Why the unemployment problem will remain unsolved


  • Focus
  • Sunday, 17 May 2020

THE problem of unemployment is becoming more serious in many countries.

The International Labor Organization (ILO) predicts 1.25 billion workers worldwide will lose their jobs due to the Covid-19 pandemic, accounting for 38% of the world’s workforce.

In the United States, since the outbreak of Covid-19,33 million people have been made unemployed. In China, a report from CNN says 80 million people lost their jobs by the end of March. That number may have increased by now.

In Malaysia, MIER has projected a total unemployment rate of 9.2% and an unemployment pool of 1.46 million. If the Covid-19 infection rate spikes again, the unemployment rate will worsen.

All these factors signify troubling news, especially for the thousands of young people who are graduating from universities. After struggling to earn a degree and spending so much money, they may still need to rely on their parents for financial support. More saddening, many may be overwhelmed by their PTPTN education loan debt.

This situation is very different from past decades. Back then the wage level may be low, but young people need not worry about job opportunities.

Having a high school certificate was enough to land a job as a school teacher or a young officer at a firm.

If they have a master’s degree, they will be eligible to be appointed as lecturers. Some may eventually be appointed as professors.

But nowadays, young people with degrees are struggling to find jobs either in the public or private sector. Even those with a PhD degree may still not get a job as a university lecturer.

The question is what has caused this situation to occur and why is it so different from the past?

One thing to understand is that in the past, the major players in the economy were individuals, rather than companies or corporations. Therefore, most business activities were carried out by sole proprietorships or partnerships.

The competition between these businesses was not intense back then because the size of these sole proprietorships or partnerships was small. There was ample space or opportunity for all businesses to find a market for the sale of products or services.

But with the growth of the banking and finance industry, things have changed. The banking industry promotes the growth of “limited liability companies”, or business entities that are separate from their owners.

This way the repayment of the loan will be guaranteed to the bank even after the founders of the companies are no longer with the companies or are deceased.

Loans in large amounts which will generate more interest income for banks will become less risky, especially if the limited liability companies are large.

This naturally will lead to a situation where small or medium-sized businesses, which traditionally provide lots of job opportunities, are deprived of financial sources of capital and thus have to compete from a disadvantaged position.

These large-size limited liability companies will then compete with each other. Debt is, of course, preferred to equity financing because it is more convenient to obtain and easier to arrange.

Moreover, in order to get approval for the project the funder’s expected rate of return is lower compared to equity financing.

As the debt level and size of the companies increase, the nature of competition becomes more intense since the stakes are higher. The financial risk also increases with the debt level.

But this vicious circle is almost impossible to avoid since any pause or reluctance to obtain more financial resources will lead to a weakening in the firms’ competitive position.

Over time, more and more companies have ended up deeper and deeper in debt as they grow in size.

For example, in the retail sector, supermarket chain X is reported to have debts of over RM2bil. This means that competition among them will intensify. Supermarket chain X must compete fiercely with other supermarket chains that are in debt as well. To ensure competitiveness, all these companies must increase productivity and lower operating costs.

Existing employees have to perform multitasking roles and are stretched to their maximum potential to increase productivity. As a consequence new employees will only be hired when they are really needed.

In the past, when the country’s economy was expanding, the need to expand operations forced many companies to continuously hire new employees. In Malaysia, this was the case in the period from the 1970s to the late 1990s.

In 1973, the GDP growth rate was 11% and in 1996 it was 10%. During this period job opportunities were plentiful. But in reality, the growth was funded by borrowed funds from domestic and foreign financial institutions and was bound to end, which it did in 1997 when the Asian financial crisis took place, resulting in a negative growth of – 7.3%.

Since then the rate of economic growth in our country has dropped to an average of just around 4.4% and this has resulted in a drastic drop in employment opportunities for graduates.

The Covid-19 outbreak that hit Malaysia this year has made the situation worse and therefore the unemployment problem will certainly worsen as many companies face serious financial difficulties and have to reduce their size. In certain sectors such as hospitality and transportation, many are forced to close down their operations completely.

Government economic stimulus packages can only postpone the problems because the financial resources for the stimulus packages are money borrowed from financial institutions.

The increase in the government’s total accumulated debt means that the annual debt servicing amount will keep rising.

Currently, the government's annual interest payment is approaching RM40bil a year. There is a probability that total government revenue will be below the expected amount whilst expenditures will be above the budgeted amount thereby forcing an increase in the government’s budget deficit for this year.

Under those circumstances, the government will also be reluctant to increase employment opportunities in the public sector.

The worsening fiscal situation may force the government to re-introduce the GST which is a more effective tax collection systems and at a higher rate than 6% previously. There may be an increase in corporate tax rate too. This will further increase the operating costs for the private sector and further limit job opportunities.

The fact remains that there is only one factor that can speedily improve the economic situation and creates job opportunities for the future - the banking industry must help to lighten the burden on borrowers by eliminating compounding interests and pardon the debts for those who are ultimately unable to pay back their debts due to the Covid-19 pandemic.

In doing so, companies that are suffocating in debt will be able to breathe again, recover and create new employment opportunities. This will trickle start the economy to create opportunities in other sectors.

Unfortunately, the natural "DNA" of the banking industry, whether conventional or Islamic, makes the act of forgiving a debt an impossibility.

Therefore, the problem of unemployment will likely not be solved unless our entire financial system is reformed and debt is no longer an industry but instead a charitable act to help the poor and needy.

The reality is if our current system continues, graduates will have to be less choosy and be willing to accept salaries that may not cover their cost of living. Moreover, they may have to accept employment contracts that are temporary or short term in nature as firms seek flexibilty in the face of an uncertain business environment.

Additionally, job applicants will face an increasingly competitive situation among themselves in trying to prove to future employers that they possess the right attitude and enough skill sets that will enable them to add value to the organisation and improve its competitiveness in the face of an increasingly challenging business landscape.

Mohd Nazari Ismail is a professor at the Faculty of Business and Accounting, Universiti Malaya. The views expressed here are solely his own and do not necessarily reflect those of Sunday Star.

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