Irresistible forces: wage differentials and demographic trends

In many parts of the world the ratio of the working age group to the elderly population is on a decline. By 2050, OECD countries will lose more than 82 million workers, and gain 96 million elderly individuals.

In contrast, developing countries are experiencing a youth bulge including Nepal which is in the midst of a demographic window of opportunity expected to last till 2047. Over 500,000 Nepali youth enter the labour market annually, not all of whom can be absorbed, increasing the pressure to migrate for work.

"In order for labour migration to be an industry for good, it has to be a good industry," said Oxford University professor Lant Pritchett at a recent lecture in Kathmandu. The irony of it was that the remarks came a week after Labour Minister Gokarna Bista was ousted for trying to push worker-friendly reforms by targeting the illicit profit-making.

Pritchett highlighted two aspects of the global economy that make labour mobility “a simply irresistible" force of the future: demographic trends and wage differentials. Pritchett and his colleagues came up with the concept of ‘place premium’: persistent wage differences for workers with the same productivity across borders, adjusted for the cost of living.

The impact of these two factors is being felt in Nepal. In April 2019, the Nepal government signed an agreement with Japan, a country with a severely ageing population to mobilise workers in 14 sectors under the Specified Skilled Worker visa category. If selected, Nepali workers will receive equal pay for equal work, which means the income gains of moving will be orders of magnitude.

However, such a win-win outcome has not always been realised in practice.  When a few months of salaries of a 24-month contract period is spent on repaying loans and interests, the wage differential that drove the decision to move can be muted.

Furthermore, migration in Nepal has also entailed giving up basic rights including freedom of movement and access to justice. The economic ‘place premium’ has almost always been accompanied by a rights ‘place cost’.  Stories of abuse, discrimination and inadequate labour protection abroad have shaped a more cautious migration discourse in Nepal despite its high dependence on remittances.

The emphasis on addressing malpractices in recruitment and employment of migrant workers is warranted, but Nepal must also be forward looking and  take advantage of potential opportunities opening up in Europe and other ageing societies.

Pritchett predicts we are entering a never before demographic era in which the narrative in many ageing societies will change from ‘how do we find jobs for workers?’ to ‘how do we find workers for jobs’? Temporary labour market programs can ease the qualms of receiving countries that fear immigration, and sending countries worried about losing their productive workforce.

Nepal needs more active labour diplomacy, especially in Europe, to benefit from these opportunities. Nepalis need skills for jobs of the future such as in hospitality and care that meet international standards and are less susceptible to automation is needed.

Private intermediaries here undercut competition for labour by compromising on wages and hiking up recruitment costs. If this is not addressed early on as newer job markets emerge, we can expect recruitment costs for the new destination markets to be significantly higher than now. The recruitment cost demanded by intermediaries at their discretion and the workers' willingness to pay for such jobs out of desperation are also often tied to the attractiveness of the job and location. This would again bring a big dent in the place premium.

Better migration opportunities should not be considered to be at odds with national development priorities. Research shows that economic development and emigration follow an inverted-U pattern, with emigration rising with economic development until countries reach upper-middle income levels.

The latest Labour Force Survey estimates that over 35% of Nepali youth (ages 15 to 24) is not in employment, education or training, while the unemployment rate of this age group is over 21%. The costs of staying are not negligible if the stayers do not have access to meaningful jobs.

Not giving those who want to migrate legal avenues means irregular channels of migration will flourish and the workers will put themselves at risk knowingly or unknowingly, especially in the face of the two ‘irresistible forces’.