Dire Nepali labor market situation made worse by COVID-19

KATHMANDU: The COVID-19 pandemic has had a significant economic and labor markets worldwide, including the Asia Pacific region. Nepal with its prevalence of informal sector and dependence on services sector such as tourism, the impact has been unprecedent and devastating.

According to the International Labor Organization (ILO), a UN agency based in Geneva, 3.7 million workers in Nepal are at risk of losing their jobs due to COVID-19. Nearly four out of five workers in construction and manufacturing are at risk. Recently the Nepali government came out with an estimate of job losses and COVID-19’s impact on poverty. The Study Committee established by the National Planning Commission estimated that 1.6 million workers lost jobs due to COVID-19 and 1.2 million entered into poverty.

In a country where 3.5 million workers are employed abroad, this disruption to the domestic labor market due to COVID-19 is a huge shock. An already dire labor market situation, has become much worse, pushing people further to look for economic opportunities elsewhere or risk slipping into poverty.

Latest estimate of informal employment shows that 80.8% of total employed in Nepal are in informal employment. This is about 5.7 million workers. Informal work is not decent work. Workers lack basic protection that come with employment. Most workers in this category of informal employment are one crisis away from slipping into poverty.

Of late, the labor market has performed better in terms of creating wage employment. According to the World Bank, wage employment in Nepal increased from 17% to 24% of total employment between 2008 and 2018. This period also saw decline in unpaid workers and self-employed. This is good news but nearly not enough.

Salaried employment increased by 7 per cent between 2008 and 2018, with job growth coming from a mix of low-productivity and high-productivity sectors. Construction, manufacturing and hotel & restaurants increased their share of employment, but these sectors have not been the most productive during this period. Finance and real estate, and transport and communication sectors also added jobs, and these have been more productive. But there are not nearly enough jobs in these sectors to absorb the growing labor force.

As shown by the World Bank, economic growth in the last decade has led to an increase in wages in both formal and informal employment. But Nepal has not created enough wage employment to absorb new entrants to the labor market. There are several factors behind this. One factor that has long hindered Nepal’s ability to create wage employment across the country is the difficult topography. Transport and logistics cost make it difficult for businesses to thrive, hindering their ability to create jobs.

Another difficulty is access to finance for small firms, although according to the Doing Business Report this is less of a constraint in recent years. Another key impediment to job creation is the declining manufacturing sector and subsistence agriculture sector. These two sectors should be creating more and better jobs, but this has not happened in Nepal. Nepal has been de-industrializing rather than industrializing. We have not been creating job opportunities for our young people.

Most jobs that have been created in the last ten years have been in relatively low productivity sectors, including farming, construction and retail. Workers skills are generally low even among the salaried employees. Most are without secondary school education and over two-thirds are in low level occupations. This is not surprising when we look at the firm size distribution across the country.

Most of the firms are small and micro-sized (5 employees or less), which are typically less productive and target domestic market with little prospects for connecting to the global value chains (GVCs). In fact, 2018 Economic Census shows that 98% of firms are less than 10 employees. Most of these firms are in wholesale and retail trade and restaurants and hotels. WRT sector is one of the least productive and low pay sectors across the developing world, including Nepal.

There is considerable potential for Nepal to utilize the skills and expertise of Nepali migrants. Our economic and labor policy needs to focus strongly on the economic reintegration of returning migrants for our long-run prosperity and development.

Occupational profile of Nepali migrants shows that close to 60% tend to go for low-skilled work abroad. However, when we dig deeper, we see a considerable heterogeneity even within this broad category. The recently published Migration Report by the Ministry of Labor, Employment and Social Security (2020) does an excellent job in providing an overview of the skills profile of Nepali migrants.

The proportion of low-skilled migrants out of total has been declining in recent years. Most migrants who go back abroad after the first contract expires go for higher skilled occupations. Migrants are learning valuable skills which helps them attain employment that is more productive and better paid. Based on their employment status after returning to Nepal, it seems that migrants returning from Malaysia are the most employable, followed by Gulf countries.

If Nepal were to revive its manufacturing sector, many of these migrant workers could be gainfully employed at home. Manufacturing revival must be central to government’s economic policy as it is key to generate more and better jobs.

Industrial policy should be focused on few key economic sectors where Nepal can be competitive in the region. We need to make it a national campaign to promote these sectors and incentivize would be entrepreneurs to enter the market. There is a need to work with provincial governments to create economic corridor based on population size. Terai region needs a lot more jobs than the hilly regions. It is also easier to transport goods from terai to elsewhere.

Despite the lack of commercialization in Nepal’s agriculture sector, increasingly larger shares of returning migrants are employed in skilled agricultural and forestry work. Recent data suggests that 14.3% of employed returning migrants work in this sector. Many returnee migrants are using their skills obtained abroad to work in farms at home. They are using improved technology and method of production to generate surplus to sell in the market. They are earning a living in a sector that typically does not provide too many decent work opportunities.

Increased commercialization of agriculture generates better paid, higher skilled work. Returning migrants could leverage their skills to start and run a modern farm. Government can create a financing mechanism to support would be agriculture entrepreneurs. Current scheme that subsidizes interest rates for loans up to Rs 1 million has been popular among migrants. There is need to think bigger and provide schemes that could support creation of large agribusiness firms, run and managed by returning migrants.

Close to 20% of migrants who have returned home have experience in service and sales work. This is a growing sector of employment in Nepal. In 2018, 21% of total employed were in services, up from 15% in 2008. Similarly, services sector accounts for 53% of Nepal’s GDP.

In order to generate high value and more productive service sector jobs, we will need to ensure we have adequate workers to work in this sector. Certification and recognition of prior skills for returning migrants will be important to ensure supply of skilled workforce. Nepali government has such a scheme to recognize prior learning, but the take-up of this initiative is very low. Most migrants are either not aware or don’t see labor market value in getting certified.

Without more and better jobs, there is no prosperity. It is high time that job creation is central to Nepal’s development agenda, as this is the surest way out of poverty and into a decent life.

-Dr. Sameer Khatiwada is an economist based at the ADB headquarters in Manila. He spent close to a decade at the International Labor Organization in Geneva, Switzerland.