Catalog

Policy conclusions

Box 2.1.2 presents the major findings of this chapter and identifies policy approaches for addressing the issues in four selected countries of developing Asia, namely, India, Indonesia, Philippines, and Thailand. Policies promoting youth employment can be classified into those that aid employment generation in general and those that are particularly targeted at young people. The former category includes macroeconomic policies and labor market regulations. The latter covers education policies as well as guidance and training for the young. (International migration offers an alternative for those facing poor employment prospects at home, dealt with in the chapter Asian workers on the move.)

It is axiomatic that any strategy to facilitate productive youth employment must be centered on a strategy for growth and job creation as a whole. Even in periods of high levels of economic expansion, formal job growth has lagged. To an extent, this is natural and indeed beneficial, as it reflects rising levels of labor productivity and real wages. But declining responsiveness of newly created jobs to growth in the four countries suggests that countries have to "run faster" than they used to, in order to create the same number of new jobs. As the private sector is responsible for about 90% of jobs created in most developing economies, constraints on business hurt workers, especially young workers (Pierre and Scarpetta 2007). These constraints need to be looked at in their country context, and blanket recommendations, beyond easing those constraints, are not particularly helpful.

Firms can expand and create formal jobs if it is easy to do business. A study on India by the World Bank highlighted inadequate infrastructure, lack of access to finance, and product and factor market distortions as the major constraints to business (World Bank 2004). Different local regulatory requirements and differences in the implementation of national regulations cause substantial differences in the ease of doing business among Indian cities (World Bank 2007b). In the Philippines, low investment rates reflect a variety of problems including inadequate infrastructure, poor governance and corruption, and market failures that keep the industrial base narrow (ADB 2007b). Firms in Indonesia cite macroeconomic instability, economic and regulatory policy uncertainty, and corruption as primary constraints to business, followed by taxation, cost of financing, and labor issues (ADB 2005). Thailand is a best practice economy for starting a business and ranks high at 15 out of 178 economies in ease of doing business. But its ranking drops to 49 for employing workers, largely due to the cost of firing, which amounts to 54 weeks of wages (World Bank 2007c).

Labor market regulation

An important set of factors that influences employment opportunities are labor market regulations, which include employment protection legislation and minimum wages. These particular aspects of regulation are likely to affect young people more than other groups. Since, by virtue of their age, they are either new or recent labor market entrants, young people are more likely to be affected by employment protection legislation in as much as this impedes new hires. Similarly, they will likely be disproportionately represented among the low paid, and so may be more affected than other groups by minimum wage legislation. Other kinds of regulation, such as those on workplace health and safety, have a more age-neutral effect on workers of different ages.

In principle, minimum wages, required notice of separation, restrictions on hours of work, and severance payments could all help young workers. In principle, too, they could help employers, if they raise productivity, cut back on labor turnover, and reduce absenteeism. In practice, however, the issues are not so straightforward and the design of policy is difficult. The effects of both minimum wages and employment protection legislation are likely to be small simply because of the extensive informal sectors operating in the four countries.

A first and basic issue is about how easily labor markets lend themselves to regulation and the capacity for implementing regulations. In countries with large informal sectors, such as the four countries under consideration in this chapter, enforcement of minimum wages has proven problematic. Between 11% and 31% of young employees and the self-employed in Indonesia reported earning less than the statutory minimum wage in 2002 (Sziraczki and Reerink 2004). In India, average daily earnings of casual workers in 2004/05 were 84% below the minimum wage (Mazumdar 2008).

Even if the implementation of minimum wage legislation is possible and coverage widened, it may not actually improve outcomes at an aggregate level. Looking at a broad cross section of countries, Neumark and Wascher (2007) observe small or negative employment effects of minimum wages—estimates of teenage employment elasticity with respect to the minimum wage range from below -1 to above 0. If minimum wage regulations raise marginal costs, they will come at the expense of jobs. Murgai and Ravallion (2005) find that a guaranteed minimum wage policy in rural India brings limited poverty reduction, costing 3.7% of GDP to support the program through the year (with 90% wage cost and 10% nonwage cost). An untargeted rural transfer of the wage cost would have a much greater poverty impact.

