Labour market diversity in emerging market economies
Emerging market economies, particularly in Asia and Latin America, are showing encouraging signs of employment recovery from the global economic crisis of 2008-2009.
Nonetheless, labour market developments amongst these countries are diverse as these countries are at different stages of growth. While rapid economic growth in many emerging market economies presents opportunities for businesses, it also raises key challenges in labour markets including labour market rigidities and informality.
Labour productivity: 2009
Source: Euromonitor International Note: (1) Emerging market economies cover 25 key economies which include Argentina, Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Kazakhstan, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Turkey, the UAE, Ukraine, and Vietnam.
- Labour markets in emerging market economies (EMEs), particularly in Asia and Latin America, are leading the employment recovery globally thanks to rapid economic growth which has led to job creation and secure employment. The average unemployment rate in the 25 key emerging market economies stood at 8.1% in 2009 and is expected to decline to 7.6% in 2011;
- There is, however, significant diversity in the development of labour markets in EMEs. Labour productivity averaged US$16,816 per person employed in EMEs but ranged from a low of US$2,155 per person employed in Vietnam to a high of US$73,835 per person employed in the UAE;
- The sheer size of the economically active population presents numerous opportunities, such as low manufacturing costs, for many industries compared to developed economies. Offshoring and outsourcing to EMEs are popular in many international companies in the advanced world including the USA and other European economies. Between 2000 and 2010, the economically active population in EMEs rose by 15.7% to 2.0 billion and over the next decade it is expected to rise by another 9.9%;
- Labour markets in EMEs have, however, been slow in developing and are less flexible than advanced economies. Lack of labour market reforms and political red tape can be a burden to businesses. In addition, high informality in labour markets will remain a key challenge. For example, in 2009, Brazil’s informal sector accounted for an estimated 55.0% of the workforce resulting in high levels of tax evasion;
- With a growing number of industries seeking new business opportunities in EMEs, several labour market trends have come to the fore. These include, a growing shortage of skilled workers, rising wages, and rising expectations amongst employees in terms of compensation, benefits and other rewards. For example, in 2010, India is estimated to have a shortfall of about 500,000 information and technology professionals.
Diversity in labour markets
The development of labour markets in EMEs remains diverse as these economies are in the early stages of industrialisation and are at different stages of growth. Differences in regulation, political and economical environment also contribute towards this diversity. Nonetheless, labour markets in these countries play an important role in creating a competitive business environment.
- Labour productivity, a measure that gives an indication of the efficiency and competitiveness of an economy, varies significantly amongst EMEs. While average productivity in EMEs has increased from US$10,882 per person employed in 2004 to US$16,804 per person employed in 2009, EMEs with a large population like Vietnam, India, Ukraine, Indonesia, China, Peru and others in Asia had productivity of less than US$10,000 in 2009. In these populous economies, any gains in output in the economy are divided amongst its large employed population;
- The labour force participation rate (percentage of population aged 15-64 who are either employed or unemployed but seeking a job) averaged 65.4% in EMEs in 2009. However, it ranged from a high of 78.6% in China to a low of 45.1% in Turkey. The low rate of labour participation in Turkey and other economies like Saudi Arabia (49.6% in 2009) and Egypt (48.2%) can be attributed to low female participation. In 2009, females accounted for only 16.2% of the total economically active population in Saudi Arabia and 25.5% of the total economically active population in Turkey and Egypt;
- According to the World Bank’s rigidity of employment, an index that measures the regulation of employment, specifically the hiring and firing of workers and the rigidity of working hours, EMEs had average index value of 28.1 in 2009. An index ranging from 0-100 with higher values indicating more rigid regulations. However, there are significant variations within EMEs: Morocco was the most rigid labour market in EMEs in 2009 with an index value of 60.0, followed by Brazil, Romania, Mexico and Indonesia. The UAE, on the other hand, was the least rigid in terms of employment regulations with an index value of 7.0 in 2009;
- There is diversity in other labour market indicators such as unemployment rates and average working hours in manufacturing and non-manufacturing activities. For example, the unemployment rate in South Africa remains stubbornly high at 23.9% in 2009 compared to an average of 8.1% in EMEs because much of the population lives in poverty and cannot afford an education that can help provide a job. In addition, labour costs are higher than neighbouring countries and other EMEs and wage-flexibility is limited resulting in a large unemployed population.
