokonomie und Statistik 221: 473–490. Kluve, J. and Schmidt, C. M. (2002) ‘Can Training and Employment Subsidies Combat European Unemployment?’, Economic Policy 35: 409–443. Leeuwen, J. van and Pannekoek, J. (2002) ‘To Work Oneself Out of Poverty: The Dutch Experience 1989–96’, Review of Income and Wealth 48: 127–140. Leontaridi, R. M. (2002) ‘Career, Experience and Returns to Human Capital: Is the Dual Labour Market Hypothesis Relevant for the UK?’, Research in Economics 56: 399–426. Longva, P. and Raaum, O. (2002) ‘Unemployment and Earnings Assimilation of Immigrants’, Labour 16: 469–489. Ljungqvist, L. (2002) ‘How do Lay-off Costs Affect Employment?’, Economic Journal 112: 829–853. Maloney, T. (2002) ‘Welfare Reform and Unemployment in New Zealand’, Economica 69: 273–293. Marston, S. A. and Smith, N. (2001) ‘States, Scales and Households: Limits to Scale Thinking? A Response to Brenner’, Progress in Human Geography 25: 615–619. Martin, R. (1994) ‘Stateless Monies, Global Financial Integration and National Economic Autonomy: The End of Geography?’, in Corbridge, S., Martin, R. and Thrift, N. (eds) Money, Power and Space. Oxford: Blackwell 253–178. Massey, D. and Jess, P. (1995) ‘Places and Cultures in an Uneven World’, in Massey, D. and Jess, P. (eds) A Place in the World? Places, Cultures and Globalization. Oxford: Open University: 215–239. Mishel, L., Bernstein, J. and Schmidt, J. (1999) The State of Working America: 1998–99. New York: Cornell University.

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Moore, D. (2002) ‘Minimum Wages: Employment and Welfare Effects, or Why Card and Krueger Were Wrong’, Australian Bulletin of Labour 28: 163–183. Morrell, S., Taylor, R., Quine, S., Kerr, C. and Western, J. (1999) ‘A Case-control Study of Employment Status and Mortality in a Cohort of Australian Youth’, Social Science and Medicine 49: 383–392. NUI (National University of Ireland, Galway) (2000) ‘Highlights of Current Labor Market Conditions in Ireland’, Global Policy Network, available at http://www.GlobalPolicy Network. org and accessed 23 August 2003. NZCTU (New Zealand Council of Trade Unions) (2003) ‘Labour Market Conditions in New Zealand’, Global Policy Network, available at http://www.GlobalPolicy Network.org and accessed 23 August 2003. OECD (1983) OECD Employment Outlook 1983 Paris: Organisation for Economic Cooperation and Development. OECD (1984) OECD Employment Outlook 1983 Paris: Organisation for Economic Cooperation and Development. OECD (1987) OECD Employment Outlook 1987 Paris: Organisation for Economic Cooperation and Development. OECD (1988) OECD Employment Outlook 1988 Paris: Organisation for Economic Cooperation and Development. OECD (1992) OECD Employment Outlook 1992 Paris: Organisation for Economic Cooperation and Development. OECD (1993) OECD Employment Outlook 1993 Paris: Organisation for Economic Cooperation and Development. OECD (1998) OECD Employment Outlook 1998 Paris: Organisation for Economic Cooperation and Development. OECD (1999) OECD Employment Outlook 1999 Paris: Organisation for Economic Cooperation and Development. OECD (2000) OECD Employment Outlook 2000 Paris: Organisation for Economic Cooperation and Development. OECD (2001) OECD Employment Outlook 2001 Paris: Organisation for Economic Cooperation and Development. OECD (2001a) Labour Market Policies That Work Paris: Organisation for Economic Cooperation and Development. OECD (2002) OECD Employment Outlook 2002 Paris: Organisation for Economic Cooperation and Development. OECD (2002a) Babies and Bosses – Reconciling Work and Family Life (Volume 1) Australia, Denmark and the Netherlands, Paris: Organisation for Economic Cooperation and Development. OECD CDE [Corporate Data Environment] 2003. http://www1.oecd.org/scripts/cde/ members/LFSDATAAuthenticate.asp, accessed on 8 August. Oslington, P. (2002) ‘Trade, Wages and Unemployment in the Presence of Hiring and Firing Costs’, Economic Record 78: 195–206. Padoa, S., Fiorella, K. and Lupi, C. (2002) ‘Family Income and Wealth, Youth Unemployment and Active Labour Market Policies’, International Review of Applied Economics 16: 407–416. Postel-Vinay, F. (2002) ‘The Dynamics of Technological Unemployment’, International Economic Review 43: 737–760. Preti, A. and Miotto, P. (1999) ‘Suicide and Unemployment in Italy, 1982–1994’, Journal of Epidemiology and Community Health 53: 694–701.

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Rowe, G. and Nguyen, H. (2003) ‘Older Workers and the Labour Market’, Perspectives on Labour and Income 15: 55–58. Saunders, P. (2002a) ‘The Direct and Indirect Effects of Unemployment on Poverty and Inequality’, Australian Journal of Labour Economics 5: 507–530. Saunders, P. (2002b) ‘The Impact of Unemployment on Poverty, Inequality and Social Exclusion’, in Saunders, P. and Taylor, R. (eds) The Price of Prosperity: the Economic and Social Costs of Unemployment, Sydney: University of New South Wales 175–193. Schendel, W. van (2002) ‘Geographies of Knowing, Geographies of Ignorance: Jumping Scale in Southeast Asia’, Environment and Planning D: Society and Space 20: 647–668. Shailor, B. (2003) ‘Internationalism for Working People’, OECD Observer 28 January. Stefansson, C. G. (1991) ‘Long Term Unemployment and Mortality in Sweden: 1980– 1986’, Social Science and Medicine 32: 419–423. Stiglitz, J. E. (2002) ‘Employment, Social Justice and Societal Well-being’, International Labour Review 141: 9–29. Teicher, J. (1996) Non-Standard Employment in Australia and New Zealand, Melbourne: Monash University National Key Centre in Industrial Relations. Tse, C. Y. (2002) ‘Monopoly, Employment and Wages’, Labour Economics 9: 681–697. Tseng, Y. P. and Wilkins, R. (2002) ‘Reliance on Income Support in Australia: Prevalence and Persistence’, Melbourne: University of Melbourne, Melbourne Institute of Applied Economic and Social Research Working Paper 6/02. Uusitalo, H. (2000) ‘Social Policy in Deep Economic Recession and After: The Case of Finland’, Helsinki: National Research and Development Centre for Welfare and Health. Weatherburn, D. (2002) ‘The Impact of Unemployment on Crime’, in Saunders, P. and Taylor, R. (eds) The Price of Prosperity: the Economic and Social Costs of Unemployment, Sydney: University of New South Wales 226–248. Webber, M. (2000) ‘Globalisation: Local Agency, the Global Economy and Australia’s Industrial Policy’, Environment and Planning A 32: 1163–1176. Webber, M. and Campbell, I. (1997) ‘Labor Market Outcomes among Retrenched Workers in Australia: A Review’, Australia and New Zealand Journal of Sociology 33: 187–204. Webber, M. J. and Weller, S. (2001) Refashioning the Rag Trade: Internationalising Australia’s Textiles, Clothing and Footwear Industries, Sydney: UNSW Press. Webber, M., Weller, S. and O’Neill, P. (1996) ‘Participation in Labour Adjustment Assistance’, The Economic and Labour Relations Review 7: 295–324.

3

Unemployment in Japan Globalisation, restructuring and social change John Benson

Introduction For much of the second half of the twentieth century Japan experienced substantial economic growth and low levels of unemployment. This high level of growth ceased in the early 1990s following the collapse of the ‘bubble’ economy, the rising competitiveness of a number of Asian countries and the financial crisis which spread through Asia in the late 1990s. These events took place within an increasingly globalised world, where many Japanese companies had relocated parts of their operations to other Asian countries to take advantage of lower labour and production costs. These factors led to a loss of competitiveness of Japanese industry and a rise in the unemployment rate. Much of the Japanese post-war success was driven by the manufacturing sector and, in particular, the automotive and electronic industries. In the period 1955 to 1982, Japanese share of the world motor vehicle production rose from just over 1 per cent to 30 per cent (Womack et al. 1991). This trend was repeated in many other sectors of manufacturing and by the mid-1980s, Japanese companies had captured over 80 per cent of the world market in cameras, video recorders and watches, over 70 per cent of calculators and microwave ovens, and in excess of 50 per cent of the market for motorcycles and colour televisions (Oliver and Wilkinson 1992: 5). This success was not, however, replicated in other Japanese industrial sectors such as banking, telecommunications, retailing and the service sectors (Porter et al. 2000). The importance of the manufacturing sector to the Japanese economy meant that the events of the last decade would have significant repercussions on manufacturing employment. An analysis of unemployment in Japan and the likely future trends in employment must, therefore, be located within this context. The chapter will begin by outlining some of the key economic and social events affecting Japan over the last half of the twentieth century. This will be followed by sections that will analyse the relationships between Japanese society and unemployment, and institutions and social problems. These sections are followed by an analysis, using data from three surveys conducted by the author in the period 1991 to 2001 that examines how Japanese manufacturing companies have responded to these events. This will allow for predictions to be made concerning

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future labour strategies of Japanese companies and employment in this sector. The chapter concludes by considering the issues raised in Chapter 2 of this volume.

Contextual factors and issues The post-war Japanese economy experienced high and sustained economic growth until the end of 1991. The first period, 1950 to 1970, saw economic growth of around 10 per cent, while for the next 20 years real GDP growth averaged about 5 per cent. These periods were, however, characterised by declining real GDP growth and significant variations in the growth of industrial output. This pattern was not unexpected as the larger the economy became the lower the possibility of maintaining high levels of growth. Moreover, as much of the growth was driven by an expansion of production and facilities, the imposition of export restrictions on Japan meant that a lower growth rate was unavoidable (Nakamura 1981: 54). For most of this period unemployment was low, ranging between 1 and 2 per cent for the 1960s and 1970s, and slightly higher, between 2 and 3 per cent for the 1980s (Ito 1993: 212). At the end of 1991 unemployment was 2.1 per cent. In this strong economic environment companies concentrated on expanding market share and were prepared to support a range of human resource management practices such as lifetime employment. The commitment to these practices was necessary if companies were to be able to recruit, retain and reward employees during this period of rapid growth (Morishima 1995: 122). The collapse of the ‘bubble’ economy in the late 1980s and increasing globalisation over the past two decades meant that the 1990s have been characterised by very low rates of economic growth and rising unemployment. Real GDP growth, which in 1991 was 3.8 per cent, fell to less than 1 per cent in 1992. Only in 1996 did real GDP growth reflect the conditions that prevailed a decade earlier, although this growth was primarily due to substantial spending on government projects1 (Nikkei Weekly 1996: 35). Much of this downturn was the result of poor consumer demand and the rising competitiveness of other countries. In over a third of these years, industrial output declined and was lower at the end of 2002 than in 1992. Part of the reason for this is that Japanese manufacturers relocated parts of their operations overseas, particularly to other Asian countries. This ‘hollowing out’ of manufacturing saw employment in this sector fall from 15.5 million in 1991 to 12.2 million in 2002. This represented a fall in employment of 3.3 million employees; 21.3 per cent of the manufacturing workforce. While this loss of jobs was compensated by an increase in service sector employment of 3.58 million employees (24.8 per cent) many of these jobs were temporary or of a parttime nature. This shift partly accounts for the rapid increase in non-regular employment in Japan, and the lower wages paid to these workers have raised concerns ‘whether such employment can support career development and family aspirations’ (Whittaker 2004: 30). Details of employment by industry over the period 1991 to 2002 are presented in Table 3.1.

Unemployment in Japan 41 Table 3.1 Changes in Japanese employment by industrial sector, 1991–2002 (millions of employees) Industrial sector

1991

1997

2002

Agriculture, forestry, fishing and mining Construction Manufacturing Utilities Transportation and communications Trade Finance, insurance and real estate Services Government Total

4.33 6.04 15.50 0.33 3.78 14.33 2.63 14.46 1.99 63.69

3.57 6.85 14.42 0.36 4.12 14.75 2.53 16.48 2.15 65.57

2.81 6.18 12.22 0.34 4.01 14.38 2.41 18.04 2.17 63.30

Source: MCA (1992, 1998); MPM (2003).

These economic difficulties were exacerbated by the Asian Crisis. The Crisis developed in Thailand in 1997 as a result of a drastic fall in confidence in the Thai currency, and quickly spread to a number of other Asian countries including key Japanese trading partners such as Indonesia, Malaysia, Taiwan and Korea. This led to a further fall in demand for Japanese consumer and capital goods. In 1998 real GDP declined by 1.3 per cent. Although the Asian Crisis had a severe impact on many of the Asian economies at the time, by 2001 most of these economies had recovered. This was not the case for Japan. A series of financial scandals in the latter part of the 1990s, a 67 per cent increase in the consumption tax in 1997, a decrease in public spending, and the use of public money to support the ailing banking system added to the economic difficulties facing Japan. These factors led to a continuation of economic decline and a record annual level of unemployment of 5.4 per cent by 2002. Details of the pattern of economic activity for the past two decades are presented in Table 3.2. Economic downturns are not a new phenomenon to Japan. The most notable post-war recession occurred in the period December 1973 to February 1975. This followed the shortage of oil brought on by the October 1973 decision by oil producing countries in the Middle East (OPEC) to raise prices five-fold and limit supply (Nakamura 1981: 227). This in turn led to lower production and, coupled with higher costs, led to significantly lower operating profits for Japanese companies (Nakamura 1981: 233). Companies responded by reducing working hours and cutting back on employment. Although some companies dismissed regular workers this was not a widespread practice. Nevertheless, five years later in the slump of 1977–1978 Japanese companies were more likely to dismiss employees (Dore 1986: 99). This pattern accelerated in the 1990s. Globalisation and the appreciation of the Yen over a number of years led to falling export demand and higher relative labour costs. These factors resulted in a decline of Japanese manufacturers’ share of global exports from nearly 10 per cent to a under 7 per cent over the 1990s (Development Bank of Japan 2002: 47).

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Table 3.2 Real GDP growth, industrial output and unemployment, Japan, 1980–2003 (%) Year

Real GDP growtha

Industrial outputa

Unemploymentb

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

3.6 3.6 3.2 3.0 4.3 5.0 2.6 4.1 6.5 7.3 4.8 3.8 0.9 0.4 1.0 1.6 3.5 1.8 −1.3 0.7 2.4 −0.6 1.2 2.7c

4.8 1.0 0.3 2.9 9.5 3.7 −0.2 3.4 9.7 5.8 4.1 1.8 −6.1 −3.6 0.7 3.4 3.0 4.1 −7.1 0.5 5.1 −6.6 −1.3 –3.3d

2.0 2.3 2.3 2.7 2.7 2.6 2.8 2.9 2.5 2.2 2.1 2.1 2.2 2.5 2.9 3.2 3.4 3.4 4.1 4.7 4.7 5.0 5.4 5.3e

Sources: a. IMF (2002), International Financial Statistics Year Book, Washington, DC: International Monetary Fund, pp. 606–609; IMF (2003), International Financial Statistics Year Book, Washington, DC: International Monetary Fund, pp. 361–363. b. OECD (2001), Labour Force Statistics, Paris: Organisation for Economic Cooperation and Development, pp. 82–83; OECD (2003b), Quarterly Labour Force Statistics, Paris: Organisation for Economic Cooperation and Development, pp. 24–25. c. Cabinet (2004), Economic and Fiscal Policy, 18 February (www.cao.go.jp). d. Statistical Handbook of Japan 2004, Tokyo: Ministry of Public Management, Home Affairs, post and communications, p. 67. e. OECD (2004), Main Economic Indicators, Paris: Organisation for Economic Cooperation and Development, January, p. 16.

Society and unemployment The poor state of the Japanese economy over the past decade and the factors discussed above have led to record levels of unemployment. The annual unemployment rate for 2003 was 5.3 per cent, although some signs of improvement were evident with the December 2003 quarterly unemployment rate falling to 4.9 per cent (The Japan Labor Flash 2004). Unemployment was more predominant among young people (15–24 years of age) with just over 10 per cent of the labour force in this group being unemployed in 2002; a five-fold increase over the past decade. Unemployment was also higher than the average for the 25–34 years and the 55–64 years age groups (Development Bank of Japan 2003: 8).

Unemployment in Japan 43 Long-term unemployment has increased four-fold over the last ten years; and by 2001 some 26.6 per cent of all unemployed have been unemployed for longer than 12 months (OECD 2004: 236). As Japan undertakes further industrial restructuring in an attempt to overcome the present deflationary economic downturn and improve competitiveness it is predicted that the unemployment rate for Japan will increase in the next few years (OECD 2002, 2003a). The Development Bank of Japan (2003: 22–23) has predicted unemployment will peak at 5.9 per cent in 2004/05; nearly 4 million unemployed workers. Whether this level of unemployment ultimately occurs will depend, to a large degree, on a number of factors affecting the supply and demand for labour. Labour supply A major supply factor is the aging of the population which has been brought about by a higher life expectancy and a falling birth rate. These conditions have led to a declining workforce. In 2002, the total workforce had declined to 63.3 million workers; down some 390,000 workers from the 1991 figure (see Table 3.1). The youngest section of the labour force (15–29 years old) is expected to decrease significantly by 2010 with a reduction of approximately 4,000,000 employees from the peak of 16,310,000 employees recorded in 1998. At the opposite end of the age spectrum, the older workforce (55 and older) is expected to increase dramatically; from 23.1 per cent in 1998 to about 29 per cent by 2010 (MOL 2000). These demographic trends suggest that Japan will suffer from a skilled labour shortage in the future. The current extensions to the mandatory retirement age and the better utilisation of women will, in part, serve to counter these trends (MHLW 2002). Another labour strategy affecting supply, one that has been gaining increasing attention, is the importation of foreign labour (United Nations 2000). As of 2001, some 740,000 foreign workers resided in Japan (JLB 2003c: 3); a three-fold increase over the last decade. Many of these workers were, however, unskilled or illegal workers rather than skilled foreign workers needed in areas of significant labour shortages. The value of such a policy is made more doubtful as a substantial increase in immigration into a relatively closed and socio-culturally homogeneous society would likely give rise to a number of social problems. Labour demand The aging of the current workforce is also contributing to demand problems. The older workforce, coupled with a seniority pay system, has led to higher labour costs and lower demand. In the past, it was possible to maintain a seniority-based pay system without increasing total payroll costs as the exit of older employees matched the entry of younger and less expensive workers. This situation has changed dramatically. The ratio of employees aged 55 or over among full-time regular male employees at companies with 1,000 or more employees increased from 22 per cent in 1979 to 36 per cent in 1998 (MOL 1999). Together with the

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loss of job opportunities for young people the growing cost of maintaining the employment of middle-aged workers has created a displacement effect between those two segments of the population (Genda 2001). This has led to a number of proposals for reform of the employment system. The best known of these proposals is the plan by Nikkeiren (1995), the peak employer body, to establish a new Japanese human resource model. Nikkeiren argued that the current employment model based on regular and non-regular forms of employment has limited quantitative flexibility and has added substantially to the cost of employment. Their proposal is to replace this dual employment system with three forms of employment each with a different level of flexibility: full-time regular employees, contractors and specialists, and temporary and parttime workers. The Nikkeiren proposal aims to increase flexibility by allowing companies to have greater ability to adjust their labour to short- and long-term economic trends. Companies appear to be moving towards such a model. The conventional Japanese employment system is found in the first category of employees, namely those in regular, full-time employment. The percentage of workers in this group has declined, although it remains a significant group that will serve as a social and economic buffer against changes that might have a destabilising effect on Japanese society. Increasingly, however, within this group workers are being rewarded for individual efforts. Workers employed on a contractor or specialist basis have grown in numbers as companies realise the need to acquire expertise at various levels within the company. While some of these will stay with the enterprise for many years most will move on after their contracts have expired. Companies are, however, increasingly relying on temporary and part-time workers who have no employment security and where wages and conditions are considerably lower than their full-time counterparts. This is evidenced in the finding that non-regular workers now account for 27.2 per cent of the total workforce (MHLW 2003a). It is this group that will bear the brunt of unemployment in future years and will serve as a buffer in periods of economic decline. Japanese management may be able to overcome the problems of labour shortages by undertaking strategies that could lead to a fall in labour demand. The first of these strategies is attempts to improve productivity. It has been estimated that if a more efficient use of capital investment, deregulation and technological progress is achieved then this would compensate for the 0.7 per cent annual decline in the working-age population (EPA 1999). A second strategy involves increasing foreign direct investment. The relocation of part of Japanese company’s productive capacity overseas has led to a significant decrease in the demand for labour in the manufacturing sector and a significant rise in the rate of import of components made in Asia by Japanese multinational corporations (METI 2001). A third managerial strategy that will affect the labour demand is an overall reduction of wages and benefits. This strategy is, in many ways, complementary to the new employment model proposed by Nikkeiren (1995), although it has been advocated by Nikkeiren (2002) as a way to reverse the declining state of Japanese industry without adding to the unemployment problem. This strategy, however,

Unemployment in Japan 45 may work against attempts to improve productivity as it would act as a disincentive for workers to adopt new practices and technology. The government, through a variety of financial incentives, has also attempted to increase the demand for labour. These schemes have generally been structured around subsidies to companies to create new employment opportunities in industries or regions that suffer from a high level of unemployment, to enable them to employ older workers, or to create employment in new and growth industries (JLB 2001: 1–3; Ohtake 2004). These schemes are aimed at a number of key social and economic problems such as the high levels of unemployment among older workers and attempting to improve employment in depressed regions. While these programmes were designed to encourage employment, other subsidies have been introduced to improve employee mobility. Overall, these strategies are short-term in nature and designed to address the current problems of the day, such as the most recent measures to minimise the unemployment that will result from the liquidation of non-performing loans (Ohtake 2004: 40–41). As such it is unlikely that these strategies will have a major effect on long-term labour demand.

Institutions and social problems Labour markets Twentieth-century Japan was marked by a sustained expansion of the workforce. The growth was largely a product of demographic changes; a tripling of the working age population and a declining birth rate that led to a rising participation by women in the labour market. These factors meant that a sufficient supply of young people were available to enter the workforce. By the beginning of the twenty-first century demographic factors have become responsible for the declining workforce. In part, the problems associated with the decline in the workforce will be offset by the phasing in of a higher retirement age (from 60 to 65 years of age), the increased participation of women in the labour market, and a general improvement in productivity. Beyond these broad labour market changes lie a number of issues that only surfaced with the decline in the manufacturing sector. The first of these is the level of excess labour, particularly white-collar employees that exist in many companies. Successful manufacturing companies could afford to carry surplus employees, although such excess labour was represented in most sectors of the economy (MHLW 2001). The excess of employees over the numbers actually required by the company, however, is difficult to calculate and so economy-wide estimates are problematic. Nevertheless, Ono and Rebick (2003: 16–17) suggested that the number of redundant Japanese workers ranges between 0.3 and 5 per cent of total employment. Part of the reason for Japanese companies wishing to retain excess employees is the investment they have made in training. As a consequence these companies, during periods of economic downturn, will exhibit ‘sluggish labour force adjustment’ (Hart and Kawasaki 1999: 20). A further issue alluded to in the 2002 White Paper on Labour (MHLW 2002) is

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latent or hidden unemployment. Again, the number of people wanting to work but have given up job searching is difficult to estimate. Darby et al. (1998) found that there existed a ‘discouraged worker effect’ in Japan and this was most pronounced among older women. Taken collective, the inclusion of excessive employment and latent unemployment in the unemployment figures would add significantly to the overall unemployment rate. For example, for 1995 Hart and Kawasaki (1999: 14–15) estimated that this would amount to 5 per cent of the employed workforce. These conditions have major implications for the long-term trends in unemployment as labour surpluses will tend to dampen demand while latent unemployment under-estimates supply. Much of the new employment in Japan is now temporary work sourced partly from the latent unemployment, particularly women workers (JLB 2002a: 2). In addition, the recent relaxation of the laws governing dispatched workers – increasing the number of job categories and the length of time workers can be dispatched for – will allow for the greater use of this provision. Manufacturing companies, for example, can now dispatch workers for up to three years and guidelines have now been developed to allow for such workers to gain regular employee status in their new company (JLB 2003b: 2; MPM 2003). These changes have led to a 15 per cent growth in the number of dispatched workers over the previous year (JLB 2003b: 2–3). In short, these developments will encourage companies to substitute regular employees with dispatched workers. This will serve to lower employment demand and will provide a convenient mechanism by which Japanese companies can reduce their number of excess employees. Social security and unemployment For those workers who are unemployed the benefits received from public and private sources are substantially less than most other industrialised countries (Ostrom 1997). In general, unemployment benefits are linked to periods of employment and are restricted to those that have paid a premium during their working lives (OECD 1999). In the event of becoming unemployed, the employee will be paid a benefit for a limited period time, usually less than one year. Such minimal support mechanisms have forced many people to cope with the financial problems associated with unemployment by utilising their own resources. A government survey found that more than half of unemployed workers (51 per cent) had no income in the month prior to the survey (MPM 2002). Of those that had an income, over 40 per cent relied on savings or the income of family members. Of the 3.57 million people unemployed in 2002 only 29 per cent or 1.03 million people were, or would be shortly, receiving an unemployment benefit (MPM 2002). These figures disguise the differences between the various groups of unemployed. Older workers were substantially more likely to have access to pension plans and unemployment benefits. Younger unemployed workers had not generally worked for a sufficient time, or were ineligible to access pension funds and so were less likely to be receiving an income. This latter situation was also more likely to be the case with temporary and part-time workers, females,

Unemployment in Japan 47 and workers who were not the head, or spouse of the head, of the household (MPM 2002). The substantial increases in unemployment over the past decade have led the peak trade union body, Rengo, to argue for improvements to benefits so as to reduce individual risk and to lessen the political resistance to economic reform (Rengo 2002). These arguments appear to have carried little weight with government. From 1 May 2003 the revised Employment Insurance Law came into effect. The purpose of this change was to stabilise the financial base of the fund which was deteriorating rapidly under the weight of the increasing number of unemployed (JLB 2003d: 3). Under the changes the annual premium will have risen from 1.4 per cent of a worker’s wage to 1.6 per cent in April 2005. Payments have been reduced substantially; from a minimum range of 60 to 80 per cent to a minimum range of 50 to 80 per cent of the unemployed person’s previous income. In addition, the maximum daily rate has been cut by 24 per cent for all age groups with the exception of the 60 to 64 years age group that have had their maximum daily benefit cut by 27 per cent. The revised programme has, however, made a limited attempt to gear the fund to the growing number of long-term unemployed. The number of people who have been unemployed for one year or longer during 2002 rose by 90,000 people to 1.12 million people. This increase represented three times the average increase in unemployment of those unemployed for less than a year (JLB 2003e: 1; MPM 2003). In recognition of this trend the maximum length of time an unemployed worker can receive benefits has been increased by 30 days for all age groups. This does not apply to those workers that voluntary left employment; for these workers the maximum length of payment was reduced by 30 days. One key aspect of these reforms was the development of a single scheme to cover all workers irrespective of whether they were regular or temporary workers. A second important aspect was the relaxation from five years to three years a person must be in the fund to receive support for educational and training costs. In these cases, however, the unemployed worker will only receive 20 per cent of the cost of their education up to a maximum of 100,000 yen (JLB 2003d: 5).

Trends and prospects for unemployment The preceding sections have outlined the economic, social, and political parameters that have contributed to the present state of employment and unemployment in Japan. In particular, deteriorating economic conditions, some significant changes in labour markets, and the relocation of manufacturing facilities overseas were significant factors behind the rising level of unemployment. To a limited degree government policy has served to moderate the rate of increase. This section will extend this analysis to a focus on company labour strategy in an attempt to understand how globalisation and economic restructuring has affected employment prospects and future trends. The analysis will focus on the manufacturing sector and will use company level data collected by the author in 1991, 1995 and 2001 in the Kansai region of Japan.3

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The last decade was characterised by low economic growth coupled with a substantial decline in manufacturing employment (see Table 3.1). For the companies surveyed this environment resulted in more competitive product markets where price had replaced quality as the second most important criteria for company success after ‘meeting customer needs’. Product demand had contracted and more companies were reporting excess production capacity. Overall company profits had fallen substantially. It was in this context that companies were asked to indicate what their labour strategies would be in two scenarios; a decline in demand, and an improvement in demand, for their major product. An increasing number of companies, if faced with a decline in their major product, would lay off regular as well as temporary workers. Extra labour, where required, would be achieved by increasing overtime and sub-contractors. Wages for those workers remaining were, in nearly a quarter of the companies, likely to be decreased. Details are presented in Table 3.3. These findings suggest a move towards some form of a core-peripheral employment (Atkinson 1985, 1987; Benson 1996) which is consistent with the model proposed by Nikkeiren (1995). To explore what led to these changes, a simple probit model containing the variables of product demand, labour productivity and active unionism, and controlling for size, casual employment and capitalisation, was tested.4 Results are presented in Table 3.4. In 1991, only low productivity would impact on the decision to reduce regular employment (p<0.10). By 1995 the key factor was product demand (p<0.01), although productivity remained important (p<0.10). In 2001, these factors were not significant. After ten years of difficult economic conditions companies were more likely to reduce the numbers of full-time regular employees irrespective of the economic circumstances. Active unionism had no impact in any of the three time periods, suggesting that the decision concerning full-time employment rested predominantly with management. When a similar model was tested for temporary employment, only product demand was significant in 1995. Clearly company labour strategies have changed and these results suggest that the search for international competitiveness is driving this change. These results cannot be used, however, to predict what companies will do in the future, particularly if the economy recovers. Companies were, therefore, asked Table 3.3 Labour strategies: decreased demand for major product (%) Decrease

1991a

1995b

2001c

Regular employees Temporary employees Hours worked Employees’ wages Productive capacity Sub-contractors

15.7 66.3 67.6 3.7 62.3 76.4

39.4 80.1 58.0 6.6 54.0 82.6

37.2 83.0 70.9 22.8 56.4 86.9

Notes: a. number of responses varied between 188 and 207. b. number of responses varied between 136 and 149. c. number of responses varied between 149 and 165.

Unemployment in Japan 49 Table 3.4 Determinants of employment reduction (regular employees) when product demand has decreased (probit analysis) 1991 Predictors Product demand Labour productivity Active unionism Control Variables Size Temporary employees (%) Capital labour ratio Log likelihood N Quasi R squared

1995

2001

0.234 −0.262** 0.283

−0.750*** −0.277** 0.182

−0.276 −0.198 0.058

−0.254** −0.005 −0.054

0.033 0.002 −0.107

0.040 −0.011 0.106

−69.142 121 0.182

−72.324 115 0.062

−67.869 167 0.055

*** p < 0.01; ** p < 0.05; * p < 0.10.

Table 3.5 Labour strategies: increased demand for major product (%) Increase

1991a

1995b

2001c

Regular employees Temporary employees Hours worked (overtime) Employees’ wages New technology Sub-contractors

54.6 56.3 52.5 43.5 92.4 76.3

36.9 60.0 56.5 32.6 90.1 67.8

24.4 73.8 63.8 21.1 89.7 77.0

Notes: a. number of responses varied between 193 and 211. b. number of responses varied between 135 and 146. c. number of responses varied between 152 and 165.

what labour strategies they would adopt if demand for their major product increased. Companies were found to be less likely to employ regular employees and would be more likely to meet labour needs by engaging temporary workers and, to a lesser extent, increasing overtime. The possibility of wage increases would also be less likely to occur. Details are provided in Table 3.5. The probit model outlined earlier was also applied to this scenario. In 1991, companies with low productivity would be less likely to increase regular employment in the event that product demand increased (p < 0.01). By 1995 this factor was no longer significant and companies that were experiencing an increase in product demand would be more likely to increase the numbers of regular employees if this product demand continued to improve (p < 0.05). By 2001, neither labour productivity nor product demand was significant and active unionism appeared to be the key determinant in the employment of regular employees (p < 0.10). This finding suggests that while management have increasingly responded to the poor economic conditions by downsizing regular employment, they remain

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willing, however reluctant, to build into their labour strategies more regular employment. This would, however, be contingent on the presence of an active union which is increasingly unlikely given the decline in unionism in Japan over the past decade (MHLW 2003b). The findings must also be qualified in that those companies with a large number of temporary employees would be less likely to entertain the need for more regular employment (p < 0.10). Details are presented in Table 3.6. Again this model was tested for temporary employment. The key finding here was that in 1991 and 2001 surveyed companies would be more likely to increase temporary workers, the larger the number of these workers already employed. Given the trend towards temporary employment, this finding suggests the employment of temporary workers will become increasingly important and will serve as a buffer, and a substitute, for regular workers. Table 3.6 Determinants of employment expansion (regular employees) when product demand has increased (probit analysis) 1991 Predictors Product demand Labour productivity Active unionism Control Variables Size Temporary employees (%) Capital labour ratio Log likelihood N Quasi R squared

0.205 0.335*** 0.418

1995 0.418*** 0.157 0.195

−0.171 0.010 0.052

0.113 0.010 −0.304

−114.406 180 0.107

−71.842 120 0.093

2001 0.248 −0.260 0.612* 0.060 0.015* 0.226 −55.109 114 0.102

*** p < 0.01; ** p < 0.05; * p < 0.10.

These company-level findings suggest that any sustained improvement in unemployment is unlikely to come about through micro-level company strategies or by an increase in product demand. Most companies will, in these circumstances, increase temporary employment. Evidence on the widespread adoption of this strategy can be seen in the rising numbers of temporary and casual workers (JLB 2003f: 16). This strategy, coupled with increasing levels of global competition, the continued ‘hollowing out’ of the manufacturing industry, and the restructuring of the banking, telecommunications and the service sectors, point to a decrease in regular employment and a continuing problem with unemployment.

Discussion and conclusion The foregoing sections have provided both a context for, and the possible factors that have influenced unemployment in Japan. This section will synthesise and integrate these findings by addressing the questions raised by Webber in Chapter 2 concerning the level, causes and impact of unemployment. The first question

Unemployment in Japan 51 concerned the levels and forms of unemployment. Since the 1990s unemployment has been steadily rising and was, at the end of 2003, 5.3 per cent. These levels, at least in the Japanese context, represented the highest level of unemployment over the past five decades. Moreover, if excessive employment and latent unemployment is taken into account the unemployment rate would be substantially higher. Although a number of factors can account for the rise in unemployment it is clear that the substantial fall in manufacturing employment over the past decade has made a significant contribution to the level of unemployment. The second question posed concerned the dynamics of unemployment and in particular the duration and effect on careers. Long-term unemployment appears to be increasing and currently represents over a quarter of all unemployed. This percentage is considerably higher than most other developed economies (OECD 2004). The lack of external training programmes, coupled with the nature of the internal labour market, means that for this group of workers unemployment will have a major effect on their careers. The most probable employment scenario for these workers will be employment with smaller companies with substantially less pay and inferior working conditions. Moreover, for those retrenched from manufacturing companies it is likely that the best they can hope for will be some form of contingent employment in this sector, or a shift to a job in the service sector where their lack of training and experience will consign them to unskilled and temporary work. The next question concerned the experiences of particular social groups such as the young and women workers. Unemployment appears to have afflicted the younger workers more severely than other groups and the unemployment rate for this group was nearly double the average unemployment rate. The level of unemployment for the older sectors of the labour force was also above the national average. The reasons why workers become unemployed are, however, quite different for these two groups. Younger workers were more likely to have left paid employment for personal reasons, whereas for older workers it related to decisions made by employers (JLB 2003a: 2). Women workers have, in recent years, appeared to have fared better than their male counterparts. Since 1996 the official unemployment rate for women has been lower than that of male workers, and in November 2003 was 0.4 per cent lower at 5.0 per cent (JILPT 2003). Yet these figures conceal issues relating to how unemployment is defined, and in particular, the number of women who are working in temporary and part-time positions but who would like to gain regular employment. Similarly, such figures do not reveal the increased difficulties that women face in re-entering the labour market due to their lower level of training or their temporary absences due to childrearing (JLB 2002b: 11; MHLW 2002). In the case of the latter group of women workers, high educational qualifications were found not to be beneficial in gaining employment (MHLW 2002). The fourth and fifth questions posed in Chapter 2 concerned the implications of more open economies and the impact of economic structure. In the Japanese case it is difficult to analyse separately these issues due to the simultaneous occurrence of low levels of economic growth, the decline of manufacturing, the

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attempted restructuring of many industrial sectors in Japan, and the increased levels of globalisation. The review of the research and the findings from the study on manufacturing suggested that much of the unemployment in Japan is due to structural problems that surfaced only with the decline in the manufacturing sector. The Japanese economy was an example of the co-existence of extremely efficient industries, such as consumer electronics and automobiles, with highly inefficient industries such as services, transportation, banking and retail. As Porter et al. (2000: 6) argued ‘these industries . . . have generated large numbers of jobs and acted as a sort of social welfare system’. The strength of parts of the manufacturing sector camouflaged these weaker sectors and led to a belief in the efficiency of the Japanese business system and management model. As Japanese manufacturing companies focused on acquiring market share, a key part of this strategy was access to foreign markets and limited domestic competition. By the late 1980s these conditions had changed. Globalisation, and particularly the development of competitive manufacturing in a number of Asian countries, led to an increased level of global competition. Japanese manufacturers responded by relocating parts of their manufacturing operations overseas in an endeavour to gain access to markets and to reduce the cost of production. Globalisation also saw more attempts being made by foreign companies to enter the Japanese market for manufactured goods. These events had the effect of reducing manufacturing employment in Japan. The sixth question concerned the economic and social costs of unemployment. This is an important issue for policy makers as the underutilisation of human resources has major costs for society. A high number of young unemployed Japanese, coupled with an internal labour market, represents a breakdown in the traditional employment system and a reduction in the opportunity for firms to develop new skills. Unemployment among older employees also represents a loss of skills for the firm, although in Japan, many in this age group would have retired, at least from the company where they had worked for much of their working life. The introduction of a variety of government support programmes also adds to the public cost of unemployment (Ohtake 2004). Notwithstanding the above, in the long term the social costs of unemployment may well exceed these economic costs in terms of reduced commitment to work and a rise in social problems. The minimal level of government support, coupled with the central role work assumes in Japanese life, leaves the unemployed worker reliant on family and disenfranchised from most of what society has to offer. This has led to higher than average suicide rates among the unemployed, especially older unemployed workers (Japan Labor Flash 2002). Moreover, it has led to higher levels of distrust in the employment system by younger workers who see little value in accepting restricted opportunities for benefits sometime in the future (Debroux 2003). On the other hand, as pointed out by Webber, the insecurity created by unemployment may lead to a more flexible labour market, a willingness by employees to accept employment in more poorly paid and less desirable jobs, and can act as an incentive for people to work harder. The seventh question posed by Webber concerned the impact of well-being

Unemployment in Japan 53 on unemployment. Well-being in this context refers to working conditions, employment protection and training opportunities. The long hours worked by Japanese employees, often in the form of unpaid overtime, are clearly not conducive to improving labour demand. Moreover, the general employment conditions are often claimed to be too rigid and do not provide the flexibility required to meet international competition (Nikkeiren, 2002). Lifetime employment and seniority pay, in the present economic downturn, provides further incentives for Japanese companies to relocate to other parts of Asia so as to reduce their labour costs. In Japan, the heavy reliance on the internal labour market also means that few training opportunities exist for the unemployed and that government programmes are unable to provide the specific training required by Japanese companies. In short, a major way out of the unemployment cycle through training programmes is not available to the unemployed. This may offer a partial explanation to the rising level of long-term unemployed in Japan. The final question raised by Webber in Chapter 2 was ‘what are the appropriate labour market and other policies with which to deal with unemployment’. Recession, globalisation, and to a lesser degree the Asian Crisis, forced Japanese manufacturing companies to restructure. This process will continue and will increasingly focus on other sectors such as the banking, telecommunications, retailing and the service sectors. Other factors such as company strategy and changing demographics were also important. These factors will continue to impact on employment and unemployment, notwithstanding the prospects of economic recovery. Moreover, the level of excessive employment and latent unemployment will continue to influence the rate of unemployment as companies search for improved efficiency and more ‘latent unemployed’ workers seek to re-enter the workforce. It is the issues of excessive employment and latent unemployment that presents the most difficulties for government policy. This is illustrated by the recent changes to the laws governing dispatched workers where the main objective was to prevent large-scale redundancies. This has meant that companies are now able to shed more of their excess labour requirements thus making it more difficult for the latent unemployed to gain work. Insufficient pension funds and the increase in part-time work will also mean that more people will enter the labour market. These supply problems must, therefore, be the major focus of government policy. This is in contrast to much of governments’ previous policies where increasing demand for employees, through a variety of subsidies and directed interventions, appeared to be the focus of strategy (Ohtake 2004). A number of long-term policy options are available to deal with these issues. First, it is important that a matching of the supply of, and demand for, skills occur. Governments have commenced this process, albeit in a limited fashion, by externalising training through increasing the number of technical training facilities and by changing university governance that will allow universities to offer part-time courses in areas of high demand such as international business. This strategy is of critical importance given the findings that skills rather than age was the key factor in enabling retrenched workers to re-enter the labour market

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(Matsushige and Fukuda 2004). It is, however, essential for the government to provide improved benefits for the unemployed to undertake re-skilling and training. Second, government must address the issue of inadequate pensions and improved welfare benefits for the older members of society. This is not only good social policy but will go some way to alleviating the need for older workers to remain in the labour market. Finally, strategies must be developed that will encourage more entrepreneurial activities. This has long been perceived as a major weakness of the Japanese business system and would require a significant re-orientation of industrial policy (Whittacker 2004: 35). This strategy may prove attractive to younger Japanese where unemployment is highest. These policy options will, however, take some time to impact on unemployment. In the short term, therefore, governments will need to consider more immediate policy solutions. First, improved state-funded social safety nets for the unemployed must be developed. As discussed above, unemployment impacts on the whole of society and Japan cannot afford to continue to treat unemployment as an individual issue. Second, further incentives must be provided that will encourage companies, in particular industries, to employ more workers. This demand-led strategy is particularly applicable to emerging industries such as biotechnology where long-term potential for employment exists. Third, short-term incentives are required to encourage companies to retain their staff, while also creating incentives to employ discouraged workers. These incentives could revolve around on-the-job training schemes, more flexible employment patterns and the expansion of child-care facilities.

Notes 1

2

3

In September 1995 the government announced a supplementary budget that allocated 8 trillion yen for public spending, much of it on capital works, to stimulate the economy (Nikkei Weekly, 4 November 1996, p. 35). Thus, a large part of the 1996 real GDP growth can be attributable to public policy. The discovery of oil in the Middle East in the early 1950s allowed Japan to shift its energy use from coal to oil. For most of the next 20 years the real price of oil declined and Japan’s dependency on oil increased substantially. In 1955 Japan imported 24 per cent of its energy requirements; by 1973 this figure had risen to 90 per cent. Oil’s share of total energy requirements rose from 16 per cent in 1955 to 71 per cent in 1973 (Nakamura 1981: 76). The research was carried out between 1991 and 2001 in the Kansai region of Japan. The region has a population of over 21 million people and its gross domestic production represents about 3 per cent of world manufacturing production (OBA 1991: 2–3; OCCI 1992: 3; Osaka Business 1996: 1). Questionnaire surveys were conducted in 1991, 1995 and 2001. The questionnaire covered a range of issues including product markets, company performance, union activity, organisational change, payment systems, and employee consultation. The questionnaire was sent to all manufacturing companies that employed a minimum of 100 employees and who were members of the Osaka Chamber of Commerce and Industry (OCCI). The OCCI had, during the period of the research, about 39,000 members, of which slightly less than 30 per cent were in the manufacturing sector. The response rates for the three surveys were 26.1 per cent, 16.0 per cent and 19.5 per cent for the years 1991, 1995 and 2001 respect-

Unemployment in Japan 55

4

ively. This represented 253 useable responses in 1991, 172 responses in 1995 and 184 responses in 2001. Variables used in the models are: Labour Strategy – reduce employment (yes = 1, no = 2); Labour Strategy – increase employment (yes = 1, no = 2); Product Demand (expanding = 1, contracting = 3); Labour Productivity (much higher = 1, lot lower = 5); Active Unionism (union with density > 50%; no union or union with density < 50%); Size (log of total number of employees); Temporary Employees (casual and temporary employees as a % of all employees); Capital Labour Ratio (high = 1, low = 3).

References Atkinson, J. (1985) Flexibility, Uncertainty and Manpower Management. IMS Report No. 89. Brighton: Institute of Manpower Studies. Atkinson, J. (1987) ‘Flexibility or Fragmentation: The UK Labour Market in the 1980s’, Labour and Society, 12 (1): 87–105. Benson, J. (1996) ‘Management Strategy and Labour Flexibility in Japanese Manufacturing Enterprises’, Human Resource Management Journal, 6 (2): 44–57. Cabinet Office (2004) Economic and Fiscal Policy, 18 February (www.cao.go.jp), accessed 18 May 2004. Darby, J., Hart, R. and Vecchi, M. (1998) ‘Labour Force Participation and the Business Cycle: A Comparative Analysis of France, Japan, Sweden and the United States’, Discussion Paper 98/1, Department of Economics, University of Stirling. Debroux, P. (2003) Human Resource Management in Japan: Changes and Uncertainties. Aldershot: Ashgate. Development Bank of Japan (2002) Recent Trends in the Japanese Economy: Globalization and the Japanese Economy, Research Report No. 30 April, Tokyo: Economic and Industrial Research Department. Development Bank of Japan (2003) Recent Trends in the Japanese Economy: A Medium-term Scenario for the Sustainability of the Japanese Economy, Research Report No. 36 February. Tokyo: Economic and Industrial Research Department. Dore, R. (1986) Flexible Rigidities: Industrial Policy and Structural Adjustment in the Japanese Economy 1970–1980, London: Athlone Press. EPA (1999) Keizai Hakusho (Economic Survey of Japan), 1998–1999: Challenges for Economic Revival, Tokyo: Economic Planning Agency. Genda, Y. (2001) ‘The Unhappiness of Middle-aged and Older Workers’, Japan Labor Bulletin, May: 6–10. Hart, R. and Kawasaki, S. (1999) Work and Pay in Japan. Cambridge: Cambridge University Press. IMF (2002) International Financial Statistics Year Book, Washington, DC: International Monetary Fund, pp. 606–609. IMF (2003) International Financial Statistics Year Book, Washington, DC: International Monetary Fund, pp. 361–363. Ito, T. (1993) The Japanese Economy, Cambridge, MA; The MIT Press. JILPT (2003) Report on Employment Service, Tokyo: Japan Institute for Labour Policy and Training, December. JLB (2001) ‘Summary of Employment Measures to Deal with Deterioration of the Job Market’, Japan Labor Bulletin, 40 (11): 1–3. JLB (2002a) ‘More People Unemployed, and for Longer: Labour Force Survey’, Japan Labor Bulletin, 41 (8): 1–2.

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JLB (2002b) ‘The 2002 White Paper on the Labour Economy: A Summary of the Analysis’, Japan Labor Bulletin, 41 (9): 10–14. JLB (2003a) ‘Half of Unemployed Stay Jobless for Six Months or Longer: Follow-up Survey’, Japan Labor Bulletin, 42 (3): 1–2. JLB (2003b) ‘2002 Unemployment Rate Hits Record High 5.4 per cent: Labour Force Surveys’, Japan Labor Bulletin, 42 (4): 1–2. JLB (2003c) ‘Hellowork Offices for Foreign Workers Open in Tokyo and Osaka’, Japan Labor Bulletin, 42 (6): 3–4. JLB (2003d) ‘Revised Employment Insurance Law Enacted’, Japan Labor Bulletin, 42 (7): 3–5. JLB (2003e) ‘People Find Themselves Unemployed for Increasingly Longer Periods: Labour Force Survey’, Japan Labor Bulletin, 42 (8). JLB (2003f) ‘The 2003 White Paper on the Labour Economy: A Summary of the Analysis’, Japan Labor Bulletin, 42 (9): 15–19. Japan Labor Flash (The), Email Journal, 1 March, 2002, Tokyo, Japan Institute of Labour. Japan Labor Flash (The), Email Journal, 16 February, 2004, Tokyo, Japan Institute of Labour. Matsushige, H. and Fukuda, A. (2004) ‘Re-entering the Workforce after the Collapse of a Securities Firm: The Role that Age and Skill Play’, Japan Labor Review, 1 (2): 54–75. MCA (1992) Annual Report of Labour Force Survey – 1991, Tokyo: Management and Coordination Agency. MCA (1998) Annual Report of Labour Force Survey – 1997, Tokyo: Management and Coordination Agency. METI (2001) White Paper on International Trade, Tokyo: Ministry of Economy, Trade and Industry. MHLW (2001) White Paper on Welfare and Labour, Tokyo: Ministry of Health, Labour and Welfare. MHLW (2002) White Paper on the Labour Economy, Tokyo: Ministry of Health, Labour and Welfare. MHLW (2003a) White Paper on the Labour Economy, Tokyo: Ministry of Health, Labour and Welfare. MHLW (2003b) Basic Survey of Trade Unions, Tokyo: Ministry of Health, Labour and Welfare. Japan Institute of Labour. MOL (1999) White Paper on Labour, Tokyo: Ministry of Labour. MOL (2000) White Paper on Labour, Tokyo: Ministry of Labour. Morishima, M. (1995) ‘The Japanese Human Resource Management System: A Learning Bureaucracy’, in Moore, L. and P. Jennings (eds), Human Resource Management on the Pacific Rim: Institutions, Practices, and Attitudes, Berlin: Walter de Gruyer, pp. 119–150. MPM (2002) Survey on the Circumstances of Job Searchers, Tokyo: Ministry of Public Management, Home Affairs, Posts and Telecommunications. MPM (2003) Annual Report of Labour Force Survey – 2002, Tokyo: Ministry of Public Management, Home Affairs, Posts and Telecommunications. Nakamura, T. (1981) The Postwar Japanese Economy, Tokyo: University of Tokyo Press. Nikkei Weekly, 4 November 1996. Nikkeiren (1995) Nihonteki Keiei no Shin-jidai (A New Era for Japanese-Style Management), Tokyo: Nikkeiren. Nikkeiren (2002) Rodo mondai Kenkyu Iinkai Hokoku (Report from the Labour Issues Committee), Tokyo: Nikkeiren Shuppanbu. OBA (1991) Osaka and Kansai: Financial and Economic Statistics, Osaka: The Osaka Bankers Association.

