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A street vendor sells beverages to motorists during rush hours traffic in Jakarta, Indonesia June 14, 2017.   © Reuters

Informal jobs sector both a blessing and curse in Southeast Asia

Unemployment rates low but income growth slowing

| Vietnam
  • The informal jobs sector has cushioned the impact of an economic slowdown in Southeast Asia over the past five years.
  • Malaysians are most concerned about their jobs and salary prospects as unemployment rises, particularly among the young.
  • Positive export performance across the Asean-5 suggests overall job market improvement is close.

Street vendors selling food, clothes and trinkets. Rice field workers who are paid daily, with no job security. Nannies taking care of children whose blue-collar parents work in factories. These are the people without whom Southeast Asian economies would grind to a halt.

Such informal sector employment has helped prevent economic and political turmoil in Asean nations after five years of slowing GDP growth. Indonesia, the largest Asean economy with a workforce of 132m, managed to reduce unemployment despite a decline in annual GDP growth (see chart).

Much of Indonesia's resilience is down to the informal sector absorbing a new generation of workers as well as those laid off from factories, mines and plantations. In February, Indonesia's informal sector employed 58.4 per cent of the total working population, expanding from 57.6 per cent in August 2016. Between February 2016 and February this year, the informal sector added 2.4m jobs, versus 1.6m in the formal sector. There is a similar picture in the Philippines, Thailand and Vietnam (see chart).

Malaysians pessimistic, youth struggles

Malaysia's experience, however, is different from the other four Asean economies. Its June unemployment rate was just 3.4 per cent but it has risen slightly over recent years as growth slowed (see chart).

Malaysians are also the most pessimistic about their job security and salary prospects compared with their regional peers, an FTCR survey showed (see chart). Nearly 75 per cent of Malaysians said it had been hard to find a job, significantly higher than nearly 60 per cent in Indonesia and Thailand.

These findings show how Malaysia's job market is more susceptible to an economic slowdown, a result of comparatively advanced industrialization and greater integration with the global economy. The depth of Malaysia's development is reflected in the size of its formal jobs sector, which employs 88.6 per cent of the total workforce.

Unemployment in Malaysia is much worse among the young. Official data show that youth unemployment was 12.1 per cent in 2016, about four times higher than the rate for the overall labor force. Our survey showed that 18-24-year-olds in Malaysia are far more concerned about their job than the young in the other Asean-5 countries (see chart).

A recent study by Bank Negara Malaysia, the country's central bank, suggested a low level of skilled-job creation and an inadequate supply of industry-ready graduates has contributed to youth unemployment. Malaysia has not attracted enough of the high-quality investment that would provide skilled and well-paid jobs.

Income matters

Although the informal sector is indispensable as a buffer during tough times, it means more than 100m people lack job protection, or health or work insurance. In Indonesia, only 1.9 per cent of 72.7m informal sector workers have registered as members of the Workers' Protection Agency.

Informal sector work often means low pay with little prospect of a raise. This explains the high worker turnover in countries with a big informal sector. Our survey found only 15.3 per cent of Malaysians were considering another job, versus 28.9 per cent in the Philippines and 25.3 per cent in Indonesia. For those considering a change, low pay is the number one reason, followed by poor career prospects and the desire to switch to another career.

The switch to informal jobs partly explains the poor income performance among Asean-5 countries. Our survey showed household income growth has been slowest in Thailand, followed by Malaysia and Indonesia (see chart).

A positive turnround

A recovery in demand for Southeast Asian exports should improve job prospects and income levels. Countries with a higher export-to-GDP ratio, such as Malaysia, Thailand and Vietnam, will benefit the most (see chart).

In the first half of 2017, Malaysia's total exports rose 20.9 per cent year on year, a jump from 1.4 per cent the year before. This, coupled with robust private sector consumption, led to Malaysia's GDP expanding more than expected in the past two quarters. We expect annual GDP growth to accelerate for the first time in three years to 4.8 per cent this year, from 4.2 per cent in 2016.

This growth should lower overall unemployment but it is unlikely to bring youth unemployment below 10 per cent.

Trade performance has been equally robust in Vietnam, where exports grew 13.1 per cent in the first half, up from 2.5 per cent in the same period last year. Meanwhile, Thailand recorded export growth of 7.8 per cent in the first half, the fastest for six years.

Similar trends are apparent in Indonesia and the Philippines, but job market expansion in both countries is less dependent on exports than household consumption. In Indonesia, this has been under pressure from sluggish income growth and rapid currency devaluations in the past three years.

This article was first published on August 30 by FT Confidential Research.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. A team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.

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