Responding to the COVID Economy: Part 2 – Understanding the Employment Shock

Media Statement by Dr. Ong Kian Ming, Member of Parliament for Bangi and Assistant Political Education Director for the Democratic Action Party (DAP) on the 5th of June, 2020

Responding to the COVID Economy: Part 2 – Understanding the Employment Shock

Key Points:

  • Loss of Employment (LOE) as recorded by the Employment Insurance System (EIS) increased by 72% in April 2020 (compared to April 2019). Projected to increase by at least 2 half times in 2020 (compared to 2019)
  • Jobs at risk in the 5 most vulnerable sectors (Travel & Tourism, Wholesale & Retail, Construction, Manufacturing & Agriculture) estimated at 1.67 million. Unemployment in 2020 likely to be far higher than the current projection of 4% by Bank Negara Malaysia (BNM). Range between 8% to 14% likely.
  • The Wage Subsidy Program (WSP) and the Employment Retention Program (ERP) have definitely helped businesses but no evidence that they have ‘saved’ 2.4 million jobs
  • Key policy recommendations – pass a COVID Relief Bill (but may be too little too late), targeted incentives and policies to revive the most affected sectors, extended financial assistance to businesses and cash transfers to individuals especially those without EIS protection

One of the most significant economic impact of the COVID crisis is the loss of employment. In the United States, for example, the unemployment jumped from 3.5% in February 2020 to 14.7% in April 2020, a level not reached since the Great Depression, which lasted from 1929 to 1933. In Malaysia, on the surface and in the official statistics (for now), we have not seen a significant increase in the unemployment rate. Even though the unemployment rate increased from 3.3% in February 2020 to 3.9% in March 2020 (or an increase in the number of unemployment from 525,000 to 611,000 in on month), Bank Negara Malaysia (BNM) is projecting the overall unemployment rate to increase to 4% in 2020.[1]

Are we underestimating the number of jobs already lost during the MCO / CMCO and also the potential job loss in the next 6 months? At the end of April 2020, the Executive Director of the Malaysia’s Employers Federation (MEF), Datuk Shamsuddin Bardan, as many as 2 million Malaysians may lose their jobs this year.[2] In addition, according to the Malaysian Institute of Economic Research (MIER), between 1.5m to 2.4m jobs may be lost in 2020.[3]

Previously, in Part 1 of this series, I argued for a need to have a targeted sectoral approach in response to the COVID Economy.[4] Similarly, in trying to understand the potential job losses, we also need to dig deeper into the economic impact at the sectoral level. The 5 sectors of the economy with the largest employment and are also the most susceptible to the COVID crisis are (i) travel and tourism (ii) wholesale and retail (iii) construction (iv) manufacturing and (v) agriculture. For each of these sectors, I estimate the number of ‘jobs at risk’. These are jobs which may be lost but could potentially be reduced if well-design policies are put in place.

Without doubt, the travel and tourism sector has been the hardest hit among all sectors. The World Tourism Organization (UNWTO) projects international tourism to fall by between 60% to 80% in 2020.[5] International tourists, which comprise almost half of the entire tourism industry in Malaysia, have decreased to almost zero during this lockdown. A spate of hotel closures have been announced including the Ramada Plaza Hotel in Melaka, the G City Hotel in KL, the Kinta Riverfront Hotel in Ipoh and the Jazz Hotel in Penang (just to name a few). Domestic tourism cannot replace the international tourists especially with continued economic uncertainty and government regulations stopping domestic travel. Up to 30% of hotels may have to close down, according to Malaysian Association of Hotels (MAH)?[6] It is not just the hotels which are suffering but also other business activities which are related to the tourism sector.

According to the Tourism Satellite Accounts for 2018, an estimated 3.4 million jobs are related to the tourism sector in services ranging from accommodation, F&B, passenger transport, travel agencies, recreational activities, retail sale of automotive fuel and retail trade. A conservative estimate of 30% of jobs at risk in this sector would translate into approximately 1 million jobs.

The next sector to consider is the Wholesale and Retail sector. There are an estimated 1.5 million full time and another 100,000 part time paid staff in this sector. Initial projections by the Retail Group of Malaysia (RGM) is for a contraction of 5.5% in retail sales, the first time that this sector has experienced a contraction since the 1998 Asian Financial Crisis.[7] An estimated 51,000 retail stores (out of 325,000) are expected to close permanently.[8] This represents about 15% of all retail stores. The Malaysian Automotive Association (MAA) has revised its passenger vehicle sales in 2020 downwards by one-third from 600,000 to 400,000.[9] Even if “only” 15% of employment in the retail sector is “at risk”, this represents 240,000 jobs.

The manufacturing sector in an important engine for trade and economic activity and provides approximately 2.3 million jobs. Manufacturing held firm in Q1 2020, registering a 1.5% growth rate (compared to Q1 2019). But the Q2 2020 figures for manufacturing will be in deep negative territory as even factories operating in essential sectors were mostly allowed to operate at a maximum of 50% capacity. The April IHS Markit Purchasing Managers’ Index (PMI) for Malaysia fell from 48.6 to 31.3, a massive decline.[10] Although the May IHS Markit PMI bounced back to 45.6, depressed global conditions are likely to dampen this sector for the remainder of the year.[11] SMEs are likely to be under represented in this PMI survey and these are the companies most negatively impacted by the shutdown. Even if 10% of jobs in this sector are at risk, this translates into 230,000 jobs.