Unemployment in Japan 57 OCCI (1992) An Economic Profile of Osaka. Osaka: Osaka Chamber of Commerce and Industry. OECD (1999) Unemployment Benefits in Japan: An Overview of the System. Paris: Organisation for Economic Cooperation and Development (http:www.oecd.org/dataoecd/35/62/ 1936888/pdf). OECD (2001) Labour Force Statistics. Paris: Organisation for Economic Cooperation and Development. OECD (2002) Economic Outlook, No. 72, June 2002. Paris: Organisation for Economic Cooperation and Development. OECD (2003a) Economic Outlook, No. 74, November 2003. Paris: Organisation for Economic Cooperation and Development. OECD (2003b) Quarterly Labour Force Statistics. Paris: Organisation for Economic Cooperation and Development. OECD (2004) Main Economic Indicators, January 2004. Paris: Organisation for Economic Cooperation and Development. Ohtake, F. (2004) ‘Structural Unemployment Measures in Japan’. Japan Labor Review, 1 (2); 26–53. Oliver, N. and Wilkinson, B. (1992) The Japanization of British Industry: New Developments in the 1990s. Oxford: Blackwell. Ono, H. and Rebick, M. (2003) ‘Constraints on the Level and Efficient Use of Labor in Japan’, Working Paper 9484, Cambridge, MA.: National Bureau of Economic Research Inc. Osaka Business (1996) Osaka: A New Gateway to Japan, Osaka: Osaka Business Publisher’s Council. Ostrom, D. (1997) Prospects for Economic Reform in Japan: Where is the Safety Net ?, Tokyo: Japan Economic Institute. Porter, M., Takeuchi, H. and Sakakibara, M. (2000) Can Japan Compete?. Macmillan: Basingstoke and London. Rengo (2002) Rengo Hakusho (Rengo White Book). Tokyo: Rengo. United Nations (2000) Replacement Migration: Is it a Solution to Ageing Populations? New York: United Nations Department of Economic and Social Affairs, Population Division. Whittaker, D. (2004) ‘Unemployment, Underemployment and Overemployment: Re-establishing Social Sustainability’, Japan Labor Review, 1 (1): 29–38. Womack, J., Jones, D. and Roos, D. (1991) The Machine that Changed the World. New York: Harper Perennial.

4

Unemployment and labour markets in South Korea Globalisation, social impacts and policy responses Chris Rowley, Kil-Sang Yoo and Dong-Heon Kim

Introduction Unemployment in South Korea (hereafter ‘Korea’) is an important issue. From the 1960s Korean society had become increasingly used to expanding employment and, on the whole, low levels of unemployment. Within this overall picture of the level of unemployment there was something of a gentle ‘roller-coaster ride’, with rates (in per cent) going from 7.7 (1965) to 4.4 (1970) to 4.1 (1975), with a short blip to 5.2 (1980) then 2.4 (1990) to 2.6 (1997). This ride became far more severe with the fall-out of Asian Crisis when unemployment rates shot up from 2.9 (1993) to 7.0 (1998) before subsiding again to 3.4 (2003). The context for this unemployment picture was Korea’s high economic growth from the 1960s (S. Park 2002; Kim 2003). The average real gross domestic product (GDP) growth rate was 9.0 per cent from 1963 to 1979 and 7.8 per cent from 1980 to 1996. Per capita gross national income (GNI) of just US$82 in 1962 reached US$11,380 by 19961 when Korea was the world’s 11th largest economy and became an OECD member. It was no wonder that at the time many Koreans drew a rosy picture of sustainable economic development and full employment in the future for their ‘Miracle of the Han River’ that had emerged, phoenix-like, from the wreckage of colonisation and war. The rapid economic growth began with the expansion of manufactured exports from the early 1960s, while increasingly integrating the economy into world markets (S. Park 2002). Korea was seen as a beneficiary of economic globalisation and for enthusiasts, was ‘a vivid proof of the virtues of globalisation’ (Shin 2000: 83). However, as the Asian Crisis hit in 1997 this picture changed. Korea was now described as a ‘victim’ of globalisation, i.e. of unregulated flows of global capital (Lee 1999; Shin 2000). The government was forced to turn to the International Monetary Fund for emergency credit. In return for this rescue package, farreaching structural reforms in financial, corporate, public and labour sectors were imposed (Kang et al. 2001; Phang and Kim 2001). The Crisis led to reduced economic activities and structural adjustment.2 In 1998 the real GDP growth rate was −6.7 per cent while inflation rose to 7.5 per cent (Park 2000). The implications for unemployment were immediate and fierce. Unemployment jumped from 2.1 per cent in October 1997 to a peak of 8.6 per cent in

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February 1999, with 1.8 million people jobless. Other labour market disruptions occurred in 1998, including a fall of 9.3 per cent in real wages, the nonstandardisation of many remaining jobs, increased job insecurity and rising poverty and income inequality (Hur 2002). To mitigate the social costs the government introduced comprehensive unemployment and social protection schemes for the unemployed (Jeong 2001, 2003; Lee and Kim 1999). Unemployment fell below 5 per cent by September 1999 and to 3.4 per cent by October 2000 as economic conditions improved markedly. Korea appeared to have emerged from the Crisis with impressive momentum (Betcherman et al. 2000; Betcherman and Islam 2001).3 With this critical economic backdrop we explore the dramatic changes in unemployment and the labour market and the social impacts during and after the Asian Crisis along with the social protection and active labour market programmes introduced to tackle unemployment. An interesting related question is how the welfare state adapted to the pressures of globalisation in the wake of the Crisis. Contrary to the popular view (for example, see Mishra 1999), the Korean social security system expanded social safety net programmes, such as the Employment Insurance System (EIS) and public assistance (Kwon 2002; Lee 1999; Shin 2000). In the following sections we will address the eight questions raised by Webber in Chapter 2. They are interwoven in the analysis and are then returned to explicitly in the Discussion and conclusion section. This chapter is organised as follows. The second section begins with an overview of the different phases and government strategies of economic development and related unemployment and labour market situations since the early 1960s. Major developments during and after the Crisis along three key dimensions of labour market performance of employment, unemployment and job quality are explored in the third section. The fourth section reviews social safety net programmes for the unemployed. Trends and prospects in terms of unemployment and the labour market are identified in the fifth section. The final section returns to the questions.

Contextual factors and issues Table 4.1 presents the pattern of economic activity for the past two decades. Korean post-war economic history can be divided into five stages of development according to the differing emphasis in government policy (S. Park 2002).4 The first two stages were characterised by heavy government intervention and exportoriented industrialisation. In the first period, 1963–1972, the government’s top policy priority was the development of labour-intensive light industries, such as electronics and textiles, and their export promotion. GDP grew on average by 8.9 per cent and non-farm employment increased by 8.0 per cent annually (the highest of any period). After successfully completing this early stage of industrialisation, the government’s industrial policy shifted. In the second period, 1973–1979, the government emphasised the development of heavy and chemical industries, such as autos, ships and steel products. GDP grew on average by a record high rate of 9.1 per cent annually. However,

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Table 4.1 Real GDP growth, industrial output and unemployment, 1980–2003 (%) Year

Real GDP growth

Industrial output growth

Unemployment

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

−2.1 6.5 7.2 10.7 8.2 6.5 11 11 10.5 6.1 9 9.2 5.4 5.5 8.3 8.9 6.8 5.0 −6.7 10.9 9.3 3.1 6.3 –

−0.9 9.5 5.7 14.4 16.3 6 18.7 18.3 12.1 3.5 9.2 9.5 5.3 5.4 10.8 11.3 6.8 6.6 −7.4 21.0 15.9 2.1 6.3 –

5.2 4.5 4.4 4.1 3.8 4.0 3.8 3.1 2.5 2.6 2.4 2.4 2.5 2.9 2.5 2.1 2.0 2.6 7.0 6.3 4.1 3.8 3.1 3.4

Source: Korea Labour Institute (2004), Korea Labour Institute Labour Statistics, Seoul: KLI. Note: Industrial output growth is that of manufacturing sector.

the average annual growth rate of non-farm employment was relatively low, 3.2 per cent, mainly due to the capital-intensive character of the expanding sector. A small number of large conglomerates, the chaebol, emerged as key engines of growth (Kim 2003; Rowley and Bae 1998; Rowley et al. 2002). The second oil shock and political turmoil caused by the assassination of former President Park Chung-Hee severely hit the Korean economy in 1979. The economy recorded a negative growth rate of 2.1 per cent, and unemployment reached 5.2 per cent in 1980. Prices began to rise rapidly from the late 1970s mainly due to expansionary fiscal and monetary policies and the oil shock. The Chun government came into power in 1980, and during the third period, 1980–1986, the government carried out economic stabilisation policies to control inflation. The GDP average annual growth rate declined somewhat, to 6.8 per cent, while the average annual growth rate of non-farm employment was higher, at 5.2 per cent, than in the previous period. Crucially, the government also tried to change the developmental strategy from a state-led one to a market-driven one through various market liberalisation strategies, such as trade liberalisation, deregulation and privatisation.

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The Korean economy faced a turning point in the late 1980s (Yoo 2000). With the fall of the authoritarian regime in 1987, Korea underwent rapid political, social and economic changes. The economy suffered from explosive labour disputes and high wage increases until 1996. The fourth period, 1987–1996, began with such political and social turmoil. The new government (1988–1993), headed by President Roh Tae-Woo, pursued further market liberalisation strategies and democratisation of politics. These policy directions were reinforced by the following government (1993–1998), headed by President Kim Young-Sam. The Kim government presented a comprehensive national reform plan, the ‘Segyewha’ (‘globalisation’) policy. Average GDP growth rate was higher, 8.1 per cent, while the non-farm employment increase was lower, 4.4 per cent per year, than in the previous period. The fifth period, 1997–2000, involved the Crisis and the IMF’s supervision over Korea’s economic management. The new government, led by President Kim Dae-Jung, vigorously pursued economic restructuring from 1998. In 1998 the real GDP growth rate was an unprecedented −6.7 per cent, unemployment reached 6.8 per cent and real wages fell by – 9.3 per cent (Yoo et al. 2002). However, the economy quickly recovered from the deep recession. Real GDP grew by 10.9 per cent in 1999 and 9.3 per cent in 2000. Although the unemployment rate remained as high as 6.3 per cent in 1999, mainly due to the lag effects of business cycles on the labour market, it began to decrease significantly in 2000. The unemployment rate was 4.1 per cent in 2000, with 913,000 jobless. Nevertheless, unemployment remains higher than pre-Crisis levels, and it is unlikely to return to the very low figures of 2 per cent recorded then. The overall labour force participation rate in 2003 was only 61.4 per cent, still below the pre-Crisis peak of 62.5 per cent (see Table 4.2). The employment rate (employment to population ratio) was also below the pre-Crisis peak. Also, since the unemployment rate measured only those ‘actively’ looking for work, it underestimated the actual number as some people became discouraged and

Table 4.2 Major employment indicators, aged 15 and over (thousands, %) Year

Labour force

LFPR

ER

Employed

Unemployed

UR

1995 1996 1997 1998 1999 2000 2001 2002 2003

20,845 21,288 21,782 21,428 21,666 22,069 22,417 22,877 22,916

61.9 62.1 62.5 60.6 60.6 61.0 61.3 61.9 61.4

60.6 60.8 60.9 56.4 56.7 58.5 59.0 60.0 59.3

20,414 20,853 21,214 19,938 20,291 21,156 21,572 22,169 22,139

430 435 568 1,490 1,374 913 845 708 777

2.1 2.0 2.6 7.0 6.3 4.1 3.8 3.1 3.4

Source: Korea Labour Institute (2004), Korea Labour Institute Labour Statistics, Seoul: KLI. Note: LFPR: Labour Force Participation Rate; ER: Employment Rate; UR: Unemployment Rate.

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stopped seeking work (Kang et al. 2001). The relatively lower participation rate compared to the pre-Crisis level suggests such discouraged workers existed.5 The Crisis profoundly impacted on Korean society. The country had become used to full employment but then faced mass layoffs and high unemployment. People began to realise that few were immune from the threat of unemployment. Many new college graduates experienced great difficulty in searching for their first jobs, while older employees who took for granted that their jobs would be lifelong, were under pressure to leave workplaces (Kwon 2002: 24). Indeed, the share of non-regular workers increased, average job tenure shortened, earnings inequality widened, and the male participation rate lowered compared to the pre-Crisis situation (Choi 2003: 23–24). In short, the Korean labour market was changed in a fundamental way by the Crisis and some of the changes were permanent. In the following section we trace the main changes in the labour market during and after the Crisis.

Society and unemployment Three key dimensions of labour market performance are employment, unemployment and job quality. We now explore these to get a clearer picture of the labour market situation. We identify major changes and trends in employment and unemployment structures, and in this process discuss the issues of labour supply and demand, as well as the social consequences. Employment With high and constant economic growth, employment increased rapidly from the early 1960s (Yoo et al. 2002). The number of employed rose from 13.7 million in 1980 to 21.2 million in 1997 and to 22.1 million by 2003. Female workers led the increase in the labour force participation rate, up from 42.8 per cent in 1980 to 49.8 per cent in 1997, while male participation dropped slightly, from 76.4 per cent to 75.6 per cent. Various factors, such as decreasing fertility, expansion of child-care services and flexible work hours, albeit poor in comparison to some countries (see below), contributed to this increase. Even though the labour force participation rate increased steadily during the 1990s, it remained low by international comparison. For example, the rate (of persons aged 15–64 years) in 2001 was 64.6 per cent, some 5.2 percentage points less than the OECD average of 69.8 per cent, while for women it was 52.6 per cent, some 6.7 percentage points less than the OECD average of 59.3 per cent (OECD 2002: 304–306). This situation was attributable to the continuing lack of institutional infrastructure, such as child-care and maternity leave, continued gender discrimination and women’s tendency to withdraw from the labour market after losing jobs (Kang and Rowley 2004). Due to industrialisation, the share of the primary sector in total employment decreased dramatically from the early 1960s. The share of the primary sector’s employment continuously fell from 34.0 per cent in 1980 to 11.3 per cent in 1997

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and further to just 8.8 per cent by 2003. The employment share of the secondary sector also decreased after peaking at 27.6 per cent in 1990, down to 19.1 per cent by 2003.6 In contrast, the service sector’s share of employment massively increased, from less than one-half to almost three-quarters, from 43.5 per cent in 1980 to 72.1 per cent by 2003. Compared to other OECD countries the Korean labour market had two distinguishing characteristics (Yoo et al. 2002). First, a large number of workers were employed in non-regular jobs with a low degree of job stability.7 In 2003, nearly one-half, 49.5 per cent, of wage and salary employees were either temporary or daily employees (see Table 4.3). The incidence of non-regular work was particularly high among women, older workers and the less educated, while younger and more educated male workers performed the majority of regular jobs. This non-standardisation of employment was observed before 1997, but had been accentuated (Betcherman et al. 2000).8 Second, self-employment was the highest among the OECD countries. Self-employment as a proportion of total employment was relatively stable at 27 to 28 per cent during the 1990s.9 Unpaid family workers accounted for about 8 per cent of overall employment in 2003 (see Table 4.3). However, part-time employment (less than 36 hours per week) made up a smaller share than in other OECD countries (OECD 2002: 319).10 In 1996, part-time employment as a proportion of employment was only 6.2 per cent, and only slowly increased over the years to reach 10.1 per cent in 2001.

Table 4.3 Employment by status (%) Wage and salary workers

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

60.5 62.7 62.7 62.0 62.9 63.2 63.3 63.2 61.7 62.4 63.2 63.3 64.0 65.0

Non-wage and salary workers

Regular

Temporary

Daily

32.8 34.8 36.0 36.6 36.4 36.7 36.0 34.3 32.8 30.2 30.2 31.1 31.0 32.9

17.5 18.0 17.4 16.6 17.5 17.6 18.7 20.2 20.3 21.0 21.8 22.0 22.0 22.6

10.2 9.9 9.3 8.9 9.0 8.9 8.6 8.9 8.6 11.2 11.1 10.3 11.0 9.6

39.6 37.3 37.3 38.0 37.1 36.8 36.7 36.8 38.3 37.6 36.9 36.7 36.0 35.0

Self-employed

Family worker

28.0 26.7 27.2 27.3 27.1 27.3 27.4 27.8 28.1 28.1 27.7 28.0 28.0 27.3

11.4 10.6 10.1 10.6 10.0 9.5 9.3 9.0 10.2 9.5 9.1 8.6 8.1 7.7

Source: Korea Labour Institute (2004), Korea Labour Institute Labour Statistics, Seoul: KLI. Note: Regular workers: workers whose contract terms are a minimum of one year or for an unspecified term; Temporary workers: workers whose contract terms are shorter than one year but equal to, or longer than one month; Daily workers: workers whose contract terms are less than one month.

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Unemployment Unemployment by gender, age and education is presented in Table 4.4. Before the Crisis there was a relatively small difference between males and females in unemployment rates (Yoo et al. 2002). After the Crisis, however, women were more likely to leave the labour market, while men looked more actively for jobs. As a result, the unemployment gap between men and women widened from 0.5 percentage points in 1997 to 2.1 percentage points in 1998, although narrowing recently. Unemployment patterns differed considerably by age. The youth labour participation rate was quite low by international standards. This may be due to the fact that more than 80 per cent of high school graduates pursued a higher education and most full-time students did not have part-time jobs. However, unemployment rates among the young were relatively high, just as in many countries, where rates are two to three times higher than adult rates (ILO 2000: 43). Youth unemployment was structural in nature. High rates may reflect a long job search process on the part of college graduates, whose parents support them. Skill mismatches between the educational curricula and labour market demands may also induce serious school-to-work transition problems for many young entrants, especially females who studied liberal arts in college (see Kang and Rowley 2004). Table 4.4 also shows trends in unemployment by educational attainment. Traditionally, the unemployment rate was higher for persons with (junior) college education than for those with high school education. However, this gap narrowed over time, and finally reversed after the Crisis. Unemployment rates for high school graduates in 2003 and (junior) college graduates were 4.1 per cent and 3.5 per cent, respectively. Structural adjustments after the Crisis were associated with downward mobility of workers as less-educated workers were forced to leave their jobs in favour of higher-educated workers. Another explanation was the shrinkage of manufacturing and construction industries which hired a large number of Table 4.4 Unemployment by gender, age and educational attainment (%)

Unemployment rate Gender Male Female Age 15–29 30–39 40–49 50–59 60 and over Education Middle & below High school College & over

1996

1997

1998

1999

2000

2001

2002

2003

2.0 2.4 1.6 4.6 1.4 1.1 0.9 0.4 1.1 2.5 2.6

2.6 2.8 2.3 5.7 1.9 1.5 1.2 0.8 1.5 3.3 3.0

7.0 7.8 5.7 12.2 5.7 5.6 5.3 2.4 5.9 8.3 5.9

6.3 7.2 5.1 10.9 5.3 5.2 5.1 2.3 5.2 7.6 5.4

4.1 4.7 3.3 7.6 3.4 3.3 2.9 1.3 3.3 4.8 4.0

3.8 4.3 3.1 7.5 3.0 2.8 2.6 1.1 2.9 4.3 3.8

3.1 3.5 2.5 6.6 2.8 1.9 1.8 1.0 2.1 3.5 3.5

3.4 3.6 3.1 7.7 2.9 2.1 2.0 0.9 2.0 4.1 3.5

Source: National Statistical Office, Labour Force Survey, various issues.

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workers with high school education. However, the unemployment gap between the two groups has narrowed recently. Long-term unemployment (over 12 months in duration) gives rise to particular concern in many countries. In Korea, the cumulative effect of high and persistent unemployment did not lead to the perpetuation of long-term unemployment as predicted by some just after the Crisis (Hur 2002; Kang et al. 2001). Long-term unemployment was relatively low compared to that of North America and Europe (OECD 2002) and less of an issue. However, a recent study found that about a third of those who experienced unemployment between January 1998 and June 1999 experienced unemployment recurrently (B. Lee 2000). As for nonregular employees, 77.5 per cent of them experienced joblessness more than twice during the 18 months.11 Job quality Job quality includes dimensions of wages and job stability. The Crisis had significant effects on wages (Choi 2003: 44–49). Between 1991 and 1997 average nominal wages almost doubled, rising on average by 12.5 per cent annually, while real wages rose at an annual rate of 6.4 per cent (see Table 4.5). Such steep wage increases suddenly reversed in 1998 and nominal wages fell by 2.5 per cent compared to the previous year. This amounted to a 9.3 per cent drop in real wages given inflation’s rise to 7.5 per cent in 1998. As the economy recovered rapidly, large wage increases occurred in 1999, although nominal wage increases since 2000 have been more moderate than before the Crisis. As mentioned previously, a large proportion of remaining employment was transformed into unstable, non-regular jobs (Hur 2002: 46–47). Even with the Table 4.5 Nominal and real wage growth, 1991–2001 (%) Year

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 1991–2001

Nominal wage

Real wage

Index

Growth rate

Index

Growth rate

100.0 115.2 129.2 145.6 161.9 181.2 193.9 189.1 211.9 228.9 241.8

17.5 15.2 12.2 12.7 11.2 11.9 7.0 −2.5 12.1 8.0 5.6 9.2

100.0 108.4 116.1 123.1 131.0 139.7 143.2 129.8 144.4 152.5 154.7

7.5 8.4 7.0 6.1 6.4 6.6 2.5 −9.3 11.2 5.6 1.5 4.2

Source: Rhee (2003: 62), Table 2.3. Note: Survey samples are based on firms with more than ten employees.

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ensuing economic recovery, the rising share of non-regular jobs was neither reversed nor diminished. This was one of the more lasting changes brought about in the labour market (Choi 2003). Between 1998 and 2000, the unemployment rate decreased from 6.8 per cent to 4.1 per cent and the number of employed rose by 0.95 million. However, the number of regular employees declined by 0.21 million, while temporary and daily employees grew by 0.51 million and 0.64 million, respectively. Thus, the jobs created were different, often of poorer ‘quality’, to those lost. A Korea Labour Institute survey (reported in The Economist 2003a) found some 26 per cent were ‘bichongkyu’ (atypical workers). While this was similar to other rich countries, in Korea this did not include the unusually high number of employees who worked full-time on three month contracts that were continually rolled-over, but offered little security or fringe benefits. Counting these, the same survey estimated that less than 50 per cent had full-time jobs they could depend on. The rising share of non-regular jobs implied that the labour market has become more flexible, at least in numerical terms (see Bae et al. 1997) since non-regular jobs had shorter job duration and higher turnover (Choi 2003: 36).12 It also implied general occupational degrading since non-regular jobs were lowerpaid compared to regular jobs. As corporate restructuring intensified, non-regular employees and less-educated workers suffered negative impacts disproportionately. This lowered job quality, together with job losses, contributed to earnings and household income inequality. Indeed, many studies indicated that income inequality increased substantially since 1996, mainly due to the Crisis (Kim 2003; S. Park 2002). A common way to measure income inequality was to calculate the percentage of total income received by families in different parts of the family income distribution. The National Statistical Office, for example, calculated the income rank of every urban family, ranked them from lowest to highest, and then divided them into five equal-sized groups. In 2003, the one-fifth of all families with the lowest incomes (I) received 7.4 per cent of total income, while families in the top one-fifth of the distribution (V) received 38.8 per cent of all income. The ratio of V to I is, therefore, 5.22 (see Table 4.6). These ratios and the National Statistical Office’s estimates of the Gini coefficient, show that family income distribution widened substantially following the Crisis.

Institutions and social problems Korea’s fast recovery from the Crisis stemmed not only from economic reforms, but also from the government’s active social and labour market policies (Hur 2002; Kwon 2002; Lee and Kim 1999; Phang and Kim 2001). The Kim DaeJung government, elected at the end of 1997 during the Crisis, extended the EIS. When the EIS was first introduced, in July 1995, coverage was limited to firms with 30 or more employees. However, it was rapidly extended – in 1998 – to firms with ten or more employees in January, to firms with five or more employees in March, and finally to all firms regardless of size in October. The government also overhauled public assistance programmes and introduced a new public assistance

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Table 4.6 Urban family income inequality, 1990–2003

Income share by 5 fifths of family income distribution (%) Year

I

II

III

IV

V

Ratio (V/I)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

8.4 8.5 8.5 8.6 8.5 8.5 8.2 8.3 7.4 7.3 7.5 7.5 7.7 7.4

13.2 13.4 13.6 13.6 13.5 13.5 13.3 13.6 12.8 12.6 12.7 12.5 12.7 13.2

17.2 17.4 17.5 17.5 17.5 17.5 17.5 17.7 17.1 16.9 17.0 16.9 17.1 17.4

22.5 22.6 22.8 22.8 22.9 23.0 23.1 23.2 22.9 22.9 22.7 22.7 22.9 23.2

38.8 38.0 37.6 37.4 37.6 37.5 37.9 37.2 39.8 40.2 40.1 40.3 39.7 38.8

4.64 4.46 4.42 4.35 4.42 4.42 4.63 4.49 5.41 5.49 5.32 5.36 5.18 5.22

Gini Gini coefficient 0.295 0.287 0.284 0.281 0.285 0.284 0.291 0.283 0.316 0.320 0.317 0.319 0.312 0.306

Source: Korea Labour Institute (2004), Korea Labour Institute Labour Statistics, Seoul: KLI.

system, the National Basic Livelihood Guarantee System, in October 2000.13 In the following sections we review such social safety net programmes. Social security The EIS was the basis of the social safety net for the unemployed, and others were supplementary social security programmes. Experience in various countries indicated that rather than just paying unemployment benefits, a better programme for workers was preventing unemployment itself by improving job stability and job competency (Yoo 2000). According to this principle, the purposes of the EIS were to help unemployed workers by providing them with unemployment benefits and to enhance employment stability and job competency through active labour market policy measures within the framework of the EIS. Thus, the EIS was a combination of the traditional unemployment insurance system and active labour market programmes – the reason why Korea called its system employment insurance rather than unemployment insurance. The Korean EIS has four basic programmes: the Employment Stabilisation Programme (ESP), the Job Skill Development Programme (JSDP), Unemployment Benefits (UB), and Maternity and Parental Leave Benefits. We focus on the UB programme, which is the core of the unemployment safety net. Until 1997 there were few UB claimants because of low unemployment (Yoo et al. 2002). With the Crisis, however, and the ensuing high unemployment, total expenditures

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for UB increased sharply: from 78 billion won in 1997 to 785 billion won in 1998 and 936 billion won in 1999 (Korea Labour Institute 2003). UB spending as a proportion of GDP increased from a meagre 0.02 per cent in 1997 to 0.19 per cent in 1999. An analysis of the attributes of the unemployed who were receiving UB shows that insured female workers were more likely to be unemployed than insured male workers (Korea Labour Institute 2003; Yoo et al. 2002). The proportion of insured female employees increased slightly from 27.2 per cent in 1996 to 31.3 per cent in 2001. However, the proportion of female recipients out of total recipients increased from 20.1 per cent in 1996 to 38.6 per cent in 2001. As for age, about 90 per cent of recipients fall into the prime working-age bracket of 25 to 59. Two key measures of the responsiveness of the EIS to the needs of the labour force are the percentage of the labour force that is covered under the programme and the percentage of the unemployed who actually receive UB, the recipiency rate (Bassi and McMurrer 1997: 51). The ratio of UB claimants to the total number of unemployed increased from 1.8 per cent in 1997 to 10.4 per cent in 1999 (see Table 4.7). The sharp increase in the recipiency rate was mainly due to souring unemployment, coverage expansion and introduction of special extended benefits. The recipiency rate decreased to 8.1 per cent in 2000, but increased sharply to 14.8 per cent in 2002. Even though UB claimants rapidly increased after the Crisis, the ratio of UB claimants to the total number of unemployed was only about 10 per cent in 1999. The figure was a relatively low level compared to other countries (Hur 2002; Yoo et al. 2002), and offered evidence for those criticising the non-effectiveness of the EIS (for example, Yun 2002). Indeed, if we narrow down the denominator of the ratio from the total unemployed to those unemployed workers actually protected

Table 4.7 UB recipiency rate, 1997–2002 (%)

As a proportion of the unemployed for less than one year

Year

As a proportion of the total unemployed

Out of displaced workers

Out of unemployed wage workers

Out of unemployed wage workers except daily workers

1997 1998 1999 2000 2001 2002

1.8 7.6 10.4 8.1 13.3 14.8

– 9.4 5.4 10.3 17.0 18.8

– 11.2 15.8 12.2 20.2 22.2

– 16.9 27.4 20.0 30.9 33.4

Source: Korea Labour Institute (2003: 59), Employment Insurance Trends, Seoul: KLI.

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by the EIS, recipiency rates increase substantially. For example, as the last column of Table 4.7 shows, the ratio of UB claimants to the unemployed wage and salary workers excluding daily workers increased to 33.4 per cent in 2002. Some identified reasons for such a low recipiency rate (Hur 2002; Yoo 2000; Yoo et al. 2002). First, there were still many employees who were not effectively covered by the EIS, notably daily workers and many temporary workers. Second, the EIS did not grant UB to those who quit their jobs voluntarily without justifiable reasons. More than half of those covered employees who left their jobs quit voluntarily. Third, the duration of benefits was relatively short in the EIS. Finally, some unemployed workers may have chosen not to apply for benefits. Hur (2002) mentions that some white-collar unemployed might feel shameful about presenting themselves at the employment security centre to receive benefits. During 1998 to 2000, the annual average proportion of non-regular workers was 50.4 per cent of total wage and salary workers. By contrast, unemployed nonregular workers accounted for 78.7 per cent of total unemployed wage and salary workers. This shows that daily workers and many temporary workers were the ones who most needed social protection from unemployment, but they were not covered by the EIS. Therefore, the government implemented temporary income support programmes, such as public works, on a large scale following the Crisis. Income support Public works projects aim to provide temporary job opportunities in the public sector and thereby to guarantee the basic livelihood of unemployed families. That is, the programme has two policy objectives: the creation of temporary job opportunities and reinforcement of the social safety net for the unemployed. Direct income support may weaken the active job search efforts of the unemployed and give rise to weakness in the economy in the long run. Therefore, Korea implemented public works as a workfare programme instead of direct income support for the poor unemployed families as a welfare programme. Public works projects emerged as a crucial unemployment scheme in the overall system of income support and social protection after the Crisis (J. Lee 2000). In 1998, over 1 trillion won was poured into the projects, and in 1999, about 2.5 trillion won. Although officially classified as an active measure, these schemes mostly played an important role as complementary income support. As an unemployment measure, whether the public works projects actually helped the unemployed has been the subject of controversy (Jeong 2001, 2003; Lee and Kim 1999; Park and Lee 1999; Phang 1999; Phang and Kim 2001). The findings from a survey conducted by the Korea Labour Institute (J. Lee 2000) suggest that the projects might have activated some economically inactive people. However, about half of the female participants, who in general were erroneously considered as economically inactive, turned out to be the major breadwinners in poor households. Furthermore, the average monthly household income of all respondents was close to the poverty line, implying that the projects should even be considered as a successful poverty measure. The projects especially benefited

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women, older, and less-skilled workers who had been excluded from the other institutionalised unemployment schemes such as the EIS. Notwithstanding the criticisms that public works were a poor job creation programme, the distribution effects of the projects were fairly positive. Finally, the livelihood protection programme was the last resort for the poor. Created by the Livelihood Protection Act in 1961, it provided support to those who were unable to work, such as the handicapped, the elderly and children (Park and Kim 1998). Thus, the programme was designed not for the unemployed but for the general poor.14 Each year the government selected poor households for this programme by a means test. The programme had no limits on duration as long as the recipients met the requirements. The government expanded the programme and introduced the temporary livelihood protection programme for the unemployed in March 1998 to protect poor unemployed people who did not qualify for UB. To qualify for the original programme people should have an income of less than 230,000 won and property worth less than 29 million won. This programme eased some of its strict eligibility criteria, i.e. property worth less than 44 million won (150 per cent of 29 million won). This new programme protected poor unemployed people by making longterm loans for maintaining livelihood, housing costs and funds for operating businesses at a low interest rate. Direct cash benefits were offered if the unemployed person was not able to work. The temporary livelihood protection programme, however, is still too limited in its coverage and generosity to complement UB (Park and Lee 1999). For example, a household of four members can receive 250,000 won per month under the programme, while the minimum living expenses of the same-size family are 880,000 won. Although Korea developed various social safety nets for the unemployed after the Crisis, their absolute level of social protection is still much lower than that of developed countries. The government introduced a new public assistance system under the National Basic Livelihood Guarantee Act in October 2000, and the temporary livelihood protection programme, together with the livelihood protection programme, were integrated into the National Basic Livelihood Guarantee System. Under the new framework, public assistance is available to every citizen who cannot maintain the minimum standard of living subject to a means test and the recipients are obliged to seek work unless they have no earning ability.15 The introduction of the National Basic Livelihood Guarantee System was one of the main social policy initiatives of the Kim Dae-Jung government and a product of a new policy initiative – ‘productive welfare’. President Kim claimed that this approach to social policy was fundamentally different from those of the past since it recognised the social right to a decent standard of living for every citizen and acknowledged the state’s responsibility for delivering that goal (Kwon 2002: 27).

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Trends and prospects As of February 2004 Korea’s overall unemployment rate was 3.9 per cent, while the rate of youth (aged 15–29) unemployment was 9.1 per cent, comprising 51 per cent of the total. Even though the unemployment rate in this group was the highest among all the age groups, the actual numbers looking for work was even greater since discouraged workers were not included (Yoo et al. 2002). Youth unemployment has worsened since the Crisis, and is now one of the most serious social issues in Korean society. The main reasons for this serious problem stem from the both sides of the youth labour market: demand and supply. From the labour demand side there have been some changes in large companies’ strategies in hiring employees since the Crisis, which resulted in fewer job opportunities for the young (Jeong 2001: 9–10). Companies showed preferences for workers with work experience over first-time job seekers. Also making it difficult were the changing recruitment practices of some companies. Rather than taking groups of graduates fresh out of college, firms were hiring according to need and preferred experienced workers or graduates with business and economics diplomas (The Economist 2003b).16 In particular, it is getting even more difficult for less-educated young workers to get jobs. This trend reduced employment opportunities for newly graduated persons, and thus extended the duration of job search. A survey of 2,688 people who graduated from four-year colleges in 2003 found less than one-half, only 44 per cent, were employed (The Economist 2003b). Furthermore, a recent analysis of the EIS database shows that ‘decent’ jobs at the 30 largest companies, public corporations and financial intermediaries declined by 280,000 from October 1997 (just before the Crisis) to October 2001 (Jeong 2001). In addition, the proportion of young employed in those decent jobs declined by 13 percentage points from 35.9 per cent to 22.6 per cent. From the labour supply side, the college entrance rate of high school graduates has stood at more than 80 per cent since 1997. These college graduates still maintain their preference for the jobs offered by large companies and do not readily lower their reservation wages, even though their employment prospects deteriorated. In short, the youth unemployment problem can largely be explained by changes in labour market structure. The rapid increase in the number of college graduates and the new practice of employing experienced workers aggravated employment prospects. How to address and improve the youth unemployment problem is a top policy priority in Korean society (Jeong 2003; Kim 2003). The increase in female labour participation is expected to be one of the most important trends in the future (Choi 2003). Female participation by age was characterised by an M-shaped pattern (see Figure 4.1 from Kang and Rowley 2004), as young females aged 25–29 tended to leave the labour market after marrying and having children. This indicated female participation peaked at 20–24 years, sharply declined between 25–34, and increased again between 40–44 to another peak. That is to say, women quit jobs in their late 20s to spend 7–8 years in domestic affairs, including child birth/care, then return in their late 30s. Furthermore, university graduated women often did not return, indicating a

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Figure 4.1 Female labour force participation rate by age, 1999 (%). Source: ILO (2000), Women, Gender and Work, Geneva: ILO.

Figure 4.2 Female labour force participation rate (college and over) by age, 2001 (%). Source: National Statistical Office, Labour Force Survey (2001).

trend for permanent drop-out from the labour market, an L shaped curve (see Figure 4.2 from Kang and Rowley 2004). In Western countries, female career drop-out disappeared from the late-1970s, showing the same inverted U-shaped employment pattern as men (for example, see Canada in Figure 4.1) and women distributed their participation continuously. Also, most female workers belong to the secondary labour market, and genderbased wage inequality is large relative to other OECD countries. Even though some improvements occurred in recent years, there is still widespread gender discrimination in the workplace (Kang and Rowley 2004). However, due to various factors such as expanded educational opportunities, development of a child-care system and changing social attitudes, more women participate in the labour market (Yoo et al. 2002). The employment rate among females aged 25–29 is rising very fast and they are highly educated (Choi 2003). Female labour will become more important in Korea in the future as these highly educated young women enter the labour market and change the composition of

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the labour force. The rise in female participation is expected to help mitigate another trend in the labour market – population ageing. Population ageing will be another major change in Korean society in the future (Chang 2003; Choi 2003). Currently, Korea’s population structure is relatively young compared to OECD countries. The proportion of persons aged 65 or older among the population was 7.92 per cent (2002). However, population ageing is progressing. For instance, the proportion of persons aged 65 or older will exceed 14 per cent by 2019. This poses challenges to Korea’s labour market. First of all, it is important to keep older workers employed in order to maintain their living standards and to prevent retirement pension payments from imposing an excessive fiscal burden on the government. Another challenge is how to maintain the productivity of the labour force since population ageing results in an older workforce. A further major change to the labour market will concern another aspect of its growing diversity (more females and older workers), this time from foreign labour and immigration. This is a new development and reversal of the position when Korea exported labour. Some companies have become more diverse, for example Samsung Electronics has many different nationalities employed in its R&D area. However, labour immigration is restricted to certain occupations and unskilled foreign workers are officially admitted only as ‘trainees’. Most immigrant workers are in ‘3D’ (dirty, difficult, dangerous) jobs (Won Woo Park 2002). Despite these changes, the Korean workplace often remains ethnically very homogeneous and exclusive. The challenge for management and business is to manage diversity in such a traditional context as Korea.

Discussion and conclusion In the previous sections the set of questions raised in Chapter 2 were interwoven in the analysis. We now return to them explicitly here. The first question concerned the levels of unemployment. Since the 1980s levels of unemployment have fluctuated, but overall have been low compared to many countries in the West, and even other ‘Asian Tigers’. Nevertheless, the post-Crisis rise was a short, sharp shock. It was traumatic as it dented the belief that continuing employment growth and low unemployment was typical. It also put in train other labour market changes. The second question raised the issue of the dynamics of unemployment, for example the transitions that are typical, its duration, its effects on careers. In South Korea the dynamics of unemployment have changed. Even if there is not such a high overall level or so much continuous, long-term unemployment, there is far more ‘flow’ into and out of periods of unemployment. These recurrent periods can have adverse effects on careers. The third question was what is the experience of particular social groups within that aggregate history? The unemployment experiences of different groups have varied. This has been especially difficult for the young, and especially the poorly educated young. The model applicable to their parents, of lifetime employment, has eroded. Likewise,

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while female employment participation rates have increased, their progress into management positions has not matched this. The fourth question considered the implications of a more open economy for unemployment. The implications for a more open economy are stark. Greater openness in trade and investment is allowing more diverse and non-indigenous companies to operate in Korea. Yet, the other side of this coin is the threat of ‘hollowing out’ and ‘off-shoring’ of jobs. This is an increasingly hot topic. One example is Samsung, which recently closed its last microwave oven manufacturing line in Suwon with the transfer of it, and the head office function for this product, to Port Klang, Malaysia. Another area of openness is in terms of immigration. This has become more contentious as Korea has moved from a labour-exporting to a labour-importing country in the context of a very homogenous ethnic society and labour force. The fifth question was what are the effects of economic structure on unemployment? In particular, how do technical change, capital investment, industrial structure and the new economy affect unemployment? Changes in the economic structure have effected unemployment. There is a sectoral shift from heavy industry and manufacturing, traditional users of large numbers of semi-skilled male operatives, to lighter, hi-tech manufacturing and services, with job opportunities for different skills and females. Samsung is a good example again as its electronics division shifts from manufacturing simple products to ever higher-tech and sophisticated ones, but which are less labour intensive to produce. The sixth question concerned the economic and social costs of unemployment. The economics and social costs of unemployment can be high. The social costs are especially high in a society and culture where traditionally hard work and speed (‘palli palli’) is praised and expected. Social costs include anecdotal evidence of suicide rates and the loss of trust and commitment among those still working – the so-called ‘survivors’ syndrome’. Also, ‘employment’ itself had changed, for example, with large numbers of non-regular jobs with low job stability, especially women, older workers and less educated and these are lower paid and also income inequality widened. The final question was what were the appropriate labour market and other policies with which to deal with unemployment? There have been a range of labour market policies introduced. Contrary to popular argument, i.e. the dismantling of the welfare state by the logic of globalisation, the government pursued an expansion of the social security system (Lee 1999). Korea seems to be following the opposite direction from the avenue suggested by globalisation regarding the social security system; Shin (2000: 83) calls this the ‘paradox’ of Korea. The changes to the social security system were most pronounced in the EIS and public assistance, rapidly expanded in response to increased unemployment. The IMF and the World Bank initially requested expansion of the EIS to mitigate impacts on living standards and promote social and political stability during the stabilisation and recovery programmes implementation (ILO 2000; Yeates 2001), but expansion gained its own momentum after that. For instance, there was intense social tension each month in 1998 and 1999 when it was close to

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the release of the unemployment statistics. Labour unions and organisations questioned the reliability of official unemployment statistics for not taking the large number of discouraged workers into account. These organisations questioned the government’s failure to cope with rising unemployment, and the EIS was the main target of attack. Confronted with these pressures, the government enhanced the role of the EIS as a social safety net for the unemployed. Shin (2000) argues that the development of the social security system during the Crisis can be mainly attributed to the change of policy networks to a tripartite corporatism and growing social demands for social welfare. His argument is especially pertinent to the development of the EIS in the wake of the Crisis. Although the EIS was introduced by a few policymakers in the early 1990s and external forces (and external shocks to the economy) forced the start of the expansion process at the beginning of the Crisis, the ensuing development process of the EIS was largely driven by internal forces. Following adjustments by many advanced welfare states since the early 1970s, it was concluded by Esping-Anderson (1996) that political and institutional mechanisms of interest representation and political consensus-building were important. The Korean experience post-Crisis supports his conclusion. Indeed, we do not claim that Korea has moved swiftly to a developed welfare state. The basic structure of the welfare state remains almost the same and that the absolute level of social protection is still much lower than that of advanced welfare states. In this chapter we identified some of the main changes in unemployment and labour market and social policy challenges. Together with ongoing external pressures of economic globalisation, these are the main challenges for Korea to have to overcome successfully in the near future to move toward a developed welfare state and to deal with unemployment.

Notes 1 Actually per capita GNI peaked in 1996. By 1998 it had dropped to US$6,823, but bouncing back to US$10,013 by 2002. 2 In his recent book Joseph Stiglitz (2002: 109–110), former senior Vice President at the World Bank, criticised IMF bureaucrats for mishandling the Crisis and policy mistakes. He mentions that the use of high interest rates induced unduly painful economic and social consequences to Korea. 3 Recently, however, a renewed sense of crisis has been prevailing in Korean society, partly due to the unstable political situation and the uncertain business environment. 4 The following is mainly based on S. Park’s (2002) excellent work. 5 Discouraged workers are those who wish to work but have been discouraged by their repeatedly unsuccessful attempts to find employment. 6 Secondary sector includes manufacturing and mining. 7 For an excellent analysis of the non-standardisation of wage employment in Korea, see Ahn (2002); Betcherman et al. (2000); Hur (2002); Choi (2003). 8 The statistical figures of non-regular workers are somehow misleading because a large number of temporary and daily workers have worked for more than one year. In the Labour Force Survey, any worker who did not receive either severance payment or medical insurance and other benefits was regarded as non-regular even if his/her employment exceeded one year. This practice exaggerates the real scope of the

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Chris Rowley, Kil-Sang Yoo and Dong-Heon Kim non-regular work. Furthermore, the OECD’s definition of temporary (or non-regular) employment is different from that of the National Statistical Office, which makes a straight comparison of statistics very misleading. For a careful explanation of this issue, see Choi (2003: 42–44). Data for self-employed include employers and all own-account workers. In OECD Employment Outlook, part-time employment refers to persons who usually work less than 30 hours per week in their main job. OECD (2002) considers repeat unemployment spells as a form of long-term unemployment. We note that the average job tenure for Korean workers was 6.0 years in 2001, which is much shorter than 11.7 years for Japanese workers and 7.5 years for American workers (Kim 2003: 10). The government also reformed the National Pension System and the National Health Insurance System. For a comprehensive review of these reforms, see Kwon (2001) and Kwon (2002). Those who had lost their job and fallen into poverty may also be protected by this programme. For a comprehensive review of the National Basic Livelihood Guarantee System, see Park (2000). However, many foreign firms were helping the young jobless, some took on interns to be considered for permanent jobs. For example, British American Tobacco Korea was paying six Korean students to study in Europe. The Europe-Korea foundation, a charity, was sending another five, sponsored by Samsung, Tesco, Wellvis, Evian and others. The aim was to find graduates who show promise and train them as future business leaders (The Economist 2003b).

References Ahn, Joyup (2002) ‘What Have We Learned about Alternative Employment Arrangements in Korea’, Newsletter of Korea Labour Institute, No. 3, January. Bae, Johngseok, Rowley, Chris, Kim, Dong-Heon and Lawler, John (1997) ‘Korean Industrial Relations at the Crossroads: the Recent Labour Troubles’, Asia Pacific Business Review, 3 (3): 148–160. Bassi, Laurie J. and McMurrer, Daniel P. (1997) ‘Coverage and Recipiency’, in C. J. O’Leary and S. A. Wandner, eds, Unemployment Insurance in the United States, Kalamazoo: W. E. Upjohn Institute for Employment Research: 51–89. Betcherman, Gordon, Dar, Amit, Luinstra, Amy and Ogawa, Makoto (2000) ‘Labour Adjustment, Non-Standard Work and Employment Programmes: Korea in an OECD Context’. Paper prepared for the International Conference on Economic Crisis and Labour Market Reform: The Case of Korea, Seoul, 18–20 May. Betcherman, Gordon and Islam, Rizwanul (2001) eds, East Asian Labour Markets and the Economic Crisis: Impacts, Responses, and Lessons, The World Bank and the International Labour Organization. Chang, Jiyeun (2003) ‘Labour Market Policies in the Era of Population Ageing: The Korean Case’, Newsletter of Korea Labour Institute, No. 24, October. Choi, Kyung-Soo (2003) ‘Employment: Trends and New Developments’, in Jang-Ho Kim, ed., Employment and Industrial Relations in Korea, Seoul: Korea International Labour Foundation: 23–56. Esping-Andersen, Gosta (1996) ‘After the Golden Age? Welfare State Dilemmas in a Global Economy’, in Gosta Esping-Andersen, ed., Welfare States in Transition: National Adaptations in Global Economies. London: Sage: 1–31.