Another well-known problem with regulations that protect workers who already have jobs is that they may work against job seekers or "outsiders," reducing their employment opportunities and perpetuating disadvantage. Several developing countries provide a relatively high standard of protection to workers in the organized sector at the cost of those in the unorganized or informal economy (Pierre and Scarpetta 2007). Labor protection in India is inversely related to growth in manufacturing, employment, elasticity of labor demand, and entry of new firms, and has possibly benefited the rich more than the poor (Ahsan and Pagés 2007, Besley and Burgess 2004, Hasan et al. 2003, Kochar et al. 2006). Sugiyarto (2005) observes that labor market regulations have partly been responsible for slower employment growth in Indonesia. He finds that increases in real minimum wages exceeded productivity growth after the Asian crisis.

Economic and political instability harms mainly small enterprises, the major drivers of new job creation in developing countries. Figure 2.1.19 presents indicators of difficulties that firms face in employing workers. Businesses in the four countries face generally more severe conditions than in most of Asia. In Indonesia, a firm has to pay 2 years of pay on severance. India and Thailand also require more than 1 year of salary. If the costs of regulation cannot be absorbed by employers or offset by productivity gains, they are also likely to push economic activity underground or to encourage employers to find other ways of evading regulations. In India and the Philippines, for example, short-term employment contracts are often used to reduce benefit entitlements. So if there is a large pool of unemployed workers, as is the case for many lowskilled occupations, employers prefer to turn over workers quickly.

Tackling the disadvantages that young people face in the labor market through regulation seems likely to run into problems. Writing the rules is one thing; enforcing them is something completely different. And even if statutory regulations can be implemented honestly, a wide variety of evidence suggests that they may do unintended harm to those whom they were intended to protect. Examining government regulations in the area of employment and social security laws, Doing Business 2008 finds that young people and women lose out from rigid employment laws (World Bank 2007c). One way to increase prospects for youth employment is to allow for more flexible contracts that provide, for example, a trade-off between wages and length of service, along with a safety net for those who cannot find work (Basu and Maertens 2007).

Education and training

An alternative route to combating the constraints that the young face in the labor market is to invest in their human capital. A compelling attraction of this approach is that the gains of education and knowledge for the current generation (especially for girls) are likely to be transmitted to their children, promising enduring benefits across society. Investing in education of the young is about much more than hardware and building schools. Relevant and stimulating curricula are needed as are knowledgeable and passionate teachers. Equality of opportunity demands that the incentives faced by poor families are tipped in favor of education, given the high opportunity costs of keeping boys and girls of poor and disadvantaged families in school. In many countries, girls may need larger moral and financial support than boys. Policies that encourage school completion and early school-leavers to return to school should also target socially excluded and marginalized students from ethnic, tribal, and backward classes, since children from these groups frequently have a higher incidence of early dropout and are subsequently at risk of persistent unemployment or low-paid work.

Conditional cash transfer systems, which have been used to great effect in Latin America to promote education participation among lowincome households, are one way of providing incentives for continuation of studies that merit serious attention. These systems provide cash transfers to households, conditional on school attendance by children and are based on means testing to determine eligibility. In Asia, successful examples of similar programs are Bangladesh's Food for Education initiative and India's Mid-day Meal scheme, both introduced during the 1990s to improve school participation through provision of meals to children, provided that they attend school.

The design of appropriate programs must of course take into account context and circumstances—"one size fits all" fits hardly anyone. In India and the Philippines, the emphasis needs to be on those at the bottom of the scale who receive little or no formal education, whereas in Indonesia and Thailand the attention may more fruitfully be aimed at maintaining enrollment beyond early childhood.

