Rising unemployment and falling real wages

The devastation caused by the floods and the resulting supply shortages, along with severe import restrictions, has led to a big loss of growth in the economy. The Pakistan Bureau of Statistics has estimated that in the year 2022-23, the GDP showed only marginal growth of 0.3%. There are strong indications that the growth rate was negative at close to minus 1%.

The three labor-intensive sectors in the economy are agriculture, manufacturing, and construction. Their share of employment significantly exceeds their share in national value added. These sectors have generally seen a contraction in their respective outputs in 2022-23.

Within agriculture, the major crop sub-sector has shown a decline in output in 2022-23 of 3.2%. During 2022-23, the large-scale manufacturing sector has suffered a contraction of 10%. Similarly, there has been a big fall in construction activity of almost 6%. Further, the wholesale and retail trade sector has also seen a decline of 4.5%. This sector is the second largest employer after agriculture, especially of the self-employed.

The decline in economic activity in the major sectors providing employment is bound to have led to very adverse developments in the national labor market in 2022-23.

The BNU Macroeconomic Model has been used to derive the growth rate in the labor force and employment between 2018-19 and 2022-23. The year 2018-19 is the last year when an unbiased labor force survey was undertaken by the PBS. The most recent survey is of 2020-21, but there is strong evidence that it understates the rate of unemployment as highlighted in an earlier article.

The total national labor force in 2018-19 was 68.75 million, with employment of 64.05 million, and the number of unemployed was 4.70 million. This implied the overall unemployment rate of 6.9%. The Model estimates the size of the labor force at 74.41 million in 2022-23. This implies that over the last four years the annual increase in the labor force has averaged close to 1.4 million. There is evidence that the rate of expansion in the labor force is less during periods of slow growth.

The Model also estimates the total employment in 2022-23 at 67.23 million. This indicates that the number of unemployed has risen to 7.18 million by 2022-23. This is equivalent to an unemployment rate of 9.6%. This is probably the highest unemployment rate ever witnessed in Pakistan.

The large decline in labor demand, coupled with runaway inflation at over 29%, has inevitably led to a big fall in real wages of virtually all kinds of workers. The Annexure to the weekly Sensitive Price Index report by the Pakistan Bureau of Statistics contains information on the daily wages of different construction workers.

The real wage is derived by adjusting the nominal wage by the consumer price index. The real wage has been derived for each worker as of December 2018, July 2022, and July 2023. The change in real wages is given in Table 1.

The estimates of the change in real wages are very striking and worrying in nature. It appears that post-COVID-19 pandemic there was a large fall in real wages and even the high GDP growth rates in 2020-21 and 2021-22 did not lead to a full recovery in real wages. As expected, the year 2022-23 witnessed a further big fall in real wages.

The surprising finding is that the decline in real wages is somewhat less in the case of relatively unskilled labor. Overall, the real wages have fallen by up to 29% from December 2018 to July 2023. The likelihood is that income inequality between the owners of capital and workers has increased in Pakistan.

There is need to also highlight the magnitude of male ‘idle’ young workers, aged 15 to 29 years. Their number has increased rapidly from 6 million in 2018-19 to over 8 million in 2022-23. They pose a special risk, given the propensity of some of these youth towards crime, fundamentalism, and illegal migration.

The above finding is also confirmed by the wage data given in the Labor Force Surveys conducted by the Pakistan Bureau of Statistics. Between 2018-19 and 2020-21, the real wages of service and sales workers, craft workers and plant and machine operators declined by 5% to 8%. The only exception was the category of highly skilled technicians and professionals who enjoyed an increase in real incomes of almost 19% during these years.

Overall, conditions in the labor market have worsened considerably in 2022-23. The overall unemployment rate is likely to have reached the peak of 9.7%. Simultaneously, there has been a fall in real wages of up to 13%. With a GDP growth rate of close to 2.5% in 2023-24 the unemployment rate is likely to reach 10%.

The government has not adequately focused on rising unemployment and falling real wages in Pakistan. Efforts ought to have been made to promote diverse employment generation schemes rather than focusing only on significantly raising the pay and pensions of government employees.

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                        Table 1                       
% Change in Real Wages of Construction Workers
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              December 2018    July 2022
                to               to         Cumulative
              July 2022        July 2023
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Mason           -17.8          -12.0             -27.7
Plumber         -15.5          -11.5             -25.2
Painter         -18.4          -13.1             -29.1
Electrician     -6.2           -3.8               -9.8
Laborer         -10.0          -12.5             -21.2
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Copyright Business Recorder, 2023