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Hur, Jai-Joon (2002) ‘Economic Crisis, Income Support, and Employment Generating Programmes: Korea’s Experience’, Quarterly Journal of Labour Policy, 2 (4): 39–73. ILO (2000) World Labour Report 2000: Income Security and Social Protection in a Changing World. Geneva: ILO. Jeong, Insoo (2001) ‘Unemployment Schemes since the Financial Crisis in Korea: Achievements and Evaluations’, Newsletter of Korea Labour Institute, No. 2, December. Jeong, Insoo (2003) ‘Unemployment Structure and Schemes’, in Wonduck Lee, ed., Labour in Korea, 1987–2002. Seoul: Korea Labour Institute (in Korean): 374–394. Kang, Hye-Ryun and Rowley, Chris (2004) ‘Women in Management in South Korea: Advancement or Retrenchment?’, Asia Pacific Business Review, 11 (2): 203–221. Kang, Soon-Hie, Jaeho Keum, Kim, Dong-Heon and Shin, Donggyun (2001) ‘Korea: Labour Market Outcomes and Policy Responses after the Crisis’, in Gordon Betcherman and Rizwanul Islam, eds, East Asian Labour Markets and the Economic Crisis: Impacts, Responses, and Lessons, The World Bank and the International Labour Organization: 97–139. Kim, Jang-Ho (2003) ‘Introduction: Issues and Emerging Issues’, in Jang-Ho Kim, ed., Employment and Industrial Relations in Korea, Seoul: Korea International Labour Foundation: 1–20. Korea Labour Institute (2003) Employment Insurance Trends. Seoul: Korea Labour Institute (in Korean). Kwon, Huck-Ju (2002) ‘Welfare Reforms and Future Challenges in the Republic of Korea: Beyond the Developmental Welfare State?’, International Social Security Review, 55 (4): 23–38. Kwon, Soonman (2001) ‘Economic Crisis and Social Policy Reform in Korea’, International Journal of Social Welfare, 10: 97–106. Lee, Byung-Hee (2000) ‘Recurrent Unemployment after the Economic Crisis’, Korean Journal of Labour Economics, 23 (1) (in Korean): 1–25. Lee, H. K. (1999) ‘Globalization and the Emerging Welfare State: The Experience of South Korea’, International Journal of Social Welfare, 8: 23–37. Lee, Joohee (2000) ‘Income Assistance and Employment Creation through Public Works in Korea’. Paper prepared for the International Conference on Economic Crisis and Labour Market Reform: The Case of Korea. Seoul, 18–20 May. Lee, Wonduck and Kim, Dong-Heon (1999) ‘The Economic Crisis and Unemployment Policy in Korea: Labour Market Outcomes and Policy Issues’. Paper prepared for the ISS International Conference on Unemployment, Job Creation, and Employment Relations, Taegu, 29–30 October. Mishra, Ramesh (1999) Globalisation and the Welfare State. Northampton: Edward Elgar Publishing, Inc. OECD (1999) OECD Employment Outlook, Paris: OECD. OECD (2002) OECD Employment Outlook, Paris: OECD. Park, Chanyong and Kim, Meesook (1998) Current Poverty Issues and Counter Policies in Korea, Korea Institute for Health and Social Affairs and United Nations Development Programme. Park, Funkoo and Lee, Joohee (1999) ‘The Social Impact of the Financial Crisis: Labour Market Outcomes and Policy Responses in Korea, mimeo, Korea Labour Institute. Park, Se-Il (2002) ‘Private Sector Development and Upward Mobility: The Case of Korea from 1962 to 2000’, Quarterly Journal of Labour Policy, 2 (2): 131–190. Park, Won Woo (2002) ‘The Unwilling Hosts: State, Society and Control of Guest Workers in South Korea’, Asia Pacific Business Review 8 (4): 67–93. Park, Young-bum (2000) ‘Feasibility of Introducing a Non-Contributory Cash Benefits

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System for the Unemployed in Korea’. Paper prepared for the International Conference on Economic Crisis and Labour Market Reform: The Case of Korea, Seoul, 18–20 May. Phang, Hanam (1999) ‘Labour Market Issues and Employment Policies in Korea after the Economic Crisis’. Paper prepared for the Manila Social Forum, Manila, 9–12 November. Phang, Hanam and Kim, Dong-Heon (2001) ‘Policy Options for Income Support and Active Labour Market Programmes: A Synthesis of the Korean Experience’. Paper prepared for the Labour Market Policies: Its Implications to East and Southeast Asia Conference, Manila, 1–2 March. Rhee, Chong-Hoon (2003) ‘Wage: Levels and Structure’, in Jang-Ho Kim, ed., Employment and Industrial Relations in Korea. Seoul: Korea International Labour Foundation: 57–88. Rowley, Chris and Bae, Johngseok (1998) Korean Businesses: Internal and External Industrialization, London: Frank Cass. Rowley, Chris, Sohn, Tae-Won and Bae, Johngseok (2002) Managing Korean Businesses: Organization, Culture, Human Resources and Change. London: Frank Cass. Shin, Dong-Myeon (2000) ‘Financial Crisis and Social Security: The Paradox of the Republic of Korea’, International Social Security Review, 53 (3): 83–107. Stiglitz, Joseph E. (2002) Globalization and Its Discontents. New York: W.W. Norton & Company. The Economist (2003a) ‘A Survey of South Korea’, 19 April. The Economist (2003b) ‘Young, Bright and Jobless’, 21 June: 63–64. Yeates, Nicola (2001) Globalization and Social Policy. London: Sage Publications. Yoo, Kli-Sang (2000) The Employment Insurance System in Korea, Second Edition, Seoul: Korea Labour Institute. Yoo, Kil-Sang, Keum, Jaeho, Hur, Jai-Joon, Lee, Byunghee and Chang, Jiyeun (2002) ‘Labour Market Trends and the Employment Insurance System in Korea’, in Kil-Sang Yoo and Jiyeun Chang, eds, Active Labour Market Policies and Unemployment Insurance in Selected Countries. Seoul: Korea Labour Institute: 287–376. Yun, Jungyoll (2002) ‘An Empirical Simulation for the Relevance of Alternative Systems to Unemployment Insurance in Korea’, Korean Journal of Labour Economics, 25 (3): 59–86.

5

Unemployment in Taiwan Globalisation, regional integration and social change Ying Zhu

Introduction As one of the ‘Asian tigers’, Taiwan experienced a period of high economic growth and low rate of unemployment from the 1960s. However, with increasing competition under the process of globalisation and regional economic integration since the mid-1980s, the national economy has undergone restructuring, and a more difficult economic situation has emerged in recent years, marked by lower and even negative economic growth, a higher rate of business bankruptcy and more unemployment. In addition, the change of political climate marked by a shift government from the Nationalist Party (KMT) to the Democratic Progress Party (DPP) in 2000 generated unstable political relationships between Taiwan and mainland China as well as increased economic uncertainty (Rigger 2003). External pressures, such as globalisation, regional economic integration and competition, and internal challenges, such as changing political power and industrial restructuring, are important factors that have led to the current economic trends of economic stagnation, increasing unemployment and rising income disparities. On the other hand, political and business leaders are responsible for implementing adequate policies and business strategies to respond to these challenges. This chapter aims to assess such problems with a focus on unemployment. The problem of unemployment is both a global and a local issue as explained in the introduction to this book. From a local perspective, low unemployment is a crucial condition for political stability and social well-being as well as for sustainable economic development. Therefore, this chapter focuses on the causes of unemployment in Taiwan, the ratio of unemployment among its labour force in terms of age, gender, educational background and industry sector as well as relevant government policies on social security, training and job creation schemes. Recommendations for improvement and contribution to the wider theoretical debate on these issues are offered based on Taiwan’s experience. This chapter is structured in the following way in order to tackle the issues outlined above. The second section illustrates the contextual factors and issues, such as the external and internal influences on national economy, labour market and relevant regulations as well as the general background of different phases of

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national economic development and related unemployment situation since the 1980s. The third section demonstrates the relationships between society and unemployment by examining the demand and supply issues and the social consequences. The fourth section highlights the role of institutions by illustrating the recent government policies on labour market development, social security and income support. The fifth section identifies the trends and perspectives in terms of the labour market as well as the relationships between skills and employability. The sixth section concludes the chapter by illustrating the theoretical and empirical debates regarding globalisation, economic restructuring and unemployment, and the policy issues related to economic development and job creation.

Contextual factors and issues Taiwan was still an agricultural dominated economy in the 1950s and employment opportunities in the industrial sectors were limited. The average unemployment rate was 4.5 per cent in the 1950s (Zhao 2002). However, industrial development in the 1960s absorbed a large number of surplus labourers and unemployment fell to 3 per cent in 1966 and to 1.7 per cent in 1971. An exportexpansion economic policy meant that industrial development maintained the momentum of high growth, and unemployment remained at a relatively lower figure of about 1.5 per cent in the 1970s, except for the 2.1 per cent in 1975 due to the impact of the first oil crisis (ibid.). Since the 1980s, Taiwan’s economic development and unemployment have fluctuated. These cycles are related to the international economic climate as well as to the domestic political and economic situation. After over two decades of high economic growth, Taiwan’s economic development reached a peak in the second half of the 1980s, marked by a huge trade surplus, large foreign reserves, and relatively low rate of unemployment. For example, the trade surplus as a proportion of GDP increased from 2 per cent in 1980 to 20 per cent in 1986 (Statistical Monthly 2003). During the same period, foreign reserves of US$55.75 billion had been accumulated (ibid.). Meanwhile, the rate of unemployment increased from 1.2 per cent in 1980 to 2.9 per cent in 1985 due to the second oil crisis and industrial relocation from Taiwan to mainland China and Southeast Asia as firms sought cheap labour and market opportunities (Zhao 2002). In the late 1980s, the growth rate of industrial output started to decline, in particular among the labour-intensive industrial sectors (ibid.). From this time, the demand for labour declined consistently in the industrial sectors. For instance, the level of employment in industrial sectors declined at an average of 4.8 per cent annually between 1987 and 1997 (Zhao 2002). In contrast, the service sector increased the number of employees at an average growth rate of 4 per cent annually between 1987 and 1997 (ibid.). Due to the capacity of the newly developed services sector to absorb employment, as well as the booming construction sector, the rate of unemployment was able to remain at a relatively low level – below 2 per cent between 1987 and 1995. However, since 1996, the

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rate of unemployment increased year by year from 2.6 per cent in 1996 to over 5 per cent in 2002/03 (see Table 5.1). Several factors influenced this increasing unemployment. First, globalisation and regional economic integration and competition are the crucial external factors that influenced the current unemployment problem (Zeng 2002). Under the process of globalisation, cross-border investment and trade became common and both multinational companies (MNCs) and Taiwanese companies rationalised their production and trade strategies in order to achieve lower business costs and higher return (Zhu and Warner 2001). In contrast, cross-border labour mobility has not been so easy as capital mobility. Hence, income disparity between countries and regions is the reality and comparisons of wage and productivity levels between countries led companies to relocate their business operations. Relocation of businesses, therefore, is one of the significant strategies adopted by companies searching for cheaper labour and larger markets in both mainland China and Southeast Asia. Many MNCs and Taiwanese companies moved their labour-intensive manufacturing production from Taiwan to mainland China and Southeast Asia from the mid-1980s, and services sector firms to the US, Japan, Hong Kong and Singapore in the late 1990s. In the period between 1986 and 2000, Taiwanese offshore investment increased from US$56.9 million to US$7.7 billion (including investment of US$2.6 billion in mainland China according to official data) (Zeng 2002). In the late 1980s and early 1990s, the secondary sector dominated offshore investment accounting for over 74 per cent of total offshore investment. However, this trend has changed in recent years and the tertiary sector has replaced the secondary sector as the leading offshore investment sector. In 2000, the tertiary sector accounted for 67 Table 5.1 Real GDP growth, industrial output and unemployment between 1989 and 2003 (%) Year

Real GDP growth

Industrial output growth

Unemployment

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

8.2 5.4 7.6 7.5 7.0 7.1 6.4 6.1 6.7 4.6 5.4 5.9 −2.2 3.5 3.2

3.8 −0.2 7.4 4.4 3.9 6.6 4.7 2.0 7.4 2.6 7.7 7.4 −7.3 6.4 4.4

1.6 1.7 1.5 1.5 1.5 1.6 1.8 2.6 2.7 2.7 2.9 3.0 4.6 5.2 5.1

Source: Monthly Bulletin of Labor Statistics, Taiwan Area, ROC., May 2003; Monthly Statistics, ROC., February 2004.

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per cent of total offshore investment compared with 20 per cent for the secondary sector (ibid.). In addition, Taiwan’s foreign trade focus has shifted from the US market to Asian markets. For instance, the proportion of exports from Taiwan to the US declined from 50.9 per cent in 1986 to 22.1 per cent in 2002, while exports to Southeast Asia and Hong Kong (including mainland China through Hong Kong) increased from 5.4 per cent and 7.3 per cent to 11.9 per cent and 23.7 per cent respectively (Statistical Monthly 2003). On the other hand, the relocation of business away from Taiwan led to an increasing number of companies to close down their businesses in Taiwan resulting in a large number of employees losing their jobs. For instance, the number of companies closing down their businesses increased from 41,491 in 1989 to 137,805 in 2000, a 3.3 times increase in eleven years (Zeng 2002). Consequently, the level of unemployment increased during the same period (see Table 5.1). Second, the impact of globalisation and regional economic integration forced the domestic economy to restructure and to the emergence of structural unemployment. From the mid-1980s, the Taiwanese economy entered a period of pronounced transformation with a transition from a manufacturer-based to services-based economy. However, the feature of employment restructuring was diverse within different national and social contexts and Taiwan is a different case from countries such as the US, the UK and Canada (Tseng et al. 2002). Taiwan did follow the general trend of this economic transformation with the share of secondary industrial employment decreasing from 43 per cent in 1987 to 35 per cent in 2003. In contrast, the share of tertiary sector’s employment increased from 42 per cent to 58 per cent during the same period (see Table 5.2). However, the difference is that Taiwan still has a relatively higher proportion of employment in the secondary industrial sector compared with the Angle-Saxon countries labelled as the service economy model (Tseng et al. 2002). The situation in Taiwan is closer to the industrial production model that is represented by Germany, where manufacturing employment is reducing, but the overall share continues at a relatively high level (Castells 2000). The economic restructuring generated new problems: insufficient supply of labour to certain economic sectors, mismatch of skills, and an oversupply of labour with insufficient skills and consequently structural unemployment. A Table 5.2 Employment by sector (%) Year

Primary sector

Secondary sector

Tertiary sector

1987 1990 1995 2000 2001 2002 2003

15.3 12.9 10.6 7.8 7.5 7.5 7.4

42.8 40.8 38.7 37.2 36.0 35.2 35.0

42.0 46.3 50.7 55.0 56.5 57.3 57.6

Source: Monthly Bulletin of Labor Statistics, Taiwan Area, ROC, May 2003.

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government report showed that the gap between demand for and supply of labour was 3.5 per cent in the secondary industrial sector and 2.9 per cent in the tertiary service sector (Executive Yuan 2003). Among the industrial sectors, hightech and electronic sectors required more employment while traditional sectors such as textiles and clothing, as well as construction, had negative growth of employment (Zhao 2002). In addition, the service sector also increased demand for professional employees with higher qualifications. Third, other factors such as the poor state of the global economy as well as political uncertainty over key decisions on national projects (e.g. the delay of the construction of the fourth nuclear power plant) and relationships between Taiwan and mainland China (e.g. the delay of opening up the so-called ‘direct threecommunications’: direct postal, cargo-shipment and aviation connection) added to the problem of unemployment. For instance, the global economy started to slow down in the third quarter of 2000, marked by the decline of electronics, information technology and telecommunications sectors in the US. Taiwan’s economy relied on the exports of those products to the US market. The recession in the US and other parts of the world hit Taiwan’s economy severely and its GDP growth dropped to −2.2 per cent in 2001 (see Table 5.1). Consequently, the rate of unemployment reached a historical peak in the following year. In addition, uncertainty over policies on national construction projects as well as the relationships with mainland China shook the confidence of foreign investors and led to a plunge in the share market. These factors also influenced local people’s confidence regarding domestic investment and consumption. Thus the emerging problem of unemployment is the outcome of both external influences such as globalisation and regional economic integration and competition, as well as internal economic restructuring and political changes. In order to have a clear picture of the unemployment situation in Taiwan, the following section examines the issues of labour force supply and demand as well as the social consequences.

Society and unemployment The analysis of labour force supply and demand is an important area of human resource planning at the macro-level. Government labour market policies rely on an adequate understanding of the skills and qualification required by employers as well as the availability of relevant human resources in the labour market. In Taiwan, the trends of labour supply and demand have been determined, by a large part, by economic restructuring. This section considers the supply issues first, such as the current unemployed labour force by age, gender, educational attainment, occupation, industry sectors, duration of unemployment, and the proportion of full-time and part-time jobs. Then the demand issues are discussed in terms of employment by industry sectors and the shortage of labour force in the labour market. Finally, some social issues related to economic transformation, labour market changes and consequently the different types of unemployment are described.

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Labour supply In the broad sense, the labour supply is defined as the total population of age 15 and above who have the capacity and willingness to work. In other words, it can be defined as the potential labour force. More narrowly, labour supply is about the available labour force in the labour market. It can be defined as the population of age 15 and above who have the capacity and willingness to work, and are looking for employment in the labour market. The gap between the total labour force and labour supply in the labour market is the ‘employed’ population (Peng 2003). From this perspective, the available labour force in the labour market is the unemployed population which has certain patterns in terms of age, gender, educational attainment and occupation. The general trend of the labour participation rate has declined in recent years in Taiwan, from 58.8 per cent in 1993 to 57.3 in 2002 (Huang 2002). The change of labour participation rate is related to several factors, including the ageing population. The population of age 14 and below accounts for less than 20 per cent of total population. At the other end of the spectrum, the population of age 60 and above is more than 10 per cent of total population (the official retirement age is 60 in Taiwan) (Liu 2003). The young unemployed with ages between 15 and 24 had the highest unemployment rate of 11.9 per cent in 2002 and 11.3 per cent in 2003 (see Table 5.3), which was followed by middle-aged unemployed between 25 and 44 with nearly 5 per cent and mature-aged unemployed between 45 and 64 with nearly 4 per cent in recent years. Labour participation by gender has changed in the past two decades. For instance, the male labour participation rate declined from 77.1 per cent in 1980 to 67.8 per cent in 2003, but the female labour participation rate increased from 39.3 per cent to 47.1 per cent during the same period (Executive Yuan 2003). The increase in women workers was most noticeable in the service sector. Among the total unemployed population, male unemployment increased from 2.0 per cent in Table 5.3 Unemployment rate by age and gender (%) Age

Gender

Year

15–24

25–44

45–64*

65 and over

Male

Female

1987 1990 1995 2000 2001 2002 2003

5.5 5.1 5.3 7.4 10.4 11.9 11.3

1.3 1.2 1.5 2.6 4.2 4.7 4.6

0.6 0.5 0.6 1.8 2.9 3.4 3.9

0.1 0.0 0.1 0.2 0.1 0.1 0.1

2.0 1.7 1.8 3.4 5.2 5.2 5.7

2.0 1.6 1.8 2.4 3.7 4.1 4.1

Source: Monthly Bulletin of Manpower Statistics, Taiwan Area, ROC, Sept. 2003 and Monthly Bulletin of Labor Statistics, Taiwan Area, ROC, May 2003. * The official retirement age is 60 in Taiwan.

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1987 to 5.7 per cent in 2003 while female unemployment increased from 2.0 per cent to 4.1 per cent during the same period. The male unemployment problem has become more serious in recent years (see Table 5.3). Unemployment by educational attainment shows that it has become even more difficult for people with less education to obtain employment (Wang 2003). Table 5.4 demonstrates that college/university graduates had less unemployment (3.8 per cent in 2003) than graduates from junior high school (5.3 per cent) and senior high school (5.9 per cent). The unemployment pattern can also be reflected in skills and occupations. The general trend is that the rate of unemployment among low-skilled blue collar labour had increased dramatically compared to that of medium and highly skilled professionals. For instance, unemployment among low-skilled people increased from 2.6 per cent to 5.8 per cent between 1996 and 2001, while medium skilled unemployed increased from 1.3 per cent to 2.7 per cent and professional unemployed increased from 2.0 per cent to 2.7 per cent during the same period (Qiu 2002). In addition, economic restructuring generated a large number of retrenched people in different sectors. After 1996 when the real estate boom burst, unemployment from the construction sector increased from 4.0 per cent in 1996 to 9.6 per cent in 2001 (ibid.). The manufacturing sector also had a substantial increase of unemployment, from 2.0 per cent in 1996 to 4.2 per cent in 2001, due to the restructuring of the economy, international economic recession and the relocation of production to offshore (ibid.). The service sector had a relatively mild increase in unemployment compared with the construction and manufacturing sectors. The rate of unemployment in the service sector increased from 2.0 per cent in 1996 to 3.2 per cent in 2001 (ibid.). The duration of unemployment also increased with the increasing number of unemployed. For instance, a survey showed that the duration of unemployment increased from an average of 23.5 weeks in 2000 to 30 weeks in 2002 (Luo 2003). A government report shows that, in 2003, among the total unemployed population, people with educational attainment at or below junior high school level had the longest duration of unemployment with 33 weeks compared with 25 weeks for Table 5.4 Unemployment by educational attainment (%) Year

Junior high school and below

Senior high school

College/university and above

1987 1990 1995 2000 2001 2002 2003

1.2 1.0 1.2 2.8 4.7 5.1 5.3

3.2 2.5 2.3 3.3 5.1 5.9 5.9

2.7 2.3 2.4 2.8 3.7 4.3 3.8

Source: Monthly Bulletin of Labor Statistics, Taiwan Area, ROC, May 2003.

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senior high graduates and 24 weeks for college/university graduates (Executive Yuan 2003). In addition, unemployed people within the age range of 25 and 44 had the longest duration of unemployment with 33 weeks compared with 19 weeks for the age range of 15–24, and 31 weeks for the age group of 45–64 years (ibid.). Male unemployed people had a longer duration of unemployment with 30 weeks compared to female unemployment of 26 weeks (ibid.). Among unemployed people, the majority seek full-time work. For instance, there were 499,000 job seekers in August 2003: 493,000 people were looking for a full-time job and 6,000 people seeking a part-time job (ibid.). Male job seekers were more likely to seek full-time employment compared to their female counterparts, although the differences were not significant (ibid.). In short, 99 per cent of male job seekers and 98 per cent of female job seekers were looking for full-time jobs. Labour demand There is a gap between supply of and demand for labour in the labour market. Broadly speaking the defined demand for labour is about the total number of workers demanded by all sectors within a national economy (Peng 2003). More narrowly this is about the number of workers demanded by all sectors but not yet in the labour market (ibid.). Therefore, this section identifies both the current employment situation as well as the needs for labour by different sectors. In April 2003, for instance, total employment in Taiwan was 9,535,000 (Monthly Bulletin of Labor Statistics 2003). The service sector accounted for 57.9 per cent of total employment, followed by the industrial sector with 34.8 per cent and the agricultural sector with 7.3 per cent (ibid.). On the other hand, by examining the narrowly defined demand for labour in the labour market, Table 5.5 shows that the total labour shortage was 152,673. The manufacturing sector had the highest absolute labour shortage with 80,052, followed by wholesale and retailing sectors,

Table 5.5 The demand for labour force in the labour market, February 2003 Sector

Labour shortage

Labour shortage rate (%)

Mining Manufacturing Water, electricity and gas Construction Wholesale and retailing Transport, storage and communications Finance, insurance and real estate Business service Social service and personal service Total

2 80,052 3 12,025 32,657 1,457 8,233 5,911 12,477 152,673

0.03 3.32 0.01 3.03 2.30 0.47 1.93 2.54 2.98 2.70

Source: Monthly Bulletin of Labor Statistics, Taiwan Area, ROC, May 2003.

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social and personal services sector and construction sector. The manufacturing and construction sectors had high rates of shortage with over 3 per cent compared to other sectors. Social issues Economic restructuring and labour market changes create an environment in which a multi-pattern of unemployment exists. Table 5.6 demonstrates the reasons for unemployment. The majority of unemployed people (58 per cent) were involuntary unemployed due to business closure or decline. For many years, unemployment in Taiwan followed a cyclical pattern which was caused by economic recessions. However, the recent trend was more related to structural unemployment which is caused by workers’ lack of appropriate skills. The figures presented in the previous tables reflect this problem marked by a large number of unemployment co-existing with shortages of labour in the key industry sectors.

Institutions and social problems Labour market As illustrated in the previous sections, the labour market in Taiwan has the following characteristics. There is an ageing population, decreasing labour participation rate, and an inadequate level of skills to meet the needs of economic restructuring. Related problems have also emerged, such as mismatch of skills and experiences, and consequently long-term structural unemployment. On the other hand, the lack of business confidence in the private sector, due to regional economic integration and political uncertainty, was reflected in the relocation of MNCs and local Taiwanese business operation to other economies, in particular mainland China and Southeast Asia. For instance, FDI fell in Taiwan by 43 per cent between 2001 and 2002. China’s WTO accession attracted more FDI into China, and more Taiwanese businesses moved to the mainland to get a toehold in China and take advantage of low labour costs and increasing Table 5.6 Unemployment by reasons (2003) Reasons

Number of unemployed

%

Business closed or shrunk Not satisfied with the job Seasonal work completed Illness Female got married or gave birth Retirement Busy in housekeeping Others Total

254,000 102,000 50,000 11,000 2,000 2,000 2,000 13,000 436,000

58.3 23.4 11.5 2.5 0.5 0.5 0.5 2.8 100.0

Source: Monthly Bulletin of Labor Statistics, Taiwan Area, ROC, May 2003.

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expansion of the mainland Chinese market. In 2002, Taiwanese investment in China increased 26 per cent from a year ago (Wells Fargo Economics: Country Reports Taiwan 2002). On the other hand, the DPP government tried to block investment, trade and tourists from mainland China to Taiwan due to political considerations. Hence, the situation was fewer business opportunities as well as fewer employment opportunities. These problems placed pressure on under-developed social security system. The unemployment benefit scheme started in 1999 and provided only six months financial support to people being laid-off due to business closure. Therefore, increasing long-term unemployment in the mature age group between 45 and 64 years meant that a job creation scheme became the first priority for the government to tackle the unemployment problem. To solve the unemployment problem, the government has to tackle both cyclical and structural unemployment. Hence, both problems require the improvement of business environment as well as human resource development initiatives to assist the jobless to learn new skills (Kao and Lee 1998). So far, the DPP government has undertaken several initiatives. As the jobless rate has continued to rise, the government has rebuilt the vocational training system while strengthening various employment services. It also launched a ‘sustainable employment project’ (yongxu jiuye jihua), started in early 2001, designed specifically to target long-term unemployment by offering temporary jobs through government agencies (Liu 2003). It provided about 25,000 short-term jobs between early 2001 and May 2002, but the project performed poorly (Huang, Y. 2003). Since June 2002, another programme was developed, the so-called ‘multiemployment development programme’ (duoyuan jiuye kaifa fangan) with the goal to expand the job creation scheme into the private sector. By considering financial support for these initiatives, President Chen Shui-bian asked economic authorities to target a minimum NT$1.2 trillion in major domestic investment and construction projects (e.g. urban renovation, the construction of nursing homes and railways) annually over a five-year period. In fact, major projects were allocated a total of NT$1.12 trillion in 2001 and NT$1.19 trillion in 2002. In addition, the government took measures to ease restrictions on foreign investment in the areas of power supply, finance, transportation, postal services and electronic communications (Hot News Special Edition 18-Nov-2002). However, the unemployment situation by the end of 2002, in particular the long-term unemployment problem, had not been fundamentally affected under these new initiatives (see Table 5.1). For instance, the rate of unemployment increased from 3.0 per cent in 2000 to 5.2 per cent in 2002, while the long-term unemployed population increased from 40,000 to 112,000 during the same period (Liu 2003). President Chen also asked the Executive Yuan (namely the government cabinet) to develop new job creation schemes to reduce long-term unemployment. In November 2002, the President made a statement about working hard to attract foreign investment and expanding major domestic projects to ensure economic growth and to reduce unemployment to below 4.5 per cent by the end of 2003 (Hot News Special Edition 18-Nov-2002). Under this pressure, the government established ‘employment creation award scheme’ (guyong jiangli jingtie) in December

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2002. Based on this scheme, if private enterprise employed a long-term unemployed person (over one year unemployed history), the government gave NT$5,000 per month as subsidy for 12 months (Liu 2003). This amount of money was one-fifth of the average wage for manual workers (NT$25,000 per month) and about one-third of the minimum wage (NT$15,800 per month). In addition, the Executive Yuan developed two new initiatives in December 2002, the so-called ‘expanding public construction programme’ (kuoda gonggong jianshe fangan) and ‘public service expansion and employment plan’ (gonggong fuwu kuoda jiuye jihua). By asking the Legislative Yuan (namely the parliament) to approve further budget spending of NT$70 billion to support these initiatives, the government hoped to achieve the political target of reducing the unemployment rate to 4.5 per cent by the end of 2003, a time not far from the Presidential election of 20 March 2004 (Huang, T. 2003). The new initiatives were developed based on the ‘sustainable employment project’ with several modifications. For instance, the ‘sustainable employment project’ relied on the effort of Labour Affairs Commission at the central government level, but the new ‘public service expansion and employment plan’ depended on all levels of government administration from the central government to local governments. The targeted unemployed person must be between 35 and 64 years old, registered at an employment service centre and having six-month work experience in the past three years. In addition, involuntary unemployed persons were given priority in job allocations. The jobs created under the new initiatives were mainly temporary positions within government agencies and community service areas such as: 1 Assisting the establishment of e-government files by scanning hard copy into electronic copy; 2 Cleaning up communities and protecting the environment; 3 Developing tourist area and being tourist guides; 4 Improving community services such as recycling waste, maintaining neighbourhood safety and conducting transport on the road. The initial plan was to employ these people for six months with another six months extension (Liu 2003). Providing short-term vocational training was another initiative. Many middle and mature aged unemployed people were less skilled manual workers. It is necessary to upgrade their skills, in particular the skills related to non-knowledgeintensive service sector such as social and personal services, in order to cope with structural changes. The government set up the ‘labour vocational capacity improvement plan’ (laogong zhiye nengli tisheng fangan) in 2002 with the hope of providing vocational training to 1.43 million people in three years in order to fill the skills and knowledge gaps due to industrial restructuring. This included assisting 50,000 unemployed people to get a job and other non-participating workers to be employed as well (Qiu 2002). Social security In early 1999, the Labour Affairs Commission established an unemployment insurance and benefits scheme under the pressure of increasing long-term

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unemployment. However, only involuntary unemployed people (due to business closure or relocation) could enjoy the benefits. In May 2002, the Legislative Yuan passed the ‘Employment Insurance Law’ that stipulated the details of insurance contribution, time, condition and procedures for claiming unemployment benefits (Yang 2002). For instance, the law requires both public and private employers to register at the Labour Insurance Bureau and to pay unemployment insurance for their employees aged between 15 and 60. The contribution is equivalent to 1 per cent of their monthly salary. Involuntary unemployed people who register at the public employment service centres can apply for the unemployment benefit with payment equivalent to 60 per cent of their monthly salary for six months (ibid.). There are other benefits attached to the unemployment benefits including: 1 Early re-employment incentives; 2 Vocational training and living subsidy; 3 Medical insurance fee subsidy (Article 10, Employment Insurance Law 2002). Social problems The most recent data shows that the rate of unemployment declined to 4.7 per cent in January 2004 (Monthly Statistics February 2004). However, the government political target of reducing unemployment to less than 4.5 per cent by the end of 2003 was not achieved (see Table 5.1). From the beginning, the public was suspicious of President Chen’s ambition to achieve such a political goal because of the government’s record of public works projects failing to achieve the desired effect. ‘To convince the public, the government must demonstrate the cost effectiveness of its projects and articulate its long-term budget planning for debt payment’, stated Tseng Chu-wei, professor at the Department of Finance of the National Chengchi University (Lin 2002). Although the policy-making Council for Economic Planning and Development (CEPD) proposed to create more jobs in the short term by expanding government spending and public projects, these initiatives created the problem of allocating tasks from the central government to local governments. For example, Taipei County Government’s public service programmes initially included more than 2,000 people. However, under the Executive Yuan’s quota, the county is to be allocated jobs for more than 14,000. The question is ‘where will the work be found for these people to do?’ This problem existed all over Taiwan. In total, the Cabinet’s public-service employment expansion proposal had made an initial decision to allocate 75,000 public-service jobs to cities and counties without consultation with these local governments (Chiu 2003). A problem also emerged with the budget deficit. The government committed a large amount of money to public projects for short-term job creation. However, all of these public projects created a more than NT$5 trillion budget deficit, which represented 45 per cent of Taiwan’s GNP (higher than the 36 per cent in the US) (Huang, Y. 2003). In addition, the jobs created were only short-term in nature and could not create a sustainable employment environment. Hence,

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the phenomena of people moving between employed and unemployed status developed. In the national health insurance system, unemployed people are still not being placed in the ‘sixth beneficiary category’, where the government will shoulder 40 per cent of insurance payments. The medical insurance cost is a heavy burden for long-term unemployed. The Bureau of National Health Insurance only provides interest-free loans to those unable to pay insurance costs (Wang 2002). Unemployment has planted the seeds of social unrest and has created poverty and a growing income gap. According to the government, households had, in 2001, for the first time seen a decline in net assets. In other words, average monthly household income in Taiwan declined from NT$91,000 in 2000 to NT$89,000 in 2001 (Wang 2002). The greatest decline occurred among the poorest 20 per cent of households, where incomes fell by 10.7 per cent. Meanwhile, the income of the richest 20 per cent of households increased by 2.1 per cent (ibid.). The annual income of the richest 20 per cent was 6.4 times greater than that of the poorest 20 per cent and this created a new record in Taiwan’s recent history. The economic difficulties as well as the unemployment problem and reduced income destroyed some families. Some jobless people even took their and their families’ lives in collective suicides (Huang, T. 2003). In addition, the rate of crime increased 5.5 per cent between 2001 and 2002 (Wang 2002).

Trends and prospects The major indicators of the national economy and labour market show that Taiwan is in the middle of transition from industrial society to post-industrial society. The manufacturing sector still plays an important role in terms of GDP growth as well as job creation. However, in recent years, the trend of economic restructuring towards service- and technology-orientation is obvious. This shift influenced the labour demand in the labour market: demand for highly skilled workers increased while the oversupply of low skilled workers was accompanied by a higher unemployment rate. For instance, in the last two decades or so, the proportion of white-collar professional employees among total employment increased from 22.1 per cent in 1981 to 38.8 per cent in 2001, while the blue-collar manual employees decreased from 44 per cent to 35.3 per cent (Zhang 2002). Table 5.7 demonstrates the changes of employment among the low skilled labour force due to industrial restructuring and technology change. Generally speaking, the trend of employment opportunities for low skilled labourers has continued to decline since the early 1980s. Technology change was a more significant cause (with −8.96 per cent) than industrial restructuring with (−3.14 per cent) between 1991 and 2000 (see Table 5.7). The pattern of employment changes had different characteristics between different sectors in the 1980s and 1990s. First, during the 1980s, agriculture and construction sectors had a significant negative growth among low skilled employment due to industrial restructuring, while mining, manufacturing, water, electricity and gas supply sectors had a moderate negative growth (see Table 5.7). In contrast, other sectors such as wholesale

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Table 5.7 The trend of changing employment among low skilled labour force due to industrial restructuring and technology improvement between 1981 and 2000 (%) Sector Agriculture The impact of industrial restructuring The impact of technology changes Mining The impact of industrial restructuring The impact of technology changes Manufacturing The impact of industrial restructuring The impact of technology changes Water, electricity and gas The impact of industrial restructuring The impact of technology changes Construction The impact of industrial restructuring The impact of technology changes Wholesale and retailing The impact of industrial restructuring The impact of technology changes Transportation, storage and communications The impact of industrial restructuring The impact of technology changes Finance, insurance and real estate The impact of industrial restructuring The impact of technology changes Social and personal services The impact of industrial restructuring The impact of technology changes Total The impact of industrial restructuring The impact of technology changes

1981–1990

1991–2000

−5.94 0.04

−5.13 −0.08

−0.49 −0.06

−0.09 −0.02

−0.30 −1.34

−2.15 −2.93

−0.01 −0.06

−0.02 −0.05

−5.56 −0.18

0.25 −1.16

2.73 −0.57

2.21 −0.57

0.14 −0.16

−0.15 −3.24

0.35 0.17

0.81 −0.17

1.17 −0.16

1.13 −0.74

−2.92 −2.33

−3.14 −8.96

Source: Adapted from Zhang (2002: 112).

and retailing, transportation, storage and communications, finance, insurance and real estate, and social and personal services all enjoyed a positive growth of low skilled employment due to industrial restructuring (in particular wholesale and retailing industries and social and personal services sector). Second, all other sectors experienced a negative growth in the 1980s, except for agriculture and finance, insurance and real estate sectors which had positive growth of low skilled employment due to the technology changes. This indicates that technology changes had a wide range of impact across industry sectors marked by a negative growth among low skilled employment. Third, the change of low skilled employment among different sectors caused by industrial restructuring presented a different picture in the 1990s compared with the situation in the 1980s. For instance, the agriculture sector had a slightly less

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negative growth (i.e. −5.13 per cent) in the 1990s compared with 1980s figure (i.e. −5.94 per cent). The mining sector also experienced a less negative growth from −0.49 per cent in the 1980s to −0.09 per cent in the 1990s. In addition, the manufacturing sector experienced an increase of negative growth from −0.30 per cent to −2.15 per cent during the same period. Transportation, storage and communications sectors had changed from positive growth in the 1980s to negative growth in the 1990s. This means that industrial restructuring had a more negative impact on low skilled employment in the manufacturing sector and transportation, storage and communications sectors in the 1990s. In contrast, other sectors such as construction, wholesale and retailing, finance, insurance and real estate, and social and personal services all had positive growth of low skilled employment. Notably, the construction sector changed from negative growth in the 1980s to positive growth in the 1990s. Fourth, technology changes had a negative impact on employment among low skilled workers in the 1990s. Such changes have further proved that a low skilled labour force became even more vulnerable to unemployment under the influence of technology change, not only in traditional industries, but also in the new economic sectors.

Discussion and conclusion To respond to the questions raised in Chapter 2 of this book, the following observations can be offered here based on the situation in Taiwan. First, certainly globalisation was a significant external factor influencing the domestic employment/unemployment situation. However, this did not result in a common labour market and policy in each country; rather it created a convenient ideological and economic environment for capital and production to be able to move crosscountry and cross-border. In contrast, this convenience is not applied to labour mobility at the international level. In other words, business operations move from one place to another, so that economic prosperity and job opportunities follow such moves. In this sense, globalisation may provide a source of pressures to convergence. However, if we look at the detailed situation, here using Taiwan as the case, it is not just the global movement of capital and production, but regional relocation of businesses towards mainland China and Southeast Asia that built such pressures. Hence, regional integration and competition are more significant in terms of influencing economic restructuring and consequently emerging structural unemployment in Taiwan than global integration or competition. Second, in comparison with other developed economies, Taiwan is in the middle of transition from an industrial society to a post-industrial society. Taiwan is still characterised by a high proportion of industrial labour force, high contribution to GDP by industrial sectors, high proportion of labour force seeking full-time employment opportunities in industrial sectors, and an infant social security system. This is not a situation that is compatible with countries such as Australia, Canada, the UK and the US, and is even far behind its neighbouring economies

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such as Japan and Hong Kong. Though the service sector and new economies are becoming increasingly important in Taiwan, the transformation to the so-called ‘service economy’ or ‘knowledge economy’ has not been completed. Therefore, policies on job creation and human resource development cannot blindly follow the policy of the so-called ‘post-industrial’ economies. This finding reminds us that the issue of homogeneity of labour market trends and policy under globalisation raised in Chapter 2 needs to be carefully considered. Third, current policies on labour market development and job creation carry a heavy politically opportunist colour. The early stage of democratisation is characterised by instability and mistrust. Popularism and short-term policies are the first priority for the government to adopt in order to maintain its power. All the government efforts that have been illustrated in the previous sections reflect a political election mode. The policy-orientation is short term and addresses only the superficial issues not the key fundamentals (as the Chinese say ‘zhibiao buzhiben’). Fourth, business strategy is based on the need to make profit, sharing markets and reducing operational costs. The business community in Taiwan is no longer committed to the so-called ‘nationalist interest’. Relocation of business to mainland China (including emigration to China) and Southeast Asia demonstrates that their interests are about the well-being of their business as well as their family and friends (including associate colleagues and sometimes loyal employees). Most of them are in favour of closer economic ties between mainland China and Taiwan, opposing the policy of the current DPP government. Based on the analysis in this chapter, business closure and relocation to offshore as well as technology changes are the key factors that directly caused both cyclical and structural unemployment. Hence, new policies must address the fundamentals to tackle the problem of unemployment. For instance, the government must adopt a new human resource development policy that emphasises upgrading skills and knowledge as well as reforming the vocational and formal education systems in order to meet the needs of economic restructuring. On the other hand, the government has to face the reality of rationalising the priority of national development through further active engagement with regional economic integration, including close and eventually direct linking of trade, investment and the people’s crossing of the Taiwan Straits. Building a common market between Hong Kong, Macao, mainland China and Taiwan may speed up economic integration and create a new wave of economic prosperity in the region.

References Castells, M. (2000) The Rise of the Network Society, second edition, Malden, MA: Blackwell. Chiu, L. L. (2003) ‘Efforts to create more jobs may be misguided’, Taipei Times, January 10: 8. Employment Insurance Law (2002) Employment Insurance Law, Republic of China, Taipei: Council of Labor Affairs. Executive Yuan (2003) Monthly Bulletin of Manpower Statistics, Taiwan Area, ROC, Taipei: Directorate-General of Budget, Accounting and Statistics, Executive Yuan, September.

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Hot News Special Edition (2002) Taiwan President Chen Pledges to Cut Jobless to Below 4.5 Per cent, Monday, 18 November 2002, Agence France-Presse (via ChariNet). Huang, S. L. (2002) ‘Woguo Shiye Wenti zhi Tantao’ (The Exploration of Our National Unemployment Problem), Chia-Nan Annual Bulletin, 28: 260–72. Huang, T. (2003) ‘Unemployment and Family Behavior in Taiwan’, Journal of Family and Economic Issues, 24: 27–48. Huang, Y. H. (2003) ‘Qiangjiu Shiye Zhishi Yichang Zhengzhi Baxi’ (Saving the Unemployed is Just a Political Game’, Jingji Qianzhan (Economic Forecast), 5 March: 28–34. Kao, C. and Lee, H. T. (1998) ‘Demand for Industrial Management Manpower in Taiwan: Viewpoints of Quantity and Skill’, International Journal of Manpower, 19: 592–602. Lin, F. Y. (2002) ‘Chen Targets jobless rate of 4.5 per cent’, National Affairs, 29 November: 1. Liu, J. X. (2003) ‘Gonggong Fuwu Kuoda Jiuye Jihua shi Guojia zai Shiye Chaoxia de Yingyou Zuowei’ (Public Service Expansion Plan for Job Creation is the Necessary Action of the Government under the Wave of Unemployment), Jingji Qianzhan (Economic Forecast), 5 March: 20–7. Luo, M. H. (2003) ‘Baituo Shiye de Jinguzhou’ (Getting off the Unemployment Sleeve), Taiwan Jingji Yangjiu Yuekan (Taiwan Economic Research Monthly), 26: 58–68. Monthly Bulletin of Labor Statistics (2003) Monthly Bulletin of Labor Statistics, Taiwan Area, Republic of China, May 2003, Taipei: Council of Labor Affairs. Monthly Bulletin of Manpower Statistics (2003) Monthly Bulletin of Manpower Statistics, Taiwan Area, Republic of China, Sep. 2003, Taipei: Directorate-general of Budget, Accounting and Statistics. Peng, B. C. (2003) ‘Cong Laodongxu de Jiangou Tancuo Shiye yu Pinqong de Wenti’ (From Labour Studies’ Structure to Explore the Problems of Unemployment and Poverty’, Jinre Heku (Today’s Cooperation), 4: 21–55. Qiu, Q. Y. (2002) ‘Dangqian Taiwan Shiyelu Pansheng zhi Fenxi yu Duice’ (Currrent Increase of Unemployment Rate in Taiwan and Related Analysis and Policies), Ziyou Zhongguo ZhiGongye (Free China Industry), June: 1–44. Rigger, S. (2003) ‘Taiwan in 2002: Another Year of Political Droughts and Typhoons’, Asian Survey, 43: 41–8. Statistical Monthly (2003) ‘You Jingji Fazhan Licheng Kan Shiye De Wenti’ (Examining Unemployment Problem Through the Process of Economic Development), Zhuji Yuekan (Statistical Monthly), March 2003, 567: 12–18. Tseng, S. F., You, Y. C. and Ho, C. C. (2002) ‘New Economy, Underemployment, and Inadequate Employment’, Information Social Research, 3: 215–37. Wang, Y. T. (2002) ‘Unemployment Rears Its Ugly Head’, Taipei Times, 31 December: 8. Wang, R. J. (2003) ‘From Elitism to Mass Higher Education in Taiwan: The Problems Faced’, Higher Education, 46: 261–87. Wells Fargo Economics (2002) ‘Country Reports: Taiwan’, Wells Fargo Economics, Dec. 2002, 28–30. Yang, X. R. (2002) ‘Kaoshiyelu, Jiuye Jinji Bujiu Cuoshi yu Jiuye Baoxian Tizhi zhi Jiangou’ (High Unemployment Rate, Employment Emergency Benefits and Employment Insurance System Establishment), Community Development Quarterly, 100: 343–67. Zeng, M. J. (2002) ‘Chanye Bianqian yu Shiye Guanlian’ (Industrial Restructuring and Relationship with Unemployment), Juye Fuwu (Employment Service), 82–87. Zhang, S. Y. (2002) ‘Taiwan Diqu Shiyelu yu Jingji Bianqian zhi Yanxi’ (Taiwan Area’s Unemployment and Economic Change Analysis), Zhuji Yuekan (Monthly Statistics), 559: 102–13.

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Zhao, H. J. (2002) Dangqian Shiye Wenti yu Yinying Zhengce (The Current Unemployment Problems and Related Policies), Taipei: Labour Affairs Commission. Zhu, Y. and Warner, M. (2001) ‘Taiwanese Business Strategies vis a vis the Asian Financial Crisis’, Asia Pacific Business Review, 7: 139–56.

6

Unemployment in the People’s Republic of China Grace Lee and Malcolm Warner

Introduction The People’s Republic of China is situated in East Asia. The third largest country in the world, next to Canada and Russia, it has an area of 9.6 million square kilometres or one-fifteenth of the world’s land mass. It is also the biggest nation in the world in terms of the number of its citizens in 2003, with its almost 1.3 billion people. Although with an official GDP per capita at a comparatively low level, China stood as the second-largest economy in the world after the US (measured on a purchasing power parity or PPP basis) (CIA 2003). In reality, the GDP per capita was much higher on this yardstick. In late 1978, two years after the death of the ‘Great Helmsman’, Mao Zedong, who had ruled the new People’s Republic of China or PRC (henceforth to be referred to as China) for almost 30 years, the new Chinese leadership set about transforming the economy from a sluggish, Soviet-style centrally planned, command economy to a more dynamic market-oriented system. Deng Xiaoping, the emerging leader, then introduced the ‘Four Modernizations’ and ‘Open Door’ policy initiatives that were to push China into a new era. But between ‘Plan’ and ‘Market’, there was to be a phase called ‘Market Socialism’. Deng created an interim stage in China’s economic evolution, the logic of which is as yet unfolding. By embarking on the Open Door policy in 1978, China demonstrated its awareness of the growing internationalization of economic life. Gradually, it was to come to terms with globalization (see Warner 2003) by encouraging Foreign Direct Investment (FDI) and the involvement of Multinational Corporations (MNCs) through Joint Ventures (JVs) and the like. The amount of foreign funds flowing into China reached hitherto unimagined levels by the 1990s. The Asian Crisis of 1997, which badly hit the region both economically and financially, came and went, leaving the People’s Republic only marginally affected (see Table 6.1). The Asian Crisis did not rock China’s banking system as it did those in much of East Asia. Unemployment was dented relatively speaking but not dramatically as in say, South Korea (see Warner 2003). Rural industries were, however, adversely affected as a result of the Crisis and exports in general were slack as demand in Asian markets slowed down. As the region recovered and as penetration of US markets in particular grew, business improved. Today, there is a huge American

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Grace Lee and Malcolm Warner Table 6.1 Gross industrial output value in China, 1980–2002 Year

Gross industrial output value (billion yuan)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

515.4 540.0 581.1 646.1 761.7 971.6 1,119.4 1,381.3 1,822.4 2,201.7 2,392.4 2,662.5 3,459.9 4,840.2 7,017.6 9,189.4 9,959.5 11,373.3 11,904.8 12,611.0 8,567.4 9,544.9 11,077.6

Source: State Statistical Bureau, China Industrial Economy Statistical Yearbook 2002 (Beijing: China Statistics Press, 2002), p. 28; State Statistical Bureau, China Statistical Yearbook 2003 (Beijing: China Statistics Press, 2003), p. 461. Note: The figures for 1980–1999 are of all industrial enterprises, while the figures for 2000–2002 are confined to all industrial enterprises above designed size (i.e. those with an annual sales income of over 5 million yuan).

trading deficit with the PRC, counterbalanced by China’s almost similarly sized foreign exchange reserves. With little external debt, furthermore, the PRC is today a big net creditor. By 2003, China’s economy was still growing apace (Subbaraman et al. 2003). It has a large current account surplus, low external debt and massive foreign exchange reserves of approaching US$400 billion, being the next highest in the world’s economies after Japan. But there is great pressure, especially from the US government on the Chinese authorities to ‘liberalize’ the Renminbi, (or RMB) the official Chinese currency – just over eight of which bought one US dollar at the time of writing – that is, to appreciate. Money supply and credit policies are allegedly seen by Western critics to be too lax; property prices have boomed excessively; over-investment additionally remains a problem; and last but not least, overheating of the economy are all seen as problems by many outside economists (Subbaraman et al. 2003: 13).

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Gross National Product (GNP) is reported as expanding at close to 9 per cent per annum in the national statistics, although many remain sceptical of the official figures. But in terms of these rates of growth, Gross Domestic Product (GDP) per capita appears to be much larger than, say, half a decade ago, if we take the five years from 1998. Between 1998 and the end of 2002, nominal GDP per capita rose from just over US$750 to just under US$1,000; it was, however, much greater than this in purchasing power, possibly three to four times, according to World Bank estimates (see World Bank 2003). Deflation has seen substantial price cuts in the shopping malls and markets, so that goods appear to be more affordable; ‘black money’ in serious quantities circulates in the back streets. Taxes are relatively low or even ignored. There is thus money to be spent but whether enough to break the deflationary cycle is not yet clear. Maoist austerity is ‘out’; ‘conspicuous consumption’ is ‘in’, even more de rigueur in prosperous conurbations, like Shanghai. But even elsewhere, living standards have also greatly improved in real terms for most of the people, for most of the time, if relatively more slowly over the recent period. The ‘Gini’ coefficient of income inequality has nonetheless increased to double what it was in Mao’s time, (from just over 0.2 then, to well over 0.4 now) more like the capitalist norm in much of East Asia. Many of China’s poor are either surplus rural labourers who are allegedly over 200 million in number, or urban workers who have lost their jobs. The number of those officially unemployed in the cities was recently estimated at 14 million. The official rate of urban unemployment in 2002 rose to over 4 per cent (see Table 6.2) but adding in those ‘laid-off’ (xiagang) who retained some of their benefits in their formerly employing SOEs, using our own projection, it climbs to over 7 per cent; unofficial estimates suggest a figure of over 10 per cent urban joblessness (see Lee and Warner 2002, 2004). In contrast to the increasing number of unemployed, the number of ‘reemployed’ has been getting worse (see O’Neill 2002). For example, the official figures show that the rate of ‘re-employment’ continued to fall from 50 per cent in 1998 to 42 per cent in 1999, and then further declined to 35 per cent in 2000 and then fell to under 31 per cent. There are many who think the number losing their jobs will grow further in future years, particularly with World Trade Organization (WTO) entry. How all this came about, is an interesting economic phenomenon and will now be briefly sketched-out.