Other aspects of education reforms that would help build a productive labor force include standardization of curricula of national education systems across regions and schools, promotion of better achievements in general education, a good certification process, placement services by schools for faster school-to-work transition, and vocation-oriented secondary and tertiary education to generate a qualitative improvement in learning achievements. Closer partnership between industry and universities can help design tertiary curricula suitable for industry's needs.

Skills training

Beyond school, it is important to address the problem of mismatch between the skills of young workers and the emerging needs of the market. Young people who are unable to find jobs on the basis of schooling alone would benefit from appropriate skills-training programs. This is more likely to benefit those leaving the schooling system early and with low levels of achievement. India, for example, is revamping its youth employment programs through a new skills development initiative. Thailand, whose competitiveness was traditionally based on cheap labor, will need to shift weight and invest in a knowledge and skills base.

A "dual system" with work-based apprenticeship and classroom instruction has been tried in some developing countries. Germany offers a good example, through an education and training system that does well in promoting youth employment. Its ratio of youth to adult unemployment rates is about one to one, an achievement that is quite unusual even among industrial countries. Developing Asia could learn from specific design features of the German system. A critical ingredient is the strong involvement of employers in the provision of training, which ensures its labor market relevance. The German system guarantees equitable access to places, and its high (and recognized) quality means that participation does not carry the stigma associated with vocational education in many other countries (World Bank 2006b). In developing Asia, however, systems would have to be geared to ensure the inclusion of young people who are vulnerable to marginalization and exclusion. This may require meeting other basic needs, such as shelter and food, for which young trainees could help pay in kind.

The Philippines tries to overcome the above problem of access and equity by implementing a Ladderized Education Program and Training for Work Scholarship Project under its Technical and Vocational Education and Training system. The former provides flexible entry and exit in the education system and job opportunities at every exit, while the latter directly intervenes in the provision of training for highly needed skills. But as this system is not as deeply rooted in the business sector as Germany's dual training approach, efforts to widen its acceptance within industry and services should be strengthened.

Active labor market policies or programs

Active labor market policies include measures such as job training and search assistance, remedial education, and direct job creation to help young people who are not employed or working in the informal economy find decent formal employment (for example, Betcherman et al. 2007). These policies largely fulfill a remedial role in correcting malfunctions in the education system and in labor markets. The main options usually involve skills training, support for youth business start-ups, and a combination of support services.

Employers place heavy demands on workers during recruitment, putting young workers, who have little or no experience, at a clear disadvantage. Labor market-based training, often combined with wage subsidy, is the most effective form of intervention for young people (O'Higgins 2001). Youth training programs have been quite successful in East and Southeast Asia. For example, in the Philippines, the Working Youth Centers implemented by the Department of Labor and Employment have had a positive impact on the employment and wage prospects of participants (Stavreska 2006). But in India, an estimated 82.5 million youth need vocational training, which would cost 10% of GDP and generate additional income equivalent to 60% of GDP for current unemployable youth (TeamLease Services 2007).

Programs promoting business start-ups for young people are fairly common in East Asia. All six programs reviewed by Stavreska (2006) have had positive impacts. These include the Young Professional Entrepreneur Development program in Indonesia and the Farm Youth Development Program in the Philippines. The broader analysis of Betcherman et al. (2007) finds highly positive effects for such programs, although they lack potential for scaling up. India's Training of Rural Youth for Self-Employment scheme provides basic technical and entrepreneurial skills to the rural poor aged 18–35 years for self- or wage employment. At least 40% of the beneficiaries have to be women. The scheme has been only partly successful, because it is not well integrated with an overall strategy for self-employment, and the training fails to address the capacity or aptitudes of the trainees or the market demand for a particular skill (Mitra 2007).

Betcherman et al. (2007) find that guidance and counseling programs targeted toward economically disadvantaged young people are more successful than programs aimed at young people as a whole. Gender counseling, training, and placement services for young women combined with awareness creation for employers through mass media can help remove constraints faced by young women in the labor force. O'Higgins (2001) suggests that the quality of active labor market programs is likely to be higher if stakeholders are involved in their design and implementation.

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References