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Unintended Consequences for the Labour Market

Written by Carmelo Ferlito, IDEAS Senior Fellow

While we wait with curiosity and some anxiety for the official data on Malaysian unemployment in April, we know that the number of unemployed persons increased by 17.1 per cent between March 2019 and March 2020; this brought the unemployment rate to 3.9 per cent. Figures are quite concerning, as the movement control order (MCO) began only on March 18th, and predictions on the evolution of the labour market are quite gloomy.

At the same time, in the attempt to identify Covid-19 clusters, the government is conducting mass isolation and screening among immigrant workers. We also know that a plan for sending back those workers to their home countries has been developed and it is now at the beginning of its implementation stage. When announcing the latest stimulus package on June 7th, Prime Minister Tan Sri Muhyiddin encouraged employers to hire local workers.

The reasoning goes more or less like it follows: unemployment is on the rise, job opportunities are created if we get rid of immigrant workers, Malaysians can fill the gap so that unemployment gets under control again. The first and most obvious thought is that over the past decades Malaysia achieved the enviable position to be in the need of foreign workers for 3D jobs (dirty, dangerous and demeaning), because better opportunities were available for Malaysians. Such an enviable achievement seems to be lost for now.

But there are also more purely economic considerations to be made; I often pointed out the importance of considering the unintended consequences when designing and implementing public policies; this is the case too. The scenario according to which Malaysians are going to be employed in jobs made available by immigrants’ expulsion, and thus the unemployment rate can be easily reabsorbed, appears too simplistic.

Labour is human capital. What is capital? Capital is a set of goods which, in a certain moment, are employed together in a production process unfolding over time in order to get a different product. Among these goods is labour, or the human factor. Capital goods, then, do not exist in isolation, they get a meaning only when they are employed together; what matters is a certain capital goods combination. If you own a café, a coffee machine is that element which you use together with water, coffee powder, electricity, mugs, spoon and labour in order to get a coffee to sell to customers; if your café closed down, and you have to do something else which is not coffee, the coffee machine lose its meaning as capital good – that capital is simply destroyed. The same goes with human capital: a plumber cannot be turned overnight into a waiter, or an accountant into a construction worker or a coconut harvester. The reshaping of capital is complex and often not possible, like in the case of the coffee machine. For labour, furthermore, expectations in terms of salary and personal fulfilment matter; it is very likely that an accountant would turn into a coconut harvester only out of desperation and as last resort.

While labour reallocation is not a straightforward process, other unintended consequences may arise in such a scenario. In particular, it is likely that employers, in order to attract local workers toward 3D jobs, will have to offer better wages, bringing up their cost of production. Entrepreneurs will then try to shift this burden on the selling price, pushing for price increases along all the relevant supply chain. However, market remains the last judge for prices and if those prices are not accepted in the market, those firms will eventually have to close down, with obvious consequences on unemployment. Similarly, the same product may become cheaper on international markets, pushing consumers away from domestic demand; the consequence will be the same: failing businesses and growing unemployment.

The key message here is that, again, policies that do not take into account the weigh of potential bad unintended consequences are very much likely to fail in their outcomes, although intentions may be good. The evolution of the local labour market is not disconnected from more general considerations about international competitiveness.

2020-06-23T11:29:05+00:00 23rd June 2020|Opinion|Comments Off on Unintended Consequences for the Labour Market