Contextual factors and issues Before 1978, the term used to refer to those jobless was ‘waiting for work’ (daiye); now after the economic reforms, mainly structural, have led to among other consequences, downsizing from state-owned enterprises on a substantial scale. Although the official rate of unemployment is low, the real figure is probably more than double this and even higher in the ‘smoke-stack’ regions of the North East (dongbei) mentioned earlier, for example. In the last five years, one in four of those laid-off from SOEs was to be found in that region. With around 8 per cent of the

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Grace Lee and Malcolm Warner Table 6.2 Unemployment by sector (%) Year

Urban unemployment (10,000 persons)

Unemployment rate (%)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

541.5 439.5 379.4 271.4 235.7 238.5 264.4 276.6 296.2 377.9 383.2 352.2 363.9 420.1 476.4 519.6 552.8 576.8 571.0 575.0 595.0 681.0 770.0

4.9 3.8 3.2 2.3 1.9 1.8 2.0 2.0 2.0 2.6 2.5 2.3 2.3 2.6 2.8 2.9 3.0 3.1 3.1 3.1 3.1 3.6 4.0

Source: State Statistical Bureau, China Labour Statistical Yearbook 2003 (Beijing: China Statistics Press, 2003), p. 128.

national population, over 22 per cent were on poverty relief (The Economist 10 January 2004: 59ff.). China’s entry into the WTO in late 2001 may speed up this process and increase unemployment, at least in the short term, according to several commentators. We will set out the background to this recent phenomenon and try to explain the factors that lay behind these as well as pointing to future outcomes. The management of human resources – broadly conceived – in China has long been associated with a Soviet-style command economy and lifetime employment from 1949, when Mao took power, until 1978 when Deng’s economic reforms that we referred to earlier were initially launched. We must go back several decades to see the root of this industrial status quo. After the Communists installed themselves in the capital Beijing, the Chinese workers were promised that they would be in charge of the places in which they worked. The new regime implemented a ‘jobs for life’ and ‘cradle to the grave’ welfare policy, for those toiling in the urban industrial SOEs but not for the bulk of the workforce that then laboured in the fields. In other words, only a minority of workers enjoyed this privileged status, around 150 million by the beginning of the economic reforms, out of over 700 million in all.

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This employment system was widely known in Chinese terminology as the ‘iron rice bowl’ (tie fan wan) and became a commonly used shorthand term for the workplace status quo amongst informed outsiders interested in what was happening in that country (see Child 1994). The system was in part derived from earlier Chinese Communist experience in the so-called ‘liberated zones’ (qiefang qu) during Japan’s occupation, as well as later Soviet usage, but in addition may have had roots in Japanese precedents in puppet-state set up by the invaders in Manchuria. It is likely that there were a number of earlier influences that shaped the evolution of the ‘iron rice-bowl’, but it had become more than definitively embedded in industrial life and fully institutionalized by the mid-1950s. Labour-market imbalances were to be addressed at the company level rather than in the open market. Like the Japanese model, the emphasis was on the ‘internal’ labour-market within the enterprise as opposed to the ‘external’ labour-market outside the enterprise. The system was basically an enterprise-centred and industry-driven form of labour-market management. In this context, labour-market policies may be considered as a form of ‘social protection’, both in theory and in practice and intended as a form of ‘employment protection’ (Abrahart and Verme 2001: 60). Several writers (Walder 1986; Warner 1995) have viewed the ‘iron rice-bowl’ relationship as ‘organizational dependency’, as well as an important theoretical support for their analysis, to which we will return later. The ‘mind-sets’ associated with this relationship became deep-rooted and difficult to modify or change. Even so, with the beginnings of the economic reforms, the guarantees of the ‘iron ricebowl’ began to be eroded. By the end of the century, they were well on the road to not only decline but also demise (see Ding et al. 2000). But this only came about gradually in the reform period. The policy of ‘jobs for life’ lingered on in the 1980s (labour contracts were nationally introduced for new entrants to the workforce in 1986) but it was not until the 1990s that the ‘iron rice bowl’ began to be effectively replaced by a market-oriented set of labour and personnel reforms. The 1992 programme of personnel reforms was a major step in this direction. With these reforms of the employment system, a new terminology of Human Resource Management (HRM) began to see the light of day in contemporary China (see Child 1994; Warner 1995, 1999). In fact, HRM was said to be rooted in both Western and Japanese management systems and then later adopted and modified in the US and Europe. It may be seen as adopted in the PRC to ‘legitimize’ the displacement of the ‘iron rice bowl’, as part and parcel of the adaptation to the new market-led environment. It can be distinguished from the older Personnel Management (PM) (renshi guanli) terminology as follows. The translation of HRM into Chinese pinyin is ‘renli ziyuan guanli ’ (with the same Chinese characters as in Japanese); this means ‘labour force resources management’. However, we find still it offered as a synonym for renshi guanli. However, in SOEs, conventional people-management continues to be the norm. One HR Director in a joint venture ( JV) noted ‘we are still the policemen of the danwei ’, which meant even there, their role was mostly bureaucratic involved in applying and policing personnel rules and regulations to

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control employee behaviour. Thus, apart from its usage in the large JVs and wholly owned MNCs in China, it is still very far from the initial concept of HRM as understood internationally. The prevalence of the old personnel model in China however cannot be ignored. It still pervades a good deal of what is left of the SOE work-unit (danwei) mind-set it once engendered (see Nolan 1995; Lu and Perry 1997). We will describe next the dimensions of the unemployment problem facing contemporary China, then go on to look at possible policy issues.

Society and unemployment Labour supply At the present time, China’s vast population and labour-force of just over half of this, in its turn the largest in the world (see Warner 1995) appeared to place human resources high on the agenda as far as the recent WTO entry in late December 2001, was concerned. Much of the nation-wide labour-force of over 700 million people is composed of country-dwellers and they mostly still live in townships and villages. There has been until lately a strict ‘one-child policy’ in most of the People’s Republic to restrain population numbers, as new citizens as well as existing ones have to be fed, housed and employed. Half the labour-force work on the land but it is estimated over 200 million of these are surplus to economic requirements (as we noted earlier) and currently over 100 million are already ‘on the move’, making their way into the towns, as part of the ‘floating’ migrant population known as the mingong (see Solinger 2002). Over one-third of China’s population lives in urban areas. Those out of work in the towns were in the late 1990s officially calculated at 3.5 per cent of the urban workforce (a figure, as we have seen above, now rising to around 4.5 per cent) but in reality this was then much higher and is now perhaps even more than this total in real terms. Unemployment was officially unknown throughout the Maoist years. ‘Jobs for life’ were de rigueur in the ‘new China’. The unemployment-rate across the country, even by 2002, was officially seen as low at 4 per cent, in spite of the industrial restructuring that had taken place in the conurbations (National Bureau of Statistics 2003). It is more than likely to be an underestimate. As a Western scholar, Solinger has rightly pointed out, ‘accurate data are hard to come by, since government statistics are murky and often presented in a way that suggest that the numbers are not all that large’ (Solinger 2002: 304). The State Council’s Development Research Centre issued a report that contradicts official figures for the current unemployment rate. In contrast to the very recent official rate of around 4.5 per cent in China, the report indicates that the urban unemployment rate is already 10 per cent, and will rise to 15 per cent under the impact of World Trade Organization entry. Politics has, we must emphasize, plagued the use of statistics from the beginning of the People’s Republic. So long as high GDP growth rates and low unemployment are treated as political targets, and are used

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to bolster the careers of provincial officials, then these problems will remain. One criticism that is commonly heard among Chinese economists is that ‘statistics make the officials and officials make up the statistics’ (shuju chengjiu guanyuan, guanyuan chengjiu shuju). Indeed, caution has to be paid to differences in definitions here. The Chinese perception of reality is most idiosyncratic. China defines the ‘jobless’ in a highly distinctive way. According to the State Statistical Bureau, unemployment refers to the urban registered unemployed who (a) possess non-agricultural residence; (b) are within a certain age range (16 to 50 for male and 16 to 45 for female); (c) are able and willing to work; and (d) have registered with the local labour bureau for employment (Chinese Labour Statistical Yearbook 1997: 588). Only the officially designated unemployed are eligible for what are known in the People’s Republic as ‘unemployment benefits’. In fact, another form of joblessness is perhaps more pervasive – ‘hidden’ unemployment – referring to workers, often in the state sector, who have been ‘laid-off’ (xiagang). The State Statistical Bureau defines ‘laid-off’ workers to be ‘workers who have left their posts and are not engaged in other types of work in the same unit, but still maintain a relationship with the unit that they have worked’ (Chinese Labour Statistics Yearbook 1997: 588). In spite of the umbilical cord of the former status quo that linked them to their work-unit (danwei), workers who have been ‘laid-off’ are given only very basic living subsidies (shenghuofei) at subsistence levels, instead of unemployment benefits, and are not included in the registered unemployment rate. This statistical convention has led to confusion by overseas observers and accounts for the allegedly low rate of joblessness in the People’s Republic. It led those who were blind ‘fellow-travellers’ to see China as a sort of worker’s paradise where everyone had a job and where all basic needs were catered for. A ‘White Paper on Employment and Social Welfare’ issued by the State Council stated that from 1998 to 2001, more than 25.5 million people were laid off from SOEs, and of which around 16.8 million managed to have rearranged employment (as cited in O’Neill 2002: A01). These figures would suggest that over 8.7 million are still in the xiagang condition in 2001. Wang Dongjin, then ViceMinister of Labour and Social Security, pointed out that many of the jobless and those laid off from SOEs were low-skilled and middle-aged who had had a poor education and had been employed in traditional sectors such as coal, textiles and machinery (as cited in O’Neill 2002: A01). Wang’s observation is supported by Maurer-Fazio’s (2002) empirical analysis that demonstrates that education has become a key determinant of labour-market outcomes in China’s rapidly changing work environment. Educational attainment is now an important factor in the ‘lay-off decision’ – the more education a worker has, the better his/her protection from lay-off. Similarly, the more education and training a worker has, the better his/her chances of finding new employment. Wang openly acknowledged that China was facing a severe condition of employment, and the number that newly joined the labour-force was at an unprecedented peak. In the coming few years, between 12 to 13 million will enter the labourmarket per year. Even if China retains its current percentage of economic growth

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per year, only 8 million jobs will be created. This evidence means that the annual newly added unemployed will be between 4 and 5 million. By the end of 2005, we estimate, around 20 million will have to be dealt with. Whereas the precise total aggregates may be in doubt, this description seems plausible. Unemployment, intertwined with poverty, now poses a huge threat to both social stability and the rule of the Party that demands an urgent policy response. Labour-market programmes have emerged as an important employment-policy tool since the reform era. The following section examines the institutional changes in the Chinese labour-market in the pre- and post-reform era. Labour demand The demand for labour in the Chinese economy is largely a function of its rate of GDP growth per annum. The relentless expansion of GDP in recent years has allowed the absorption of much surplus labour but not all. It has taken a growth rate of at least 8 per cent per annum to achieve even this partial success. If the economy flounders, then the rate of joblessness will grow. As we saw earlier, GDP per capita rose to just under US$1,000 in nominal terms but was much greater than this in purchasing power, possibly three to four times so, according to World Bank sources (see World Bank 2003). Growth rates have been vigorous from 1980 onwards (see Table 6.3). They have averaged around 10 per cent per annum for much of the period. The demand for labour has, however, been mitigated by the reform process itself in that as more efficient factor-allocation has been institutionalized, fewer workers are needed per unit of investment. With this, factor productivity has risen and big investments have not generated as many jobs as in the past. Pari passu, structural reform has led to the growth of the non-state sector and a proliferation of urban small and medium-sized enterprises (SMEs) and rural town and village enterprises (TVEs) that have absorbed a fair amount of labour supply. Social issues The demise of the ‘iron rice bowl’ (see Ding et al. 2000) has hugely contributed to the social malaise that has occurred as a result of structural reforms in the economy. There has been a collapse of social welfare arrangements in the countryside. In the cities, a new social security regime has been planned to take over where the old status quo left off but has not yet been implemented nationwide. Many SOEs are bankrupt and cannot always honour their pension commitments on a regular basis; the new state schemes that enterprises must set up are contributory in basis. The workers – no longer the ‘masters’ – must now carry part of the burden of provision for sickness and old age. Poverty has grown hand-in-hand with greater prosperity. The state has not yet been able to effectively deliver the promised ‘safety-net’ across the nation.

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Table 6.3 GDP and GDP growth in China, 1980–2002 Year

Gross domestic product (billion yuan)

GDP growth rate (%)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

451.78 486.24 529.47 593.45 717.10 896.44 1,020.22 1,196.25 1,492.83 1,690.92 1,854.29 2,161.78 2,663.81 3,463.44 4,675.94 5,847.81 6,788.46 7,446.26 7,834.52 8,206.52 8,946.81 9,731.48 10,479.06

7.8 5.2 9.1 10.9 15.2 13.5 8.8 11.6 11.3 4.1 3.8 9.2 14.2 13.5 12.6 10.5 9.6 8.8 7.8 7.1 8.0 7.5 8.0

Source: State Statistical Bureau, China Statistical Yearbook 2003 (Beijing: China Statistics Press, 2003), pp. 55–57.

Institutions and social problems Hussain, Stern and Stiglitz (2000: 4) argued most persuasively, in their theoretical analysis of the recent economic reform process, that China’s more successful transformation has been based on ‘a process of institutional change that preserved and built on its basic codes and practices of behaviour’. Table 6.4 shows a comparison of the institutional changes in the pre- and post-reform era. China’s pre-reform labour system was the antithesis of the free market. The state then claimed ownership of labour services and bureaucratically assigned workers to enterprises for life (tongyi fenpei). Workers’ preferences concerning occupation or location mattered little. On the enterprise side, managers for the most part had to accept any and all workers allocated to them. Job mobility was minimal and would occur mostly as the result of workers’ reassignments or transfers to satisfy the need of state-run organizations (Walder 1986: 8). Under these circumstances, where individuals are discouraged from searching for jobs, information about jobs is unimportant and meaningless. Around 1992 and 1993, the policy of state job assignment was largely abolished. By the mid-1990s, the tongyi fenpei system remained only in a residual manner in

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Grace Lee and Malcolm Warner Table 6.4 Institutional changes in the Chinese labour market Pre-reform era Role of the state Socialist ideology Direct allocation of jobs Provisions from ‘cradle-to-grave’ State-owned enterprises Centralization Life-long employment Tool for full employment Workers as ‘masters’

Post-reform era Market principles Facilitate job search Individual self-reliant Decentralization Contract terms Layoffs for efficiency Workers as ‘proletarians’

large cities such as Shanghai (Davis 1999: 22–43). School graduates still have access to state-sponsored channels for employment, but they now have the option of using market channels such as advertisements, job fairs, and employment agencies, even the Internet. The number of private enterprises, foreign-funded firms, and other non-state controlled businesses has significantly increased. Seen positively, the operation of labour-markets made it legitimate for individuals to use all kinds of channels to search for jobs. Bian’s (2002) study of job mobility in five Chinese cities indicated that from the pre-reform period to the 1980–92 and the post-1992 period, job mobility through hierarchical channels declined sharply from 76 per cent to 52 per cent to 10 per cent respectively. Meanwhile, job mobility through market channels increased from 15 per cent to 32 per cent to 60 per cent respectively. These changes point to the decline of job assignments and the growth of labour-markets in Chinese cities from 1980 to 1999 (Bian 2002: 4–7). While this process is as yet incomplete, China is now conclusively evolving towards a market-led model of factor-allocation. Our empirical, field-based research into employment, unemployment and re-employment in China focused on a number of problems and policies we will now outline. The abolition of the state allocation system also means that concerns about statesector inefficiency began to override concerns about dismissals and layoffs. Enterprise reforms replaced the ‘iron rice bowl’ with performance-based hiring, firing, and compensation. The ‘three new irons’ replaced the ‘three old irons’. ‘Iron rice bowl, wage and chair’ were to be superseded by ‘iron face, guts and hands’ (see Warner 2000: 29). Soon, SOEs began to use the new tools of economic efficiency, such as adopting labour contracts, implementing wage reform, and decentralizing labour management. The policy of putting workers on xiagang was first experimented with and then applied nation-wide in 1997. The effects were profound. The security once enjoyed by urban workers rapidly eroded. Chinese urban workers are no longer shielded from market forces. They bear the brunt of the adjustment costs as enterprises shed redundant workers in their attempts to become more efficient and profitable.

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Laid-off workers in the People’s Republic mostly experience substantial periods of unemployment with minimal stipends. To address this issue, various localities have devised their own ‘re-employment projects’ (zaijiuye gongcheng). Among the policy alternatives that we empirically investigated, the Re-employment Service Centre (zaijiuye fuwu zhongxin) programme has been an integral part of what was called the ‘Shanghai re-employment project’. The main research methods we used, in the citywide case-study presented here, were drawn on evidence gleaned mainly from both primary and secondary documents, media reports and official statistics; these we consistently approached with caution, for an analysis and evaluation of the Shanghai re-employment model. Our empirical field research in this east coast conurbation, with its burgeoning over 14 million person population, took the form of over 50 open-ended, qualitative interviews with policy-makers, senior managers, trade union representatives, factory workers and unemployed persons in the late 1990s. Further contacts with respondents, right up to the end of the year 2001, also provided supplementary valuable data in the writing of this chapter. Additionally, visits were made to government departments such as the Labour and Social Security Bureau in Shanghai, as well as the Re-employment Service Centres. The operation of the placement service, re-training services and social security insurance was observed at firsthand. The evidence summarized below, we believe, has thus sound empirical underpinnings. Combining welfare provision, employment service and re-training programme, the Shanghai Re-employment Service Centre was recognized by the central government as a ‘learning model’ for other local governments. The use of such models has been a feature of the reform process for many years, indeed since its inception, as experimental projects were rolled out and tried in one or more localities before being implanted across the nation. Since 1998, this device has been extended to the whole country as a national labour-market policy. Being a transitional mechanism to protect the xiagang (laid-off) workers, the Re-employment Service Centre is intended to eventually fade from the employment system. An unemployment insurance system will then hopefully be fully implemented, institutionalized and in place. To cushion the xiagang workers against the pain of being laid-off, the Reemployment Service Centre acts as a buffer for them to gradually enter the market by providing a temporary safety-net to solve the immediate financial problem of these workers. Its responsibility is to create multi-tiered re-employment channels for the entrusted workers, and eventually be a recycling mechanism facilitating the ‘rational’ distribution of labour resources by the market (Li 1997). The goal of this programme is to prima facie guarantee a basic living to those xiagang workers entrusted and to help them to get re-employment as soon as possible. The immediate purpose is to reduce the financial burden of the enterprises by transferring much of their responsibility for the redundant workers to the State Holding Corporations (SHCs) (Guojia Konggu Jituan Gongsi) that have their own budget. The work of the centres has been concentrated on persuading the laid-off workers to accept various forms of settlement, so that they could in effect ‘sever’ the relationship with their employing enterprises (Solinger 2002).

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The setting up of Re-employment Service Centres, according to the above sources, enabled 164 loss-making enterprises in the textile sector, for example, to shut down, suspend production or shift to producing other goods. By cutting its primary processing capacity by around 30 per cent, the sector had checked its losses. Altogether, the textile and electrical machinery industries had saved over 300 million RMB (just under US$90 million) in eight months by sending 116,552 redundant workers to the Re-employment Service Centres (ibid.). Under the so-called ‘Shanghai model’, the main core of our empirical research, an enterprise has to submit a formal request to such a centre before they can lay off their surplus workers. The Re-employment Service Centre would then screen the request in the light of the conditions set by the municipality that the enterprise must be undergoing major restructuring, merger, or facing bankruptcy. If approval was granted, the enterprise would then transfer its xiagang workers to the Centre (Feng 2000). After transferring their redundant workers to the centres, enterprises only have to pay a small management fee, approximately a third of the previous cost they spent, and those remaining will be covered by the centre. With regard to the funding of the centres, this comes from three sources, each of which covers about onethird of the total costs. These include earmarked funds from the municipal treasury, management fees collected by the Labour Bureau from enterprises employing migrant workers, and funds raised by the State Holding Corporations, with the municipal trade union being a major contributor (ibid.). The Re-employment Service Centre and the laid-off workers sign trusteeship contracts with specified mutual obligations. The term is three years, during which the centre will provide a package of integrative services including provision of basic living allowance, contribution to the premium of pension, medical and other social insurance, training and counselling, and job referrals. On the other hand, if a xiagang worker refuses to accept a job referred to him or her by the centre twice, his or her living allowance will be terminated. After the period of three years’ entrustment, those who have not taken up new jobs will have to leave the centre and terminate their labour relationship with their employing enterprises (Li 1998). Unemployment ‘dole’ will be paid to those who are no longer seen as xiagang, and poverty allowances will be paid to those who have exited from the two-year period that characterizes the official unemployed status. These payments are both very nominal and provide only a pittance, about a quarter of the average livingwage in RMB terms.

Trends and prospects China’s entry to the World Trade Organization (WTO) in late 2001, the speeding up of the structural readjustment of industries, the influx of fresh graduates from universities, and the residual economic effects of SARS (Severe Acute Respiratory Syndrome) will put an even more serious strain on the management of human resources broadly envisaged and increase employment pressures in the coming years, as globalization advances (see Warner 2002). The Green paper ‘Report on

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China’s Population and Labour Problems’, published by the Chinese Academy of Social Sciences, pointed out the impact of China’s accession to the WTO on China’s employment situation: in the short term, urban unemployment is likely to increase by 3 to 4 million, and the unemployment rate to rise by 2 per cent. The impact on agriculture may be most severe, and it is estimated that employment could decrease by 10 million. The impact of the WTO on agriculture has important implications for workers laid-off from SOEs. Increased rural–urban migration may not only raise urban unemployment but put downward pressure on wages, especially in labour-intensive industries. The Chinese Vice-Premier Huang Ju has highlighted the need to create more jobs and offer employment services for college and university graduates (China Daily, 6 April 2003). Huang said this year’s graduates were the first to experience China’s reforms in increasing enrolments in universities and colleges, which meant the number of college graduates would be much greater this year than usual. Over 2 million students graduated from university this year, about 700,000 more than last year. As at the end of September 2003, only about 70 per cent of all university graduates could secure employment (ibid.). It is expected that the number of university graduates in 2004 will be 2.8 million, an additional surge of 680,000. Furthermore, the outbreak of SARS has worsened China’s already ‘grave’ employment situation. The SARS outbreak badly hit industries such as civil aviation, tourism, catering and taxis. In a circular released in May 2003, the government said: ‘Uncertainties for economic development caused by the outbreak of SARS has brought about new difficulties and had negative effects on employment. It is challenging the realization of this year’s employment targets.’ The State Council said local governments must take immediate action and try to keep the official jobless rate in their respective areas below 4.5 per cent of the working population this year (China Daily 22 May 2003). The latest state statistics indicated that 7.75 million people were registered as unemployed in urban areas as of the end of March, 750,000 more than that at the same time last year. The registered unemployment rate was 4.1 per cent. A report released by the Ministry of Labour and Social Security in June 2003 revealed that about 24 million new urban job-seekers, laid-off workers from SOEs and the registered jobless have been swarming job fairs, but only 10 million openings at the most will be available by the end of 2003 (China Daily 24 June 2003). Lin Yueqin, a researcher from the Economic Research Institute affiliated to the Chinese Academy of Social Sciences, said ‘[t]he SARS outbreak will not affect China’s economic growth in the long run but its job market will be hardest hit’. Lin said many enterprises will not expand their recruitment or production this year because of the SARS outbreak, reducing the number of new jobs available. Despite a slow recovery, the retail, catering, hotel and recreation industries were dealt the biggest blow from SARS. There were about 50 million people employed in these sectors. If their total business shrank by 10 to 20 per cent, 5 to 10 million jobs would be threatened. Tourism, real estate, construction, training and household services had also been seriously affected. About 100 million workers were

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engaged in these sectors. If these sectors earned 5 to 10 per cent less revenue, about 5 to 10 million jobs would be affected. Experts and officials believe that migrant labourers had been the hardest hit by SARS in terms of unemployment, followed by laid-off workers and university graduates (China Daily 4 June 2003). Cai Fang, a researcher with the Chinese Academy of Social Sciences, claimed that poverty rates in rural areas would increase because 7 to 8 million farmers have returned to their hometowns and lost their city jobs. Mao Yushi, a renowned economist from the Beijing-based Unirule Economic Institute, said ‘[m]any migrants left the cities when the SARS appeared because of fear . . . About 8 million farmers returned home during April and May and now 73 per cent are still waiting to see if the cities are safe enough to return and find jobs’ (ibid.). Chen Huai, a central government think-tank researcher with the State Council Development and Research Centre, forecasted that migrant labourers were expected to lose some 40 billion yuan (US$4.8 billion) of income by the end of 2003 and should be granted short-term unemployment allowances’ (ibid.).

Discussion and conclusion Figure 6.1 depicts a labour market model we have conceptualized that summarizes the operation of the system in Shanghai. Over the past 40 years, ‘active’ labour-market programmes have emerged as an important employment-policy tool, particularly in developed countries. However, more recently the case for active labour-market policies has also emphasized the potential social benefits in the form of the inclusion and participation that comes from productive employment (Betcherman et al. 2000: 1). In the analysis we develop here, we use the labour market theoretical framework we have referred to above, albeit with minor modifications and a number of caveats. Labour supply (school leavers, job changers and laid-off workers) is the primary input to the systems model. It is hoped that this supply of labour will be transformed by the active labour market programmes of the government leading to positive output of employment. This policy envelope includes a wide range of activities, intended to increase the quality of labour-supply (for example, retraining); to increase labour demand (for example, direct job-creation); or to improve the matching of workers and jobs (for example, job-search assistance). The objective of these measures is primarily economic – to increase the probability that the unemployed will find jobs or that the underemployed will increase their productivity and earnings. Shanghai has also established a ‘passive’ labour market policy of unemployment insurance. In relatively well-off Shanghai, the re-employment centres do provide a ‘safetynet’ for the xiagang workers as the minimum living protection of laid-off workers provided by the Re-employment Service Centres has been merged gradually with the unemployment insurance system. However, the types and quality of services provided by the centres in different localities do vary considerably. In some centres, on the other hand, there are also cases where the centres fail to provide any assistance. For instance, some centres in Wuhan merely provide a form for the

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Figure 6.1 Chinese labour market model.

entrants to fill out but have virtually nothing more to offer. A desperate worker thus received no money, no training, no placement, and did not hear from his centre after he had signed a contract with the centre for 18 months (Solinger 2001: 683). Such problems often provoke protests and demonstrations: for example, 30,000 workers from 20 bankrupt factories marched in the streets in Liaoyang in the North-East (dongbei) ‘rust-belt’, in March 2002 (see Becker 2003). The regime gravely fears a cloning of the Polish-style ‘Solidarity’ movement – a reason why Deng had earlier tried to increase worker involvement in enterprise decision making at the beginning of the reform process in the early 1980s. Moreover, officials from the Ministry of Labour and Social Security had warned that the chances for the xiagang workers to get re-employment might deteriorate in the years to come. Statistics from the Ministry show that about 23 million labourers will be seeking jobs in urban areas in the next three to four years since 2002, but

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there are only expected to be about 8 million job opportunities available (China Daily 24 September 2002). In the first half of the year 2001, among those 7.69 million xiagang state workers, the official statistics concede that only 11.1 per cent of the total had succeeded in finding new jobs. This proportion was 4.9 percentage points lower than that of the same period in the previous year (China Daily 28 July 2001; People’s Daily 30 July 2001). This record is not very encouraging in face of the mass redundancy China faces as a result of further ‘deepening’ of the reforms and the consequences of now ongoing trade liberalization. Even though China aims to contain the ‘official’ unemployment rate within 5 per cent during the Tenth Five-year Plan (2001–2005) (China Daily 7 August 2001), it is clear that the problem of unemployment will still be vexing the Chinese government in the foreseeable future (see Becker 2003) and may likely still constitute a potential threat to social stability. The system can probably only maintain its status quo if there are more ‘winners’ than ‘losers’ (see Warner 2003). The rate of economic growth must keep growing at a rate above 8 per cent per annum just to absorb the redundant old and job-seeking youth. If China can continue its almost unprecedented rapid economic expansion, it might just keep matters under control. Otherwise the system will prove to be unstable and the future unpredictable. We now conclude by attempting to deal with the key questions concerning unemployment trends and policies, raised by Webber in Chapter 2. We can sum up our responses as follows: The first question concerned the levels and forms of unemployment in different countries and regions. We have seen that, in the PRC, unemployment is more structural than cyclical, probably due to the very rapid pace of economic growth and because it had been for many years de-coupled from international business cycles but is now clearly less so. What are the dynamics of unemployment (question 2) – the transitions that are typical, its duration, its effects on careers? The dynamics of unemployment have been described and analyzed above. China has experienced a period of reform of two decades and has adjusted well in its more prosperous areas in the coastal regions. Joblessness has mostly affected the careers of those in the state sector. The third question refers to the experience of particular social groups within that aggregate history? Age and gender are important factors here. Older workers in SOEs have been most affected as well as women workers in older manufacturing sectors, like textiles. What are the implications of more open economies for unemployment (open for trade, investment, immigration)? Today, as is evident in our chapter, all have been affected by growing international economic links especially entry into the WTO. The fifth question concerned the effects of economic structure on unemployment. In particular, how do technical change, capital investment, industrial structure and the new economy affect unemployment? Structural changes have been a dominant factor and the other cited factors have been the intervening variables involved in the process. What then are the economic and social costs of unemployment? The economic and social costs have been substantial as enterprises have had to carry the costs of those laid off and families have had to support those out of work, but by and large these costs have been compensated for by the fast rate of economic growth.

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Joblessness has led to a deterioration of living conditions especially in the ‘rust-belt’ in the North East and the interior, although this has been counterbalanced by improvements in living-standards in the coastal region. Finally, what are the appropriate labour market and other policies with which to deal with unemployment? As we have seen in this chapter, the state has encouraged job-creation and re-training programmes but these have had a patchy degree of impact.

References Abrahart, A. and Verme, P. (2001) Social Protection in Asia and the Pacific, Manila: Asian Development Bank. Becker, J. (2003) ‘China’s gestures of reform leave workers in chains’, International HeraldTribune, 8–9, February, p. 8. Betcherman, G., Dar, A., Luinstra, A., and Ogawa, M. (2000) Active Labor Market Programmes: Policy Issues For East Asia. Washington: The World Bank Group. Bian, Y. (2002) ‘Network Resources and Job Mobility in China’s Transitional Economy’. Draft prepared for presentation at University of California, Davis. Child, J. (1994) Management in China during the Age of Reform. Cambridge: Cambridge University Press. China Daily, 6 April 2003, 28 May 2003, 4 June 2003, 24 June 2003, 28 July 2003, 7 August 2003, 24 September 2003 (http://www1.chinadaily.com.cn/cndy/). Chinese Labour Statistical Yearbook 1997. Beijing: China Statistics Press. CIA (2003) The World Factbook. (http://www.cia.gov/cia/publications/factbook/geos/ ch.html#Econ). Davis, D. (1999) ‘Self-employment in Shanghai: A Research Note’, China Quarterly, No. 157, 22–44. Ding, D. Z., Goodall, K. and Warner, M. (2000) ‘Beyond the Iron Rice Bowl: Whither Chinese HRM? International Journal of Human Resource Management, 11, 2, 217–236. Feng Chen (2000) ‘The Re-employment project in Shanghai: Institutional Workings and Consequences for Workers’, China Information, Vol. XIV, No. 2, 170. Hussain, A., Stern, H. and Stiglitz, J. (2000) ‘Chinese Reforms from a Comparative Perspective’, in (eds), P. Hammond and G. Miles, Incentives, Organization and Public Economics, Papers in Honour of Sir James Mirrlees. Oxford: Oxford University Press. Lee, G. O. M. and Warner, M. (2002) ‘Labour-Market Policies in Shanghai and Hong Kong: A Study of “One Country, Two Systems” in Greater China’, International Journal of Manpower, 23, 6, 505–526. Lee, G. O. M. and Warner, M. (2004) ‘The Shanghai Re-employment Model: From Local Experiment to Nationwide Labour-Market Policy’, China Quarterly, No. 177, March (in press). Li Jianguo (1998) ‘A Million Workers Reemployed’, China Today, Vol. 47, No. 1, 14. Li Ning (1997) ‘Promising Reemployment Project’, Beijing Review, Vol. 40, No. 33, 11. National Bureau of Statistics, People’s Republic of China, 28 February 2003, Statistical Communiqué 2002. Lu, X and Perry E. (1997) Danwei: The Changing Chinese Workplace in Historical and Comparative Perspective, Armonk, NY and London: M. E. Sharpe. Maurer-Fazio, M. (2002) ‘The Role of Education in Determining Labor Market Outcomes in Urban China’s Transitional Labor Markets’. William Davidson Working Paper, April, No. 459, 1–24.

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Nolan, Peter. (1995) ‘China’s rise, Russia’s fall: politics, economics, and planning in the transition from Stalinism’. New York: St Martin’s Press. O’Neill, M. (2002) ‘China Warns of 20 Million Urban Jobless’. South China Morning Post, 30 April, Section A, p.1. People’s Daily, 30 July 2001 (http://english.peopledaily.com.cn/). Solinger, D. J. (2001) ‘Why We Cannot Count the “Unemployed” ’. China Quarterly, No. 167, 573–833. Solinger, D. J. (2002) ‘Labour Market Reform and the Plight of the Laid-Off Proletariat’. China Quarterly, No. 170, 303–326. Subbaraman, R., Jones, R. and Shiraishi, H. (2003) Damocles: Low risks, but for how long? London: Lehman Brothers. The Economist, (2004) ‘Special Report: Parts the bulldozers have not yet reached’, 10 January, 59–61. Walder, A. (1986) Communist Neo-Traditionalism: Work and Authority in Chinese Industry, Berkeley, CA: University of California Press. Warner, M. (1995) The Management of Human Resources in Chinese Industry, London: Macmillan and New York: St. Martin’s Press. Warner, M. (ed.) (1999) China’s Managerial Revolution. London: Frank Cass. Warner, M. (ed.) (2000) Changing Workplace Relations in the Chinese Economy, London, Macmillan and New York: St. Martin’s Press. Warner, M. (2002) ‘Globalization, Labour Markets and Human Resources in Asia-Pacific Economies: An Overview’, International Journal of Human Resource Management, 13, 3, 384–398. Warner, M. (ed.) (2003) The Future of Chinese Management. London: Frank Cass. Warner, M. (2004) ‘Introduction: Human Resource Management in China Revisited’, International Journal of Human Resource Management (in press). World Bank (2003) Annual Report, Washington, DC: World Bank.

7

The impact of economic reforms on unemployment in Indonesia Poppy Ismalina and Sari Sitalaksmi

Introduction Over the last two decades, the Indonesian economy has experienced remarkable economic growth. The economic reforms and deregulation instituted in this period have led to a recovery in gross domestic product (GDP) from a low of 2.6 per cent in 1985 to an average of 6–7 per cent in the 1990s in real terms (Feridhanusetyawan 1999). However, fortunes reversed in 1997 with the onset of the Asian Crisis. The Crisis quickly spread into the real sector,1 and by early 1998 Indonesia was in its worst economic recession since the 1960s. Further, political and social instability following democratisation and regional decentralisation escalated. To complicate matters, the impact of external forces such as globalisation was also becoming increasingly evident. Although most attention has been given to resolving the Crisis, a number of questions regarding the wisdom and process of liberalisation are still raised by the public. On the one hand, some regard liberalisation as a manifestation of the globalisation process, which has inevitably cascaded down to the country level, and that this process might have gone too far. On the other hand, some believe that the liberalisation of the current and capital accounts, the latter in particular, should be held responsible for the Crisis. Jomo (2000) argued that the Crisis was principally due to the undermining of the previous governance in the financial sectors. In particular, he blames the deregulation and other developments associated with globalisation, and the growing influence of financial interests at both international and national levels as well as measures of financial liberalisation. More clearly, the Crisis has brought a far-reaching reassessment of the ongoing programmes of liberalising economic reforms in Indonesia. Many have blamed the Crisis on the premature opening up of the Indonesian economy some three decades earlier. Along the way there were periods in which the process slowed down, or came to a halt, or even experienced a reversal. Indonesia began with the liberalisation of its economy in 1966, but the programme was presented as a ‘total correction’ to the economic policies of the ‘Old Order’ government. An open door investment policy was introduced by the adoption of a Foreign Investment Law in 1967 which (initially) had no restrictions on foreign equity and the employment of expatriates and allowed 100 per cent

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foreign ownership. In 1982, the Indonesian government began to significantly restructure the economy with some liberalisation programmes. This fluctuation was seen by Soesastro (2003) as the government’s ambiguity toward economic liberalisation policy which is shown by the absence of any grand design to guide the process. In reality, it has been a process driven by pragmatism and by necessity. Over the years, this process has been largely determined by various factors, both internal and external to the economy. On the one hand, the liberalisation process has been motivated by a number of significant initiatives, such as global liberalisation initiatives (World Trade Organisation – WTO), competitive liberalisation, and a dynamic regional environment (Asia-Pacific Economic Cooperation – APEC, ASEAN Free Trade Area – AFTA). On the other hand, the process has been conducted in a gradual fashion, taking full account of its political feasibility. The dominant position of the state, with the strong role of the government and the central power of the president, meant that the economic and political environment was largely influenced by changes in government policy. Pangestu (1991) supported this argument by noting that the identifiable periods of liberalisation trends and the intervening periods of increased protectionist policies were all closely linked to major economic and political changes. Indeed, after 30 years of development, the institutional setting remains largely underdeveloped. In other words, this liberalisation process was not guided by some overall blueprint (Soesastro 2003). Accordingly, Indonesia was not well equipped to cope with the pressures of globalisation. The Asian Crisis caused Indonesia to experience major social and political upheaval. ‘Indonesia’s open, deregulated economy that coexisted with a closed, patrimonial (crony) system’ (Kim 2000) coupled with its economic position and high exposure to foreign debt prior to the Crisis forced it to accept the IMF bailout packages. Not surprisingly, the Crisis of 1997/1998, which is still ongoing in Indonesia, has led to serious economic problems. In 1998, the economy went into deep recession with overall growth falling by 13.7 per cent. Cumulative inflation reached more than 40 per cent for the first five months of 1998, and then reached 70 per cent in September 1998. Unemployment increased to as much as 20 million people, from about 6 million at the onset of the Crisis. The number of people living under the poverty line was estimated to have risen to 80 million, or about 40 per cent of the population. Hence, the real challenges facing Indonesia are solutions to the increased unemployment, slow economic growth, greater income disparity and increased poverty. This chapter specifically analyses these problems, with attention to the issue of unemployment, its antecedents and impacts. Also, the chapter examines policy implications and recommendations to address the unemployment problem. Unemployment deserves much more careful examination due to its potentially large impact on the economy and society at large. By taking into account both external (such as globalisation, competitive liberalisation and the dynamic regional environment) and internal pressures (such as democratisation and more importantly economic restructuring) into the analysis, it is expected that the

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empirical and theoretical debates will shed some light for providing better policy recommendations. To provide a sense of the dynamics within the Indonesian economy, this chapter will start with a discussion of the contextual factors and issues and will review the Indonesian restructuring programme, particularly after 1980s when the oil boom era ended and how it has influenced the economy and employment structure. The third section will discuss the relationship between society and unemployment. The fourth section will elaborate the importance of the relationship within Indonesian labour and social institutions. The trends and prospects for unemployment will then be discussed in the fifth section, and the last section will present a set of policy recommendations.

Contextual factors and issues Indonesia has achieved remarkable success in economic development over the past two decades and a half (see Figure 7.1). While the GDP growth during 1980 to 1990 was 6.1 per cent per annum, it went up to 7.6 per cent per annum during 1990 to 1995 and 7.8 per cent in 1996. In 2002, real GDP growth rate stood at 3.7 per cent and in 2003 it was estimated to be 4.1 per cent (The Economist Intelligence Unit 2004). This consistently high growth has been associated with an impressive diversification of the economy and the strong performance of the industrial sector which grew at a rate of 10 per cent per annum between 1990 and 1995 and accounted for almost half of the nation’s GDP (see Table 7.1). On the employment front, the performance has been less impressive. The

Figure 7.1 GDP annual growth (%). Source: The World Bank (2004).

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Table 7.1 GDP shares by sector at current prices (%) Year

Agriculture

Industry

Services

1985 1990 1995 1998 1999 2000 2001 2002

23.2 19.4 17.1 18.1 19.6 17.2 17.0 17.5

35.8 39.1 41.8 45.2 43.4 46.1 45.6 44.5

40.9 41.5 41.1 36.7 37.0 36.7 37.5 38.1

Source: ADB Key Indicators (2003).

growth of employment has lagged behind that of the growth of the labour force. During 1985 to 1995, the rate of employment growth had been 2.3 per cent per annum compared to a labour force growth of 3.1 per cent. Indeed, employment growth declined from 2.8 per cent per annum during 1985 to 1990 to 1.8 per cent during 1990 to 1995. As shown in Figure 7.2, the unemployment rate had been relatively low at around 2.0 per cent until 1985, but increased from 1986 to 1993 before it started to fluctuate significantly. By 2002, the unemployment rate stood at 9.1 per cent, and this figure increased to 9.5 per cent in 2003 (BPS 2004). Economic change faced by Indonesia, which in turn induced change in employment structures, is largely determined by the following external and internal factors.

Figure 7.2 Unemployment rate. Source: Key Indicators (ADB 2001), (ADB 2002), and (ADB 2003).

Globalisation and open market regime have become much more prevalent worldwide in the 1970s. However, the oil wealth and rents expropriated by the Indonesian government from the mid-1970s to 1981 has reduced the perceived sense of urgency. According to Pangestu (1991), under the New Order protective regime, the ruling regime at time, emphasis was given to local supply for

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domestic consumption by adopting an import-substitution policy. Huge funds were particularly invested in the heavy industries, petrochemicals and mining which were mainly controlled by the newly established state-owned enterprises. Indonesia maintained an import substitution approach until the early 1980s. The government was highly influential through the presence of state-owned firms in heavy industries like oil refining, cement, aircraft, steel and fertilisers. The country did experience economic growth throughout the 1970s and 1980s, induced by direct government spending on infrastructure and a drive for selfsufficiency in rice production. When commodity prices fell dramatically in the 1980s, Indonesia began to deregulate and liberalise. Massive capital inflows started when Indonesia opened its economy in the late 1980s in response to the falling revenue due to the drop of oil prices in the mid-1980s. While Indonesia had opened its capital controls and financial sector substantially by the end of the 1980s, inflows of capital were channelled through unsound institutions and invested in non-tradable goods. Indeed, while the potential benefits from liberalisation would be positive there might well be high transitional costs. There should have been more careful management of the liberalisation process with respect not only to the pace and sequencing of trade liberalisation measures but also to ensuring a stable macroeconomic environment (Lee 1996). Clearly, liberalisation was ambivalent because the government tackled the worsening balance of payments by curbing imports with a very protectionist import licensing scheme and creating a ministry for utilisation of domestic products (Pangestu 1991). In other words, policy errors accompanying the liberalisation process such as overshooting in terms of macroeconomic stabilisation and inappropriate monetary and exchange rate policies have generated a debt crisis. However, its impact on the labour market is much more understandable supporting the prediction that liberalisation would not be significantly beneficial to the labour market. This concern is illustrated by the unemployment trend during this period (from 1983 to 1985) which tends to be constant (see Figure 7.2). In short, it indicates that there was no significant change on labour absorption due to the open economy policy. It was in the period 1985 to about 1990 when Indonesia’s economic reforms were actually instituted (Ismalina 2002). During this period, the government extensively passed a set of deregulation policies to improve industrial efficiency and competitiveness. In particular, the government promulgated a set of export-oriented policy measures aimed at improving international trade. Global competition had become increasingly inevitable for Indonesia designated by its participation in several regional and global liberalisation initiatives such as AFTA and WTO (Ismalina 2002). Similar to other East Asian countries, strong macroeconomic performance after the deregulation led to a high expectation about future income. Combined with the declining return to investment in the US, represented by the drastic fall of the stock prices in 1987, global investors started to find more promising places to invest – mostly in other parts of Asia. The high expectation about economic growth and potential future income led to high investment, capital inflows and a strong currency. It was only after the Crisis when

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most of the inflows turned out to be short-term in nature that the vulnerability of the financial system was recognised. Massive short-term capital made available by portfolio managers was easily transferable to different markets, leaving businesses and nations strapped for cash. In the banking sector, the expansion and establishment of new business ventures were made possible through the revitalisation of the sector that enabled the mobilisation of domestic savings. These massive banking reform packages were set out in 1988. Efforts to strengthen bank prudential regulations were made in 1992 and in subsequent years. However, they appeared to be far from adequate. Private banks began to grant loans based on ‘quick returns, superficial collateral and links with powerful politicians’, (Rasiah 2000) rather than on prudent investment decisions. Offshore interest rates were often substantially lower than those offered by domestic banks, leading to massive external borrowing without hedging to account for risky investments (The World Bank 2000). These actions led to high inflation and caused people to experience loss of livelihood and significant reductions in their standards of living. Also, one of the problems that occurred was job losses. As depicted in Figure 7.2, the unemployment rate from 1985 to 1994 increased. During this period, job losses in Indonesia’s uncompetitive industries occurred, while job creation in competitive new industries was held back by the inability of the financial system to meet the needs of enterprises for investment funds, by bottlenecks in essential infrastructure such as power and transportation, and by shortages of skilled labour. More changes occurred in the middle of 1994 with the adoption of liberalisation measures in the investment field. This marked the beginning of a process that was driven by the need to compete in the region characterised by an increased competitive liberalisation in East Asia. The investment liberalisation of June 1994 allowed for 100 per cent foreign ownership so as to increase the attractiveness of Indonesia’s investment regulation due to increased competition for investment from China, Vietnam and other countries in the region. Nine sectors that were previously closed to foreign direct investment (FDI), including ports, power generation, shipping, air transport, railways, telecommunication, and initially even the mass media, were opened up. According to statistics from the Capital Investment Coordinating Board from 1967 through 1998, the government of Indonesia approved over 6,500 foreign investment applications worth more than US$216 billion; over half were approved after 1993 (US Embassy Report 2004). In relation to Multinational Corporations (MNCs), they, by and large, produced goods solely for the domestic market. A key motive for MNCs choosing to have a subsidiary in Indonesia was to take advantage of a protectionist regime that provided incentives for engaging in domestic production of importcompeting goods. For most developing countries, including Indonesia, importcompeting goods are capital-intensive in nature, and an increase in the domestic production of these goods cannot be expected to have an appreciable positive impact on wages and employment of the recipient country. Thus, it is clear that an increase in FDI had not automatically led to significant favourable effects on the labour market in Indonesia.

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Further, a liberalisation package was issued in May 1995 which included a timetable for the reduction of tariffs on most items up to the year 2010. This was the first time the government set a definite timetable for liberalisation. This unilateral liberalisation measure was clearly issued in response to the competitive liberalisation environment in the region (AFTA, APEC and WTO). However, a few sectors remained highly protected. As a result, an attempt to dismantle this protection has been a problematic political question. It no longer involves a competition of ideas between different ministries in the government. Rather, it became a struggle to dismantle the cronyism that has become so rampant and entrenched. During the Indonesian economic reform, many have been concerned over the weak foundation of the economy. The domestic economy has been distorted by unnecessary monopolies, non-transparent economic policies dominated by vested interest groups, high levels of protections on certain sectors such as automotive and petrochemicals, and an inefficient banking system. The weak economicfoundation mainly consisted of policy, legal, and institutional failures. Both the government and the private sectors contributed to these policy failures, which consisted of, for example, non-transparent economic policies influenced by vested interest groups, unrecorded foreign borrowings, and weak financial risk management. The combination of these failures led to the excessive practices of collusion, corruption, and nepotism, more commonly known by its Indonesian abbreviation, ‘KKN’ (kolusi, korupsi, nepotisme). In relation to the economy, it was more than a slogan, it was a severe misallocation of resources. The combination of a weak economic foundation and the bubble asset prices clearly led to a vulnerable condition for speculative attacks. The Crisis was seen as providing an opportunity to redress these problems due to the inconsistent programmes of liberalising economic reforms in Indonesia. Not surprisingly, the contagious Asian Crisis in 1997 has been detrimental for the Indonesian economy which impacted on some important social dimensions. These social dimensions include employment, incomes and living standards of the poorer and more vulnerable segments of the society, and the social protection of the workers. There are a number of economic indicators to illustrate the severity of its impact. First, inflation rose dramatically from an average of 8.4 per cent in the period 1991 to 1997 to an alarming high of 58.5 per cent in 1998. Second, all but the agricultural sector had negative growth in 1998. Third, foreign direct investment dropped sharply from US$4,677 million in 1997 to US$ −356 million in 1998 and to US$ −2,745 million in 1999 and US$ −4,550 million in 2000. The fall in foreign investment was due to several factors, such as the increased investment to China and the internal political and legal uncertainties which had raised the cost of doing business in Indonesia. Lastly, many firms have gone bankrupt simply because those firms failed to plan for an 80 per cent devaluation of the currency and a period of interest rates in excess of 100 per cent. The large number of bankruptcies and the sharp decrease in production of some firms had an adverse effect on other firms and caused many wellmanaged firms to also go bankrupt. The Asian Crisis combined with an intense

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global competition had forced the closure and restructuring of many Indonesian companies resulting in the lay-off of thousands of workers. Unemployment rose from 4.7 per cent in 1997 to 5.5 per cent and 6.4 in the following two years. More serious impacts on labour were evident. Due to the absence of unemployment insurance, the temporarily laid off employees were too poor not to seek work elsewhere. Consequently, they sought any job possibility which then led them to enter the informal sectors or committing to less than optimum work hours. This has resulted in an increase in non-wage workers and underemployment. A study conducted by Suryahadi et al. (2003) found that the least advantaged group of people were skilled workers who were forced to leave their formal jobs and shift to the informal sectors. Female, young and less skilled workers experienced slightly better circumstances. But with this second group forming a major part of the Indonesian labour force, this finding illustrates the rapid impoverishment of Indonesian labour. Combining this with the current figure of high unemployment among the skilled workers, due partly to the lack of required competences, created a serious economic and social threat. Indeed, workers have become the ultimate casualties. These realities support the previous notion that globalisation through the liberalisation programmes has not benefited the vast majority of the workers in Indonesia.

