Asian employment at risk in prolonged downturn

Asian employment at risk in prolonged downturn
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First Published: Mon, Jun 29 2009. 01 04 PM IST
Updated: Mon, Jun 29 2009. 01 04 PM IST
Mumbai/Tokyo: Asian unemployment is running at lower levels than in major economies for now, but a reliance on exports and rising commodity prices mean an aversion to large layoffs may soon be put to the test.
Many Asian countries rely on exports to the United States and Europe to drive growth. But if demand is falling and consumers are losing their jobs, there can be little upside for suppliers.
“The headwind that concerns us most is unemployment,” Nomura economists said in a report on Asian economies.
“Granted, it is a lagging indicator of the cycle, but without a strong recovery in aggregate demand it will be difficult to create new jobs, and so unemployment can remain stubbornly high, hindering the economic recovery.”
Hong Kong, Korea, Malaysia, Singapore, Taiwan and Thailand are most exposed in Asia to the global crisis, Nomura said.
All are registering double-digit peak-to-trough declines in gross domestic product (GDP) growth and the impact on the region’s economic activity as a whole is now worse than during the Asian crisis, it said.
“In the six most exposed economies there is increasing evidence of negative second-round effects, as export-related firms are cutting capex (capital expenditure) and jobs,” it said.
In a vicious cycle, exporters would feel pressure to cut costs as consumers in recession-hit economies cut spending, so eroding spending power throughout Asia.
Analysts say Indonesia, China and India have large domestic sectors to buffer their economies against the slump in world trade. That should mean these economies avoid recession, although growth will slow.
Stigma
Unemployment rates in major economies are heading towards double-digits, and while rates in Asia are rising, they remain far lower and headlines of mass firings are rare.
Singapore’s jobless rate is at a three-year high of 3.3%, South Korea’s is at 3.9%, its highest in nearly four years, and in Japan unemployment has hit a five-and-half-year high of 5%.
Cutting jobs in Asia can be difficult. While unpalatable anywhere, the social stigma attached to cutting jobs, labour laws and a lack of a social security safety net make layoffs a difficult process.
Beyond unemployment, there is also disguised unemployment, where more people are employed to do a job than are needed, and underemployment, where workers are not fully utilized.
Even in extreme cases, layoffs can be hard to push through.
Satyam Computer Services, once India’s fourth-largest outsourcing firm, was left struggling for survival after its founder revealed a massive accounting fraud this year.
Its new owner Tech Mahindra created a pool of 9,000 staff, about 20% of its work force, who had not worked for three months and put them on reduced pay. Talk of job cuts has faded.
Loss-making Jet Airways sacked 800 flight attendants and announced plans to lay off another 1,100 staff after it had cut routes to deal with falling demand and rising fuel prices.
However, protests and political pressure followed. Within days, the workers were reinstated and the chief executive apologized to staff. Subsequently, Jet cut its expatriate employees, including pilots, and reduced salaries to lower costs.
South Korea’s government is giving tax benefits and other advantages to companies that keep or add jobs by “adjusting” wages and work hours. The government said this month a quarter of worksites with more than 100 workers had joined the campaign.
Thailand, Malaysia and Japan are taking similar steps.
“Many governments are recognizing how severe job conditions are and have been taking measures to limit the damage. So I do not expect it to take 2-3 years for Asian economies to recover like (after the) Asian crisis,” said Shunji Karikomi, a senior economist at Mizuho Research.
While work-sharing is most common in South Korea, it is becoming increasingly popular elsewhere in the region.
Hitachi Ltd, Japan’s biggest industrial electronics group, and Cathay Pacific Airways Ltd are trying to keep jobs by asking staff to take unpaid leave.
Even in the hard-hit financial industry, Asia has lagged the pack.
Banks, funds and insurers have cut about 385,000 jobs since August 2007. Only one Asian firm makes the list of those that have made the deepest cuts - Japan’s Nomura with 1,530 jobs, which included 1,000 after its acquisition of Lehman Brothers units.
That pales in comparison with slated cuts of 75,000 at Citigroup and 45,500 at Bank of America.
Lagging, leading
Unemployment is generally considered a lagging indicator.
Going into a economic downturn, activity and demand slows, sales fall and then workers are laid off. Coming out of a downturn, employers wait to see that the upturn is sustainable before making a commitment to hiring new staff.
But when there is uncertainty about whether a recovery will be quick, slow of occur at all, unemployment can be a leading indicator of a prolonged slump.
People who have lost their jobs don’t have the spending capacity they did while employed. Those still in jobs rein in their spending and increase their savings in case they are next.
Even growing optimism of a China-led recovery could, somewhat ironically, worsen the position of Asian workers.
The fall in commodity prices since last year had reduced business costs and improved profit margins for Asian firms, limiting the need to cut jobs, said Frederic Neumann, an economist with HSBC in Hong Kong. But that is changing.
“The recent rise in oil prices raises the risk that firms in Asia face greater pressure to lay off workers,” Neumann said, noting profit margins would be squeezed as raw materials prices rise just as manufactured goods are under pressure to fall.
“In fact, China’s growing demand for commodities may push up raw material prices globally and therefore undermine prospects for a global recovery, especially in developed markets,” he said.
Additional reporting by Yoo Choonsik in Seoul
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First Published: Mon, Jun 29 2009. 01 04 PM IST
More Topics: Jobs | Layoffs | Employment | Unemployment | Asia |