Labour force participation rate and employment rate in selected emerging market economies: 2009
|% of working age 15-64 population|
Opportunities for businesses
EMEs are becoming increasingly attractive markets for businesses as they help them achieve lower manufacturing costs, tap the potential of growing consumer markets and gain from the rapidly increasing work-force in these economies:
- Low labour costs are one of the biggest advantages in EMEs. In 2009, the average labour costs in EMEs stood at US$2.5 per hour and US$3.1 per hour for manufacturing and non-agricultural activities respectively, significantly higher than the average of US$18.5 per hour for manufacturing activities in developed economies and US$19.3 per hour in non-agricultural activities;
- Within EMEs, Asia has the lowest manufacturing labour costs while Hungary, Poland and South Africa have amongst the highest manufacturing labour costs in EMEs (US$4.9 – US$5.5 per hour in 2009). India has the lowest labour costs in manufacturing in the world and wages have increased only marginally from US$0.2 per hour in 2004 to US$0.3 per hour in 2009. India has been identified as a potential manufacturing gi¬ant and has generated interest in the global marketplace because of its low cost of labour and large population;
- As cost is a major determinant for businesses, there is growing demand for low-wage labour in EMEs from high-wage countries in the advanced world and has led to ‘offshoring’ and ‘outsourcing’ where companies in developed economies shift activities to EMEs like Brazil, India or China. Within EMEs, China continues to be a prominent destination for production offshoring while India’s abundant pool of English speaking population and proficient information and technology professionals has made it an important services offshoring destination.
|US$ per hour in manufacturing|
Source: Euromonitor from trade sources/national statistics.
Informal employment remains key challenge
Despite the advantages, businesses have to grapple with many challenges within labour markets in EMEs:
- Informal employment is one of the key challenges for businesses and policy makers in EMEs. According to the OECD, over 50.0% of the employed population in Brazil and India belong to the informal sector and while it is decreasing in countries like China and South Africa, it still remains high (15.0-35.0% of employed population). Informality and tax evasion creates unfair competition for tax-compliant companies, which have to bear both the burden of the tax and the cost of complex compliance procedures;
- Informality can also lead to higher levels of income inequality which is a prevalent problem in EMEs. Within these countries, informal employment tends to be higher in women and migrant workers resulting in higher wage differences;
- Labour market regulations in EMEs are cumbersome and businesses find it difficult to access clear and accurate information on regulations. In addition, some countries have different rules for domestic and foreign companies. For example, in China, a foreign company might have costs that a local company might be exempt from.
Income-led growth has led to sustainable job creation in many EMEs after the global economic crisis of 2008-2009. However, according to the International Labour Organisation, while employment in the emerging and developing countries has resumed growing, over 8.0 million new jobs are still needed to return to pre-crisis levels in those countries suggesting that the recovery of labour markets in EMEs is uneven.
While these economies continue to provide a new pool of untapped labour potential for many businesses, high informality in labour markets will prove to be a key challenge in the long term. With rapid economic development and increasing investments in EMEs, several trends are developing in the labour markets which will be seen by businesses seeking opportunities in these countries in the coming years:
- There will be a rising shortage of skilled workforce in EMEs. For example, in 2010, India is estimated to have a shortfall of about 500,000 information and technology professionals;
- Rising wages and rising expectations of employees is another emerging trend. With rising disposable incomes, consumer spending patterns in these economies will see a gradual transition from spending on basic necessities to discretionary spending by 2020. As a result, the workforce in these economies may want more than the basic pay and demand more from their employers in terms of compensation, benefits and other rewards.