Society and unemployment The dynamics of Indonesia’s economic reforms in conjunction with an increasingly globalising economy has had considerable impact on the domestic labour market reform. In this section, we begin with an analysis of labour supply and demand to show how the growth of the labour force still plays a central role in the national employment equation. In the meantime, the structural changes have had a major impact on employment through its influence on labour demand. Several special features of economic growth in Indonesia had distinct labour market effects. The examination of the labour supply consists of the analysis of labour force participation and the unemployment condition while labour demand is illustrated in the distribution of employment by economic sector. At the end of this section, some social issues with respect to the reason for people being unemployed are analysed. This analysis examines the trends in employment and unemployment during the economic reform period, from 1986 to 1999, based on data collected in the National Labour Force Surveys (SAKERNAS) from BPS – Statistics Indonesia, except for 1995 where the data has been obtained from the Inter-censal Population Survey (SUPAS). Labour supply The utilisation of labour can be defined in several ways. The most commonly used measures are unemployment and participation rates which measure the unemployed as a percentage of the labour force (employed plus unemployed), and

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the labour force as a percentage of the working age population. The general understanding gained from the first and second sections of this chapter is that despite the prospects for relatively rapid economic growth in the future, improved living conditions for Indonesian workers are still widely doubted. Trends in the size and structure of labour force participation in Indonesia have indicated a dramatic change during the last three decades. The Indonesian labour force has more than doubled in size, from around 40 million in 1971 to almost 95 million in 1999, with participation rates increasing from 50 per cent to 67 per cent of the overall working age (15 years or more) population during this period. The growth rates of the labour force have accelerated from 2.3 per cent per annum in the 1960s, 2.7 per cent in the 1970s, to about 3 per cent in the 1980s, and then remained constant at around 3.1 per cent in the 1990s. This growth pattern in the labour force is a common feature of the labour market situation in many developing regions (Manning 1998) In addition, over the economic reform period, there is a high proportion of Indonesia’s population that was not involved in productive labour market activities. The ratios of employment to population in Indonesia decreased from around 80 per cent in 1986 to 78 per cent in 1999 for males, and from around 50 per cent to 48 per cent for females during the same period. The ratios of males was much higher than those of females over time and the male to female gap in ratios of around 31 percentage points occurred consistently during the period 1986–1999. Relatively low employment to population ratio among females was also a reflection of their low participation in the labour force. The most significant feature of the unemployment problem in Indonesia is reflected in the rate of youth unemployment rather than in overall unemployment. The incidence of unemployment in Indonesia among the cohort 15–24 years was around three times the overall rate of unemployment. During the period 1986–1999, the youth unemployment rate rose substantially from 8.3 per cent to 19.8 per cent. A more rapid increase in youth unemployment was recorded among women. Youth unemployed as a percentage of total female youth labour force increased from 7.7 per cent in 1986 to 21.2 per cent in 1999, while in the same period the male youth unemployment rate rose from 8.8 per cent to 19.0 per cent. Moreover, unemployment rates as the proportion of labour force that are unemployed and actively seeking work, increased during the period 1986–1999. During the period 1986–1993, the unemployment rate was just below 3 per cent. In 1998, it was 5.5 per cent and increased to 6.4 per cent in 1999. In the same period, youth unemployment rate rose substantially from 8.3 per cent to 19.8 per cent. This shows Indonesia had a major problem regarding unemployment since youth unemployment rates were more responsive to changes in labour demand (Manning 1998). Unemployment was also related to education level. The trend of unemployment among secondary and tertiary graduates fluctuated over the period 1986–1999. During the period of rapid economic growth from the end of the 1980s to the early 1990s, unemployment rates among secondary and tertiary graduates decreased. In the early 1990s, unemployment rates were very high (20–30 per

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cent) among two age-education cohorts: upper secondary graduates (from both academic and vocational streams) in their early twenties and tertiary graduates in their late twenties. Graduates from upper secondary schools in their early twenties alone accounted for nearly one-third of all urban unemployed in 1992, whereas they accounted for 7 per cent of the urban labour force. In 1999, among secondary and tertiary graduates the rates were 16 per cent and 13 per cent respectively, while in the same period unemployment rates among less educated people were much lower: 4.8 per cent for primary (elementary and junior high school) graduates, 1.5 per cent for people with less than primary and 0.4 per cent for people without schooling. As such, the highest proportion of unemployed was among those with secondary education followed by those with primary education and tertiary education. It is also interesting to note that the unemployment of those with tertiary education increased from 4.1 per cent in 1986 to 9.1 per cent in 1999. This supports the theoretical prediction that education increases the search time for new jobs. In other words, those who have higher education could afford to wait to find better jobs. Another characteristic of unemployment in Indonesia is urban unemployment. While urban areas accounted for only 30 per cent of the total employment, they accounted for almost 60 per cent of unemployment and that this was increasing among young people in the 1990s (Manning and Jayasuriya 1996). Another important dimension of the unemployment problem was the extent of long-term unemployment. SAKERNAS data from 1986 to 1999 showed that the long-term unemployment rate continuously increased in Indonesia. During this period, the long-term unemployment rate rose from 0.8 per cent to 1.8 per cent (BPS 1986–1999). Moreover, the ratio of the unemployed searching for a job for one year or longer to total unemployed was around 29 per cent in 1999, indicating a serious problem due to the absence of any form of social security benefit. To some extent, this indicates that the Indonesian labour market was inadequate to promote employment among the long-term unemployed. Labour demand Economic development has brought about a structural transformation in the Indonesian economy. Table 7.2 shows the distribution of employment by economic sectors. There was a redistribution of the sectoral share of employment away from agriculture toward industry and, in particular, the services sectors, at least during the pre-crisis period. Between 1988 and 1997 the share of the employment in agriculture fell significantly from 55.2 to 40.7 per cent, while the industry and services increased from 8.3 to 13.9 per cent and from 31.1 to 45.4 per cent respectively. The fall in the employment share of agriculture was driven primarily by a fall in employment within the food crops sub-sector. There was a temporary reversal of this trend during the Asian Crisis. In 1998 the employment share of agriculture increased to 45 per cent, while the share of industry and services dropped back to 12.1 and 43 per cent respectively. In the

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Table 7.2 Sectoral distribution of the workforce, 1986–1999 (%)

Year

Agriculture

Industry

Services

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

54.5 54.5 55.2 55.4 55.1 53.4 52.5 50.0 45.6 43.4 43.5 40.7 45.0 43.2

8.2 8.3 8.3 10.7 10.9 11.1 11.3 11.9 14.1 13.5 13.5 13.9 12.1 13.8

37.1 37.3 31.1 33.9 34.0 35.5 36.1 38.1 40.1 43.1 43.0 45.4 43.0 43.0

Source: BPS – SAKERNAS (BPS 1986–1999), except for 1995 where the date have been obtained from the SUPAS (Inter-censal Population Survey) (1996).

following year, the previously identified long-term trends returned with a decrease in agriculture and increases in industry and services. Social issues To highlight Indonesian unemployment in a broader perspective, we can use two contrasting views regarding the economic and social significance of unemployment in developing economies (Horton et al. 1995). The first position comes from the neoclassical view. By stressing labour market efficiency, it argues that unemployment is an indicator of distortions introduced by government policies rather than evidence of market failure. Unemployment is seen as a rational response of people who endeavour to gain access to high wage jobs in segmented labour markets, rather than a symptom of labour market failure. The other view emphasises inadequate labour market response to increases in the workforce, and structural and cyclical change. Evidence to support this view includes a high incidence of long-term unemployment in many developing economies, and limitations on the choices available to new job seekers for supposedly ‘easy-entry’, informal sector work. It is also argued that older workers from less-affluent families are beginning to dominate unemployment queues as developing economies become more industrialised and urbanised. Evidence for the second view existed in Indonesia during the economic reform period. The size and age structure of population, population growth, employment and income opportunities available in the economy also determine the supply of, and

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demand for labour that characterise a country’s economy. This is also the case for Indonesia. Females, for example, tend to be more involved in activities that are on the borderline between economic and non-economic pursuits. If they pursue gainful employment, they are also more likely to work part-time or seasonally in these activities (Hugo 1993). In addition, the activity rates of females tend to be lower, not only because of their traditional dual role in household’s economy as is the case in most developing societies, but also related to the changing commitment to participate in the labour force over the period of their lifecycle. Women are likely to retreat from the labour force when they get married, give birth and raise children, and then they may return to the labour market when their children are old enough. Differences in the size of the labour force may vary between urban and rural population, partly due to different nature and extent of income earning opportunities in both areas; and among different socio-economic categories.

Institutions and social problems Labour markets The Asian Crisis has reversed the formalisation of the Indonesian labour market. In this period, the share of the informal sector increased from 63.3 per cent to 65.4 per cent. This 6.9 per cent annual increase during the Crisis was much larger than the annual growth of the informal sector which was at around half a per cent for the last decade. At the same time, the growth of formal sector employment declined by 4.4 per cent. The fact that total employment grew by 2.7 per cent from 1997 to 1998, higher than the annual rate at around 2.0 per cent before the Crisis, was due to the sharp increase in informal employment. The number of jobs created in the informal sector are not, however, as promising as those lost in the formal sector. This is mainly due to high competition and hence the low survival rate of firms in the sector. Also earnings in the informal sector are lower than in the formal sector, making workers in the sector more vulnerable to poverty. Before the Crisis, the Intensive Labour Project (more commonly known by its Indonesian abbreviation, PK Programme or Programme Padat Karya) had been implemented as a ‘cash for manual work’ welfare programme by the Ministry of Manpower and cooperating ministries. PK Programme beneficiaries were largely self-selected poor people, normally males with family dependents. But this project was abandoned in 1994 in favour of other poverty alleviation strategies like ‘Inpres Desa Tertinggal’ (IDT or the Presidential Decree to help Backward Villages). IDT was in fact a kind of ‘social fund’ consisting of credit for self-employment and financial allocations for labour intensive infrastructure. In 1994–1995, as a part of IDT, the government implemented the village infrastructure project. In Java, under this project, more than five million days of employment were created. There was potential for employing labour intensive methods in creating and upgrading urban infrastructure as demonstrated by the Kampung Improvement Programme (KIP) which was a programme applied to

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densely populated poor urban neighbourhoods. Although the KIP was targeted at poor neighbourhoods, the benefits also flowed onto the wealthy suburbs. As such, ways and means needed to be found to improve the effectiveness of targeting. To overcome the immediate effects of the Asian Crisis, the Indonesian government introduced several social assistance measures known collectively as the Social Safety Net (JPS). For job creation, the PK Programme was to be targeted to the poor and the unemployed. The programme was conducted by the Ministry of Settlements and Regional Development, and was intended to promote job creation and income improvement. Through this programme, infrastructure development was introduced into all urban areas throughout Indonesia. The programme was intended to provide employment opportunities for 400,000 people annually, providing at least three months’ employment. However, the central government did not have an adequate administrative network to deliver these programmes, and the local arrangements used were often problematic. The PK Programme has suffered from a number of problems, both in design and in implementation. Multiple and uncoordinated programme objectives, poor targeting, lack of coordination among implementing agencies, inept fund management, virtual absence of proper programme monitoring and, above all, the pervasive influence of collusion, corruption and nepotism have been cited as some of the reasons for programme failure (The World Bank 1998). Labour market reform also included the introduction of a minimum wage policy. Indonesia first introduced a minimum wage policy in the 1970s, but at that time the regulations were not properly reinforced, control of the minimum wage policy was weak and allowed employers to violate the policy with minimal penalties. The government tripled minimum wages in nominal terms from the early to the mid-1990s resulting in a doubling of wages in real terms within five years. This was a deliberate attempt to respond to the widespread perceptions of economic inequality of the workers despite the rapid economic growth. At the onset of the Crisis, however, real wages fell. Social security The loss in welfare for employees in developing countries, including Indonesia, following involuntary unemployment is much more severe due to the lack of unemployment benefits in these countries. The absence of these benefits means that the unemployed have independently to find a means of earning a living or be supported by their family. Since poorer job seekers have to support themselves, they are forced to take informal sector or casual, less well-paid jobs. Despite this persistent problem, the Indonesian government has not provided an unemployment benefit. Nevertheless, some social insurance for the Indonesian workers has been implemented, such as JAMSOSTEK, TASPEN, ASABRI, and Dana Pensions. JAMSOSTEK (JST) is the formal retirement, death and disability system for private sector employees. It is compulsory for all employers, with more than ten employees or with a monthly wage bill of more than Rp1.0 million, to enrol all of

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their employees in the plan. Only 45 per cent of eligible employers (approximately 83,000 out of 183,000) were contributing to the plan in 2000 (Callison 2002). Civil servants, members of armed forces and self-employed workers are not required to participate as there are separate programmes for civil servants (TASPEN) and members of the armed forces (ASABRI). In addition to these formal retirement systems, labour regulations require that employees who reach the age of 55, and are not members of another pension programme, receive a lump sum based on length of service and final salary, a combination of severance and service pay. In fact, expanding the JAMSOSTEK pension coverage beyond that currently authorised is difficult due to statutory exclusions, poor enforcement, or inadequate benefits (Callison 2002). At this stage therefore it should concentrate on improving JAMSOSTEK governance and operational effectiveness and obtaining greater compliance among those formal sector workers who are already supposed to be in the system. Indeed, without effective institutional frameworks those programmes are quite vulnerable to graft and fund embezzlement practices as experienced by JAMSOSTEK a few years ago. Social problems The issue of who gains and who loses from the liberalisation programme has become important because the future of the liberalisation process will depend on its assessment by the body politic and the public at large. Hill (1997) noted that some of these popular beliefs were that the liberalisation (and deregulation) process led to the creation of conglomerates and monopolies, increasing inequality and poverty, widening regional disparities, and causing the demise of small firms. It should be clear from the above that what at first appeared to be a financial crisis started from a deeper economic malaise, and will almost certainly lead to further economic problems; and there are important social dimensions to such problems. These social dimensions include employment, incomes, the living standards of the poorer and vulnerable segments of the society, and the social protection of the workers. The employment situation is being adversely affected in at least two ways: first, by the retrenchment of workers from economic activities directly affected by the Crisis (for example, the financial sector, construction, and trade), and second, by the slowdown in the growth of employment due to a slowdown in economic growth. The poverty situation may also be affected in different ways, such as through a direct reduction in incomes (i.e. reduction in wages or returns from self-employment), reduction in real incomes due to price increases and reduced access to such services as health and education.

Trends and prospects The Indonesian labour market has been undergoing structural transformation for some time and entered a ‘turning point’ in the early 1990s. The first sign was the rapid decline in the employment growth in agriculture. From 1971 to 1990,

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2

employment growth in agriculture in Java was around 1 per cent, but in the period 1990 to 1996 it declined to minus 3.4 per cent. The second sign was the rapid growth in value added and labour productivity in industries, especially in manufacturing. The annual growth of agricultural employment in outer Java was 2.7 per cent from 1971 to 1990, and declined to near zero in the 1990s. In contrast, the growth of value added in manufacturing averaged more than 10 per cent per annum from 1971 to 1990. Labour productivity rose steeply, over 5 per cent per annum on average, excluding oil and mining (Manning 1995). The last sign is the importance of the construction and services sectors, rather than manufacturing, in absorbing employment from new job entrants and from rural areas. Services accounted for around 44 per cent of new jobs created in the period 1990 to 1997. While the initial impact of the Asian Crisis on employment was felt by a few sectors of the economy, the real effect gradually spread to cover almost all branches of the economy. It appears that the employment effect was not manifested in terms of persistent high unemployment, but rather by a large movement of workers from manufacturing, construction, modern trades and other services into agriculture and possibly the informal sector employment at reduced wage rates and by an overall decline of real earnings for virtually everyone, whether in the affected sectors or not. These features are considered to be signs of the improved flexibility of the labour market in Indonesia. Hence, the reversal of the labour market transformation means that Indonesia is moving back to a labour surplus economy, at least for the near future, similar to the situation in the late 1980s.

Discussion and conclusion To conclude this chapter some issues related to the questions raised in Chapter 2 of this volume will be considered. First, economic change faced by Indonesia which in turn induced change in employment structures, is largely determined by both external and internal factors. On the one hand, the changes have been motivated by a number of significant external initiatives, such as globalisation. On the other hand, the changes have been conducted in a gradual fashion, taking full account of their political feasibility. The long Indonesian economic crisis has shown some evidence of the negative effects of the liberalising economic reforms in Indonesia. Not surprisingly, the Asian Crisis has been detrimental for the Indonesian economy which impacted on some important social dimensions. These social dimensions include employment, threats to the most vulnerable segments of the society, and the social protection of the workers. Second, the dynamics of Indonesia’s economic reforms in conjunction with increasing globalisation has had considerable impact on the domestic labour market reform. The Asian Crisis has reversed the trend towards a more formalised labour market. The number of jobs created in the informal sector are not, however, as promising as those lost in the formal sector. This is mainly due to high competition and hence the low survival rate of firms in the sector. Also earnings in the informal sector are lower than in the formal sector making workers in the sector

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vulnerable to poverty. Accordingly, improved living conditions for Indonesian workers are still widely doubted, despite the prospects for relatively rapid economic growth in the future. Third, the economic and social significance of unemployment in Indonesia consist of a high incidence of long-term unemployment and limitations on the choices available to new job seekers for supposedly ‘easy-entry’, informal sector work. Moreover, the size and age structure of the population, population growth, employment and income opportunities also determine the supply of labour and the demand for labour in Indonesia. Differences in the size of the labour force may vary between urban and rural population, partly due to the different nature and extent of income earning opportunities in both areas, and among different socioeconomic categories. The loss in welfare for employees in Indonesia, following involuntary unemployment is much more severe due to the lack of unemployment benefits. The absence of these benefits means that the unemployed have to independently find a means of earning a living or be supported by their family. Accordingly, the government of Indonesia faces not only the difficult task of creating economic growth but also the additional challenge of tackling the problems of massive unemployment as well as the worsening poverty situation. There is little choice for Indonesia other than maintaining its commitment to economic reforms in the future. To respond effectively to the employment and income crisis, the critical requirements are a coherent policy framework, decentralised and coordinated labour institutions, well targeted employment programmes and efficient programme implementation, and monitoring and evaluation. The employment programmes in Indonesia clearly should be linked to other measures for regional and local development. The Crisis has provided a natural selection mechanism in the economy, where the inefficient and protected sectors are collapsing and the competitive sectors are booming. Any employment creation programme should facilitate the movement of labour from the shrinking and inefficient sectors to the booming sectors. The policies should not prevent the collapsing sectors from laying off workers, but instead, they should provide employment incentives and training for the newly booming sectors. In order to ensure that the workers and vulnerable segments of society do not suffer disproportionately from the adverse effects of the Crisis, it is important for the government to urgently implement special programmes for creating employment for the poor and protecting their incomes and living conditions. The experience in implementing such programmes, including the institutional framework, can be utilised to undertake emergency measures for employment creation and to provide a safety net for the poor. One of the elements of the programme would be a broad-based ‘employment generation fund’ which could be used to create wage employment as well as self-employment on an emergency basis. The major instrument for creating wage employment would be the use of labourintensive methods in infrastructure construction, while targeted credit could be the instrument for self-employment. The weakness of the social protection system as exposed by the Asian Crisis

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and the dissatisfaction with the performance of JAMSOSTEK together with the future structure and financing of public sector schemes, and the need to extend coverage to more people are matters of concern. Hence, strategies for the development of employment, whether or not Crisis-related, need to be complemented by appropriate social protection measures. Broadly, these should be concerned with ensuring income security during periods of employment interruption, providing income support to the poor and ensuring access to adequate and affordable health care.

Notes 1 2

Real sectors refer to production sectors such as agricultural, manufacturing, construction and services. The statistical data are commonly distinguished between Java and outer Java.

References ADB (2001) Key Indicators 2001; Growth and change in Asia and Asia-Pacific, Manila: ADB, in http://www.adb.org/Documents/Books/Key_Indicators/2001/default.asp, 24 May 2004. —— (2002) Key Indicators 2002: Population and human resource trends and challenges, Manila: ADB, in http://www.adb.org/Documents/Books/Key_Indicators/2002/default.asp, 24 May 2004. —— (2003) Key Indicators 2003: Education for global participation, ADB, in http:// www.adb.org/Documents/Books/Key_Indicators/2003/default.asp, 24 May 2004. BPS (1986–1999) SAKERNAS (National Labour Force Surveys), Jakarta: BPS, in www.rand.org/ labor/bps.data/webdocs/sakernas/sakernasmain.htm, 21 May 2004. —— (2004) Several Important Indicators on Indonesia, BPS: in www.bps.go.id/leaflet/leafletjul04-ind.pdf, 11 August 2004. Callison, S. C. (2002) Social protection programmes: Components, priorities, strategic choices and alternatives for Indonesia, http://www.pegasus.or.id, 21 May 2004. Feridhanusetyawan, T. (1999) The impact of the crisis on the labour market in Indonesia, in the Asian Development Bank, Manila. Hill, H. (1997) ‘Towards a political economy explanation of rapid growth in ASEAN: A survey and analysis’ ASEAN Economic Bulletin, 14, 131–149. Horton, S., Kanbur, R. and Mazumdar, D. (1995) Openness and inequality, in the World Congress of International Economic Association. Hugo, G. (1993) ‘Indonesian labour migration to Malaysia: Trends and policy implication’, Southeast Asian Journal of Social Sciences, 21, 36–71. Ismalina, P. (2002) How to sustain Indonesia’s economic development through export-led growth strategy: Building productive capacity and equal economic opportunity, in Seminar Nasional ‘Peningkatan Daya Saing Ekspor Non-Migas’, (Improving the export competitiveness of non oil and gas) Dies Natalis ke-43 Fakultas Ekonomi Universitas Diponegoro in collaboration with Bank of Indonesia, Semarang. Jomo, K. S. (2000) Globalisation, liberalisation, poverty and income inequality in Southeast Asia, in presented at OECD conference ‘Poverty and income inequality in developing countries: A policy dialogue on the effects of globalisation’. Kim, S. (2000) ‘East Asia and globalisation: challenges and responses’, in (Kim, S. ed.) East Asia and globalisation, Maryland: Rowman & Littlefield.

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Lee, E. (1996) ‘Globalisation and employment: Is anxiety justified?’, International Labour Review, 135: 485–497. Manning, C. (1995) ‘Approaching the turning point?: Labour market change under Indonesia’s New Order’, Developing Economies, 33: 52–81. —— (1998) Indonesian labour in transition: An East Asian success story?, Cambridge: Cambridge University Press. Manning, C. and Jayasuriya, S. (1996) ‘Survey of recent development’, Bulletin of Indonesian Economic Studies, 32: 3–43. Pangestu, M. (1991) ‘Managing economic policy reforms in Indonesia’, in (Ostry, S. ed.) Authority and academic scribblers: The role of research in East Asian policy reform, International Center for Economic Growth. Rasiah, R. (2000) ‘The Asian financial crisis and recovery plans’, in (Embong, A. and Rudolph, J. eds) Southeast Asia into the twenty first century: Crisis and beyond, Kualalumpur: Ampang Press Sdn, Bhd. Soesastro, H. (2003) ‘The economic crisis in Indonesia: Lessons and challenges for governance and sustainable development’, in http://www.pacific.net.id/pakar/hadisusastro/ economic.html, accessed on 21 March 2003. SUPAS (1996) Badan Pusat Statistik, Jakarta. Suryahadi, A., Widyanti, W., Perwira, D. and Sumarto, S. (2003) ‘Minimum wage policy and its impact on employment in the urban formal sector’, Bulletin of Indonesian Economic Studies, 29: 29–50. The Economist Inteligence Unit (2004) Vol. June. London: The Economist Intelligence Unit. The World Bank (1998) Rapid Appraisal of Padat Karya Programmes in Indonesia, Jakarta: The World Bank. —— (2000) East Asia recovery and beyond, Washington, DC: The World Bank. —— (2004) World Development Indicators, The World Bank, http://devdata.worldbank. org.mate.lib.unimelb.edu.au/dataonline, 24 May 2004. US Embassy Report (2004) Foreign direct investment statistics: from country commercial guide, IMF: http://www.aiccusa.org/foreign_investment_statis.htm, 5 June 2004.

8

Malaysia Unemployment in the midst of full employment Ragayah Haji Mat Zin and Wendy Smith

Introduction Malaysia is an independent nation1 in Southeast Asia comprising Peninsular Malaysia in the west and the states of Sabah and Sarawak in the east. Malaysia is a foundation member of the Association of Southeast Asian Nations (ASEAN) and AFTA (ASEAN Free Trade Area), and of APEC (Asia-Pacific Economic Cooperation), the WTO (World Trade Organization) and the OIC (Organization of the Islamic Conference). The Malaysian development strategy since independence in 1957 has encompassed two important objectives: first, resource allocation to ensure real per capita income growth and second, the equitable distribution of income and wealth. However, prior to 1970, while the policies implemented during this period were able to attain satisfactory growth, they failed to improve equity or significantly eradicate poverty. This growing inequality, overall as well as along intra-ethnic lines, and persistent poverty were said to be proximate causes of the 13 May 1969 ‘race riots’ which culminated in the proclamation of the New Economic Policy (NEP) in 1970. The NEP, which was implemented between 1971 and 1990, was hailed as a successful model for redistributing income without sacrificing growth. It was launched with the objective of attaining national unity and fostering nationbuilding through poverty eradication and economic restructuring to eliminate the identification of the different Malaysian ethnic groups with specific economic functions. Since the implementation of this policy, Malaysia has achieved growth, structural transformation, poverty alleviation and improved income distribution in an ethnically diverse society. The NEP was succeeded by the National Development Policy (NDP) 1991– 2000, which retained the basic strategy of growth with equity of the NEP. This in turn was followed by the current National Vision Policy (NVP) contained in the Third Outline Perspective Plan 2001–2010. In essence, the NVP represented the consolidation of all past development efforts (NEP and NDP) to attain a united, progressive and prosperous Malaysian society. The quest of the nation is to become a developed nation in its own style, and in meeting the challenges towards this end, the same strategies expounded in the NEP and NDP of building a resilient, competitive nation and an equitable society to ensure national cohesion

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and social stability are emphasized in the NVP era. National levels of employment and unemployment are very much related to the economic base of a country and its growth rates. A focus on unemployment in Malaysia is therefore critical in evaluating the success of this development planning. Although the implementation of the NEP managed to tame the unemployment rate, the economy faced a host of problems by the early 1980s, including a fiscal and balance of payments deficit. The situation worsened in the mid-1980s when falling commodities prices plunged the economy into a recession, causing unemployment to swell again. However, the liberalization and deregulation of the economy in 1986, complemented by external factors, enabled Malaysia to again attract foreign direct investment (FDI). Between 1987 and the onset of the 1997–1998 Asian Crisis, Malaysia had one of the fastest growth rates in East Asia, averaging about 8.5 per cent per annum. In the 1990s, the rapid expansion of the Malaysian economy tightened the labour market considerably, such that the national unemployment rate fell to 2.8 per cent in 1995 from 5.1 per cent in 1990. In fact, Malaysia attained full employment after 1992, which, in statistical terms, lasted even during the Asian Crisis and until the present day. In order to ease the tight labour market situation, the government has allowed the import of foreign workers since the early 1990s. This action formalized practice as Malaysia has relied on foreign workers since the late 1970s. However, despite being in a situation of full employment, there is increasing concern that the unemployment rate is on the rise again. The dampening of the US economy, the continuing low growth in the Japanese economy plus the events of 11 September 2001 impacted negatively on Malaysia’s growth rate. This slow growth, together with the relocation of labour-intensive industries to China, has contributed to the rise in the number of unemployed. Moreover, the government has become concerned about the rising graduate unemployment. In order to assess the impact of globalization and economic restructuring on the Malaysian employment and unemployment situation, the next section will examine the external influences as well as the changing structure of the economy and other internal influences that affect the unemployment situation. The third section will examine the supply and demand of labour and the social impact of unemployment. The fourth section will describe the labour market structure and the availability of social protection. The fifth section will assess trends and prospects and offer some policy suggestions, and the sixth section concludes the chapter with an assessment of the eight questions raised in Chapter 2.

Contextual factors and issues External influences: globalization and the Asian Crisis Globalization is a highly complex and contested concept. Unlike the common perception that globalization implies merely a world without borders, it in fact encompasses more than that – globalization involves the widening, deepening and speeding up of world-wide interconnections and interpenetrations of all aspects

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of contemporary social life – economic, technological, social, political, cultural and ideological. In other words, globalization compresses the time and space aspects of social relations resulting in greater world integration. This process of globalization, however, is underpinned by the belief that the free market is the ideal and universal arrangement for co-ordinating economic activity. In fact, the contemporary form of globalization is market-driven, as reflected by the World Bank’s definition, which is ‘Freedom and ability of individuals and firms to initiate voluntary economic transactions with residents of other countries’ (Milanovic 2002). Empirically globalization translates into growing cross-border mobility of finance, goods, information, technology, labour and other forces through increased trade and foreign investments, both direct and portfolio. Within this globalization scenario, Malaysia’s experience has been primarily understood in terms of her reliance on FDI for capital and technology, and on migrant labour (Tham, 2004: 64), both at worker and professional levels. Prior to 1997, many Malaysian policy makers were almost total believers in globalization, accepting the idea of free competition, market forces and liberalization without question. They argued that globalization helped to generate growth and increased employment opportunities, particularly in the East Asian region. The Asian Crisis that impacted on several East Asian countries, including Malaysia, created considerable social problems such as rising unemployment, inflation, increasing incidence of poverty, widening income inequality, and the erosion of the social fabric (Ishak 2001; Jomo and Lee 2001; Ragayah 2002a, 2002b). Malaysia was facing a very tight labour market when the Crisis struck. Nevertheless, unemployment rose from a low of 2.4 per cent in 1997 to only 3.2 per cent in 1998 and 3.4 per cent in 1999. Table 8.1 shows the retrenchment of workers by sector for 1996–1998. Between 1996 and 1997, there was a 143 per cent increase in retrenchment, which jumped by 345 per cent between 1997 and 1998. A total of 83,865 workers lost their jobs in 1998. As in Indonesia, the manufacturing and construction sectors were the worst affected, with almost 54 per cent of the total retrenched being from the former and 11.1 per cent from the latter. Another 12.4 per cent were from the wholesale and retail trade, hotel and restaurant sectors. More than half of those retrenched were production workers. However, 74,610 vacancies were registered in selected sub-sectors, such as agriculture (oil palm and other plantation sectors) and certain areas of manufacturing (rubber products, oleo-chemicals and the so-called ‘3Ds, the dirty, dangerous and difficult’ lower ranking positions (Shamsulbahriah 2003: 61), enabling those retrenched workers to be re-employed. Ishak and Abdul Rahman (1998) contended that the official figures might not fully reflect the seriousness of the problem. This is partly due to the fact that a significant number of retrenched workers were foreign workers and many of them, especially those in the construction sector, were unregistered workers. Hence foreign workers provided a significant safety valve for domestic labour. Retrenchment of local workers was also occurring in the informal sector and their numbers are not accurately captured in official statistics. The press reported

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Table 8.1 Retrenchment of workers according to sector, 1996–19981 Year

Total

1996 1997 1998

7,773 18,863 83,865

1998 Agriculture Mining Manufacturing Construction Electricity, gas and water Transport, storage and communications Wholesale and retail trade, hotels and restaurants Finance, insurance, real estate and business services Social services Others2 Total

5,108 877 45,151 9,334 1 2,007 10,434 6,596 4,242 115 83,865

% Change 143 345 % of Total 6.1 1.1 53.8 11.1 0.0 2.4 12.4 7.9 5.1 0.1 100.0

Source: Malaysia 1999. Note: 1 These retrenchment statistics were published in this format only for the period of the Crisis. 2 Includes unclassified sectors.

that a substantial number of small businesses went bankrupt as a result of falling demand and rising operating costs. In fact, the small and medium enterprise (SME) sector lost 37 per cent of jobs in 1998 compared to 1997 (Small and Medium Industries Development Corporation (SMIDEC) 1999). There were also claims of considerable underemployment, again unlikely to be captured in the official statistics. Internal influences Development strategies and the labour market Since independence in 1957, the Malaysian economy had undergone rapid growth and structural change which significantly transformed employment patterns and labour market structures. The aftermath of the May 1969 racial riots called for job creation to absorb the surplus labour from underdeveloped rural areas. Besides emphasizing rural development, the policies promoted the growth of the manufacturing sector through export-orientation and called for more active participation of Bumiputeras2 in industrial activities (Tham and Ragayah 2003: 4). The restructuring prong of the NEP set a 30 per cent quota for Bumiputeras for all categories of jobs in an enterprise, particularly in the modern urban sector. In the 1980s, external and internal conditions forced the development strategy to take new directions. Externally, the first half of the 1980s saw Malaysia facing

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uncertainty in the global economy and growing protectionism in developed countries, apart from having to contend with her balance of payments position and the size of her external debt. Internally, the structural features of the labour market, which resulted in a mismatch between demand and supply, were said to be responsible for problems in attaining full employment on the one hand and for growing labour shortages on the other (Lim 1988). In order to raise employment, the government implemented the ‘Operasi Isi Penuh’ (Full Employment Operation) that raised the public sector workforce from 398,000 in 1970 to 804,000 in 1983. In the second half of the 1980s, the recession of 1985–86, the burden of the national debt and the government’s financial situation all necessitated an alternative source of financing for Malaysia’s economic development. The government turned to the private sector as the engine of growth by easing the implementation of the Industrial Co-ordination Act 1975 (ICA)3 and replacing the Investment Incentive Act of 1968 with the Promotion of Investments Act 1986 (PIA). These incentives, combined with the favourable external market conditions, appreciating East Asian currencies, the withdrawal of the Generalized System of Preferences from the Asian newly industrializing economies (NIEs) in 1988 and the creeping import controls on them and Japan, made Malaysia a very attractive destination for FDI. The resultant rapid expansion and the structural transformation of the Malaysian economy created a healthy demand for labour and brought down the unemployment rate in Malaysia from 6.9 per cent in 1985 to a historic low of 2.4 per cent just prior to the Asian Crisis in 1997. The agriculture sector had been facing labour shortages since the late 1970s. In order to overcome this problem, the government officially approved the import of foreign workers from ASEAN and Bangladesh in July 1982. However, the acute labour shortage experienced in the late 1980s forced the government to allow foreign workers to work formally in manufacturing and selected service sectors (Zulkifly 2001: 21). By 1992 the tight labour market situation enabled the government to reduce its employment generation goals and shift to human resource development. Labourintensive investment was discouraged from the western corridor of Peninsular Malaysia after 1992. Crowded industrial states like Penang and Selangor began to encourage their labour-intensive firms to relocate either to East Malaysia or abroad (Rasiah and Zulkifly 1998: 78). At the same time, there was a shift towards high technology development, particularly with the launch of the National Action Plan for Industrial Technology Development in 1990. It was also declared a national priority in Vision 2020.4 Internal migration Official statistics show that in the 1980s,5 rural–rural migration was the dominant form of mobility, and was especially true for intra-state migration (see Table 8.2). During the early years this reflected almost exclusively movements into land schemes created under the NEP. However, as the NEP era progressed, the size of the urban population increased by 4.5 per cent per annum, resulting in an

1992 36.8 22.7 25.7 14.8 100.0

19862 58.6 14.7 4.7 22.0 100.0

Intra-state migration direction Rural-Rural Rural-Urban Urban-Urban Urban-Rural Total 1993 32.2 23.9 23.3 20.6 100.0

14.8 20.6 44.0 20.6 100.0

1993

1995 39.0 19.7 21.3 20.0 100.0

11.6 17.1 47.7 23.6 100.0

1995

1996 36.9 20.8 21.6 20.7 100.0

9.6 16.0 51.3 23.1 100.0

1996

Notes: 1 Urban refers to those areas with a population of 10,000 or more. All the rest are rural. 2 Latest available figures, July 2004. 3 Peninsular Malaysia only.

Source: Malaysia. Migration Survey Report, various issues. Department of Statistics.

15.7 18.4 44.2 21.7 100.0

32.3 16.5 20.8 30.4 100.0

Rural-Rural Rural-Urban Urban-Urban Urban-Rural Total

1992

19863

Inter-state migration direction

1997 34.1 19.2 23.4 23.3 100.0

11.8 16.8 47.5 23.9 100.0

1997

Table 8.2 Percentage distribution of inter- and intra-state migrants by migration direction1, 1986–20012

1998 35.5 20.1 23.7 20.7 100.0

12.7 15.1 44.3 27.9 100.0

1998

1999 30.3 21.4 26.3 22.0 100.0

12.5 15.4 44.3 27.8 100.0

1999

2000 35.6 19.1 20.9 24.5 100.0

14.6 15.6 41.6 28.2 100.0

2000

2001 21.6 18.3 41.4 18.7 100.0

4.0 11.9 65.7 18.5 100.0

2001

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increase in the proportion of the population residing in urban areas from 51 per cent in 1991 to 55.1 per cent in 1995. By 2000, this proportion has risen to 61.8 per cent, accelerating at an average annual rate of 4.8 per cent. These increases are due to the migration of workers attracted by better economic opportunities and the expectation of an improved quality of life in urban areas, as well as the extension of administrative urban boundaries. It is expected that the urbanisation rate will rise to 66.9 per cent by 2005. Thus, in the 1990s, the main component of inter-state migration in Malaysia is urban–urban, followed by urban–rural. In contrast, the main component of intra-state migration is rural–rural, followed by urban–urban, but the latter superseded the former in 2001. Economic growth, structural transformation and the labour market The real (in 1978 prices) gross domestic product (GDP) of Malaysia grew from an average of 5.1 per cent per annum in the first half of the 1980s to an average of 6.7 per cent per annum in the second half of the 1980s and 8.7 per cent per annum in the first half of the 1990s. The negative impact of the Asian Crisis slowed the average growth rate in the second half of the 1990s to 4.9 per cent per annum. While the Malaysian economy made a speedy recovery in 1999 and 2000, the dampening of the US economy, the continuing recession in the Japanese economy (two of Malaysia’s leading trade partners) plus the events of 11 September 2001 reduced the growth rate for 2001 to 0.3 per cent, down from the 2000 figure of 8.5 per cent. Growth has recovered somewhat in the last two years to over 4 per cent per annum. The high growth rate of the whole economy is associated with the intensive growth of the manufacturing sector. Although the mid-1980s recession decelerated the growth of this sector, since then it grew with double-digit averages till 2000. Slack in the US demand plunged its growth rate to −5.5 per cent in 2001, but it has picked up to register moderate growth in 2002 and 2003. In contrast, the primary sector, which grew at an average of 3.7 per cent per annum in the 1980s, slowed down to a mere 0.7 per cent per annum in the second half of the 1990s. However, with the efforts made to rejuvenate agriculture as one of the engines of growth in the economy, this sector has managed to register improving growth rates in the last two years. The rapid growth of the manufacturing sector in the face of a much slower rate in the primary sector (agriculture, forestry and fishing) resulted in a significant transformation of the Malaysian economy. The share of the latter declined from 22.9 per cent in 1980 to 8.2 per cent in 2003 while the share of the manufacturing sector rose from 19.6 per cent to 30.6 per cent over the same period. The share of the services sector fluctuated between 40.1 per cent and 57 per cent over the period. The impact of law and labour regulation Employment and retrenchment is specified under the Employment Act 1955 (Act 265) and the Employment (Termination and Lay-off Benefits) Regulations 1980.6

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Malaysia has no unemployment benefits, despite the proposal for a National Retrenchment and Unemployment Fund by the Malaysian Trades Union Congress (MTUC), since 1997 (Ragayah et al. 2002: 150). A MTUC official explained the realities of the retrenchment experience for Malaysian employees. In 1980 the law was modified for those retrenched: they should receive 10 days wage for each year worked, for those with less than 2 years service; 2–5 years service receive 15 days wage for each year worked and over 5 years service receive 20 days wage for each year worked. But if a company is placed under receivership, and there were many cases of this in 1997, then they do not pay these retrenchment benefits, as these are not considered to be a priority, and their money is taken over by the bank. In 1997–98 100,000 people were retrenched in Malaysia and 10,000 have not received this compensation until today. (Quoted in Smith and Asma 2004) Norma et al. (2001: 172) describe the situation in 1998, when RM301.5 million was accruing to 56,292 retrenched workers, but only 83 per cent of this was paid out. However, as they point out, this represents a high degree of compliance on the part of employers. They also report an increase of 600 per cent in disputes in 1998 involving unfair labour practices over the 1997 levels, predominantly in the manufacturing sector. Hence the effects of the Crisis were clearly seen in labour disputes.

Society and unemployment Labour supply The determinants of labour supply include the size of the adult population, net immigration, population composition in terms of sex and age groups and the participation rates of each of these groups. For most of the period, the main determinant of the increase in the Malaysian labour force was the rapid growth of the working age population (15–64 years). Between 1981 and 1990, the working age population accelerated at an average annual rate of 3.2 per cent, 3.5 per cent between 1991 and 1995, 2.8 per cent between 1996 and 2000 and 2.6 per cent between 2001 and 2003. On the other hand, the labour force increased at an average annual rate of 3.0 per cent in the same decade, 3.1 per cent between 1986 and 1990, 2.9 per cent between 1991 and 1995, 2.8 per cent between 1996 and 2000 and 3.2 per cent between 2001 and 2003 (Malaysia 1986, 1991, 1996, 2001, 2003). The lagged response of labour force expansion in relation to the growth of the working age population was due mainly to the lower participation rates of males, females and those in the 15–19 years age group. The latter’s entrance into the labour market decreased by 0.3 per cent per annum due to an increasing number of youth proceeding to higher secondary education. Rising

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labour force participation rates (LFPRs) of both males (from 85.7 per cent in 2000 to 87.1 per cent in 2003) and females (from 44.8 per cent in 2000 to 45.7 per cent in 2003) resulted in the growth rate of the labour force exceeding that of the working age population during the last three years. Table 8.3 shows that the LFPRs were lowest during the Crisis years of 1998–1999 when many workers were retrenched as well as discouraged from entering the job market. There has been a dramatic rise in the educational attainment of the labour force. The proportion of workers with no formal education dropped from over 14 per cent in 1980 to 5.7 per cent in 2003 (see Table 8.4). At the same time, the proportion of workers with secondary level schooling rose from 36.5 per cent to 54.9 per cent while those with tertiary education jumped from 4.2 per cent to 15.3 per cent over the same period. The supply of unskilled workers surged with the importation of foreign labour, either legally or illegally, since the late 1970s. However, Malaysia has been experiencing a shortage of skilled workers throughout the period, including the recession years. In order to meet the demand for skilled and semi-skilled workers, the government implemented a programme from 1 January 2001 to encourage professionally qualified and skilled Malaysians working abroad to return and work in Malaysia.7 Another approach has been to expand skill-training programmes. As part of the measures to increase the supply of trained manpower, the Human Resources Development Fund (HRDF) was established in 1992, with a matching grant from the government, to stimulate private sector involvement in training and retraining of their workers (Malaysia 1996: 119). Table 8.5 shows the output of skilled and semi-skilled human resources by course throughout the period. The types of courses provided have changed over the period according to structural changes in the economy, but it can be seen that engineering courses and the building trades remained important. Skill upgrading was particularly emphasized during the recession years, as employers were able to release their workers to attend training. The relatively high growth rate of the working age population in the first half of the 1990s can be accounted for by the substantial increase, averaging 12.3 per cent per annum, of non-citizens in the total population, reflecting the flow of foreign workers into the country. However, the rate of increase in non-citizens was noticeably moderated in the second half of the 1990s, falling to 4.3 per cent per annum, due to the adverse conditions they encountered during the Asian Crisis. In fact, the brunt of retrenchment and unemployment during that time was mostly borne by these foreigners whose pattern of ‘reverse migration’ in 1998 showed over 350,000 persons, including dependants, returning to Indonesia and other countries (Zainal Aznam 2001). Nevertheless, foreign workers are coming back to Malaysia again and during the period 2001–2003, their average annual population growth rate rose to 5.6 per cent compared to that of 2.0 per cent for Malaysian citizens. In the 1990s, as production processes became more capital-intensive, the demand for higher-skilled labour increased rapidly. Moreover, rapid technological changes and the need to enhance competitiveness required the retraining and upgrading of workers, making the concept of life-long learning fashionable.

65.8 87.4 44.3

n.a.

n.a.

64.9 85.9 44.0

6039.1 5624.6 6.9

5108.9 4816.9 5.7

66.5 85.6 47.3

n.a.

7042.0 6686.0 5.1

9.7 17,877 10601.8

−1.1 15,291 9186.8

7.9 13,879 7845.6

64.5 83.8 44.3

25.0 −4.5 20.9

8256.8 7999.2 2.8

9.8 20,689 12710.0

1995

65.8 84.8 45.8

4.9 2.8 4.4

8641.4 8426.5 2.5

10.0 21,169 n.a

1996

67.0 85.7 47.4

2.7 3.9 5.9

9038.2 8818.8 2.4

7.3 21,666 n.a

1997

Notes: 1 Estimate. 2 Labour force participation rate. 3 For the period of January–June 2003.

64.4 83.9 43.8

8.8 −5.0 −1.7

−6.3 −5.0 −2.7 64.3 83.4 44.2

9177.8 8862.1 3.4

6.1 22,712 n.a.

1999

9880.9 8564.1 3.2

−7.4 22,180 13815.9

1998

Source: Malaysia: Economic Report, various issues. Ministry of Finance. Malaysia: 1986, 1991, 1996, 2001, 2003.

LFPR2: Total Male Female

GDP Growth Rate Population Working age population (15– 64) Labour Force Employment Unemployment (%) L Productivity & Wages in Mfg Sector (% Growth): Real Productivity Unit Labour Cost Real Wage

1990

1985

1980

Table 8.3 Growth rate of the GDP, population, employment and labour, 1980–2003 (000s)

65.7 85.7 44.8

22.7 −12.0 12.9

9572.5 9271.2 3.1

8.5 23,275 14620.0

2000

66.1 86.1 45.0

−6.7 10.8 3.5

9892.1 9532.5 3.6

0.3 23,840 n.a.

2001

66.3 86.3 45.2

10.8 1.2 4.9

10198.8 9840.0 3.5

4.1 24,527 n.a.

2002

66.9 87.1 45.7

6.23 −3.83 4.43

10514.9 10150.0 3.5

4.5 25,048 15720.0

20031

14.3 45.0 36.5 4.2 100.0

No formal education Primary Secondary Tertiary Total

14.1 39.7 39.4 6.8 100.0

1985 9.8 34.6 46.8 8.8 100.0

1990 8.7 28.0 52.2 11.1 100.0

1995

Note: 1 Refer to Peninsular Malaysia only.

Source: Malaysia Labour Force Survey Report, Department of Statistics, various issues.

19801

Educational level

Table 8.4 Educational attainment of the labour force (%)

7.9 28.4 51.7 12.0 100.0

1996 7.3 27.9 52.0 12.8 100.0

1997 7.0 27.4 52.4 13.2 100.0

1998

6.5 26.0 54.3 13.2 100.0

1999

6.2 26.4 53.5 13.9 100.0

2000

5.7 24.1 54.9 15.3 100.0

2001

170 8,890 4,470 4,690 11,190 4,730 111,030

460 9,230 4,459 5,847 2,954 1,437 79,640

Source: Malaysia (1986, 1991, 1996, 2001).

64,040 28,240 21,110 13,440 1,250 12,850 –

47,091 24,778 13,543 8,621 149 8,162 –

Engineering Mechanical Electrical Civil Others Building Trades Information and Communications Technology Printing Trades Commerce Agriculture Home Science Others Skill Upgrading Total

1986–90

1981–85

Course

414 – – – 7,711 3,500 149,580

121,110 58,972 60,701 1,437 – 16,845 –

1991–95

Table 8.5 Output of skilled and semi-skilled workers by course, 1980–2005

– – – – 19,354 3,781 187,439

122,593 56,971 63,643 1,979 – 13,415 28,296

1996–00

– – – – 31,161 6,089 301,859

197,441 91,758 102,496 3,187 – 21,601 45,566

2001–05

27.3 – – – 35.7 48.5 10.3

9.6 5.3 15.0 3.6 – 5.2 –

1991–95

– – – – 5.6 38.7 9.8

8.1 6.6 9.2 13.0 – 4.7 14.5

1996–00

Average annual growth rate

– – – – 5.3 10.0 11.1

13.0 15.0 11.5 10.2 – 8.6 7.7

2001–05

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In an attempt to meet this requirement higher education’s share of actual development expenditure jumped to 40.2 per cent under the Sixth Malaysia Plan (6MP) 1991–1995. This emphasis has shifted to industrial training in the last eight years, resulting in an increase in the share allocated for industrial training from 4.9 per cent during the 6MP to 9.3 per cent under the Seventh Malaysia Plan (7MP) 1996–2000 and to 16.6 per cent under the Eighth Malaysia Plan (8MP) 2001–2005. Moreover, the 1996 amendment to the Universities and University Colleges Act of 1971, as well as the enactment of the Private Higher Education Act in 1996, paved the way for the corporatization of public universities. The deregulation of the private sector’s role in education aimed to expand the supply of educational services in Malaysia (Tham and Ragayah 2003: 16). This has led to a mushrooming of tertiary level institutions, with some offering undergraduate degrees that require only two years to complete after the Sijil Persekolahan Menengah certificate (awarded after 11 years of schooling), raising doubts regarding the quality of these programmes. Since the mid-1990s, even the public universities have reduced the number of years required for a degree, from four to three years for most courses, in order to hasten the supply of graduates. Prior to the Crisis, a study referred to in the Seventh Malaysia Plan (7MP) showed that about 27 per cent of eligible firms did not register and contribute to HRDF, while more than one-third of the registered firms, mainly small and medium-scale industries (SMIs), did not claim any reimbursements (Malaysia 1996: 120). Their reasons for not utilizing the fund include limited resources for training, the use of mature technology with low skill requirements and the inadequacy of skills provided by training institutions. At the same time, the main obstacle to schemes aiming to provide training for workers has been the threat perceived by employers of losing them to their competitors, and the relative ease in the labour market of hiring skilled workers from other firms. In tight labour markets, labour turnover is high. For example, Mohd. Fauzi et al. (2000) showed that most production workers only stay in a company for a period of one to three years before moving on. Moreover, sending workers for training also interrupts firms’ production schedules. Finally, there are employers who feel that the courses are too general and not necessary or relevant for their employees. In order to enable retrenched workers to acquire new skills, a retraining scheme was introduced in 1998 at the diploma and certificate levels. Unfortunately, external events almost drove the Malaysian economy into another recession in 2001. It came to light in early 2002 that there has been a sharp increase in the share of graduate unemployment, which has been reported to be around 49,000 in November 2001. Table 8.6 shows that the unemployment share of tertiary graduates jumped from 9.8 per cent in 1996 to 15.2 per cent in 2000 and 14.6 per cent in 2001. This problem is more severe among female graduates. Most of these unemployed were under 25 years, implying that many have very little work experience. The duration of unemployment indicates the seriousness of this problem, but most were frictionally unemployed, as the time they spent looking for a job was less than three months. Graduates from the Arts and Humanities, Economics and Islamic Studies registered the highest incidence of

4.9

20.6 66.7 7.8 100.0

4.9

17.3 66.3 11.5 100.0

5.0

12.3 65.7 17.0 100.0

F

16.0 67.9 12.8 100.0

3.3

T

M

23.6 62.2 8.4 100.0

T

19.5 65.6 8.0 100.0

5.9

1998

29.4 59.4 6.1 100.0

24.5 62.5 7.1 100.0

6.9

1997

5.0

5.9

T

F

T

M

1985

1981

4.7

2.9 17.8 69.5 9.8 100.0

M

27.9 60.6 6.8 100.0

M 7.5

4.1 12.6 64.9 18.4 100.0

F

17.5 64.4 10.6 100.0

F 4.5

2.4 15.2 68.4 14.0 100.0

T

1999

17.3 69.1 9.0 100.0

T

1990

Note: T = Total; M = Male; F = Female.

