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Pandemic Hit Labour Market Harder Than Financial Crisis

By Dr Mohd Yusof Saari

 

THE economic crisis brought about by the Covid-19 pandemic is different from the Asian financial crisis in 1997/98 and expected to bring long-lasting effects.

In this article, I describe some significant labour market implications induced by Covid-19 last year. The severity of the economic contraction induced by the Asian financial crisis was worse than that of the pandemic.

The financial crisis had turned a strong expansion of 7.3 per cent in 1997 into a deep contraction of -7.4 per cent in 1998 (see Figure 1).

The outbreak of the pandemic adversely affected the economic growth in Malaysia with -5.6 per cent contraction last year.

Although the economic growth during the pandemic is less severe than the financial crisis, it has a profound impact on the labour market.

However, the pandemic resulted in thousands of people losing their jobs and income, increasing the unemployment rate to the average of 4.5 per cent last year.

 

 

 

 

The implementation of movement restrictions to control the outbreak has economic costs. The measures have caused massive disruptions to the supply side and demand side of the economic system.

On the supply side, the sudden operation halt of non-essential businesses disrupted the supply-chain and production output, which, in turn, affected the demand for labour.

Firms could not afford to pay wages and were forced to retrench workers.

The income losses of the retrenched workers reduced the consumption on the demand side.

Some workers may not be directly affected but they could not consume as much as before due to the limited supply of goods and services.

Altogether, the supply side and demand side of the economy have been affected by the movement control restrictions.

Trade-off is likely to hold between economic and movement restriction economic slowdowns when movement restriction is imposed and vice versa.

Covid-19 impacted the natural unemployment and cyclical unemployment.

The natural rate of unemployment is defined as the unemployment rate that is compatible with a steady inflation rate or non-accelerating inflation rate.

Nairu can also be seen as the unemployment rate that would occur in the absence of cyclical fluctuation due economic crisis.

According to EU-ERA estimate, the Nairu experienced by Malay-sia is averagely at around 3.3 per cent (see Figure 2).

The Covid-19 crisis increased the actual unemployment rate from 3.3 per cent in 2019 to about 4.5 per cent last year.

The difference between 3.3 and 4.5 per cent is the unemployment due to the Covid-19 crisis.

The crisis also shook natural unemployment and cyclical unemployment rates.

Addressing natural unemployment and cyclical unemployment requires a different approach.

Cyclical unemployment demands active short-term measures because the unemployed are directly affected from the crisis induced by the pandemic.

Long-term measures are more appropriate for addressing natural unemployment. – NST ONLINE

 

 

  • The writer is Associate Professor, EIS-UPMCS Centre for Future Labour Market Studies (EU-ERA) Employment Insurance System, Social Security Organisation (SOCSO)

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