Labor supply and a slowing economy

With the economy expected to slow and a million new workers joining the labor force next year, the job prospect for the new, young workers do not appear rosy. The labor market is facing another tough year. It would have to create a million new jobs just to be where it is right now — the highest unemployment rate in the ASEAN-5 region and in a virtual tie with Indonesia. But in the case of the Philippines, the sad state of joblessness has a worrisome twist: it’s the army of unemployed college-trained workers that is swelling.

The recently released composite leading economic indicator (LEI) has just confirmed what economists knew all along: the economic recovery is losing steam. While the LEI continued to grow, the fourth-quarter LEI tracked the slowdown that started in the third quarter.

Many economists expect the slowdown to carry over next year. The reasons are obvious. The base effects attributed to two anemic prior years (2008 and 2009) will be gone. The 2001 economic performance will be compared to a strong 2010 economic record. The massive election spending for the national and local elections of 2010 will be gone, too. And the public spending spree to complete Arroyo’s SONA projects will be absent.

In addition, the double-digit growth of manufacturing, the major driver of the recent economic rebound, will slow to its pre-crisis levels. There are three reasons for the sharp rise in manufacturing output. First, the base effects. Coming from two years of contraction, it was not hard to register a strong rebound especially in an economy aided by massive election spending.

Second, after close to two years of slow production, the inventory thinned and needed to be replenished. Third, the twin typhoons Ondoy and Pepeng have resulted in massive destruction of properties including cars, office equipment, and personal appliances. This created a strong demand for consumer durables which then helped boost manufacturing

All these positive effects on consumer demand and hence manufacturing production will be gone in 2010.

Where will the new jobs come from?

The question faced by government and industry is where will the new million jobs come from? The first obvious answer is agriculture. After several quarters of contraction, the agricultural sector has to bounce back. Barring any severe La Niña phenomenon, the sector is expected to grow by 2.5 to 3.5%.

The agriculture sector has always been a major source of employment. But its ability to absorb those who are unemployed is extremely limited. The sector has the highest incidence of underemployment, at 43%.

Put differently, more than 4 out of 10 workers who are employed but would like to work longer hours are in the agricultural sector.

At best, additional activity in agriculture may only increase the number of hours worked for those already employed in the sector. The underemployed will simply be employed longer hours; some will turn out to be employed, others less underemployed. Of course, for college-trained unemployed, farm work is out of the question.

The industrial sector created 184,000 new jobs from October 2009 to October 2010 — 120,000 in manufacturing and 90,000 in construction. A repeat of double-digit growth in manufacturing is unlikely for reasons given above. Growth in manufacturing jobs is likely to slow.

Construction has been a major source of employment in October 2010 — from 1.88 million a year earlier to 1.97 million, or by 90,000. Will private construction continue to expand or will it plateau?

The number of jobs from public construction is likely to be flat or slightly negative next year. Two reasons: the public infrastructure program for 2011 is less than that in 2010, and the public-private partnership projects are not expected to take off until after the rainy months. Even then the PPP projects are large, capital-intensive operations. They do not require a large number of workers.

More than half a million workers — 558,000 to be exact — were created in the service sector from October 2009 to October 2010. The bulk of the new jobs came from wholesale, and retail trade, repairs of motor vehicles, motorcycles, and personal and household goods (234,000); real estate, renting, and business activities (141,000); hotels and restaurants (102,000); and private households with employed persons (55,000).

Let’s be realistic. In a slowing economy, it may be hard to create more than a quarter of a million new jobs in wholesale and retail trade, repairs of motor vehicles and motorcycles and personal and household goods.

The 141,000 new jobs in real estate, renting, and business activities may be attributed to the expansion of BPO activities which may be repeated in 2011, though at a slightly slower pace. Within thinning margins as a result of the peso appreciation, BPO firms have to undertake cost-cutting measures to remain afloat.

The creation of 121,000 new jobs in the hotel and restaurant business is largely attributable to the expansion of the fast-food business. Fast-food outlets have mushroomed everywhere — in areas where there are BPO establishments and in urban cities and big towns all over the archipelago. I expect the expansion to continue though at a slower pace.

The key to job creation in the hotel business is the effectiveness of the government to expand tourism activity. No doubt, the possibilities are enormous. But so are the challenges.

In the face of a slowing global economy, with so much uncertainty in the air, and with rising competition from other foreign destinations, what can government authorities do to attract more foreign tourists to the country?

For many Filipinos, but especially the poor, having a decent, stable job is all that matters. Having one could lead to a way out of poverty and perhaps a satisfying future. But not having one could lead to life of abject poverty, alienation, and uncertainty. –Core — By Benjamin E. Diokno, Businessworld