Source: Malaysia Labour Force Survey Report, Department of Statistics, various issues.

No formal education Primary Secondary Tertiary Total

Educational level

No formal education Primary Secondary Tertiary Total

Educational level

Table 8.6 Educational attainment and gender of the unemployed (%)

2.8

2.3 17.8 69.6 10.3 100.0

M

19.7 70.7 6.8 100.0

M 6.7

2.6 9.8 65.8 21.7 100.0

F

14.1 67.2 11.9 100.0

F 4.3

3.7 15.8 65.3 15.2 100.0

T

2000

16.5 70.3 8.9 100.0

T

1995

4.0

3.5 17.7 68.1 10.6 100.0

M

17.7 71.8 6.5 100.0

M 4.8

4.1 12.3 60.2 23.4 100.0

F

14.8 68.1 12.3 100.0

F

5.2

3.5 14.1 67.8 14.6 100.0

T

2001

19.1 65.9 9.8 100.0

T

1996

5.9

3.1 16.6 69.2 11.0 100.0

M

21.2 65.2 7.7 100.0

M

4.2

4.1 9.8 65.4 20.7 100.0

F

15.3 67.0 13.6 100.0

F

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unemployment, while those from engineering and science showed the lowest incidence and there was very little unemployment for those with a medical degree. In 2004 it was widely reported8 that this phenomenon came about due to a mismatch between the graduates being produced and the types that are required by employers. This situation is exacerbated by the fact that many of these graduates had poor communication skills, particularly in English, the language used in the private sector. In order to enhance the employability and marketability of these graduates, the government implemented the Training and Attachment Programme for Unemployed Graduates in November 2001. These graduates were attached to public and private sector agencies to gain work experience and were trained in areas such as Information and Communication Technology (ICT), English language and research methodology techniques, as well as being re-skilled in specialized areas (Malaysia 2003: 114–115). By the end of 2003, a total of 38,942 persons had participated in the various attachment and training schemes for unemployed graduates (Bank Negara Malaysia 1999: 36). Labour demand The growth and structural transformation of the Malaysian economy provided wide opportunities for employment as well as restructuring the distribution of the labour force by sector. The employment share in the primary sector decreased from 39.7 per cent in 1980 to 13.8 per cent in 2003 while that of the industrial sector (mining and quarrying, manufacturing and construction) and services sector increased from 23.0 per cent and 37.3 per cent to 36 per cent and 50.2 per cent respectively over the same period. With this rise in employment opportunities, the unemployment rate contracted to 2.4 per cent in 1997, but rose slightly to 3.5 per cent by 2003. As we have seen, the labour market became tight in the 1990s and some sub-sectors had to resort to imported labour from abroad. Social issues The creation of employment opportunities, mainly through export-oriented industrialization, played a very important role in eradicating poverty, one of the two main aims of the NEP (1971–1990) and a key aim in all subsequent Malaysian development plans.9 In fact, the incidence of poverty among Malaysian citizens decreased from 52.4 per cent in 1970 to 5.1 per cent in 2002. The incidence of poverty was falling throughout the period except during the Asian Crisis where the incidence of poverty among Malaysian citizens went up to 7.5 per cent while the overall incidence rose to 8.1 per cent in 1999. Moreover, it should be noted that the incidence of poverty is still high in certain states like Sabah, Kelantan, Terengganu, Kedah and Perlis. These are states with the some of the highest unemployment rates in the country. When the sectoral GDP and employment shares are compared, it is clear that the structural transformation of the economy in terms of output has not been matched by changes in the employment structure. This unbalanced share

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of output implies that there are sectoral disparities in labour productivity and earnings and therefore income distribution. However, the promotion of exportoriented industrialization, driven primarily by FDI, generated demand for labour, thus lowering unemployment, raising household incomes and contributing to improved income distribution during the NEP period. Nevertheless, the soaring salary levels of skilled and professional workers, in contrast to the creeping rise in the wages of unskilled workers, have been hypothesized as the cause of the reversal of the declining trend in income inequality during the 1990s (Ragayah et al. 2000: 2–3). Foreign labour issues There are two categories of foreign labour in Malaysia: expatriates and foreign workers. The former refers to those who work as professional, technical, administrative and managerial staff and are highly educated, trained in their specific field and have some working experience. They numbered just under 75,000 in mid-2001. The latter refers to the mostly semi-skilled and unskilled workers involved in lowly ranked job categories. Foreign workers are employed particularly in these job categories spurned by local workers, the so-called 3D (dirty, dangerous, degrading) jobs. There is no accurate estimate of the number of foreign workers in Malaysia as different sources have different estimates (see Edwards 1997: 16–19). He quoted estimates of 500,000 for 1985, over 1 million for early 1990s and estimated that there were 1.7 million in 1995. According to official estimates, there were 290,000 foreign workers in 1990 (Malaysia 1996: 116), 852,000 in 1995 and 749,000 in 2000 (Malaysia 2001: 92). There were also substantial numbers of illegal workers. Azizah (1998: 5) reported that the authorities found about 1.2 million in Peninsular Malaysia alone between 1991 and 1996. Although the Asian Crisis resulted in workers being retrenched from certain sub-sectors, particularly construction, many have been re-deployed to other sectors which were still experiencing labour shortages, such as some sub-sectors in the manufacturing and services sectors as well as the agriculture sector. Quite a number of foreign workers, both legal and illegal, have also returned to their respective countries. In the face of retrenchments and rising unemployment since the advent of the Crisis, the large presence of foreign workers became a major issue of concern. Table 8.7 shows the total number of foreign workers and their ratio to local workers by industrial sector in early 1998. Foreign workers are mostly found in the manufacturing, plantation and construction sectors as well as working as domestic helpers. However, the sharp contraction in the construction sector plunged the number to just over 60,000 in January 2002. When unemployment began to creep up again in the new millennium, the impact of foreign workers on the employment opportunities of local workers came to be questioned. Given the fact that locals are not interested in the 3D jobs, Malaysia’s dependence on foreign workers will continue, particularly as the government is trying to rejuvenate the agriculture sector as one of its

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Table 8.7 Distribution of legal foreign workers by industrial group, March 1998 Occupational group

Estimated total foreign workers

Ratio of foreign to local workers

Manufacturing Plantation Construction Domestic servants Services Others Total

280,000 265,000 220,000 129,000 118,000 21,000 1,033,000

1:8.3 1:3.4 1:2.8 – 1:6.9 – 1:4.4

(27.1) (25.7) (21.3) (12.5) (11.4) (2.0) (100.0)

Source: Adapted from Shamsulbahriah (2003). Note: Figures in parentheses are percentage shares.

engines of growth. Malaysian workers can try to replace them in some of the more pleasant job categories, such as production workers and operators in the manufacturing sector. However, Tham and Liew (2002: 3) argued that, while manufacturing employers claim that they are unable to find local workers, it is possible that discriminatory wages may have contributed to their preference for foreign workers. Moreover, some employers view these workers as more reliable, disciplined, productive and easily controlled. As for the expatriates, their involvement in the Malaysian labour market is also necessary in the course of attracting FDI, as foreign investors prefer to hire workers from their respective countries or those with appropriate levels of knowledge and skill. Ragayah (2002c: 59) has argued that the easily available foreign workers, while contributing to the competitiveness of Malaysian exports, have nevertheless discouraged employers from both undertaking more capital and technology intensive methods of production and providing skill training to their workers, thereby keeping productivity and wages low. At the upper end, the excessive demand for skilled labour as well as for professional, technical, administrative and managerial workers has pushed up their salaries. This disparity could be one of the reasons for the re-emergence of widening Malaysian income inequality since 1990.

Institutions and social problems Labour markets The previous sections have illustrated that Malaysia faced a full employment situation in the last decade or so. However, the tight labour market eased somewhat after the Financial Crisis of 1997–1998. Nevertheless, the overall labour force participation rate (LFPR) has recovered to the pre-Crisis level, mainly due to the rise in the male LFPR. Bank Negara Malaysia (2004: 33–34) reported that domestic labour market conditions remain stable and healthy and measures have been taken to improve the quality of labour, narrow skills mismatches and address the changing demands of the economy.

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In spite of this robust employment situation, there are significant differences in the incidence of unemployment among people of different ages. Those aged between 15 and 19 years have the highest incidence, followed by those in the 20–24 age group. For example, in November 2001, their unemployment rates were 14.8 per cent and 8.2 per cent respectively. Most of those unemployed were new entrants to the labour market, with inadequate training and education and little or no working experience. As graduate unemployment is of grave concern to the government, the Minister for the newly created Higher Education Ministry has proposed the double degree programme as one of the ways to overcome this problem, particularly among social science graduates. The government is encouraging firms to undertake various measures and introduce structural changes in order to raise efficiency and productivity and alleviate the worker shortage problem. In the interim, the recruitment of foreign workers from designated countries has been approved, mainly for the agriculture, manufacturing and construction sectors. Currently, foreign workers constitute about 12 per cent of the total labour force. FDI continues to be a major generator of jobs in Malaysia as it accounts for about one-third of total private investment. During the post-Crisis period, FDI flows remained stable as MNCs with operations in Malaysia continued to reinvest their retained earnings (accounting for nearly half of gross FDI between 1998 and 2002) to expand, upgrade and diversify their production lines, in spite of the increased competition from low-wage economies in the region (Bank Negara Malaysia 2004: 47). Gross FDI was sustained at 6 per cent of GDP in the postCrisis years, compared with the average of 8 per cent in the mid-1990s when FDI flows peaked. The rapidly rising share of FDI flows have been targeted for the higher value-added services sector and knowledge-based activities. Other generators of employment are the small and medium enterprises (SMEs). The government established the Small and Medium Industry Development Corporation (SMIDEC) in 1995 to assist the development of the SMEs, particularly in developing linkages with large foreign-owned companies. Social security Ragayah et al. (2002) listed several social protection schemes in Malaysia, although not all are national in coverage and function. These include (1) The Employer’s Liability Scheme (ELS) covering employment injury compensation since 1952 and sickness and maternity benefits since 1955; (2) civil service pension (1951), a non-contributary pension scheme for civil servants; (3) Employee Provident Fund (EPF) (since 1951) is for all workers not covered by the civil service pension; (4) Workers’ Compensation Scheme (1952) to determine the terms and amounts of compensation in the case of death or accident, which never attained much significance. In March 1998, the Foreign Workers’ Compensation Scheme was formed to cater primarily for foreign workers’ insurance needs. The main social insurance scheme for workers earning less than RM2000 (US$1 = RM3.8) a month in Malaysia is the Social Security Organization (SOCSO) established in

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1969. There are also several private saving schemes which workers can fall back on in times of need if they are members of these schemes. Ragayah et al. (2002) stressed that coverage of the formal social protection system in the country is inadequate. The ELS rests solely on the employers, which causes problems to employers who are not financially stable. The civil service pension is financed through taxation largely provided by the low-income groups and therefore is regressive in nature. EPF does not pool risks and provides life-long security as benefits are based on contributions with dividend rates fluctuating over the years. Moreover, workers in the informal sector and the self-employed, such as petty traders and hawkers, are not compelled to have accounts with EPF and contribute only on a voluntary basis. As for SOCSO, the real costs are borne by consumers as employers can shift the burden of payment to production costs, while the social assistance provided is insignificant (119–120). Income support The Malaysian government has repeatedly stressed it does not favour an incomesupport policy for the unemployed as it would incur a financial burden besides discouraging the unemployed from seeking jobs and thus prolonging the period of unemployment. Instead, the government has opted to provide training in skills required by industries and work at ensuring adequate job opportunities are available (Norma et al. 2001: 188). Generally, the intensity of the negative impact of the Asian Crisis was less severe compared to the experience of other affected countries. One of the contributing factors was the government’s relatively high social expenditure and pro-poor programmes since the implementation of the NEP. Thus, the government ensured that the budget shares for social services, particularly health and education, in 1998 remained at their 1997 levels and maintained the public expenditure on major anti-poverty programmes despite the reduction of its total development expenditure (Bank Negara Malaysia 1999).

Trends and prospects In this section the analysis will focus on Penang to investigate trends and prospects in unemployment. Penang is a major locus of FDI in Malaysia and the labour market there experiences the most serious effects of the global economy due to the presence of many MNCs manufacturing information technology (IT) hardware. After the Asian Crisis, the slack in the labour demand in Penang presented an opportunity to the state to re-organize its industries. Penang’s previous advantages included cheap costs, relatively good managers and relatively skilled or trainable workforce. However, with the end of the Cold War, the labour-intensive exportoriented industrialization approach was no longer tenable for Malaysia as a whole and Penang in particular, which was facing severe labour shortage in the 1990s. Penang now does not have competitive advantage in labour-intensive products nor has it acquired competitive advantage in the capital- and technology-intensive

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products. In order to maintain competitiveness in the global market, Penang needs to upgrade her industrialization development to be more capital- and technology-intensive. Hence, now is the time to substitute foreign labour with capital. The move towards regional integration and increasing liberalization of trade and capital flows through AFTA and the WTO agreements at the global level require Penang to be integrated with the world economy. The dismantling of tariff and non-tariff barriers results in markets becoming more accessible, simultaneously intensifying competition. For example, AFTA opens up a market of about 500 million people to competitive and export-oriented firms. At the same time, it also opens up the Malaysian market to competition from other countries in the region. Moreover, some companies might re-locate to lower cost countries (SERI 2001: 18–37). Again, the employment prospects will be critically influenced by the responses of the firms to these challenges. The immediate concern is the spate of retrenchments currently occurring in the state that involved several thousands of workers following a fall in US demand. The domination of Penang’s manufacturing sector employment by the electrical and electronics industry creates an unstable situation since the industry is very volatile to the vicissitudes of the global markets. There is thus a need to diversify the industrial base as well as to promote selected industries in the services sector as new sources of growth. The rapid advances in technology have enabled the emergence of a new economy in which the digitization of information has allowed for widespread two-way electronic communication that operates in real time allowing business to obtain information about almost anything at incredible speed. Furthermore, businesses can not only expand beyond national boundaries but such expansion is now taking place in the virtual world of cyberspace as well. The declining costs and rapid spread of ICT have made it easier for new entrants to compete in the market. Businesses therefore need to anticipate changing market needs and respond rapidly to the changing demand requirements. Technology is also dissolving the boundaries between industries, rendering some obsolete while creating new industries. New products and services have emerged at lower costs as product cycles become continuously shortened. In the new economy, it is not only the advancement in productivity that is important but also creativity and innovation.

Discussion and conclusion In discussing unemployment the case of Malaysia is relatively special in Asia as Malaysia was able to use the foreign workers and expatriate professionals as a safety valve in alleviating retrenchment for local employees during and after the Asian Crisis. Hence, the basis of Malaysia’s participation in the global economy is not just in terms of the high levels of FDI attracted by various government policies to support the export-oriented industrialization strategy of the NEP and subsequent development policies, NDP and NVP. Malaysia’s handling of unemployment also comes under the rubric of globalization, as Malaysia, while subject to the vicissitudes of MNCs investment patterns in her focus industries,

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nevertheless acts as an employer of international labour in the global labour market. Thus Malaysia was able to balance supply and demand for labour in this global context. In Chapter 2 Webber raised eight questions. It is therefore a consideration of these that will conclude this section. 1. Levels and forms of unemployment In Malaysia, levels of unemployment have remained low, before, during and after the Asian Crisis, but are now being challenged by the ability of Malaysia to keep attracting FDI in labour intensive industries since the entry of China into the WTO, to transform the economy into a knowledge economy and to handle the mismatch in graduate numbers and type with the needs of the economy. The forms of unemployment in Malaysia reflect the situation of a late industrializer, heavily dependent upon FDI and the manufacturing sector for the creation of jobs for a hitherto largely peasant population, with workers in MNCs in such industries as electronics being particularly vulnerable to global economic forces. 2. Dynamics of unemployment As there is no system of unemployment benefits in Malaysia, unemployment tends to be short-term with those affected tending to look for a job in a less desirable occupation, or the more preferred option, to start up their own businesses in the informal sector, such as operating a stall in the very popular travelling night markets, or more middle class options such as pyramid selling or e-commerce. Anecdotal evidence suggests that some professionals retrenched during the Financial Crisis made more money in their own trading business than from a company salary and this led to a permanent career change. 3. The experience of particular social groups Malaysian society is characterized by the presence of three large and distinct social groups, the indigenous Muslim Malays making up 60 per cent, ethnic Chinese Malaysians, making up 30 per cent and Malaysians of various Indian ethnic backgrounds, mainly Tamil, but also Sikh and others, constituting around 8 per cent. In terms of social class, before the NEP, there were a small political and administrative elite, a small group of middle class professionals and entrepreneurs, a small urban working class and a large rural population of peasant smallholders and plantation workers. A result of the middle class has been to create a large urban middle class and working class. Before the Asian Crisis, unemployment was experienced by industrial wage workers from time to time when MNCs moved locations internationally, but the steady growth of the economy created a situation of full employment, so much so, that foreign labour was necessary to fill the ‘3D’ jobs in manufacturing, construction and the plantation sector. There is evidence that rural young women found it easier to get industrial waged

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employment than young men, as the production types in export-oriented industries favoured the employment of dextrous and docile female labour, and indeed this was one of the selling points of the Malaysian labour force to foreign investors. In the case of middle class professionals, Malays had good employment opportunities until the Asian Crisis and the graduate mismatch phenomenon became evident, due to the affirmative action policy instrument of the NEP, the ICA of 1974, which required companies to employ the various ethnic groups at all levels in the organization to the same percentage as the population and many had trouble filling the upper levels with 60 per cent Malay supervisors and managers until the graduates of the new NEP universities began to emerge and have enough experience to be promoted into the higher levels in the 1980s and 1990s. For Malaysian Chinese, starting a business has always been the preferred option to a salaried position, and many had the two sources of income concurrently, so discussion of unemployment in their case is blurred. For Malaysian Indians, the picture is not so rosy. Left out of the Malay affirmative action aspect of the NEP, and being of minority status in terms of political clout, they have nevertheless benefited by the increased education opportunities in local university placement, and by the increased purchasing power of waged working class and new middle class Malaysians, if they chose to go into business. The fact that their former rubber and oil palm plantation jobs have had to be filled by foreign labour attests to their relative success in the wider economic context of Malaysian development. However the interests of the Malaysian Indian community have been the least well served by national development policy and some analysts link this to increasing levels of crime and gang membership among their young people. 4. The implications of a more open economy The opening up of the Malaysian economy under the regional trade agreement, AFTA, has placed pressure on national industries, as they now face competition from close rivals in the region, sometimes from subsidiaries of the same MNC producing the same product more cheaply due to cheaper labour costs. Better technology, smarter work practices and retrenchment are all ways to reduce production cost, so the potential for rising unemployment has increased. In terms of investment, the Malaysian economy has been open to FDI as its main development strategy since 1971. It has relied heavily upon investment in the electronics area and indeed modified or restricted its labour laws to encourage this type of investment by restricting workers in these industries from organizing trade unions. Controls on strike action have also been tightened since the 1980s in line with the policy of reliance on FDI. In terms of immigration, at first unofficial, then recognized foreign workers have been supporting the development strategy of Malaysia since the NEP era. They come under contract rather than as immigrants and thus are easily repatriated. As such they are a vital ingredient in the way in which Malaysia manages the need for flexibility in its labour market under the pressures to restructure away from manufacturing due to global pressures, and also a key to its containment of unemployment for citizens during and after the Asian Crisis.

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5. Effects of economic structure Malaysia’s identity as a primary commodity rubber and tin producer, the ‘jewel in the crown’ of the British colonial economy, continued into the era of Independence, with the addition of oil palm as a major commercial crop. This left the economy at the mercy of global commodity price fluctuations and was a reason for the push to export-oriented industrialization in the 1970s after import substitution industrialization had failed to provide enough jobs or economic advancement opportunities for the non-Chinese Malaysians. Malaysia has benefited from the booming market for rubber health care products in recent decades, but rubber plantation labour is increasingly less desirable to Malaysians and being taken up by foreign workers. With cheap labour economies such as Vietnam and now China coming into the global arena, Malaysian policy makers are advocating the need to create a Knowledge Economy,10 to keep one step ahead of economies founded on manufacturing. The success of training policies to further this objective will greatly influence the employment/unemployment outcomes for Malaysians in the increasingly globalizing economic environment. 6. Economic and social costs The economic costs of unemployment are borne by non-market institutions embedded in the cultures of the various ethnic groups in Malaysia, such as the family, Chinese clan associations, the institute of zakat in Islam, the Sikh temple and so on (Sity et al. 2004). Moreover, the dynamic entrepreneurial spirit found in the various cultures, from petty commodity trading among the rural Malays to modern business nurtured by the NEP policies, to generations of entrepreneurship among the Chinese, mitigates against economic costs at the state level. The social costs of unemployment have been documented throughout the NEP era and were linked at the time to such phenomena as increasing drug use among unemployed young males, pressure on rural communities to support the recently retrenched. In popular opinion, increasing crime rates were attributed to the influx of foreign workers, who by definition came from a much poorer economic base than the middle and waged working class Malaysian communities in the midst of which they settled, usually in squatter communities, to perform construction and other ‘3D’ jobs. 7. Impact of well-being and labour conditions In the growth economy, Malaysian employees have not had to trade working conditions and well-being for employment, at least in the unionized sector. However, tighter legislative controls on the right to strike have come into play from the 1980s and this must be factored into the view of progress in improving working conditions. Young women working three-shift systems in the non-unionized largely MNC owned semi-conductor industry have no say regarding their working conditions expect to go into a state of mass hysteria (Ong, 1987) and are also facing unemployment due to global forces beyond Malaysia’s control.

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8. Appropriate labour market policies Malaysian policy makers mention the various development plans and policies such as the NEP as the main instruments of ‘social protection’ in the society. When development policy fails, usually due to global economic forces, then the unemployed fall back to traditional non-market institutions of social protection embedded in the various cultures of the plural society. The policy of reliance on the flexibility provided by foreign illegal and contract labour has been the second major strategy with which Malaysia has attempted to manage the labour market, both in times of full employment and in times of crisis. With the retrenchment and repatriation of large numbers of foreign professionals and labourers, it is this policy area which distinguished Malaysia as the nation having the most successful unemployment statistics in response to the Asian Crisis.

Notes 1 Malaysia, a constitutional democracy, has a population of 25.45 million, of whom 70 per cent are below the age of 35 and 57.3 per cent are urban residents. Malaysians have an average life expectancy of 72 years and a literacy rate of 93.7 per cent. 2 Literally means ‘son of the soil’, and refers to the indigenous Malays in Malaysian society. 3 The ICA imposed ownership and employment conditions consistent with he NEP along ethnic lines for firms supplying largely the domestic market (Rasiah and Zulkifly 1998: 75). 4 See http://www.epu.jpm.my/Bi/speech/vision2020i.html 5 Figures are available only for Peninsular Malaysia. 6 see http://www.jaring.my/ksm/gline.htm (accessed 31 July 2003). 7 http://www..mohr.gov.my/+Ministry+of+Human+Resource+percent2B+Malaysia &hl=en&ie=UTF-8 8 This is widely reported in the national media. For example, see The Star Online at http://thestar.com.my for reports by Joanne Lim, ‘Varsity-industry mismatch’, Sunday 11 July 2004; ‘Government sees remedy in double degrees’, Tuesday 20 July 2004; and comment by V. K. Chin, ‘Making Graduates more employable’, Wednesday 28 July 2004. 9 These are found at the Economic Planning Unit (EPU) website http://www. epu.jpm.my 10 ‘In our pursuit towards developing the K-economy, knowledge has to replace labour and capital as the key factors of production in our economy. The challenge for Malaysia is to develop this knowledge among our citizens so that our success will be due to the contributions of Malaysian talents and knowledge workers’ (Dr Mahathir bin Mohamad, utrajaya 8 March 2001 – advertisement in the New Straits Times 13-042001, cited in Evers 2003).

References Azizah Kassim (1998) ‘Profile of Foreign Migrant Workers in Malaysia: Towards Compiling Reliable Statistics’. Paper presented at the Conference on Migrant Workers and the Malaysian Economy, 19–20 May, Quality Hotel City Centre, Kuala Lumpur, Malaysia. Bank Negara Malaysia (1999) Annual Report 1998. Bank Negara Malaysia (2004) Annual Report 2003.

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Edwards, C. (1997) Foreign Labour in Malaysian Development: A Strategic Shift? IKMAS Working Paper No. 6, Bangi: Universiti Kebangsaan Malaysia, January. Evers, H-D. (2003) ‘Transition towards a Knowledge Society: Malaysia and Indonesia in Comparative Perspective’ Comparative Sociology 2, 2: 355–373. Ishak Shari and Abdul Rahman Embong (1998) Rapid Participatory Assessment of the Social Impact of the Financial and Economic Crisis in Malaysia. Draft Final Report prepared for the United Nations Development Programme Regional Bureau for Asia and the Pacific (UNDP/RBAP), 14 December. Ishak Shari (2001) ‘The 1997–98 financial crisis in Malaysia and its social impact: Some lessons’ in C. Nyland, W. Smith, R. Smyth and M. Vicziany, (eds) Malaysian Business in the New Era, Cheltenham, UK and Lyme, US: Edward Elgar. Jomo, K.S. and Lee H.A. (2001) ‘Social Impacts’, in Jomo K.S. (ed.) Malaysian Eclipse: Economic Crisis and Recovery, London and New York: Zed Books. Lim Lin Lean (1988) ‘Labour Markets, Labour Flows and Structural Change in Peninsular Malaysia’, in Pang Eng Fong (ed.) Labour Market Developments and Structural Change – The Experience of ASEAN and Australia, Singapore: Singapore University Press. Malaysia (1986) Fifth Malaysia Plan, 1986–1990, Kuala Lumpur: National Printing Department. —— (1989) Mid-Term Review of the Fifth Malaysia Plan, 1986–1990, Kuala Lumpur: National Printing Department. —— (1991) Sixth Malaysia Plan, 1991–1995, Kuala Lumpur: National Printing Department. —— (1993) Mid-Term Review of the Sixth Malaysia Plan, 1991–1995. Kuala Lumpur: Percetakan Nasional Malaysia Bhd. —— (1996) Seventh Malaysia Plan, 1996–2000. Kuala Lumpur: Percetakan Nasional Malaysia Bhd. —— (1999) Mid-Term Review of the Seventh Malaysia Plan, 1996–2000. Kuala Lumpur: Percetakan Nasional Malaysia Bhd. —— (2001) Eighth Malaysia Plan, 2001–2005, Kuala Lumpur: Percetakan Nasional Malaysia Bhd. —— (2003) Mid-Term Review of the Eighth Malaysia Plan, 2001–2003, Kuala Lumpur: Percetakan Nasional Malaysia Bhd. —— Economic Report, various issues, Ministry of Finance. Kuala Lumpur: Percetakan Nasional Malaysia Bhd. —— Labour Force Survey Report, various issues, Kuala Lumpur: Department of Statistics. Milanovic, B. (2002) ‘Can we Discern the Effect of Globalisation on Income Distribution? Evidence from Household Budget Surveys’. Paper presented at the Conference on Globalisation and Inequality, Brookings Institute, 5 June. Mohd. Fauzi Mohd. Jani, Norasiah Sulaiman, Zaimah Derawi and Mohd. Nor Mamat (2000) ‘Profil Sosio-Ekonomi Pekerja Pengeluaran dan Pertengahan: Implikasi Kepada Pembangunan Sumber Manusia’. Paper presented at the Bengkel Membincangkan Hasil Penyelidikan di Bawah Peruntukan Kumpulan Wang Pembangunan Bank of Tokyo, Port Dickson, 28–29 October. Norma Mansor, Tan Eu Chye, Ali Boehanoeddin, Fatimah Said and Saad Mohd Said (2001) ‘Malaysia: Protecting Workers and Fostering Growth’, in Betcherman, Gordon and Rizwanul Islam (eds) East Asian Labor Markets and the Economic Crisis – Impacts, Responses & Lessons, Washington, DC: The World Bank and the International Labour Organization. Ong Aihua (1987) Spirits of Resistance and Capitalist Discipline – Factory Women in Malaysia, Albany: State University of New York Press.

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Ragayah Haji Mat Zin (2002a) ‘Income Distribution in East Asian Developing Countries: The Aftermath of the Crisis’. Paper presented at the 8th Covention of the East Asian Economic Association, 4–5 November, Kuala Lumpur. —— (2002b) ‘Socio-economic Impacts of Globalisation in Selected ASEAN Countries’. Paper presented at the 27th Annual Conference of the Federation of ASEAN Economic Association, 20–22 December, Hanoi, Vietnam. —— (2002c) ‘The Impact of the Financial Crisis on Poverty and Inequality in Malaysia’, in Shahid Khandker (ed.) Impact of the East Asian Financial Crisis Revisited, Manila: The World Bank Institute and the Philippine Institute for Development Studies. Ragayah Haji Mat Zin, Lee Hwok Aun and Saaidah Abdul-Rahman (2002) ‘Social Protection in Malaysia’, in Erfried Adam, Michael von Hauff and Marei John (eds) Social Protection in Southeast and East Asia, Singapore: Friedrich Ebert Stiftung. Ragayah Haji Mat Zin, Rahmah Ismail and Ishak Shari (2000) ‘The Impact of Industrialization on Income Distribution in Malaysia’. Paper presented at the 7th Convention of the East Asian Economic Association, 17–18 November 2000, Singapore. Rasiah, Rajah and Zulkifly Osman (1998) ‘Economic Policy and Employment Growth in Malaysia’, in Rasiah, Rajah and Norbert von Hofmann (eds) Employment Development – Experiences of the OECD and Southeast Asian Economies, Singapore: Fiedrich Ebert Stiftung. Socio-Economic & Environmental Research Institute – SERI (2001) The 2nd Penang Strategic Development Plan 2001–2010, Technical Report submitted to the State Government of Penang. Shamsulbahriah Ku Ahmad (2003) ‘Malaysia after the Asian Crisis: An Overview of Labour Market Issues’, in Barlow, C. and Francis Loh Kok Wah (eds) Malaysian Economics and Politics in the New Century, Cheltenham, UK: Edward Elgar. Sity Daud, Smith, W. and Nyland, C. (2004) ‘Social Safety Nets in Malaysia after the Asian financial crisis: Institutions, Development Policy and the Role of Community Factors’ paper presented at the International One Day Workshop on Social Protection in South Asia, China and Malaysia, International Business Research Unit, Department of Management, Monash University, Melbourne, 10 June 2004. SMIDEC (1999) Performance of the SMIs in the Manufacturing Sector 1998 (unpublished). Smith, W. and Asma Abdullah (2004) ‘HRM Changes in Malaysia after the Asian Financial Crisis’ Asia Pacific Business Review 10, 3–4: 402–421. Tham Siew Yean (2004) ‘The Impact of Globalisation on Malaysia’, in Davies, G. and Nyland, C. (eds) Globalisation in the Asian Region – Impacts and Consequences, Cheltenham, UK and Northampton, MA: Edward Elgar. Tham Siew Yean and Liew Chei Siang (2002) ‘Foreign Labour in Malaysian manufacturing: Enhancing Malaysian Competitiveness?’ Paper presented at the International Conference on Globalisation, Culture and Inequalities: In Honour of the Work of the Late Prof. Dr Ishak Shari (1948–2001), Universiti Kebangsaan Malaysia, Bangi, 19–21 August. Tham Siew Yean and Ragayah Haji Mat Zin (2003) ‘Moving Towards High-Tech Industrialisation: The Case of Malaysia’. Paper presented at the Seminar on East Asian Hi-Tech Drive, 24–25 August, Taipei. Zainal Aznam Yusof (2001) ‘Income Distribution in Malaysia’, in Colin Barlow, C. (ed.) Modern Malaysia in the Global Economy: Political and Social Change into the 21st Century, Cheltenham, UK: Edward Elgar. Zulkifly Osman (2001) ‘Jobless Growth and Unemployment Problem in Malaysia’ Universiti Kebangsaan Malaysia, norsearch.scu.edu.au/unemploymentconf2001/papers/osman. pdf

9

Unemployment in Thailand Social issues, challenges and opportunities Vimolwan Yukongdi

Introduction The impact of globalisation, the liberalisation of the financial market, economic restructuring, and technological advances have all contributed to changes in the pattern of employment in Thailand over the past two decades. Economic restructuring transformed Thailand from an agrarian economy into an exportoriented industrialising nation. The main driving force behind this rapid transition was the boom in manufacturing exports in the 1990s. During the period between 1985 and 1995, Thailand’s average GDP growth rate was 8 per cent per annum, making it one of the fastest growing economies in the world (Phongpaichit 2000). As manufacturing exports increased, demand for urban labour exceeded supply. As a consequence, the country encountered not only a shortage of skilled labour, but also a surplus of unskilled workers. The emerging structural unemployment therefore remains a challenge facing the Thai government. The liberalisation of the financial market exposed Thailand to the rest of the world. Increased inflows of capital created a shock to the economic system and led to its eventual collapse in 1997. Unemployment rates had been relatively low since the 1980s until the Asian Crisis hit Thailand in 1997. Unemployment insurance was non-existent. Since the Crisis, in addition to implementing changes to the social security system, the government also launched various employment creation programmes and experienced some success as evidenced by a decline in unemployment. However, other issues remain to be resolved, such as underemployment and the incidence of poverty. Thailand is currently undergoing transformation and offers an interesting case study of a developing country initially dependent, to a large degree, on agriculture and characterised by labour surplus. The agricultural sector had played a key role in providing an alternative source of employment for displaced workers from the formal sector. This had resulted in low unemployment rates since the 1980s. This chapter begins by tracing the development of the Thai economy over the last two decades. In particular, the chapter discusses the impact of globalisation, the reorientation of economic strategy, and the liberalisation of the financial market and the consequent unemployment in Thailand. The chapter provides an overview of the structure of the labour market, examines unemployment, underemployment,

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and the current labour market situation in Thailand. Finally, the chapter evaluates the effectiveness of the government’s social safety net programme and discusses policy implications.

Contextual factors and issues Several external and internal factors, such as the impact of globalisation and the reorientation of economic strategy, influenced the patterns and trends of employment in Thailand. First, from the mid-1980s the government shifted its strategy, which was based on agricultural exports and domestic market protection, to export promotion in both services and manufacturing industries. The increase in manufactured exports was principally in labour intensive industries, such as textiles, and resource-based industries, such as wood and processed foods (Phongpaichit and Baker 2002). By the late 1990s, these industries were overtaken by exports of technology-based products, such as computer disk drives, automotive, electrical goods, and computer parts. The reorientation in economic strategy occurred at the same time as Japan, Korea, Hong Kong, Taiwan, and the USA were searching for low-cost production sites. Thailand was noted for its supply of cheap labour (Phananiramai 1995). In consequence, multinational firms moved their production to Thailand to benefit from low cost conditions. Foreign firms were employing relatively sophisticated technology which required skilled and educated labour. But the Thai labour force comprised predominantly unskilled workers, whose education was limited to the primary school level. Hence, there was a mismatch between the skills required to perform the jobs and the existing skills of the workers. As demand for skilled workers increased, firms encountered difficulty in securing the needed labour and this led to a shortage of skilled labour and an oversupply of low skilled workers. The number of white-collar workers increased from 500,000 to 4.5 million between 1960 and 1991. Thailand’s move toward industrialisation boosted demand not only for skilled workers, but also for local executives and managers at a rate even greater than that for blue-collar workers (Phongpaichit and Baker 2002). Second, the continuing decline in agricultural employment had an impact on the pattern of employment. The main driving force of economic growth in Thailand was the boom in manufacturing exports, which had grown at an average rate of 29 per cent per year (Islam and Chowdhury 1997) since 1986 up until the mid-1990s. The growth in manufacturing exports between 1980 and 1996 corresponded to an increase in the industrial share of GDP from 29 to 40 per cent (manufacturing increased from 22 to 29 per cent), while the share of agriculture dropped from 23 to 11 per cent. Services expanded from 48 to 50 per cent over the same period. In 2002, agriculture’s share of GDP dropped further to 9 per cent, while industry continued to increase to 42.5 per cent, and services dropped slightly to 48.5 per cent (Table 9.1) (Asian Development Bank 2003). Agricultural employment had been steadily declining since 1989 (World Bank 1999). Despite the sectoral changes in the 1980s and 1990s, 50 per cent of the labour force remained in agriculture in 1998 (Mahmood and Aryah 2001). In the third quarter of

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Table 9.1 Structure of output as percentage of GDP Year

1985

1990

1995

1998

1999

2000

2001

2002

Agriculture Industry Services

15.8 31.8 52.3

12.5 37.2 50.3

11.0 39.3 49.7

12.2 38.2 49.6

10.8 39.5 49.7

10.4 40.5 49.1

10.4 40.7 48.9

9.0 42.5 48.5

Source: Asian Development Bank (2003).

2003, agricultural employment dropped further to 44.8 per cent of total employment (National Statistical Office Thailand 2003a). The decline in agricultural employment was accompanied by an increase in the number of rural migrants moving into urban jobs. Between 1985 and 1995, the non-agricultural workforce increased from 9 to 15 million, while workers in the manufacturing sector doubled from 2 to 4 million (Phongphaichit 2000). The supply of labour came from three main sources: demographic increases, those previously working in agriculture, and the unemployed mainly from the rural areas (Phongpaichit and Baker 2002). Third, Thailand liberalised its financial market in the 1990s. The Thai economy became more vulnerable to increased volatility in the international economy after opening to the world. Increased capital inflows provoked a domestic market boom, overinvestment in property, labour shortages, and rising wages. Export competitiveness declined and firms faced falling profitability. The economy eventually collapsed in 1997. Unemployment increased from 300,000 in 1997 to 1.1 million in 1998. Following the Asian Crisis, Thailand was further affected by the decline in the global economy in 2001 and the 11 September terrorist events, which slowed down GDP growth from 4.6 per cent in 2000 to 1.8 in 2001 (Table 9.2) (Asian Development Bank 2001). This period corresponded to an increase in unemployment, which rose slightly from 2.4 per cent in 2000 to 2.6 per cent in 2001 (ILO 2000; ILO 2001). During the Asian Crisis, the agricultural sector played an important role in absorbing laid-off workers particularly from the construction and manufacturing sectors, thereby moderating the effects of the Crisis. This indicates that labour force mobility is high in Thailand, and in times of Crisis, the agricultural sector acts as a buffer, amelioriating the adverse impact on employment. The past two decades have witnessed major changes in the Thai labour market associated with the process of globalisation, liberalisation of the financial market, integration of national economies, and reorientation of the Thai economy. Thus, the emergent unemployment situation in Thailand resulted from both external and internal forces.

Society and unemployment Accompanying the shift to industrialisation was a change in labour demand and supply. This section discusses the seasonality nature of employment in Thailand, the characteristics of the Thai labour market, unemployment, and underemploy-

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Table 9.2 Growth of GDP (%) Year

1980–1990

1985

1990

1995

1998

1999

GDP

7.6

4.6

11.2

9.2

−10.5 4.4

2000

2001

2002

2003

4.6

1.8

5.2

6.31

Source: World Development Indicators (1998, 1999); Asian Development Bank for 1995–2002. Note: 1 First three-quarters of 2003, World Bank (2003).

ment. This is followed by a discussion on labour demand, and the shortage of skilled labour, particularly, in the science and technology industry. Social issues associated with underemployment and workers in the informal sector are also examined. Labour supply According to the Labour Force Survey (LFS), total labour force includes the employed, the unemployed, and the seasonally inactive. An employed person is defined as an individual, 15 years and over who during the survey week, worked for at least one hour, or did not work at all but had regular jobs (from which they were temporarily absent), or worked for at least one hour without pay (Labour Force Survey). Employees in the labour market are in either the formal or informal sector. Generally, workers in the formal sector include government employees, stateenterprise employees, private employees and employers in the non-agriculture sector. The informal sector includes employees in small establishments employing up to five workers, the self-employed, unpaid family workers, many of whom are female (Chandoevwit 2002). It should be noted that employment in Thailand is highly seasonal (Paitoonpong 2002). For this reason, labour force surveys are conducted on a quarterly basis, in February (non-agricultural season), May (end of school year, when new members enter the labour force), August (agricultural season) and November (end of agricultural season) (Labour Force Survey). Total employment is at its peak in August (Paitoonpong et al. 2001). As discussed in Chapter 2 of this volume, population growth rate affects the supply of labour. Thailand’s population growth rate was 1.9 per cent in 1985 (a population of 51.58 million), 1.1 in 1990, 1.0 in 2000, and 0.8 per cent (63.4 million) in 2002 (Asian Development Bank 2003). Similarly, the labour force was also growing at declining rates as a consequence of falling fertility rates and increased compulsory education (Mahmood and Aryah 2001). The labour force grew by 3.0 per cent between 1980 and 1985; 2.9 per cent between 1986 and 1990; 1.5 per cent between 1991 and 1995; then contracted by 0.4 per cent in 1999. As the economy began to recover following the Crisis, the labour force increased by 2.3 per cent in 2000, but dropped by 1.4 per cent in 2002, reaching 34.9 million. In the third quarter of 2003 during the agricultural season, the total labour force stood at 35.3 million, of which 35.2 million were in the current labour force, and 0.1 million were seasonally inactive (National Statistical Office

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Thailand 2003a). Among the current labour force (35.2 million), 34.7 million were employed, while 0.5 were unemployed. Among the employed, there were 2.6 million government employees (7.5 per cent), 11.5 million private employees (33 per cent), 10.9 million self-employed workers (31.5 per cent), 8.5 million unpaid family workers (24.6 per cent), 32,300 members of producers’ cooperatives (0.9 per cent), and 1.1 million employers (3.3 per cent). Of the 13.1 million over 15 years old not in the labour force, 3.7 million were doing housework, 4.5 million were studying, 3.9 million were the very young and elderly, and 0.9 of others. In the third quarter of 2002, 46.2 per cent of the employed were in agriculture, 32.7 per cent were in service, and 21.1 per cent in industry. The labour force participation rate was 73 per cent in 2003 (third quarter) (National Statistical Office Thailand 2003b). In terms of the labour market, 55 per cent (19.4 million) of the total labour force in 2003 were male. Labour force participation rate was also higher for men (81 per cent) than for women (65 per cent) (calculated from the National Statistical Office Thailand statistics for 2003b). Over the years, the proportion in the age group 15–19 years declined from 5 per cent in 2001 to 4 per cent in 2003, while the proportion of those 50 years and above increased from 19 per cent to 20 per cent (calculated from the National Statistical Office statistics 2003c). The decline in the 15–19 age group could be attributed to increasing educational opportunities and the implementation of the Labour Protection Act in 1998, which raised the minimum working age to 15 years old. Sixty-four per cent of the employed persons had only primary education or lower, while 12 per cent of the workers had a university degree (calculated from the National Statistical Office, statistics for 2003d). Unemployment In Thailand, the Labour Force Survey (LFS) is used to collect data on unemployment. Prior to 2003, Thailand did not have an unemployment insurance scheme and therefore no registration for unemployment benefits. Accordingly, there are no other reliable sources of data on unemployment levels except for those based on the Labour Force Survey. Unemployment is defined as ‘persons, 15 years of age and over who, during the survey week, did not work even for one hour, had no jobs, business enterprises, or farms of their own, from which they were temporarily absent, but were available for work’ (Labour Force Survey). Prior to 2001, unemployment included persons 13 years of age and over. Over the last two decades, the rate of unemployment rose to historical levels in 1985 to 3.7 per cent following the second oil crisis, and again in 1998, when it hit 3.4 per cent in the aftermath of the Asian Crisis (Table 9.3). Following the Crisis, labour shifted out of the formal sector. Private sector employees, who constituted the largest group of employees (11.6 million in 1997), declined by 1.4 million in 1999. To remain employed, workers accepted lower wages, while others shifted to self-employment, which increased by 0.8 million in 1999. In urban areas, there was a shift to the informal sector, and migration to rural areas (Mahmood and

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Table 9.3 Unemployment rate1 Year

1980 1985 1990 1996 1997 1998 1999 2000 2001 2002 2003

Total 0.82 unemployment rate

3.7

2.2

1.1

0.9

3.4

3.0

2.4

2.6

1.8

1.53

Source: ILO (1980–2001); Asian Development Bank (2003). Notes: 1 Third round (August) of each year, unless otherwise stated. 2 Second round (July–September). 3 First three-quarters of 2003, World Bank (2003).

Aryah 2001). It was estimated that the number of unemployed workers could be 0.6 to 1.1 million (World Bank 2000) higher during the Crisis had it not been for the agricultural sector which absorbed laid-off workers from the other sectors, such as construction and manufacturing. This indicated that the agricultural sector played a significant role in cushioning the effects of the Crisis. As previously noted, the Thai labour market is characterised by seasonal fluctuations. During the year, a proportion of the agricultural workforce becomes inactive during the dry season (non-agricultural season). Some writers estimate employment to decline during the dry season by 3 million or 10 per cent of a labour force of 30 million (Kakwani 1998). For instance, during the Crisis period, Mahmood and Aryah (2001) estimate seasonal unemployment to be around 2 million. Thus, the seasonal impact on employment is quite significant. Likewise, unemployment also exhibits a seasonal component. Unemployment tends to be lowest in August, which is the peak agricultural season, while levels are higher in February, the dry season (Paitoonpong et al. 2001). Beginning from the first quarter of 1998, unemployment continued to increase over six quarters until the second quarter of 1999. The adverse effects on employment appeared to be relatively short-lived as employment started to increase in the first quarter of 2000 (World Bank 2000). In 1999, 1.72 million persons were unemployed (5.2 per cent of the total labour force) during the dry or slack season, while unemployment dropped to 3.0 per cent or 0.99 million during the wet season. The unemployment situation improved in the following four years. In the first quarter of 2003 (non-agricultural season), 0.97 million persons were unemployed (2.8 per cent unemployment rate), while the number dropped to 0.54 million (1.5 per cent unemployment rate) in the third quarter (agricultural season) of the same year. The seasonally inactive declined from 345,800 to 90,400 during the same period (National Statistical Office Thailand 2003a). A breakdown by educational level showed that between 1990 and 2000, the proportion of the unemployed with elementary schooling or less decreased over the period. This proportion was 62 per cent in 1996, and 46.7 per cent in 2000. The proportion of the unemployed with some secondary schooling, vocational and university education increased by more than 300 per cent in 1998, following the Asian Crisis (calculated from ILO statistics for 1998). Overall in 2000, the

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largest unemployed group included persons with elementary schooling or less (46.7 per cent), followed by 26.7 per cent of those having vocational education, and 18 per cent with university degrees (calculated from ILO statistics for 2000). It is possible that unemployment rate among those with elementary schooling may be high during the agricultural season because a large proportion of the workers were originally from the agricultural sector. In terms of age group, the proportion of the unemployed in 2000 was largest among those in the 20–24 age group (33.9 per cent), followed by the younger age group of 15–19 years old (18.1 per cent), and those who were 25–29 years old (17 per cent) (calculated from ILO statistics for 2000). By gender, the ratio of unemployment among men was higher than that for women, particularly in the peak season. During the slack season, the ratio of unemployment was higher among women (Paitoonpong et al. 2001). A profile of the unemployed by occupational groups indicated that in the third quarter of 2000, the largest proportion of the unemployed was among the production workers and labourers (29.9 per cent), followed by 21.9 per cent of those in agriculture (farmers, fishermen, forestry workers), sales workers (4.7 per cent), and professional and technical workers (4.4 per cent) (calculated from ILO statistics for 2000). By geographic region, the unemployment rate in 1999 was highest among those who resided in the northeastern region of Thailand. Fifty-three per cent or 0.92 million people were unemployed in the dry season, and 44.8 per cent (0.44 million) in the peak season. The central region, including Bangkok (26.1 per cent), as well as the north (14.7 per cent), also experienced high rates of unemployment in the dry season (Paitoonpong et al. 2001). Although the Thai economy showed signs of gradual recovery, unemployment levels were still higher than they were before the onset of the Crisis. While unemployment started to decline from the third quarter of 1999, unemployment rates in the first, second and third quarters in 2003 were 2.8, 2.5, and 1.5 per cent, respectively (National Statistical Office Thailand 2003a). These rates were still higher than the pre-crisis period of 1.1 per cent in 1996. As shown in Table 9.3, the unemployment rate in Thailand has been relatively low. Generally, the rate has hovered around 1–2 per cent. The unemployment rate is low for a number of reasons. First, the definition of employment adopted in the labour force survey includes own-account workers or the self-employed and unpaid family workers, most of whom are in agriculture. The two groups account for a large proportion of the employed. For instance, this proportion is as high as 56 per cent of the employed in the third quarter of 2003. Second, the informal sector provides alternative employment for those unable to find work in the formal sector. It is estimated that workers in the informal sector account for 50–60 per cent of the employed. Third, prior to 2004, Thailand did not have an unemployment insurance system for workers to register their unemployment status (Paitoonpong 2002). Finally, a substantial number of the employed are underemployed or willing to work additional hours. Underemployment is examined in the following section.

