EIC Analysis / Interesting Topics
Labor shortages leave Thailand's growth stuck in the starting gate
07 April 2015

Author: EIC | Economic Intelligence Center

Published in Bangkok Post/Asia In Depth: Asia Focus section, 7 April 2015

 

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A growing labor undersupply is one of the factors behind Thailand's recently sub-par economic growth. It's no secret that employers in Thailand are short on workers. A nationwide survey of companies in six key sectors by SCB Economic Intelligence Center last year found that at least half of them have trouble filling vacancies within a three-month search. Firms that need workers with vocational degrees struggle most, reporting a 23% shortfall of hires. For every 100 openings, they can only find 77 recruits. That leaves expansion plans stuck at square one.

 

Unfilled vacancies are the downside of Thailand’s very low rate of unemployment, which has averaged around 1% during the past ten years. A healthy level of unemployment should actually be higher than that, to allow for factors like job seekers' transition period between positions, when they are searching for a new post or waiting to fill one. (In the U.S., 5% unemployment is considered a healthy minimum rate.)

 

What is causing the problem? EIC's analysis identifies three main factors, and we compare Thailand's case to neighboring countries.

1. Demographic dividend is disappearing

          

The number of Thais who are of working age will peak in 2018 and shrink thereafter. Back in the 1970s-1990s, the East Asian growth miracle was driven in part by fast growth in the size of the working-age population, a legacy of high birth rates in earlier years. This was the period when Thailand experienced what economists call “the demographic dividend,” characterized by an economically optimal population structure shaped by a shift away from farming towards occupations in industry; more women entering the workforce; and fewer non-working dependents like children and old people.

           

During those years of fast modernization and after, in Thailand as in other industrializing countries, birth rates fell, in part because urban families tend to opt for having fewer children than do rural ones working the land. As a consequence of fewer births, the working-age population eventually shrinks, as soon will be the case here in Thailand. Thailand’s birthrate is now the lowest in ASEAN, on par with that of Singapore. Meanwhile, the nation’s progress in delivering better medical care has been increasing the number of elderly. Today there are 10 elderly folks for every 100 people of working-age, but that ratio will double within 15 years.

           

The upshot is that Thailand is already an “aging society.” And this transformation is happening much faster than in nearby countries with comparable levels of economic development. In Indonesia, Malaysia and the Philippines, the size of working-age population is likely to grow throughout the next two decades.

 

2. Productivity investment lags

          

Poor deployment of human resources has worsened Thailand’s labor problem during the past decade, a consequence of shortsighted management and government policy. From 2007 through 2013, both the government and private sector invested too little in the machinery and infrastructure needed to enhance productivity and to improve working conditions so as to attract and retain employees.

 

Thailand’s annual level of capital spending has not recovered to the pre-1997 financial crisis level during any single year since. In contrast, capital spending by other Asian nations, like South Korea and Indonesia who were also hit hard by the crisis, has substantially exceeded their pre-crisis levels.

 

Why have businesses scrimped on tools, technology and infrastructure? One big reason is that it’s simply cheaper to hire migrant workers. Thailand hosts some 3 million migrants, most of them undocumented, from Myanmar, Cambodia and Laos, according to the United Nations’ International Labor Organization (The government’s official number of registered workers is 1.2 million.) Migrants are mostly unskilled; their wages are low, often below the official minimum. Businesses therefore lack incentive to invest in new machinery to augment labor. This limits productivity. And Thailand's heavy reliance on migrants can't be sustained. Living standards, jobs and wages will soon improve in migrants' own countries and attract them back home.

 

3. The labor force lacks needed skills

          

There is a mismatch between the job skills that employers seek and the skills actually possessed by workers trained in the Thai educational system. Thai schools and universities emphasize general education instead of vocational training, engineering and science.

 

Vocational students account for only 20% of all students in post-secondary education in Thailand, a very low fraction compared to other countries like Malaysia (50%), South Korea (45%) and Indonesia (30%). This is a worrying figure, because employers actually have a greater need for vocational workers, with their practical training, than for graduates of universities.

 

Even professional-level candidates lack many skills required by employers. According to a World Bank survey published in 2007, Thai professionals perform poorly in creativity, innovation, IT, English language and mathematics. The workforce’s skills in English and IT have been trending down, whereas workers in Malaysia, the Philippines and some other ASEAN countries perform much better on these points. This probably means that the AEC will result in Filipinos replacing many Thai workers in sectors like hotels and tourism, which require English proficiency.

 

Universities are underperforming. The World Economic Forum’s Global Competitiveness Report rates Thai universities lower than those of competing countries. In 2014, Thailand ranked 87th in the quality of its universities, below Malaysia, Indonesia and the Philippines.

 

Thailand’s labor shortages, whether caused by too few workers, poor education or too little laborsaving investment, are reducing the economy’s capacity to grow. They have contributed to the decline in Thailand’s potential growth rate to just 3-4% for the past five to six years, down from 5% in the early 2000s.

 

Solving labor shortages will let companies expand and increase the nation’s growth potential. Although Thailand’s demographic shift cannot be changed, other labor supply factors can be improved. It’s mostly a matter of ramping up investment in productivity and optimizing management of human resources.

 

Time to get working on it.