Ideas: Unintended consequences for the labour market

This article first appeared in Forum, The Edge Malaysia Weekly, on June 25, 2020 - July 01, 2020.
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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% between March 2019 and March 2020. This brought the unemployment rate to 3.9%. These figures are quite concerning as the Movement Control Order (MCO) began only on March 18 and predictions on the evolution of the labour market are quite gloomy.

At the same time, in its 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 7, Prime Minister Tan Sri Muhyiddin Yassin encouraged employers to hire local workers.

The reasoning goes more or less like this: unemployment is on the rise, job opportunities are created if we get rid of illegal immigrant workers, and 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 of needing 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 purely economic considerations to be made. I have often pointed out the importance of considering the unintended consequences when designing and implementing public policies. This is the case too. A scenario in which Malaysians are going to be employed in jobs made available by the expulsion of immigrants, and thus easily absorbing the unemployed, appears too simplistic.

Labour is human capital. What is capital? Capital is a set of goods which, in a certain moment, is 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 that you use together with water, coffee powder, electricity, mugs, spoons and labour in order to get coffee to sell to customers. If your café is closed down and you have to do something else that is not coffee, the coffee machine loses its meaning as a capital good — that capital is simply destroyed.

The same goes with human capital: a plumber cannot be turned into a waiter overnight, 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 a last resort.

Labour reallocation is not a straightforward process and unintended consequences may arise. In particular, it is likely that employers, in order to attract local workers to 3D jobs, will have to offer better wages, increasing their cost of production. Entrepreneurs will then try to shift this burden on to the selling price, pushing for price increases along the relevant supply chain.

However, the market remains the last judge for prices and if those prices are not accepted, those firms will eventually have to close down, with obvious consequences on unemployment. Similarly, the same product may become cheaper in 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 weight of potentially bad, unintended consequences are very much likely to fail in their outcomes, although the intentions may be good. The evolution of the local labour market is also not disconnected from more general considerations about international competitiveness.

Carmelo Ferlito is senior fellow at the Institute for Democracy and Economic Affairs

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