Labour quality can trump quantity

Availability of industrial labour is less of a challenge than widely believed. Parents with fewer children have healthier and more educated ones

In the Tessellatum last month, we discussed the first major finding from our project assessing the impact of Asia’s ageing on the global supply of workers and savings, and on global economic growth: That demographic shift in 10 major Asian economies (the A-10: China, India, Indonesia, Japan, the Philippines, Vietnam, Thailand, Korea, Malaysia, and Taiwan) is faster than the economic transition. Here we discuss the second major finding — that workforce quality is likely to trump quantity, at least for the next decade.

The A-10 countries, which dominate global trade in manufactured goods, were half of incremental global workers till 2010, but will see working-age population decline soon. While the global population is still growing, several countries with growing young-age populations are less politically stable and not integrated economically.

Trends diverge within the A-10: The number of workers can grow 0.9 to 1.6 per cent annually in India, Indonesia, and the Philippines, but shrink 0.2 to 1 per cent in China, Japan, Thailand, and South Korea.

Further, while Asian economies have higher labour force participation ratios (LFPR), they are declining, and are expected to continue falling in the near future. A significant part of this decline is due to people spending more years in education, but it does reduce worker availability. In addition, findings from our proprietary survey supported the hypothesis that as incomes rise in some of the North Asian economies, the willingness of younger hands to work in industrial jobs also drops. A growing demand for services jobs as economies grow more prosperous also affects the availability of industrial workers.

However, before we begin to worry about these countries running out of industrial workers, it is important to note that 28 per cent of the A-10 workforce is still deployed in agriculture. Reskilling farm workers for industrial work is undoubtedly challenging, but even with a slow transition to industrial work— with farm workers dropping out of the workforce due to old age and newer workers joining industry or services instead of farming — the numbers are sizeable. Labour productivity in agriculture has been growing at 5 per cent annually, offsetting the decline in workers.

Two factors that are even more important are the quality of the workers and the quality of the workplace. Parents with fewer children also have the time and resources to invest more in their development. This not only affects their average level of education, but also their physical development.

Illustration: Binay Sinha

 

The prevalence of underweight children has fallen meaningfully across countries in Asia. While better child nutrition often depends on government interventions and is a policy challenge for younger economies like India, Indonesia and the Philippines, which still have high levels of malnutrition and stunting, parental attention also matters. The improvement in height between people born in 1966 and those born in 1990 is inversely correlated with the prevalent total fertility rate or TFR in 1990 for both males and females. In South Korea and China, the average height of adults increased by more than 3 centimetres in this period.

Average years of schooling has risen substantially across the region, rising by three to five years, with the best improvement in Indonesia and Vietnam. This is again driven by government efforts, as well as the ability and willingness of parents with fewer children to invest more in their education. Thus, in 2018, 27 per cent of 25- to 34-year-olds in China had a graduate degree, versus just 7 per cent of the 45- to 54-year-olds.

Better education enables workers to use more sophisticated machines that drive labour productivity higher, as was reported recently in a paper that studied educational qualifications of workers in machining in the US over the last five decades. More educated people also have a longer work-life, as mental faculties remain robust for much longer than physical strength. One moderating factor, though, from the perspective of availability of industrial labour, is that more educated people are less likely to work in factories. Graduates make up less than 10 per cent of the workers in agriculture, production and construction in the US, whereas they are 37 per cent of the overall workforce and 43 per cent of the services workforce.

There is significant potential for improvement in the quality of the workplace as well. Except for Japan, Korea, Taiwan, A-10 economies still have high informality in their labour force. Informal workers tend to have lower productivity, partly due to a skill gap, but also due to smaller sizes of enterprises they work in (informal firms are smaller), as they are less capable of exploiting economies of scale and investing in skill-building. As digitisation and reforms improve state capacity in these economies, there is greater formalisation and growth in firm-size, which should improve labour productivity.

Overall, improvement in human capital can offset some of the decline in fertility: On average, people may have fewer children, but those are more likely to grow into stronger and more capable workers. There is also strong evidence of a rise in robotisation in ageing societies.

Due to a combination of these factors, industrial productivity in the A-10 has grown at 3-5 per cent a year, and the pace itself has accelerated meaningfully over the past decade.

There are industries like electronics assembly, garments and toys where significant automation is still difficult. These are the most likely to shift out of the ageing economies to younger ones, granted that the latter build infrastructure and integrate into global value-chains to absorb this shift.

We modelled global demand-supply for goods over the next five years, using consensus forecasts for growth, and some reasonable assumptions on the split of goods and services consumption. We found that A-10 industrial labour supply may even remain in surplus, contingent on the younger economies (India, Indonesia, Philippines) successfully deploying their workers, and productivity growth in China not slowing down substantially. Even if China’s productivity growth slows by 2 per cent annually, it would still have surplus labour; only if it slows by 4 per cent would it face worker shortages. The risk, thus, is more in fragmenting global value chains slowing down productivity growth and less in the availability of workers.

From a longer-term perspective, the main lesson for countries with younger populations like India is to focus on improving human capital, urgently closing gaps in early-childhood nutrition and educational outcomes, and in accelerating the process of economic formalisation. With fertility rates falling sharply, the children born today will be the adult workers when the workforce starts shrinking — making them capable of doing more should be our priority.

The writer is co-head of APAC Strategy, Credit Suisse