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Underemployment Underemployment is defined by the National Statistical Office of Thailand as those who work less than 35 hours per week during the week of survey and are available to work additional hours. In order to reflect the ‘severely underemployed group’, a recent study adopted a definition differing from the official one for underemployment, which includes those who work less than 20 hours per week (Paitoongpong et al. 2001). Using this definition, the number of underemployed was 580,700 in 1996, rising to 938,400 in 1998, 953,900 in 1999, and to 982,700 in 2000 (Paitoonpong 2002). Underemployment increased as a result of a reduction in working hours following the impact of the Asian Crisis. Underemployment rates were higher among the female workforce. By age group, underemployment in 1999 was higher among those in the younger age group of 15–19 years (23.1 per cent during the slack season versus 22.9 per cent of the total underemployed in the peak season), followed by the 40–49 age group (13.8 per cent in the slack season versus 12.3 per cent in the peak season), and the 50–59 age group (11.8 per cent in the slack season and 14.0 per cent in the peak season). A substantial proportion of the underemployed had only elementary schooling or less (73.2 per cent or 697,800 persons), 17.7 per cent had lower secondary education, and 7.1 per cent had completed upper secondary and vocational education. This pattern remained unchanged in 2000, with 70 per cent of the underemployed having only elementary education or lower. A breakdown by economic sectors showed that the agriculture sector accounted for the highest proportion of the underemployed. In 2000, there were 796,300 underemployed persons (81.2 per cent) during the peak season relatively higher than the proportion in 1996 (435,800 persons) (Paitoonpong 2002). An analysis of underemployment shows that the number of employed workers who work less than 20 hours and are willing to work additional hours represents a significant proportion of the employed. Thus, the substantial number of workers who are underemployed is another key reason for the low rate of unemployment in Thailand. Labour demand Due to the shift from labour-intensive products to the production of technologybased products, the demand for skilled and semi-skilled labour has grown rapidly. Consequently, there is a labour surplus of unskilled workers and a shortage of skilled and semi-skilled labour (Phananiramai 1995). The proportion of the labour force with secondary school education is predicted to increase to 24 per cent, those with university degrees to rise to 14 per cent, while those with elementary education will drop to 62 per cent in 2006 (Mahmood and Aryah 2001). The Office of Industrial Economics (OIE) conducts demand forecasts for workers by industry and specifically in the science and technology field. In 2005, OIE predicts that the manufacturing sector will require 3.33 million workers,

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particularly in the food and textiles sectors. It is also estimated that in 2005, Thailand will require 366,460 workers in the science and technology industry, in electrical equipment, electronics, and motor vehicles and parts (Mephokee 2003). Vocational education has previously addressed labour shortage in the areas of engineering. Subsequently, there is currently a labour surplus in this area, which is expected to shrink as demand for science and technology workers rise over the next few years. Social issues Unemployment has not been perceived to be a serious issue by the government in Thailand (Mephokee 2003; Phananiramai 1995). According to Thai economists, the informal and agricultural sectors play a significant role in absorbing labour surplus from non-agricultural sectors. What is regarded to be of grave concern is the labour migration to the agricultural sector, which creates a problem of underemployment and low levels of productivity (Mephokee 2003), particularly among the less educated workforce. Some economists consider the self-employed and unpaid family workers as the two largest groups in the informal sector (Chandoevwit 2002). For instance, in 2003 there were 11 million of the selfemployed, and 9 million unpaid family workers. Workers in the informal sector earn lower wages relative to those in the formal sector. At this point, very few informal sector workers are covered by social security benefits, partly due to low compliance among firms that employ them, and to some extent, ignorance on the part of the workers. More importantly, many of these workers are not eligible for social security coverage because their wages are below the minimum level (World Bank 2000). This remains a problem for the Thai government to tackle.

Institutions and social problems Labour market Workers in the formal sector are protected by labour law and are eligible to receive social security benefits (Chandoevwit 2002). In contrast, those working in the informal sector receive lower wages, are less educated, concentrated in the agricultural, commerce, transport, construction industries (National Statistical Office Thailand 1994) and remain largely unprotected against income loss. This section describes the existing social security scheme in Thailand and the changes that were instituted in response to the Asian Crisis. Following this is an assessment of the effectiveness of the government’s social safety net programme. Social security During robust economic expansion in the last two decades, the government did not pay much attention to social safety net programmes, which were regarded as costly. In particular, the concept of receiving unemployment benefits was

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considered to be incompatible with Thai social values that emphasised self-help, self-reliance and family responsibility (World Bank 1999). Some also feared that workers who were eligible would simply live off unemployment benefits (Chandoevwit 2000). Additionally, contributions to the fund would increase public expenditures, adding a substantial burden to the Thai government, especially during the time of the Crisis (World Bank 1999). Prior to the Crisis, Thailand’s social protection programme did not include an unemployment insurance programme, a government-sponsored pension scheme for the private sector, or large-scale transfer programmes for the poor (e.g. food stamps, transfer entitlements for the indigent) (World Bank 2000). These instruments were commonly found in social protection programmes in OECD and Eastern European countries. The Social Security Act was adopted in 1990 (Chandoevwit 2000). The Social Security Scheme operates in accordance with the Social Security Act B.E. 2533, its Amendment B.E. 2537, and B.E. 2542. There are three schemes under the Social Security Act of 1990. The first scheme provides financial assistance in the event of non-work related sickness, non-work related disability, or maternity, as well as death from non-work related causes, and assistance to the next of kin (Chayasriwong 2001). Public servants are covered by the Civil Servants’ Medical Benefit Scheme (World Bank 2000). The benefits for work-related sickness, loss of organs, invalidity, and death are covered by the Workmen’s Compensation Fund for workers working in enterprises with ten or more employees. The coverage has been extended to establishments with one or more employees. Employers alone are required to make contributions to the Fund. The second scheme is the Child Allowance and Old Age Pension. After the Asian Crisis, the Child Allowance and Old Age Pension scheme was established for private sector employees in 1998. The Social Security Act covers insured workers who are in the 15–60 age group in establishments with ten or more employees. The employer and employee are each to contribute 1 per cent and 2 per cent of the monthly insured earnings (up to but not exceeding Thai Baht 15,000) for the first and second schemes, respectively. The coverage has been extended to establishments with one or more employees. A Labour Force Survey revealed that only a small number of workers were covered by the Social Security Scheme and coverage was limited to employees in the formal sector (World Bank 1999). This is discussed further in the chapter. The third scheme is unemployment insurance. There had been a delay in launching the scheme due to concerns about the feasibility of the scheme and the financial burden it would place on employers and workers (World Bank 2000). In October 2003, a royal decree established the unemployment benefits fund with contributions to begin in January 2004 (Charoensuthipan 2003). Under the unemployment insurance scheme, unemployment benefits are available not only to those dismissed from work, but also to those who resigned voluntarily, because everyone would have to contribute to the fund. Laid-off workers would receive 50 per cent of their wage for 180 days. Those who resigned voluntarily would have two options: receiving either 50 per cent of their wage for a period of 90 days, or 30 per cent for 180 days. Employers and employees would each contribute 1 per cent of a worker’s wage and the government one-half (0.50) a per cent to the

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unemployment benefits fund. Insured persons who are eligible are those who have contributed to the fund for at least six months over a 15-month period prior to their job loss or interruption to their earnings (Chandoevwit 2000). Workers must also register with the Ministry of Labour’s employment office (Charoensuthipan 2003). The impact of the unemployment insurance scheme has not yet been assessed as contributions to the fund did not begin until January 2004. In 1998, the government launched a social safety net programme to mitigate the adverse impact of the Crisis on the labour market. The government expanded several existing programmes as well as implemented new ones. The main objectives of the social safety net programme were to generate employment, provide income support and social services for the unemployed and vulnerable groups, develop workers’ skills, and increase economic competitiveness through structural reforms (Paitoonpong et al. 2001). Various programmes were implemented in response to the Crisis. These included public employment information services, training programmes, public works programmes, and unemployment insurance scheme (Bulletin on Asia-Pacific Perspectives 2002/03). Some of these programmes, such as employment information services and training programmes were already operational well before the Crisis (Horton and Mazumdar 2001). These employment creation programmes achieved some success in reducing unemployment (Mahmood and Aryah 2001). Social problems Since the Crisis, the Thai government has implemented a number of job creation programmes to boost employment. Significant changes were made to the existing social security system. The effectiveness of the social security system in offering a better safety net tool for displaced workers and that of job creation programmes in boosting employment among the unemployed remains to be addressed. The Labour Force Survey indicated that social security coverage was low. In the third quarter of 1999, only 15 per cent of the workers reported having social security cover. Workers who earned below the minimum wage were not eligible for social security coverage. Overall, social security coverage varied with the size of establishments. Large establishments (100 workers or more) reported social security coverage for 91.1 per cent of their employees, 43.1 per cent in mediumsized establishments (10–99 employees), and only 3.9 per cent of employees in small-sized establishments (0–9 workers). On the whole, coverage rates were relatively low, but it is believed based on the experience of more developed countries, this may be typical during the initial period. It should be noted that in 2001, coverage of social security programme was extended to establishments with one or more employees (the Labour Force Survey in 1999 was based on establishments with ten or more employees). The extension should increase coverage to another 3.6 million workers, bringing the number of workers covered to 9.3 million (World Bank 2000). At this point, coverage rates tend to be higher among formal sector employees and large-sized establishments. Over time, with the extension to small-sized establishments, social security coverage is expected to

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reach those in the informal sector and self-employed workers who currently have no protection. With respect to the social security scheme, compliance with the legal requirement under the Labour Protection Act of 1998 was low. The Labour Force Survey found only 32.4 per cent of wage employees reported being covered by severance pay in 1999 (World Bank 2000). A breakdown by sector showed that the proportion was as low as 13 per cent for private sector wage employees who had severance pay coverage. Severance pay coverage was also strongly associated with the size of establishments, with reported coverage rates ranging from 1.3 per cent in small establishments, 11–12 per cent among medium-sized ones, and 30 per cent in large establishments (World Bank 2000). Furthermore, 92 and 50 per cent of displaced workers in small and large establishments, respectively, reported receiving no compensation when their employment was terminated, while only 11.8 per cent reported receiving the equivalent of 4–6 months’ salary upon termination. The reported low levels of severance pay coverage (which is compulsory and applies to all commercial establishments) is a reflection of both a disregard for compliance with the Act on the part of the establishments, and to some extent, ignorance on the part of employees for severance pay benefits. Thus, only a small fraction of dismissed employees (11.8 per cent) in the survey benefited from the extension of severance pay requirement from 6 months to 12 months (World Bank 2000). Ensuring that employers comply with existing laws and regulations should be a priority for the government, if the social protection programme is to be meaningful. Labour unions can play an important role in protecting workers’ rights and interests. However, labour institutions are poorly developed in Thailand as reflected in the low rate of labour union penetration in organisations. A survey in 1998 (Labour Force Survey) indicated that only 4.6 per cent of private-sector wage employees had a labour union in their establishments, while only 2.9 per cent of employees reported that they were union members. Based on these rates, unionisation is among the lowest in the world. Workers wishing to organise a union receive little legal protection, a number of whom are terminated from their employment even before the union holds its first meeting (World Bank 2000). In terms of employment creation programme, the Labour Force Survey indicated that the programme resulted in a decline in unemployment, which dropped from 1.14 million persons in August 1998 to 0.99 million in August 1999. Other job creation projects may have also contributed to this decline in unemployment. Despite some initial success, there were delays in implementing the projects, many of which required individuals who had completed secondary schooling and university education. Another problem was that educated workers were being paid below the market rate (a disincentive to stay on the job) and these jobs lacked job security due to their temporary nature (Mahmood and Aryah 2001). The labour market information system was found to be lacking in a number of areas. The Department of Employment, which provided public employment services, had difficulty in matching jobs with applicants because contacts with job seekers had been limited. The database could not provide timely information

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to job seekers and employers. Although the implementation of the Vocational Training Promotion Act indicated some success, as evidenced by an increase in the number of recognised training organisations that were established in 1998, only a small number of private firms had taken advantage of tax incentives and the Skill Development Fund to provide training to their employees. On the whole, the employment services provided by the Department of Employment accounted for only a small proportion of job placements in Thailand (Mahmood and Aryah 2001). The Department will need to take a more proactive role in disseminating information and promoting its services to the public. Another issue of concern is the incidence of poverty. During the 1980s up until the Crisis in 1997, the incidence of poverty in Thailand declined significantly throughout the country. Following the Crisis, companies went bankrupt, unemployment increased, and the average income of the Thai people declined. The incidence of poverty increased from 11.5 per cent in 1996 to 13 per cent in 1998, and to 15 per cent in 2000 (Medhi 2001). Accompanying the Crisis were increased school dropouts, child labour, and child prostitution (World Bank 1999). In 1999, 20 per cent of the population received only 3.8 per cent of aggregate national income, while the richest 20 per cent received 59 per cent. Two-thirds of the country’s poor lived in the northeastern region, which had not benefited from economic growth. By 2002, the incidence of poverty had dropped to 9.8 per cent, exceeding the government’s target of 12 per cent (World Bank 2003). But income inequalities remain pronounced and are distributed more unequally in Thailand than in many middle income countries (Asian Development Bank 2001). Poverty incidence continues to be a major policy issue for the Thai government.

Trends and prospects The Thai government played a major role in restructuring the labour markets in its effort to facilitate the country towards industrialisation. As a consequence of rapid economic growth, shortages of skilled workers and rising wages developed. The government intervened by developing a two-tier labour market (Phongpaichit 2000) or the formal and informal sectors. Labour regulations were enforced to protect the upper-tier. Wages and working conditions were increasingly being regulated by the government. A minimum wage was imposed and a series of employer-labour-government tripartite bodies were formed to handle labour disputes. In contrast, lower wages and poorer working conditions characterised the second-tier, which developed in the absence of government regulations. Major industries hired employees as casuals or subcontractors to avoid paying the minimum wage. The source of labour for the second-tier was the rural area, and an increasing proportion was from child labour and illegal immigrants from Myanmar, China and Indochina (Phongpaichit 2000). The results from the World Bank study (2000) lend support to the existence of a two-tier labour market. The study indicated that only a small proportion (15 per cent) of the workers reported having social security coverage (the uppertier), while those who earned below the minimum wage were ineligible for social

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security coverage (the lower-tier). Furthermore, severance pay coverage was greater in large establishments, with over 90 per cent of the workers reporting receiving severance pay, but this was almost non-existent in small-sized establishments (1.3 per cent). The social security scheme excluded employees in the informal sector as well as own-account employees. The prospects for the lowertier look better as extension of the social security coverage to establishments with one or more employees is in progress. This should extend coverage to employees in the informal sector over time. Currently, there is much discussion about moving towards becoming a technology-intensive, knowledge-based economy (Mephokee 2003). Despite the increasing level of educational attainment among the employed, the Thai labour force still comprises chiefly unskilled workers who had elementary schooling. In 2003, 63.7 per cent of the Thai labour force had six years or less of elementary schooling (calculated from National Statistical Office Thailand statistics for 2003d) compared to 79.7 per cent in 1993 (Mephokee 2003). Since 1993, the number of workers who had completed secondary schooling had more than doubled (10.6 to 24 per cent in 2003), but only 11.9 per cent had a university degree. The proportion of university educated workers had increased from 4.85 per cent in 1993. In consequence, there is a surplus of unskilled workers and a higher incidence of unemployment among this group. With a small proportion of university educated workers, the country also experiences a shortage of skilled labour. At this stage, Thailand appears to be hindered by shortages of technically skilled workers, making it difficult for the country to move forward. The researchers per 10,000 population ratio was 2.2 in Thailand, 80 in Japan, 43 in Korea, and 34 in Singapore. The Ministry of Science and Technology has set targets of producing 70,000 university graduates in science and technology, 7,000 at the master’s degree level, and 700 at the Ph.D. level by 2007. The Ministry also aims to increase the ratio of researchers per 10,000 population to three in 2007 (Mephokee 2003). This remains a problem for the Thai government to tackle if it aspires to become a knowledge-based economy. Already underway are government projects to raise the quality of teaching staff at state universities, to modernise science laboratories, and offer training to teachers. Additionally, the government has implemented projects to raise the quality of education, specifically in mathematics, science and technical areas. Hence, to sustain economic growth and maintain its international competitiveness, Thailand needs to strengthen the educational system, the quality of education in secondary, technical schools, and universities in order to build a workforce that the country requires for high-tech industrialisation.

Discussion and conclusion The development of the Thai economy over the last two decades is similar, to a large degree, to the economic development of other developing countries with a labour surplus. In the 1980s, the government liberalised the financial market and pursued an export-oriented strategy. First, through the process of globalisation,

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the inflow of foreign direct investment created employment among the educated and skilled workforce, but advances in technology resulted in unemployment among the less skilled workers which contributed to structural unemployment. In addition, the Thai economy continued to remain vulnerable to external forces, such as the Asian Crisis in 1997, and more recently, the global downturn in 2001, both of which resulted in increasing unemployment, underemployment, and poverty. Second, despite the structural transformation of the Thai labour market from agriculture to industry, the informal sector remains a major source of alternative employment for a significant proportion of the urban workforce. The rural labour market is uniquely characterised by a pattern of seasonal variation, contributing to seasonal employment and unemployment. Third, Thailand, in a similar fashion to Indonesia and the Philippines, is still in a transition stage of economic development from the agricultural to the industrial sector. But Thailand lags behind the other countries, with the exception of Indonesia, in terms of human capital formation. The proportion of the Thai labour force with secondary and higher education remains low relative to those in other East and Southeast Asian countries. This continues to be an obstacle for Thailand if it aspires to become a knowledge-based economy. Fourth, the social protection scheme in Thailand is underdeveloped, with low rates of coverage, which is limited predominantly to workers in the formal sector. Furthermore, labour organisations, which could protect workers in times of a Crisis, remain weak in Thailand, which has among the lowest rates of unionisation in the world. With respect to labour market programmes, the implementation of unemployment insurance may not be as effective as programmes to increase the level of skills and education for workers, particularly, in the informal sector, who remain vulnerable to poverty. In conclusion, as a long-term strategy to combat a shortage of skilled and an oversupply of unskilled workers in the labour market, Thailand needs to develop policies to address areas of weaknesses in skill training, vocational and university education, research and development, and labour productivity. The future of the unemployment situation in Thailand will depend on how well it addresses the labour market issues discussed in this chapter.

References Asian Development Bank (2001) Country Strategy and programme update 2002–2004 – Thailand. Online. Available HTTP: http://www.adb.org/Documents/CSPs/THA/2001/ csp0200.asp?p=ctrytha. —— (2003) Key Indicators of Developing Asian and Pacific Countries, Economics and Development Resource Centre. Manila, Philippines: Asian Development Bank. Bulletin on Asia-Pacific Perspectives (2002/03) ‘A Note on Unemployment in the Wake of the Asian Economic Crisis and some Responses’, in Asia Pacific Economies: Sustaining Growth Amidst Uncertainties. Online. Available HTTP: http://www.unescap.org/pdd/ publications/bulletin2002/ch3.pdf

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Chandoevwit, W. (2000) ‘Unemployment Insurance’, TDRI Quarterly Review 15 (3): 17–22. —— (2002) ‘Labour Market Issues in Thailand’. Unpublished paper. Thailand Development Research Institute. Charoensuthipan, P. (2003) ‘Fund will operate from next January’, The Bangkok Post, 27 February 2003. Chayasriwong, S. (2001) ‘Feasibility of the Thailand Unemployment Insurance Social System’. A paper presented at the KLI-FES-ILO Seminar: The Role of Employment/ Unemployment Insurance Under New Economic Environment, 12–13 September, Korea. Horton, S. and Mazumdar, D. (2001) ‘Vulnerable Groups and the Labor Market: The Aftermath of the Asian Financial Crisis’, in G. Betcherman and R. Islam (eds) East Asian Labor Markets and the Economic Crisis. Washington/Geneva: The World Bank/The International Labour Office. ILO (1980–2001) Laborstat Internet. Online. Available HTTP. http://laborsta.ilo.org/ cgi-bin/brokerv8.exe. Islam, I. and Chowdhury, A. (1997) ‘Thailand’, in I. Islam and A. Chowdhury (eds), AsiaPacific Economies: A Survey. London and New York: Routledge. Kakwani, N. (1998) ‘Impact of the Economic Crisis on Employment, Unemployment, and Real Income’. Bangkok: National Economic and Social Development Board and Asian Development Bank. Labour Force Survey. National Statistical Office of Thailand. Online. Available HTTP: http://www.nso.go.th/eng/stat/lfs/lfse.htm. Mahmood, M. and Aryah, G. (2001) ‘The Labour Market and Labour Policy in a Macroeconomic Context: Growth, Crisis, and Competitiveness in Thailand’, in G. Betcherman and R. Islam (eds) East Asian Labor Markets and the Economic Crisis: Impacts, responses, and lessons. Washington, DC: The World Bank/The International Labour Office. Medhi, K. (2001) ‘Alienated life: Socio-Economic Characteristics of the Ultra Poor in Thailand’. Paper presented at the Global Development Network (GDN) Conference, Blending Local and Global Knowledge, Rio de Janiero, 9–12 December 2001. Mephokee, C. (2003) ‘Thai Labour Market in Transition Toward a Knowledge-Based Economy’, in M. Makishima and S. Suksiriserekul (eds) Human Resource Development Toward a Knowledge-Based Economy: The Case of Thailand. Chiba, Japan: Institute of Developing Economies, Japan External Trade Organization. National Statistical Office Thailand (NSO) (1994) Formal and Informal Labour Force Market Survey 1994. Online. Available HTTP. http://www.nso.go.th/eng/stat/report/ ablfs.htm —— (2003a) Online. Available HTTP. http://www.nso.go.th/eng/stat/lfs_e/lfse-tab1.xls —— (2003b) Online. Available HTTP. http://www.nso.go.th/eng/stat/lfs_e/lfse-tab8.xls —— (2003c) Online. Available HTTP. http://www.nso.go.th/eng/stat/lfs_e/lfse-tab6.xls —— (2003d) Online. Available HTTP. http://www.nso.go.th/eng/stat/lfs_e/lfse-tab5.xls Paitoonpong, S. (2002) ‘The Labour Markets: An Overview’, TDRI Quarterly Review 17(1). Paitoonpong, S., Thongpakde, N., Uchupalanun, J., and Isarangkun na Ayuthaya, C. (2001) ‘Growth, Poverty, Reduction and Adjustment to Crisis – Thailand’, Labour Markets in Transitional Economies in Southeast Asia and Thailand Ottawa, Canada: Development Analysis Network, International Development Research Centre. Phananiramai, M. (1995) ‘Employment Situation, Problems, and Policy’, TDRI Quarterly Review 10 (3): 11–15. Phongpaichit, P. (2000) ‘The Thai Economy in the Mid-1990s’, in R. Ash and A. Booth

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(eds) The Economies of Asia 1950–1998: Critical Perspectives on the World Economy Volume II. London and New York: Routledge: 184–197. Phongpaichit, P. and Baker, C. (2002) Thailand: Economy and Politics. New York: Oxford University Press. World Bank (1999) ‘Thailand Social Monitor: Challenge for Social Reform’, Online. Available HTTP: http://www.worldbank.org/eapsocial/library/socialnote1.pdf —— (2000) Thailand Social Monitor: Thai Workers and the Crisis. Bangkok, Thailand: World Bank/National Statistical Office. —— (2003) Thailand Economic Monitor, October 2003. Online. Available HTTP: http:// www.worldbank.or.th/economic/pdf/TEM_OCT16.pdf World Development Indicators (1998) Washington, DC: International Bank for Reconstruction and Development/World Bank. —— (1999) Washington, DC: International Bank for Reconstruction and Development/ World Bank.

10 Economic reform and unemployment in Vietnam Ngan Collins

Introduction Economic growth in Vietnam has been remarkable over the past two decades due to the economic reform strategy (Doi moi), which started in the mid-1980s. In early 1990s, annual gross domestic product (GDP) growth averaged 7.4 per cent, more than double the rate of the previous decade (Zhu 2002). The Asian Crisis reduced this figure to 4.8 per cent in 1999 but growth has risen during the last few years, reaching 7.2 per cent in 2003 (see Table 10.1) (UNDP 2004). Since 2000, Vietnam’s GDP growth has been the second fastest in the East Asian region after China (Saigon Times Magazine 2004; Xuan Trung 2004). Doi moi is taking place within the context of globalisation. In other words, the changes to Vietnam’s economic system is accompanying and, in part a response to, globalisation. The changes in labour and employment have accompanied the economic changes. Unemployment has been a concept in Vietnam only since the beginning of Doi moi in 1986. Before then, Vietnam’s labour force had been divided into two different categories. The official labour force, which was in line with government economic sectors such as state-owned enterprises (SOEs) and collective-owned enterprises (COEs), and the unofficial one, which was driven by non-government economic activities. The official labour force was driven by government policies and employees were paid directly by government. The concept of labour supply and demand did not exist, and so there was seen to be full employment. An unofficial labour force existed in parallel to the official one but was not accounted for and consisted of verbal agreements and short-term contracts for irregular and casual work (Nguyen thi Lan Huong 2002: 58). There were no national labour laws until 1994 and unemployment was only written into the law, with a formulated policy, in the amended Labour Code of 2002 (The Socialist Republic of Vietnam 2002). This chapter argues that whilst Doi moi has created job opportunities, a higher percentage of the labour force is now unemployed and workers have less job security than in the past. In the second section the contextual factors and issues which have influenced unemployment since Doi moi will be examined. The chapter will then analyse the linkage between society and unemployment under the new market economy. In the fourth section, the focus is on government employment

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Table 10.1 GDP growth, industrial output and unemployment in Vietnam since 1986 (%) Year

Real GDP growth

Industrial output growth

Unemployment rate in urban areas

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

2.8 3.6 6.0 4.7 5.1 5.8 8.7 8.1 8.8 9.5 9.3 8.2 5.8 4.8 6.8 6.9 7.0 7.2

– – – – 3.1 10.4 17.4 12.7 13.7 14.5 14.2 13.8 12.5 11.6 17.5 14.6 14.5 14.9

– – – – – – – 3.40 – – 5.88 – 6.60 7.40 6.44 6.28 6.01 5.78

Source: GSO 1999; GSO 2000; GSO 2003; GSO 2004; CIEM 2003; Tran Van Tho 2001; UNDP 2004.

policies as well as the social problems which unemployment has brought into community. The chapter will then address the trends and prospects of employment and labour force and the final section will present the key findings of the research. Data used for this chapter were gathered mainly from Vietnamese secondary sources as well as through first-hand research data through interviews with workers and government officials. The interviews took place during field trips to Vietnam in 2002 and early 2003.

Contextual factors and issues External factors It is clear that the Doi moi process, with its decentralisation of the economy and opening up to international business, has been part of a broader globalisation movement. Under globalisation, international business is looking for opportunities around the globe with the purpose of making profit. Foreign Direct Investment (FDI) is a key element of this process (Dunning 1993; Holton 1998). Vietnam is among many developing countries with a large population, strongly labour intensive industries and with a need for capital investment and new technology, all of which are attractive to FDI. For Vietnam, FDI has not only been the most important capital source to develop the economy but also the main factor in

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increasing output and production, updating technology, accumulating experience and creating jobs. FDI has flowed into Vietnam since the Foreign Investment Law was issued in 1987 and has brought new employment opportunities. In March 2004 there were 4,462 FDI projects in Vietnam with US$42 billion in registered capital (Thu Tra 2004). FDI has focused on the industrial sector, with 34 per cent of total FDI in the 1988–1998 period being directed into labour intensive manufacturing industries (Mihaljek et al. 1999: 12). In 2002 nearly 480,000 people or 3.5 per cent of the Vietnamese labour force were employed by FDI (see Table 10.2) (Vietnam Economic Times 2003: 39–42). Through their operational practices and people management approaches, FDI has been one of the key causes of the changes in the area of employment relations. Since Doi moi commenced, employment conditions have changed from life-long employment to a contractual system, the traditional industrial relations system has been abolished, a different relationship between employees and employers has developed, and the central government’s involvement in enterprise decision making has decreased (Collins and Zhu 2003). Those changes have brought employment relations in Vietnam closer towards that of the international market in terms of having more labour flexibility, including the flexibility in hire and dismissal. The Doi moi process had been underway for only a short time before the collapse of the Eastern European Socialist bloc in the early 1990s. The financial problems of these countries was a key factor impacting on employment in Vietnam in the early 1990s as the Vietnamese economy had been reliant on those countries for aid. During the war period from the late 1950s until middle 1970s, the Vietnamese economy was weak due to the cost of equipping the military and the heavy damage inflicted by American bombing. It depended primarily on aid from China, the Soviet Union and other Eastern European Socialist countries for its economic survival (Fforde and Paine 1987; Mackerras 2000). These countries became major markets for Vietnamese consumer export products during the 1980s as Vietnam was still isolated from non-socialist countries until 1993 due to the American embargo. Its exports were in light industries such Table 10.2 FDI status in period 1996–2002 Unit: US$mil

1996

1997

1998

1999

2000

2001

2002

New investment Capital increased Turnover Exports Imports FDI in state budget Total employment*

8,640 788 2,771 920 2,042 263 220

4,659 1,173 3,850 1,790 2,890 315 250

3,897 884 4,400 1,982 2,668 317 270

1,568 629 5,200 2,590 3,382 271 296

2,014 431 7,000 3,320 4,350 280 349

2,521 579 8,200 3,600 4,700 373 439

2,350 – 9,000 – – – 472

Source: Vietnam Economic Times 2003: 39–42. *1,000 persons.

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as footwear, garments and handicrafts and these sectors employed a large numbers of workers. During this time a number of large, light-industrial enterprises amalgamated solely for the purpose of producing products for these markets under a regime of annual quotas signed by the governments (Author’s data 10/9/2002). After the political changes in the Eastern European bloc, these quotas were no longer valued and led to the closing down of many light industries in Vietnam, leaving their employees without any work. However, as SOE employees they were not dismissed but instead worked reduced hours and were paid 70 per cent of their total salary to stay at home and wait until the company had work for them. For example, Hong Gam Textile Co-operative and the Saigon Garment Union were among those that closed. When the Hong Gam Textile Co-operative closed down in 1999, only two of its ten member companies remained in operation. The Saigon Garment Union was faced with a similar situation, as only three companies survived out of a dozen member enterprises (Author’s data 15/09/02). Former Eastern European Socialist countries also imported Vietnamese labour under agreements signed with the Vietnamese government. Exporting labour to work in these countries was an important government activity from immediately after the war until the transformation of these countries. Labour exports contributed to balancing the government’s foreign currency trade and reducing Vietnam’s labour surplus. At one time there were more than 300,000 Vietnamese employees working in former socialist countries sending home about US$1.2 billion (Nguyen Ba Ngoc and Tran Van Hoan 2002: 160). After Eastern Europe’s transformation these workers returned home and joined a labour force which already had high numbers of surplus labour. In 1997 the Asian Crisis hit many Asian economies, including Vietnam. The Crisis impacted on employment in Vietnam in two main ways. First, in the early 1990s a major proportion of FDI in Vietnam came from Asian countries, such as Singapore, Taiwan, South Korea, Hong Kong and Japan, both in terms of investment capital as well as the number of businesses (Freeman 2001). These businesses withdrew from Vietnam or downsized their business activities when the Asian Crisis hit their countries. Employment was affected by the closing down of many enterprises during the Crisis and a reduction in new enterprises starting up. Second, as Asian countries were the main market for Vietnamese exports, especially agricultural products and materials such as coffee, rubber, rice, seafood, and oil (GSO 1996; 1997; 1998), the slowdown of these economies directly impacted the amount of labour employed by export enterprises. Internal factors Many socio-economic reforms have occurred since Doi moi, including administrative reform, substantial growth in the domestic private enterprises (DPEs), restructuring of SOEs, changes to employment policies, and strong internal labour migration. All these factors have had a direct impact on employment and unemployment. The first and most obvious impact of Doi moi on employment has been

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administrative reform. Before Doi moi all SOE employees, with the exception of casual workers, were recruited through government labour bureaus. Enterprises did not have any right to recruit or dismiss their employees. When any enterprise had a demand for labour they notified the labour bureaus, which were authorised to distribute the human resources under their control. Graduates from vocational schools, colleges, universities and other tertiary institutions were automatically transferred to these bureaus to find employment (Collins and Zhu 2003). Farmers and other non-industrial workers did not have the right to look for extra work during off-seasons. Since Doi moi the individual has been allowed to freely search for work throughout the nation and in all economic sectors. In particular, farmers are now permitted to search for jobs in the cities during the off-season. Economic transformation has also bolstered employment creation through the establishment of DPEs in the economic system. The DPEs are relative newcomers to the economy. The Law on Private Enterprises passed in 1999 was designed to develop this sector. Since then the number of local private companies has increased substantially both in terms of capital invested and people employed. Excluding agriculture and forestry, this sector employed 4,643,800 people in 2000, accounting for 12 per cent of the active workforce (see Table 10.3). By 2002 the proportion had increased to 25 per cent (Duong Ngoc 2002; Nguyen Huu Dat 2000). The government policy on restructuring SOEs and closing down collectively owned enterprises (COEs) has made an important difference to Vietnam’s employment situation since Doi moi. The 11,000 SOEs which operated in the early period of Doi moi decreased to just over 5,000 in 2000 (Nguoi Lao Dong ‘Workers’ Newspaper 2000). In the three years from 2000 to 2002, 2,280 SOEs were restructured and the number of SOEs decreased by 43 per cent (Vietnam Economic Review, 2001a: 44). The number of COEs, which were mainly involved in the processing of agricultural and forestry products, has declined even faster than SOEs. They were reduced from some tens of thousands down to just 3,000 in 2002 (Institute of World Economy 2002: 39). The restructuring has resulted in heavy job losses. For example, in the period 2000 to 2002 over 400,000 SOE employees lost their jobs, mainly due to this Table 10.3 Workers employed by DPEs from 1996 to 2000

Labour (people) Development rate (per cent) Growth rate (per cent) Proportion of total workforce

1996

1997

1998

1999

2000

3,865,163 100

3,666,825 94.87

3,816,942 104.09

4,097,455 107.35

4,643,800 113.33

–

−5.13

4.09

7.35

13.33

11.2

10.3

10.3

10.9

12.0

Source: Pham Ngoc Kiem 2002: 5.

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restructuring (see Table 10.4). In total approximately one million SOE employees have been made redundant since Doi moi began. Although some former SOE employees have attempted to open their own businesses using money from their redundancy packages, many of these have become unemployed or underemployed (Nguyen thi Lan Huong 2002). According to the Ministry of Finance, in 2003, 388 SOEs were restructured and 13,542 employees were made redundant, of whom 12,214 received redundancy benefits (Nguyen Xuan Nga 2004). Changes in the employment situation are also linked to government reform policies, such as changes to recruitment and dismissal policy, the central government’s empowerment process as well as implementation of labour contracts, reforms to the wages system, and the establishment of social insurance and unemployment benefits. These policies have had both positive and negative impacts on Vietnam’s employment and unemployment. A major aspect of employment policies reform since the late 1980s has been changes to recruitment and dismissal. Due to the central government’s devolvement of some power and responsibilities to SOEs, the SOEs managers are now in charge of the companies business affairs, including employment issues. Decision No. 217/HDBT, passed in 1987, permitted SOEs to take charge of their own recruitment and dismissals (Collins and Zhu 2003). This is even more flexible in the non-SOE sectors where management has full autonomy over their business operations and employment. People now have a greater chance of being employed on merit but less job security, as they can be made redundant or dismissed at any time if they are no longer needed by the business. The implementation of labour contracts in the early 1990s ended a long era of ‘tenure’ which SOE’s employees had enjoyed during the pre-Doi moi period (Nguyen thi Thanh Ha 1997: 80). Labour contracts gradually became compulsory in SOEs after the Labour Code was issued in 1994 (Kim Anh et al. 1999: 13). In the non-SOE sector, labour contracts are normally signed in big companies, such as FDI businesses or big domestic public enterprises (DPEs), but are usually avoided in many family businesses employing just a few workers. DPEs are the dominant sector in terms of the number of employees so the percentage of Table 10.4 The number of workers in reorganised SOEs from 2000 to 2002 Redundant workers

Total Incorporation, merger Equitisation Transfer, sale, on contract, lease Disbanded, declared bankrupt Turned into administrative organisations

3 years

2000

2001

2002

429,075 40,100 270,550 41,427 75,356 1,662

137,550 16,215 87,425 15,654 17,988 448

147,746 13,112 90,112 14,122 28,658 876

143,799 10,773 93,183 41,427 28,710 338

Source: Vietnam Economic Review 2001a: 44.

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workers working without labour contracts is quite high and those people with contracts are often contracted for only short periods. Internal migration has occurred strongly, and has been a crucial factor in changes to employment patterns, during the last 20 years. It has occurred in two directions: from rural areas to the cities and from northern to southern Vietnam, where there are more job opportunities. According to the Ho Chi Minh City Trade Union Association of the approximately 2 million employees working in Ho Chi Minh City in 2002 only 900,000 were Ho Chi Minh City residents while the rest were from other provinces (Author’s interview 19/09/02). There are several reasons for this movement. Changes in administrative procedures have allowed people to move freely between regions to search for work. The decline of agricultural land has contributed to a high labour surplus in rural areas, instigating a wave of people moving to the cities and industrial zones to look for work.

Society and unemployment Labour supply Vietnam’s labour force is reasonably young. In 1999 employees in the 18–24 age bracket made up 27 per cent of the total working population of (15–60 age bracket) 37 million people (GSO 2002a: 17). This raises the issue of the need for vocational training and other social preparation in order to help young workers to be employable. This has become a serious concern in the last few years. The vocational training programme is out of date and does not impart enough practical knowledge to keep pace with the substantial growth of the economy and social changes since Doi moi started. The limited subject and career choices in the training programmes have been another barrier for young people. A great number of college graduates are unable to find employment. For example, in 1999 nearly 42 per cent of mining graduates and 46 per cent of computer science graduates were unemployed (MOLISA 2001b: 750). Despite so many unemployed there is nevertheless a severe shortage of skilled employees in many businesses, especially in the FDI and DPE sectors (Vietnam Net 2003). This is a particularly difficult problem in rural areas. Labour demand Approximately 1.2 million young people still enter the workforce each year, placing considerable pressure on the government to create jobs. Ho Chi Minh City has the most job opportunities and attracts the most workers from around the country. It has 5.5 million residents and a labour force of approximately 2.3 million. However, even here only 198,000 new jobs were created in 2001 and 208,000 new jobs in 2002 (Ho Chi Minh City People Committee 2004). Just as the economic reform process has had both positive and negative impacts on the labour force as a whole, it has also had both a positive and negative

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influence on employment demand, especially on the gender composition of the workforce. According to a General Statistical Office (GSO) survey in 1999, the percentage of male employees increased on average by about 2.7 per cent during 1989–1999 while female employment increased by only 1.5 per cent (GSO 2002a: 12). There are a number of possible explanations. First, the serious decline in agricultural land in recent years, accompanying the rapid growth of industrial zones and the expansion of urban areas, has reduced the demand for agricultural work, especially among women. From 1990 to 1998 the annual average internal migration from rural to urban areas was about 200,000, about half of whom were seeking employment and two-thirds of whom were female (Nguyen Ba Ngoc and Tran Van Hoan 2002: 161). Second, the SOE’s redundancy policy affected female employees to a greater degree than males. Many female workers were made redundant during the Asian Crisis because they could not compete with their male colleagues in terms of productivity and their welfare costs, including maternity leave, child care and sick leave. For the same reasons, women have also found it more difficult to be re-employed in a strongly competitive market-based economic system. For example, in 2003, 250 female workers were made redundant by an SOE called Building Irrigation Company 1 when it was equitised. Most of those laid off were middle-aged and either unskilled or semi-skilled (Author’s data 9/02/03). Second, with the economic boost since Doi moi, an increasing number of women of child-bearing age can afford not to be involved in paid work and so spend more time with their families (GSO 2002a: 17). Although there has been a declining demand for female workers in SOEs and in some heavy and high tech industries for the reasons stated above, female employment prospects have dramatically improved in DPEs. Many DPEs are family businesses operating in light industry, trade and services. These kinds of business usually have less technological investment and are more labour intensive. They are therefore a major source of employment for female employees, especially low and semi-skilled employees. With living standards increasing in recent years (UNDP 2004; World Bank 2003) there has been a corresponding rise in demand for domestic young female workers in big cities such as Ho Chi Minh City, Hanoi and Danang (Hanoi Moi Newspaper 2004). This trend of job opportunity has been reflected by the increasing proportion of female workers in the 15–24 age group since 1989 (GSO 2002a). The Doi moi process has coincided with industrialisation and there has been high growth in the industrial zones since the mid-1990s. In 2001 there were about 67 industrial zones attracting about 250,000 workers, mainly from rural areas. For example, more than 70 per cent of workers in the Dong Nai, Binh Duong and Danang industrial zones came from rural areas (Nguyen Ba Ngoc and Tran Van Hoan 2002: 157).

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Institutional and social issues Unemployment As unemployment in Vietnam is a new concept there is not yet much data available on unemployment. Official unemployment data have only recently become available (see Table 10.1). There are at least three main sources: United Nations Development Programme (UNDP) data, data from the GSO and data from Ministry of Labour – Invalid and Social Affair (MOLISA). These sources differ in the way that data are collected and the actual results. The UNDP has conducted the Vietnam Living Standards Survey every five years since 1993. The 1993 Vietnam Living Standards Survey (VLSS1993) and the 1998 Vietnam Living Standards Survey (VLSS1998) are both available but the 2003 survey has not been made available to the public. Both the 1993 and 1998 survey provided data on unemployment (see Table 10.5). GSO has been compiling statistics annually since 1992 but did not provide unemployment figures until 1996 and even then only for urban areas (see Table 10.6) (GSO 1996, 1997, 1998, 1999, 2000, 2001, 2002b, 2003). MOLISA data have been collected annually since the mid-1990s and focus on labour issues. These figures are more detailed but consider the respondents’ employment situation only during the previous seven days from the survey date and there are inconsistencies between the reports. MOLISA results differed slightly from the other two publications (see Table 10.7). MOLISA’s explanations for the declining unemployment rate in urban areas in the last few years is that the urbanisation process has transferred many villages and hamlets into urban towns but in fact the percentage of residences involved in farming is still high. This contributes to the drop in urban unemployment statistics but in practice underemployment is high and is similar to that in rural areas (MOLISA 2001b). Labour force and underemployment In Vietnam, underemployment is as serious as unemployment, particularly in rural areas. According to MOLISA research in 2004 surplus labour in rural areas amounted to about 20 million people with the majority being women (Hanoi Moi Newspaper 2004). The figures from GSO presented in Table 10.8 provide a more Table 10.5 Unemployment rates, 1993 and 1998 (%)

Vietnam overall Rural areas Urban areas Men Women Source: Haughton et al. 2001.

1993

1998

3.4 2.5 6.9 3.5 3.4

1.6 0.8 4.5 1.9 1.3

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Table 10.6 Unemployment rate of labour force by working ages in urban areas (%)

Whole country By Regions Red River Delta North East North West North Central Coast South Central Coast Central Highlands South East Mekong River Delta Some Large Cities Hanoi Danang Ho Chi Minh City Dong Nai

1996

1998

1999

2000

2001

2002

5.88

6.60

7.40

6.44

6.28

6.01

7.57 6.42 4.51 6.96 5.57 4.24 5.43 4.73

8.25 6.60 5.92 7.26 6.67 5.88 6.44 6.35

9.34 8.72 6.58 8.62 7.07 5.95 6.52 6.53

7.34 6.49 6.02 6.87 6.31 5.16 6.20 6.15

7.07 6.73 5.62 6.72 6.16 5.55 5.92 6.08

6.64 6.10 5.11 5.82 5.49 4.92 6.31 5.52

7.71 5.53 5.68 6.61

9.09 6.35 6.76 5.52

10.31 6.64 7.04 5.87

7.95 5.95 6.48 5.52

7.39 5.54 6.04 5.87

7.08 5.30 6.73 5.27

Source: GSO 2003: 47.

Table 10.7 Unemployment rates, 1997–2002 (%)

Vietnam Overall Rural areas Urban areas

1997

1998

1999

2000

2001

2002

– – 6.01

2.21 1.11 6.85

– – 6.74

2.32 1.09 6.42

2.76 2.01 6.13

2.11 0.94 5.84

Source: MOLISA 1995; 1999; 2001a; 2001b; 2002.

Table 10.8 Rate of used working time of labour in rural areas (%)

Whole country By Regions Red River Delta North East North West North Central Coast South Central Coast Central Highlands South East Mekong River Delta Source: GSO 2003: 48.

1996

1998

1999

2000

2001

2002

72.11

71.13

73.49

73.86

74.37

75.30

75.69 79.01 79.01 73.35 70.69 74.98 61.76 68.16

72.51 67.19 66.46 69.20 72.56 77.23 74.55 71.40

73.98 71.40 72.62 72.28 74.02 78.65 76.20 73.16

74.98 72.67 73.23 71.78 73.50 76.74 76.44 73.10

75.63 73.12 72.83 72.80 74.74 77.16 76.50 73.39

75.38 75.90 71.08 74.50 74.85 77.99 75.43 76.55

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general indication of the underemployment situation in rural areas during Doi moi. In the government sector, there were approximately 1.5 million public servants in 2002, but according to MOLISA officials, there were only enough jobs for half this number. By implication, 50 per cent of public servant will need to be made redundant at some stage. This is not an easy task but it is widely acknowledged that it must be carried out (Author’s data 6/02/2003). Even in foreign enterprises, which would seem to make the most productive use of their labour, the numbers of employees without work to do accounts for 10 per cent of the total (CIEM 1999).

Institutions and social security Unemployment benefits The new market-based economic system brought about by Doi moi has resulted in a newly wealthy sector of society who have the ability to develop their lives through the Doi moi process. At the same time, a large section of the population has been disadvantaged by the process in terms of lost jobs, low incomes and greater poverty. The gap between rich and poor has increased and has become a serious social concern with the need for a social security safety net becoming critical in recent years. The amended Labour Code in 2002 was aimed at addressing this issue through a simple statement in article 140 recommending unemployment benefits (The Socialist Republic of Vietnam 2002: 76). The provisions of these benefits have not, however been fully developed. After visiting other countries, government experts have formulated some ideas on which model Vietnam should adopt or modify. The benefits will not be implemented until 2005 and even then it will be just on an initial trial basis for at least a year in a small number of southern provinces, including Binh Duong and Dong Nai. The process will then be evaluated before any implementation takes place elsewhere (Author’s data 5/06/2003). Government employment policy A ‘redundant worker’s fund’ was established in the early stages of Doi moi as the government’s key method of dealing with SOE’s redundant employees. Through this fund, the government encouraged poorly qualified workers to undergo further training to help them transfer to a new job. It assisted workers in seeking employment in other economic sectors by providing them with financial support during their job search and with a low interest loan to begin a new business or trade (Pham Duc Thanh 2002). Another policy to deal with surplus SOE’s worker is the early retirement of middle-age redundant workers. The definition of early retirement age is younger than 60 years old for male employees and younger than 55 years old for female employees, coupled with 20 years’ contribution to a social security fund (Kim Anh et al. 1999). So far about 17,000 people have been placed into this category in

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2001, only about 15 per cent of whom have been entitled to these benefits. The rest have needed state assistance to be able to retire (Pham Duc Thanh 2002). One of the government’s most important employment policies was the establishment of social security and medical insurance in 1995. According to these policies, the employer pays 15 per cent of total monthly salary to the social security fund and employees pay 5 per cent. For medical insurance, 3 per cent of total monthly salary is paid: 2 per cent by the employer and 1 per cent by the employee (Kim Anh et al. 1999; The Socialist Republic of Vietnam 2002: 76–83). The establishment of minimum wages in 1993 was one of the social safety net policies. The monthly minimum wage for unskilled workers was VND120,000 in the non-FDI sector and US$451 in the FDI sector (Do Duc Dinh 2001; Kim Anh et al. 1999). A sharp drop in real wages caused by high inflation during the midand late-1990s forced the government to raise minimum monthly wages from VND120,000 to VND144,000 in January 1997. However, this rise was not enough to provide for daily living expenses, so in January 2000 the rate rose once again to VND180,000 (Nguoi Lao Dong ‘Workers’ Newspaper 1999: 2). By 2002 the rate was VND290,000 (Tuan Dung 2004a). As wages in the FDI sector have been considerably higher there has been little change to this sector except that since 1999 all wages previously paid in US dollars have had to be paid in Vietnamese dong. Together with social security and medical insurance policies, the government hopes the minimum wage will build up a legal basis to protect employed people, especially those on low incomes, from the uncertainties of the labour force during Doi moi. Another important activity concerning employment was the restructuring of vocational training programmes to help with the shortage of skilled workers and provide basic skills to young workers. In 1999 the government established the Department of Vocational Training aimed at improving and developing vocational training programmes, as well as establishing new training institutes (Author’s data 5/02/2003). The relocation programme, which began in the early 1980s, alleviated the high level of unemployment in the north and helped to develop many so called ‘new economic zones’. This programme included relocating a large number of villagers from northern to southern Vietnam and by 1997 six million people had been relocated (Nguyen thi Lan Huong 2002: 74). Another important initiative to reduce unemployment has been the exporting of labour. After the economic collapse of Eastern European countries, from the late 1990s a second wave of labour has been exported to Asian nations, such as Malaysia, Taiwan, South Korea and Japan. In 2000, 31,500 workers went to work overseas, increasing to 40,000 in 2001 (Nguyen Ba Ngoc and Tran Van Hoan 2002).

