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  • Published at 11:08 pm September 29th, 2018
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Bangladesh should make it cheaper to employ people formally

Bangladesh has, by one set of measures, pretty much no unemployment. 

Bangladesh has, by another set of oft used measures, an appalling amount of unemployment, as much as 86% of all the people. There’s a certain conflict between those two statements, one that can only be resolved by moving back to very, very, basic economics.

To explain the two, we’ve the latest results of the Labour Force Survey, which tells us about who has jobs, how many there are, out there in the economy. If we talk about “unemployment” itself, then that’s around 4.4%. That’s also what we more generally call none. 

For we do try to distinguish between people who are between jobs, or are picking between alternatives to select the best one for themselves, and those who simply cannot find one. A useful rule of thumb is that 10% of all jobs disappear each year -- employers go bust, change their ideas and processes, that sort of thing. 10% of all jobs are also newly created each year as new companies start, others expand and so on. 

We’ve also another 10% of all people who voluntarily quit one job to move to another. The whole set of this is called “jobs churn” and there’s always some period of time between the leaving, or ending, of one job and the beginning of another. That’s this “frictional” unemployment, and 4.4% is around what we think is normal for that. 

Somewhere between 3.5% and 5%, certainly. If 20% of all jobs move each year, it takes three months to leave and start again, we get to 5% -- roughly enough.

It’s unemployment rates above this sort of level which concern. People who want to work but who just cannot find anything to do at all, over long periods of time. We don’t have much of that around, as is also true of many other countries at present -- both the US and UK are at about 4% unemployment, for example.

Excellent -- but we’ve also the idea that we’ve entirely massive amounts of unemployment. Only 14% or so of those people working are in the formal economy, where there are all those rights to sick pay, holidays, pensions, and the rest. Everyone else is off in the unregulated informal economy, which we could call unemployment -- it’s not employment in the formal economy, is it? 

There are certain subsets here. The young have higher unemployment rates, that’s normal. Women too, whatever we might think of the cultural attitudes which lead to it that’s also normal. The one subset that does appear odd is that the unemployment rate among the educated is higher than it is in the population in general.

This does become a rather sticky subject to discuss, for we’re all aware of how more education is seen as the panacea for all economic ills. It isn’t though, not really. What we do want is the level of education that fulfils people as inquisitive human beings, that’s most certainly true. 

But in the purer economic sense, we want the correct level of education for the things we want done in the country. A degree in economics is rewarding as an intellectual exercise, as I know very well. It’s also not something that will necessarily produce a job -- as I also know very well. I’ve never used my degree professionally at all.

It is actually possible for us to have too many people educated to too high a level for the tasks we’ve got in front of us -- this is true even in such an obviously beneficial subject as economics. And that we’ve got a higher unemployment rate among the educated might be a good sign that we do have that oversupply.

But to our observation about the informal economy -- we all agree that those things which are gained by employment in the formal economy are desirable. That’s why they’re instituted as part of those formal labour contracts of course. 

But they do all also come with an expense to the employer. Obviously, sick pay is an expense, so too holiday pay and pensions and so on. They all add to the cost of employing someone, over and above their wages. And an employer quite obviously looks at the total cost of employment, the compensation, not just the wages.

There’s also something we don’t think about enough, the protections against being fired that can come from a formal contract. There’s very good evidence from Europe where in the Latin economies (France, Italy, Spain etc) those formal protections are very much stronger than they are in the Anglo (Britain) or Nordic (Denmark, Sweden etc) economies. 

And we do find that where the protections against being fired are stronger, employers are less likely to hire in the first place. Indeed, those Latin countries have a large portion of the workforce without formal contract employment, they are employed on a series of time limited and no protection ones instead.

The general take away from this is that the higher the costs of formal employment, the less likely it is to be offered. Instead, less expensive to the employer forms of work will be offered, from differential contracts all the way through to entirely informal arrangements.

This is something we can run the other way around as well. If we see the vast majority of the labour force unable to gain employment in the formal economy, we need to muse on how expensive we’re making it to employ people in that formal economy. The reason that employers hire informally, operate entirely informally perhaps, is linked to how much cheaper it is to do that.

Which is very basic economics indeed -- just supply, demand, and prices. We’ve made formal employment more expensive, therefore there’s less demand for it. And if we’ve 86% of the economy informally employed, only 14% formally, then that price difference must be quite large.

Thus the one big lesson from the Labour Force Survey is that Bangladesh should make it cheaper to employ people formally, then we’ll have more of that happening. You know, demand, prices, all over again? People do more of things which are cheaper?  

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.