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Why rising unemployment?

It was not so long ago when unemployment was not heard of in Bhutan. Jobs were available to everyone
whoever entered the labor force and wanted to be employed. The government created a large number of jobs as
the domain and intensity of its intervention expanded.
But things have changed quite rapidly in the last decade. Now, Bhutan is faced with the twin problems of
unemployment and poverty. It requires an analysis of the nature of the labour market, past approach and the
growth pattern to reach any judgment about its possible cause.
Rising unemployment is an indication of distortions in the labour market. Neo-classical economists believed in
the existence of full employment at every point of time because wages are fully flexible. Unemployment can
occur only if the nominal wages are higher than the equilibrium or market wages. There are two reasons that
have raised the wages above the market level - the wage expectations and the minimum wage regulations.
Every labour has a target wage in mind at which he/she is ready to work and it is an important determinant of
actual wages. Anything that affects target wage affects employment situation. Rising target wages tend to have a
depressing effect on employment generation.
Bhutanese labour has relatively higher target wages consequently the demand for such labour gets
suppressed. No employer would pay what is more than what the labour contributes to the total revenue. Increase
in wage expectation without parallel increase in productivity only calls for substitution of labour with capital - firms
would like to have more machines than labour. Cheaper availability of capital also induces such substitution.
There is another angle to it - Bhutanese firms can substitute expensive local labourers with cheaper migrant
labourers. Both affect employment generation for Bhutanese labour. A dose of realism is necessary for finding
the solution.
A minimum wage regulation is another villain. The regulations prohibit hiring of labour below a legally set
standard. Though done on welfare consideration the final outcome is opposite. Market cannot function on the
dictates of states value judgment. Because of unrealistic wage controls firms either do not hire such labour or
make some tacit arrangements. The early we realize that minimum wage regulation has net welfare loss, better it
would be. Lesson number one to be learnt - do not tamper with the market mechanism.
Things worked in the past because the state assumed the responsibility to create employment and as a result
it just postponed the problem. How? Most of the government jobs come as booty - pay without performance, jobs
are secured, salary hike is assured, and all come with greater social prestige and power. Work started being
taken for granted, work ethics evaporated and productivity took the final blow.
The government can still function with such an inefficient system but the market operates on a different
paradigm. The lack of work culture which has received so much attention in newspapers and drawing room
discussions, finds hardly any takers where it matters the most. The second lesson to be learnt - develop a work
culture and it has to be done at an individual level.
The third important factor is the growth process itself. Hydroelectricity and construction have been and
definitely will be the engine of growth in Bhutan. Unfortunately, both do not have the ability to generate sufficient
employment. Hydroelectricity is capital intensive and despite its high growth orientation it does not create
sufficient employment opportunities. Construction on the other hand is labour intensive but draws it mainly from
outside labour pools. The local labour is either too expensive or falls short on needed skills. Given this situation,
even a more rapid growth in future is highly unlikely to create adequate employment opportunities. The final
lessons to be learnt diversify the rural economy; develop the skills needed by the market; and respect the
labour. A work itself is not small or big, it is the way in which it is performed that makes work big or small.
The future looks grim. As the government reduces its size, employment would be mainly created by the market
forces. Unless we learn to respect the market forces and its values the problem of unemployment and low
productivity are there to stay