Trends and prospects For the 2000–2010 period, the Vietnam National Party congress declared that Vietnam needs to move quickly towards industrialisation and modernisation. This

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would be achieved by the development of human resources, improved education and training, solving the key and urgent issues on labour and employment, reducing poverty, achieving economic stability and improving people’s living conditions (Vietnam Economic Review 2001b). Increasing urbanisation is one of the major elements of the government’s drive to modernise and this process has strongly impacted on employment trends in recent years. In 1997 there were only 15 cities and 592 provincial towns in Vietnam (GSO 1998: 7). By 2002 this figure had increased to 22 cities and 635 towns. Following the urbanisation process the urban population has increased from 22.7 per cent of the total population in 1997 to 25.1 per cent in 2002 (GSO 2003: 28). In 1996 the rural workforce accounted for 81 per cent of the national labour force, but this figure had decreased to 77 per cent by 2001 (MOLISA 2002). The establishment of more industrial zones will add to the decline in agricultural labour in the next few years. In the 1990s, industrial zones existed only in the southeast areas but with the industrialisation strategy new industrial zones have been promoted in each province. The zones have attracted more investment at the provincial level and of course have raised job opportunities for young workers, especially in areas with very poor agricultural land such as central Vietnam and the highlands. For example, the central coast province of Quang Nam is in the process of establishing the Chu Lai free economic zone. In the next few years, this zone will create about 150,000 jobs in an area that has among the poorest agricultural land area and most serious labour surplus in Vietnam (Author’s data 7/02/03). However, the urgent issue here is the shortage of skilled workers needed in the developing industrial and service sectors. The shift to a more technology and service oriented economy creates a greater demand for skilled workers and Vietnam can no longer focus only on highly labour intensive industries to attract FDI. The serious shortage of highly skilled employees has become one of the main reasons that highly skilled Vietnamese employees, in recent years, have become more expensive then their counterparts in Jakarta or Beijing (Vietnam Net, 2003). This has led to the urgent need for restructuring the provincial vocational training programmes to provide skills for young workers in the coming years. The ‘Vietnamese Youth Programme for 2004–2005’ stated the government’s target of providing 2 million jobs for young people, including 1.5 million fully trained workers for service and industrial jobs (Saigon Times Magazine 2004). The process of restructuring SOEs is gaining pace in line with the government’s plan that there should only be 2,000 SOEs by 2005 (Nguoi Lao Dong ‘Workers’ Newspaper 2000: 3). SOE numbers will be reduced through a number of methods such as equitisation, changing SOEs into new forms of business, and merging the less financially successful ones (CIEM 2004). This means there will be further job losses and the unemployment rate in this sector will be rise. On the other hand, the Amended Foreign Investment Law giving FDI enterprises more freedom in recruitment will help with the employment situation in this sector. One of the government’s methods of controlling unemployment in the coming years

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will be to commit to the growth of DPEs to absorb the labour surplus and to help to achieve the government’s target of transferring 50 per cent of labour force into commercial and industrial jobs by 2010 (Tuan Dung 2004b). The trend of continuing to export labour overseas will become a greater government priority in keeping unemployment rates down in coming years. Exporting labour will also help to create jobs for semi- and low-skilled labour from rural areas as most of these job are in domestic service or manufacturing (Nguyen Ba Ngoc and Tran Van Hoan 2002). The privatisation of labour export agencies since 2002 has allowed this industry to grow quickly. In early 2004 about 350,000 Vietnamese workers were working in 40 different countries (Chi Thinh 2004). The government intends to increase this figure by a further 100,000 to 150,000 workers in the coming years (Nguyen Ba Ngoc and Tran Van Hoan 2002).

Discussion and conclusion This chapter contributes to the debate concerning globalisation’s association with the emergence of common labour market trends and policy responses in East Asia. The evidence from Vietnam’s labour market shows that even though the Doi moi process has been influenced by globalisation, the responses to this impact are unique to Vietnam and the impact has been directly on the economy rather than on the labour force. Rather, changes in the labour force have been driven by the process of Doi moi and government policy more than by globalisation. The evidence of globalisation’s impact can be found in relation to the operation of FDIs in the market but in fact FDI’s activities have been a less important source of employment both in terms of GDP contribution and employment creation, compared to the SOEs and DPEs. Changes to Vietnam’s labour market are mainly due to the process of Doi moi and the government’s policy reaction rather than due to external forces, such as FDI and international donors such as the World Bank, IMF and the Asian Development Bank. There is evidence of regional institutions such as the Association of Southeast Asian Nations (ASEAN) and the Asia-Pacific Economic Cooperation (APEC) having had more impact on Vietnam’s labour force in recent years. The pressure of being a member of ASEAN, and the policy of the Asian Free Trade Area (AFTA) between members has presented challenges to the Vietnam economy in general, and employment in particular. Under AFTA, Vietnam is required to devise and implement a specific tariff reduction schedule. The schedule involved two important milestones: November 2001 and January 2006. At the present time 83.2 per cent of Vietnam’s goods are subject to a tariff rate of less than 20 per cent. From 1995 to 2006, the government must move nearly ten goods each year from the temporary exclusion list to the list which is subject to tax reduction (Hoa Huu Lan 2001). The issue of how to improve the quality of local goods and prices so as to be able to compete with overseas products depends on the skill levels of Vietnamese workers. In term of labour force responses, if only changes in employment policies are considered, such as the implementation of labour contracts, minimum wages,

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recruitment and establishing the Labour Code, Vietnam’s labour force is more in line with international trends than before Doi moi. However, there is also divergence in the way in which Vietnam’s labour force has responded to the impact of globalisation. Vietnam’s political and economic system has far more differences than similarities with its neighbouring countries, so the starting point for Vietnam’s labour force to join with international trends has been quite different from other nations in the regions. The result is that Vietnam has responded differently from other countries to globalisation. First, the political system is still under one party control. Even though there has been some liberalisation in employment since economic reform, in general there is still strong government regulation. In short, the reform process for employment policy and practice has been monitored by the state and influenced by state power. This rarely occurs in more market oriented economies. Therefore, unlike other transitional economies, in Vietnam the government still plays a decisive role in regulating the performance of labour force through its policy. Second, unemployment is not only social concern but also a political concern. As the result of the state’s desire to maintain state power and social stability, SOEs are still a dominant force in the economy and are still operating in the crucial industries seen as national security. The new employment policies normally take SOEs interests into consideration before other sectors, which has led to the situation of different employment policies being applied for different sectors. This is unique to Vietnam. Third, through Doi moi new jobs and industries were created at the same time as some traditional jobs and industries disappeared This process has brought about structural unemployment caused by an imbalance between employee skills and changes in job demands (Tran thi Thu 2002). A greater need for vocational training has arisen to redress this imbalance. Fourth, the government is concerned about social stability during economic reform but it also has a commitment to economic liberalisation for attracting FDI to Vietnam. As the gap between rich and poor continues to grow, unemployment and other welfare issues are becoming more important. Social stability becomes the key to the government retaining control, building up a safety net for low income people is important for the government’s survival as well as individual well-being. In conclusion, the crucial question for the government is how to maintain the balance between offering more freedom for business to be able to compete and attract more FDI while at the same time finding a way of solving the problem of increasing unemployment. The policy of greater opening up of the economy will involve decentralising the state’s power to grassroots levels and giving more autonomy to business operations.

Note 1

US$1 was equivalent to approximately VND7,000 in 1993 (Author’s data 2/03/2003).

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References Chi Thinh (2004) ‘Tp.HCM Ký Ket 4 Chuong Trình Hop Tác CNTT (Ho Chi Minh City Signs 4 Collaborative Vocational Training Projects)’, Hanoi: Vietnam net: http://www.vnn.vn/kinhte/ toancanh/2004/03/55472/, 31 March; 9: 56am. CIEM (1999) Vietnam’s Economy in 1998, Hanoi: Education Publishing House. CIEM (2003) Vietnam’s Economy in 2002, Hanoi: National Political Publishers. CIEM (2004) ‘Day Manh Co Phan Hóa Doanh Nghiep Nhà Nuoc (Further Boost to Equitisation of SOEs)’, Hanoi: CIEM: http://www.ciem.org.vn/news.php?op=detailsmsg&detailsmsg= 88&viewmsgcat=5, 31 March; 10: 33am. Collins N. and Zhu Y. (2003) ‘Vietnam’s Labour Policies Reform’, in Frost S. et al. (eds), Workers’ Rights for the New Century, Hong Kong: Asia Monitor Resource Centre Ltd. Do Duc Dinh (2001) ‘Vietnam’s Doi Moi Policy Progress and Prospects’, Vietnam Economic Review June: 3–14. Dunning, J. H. (1993) The Globalisation of Business, London: Routledge. Duong Ngoc (2002) ‘Vietnamese Private Economy: Results and Limitations’, Vietnam Economic Review May: 23–24. Fforde, A. and Paine, S. (1987) The Limits of National Liberation: Problems of Economic Management in the Democratic Republic of Vietnam, London: Croom Helm. Freeman, N. J. (2001) ‘Understanding the Decline in Foreign Investor Sentiment Towards Vietnam During the 1990s’, Asia Pacific Business Review 8: 1–18. GSO (1996) Vietnam Statistical Yearbook 1995, Hanoi: Statistical Publishing House. GSO (1997) Vietnam Statistical Yearbook 1996, Hanoi: Statistical Publishing House. GSO (1998) Vietnam Statistical Yearbook 1997, Hanoi: Statistical Publishing House. GSO (1999) Vietnam Statistical Yearbook 1998, Hanoi: Statistical Publishing House. GSO (2000) Vietnam Statistical Yearbook 1999, Hanoi: Statistical Publishing House. GSO (2001) Vietnam Statistical Yearbook 2000, Hanoi: Statistical Publishing House. GSO (2002a) Survey of Population and Housing in Vietnam 1999: Specialised in Labour and Employment in Vietnam, Hanoi: Transportation Publishing House. GSO (2002b) Vietnam Statistical Yearbook 2001, Hanoi: Statistical Publishing House. GSO (2003) Vietnam Statistical Yearbook 2002, Hanoi: Statistical Publishing House. GSO (2004) Vietnam Statistical Yearbook 2003, Hanoi: Statistical Publishing House. Hanoi Moi Newspaper (2004) Hau Qua Kho Luong (Fathomless Consequence), Hanoi: Hanoi Moi Newspaper: http://www.hanoimoi.com.vn/vn/13/14560/, 19 April; 11: 03am. Haughton, Dominique et al. (eds) (2001) Living Standards During an Economic Boom, UNDP Hanoi: Statistical Publishing House. Ho Chi Minh City People Committee (2004) Dan So Lao Dong Xa Hoi (Population, Labour, Society), Ho Chi Minh City: Ho Chi Minh City People Committee: http://www. hochiminhcity. gov.vn/home/left/gioi_thieu/thong_ke/giai_doan_99_02/slcy1?left_ menu, 17 February; 12:19pm. Hoa Huu Lan (2001) ‘ASEAN’s Role in the Process of Vietnam’s Economic Development’, Vietnam Economic Review 77: 15–19. Holton, R. (1998) Globalisation and the Nation-State, London: Macmillan. Institute of World Economy (2002) ‘Two Years of Implementation of Law on Enterprises in Vietnam: An Assessment’, Vietnam Economic Review 12: 10–14. Kim Anh et al. (1999) Tim Hieu Cac Van Ban Phap Luat Ve Lao Dong, Tien Luong Va Bao Hiem Xa Hoi (Examining Legal Documents on Labour, Wages and Social Insurance), Hanoi: Statistics Publishing House. Mackerras, C. (2000) Eastern Asia: An Introductory History, Sydney: Longman.

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Mihaljek, D. et al. (1999) Viet Nam: Mot So Van De Kinh Te (Vietnam: Some Economic Issues), Hanoi: International Monetary Fund. MOLISA (1995) Statistical Data of Labour-Employment in Vietnam 1994, Hanoi: Labour and Social Publishing House. MOLISA (1999) Statistical Data of Labour-Employment in Vietnam 1998, Hanoi: Labour and Social Publishing House. MOLISA (2001a) Statistical Data of Labour-Employment in Vietnam 2000, Hanoi: Labour and Social Publishing House. MOLISA (2001b) Statistics on Labour-Invalids and Social Affairs in Vietnam 1996–2000, Hanoi: Labour and Social Publishing House. MOLISA (2002) Statistical Data of Labour-Employment in Vietnam 2001, Hanoi: Labour and Social Publishing House. Nguoi Lao Dong ‘Workers’ Newspaper (1999) ‘Viec Nang Luong Toi Thieu Co the Lui Lai Vao Qui II Nam 2000 (Increase to Minimum Wages Will Be Delayed until Second Quarter 2000)’, Nguoi Lao Dong ‘Workers’ Newspaper, 15 December, p. 2. Nguoi Lao Dong ‘Workers’ Newspaper (2000) ‘Chi Con 2000 Doanh Nghiep Nha Nuoc (Only 2000 State-Owned Enterprises Remain)’, Nguoi Lao Dong ‘Worker’ Newspaper, 14 February, p. 3. Nguyen Ba Ngoc and Tran Van Hoan (eds) (2002) Toan Cau Hoa: Co Hoi va Thu Thach Doi Voi Lao Dong Viet Nam (Globalisation: Opportunities and Challenges for Vietnamese Labour), Hanoi: Labour and Social Publishing House. Nguyen Huu Dat (2000) ‘Development of the Private Sector (1990–2000)’, Vietnam Socio-Economic Development 22: 13–25. Nguyen thi Lan Huong (ed.) (2002) Thi Truong Lao Dong Viet Nam: Dinh Huong va Phat Trien (Vietnam’s Labour Market: Orientation and Development), Hanoi: Labour and Social Publishing House. Nguyen thi Thanh Ha (1997) Vai Tro Cua Khu Vuc DNNN Trong Nen Kinh Te Nhieu Thanh Phan (The Role of SOEs in a Multi-Sector Economy), Hanoi: Social Science Publishing House. Nguyen Xuan Nga (2004) ‘Viec Lam, Doi Song Nguoi Lao Dong Nam 2003: Thap Nghiep Giam, Nhung Doi Du Con Lon (Job and Life of Workers in 2003: Decreased Unemployment, and Still High Rate of Surplus)’, Lao dong ‘Labour’ Newspaper, 5 January, p. 5. Pham Duc Thanh (2002) ‘Sap Xep, Doi Moi Va Phat Trien Doanh Nghiep Nha Nuoc Voi Van De Lao Dong Doi Du (Restructuring, Reforming and Developing SOEs and the Female Labour Surplus)’, Economics and Development Review 56: 30–32. Pham Ngoc Kiem (2002) ‘Ve Vai Tro Cua Kinh Te Tu Nhan Doi Voi Qua Trinh Phat Trien Kinh Te Cua Nuoc Ta Hien Nay (the Roles of Private Economy in Our Economic Development Process)’, Economics and Development Review 57: 3–6. Saigon Times Magazine (2004) ‘Kinh Te Viet nam Qua Cac Con So (Vietnam’s Economy through Figures)’, The Saigon Time Magazine, Special issue 1 January: 9. The Socialist Republic of Vietnam (2002) Labour Code of the Socialist Republic of Vietnam (Amended and Supplemented in 2002), Hanoi: Labour and Social Publishing House. Thu Tra (2004) No Luc Tao Hình Anh Tích Cuc Doi Voi Các Nhà Dau Tu Nuoc Ngoài (Efforts to Build up a Positive Image with Foreign Investors), Hanoi: Vietnam Investment Review: http:// www.vir.com.vn/Client/dautu/dautu.asp?CatID=6&DocID=2872, 19 April; 10: 55am. Tran thi Thu (2002) ‘Tao Viec Lam Cho Lao Dong Nu Ha Noi Trong Thoi Ky Cong Nghiep Hoa, Hien Dai Hoa (Job Creation for Hanoi’s Female Workers During Industrialisation and Modernisation Process)’, Economics and Development Review 56: 16–19.

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Tran Van Tho (2001) ‘Vietnamese Gradualism in Reforms of the State-Owned Enterprises’, Vietnam’s Socio-Economic Development: a Social Science Review 26: 3–23. Tuan Dung (2004a) Cai Cách Tien Luong Và Tro Cap: Tháng 8/2004 Ban Hành Các Van Ban Thuc Hien (Wages and Welfare Reforms: Implementing Documents Enforced in August 2004), Vietnam Economic Times: http://www.vneconomy.com.vn/tbktvn/index. php? param=article&back_issue=49 2004–03–26&id=26, 14 April; 2:11pm. Tuan Dung (2004b) Chat Luong Day Nghe Moi Dáp Ung 30% Nhu Cau (The Training Quality Has Only Fulfilled 30% of Demand), Vietnam Economy Electronic journal: http://www. vneconomy.com.vn/vie/article_to_print.php?id=040308154648, 18 March; 8: 45am. UNDP (2004) Basic Facts About Vietnam, Hanoi: UNDP: http://www.undp.org.vn/undp/ fact/base.htm, 18 March; 10: 35am. Vietnam Economic Review (2001a) ‘Overhauling State Enterprises from 2000 to 2002 and up to 2005’, Vietnam Economic Review 1: 43–44. Vietnam Economic Review (2001b) ‘Socio-Economic Development Lines and Strategy’, Vietnam Economic Review 81: 3–10. Vietnam Economic Times (2003) ‘Vietnam Foreign Investment Sources’, Vietnam Economic Times 7: 40–43. Vietnam Net (2003) Chi Phi Lao Dong Khong Con La Loi the Cua Viet Nam (Labour Costs are no longer an Advantage for Vietnam), Vietnam Net: http://www.vnn.vn/442/2003/3/6232/, 24 March; 2: 43pm World Bank (2003) Vietnam Annual Report 2002, Hanoi: World Bank. Xuan Trung (2004) ‘Kinh Te Vietnam 2003: Hai Tin Hieu Con Dong Va Canh Bao (Vietnam’s Economy in 2003: Encouraging Signs and Warning Bells)’, Youth (tuoi tre) Newspaper, 1 January, p. 3. Zhu Y (2002) ‘Economic Reform and Human Resource Management in Vietnam’, Asia Pacific Business Review 8: 115–134.

11 Unemployment in Asia Implications of globalisation, regional integration, and social and economic transformation Ying Zhu and John Benson Unemployment has become an increasingly difficult challenge for the state, institutions, and citizens in East Asia. The case studies presented in this volume have provided a detailed description and evaluation of this issue by analysing the driving forces, policy responses and future trends. This analysis was located within the debates on globalisation, regional economic integration, domestic economic restructuring, and labour market changes. This chapter synthesises the findings of the case studies as well as addressing the three key questions raised in Chapter 1 regarding the extent of unemployment, the responses by governments and the future prospects for unemployment. The chapter is structured in the following way. First, the level of unemployment among the selected economies is identified in the context of the social and economic transformations that have taken place. Second, the likely prospects for unemployment and the factors which influenced the unique situation in each case study economy are considered. These factors include external events, such as globalisation and regional integration, as well as internal factors such as economic restructuring, the changes in nature of the labour force, the demand and supply of labour, and the policy responses. Third, the trends and factors affecting unemployment in East Asia are compared to OECD countries, and the fundamental questions raised in Chapter 2 are considered.

The level of unemployment in Asia A common phenomenon regarding employment/unemployment among the East Asian economies is that it is closely linked with economic development. In the 1980s and most of the 1990s, high economic growth was associated with low unemployment. After the Asian Crisis, lower economic growth and higher unemployment occurred. However, there were some exceptions to this rule, such as Japan where an economic recession occurred earlier than other Asian economies. Other cases, such as China and Taiwan, were less influenced by the Asian Crisis and their unemployment problem was more related to economic restructuring and, in the case of Taiwan, a slowdown in the IT industry. Among the developed economies, namely Japan, South Korea and Taiwan, similarities and differences existed and there was a clear shift towards a post-industrial

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society. Japan, for example, had low levels of unemployment at between 1 and 2 per cent in the 1960s and 1970s and between 2 and 3 per cent in the 1980s. After the Japanese economy went into recession in the early 1990s, the unemployment rate started to increase, especially after the Asian Crisis, and reached a historical peak of 5.4 per cent in 2002. Among the total unemployed population, youth unemployment was over-represented and there was an increasing number of long-term unemployed. South Korea also enjoyed a period of high economic growth and low unemployment between the 1960s and the late 1990s. For example, unemployment was between 3 and 4 per cent from the 1960s to the 1980s and 2.5 per cent between 1990 and 1997. However, after the Asian Crisis, unemployment jumped to 8.6 per cent in 1999. Following the implementation of the government’s contingent economic adjustment policy, unemployment fell to under 5 per cent after 2000. This unemployment level is, however, understated as the majority of the unemployed accepted non-regular work that had less job security, lower wages, and less welfare entitlements and protection compared to that of regular employees. Youth unemployment, as with Japan, is a serious problem. Nearly 50 per cent of the total unemployed in South Korea are unemployed youth and the rate for this group was two to three times higher than the adult unemployment rate. Taiwan also had low unemployment from the 1970s to the 1990s. For example, the average unemployment rate was 1.5 per cent in the 1970s and 2 per cent in the 1980s and the 1990s. The Asian Crisis appeared to have little effect on the unemployment rate although it started to increase in 2000 when the global IT industry experienced a slowdown and the US market declined for IT products from Taiwan. The unemployment rate reached a peak of 5.2 per cent in 2002 when the Taiwanese economy experienced a decline in manufacturing employment, brought on by the industrial relocation to mainland China and the introduction of new technology. Youth unemployment was also high and was similar to that of Japan and South Korea. Among the developing economies, there were also several similarities in the relationship between economic development and employment/unemployment. First, for most of the 1980s and 1990s, these developing Asian economies enjoyed high economic growth and low unemployment. The average unemployment rate during this time was under 3 per cent. Second, after the Asian Crisis, most of these economies went into recession and unemployment jumped dramatically. For example, by 1999, the unemployment rate had reached 6.4 per cent in Indonesia, 3.0 per cent in Thailand, 3.4 per cent in Malaysia, and 7.4 per cent in Vietnam. The Asian Crisis had less impact on the Chinese economy and the unemployment rate remained at 3.1 per cent level from 1997 to 2000. There has, however, been an increase in unemployment in China in more recent years, with the unemployment rate rising to 4 per cent in 2002, primarily due to further restructuring of SOEs. For a number of reasons the official unemployment figures do not reflect the real extent of the unemployment problem in these economies. First, a large informal sector absorbed many workers into contingent casual jobs without any

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job security and welfare entitlements. These workers are not able to be registered as formally unemployed. This was typical of South Korea and Malaysia. Second, frequent labour movement between urban and rural areas reduced the registered number of unemployed in economies such as Thailand, Indonesia, China and Vietnam. Third, different statistical practices are adopted by the various governments that, in some cases, are used to manipulate the unemployment figures. For example, in China, retrenched workers are often labelled as ‘laid-off’ workers rather than unemployed. These workers stay at the re-employment centre within the work unit for three years. If they have not gained a job in this period they are then considered as unemployed. Fourth, in most East Asian economies, the rural workforce was not included as part of the potential labour force. As many rural workers have limited employment, this has the effect of significantly understating the real unemployment level. In addition, underemployment was high in most of the economies considered and this further contributed to the level of real unemployment and the viability of certain solutions to the problem. Finally, there is a general lack of well-established social security systems among the majority of East Asian economies. As a consequence there was little point for many of the retrenched workers registering as unemployed in order to gain benefits. In these cases they are forced to rely on their own resources, and on their friends and relatives for survival. This again contributes to the understatement of the real unemployment situation. Globalisation and regional integration The influence of globalisation on a national economy and unemployment is marked by the impact of capital mobility and industry relocation, the intervention of global bodies and their policies, and the fluctuations of the global market and international economy. The ideological shift, driven by the neo-liberal economic paradigm as well as new technology, enabled capital to move easily across countries and regions. One of the factors that led to the Asian Crisis was the financial deregulation that occurred among some of the developing East Asian economies. The limited control over capital inflow and outflow, coupled with regional competition for foreign investment brought on by the provision of cheap labour and market opportunities, led to many East Asian economies losing investment to larger and more promising economies such as China. Moreover, developed economies such as Japan, South Korea and Taiwan lost their competitiveness in certain industrial sectors to the developing economies, in particular the economies of China and Vietnam. Even within the developing economies, capital moved from Thailand, Malaysia and Indonesia to China. In the post-Asian Crisis period, the International Monetary Fund (IMF) played a crucial role in some of the East Asian economies that were hit hardest by the Crisis. Severe conditions were imposed on the relevant national governments which led to a re-prioritising of the policy agenda to include the reform of labour markets and reduced spending on social security. This led to a painful recovery process in these economies and meant that the causes and consequences of

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unemployment were not dealt with adequately. In addition, the fluctuations of the global market and the international economy had a significant impact on the national economies and unemployment. At the beginning of this century an economic slowdown in the major international markets, such as North America and Europe, as well as the difficulties being experienced in particular industries such as IT, had profound consequences for East Asia. This added further difficulties for economies, such as Japan, South Korea, Malaysia and Indonesia, in their endeavours to recover. Other economies that were less influenced by the Asian Crisis, such as Taiwan, were also affected. Unemployment rates, as a consequence, remained high in many of the East Asian economies. Economic restructuring, labour and policy responses Internal, or country specific factors, impinged on unemployment in two ways. First, labour force and labour market related issues such as demography, labour force participation, economic restructuring, that affected labour demand and supply, and the reform of labour markets served to exacerbate the unemployment problem created by globalisation and regional integration. Second, the policy responses of governments concerning such issues as unemployment benefits, training, and job creation proved to have minimal effect on the overall reduction in unemployment. Within these eight economies some common elements in both these aspects can be identified. The ageing population was a major problem affecting several of the case study economies. This issue placed pressure on both governments and enterprises to adjust their employment strategy as well as their pension policy. For example, the Japanese government extended the retirement age from 60 to 65 years. Another aspect affecting several economies was the increasing demand for skilled labour and the oversupply of unskilled and semi-skilled labour. This meant that human resource development (HRD) became crucial for improving economic competitiveness and most of the governments had placed training and education at the top of their national development agenda. The third area of commonality was the under-developed nature of the national social security systems. Among the majority of East Asian economies, the social security system was in an infant stage marked by inadequate funding, tight restrictions on eligibility, as well as a short-term orientation. Before the Asian Crisis, most economies had little in the way of a social security network for retrenched workers. When the Crisis occurred and unemployment rose in late 1997 and early 1998, most governments responded by establishing a temporary scheme. Although the Asian economies had experienced nearly two decades of economic growth, social protection and welfare lagged well behind. Notwithstanding the commonalities among the East Asian economies, unique characteristics existed in each case. Among the developed economies, Japan had several common characteristics with other developed OECD economies. The general trend was a decline in male workforce participation due to less demand for full-time workers in industries such as manufacturing, and an increase in

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female workforce participation brought on by increased casualisation and the growth of the service sector. In addition, the youth labour participation rate was low due to many young people going on to further higher-level education. The youth unemployment rate was also higher than the adult population. There was an obvious structural problem in Japan where extremely efficient industries coexisted alongside inefficient industries. Underemployment and hidden unemployment were also substantial given that many workers could not fully utilise their production capacity due to a decade of recession as well as due to many retrenched workers giving up job searching and unemployment registration. At the firm level, there was an increasing emphasis on flexibility by using low paid part-time and casual workers. The policy on productivity improvement increasingly concentrated on capital investment and technological progress on the one hand, and a cost minimisation strategy, based on a reduction of total wages and benefits, on the other hand. At the government level, shortterm oriented job creation schemes were implemented through various financial incentives. The social security system was reformed but is still in an early stage compared with the developed OECD economies. Most workers still relied on their savings and family members’ support when retrenched. There was increasing pressure developing, from both workers and trade unions, to improve social security benefits. Japan represents the most developed economy in East Asia and is facing severe challenges of global competition, regional integration and industrial relocation. The decline of the manufacturing sector and the influence of a long period of low growth and recession created considerable obstacles to reducing unemployment. It is, therefore, unlikely that unemployment will substantially fall in the near future given that a short-term employment policy objective, with a labour cost reduction strategy, underpins the decision-making process. South Korea is another member of the OECD and is in a transition from an industrial society to a post-industrial state. The key characteristics of the labour force and market can be summarised as follows. First, a large number of workers were engaged in the informal sector or were self employed. The numbers in these sectors were the highest among the OECD countries. Second, the youth labour participation rate was low due to higher education retention rates. The youth unemployment rate was higher than the adult population. Third, the shortage of skilled workers and the oversupply of less-skilled workers led to an imbalance between labour demand and supply. In addition, skill-mismatch between education/training and labour demand was a major problem. Finally, firm-level strategy, in recent years, has focused on cost minimisation through wage and benefits reduction. Firms preferred to employ experienced workers, which made it more difficult for retrenched unskilled workers and young people to find work in the formal sector. In South Korea, the Employment Insurance System was established in 1995 and expanded in 1997 to provide unemployment benefits. After the Asian Crisis, the government, in 2000, also passed legislation to provide emergency income support for retrenched workers. However, both schemes were less well-established

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compared to other developed OECD economies and they were also of a short-term nature and provided only minimum support for unemployed workers. South Korea was seen as the classic example of a ‘beneficiary’ of globalisation before the Asian Crisis. After the Crisis, this view changed to one of ‘victim’ and South Korea was subjected to severe economic restructuring and industrial relocation. The decline of the manufacturing and construction sectors hit the labour market severely. The difference between the pre- and post-Asian Crisis labour market was one of poorer job quality, less full-time work and more casual positions, more employees in informal sector, and increasing income inequality. Taiwan is also in the process of transformation from an industrialised state to a post-industrialised economy although the manufacturing sector remains a significant employer. Male participation in the labour market was declining and female participation was increasing. Many middle-aged male full-time workers had lost their jobs, while part-time and casual female workers were increasingly employed. Similar to Japan and South Korea, the youth labour participation rate was low and the youth unemployment rate was higher than the adult population. A shortage of skilled workers and an oversupply of unskilled and semi-skilled workers were increasingly affecting the balance between labour demand and supply. This also reflected the inability of the training and education systems to meet the skill needs of the labour market. The number of unemployed increased after 2000 when the global economic recession and the collapse of IT industry hit Taiwan. The duration of unemployment increased during this period. The government’s policy on social security was characterised as short-term and under-developed. Job-creation schemes were also not sufficient or effective. Social problems, such as increasing poverty and income inequality, were becoming severe. In Taiwan economic restructuring and the relocation of industries offshore, predominately to mainland China, clearly influenced economic performance and job creation. On the one hand, the changes to production systems and new technologies required a highly skilled workforce. Up-grading labour skills was, therefore, the crucial HRD policy for both the government and firms. On the other hand, political instability marked by the tension across the Taiwan Strait led to a reduced inflow of FDI and a higher outflow of Taiwanese capital. If this trend continues, Taiwan may become an ‘empty economic shell’ with restricted avenues for future economic growth. In contrast to the developed economies, the developing economies had much larger rural workforces and considerably more workers in the informal sector. In China, for example, only the urban workforce was counted for employment/ unemployment statistics. The major part of the workforce, around 70 per cent, were rural labourers who were employed irregularly and enjoyed little job protection and security. Many of these labourers were categorised as migrant workers (mingong). The division of the urban and rural labour force not only created different classes of workers, with different income levels and benefits, but also made it difficult to assess the real level and problems of unemployment and underemployment. Based on the official statistics, unemployment among the urban workforce

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increased in the past several years due to further reform of the SOEs and the subsequent workforce reductions. On the other hand, the situation of reemployment was deteriorating with fewer job opportunities for retrenched workers. The social security system was not widespread and only certain urban unemployed workers were able to benefit from it. There was an increasing trend of transferring surplus labour from the internal to the external labour market. Although the government had developed an active labour market programme, including re-training, direct job creation and job search assistance, problems such as a mismatch between the training and the skills demanded in the labour market, the inadequate financial support for poor households, the increasing income inequality, and the disparity in economic opportunity were causes for social unrest. In Indonesia the situation was quite different. Unemployment started to increase after 1994 when the economic liberalisation policy was implemented. However, this so-called ‘liberal’ economic policy was mixed with the traditional economic monopoly that existed between the political leaders’ family and business entrepreneurs, a less than transparent decision-making process, a weak micro-economic foundation as well as an inconsistent economic reform policy. After the Asian Crisis hit the Indonesian economy, the inflation rate reached 59 per cent in 1998 with a dramatic decline in FDI and economic growth. Many firms went bankrupt and the government failed to develop adequate plans to assist them. Workers laid-off from firms had to survive on their own due to a lack of sufficient government unemployment benefits to support them. Many unemployed workers moved to rural areas and the informal sector. Due to a lack of job opportunities in the formal sector, both male and female labour participation rates fell, and youth unemployment rose substantially. To date, the government policies on re-training, job creation and social security remain limited. Malaysia’s situation was marked by high economic growth and a shortage of labour for most of the 1990s. As a consequence, a large number of workers were imported from countries within the region. However, despite being in a full employment situation, there was an increasing concern that unemployment was on the rise, up to 3.6 per cent in 2001. Key factors influencing the rising unemployment were the decline in the US demand due to events of 11 September, 2001 the domestic economic recession, and the continuing recession in Japan. Relocation of certain industries to China also contributed to the problem of unemployment. Many laid-off workers moved from the formal sector to the informal sector due to a lack of new jobs in that sector as well as limited social security support for unemployed workers. The problem of a mismatch between the knowledge and skills of graduates and those demanded by the labour market led to a sharp increase in graduate unemployment. Thailand’s economy is undergoing a transition from an agricultural-orientation to industrialisation. The majority of the labour force are unskilled. Underemployment existed among youth, female and the less-educated workforce. The shortage of skilled workers was a serious problem and retarded economic and social development. The Asian Crisis which commenced in Thailand, severely

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affected the Thai economy and unemployment rose, although it was partially hidden by a two-tier labour market consisting of the urban and rural sectors. When the recession occurred, many laid-off workers could not obtain financial support from the government and so they moved back into agriculture. Unemployment benefits started in 2004 when the first unemployment insurance scheme was established. Other policies on re-training, job creation and job-search assistance were inadequate. The lack of labour market information also jeopardised the opportunities for less-educated people to obtain employment. Finally, Vietnam is in transition from a centrally planned system to a marketoriented economy as well as from an agrarian to an industrialised economy. The restructuring and the economic reform agenda brought many new initiatives, including a more flexible-oriented employment policy that introduced a fixedterm labour contract system and dismissal policy. A social insurance system was gradually established but mainly covered urban workers. Similar to the situation in China, a large number of rural workers moved to urban areas and engaged in industrial production but with less protection and benefits. The major source of urban unemployment was the laid-off workers from SOEs, and in particular female workers. In response, the government developed some initiatives on retraining redundant workers, relocated unemployed workers to industrial zones, developed an urbanisation plan to absorb surplus rural workers, promoted technological improvement and the service sector, as well as encouraging the export of Vietnamese workers overseas. Notwithstanding, there was an increasing number of urban workers engaged in casual work but with less security compared to that of the centrally planned system. In addition, underemployment was a widespread problem among the Vietnamese workforce, including both urban and rural workers. Like other East Asian developing economies, the shortage of skilled labour was a serious problem in Vietnam. Reforming the current HRD system and policies was seen as crucial for the future competitiveness of the Vietnamese economy.

Comparison between East Asia and OECD countries In Chapter 2, Webber highlighted one of the key underpinning themes of this book, namely whether unemployment in these East Asian economies share common attributes and whether those attributes are similar to the characteristics of unemployment elsewhere, namely the non-Asian OECD countries. In the previous sections, we compared and contrasted the situation among the East Asian economies based on the findings of the case studies presented in this book. We now consider whether the labour market trends and policy responses in East Asia are different from those of OECD countries. What are the factors driving the dynamics of unemployment and what are the differences between these groups? And what are the implications of opening up economies, economic restructuring, increased labour market flexibility, and direct labour market policies? Clearly, there are difficulties in making a general comparison between these East Asian economies and OECD countries given the diversity within both groups. This diversity among East Asian economies has been outlined earlier in this

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chapter while Webber highlighted these differences in Chapter 2. We therefore restrict our comparisons of the major issues to that between our case studies economies and the more developed OECD countries. As expected, the developed economies in East Asia, namely Japan, South Korea and Taiwan, are quite close to the situation of the developed OECD countries, while the developing East Asian economies are quite different from the developed OECD countries. For example, some general indicators, such as the low level of population growth, an ageing population, the decline in male labour participation, the increasing youth unemployment and long-term unemployment, the shortage of skilled labour, and the casualisation of the workforce are the common elements in the labour markets of the developed Asian economies and the OECD countries. In contrast, the developing East Asian economies have a relatively higher population growth, and an increasing labour participation rate. Some common phenomena do exist such as an ageing population, a higher youth unemployment rate, a shortage of skills, and the increasing casualisation of work. Another major difference in the developing economies of East Asia, and also South Korea, is a larger informal sector with a higher proportion of non-regular workers than in the developed OECD countries. Labour mobility between the formal and informal sectors and between the urban and the rural areas (i.e. internal migration) led to unemployment remaining at a relatively lower level in East Asia compared with the developed OECD countries. Immigration and foreign workers, with both legal and illegal status, have become an important source of labour in the developed OECD labour market while these groups make up a smaller proportion of the labour force in East Asia. Internal migration is the major source of cheap labour for industrialisation in most of the developing East Asian economies. There are some common causes of unemployment between the East Asian economies and the developed OECD countries. Certainly, the process of globalisation has intensified the economic competition between economies and regions. The liberalisation of trade, investment and finance has enabled commodities and capital to move and relocate more easily. The lack of investment in certain industrial sectors (i.e. mainly traditional labour intensive sectors) and the relocation of firms offshore continue to influence the developed economies, whether in East Asia or the OECD countries. External influences over many developing East Asian economies have been made more severe by the negative consequence of the Asian Crisis. On the other hand, internal adjustments were implemented among the majority of East Asian economies and the developed OECD countries as part of a wider response towards the uncertainties caused by external forces. For example, economic restructuring and reform were carried out by different governments in East Asia to combat the negative consequence of the Asian Crisis. Generally speaking, the role of the state and state institutions in East Asia remains strong compared to the developed OECD countries. A parallel phenomenon of the trend towards institutionalisation in many East Asian economies is contrasted by the trend towards de-institutionalisation among the leading OECD countries. This reflects the reality of the global society transformation

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from industrialisation/modernism to post-industrialisation/post-modernism. For example, more comprehensive labour market regulation and social security systems have been established in many East Asian economies in recent years. A tendency towards ‘the rule of law’ dominated the debate of this reform agenda. On the other hand, the developed OECD countries embraced the neo-liberal approach by implementing a flexible labour market policy and a reduced government involvement in the protection and welfare of the disadvantaged groups within society. The question regarding the implications of the opening up of economies, economic restructuring, labour market flexibility and direct labour market policies pushes the debate even further. We observed the changes between ‘winners’ and ‘losers’ within the game of globalisation in the East Asian economies. In the period before the Asian Crisis, the majority of East Asian economies considered in this volume were seen as the ‘winners’ of globalisation marked by high economic growth, low unemployment and a large foreign capital inflow into their economies. These positive economic indicators gave national governments more confidence to further open up their economies with more liberalised trade policies and deregulated financial markets. However, after the Asian Crisis occurred, in many cases, the ‘winners’ suddenly became ‘losers’ with severe consequences. The change in the economic landscape led to heated national debates over economic openness and deregulation. Without an adequate economic foundation, market infrastructure, legislation, and transparent decision-making processes and political systems, economic openness and liberalisation can be a two-edged sword. The Asian Crisis, and the consequent outcomes, demonstrated the vulnerability and the weak institutional foundations of the East Asian economies. Direct labour market policies such as re-training, job creation and unemployment benefits implemented after the Asian Crisis assisted in the economic recovery whilst lessening the pain among some of those unfortunate to become unemployed. Nevertheless, these policies had some obvious problems, such as their short-term orientation, limited coverage and lack of adequate implementation mechanisms, which impeded their effectiveness.

Conclusion From the material presented in this volume three broad conclusions concerning unemployment can be drawn. First, the level of unemployment in East Asia depends on the social and economic conditions within each economy. In economies like Japan, there has been a continued rise in the rate of unemployment during a decade of slow growth (the 1990s); in places like Taiwan, unemployment rates have responded to slowdowns in specific industries; in many of the other economies, the Asian Crisis prompted a sharp rise in the unemployment rate; and in China, there was little apparent rise in the rate of unemployment. Conditions within this region are not at all common, even though the Crisis, and the response of such institutions as the IMF, had similar affects on the subgroup of developing economies.

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Second, the likely prospects for unemployment partly depend on external factors, such as globalisation and regional integration; however, divergence of experience within each economy is prompted by the importance of such internal factors as economic restructuring, changes in the labour force, the demand and supply of labour, and the policy responses. Third, the diversity in experiences of unemployment is not unlike the diversity within the OECD. However, there remain broad differences in the conditions between East Asia and the OECD that render their experiences distinct. These include the nature and extent of the informal sector, the degree of influence of global financial institutions, such as the IMF, the strength of the state, and the degree of welfare protection for the unemployed. In all these respects, East Asian economies are broadly distinct from OECD countries, even though economies like Japan, Korea and Taiwan fall somewhere in between: and even though globalisation and regionalisation are both creating some tendencies towards common experiences of unemployment, the degree of individuality in each country’s history, response and prospects remains high. Unemployment in East Asia is a key economic challenge and affects the level of economic development. This volume discussed the causes, impacts and implications of unemployment in the context of globalisation, regional integration, and social and economic transformation. The changes and transitions in East Asia are complex, dynamic and unpredictable, and it is therefore necessary to take a wider and more holistic view of the unemployment issue. This was the purpose of the volume and we hope it will contribute to a better understanding of Asian society, and the economic and social challenges that economies in the East Asian region face.

Index

active labour market policies 29, 110 ageing population 17–19 73, 197 Arulampalam, W. 31 Aryah, G. 164 Asian Crisis 5–9, 12, 194–7 202 in China 97 in Indonesia 115–16, 119–31 in Japan 41, 53 in Malaysia 134, 139, 147–8, 153–6 in South Korea 58–62, 67–9, 75, 198 in Thailand 161, 164, 173 in Vietnam 176, 179 Asian Development Bank 189 Asian Free Trade Area (AFTA) 116, 119, 121, 152, 189 Asia-Pacific Economic Co-operation (APEC) 116, 121, 189 Association of Southeast Asian Nations (ASEAN) 189; see also Asian Free Trade Area Australia 19, 21, 25–6, 30–1 Austria 19–21 25 Azizah, Kasim 148 Bank Negara Malaysia 149 Belgium 17, 19–21, 25, 30 Bian, Y. 106 Cai Fang 110 Canada 21, 26, 30 chaebol 60 Chen Huai 110 Chen Shui-bian 88, 90 China 2–9, 13–15, 19, 79, 83, 87–8, 97–113, 134, 153, 155, 194–6, 199 labour market 102–4 social issues 104–5 trends and prospects 108

Czech Republic 17, 19, 22, 26, 30 Darby, J. 46 Deng Xiaoping 97, 110–11 Denmark 17, 19, 21, 25, 29 dependency ratios 17 deregulation, financial 196 developed and developing countries 2–3, 5, 9, 199, 202 Development Bank of Japan 43 discouraged workers 46, 62–1, 75 dispatched workers 46, 53 Doi moi reforms 176–90 educational standards 64, 85, 123–4, 141–7, 164–5, 172–3 Edwards, C. 148 employment growth in 19, 22 structure of 2–3 employment protection 28 Esping-Anderson, Gosta 75 female employment and unemployment see women in the labour force Finland 17, 19–21, 25, 29 flexible labour markets 28, 66 foreign direct investment (FDI) 120, 150–4, 177–9 France 19–21 Germany 19, 21, 25, 82 Gini coefficient 66 globalisation 4, 11–14, 27, 32–3, 41, 52, 58–61, 74, 82, 93, 115–18, 129, 134–5, 152, 160, 176–7, 189, 196–9, 202–4 Greece 17, 19, 21, 25–6, 30 Gregory, M. 31 growth (in real GDP) 3–5, 13, 19–20, 60

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Hart, R. 45–6 health standards 31 Hill, H. 128 homogenisation between economies 11–12, 33 Huang Ju 109 Hungary 17, 19, 22, 25–6 Hur, Jai-Joon 69 Hussain, A. 105 Iceland 16–17, 19–21 immigration 73, 202 income support 28, 31, 69–70, 151 Indonesia 2–3, 5, 7, 9, 13, 115–31, 196–7, 200 labour markets 122–7 social issues and social security 125–8 trends and prospects 128–9 industrial policy 59–60 inequality of income 66–7 inflation 200 informal sector of the economy 6–9, 14, 44, 50, 63–6, 122, 129–30, 163, 166–7, 173, 195–8 integrated labour markets 11–14 International Monetary Fund (IMF) 6, 58, 61, 74, 116, 189, 196, 203–4 Ireland 17, 19, 21, 30 Ishak, Shari 135 Italy 17, 19–20, 23, 25, 30–1 Japan 2–3, 6, 9, 13, 17, 19, 39–54, 172, 194–9, 202–4 labour markets 43–6 social security and unemployment 46–7 trends and prospects 47–50 Java 129 job quality 65–6 Jomo, K.S. 115 Jukes, R. 31 Kawasaki, S. 45–6 Kim Dae-Jung 61, 66, 70 Kim Young-Sam 61 Korea see South Korea labour demand in China 104 in Indonesia 124–5 in Japan 43–5 in Malaysia 147 in Taiwan 86–7 in Thailand 166 in Vietnam 182–3

labour force 15, 17, 184–6 labour market policies 28–9, 156, 202–3 labour markets flexible 28, 66 in Indonesia 126–7 in Japan 45–6 in Malaysia 149–50 in Taiwan 87–9 in Thailand 167 integrated 11–14 labour supply definition of 84 in China 102–4 in Indonesia 122–4 in Japan 43 in Malaysia 140–7 in Taiwan 84–6 in Thailand 162–3 in Vietnam 182 late industrialisation 13–14 Leontaridi, R.M. 31 liberalisation, economic 115–16, 119–21, 159–61 Liew Chei Siang 149 Lin Yueqin 109 Luxembourg 16–17, 19–21 Mahmood, M. 164 Malaysia 2, 5, 7–9, 13–14, 17, 19, 74, 133–56, 195–7, 200 development strategies 136–7 foreign labour 148–9 income support 151 internal migration 137–9 labour markets 140–50 law and order regulation 139–40 social issues 147–8 social security 150–1 trends and prospects 151–1 Mansor, Norma 140 Mao Yushi 110 Mao Zedong 97, 100 minimum wage policies 127, 187 Mohd, Fauzi 145 mortality rates 31 multinational corporations (MNCs) 44, 120, 152–3 neo-liberal policies 196, 203 Netherlands, the 17, 19, 21, 25–6 New Zealand 19, 21, 26 Nikkeiren 44, 48 Norway 19, 21, 25, 30

Index OECD countries 3–4, 12–32, 58, 62–3, 197–204 shared characteristics of 32 OECD Employment Outlook 28, 32 oil crises 41 Ono, H. 45 openness of economies 27, 74, 154 Organisation for Economic Cooperation and Development see OECD paid and unpaid work 23–5 Pangestu, M. 116, 118–19 Park Chung-Hee 60 participation rates 17, 202 part-time work 26 Penang 151–2 Poland 19–20, 22 population growth 16–17, 202 Porter, M. 52 Portugal 19, 21, 25 poverty 29–31, 69–70, 91, 104, 128–30, 133, 147, 171 probit analysis 48–9 productivity 19, 21 public works projects 69–70 Ragayah, Haji Mat Zin 149–51 Rasiah, R. 120 Rebick, M. 45 regional disparities 26 regionalisation 12–14 Rengo 47 reservation wages 71 Roh Tae-Woo 61 Samsung Electronics 73 Saunders, P. 30 September 11th 2001 attacks 139, 161, 200 severe acute respiratory syndrome (SARS) 108–9 Shamsulbahriah, Ku Ahmad 135 Shanghai 107–10 Shin, Doug-Myeon 74–5 Singapore 13, 172 skill shortages 43–4, 141, 160, 173, 188, 200–1 Slovak Republic 17, 20, 22, 25–6 small and medium-scale industries and enterprises 145, 150 social security 196–8 in Indonesia 127–8 in Japan 46–7 in Malaysia 150–1 in South Korea 67–8, 74–5

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in Taiwan 89–90 in Thailand 167–72 in Vietnam 187 Soesastro, H. 116 Solinger, D.J. 102 South Korea 2–3, 5–6, 9, 13, 17, 19, 58–75, 172, 194–9, 202, 204 employment and unemployment 62–5, 74 income support 69–70 institutions and social problems 66–7 social security 67–8, 74–5 Spain 17, 19–20, 22, 25 Stern, H. 105 Stiglitz, J. 105 structural change 27 subsidies 45 subsistence farming 15 Suryahadi, A. 122 Sweden 17, 19, 21, 25, 31 Switzerland 17, 19–21, 25–6 Taiwan 2–9, 13, 79–94, 194–9, 202–4 labour markets 84–9 social problems and social security 89–91 trends and prospects 91–3 technological progress 27, 44 Thailand 2, 5, 8–9, 13, 19, 41, 159–73, 196, 200–1 labour markets 162–3, 166–7 social issues and social security 167–72 trends and prospects 171–2 Tham, Siew Yean 149 training programmes 28, 53–4, 141, 145, 171, 182, 187, 199 Tseng Chu-wei 90 Turkey 16–17, 19, 23 underemployment 166, 184–6 unemployment conclusions on 203–4 definition of 15, 163 effects and costs of 29–31 hidden 103 in China 112, 199–200 in Indonesia 118, 123–4, 200 in Japan 42–3, 46–50, 195 in Malaysia 135, 145, 153, 200 in South Korea 58–65, 71–4, 195 in Taiwan 80–7, 195, 199 in Thailand 161–5 in Vietnam 184–5 long-term 30, 47, 51, 65, 86 measurement of 5, 14, 26, 75, 195–6

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reasons for 87 overview of 1–5, 21–4, 194 of young people 51, 71, 123, 165, 195 unemployment benefits 67–70, 88, 103, 186, 201 unemployment rates 15–16, 25, 46 United Kingdom (UK) 17, 19, 21, 25–6, 28 United States of America (USA) 19, 21, 29–31, 97–8, 178 Vietnam 2–3, 5, 8–9, 13, 15, 17, 19, 155, 176–90, 195–6, 201

government employment policy 186–7 labour markets 182–6 trends and prospects 187–9 Wang Dongjin 103 women in the labour force 25, 51, 68, 71–2, 126, 183 World Bank 74, 99, 104, 135, 171, 189 World Trade Organisation (WTO) 7, 87, 99–100, 108–9, 112, 116, 119, 121, 152–3 xiagang workers 106–8