Asia’s Youth Job Crisis

Thoughts on the Market vor 11 Monaten

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Our Chief Asia Economist Chetan Ahya discusses how youth
unemployment will impact future growth and stability across
China, India, and Indonesia.

Read more insights from Morgan Stanley.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan
Stanley’s Chief Asia Economist.

Today – Asia’s young workforce is facing a significant challenge.
How a soft labor market will shape everything from consumer
demand to social stability and long-term growth.

It’s Tuesday, October 14th, at 2pm in Hong Kong.

Across Asia, a concerning trend is emerging. The region’s younger
generations face mounting challenges in the job market.

Asia’s youth unemployment averages 16 percent, which is much
higher than the U.S. rate of 10.5 percent. Youth unemployment
rates are running two to three times higher than headline
unemployment rates. The underlying situation is even weaker than
what is represented by [the] unemployment rate.

And within Asia, the challenge is most acute in China, India, and
Indonesia, the three most populous economies. Youth unemployment
rates for these three economies are running close to double, as
compared to other economies in Asia.

Now let’s take a closer look at China. The urban youth
unemployment rate, i.e. for 16–24-year-olds, has steadily
increased since 2019.

What’s driving this rise in unemployment? A mismatch in labor
demand and supply. The number of university graduates surged 40
percent over the last five years to close to 12
million. But economy-wide employment has
declined by 20 million over the same period. Entry-level wages
are sluggish, and automation plus subdued services growth mean
fewer opportunities for newer entrants.

Turning to India, their unemployment rate is the highest in the
region at 17.6
percent. Employment creation has been
subdued. And on top of it, India also faces another issue:
underemployment. Post-COVID, primary sector – i.e. farming and
mining – employment rose by 50
million, reaching a 17-year high. Note that
these jobs are relatively low productivity
jobs. And this is explained by the fact
that [the] primary sector now accounts for less than 20 percent
of GDP but it employs about 40 percent of the workforce. That’s a
sign of COVID-induced underemployment.

How fast must growth be to tackle the unemployment challenge? In
our base case, India's GDP will grow at an average of 6.5 percent
over the coming decade – and this will mean that India will be
one of the fastest-growing economies globally. But this pace of
growth will not be sufficient to generate enough jobs. To keep
[the] unemployment rate stable, India needs an average GDP growth
of close to 7.5 percent; and to address underemployment, the
required run rate in GDP growth must be even higher at 12
percent.

Shifting to Indonesia, its youth unemployment rate is the second
highest in the region. Moreover, close to 60 percent of jobs are
in the informal sector. And many of these jobs pay below minimum
wage. Similar to India, both these trends
signal underemployment. The key reason behind this challenge is
weak investment growth. Indonesia's investment-to-GDP ratio has
dropped meaningfully over the last five years.

So, what’s the way forward? For China, shifting towards
consumption and services could reduce labor market
mismatches. And for India and Indonesia,
boosting investment is key. India in
particular needs much stronger growth in its industrial and
exports sectors. If reforms fall short, policy makers may need to
fall back on increasing social welfare spending to manage social
stability risks.

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