Unemployment as market failure

July 21, 2011 at 10:45

This article by columnist Benjamin E. Diokno is a repost.

Balanced growth in the 1970s, growth with equity in the ‘80s, and now inclusive growth — all these growth strategies are designed to make sure that in the process of development the poor are not left behind. The strategy is supposed to be comprehensive and should include creating employment opportunities for all, but especially the poor, and transforming rural communities where most poor people live.

A sustained, strong, and inclusive growth that the Aquino III administration is aspiring for should focus on job creation as a way of reducing poverty. The old strategies appear to have failed the Filipino people. Even during episodes of strong economic expansion, such as 2004-2008, poverty continued to increase.

In fact, during the immediate past decade, poverty incidence has been flat, at about one-third of the population. But since population was growing at a high rate of 2%, the ranks of the poor has expanded. Income inequality remains relatively high. The poorest 20% of the population account for only 5% of total income or consumption.

The rural countryside has suffered the most from the lopsided and erratic growth. The agriculture sector which accounts for about one-third of economic output has grown weakly. As a result, it failed to raise the incomes of the rural poor.

In addition, the rural poor suffered from the inadequate provision of government services which, sadly, had distinct urban bias.
The challenge for any president is how to design, and implement, a development strategy that addresses the twin problems of unemployment and rural backwardness. Public policy should directly address the labor-surplus characteristic of the economy. The mismatch between what skills the economy needs and what the education institutions produce should be addressed. The high unemployment rate, the highest in ASEAN-5, suggests that reliance on markets is a failure — the market-clearing mechanism is not working.

Our national leaders expressed elation when the unemployment rate dropped to 7.2% in April 2011, from 8.0% last year. But that’s nothing to crow about. Unemployment in the Philippines is the highest among our ASEAN-5 neighbors. Unemployment rate is 0.7% in Thailand, 2.6% in Vietnam, 3.0% in Malaysia, and 6.8% in Indonesia.

A big chunk of the employed labor force work without pay: 4.3 million out of 36.8 million, or 12%. This category of employed workers increased by 223,000 compared to the April 2008 level, the approximate start of the economic crisis in the Philippines and a non-election season. This suggests the poor quality of employment.

But a look at who’s unemployed and underemployed is equally depressing. First, who’s employed? He is a person who is 15 years and above and has worked even for one hour during the past week of the interview, or work without pay on the farm or business enterprise operated by a member of the same household related by blood, marriage or adoption.

Who’s underemployed? An underemployed person refers to all employed persons who expressed the desire to have additional hours of work in their present job, or to have a new job with longer working hours.

Based on the April 2011 data, some 2.9 million are unemployed and another 7.1 million are underemployed. The unemployed are mostly young (five of 10 were in age group 15 to 24 years old, while another three of 10 were in age group 25 to 34 years old), mostly male (64% male, 36% female), and mostly educated. Some 32.6% were high school graduates, 23.1% were college undergraduates, and 20.4% were college graduates.

About 60% of the total underemployed persons were working less than 40 hours during the reference week. The underemployed in agriculture accounted for 43.4% of the total underemployed, those in the services sector, 39.9%, and those in industry sector, 16.7%.

A humane and responsible government cannot sit idly by and leave to the market the problem of joblessness. It has a lot of tools in its arsenal and it has to use them.

While fixing the kinks in its public-private partnership (PPP) initiatives, the government has to devote a lot of attention to the needs of rural communities, and in the process, job creation. Farm-to-market roads, communal irrigation, rural water systems, small power projects, school buildings in remote areas — these are some of the projects needed to transform the rural areas and link them to the mainstream economy.

These projects can be partially addressed by expanding the engineering brigade of the Armed Forces of the Philippines. The AFP may hire high school graduates on a contractual basis (two to three years). It may provide these young recruits construction skills under rigorous military supervision, and in the process, turn young men into able, responsible, and disciplined builders of the future. This is better than hiring road sweepers as done by the previous regime. Because the casual road sweepers are hired for short period of time, sometime for less than a month, there is no incentive for them to develop skills and discipline that they need to build a career.

Majority of Filipinos die without seeing a doctor or a nurse. Yet hundreds of thousands of nurses and nursing graduates remain idle or working in unrelated jobs.

The national government, in partnership with local governments, can build an army of nurses, young graduates with no experience, deploy them in the countryside for a period of two years, and with intermittent assignment in regional and provincial hospitals.

At the end of the two-year cycle, these young nurses should have gained the necessary experience that will allow them to find gainful employment here and abroad.

I know this program with nurses is being done now on a small scale. But it should be done in a big way and in coordination with some 79 provinces, 138 cities, and 1,496 municipalities. After all, the national government provides these local government units (LGUs) some P300 billion in annual transfers. Moreover, the provision of basic health care is an LGU responsibility.

Philippine forests have disappeared rapidly and they need to be recovered. Its rivers are clogged and silted. The national government, again in coordination with local governments, can hire a green army, to be paid at lower than minimum wages, to reforest the denuded forests and clean the clogged rivers all over the country. We should put the staff of the Department of Environment and Natural Resources to work. DENR has presence down to the municipality level. Yet, by and large, DENR’s staff are underutilized.

An active government employment program that involves an expanded engineering brigade, an expanded rural health delivery service, and a green army focused on reforestation, river cleaning, and other environmental activity is affordable.

Part of the financing will come from congressional pork — which has expanded rather than contracted this year. Part of the financing will come from the PSCO’s Charity Fund, PAGCOR’s President’s Social Fund, and other shadowy funds that right now are outside the President’s Budget. Part of it will come from local governments’ budgets. Part of it will come from a higher deficit. It is easy to argue for a higher deficit — say from 2.0% of GDP to 3.0% of GDP — if it will result in cutting by one-third the unemployment rate for young high school and college graduates. This job creation program will increase income, consumption, output, and consequently tax revenues.

A direct, active government jobs program makes economic sense too. I support the cash transfer program, assuming it is properly implemented. But I think there is a stronger economic case for the government to help young educated workers, who have persevered and invested in their education, find a job, enhance their productivity, and make a positive contribution to the economy and society.

The incomes of these young workers which will be spent mostly in the countryside will have a large multiplier effect, which will then perk up economic activity in rural communities. As a result, the rural economy, and consequently, the whole economy, will expand, rural poverty will decline, health care of rural folks will improve, and the vulnerability of society to harsh climate and natural calamities will fall.

The young, educated, but unemployed, youth who right now feel alienated and disenchanted with the government will feel empowered and more confident of their future. That’s real change.

But, then again, at the moment, all these are hypothetical.
Source: Business World, July 21, 2011
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