The construction sector provides an estimated 1.5 million jobs to the economy. In Quarter 1 2020, this sector contracted by 7.9% in real terms (compared to Q1 2019). Most construction activity grounded to a standstill during the MCO and still have yet to be fully restored during the CMCO while awaiting testing for the large foreign workforce which comprise a significant number of manual workers in this sector. It would not be surprising to have 10% of jobs in this sector at risk if construction activity remains lethargic for the rest of the year. This puts another 150,000 jobs at risk.

The agriculture sector provides an estimated 483,000 jobs to the economy. This sector contracted by 8.7% in Q1 2020 (compared to Q1 2019), led by palm oil production which contracted by 22% during this time period. Approximately 90% of Agriculture establishments are SMEs employing about 190k workers. According to a report by the Khazanah Research Institute (KRI), these SMEs are the most at risk of failing and their workers being asked to take unpaid leave or be retrenched.[12] The agriculture sector also has a high proportion of workers who do not contribute to the Employment Insurance Scheme (EIS) and as such as more financially vulnerable when out of work. Even if 10% of jobs are at risk in this sector, this represents another 50,000 jobs.

When the total jobs at risk are summed up, we arrive at an estimation of 1.67 million jobs (Table 1 below). When we add this to the 600,000 unemployed as of March 2020, we will exceed the 2 million unemployed mark. The total labour force was 15.8m as of March 2020. With an estimated 2.3 million unemployed, we may reach a 14% unemployment rate at the height of this economic crisis.

Table 1: Estimation of total “jobs at risk” in 5 vulnerable sectors

Sector Estimated Jobs at Risk
Travel and Tourism 1 million
Wholesale and Retail 240,000
Manufacturing 230,000
Construction 150,000
Agriculture 50,000
Total 1.67 million

Source: Author’s own estimates

Some of these jobs at risk may have been saved by the Wage Subsidy Program (WSP) and the Employee Retention Program (ERP) that was launched by the government earlier this year. According to the 7th LAKSANA report, as of the 31st of May 2020, approximately 286,000 companies had applied for the WSP involving 2.2 million workers at a total cost of RM3.22 billion. At the same time, 184,000 workers had been approved for the ERP.[13] While these programs have been helpful to companies, especially the SMEs, it would be wrong to claim that they have ‘saved’ 2.4 million jobs. Some of these companies would have continued to operate even without the wage subsidy program. At the same time, there would have been other companies which did not sign up for the WSP because they couldn’t afford to continue to keep the same number of staff on the payroll for the next 6 months, which is a condition for applying for the WSP.

One important indicator of the loss of employment (other than the official unemployment figures reported by the Department of Statistics Malaysia or DOSM) are the reports to the Employment Insurance System (EIS) made by individuals who have been retrenched. The EIS center has made available these retrenchment figures for 2019 and also for the months of January to April 2020. For the months from January to April 2020, LOE was reported at 21745 jobs compared to 14561 jobs during the same time period in 2019, an increase of 49.3%. Reported retrenchments increased by 72% from 3571 in April 2019 to 6143 in April 2020. (See Table 2 below)

Table 2: Loss of Employment reported to the Employment Insurance System (EIS), Jan to April 2019 vs 2020

  2019 2020 Change % Change
Jan 4998 5778 780 15.6%
Feb 2848 4562 1714 60.2%
March 3144 5262 2118 67.4%
April 3571 6143 2572 72.0%
Total 14561 21745 7184 49.3%

(April 2020 corrected from an earlier version)

What is more worrying is the projections made by the EIS center, that total LOE will increase from 40084 in 2019 to 106700 in 2020, or an increase of 266% (Graph 1 below). We have to keep in mind that not all workers are registered with under the EIS and that LOE claims represent only part of the actual unemployment reality. We must also keep in mind that those who may have lost their jobs in the past would not find it as easy to find another job soon in the COVID economy. The unemployment rate in 2019 was 3.4%. If we project this to increase by 2.5 times, as a reflection of the projected LOE, by the EIS center, we would reach an unemployment rate of 8.4% in 2020, far higher than the estimated 4% by Bank Negara Malaysia and other government agencies.

Some of this increase in unemployment would be borne by the foreign worker population which makes up 15% of the total work force (using official foreign worker figures). But it would be a mistake to think that all of the foreign workers will lose their jobs first before Malaysian workers. This is very dependent on the industry in question.

What does this mean from a policy perspective?

Firstly, some of the jobs losses and shops and businesses closures could have been prevented if Malaysia had been more pro-active and passed a COVID Relief bill before the beginning of the MCO. Singapore passed its COVID-19 (Temporary Measures) Act 2020 in early April 2020 which provided temporary relief measures for certain contractual obligations which companies could not meet because of the COVID crisis.[14] In Malaysia, the legal affairs division in the Prime Minister’s office is only NOW asking for feedback for a similar bill.[15] Some lawyers have already argued that such a bill, which can only be debated and passed in both houses of parliament by August and gazetted in September, will be too little too late.[16]

Secondly, with local transmissions having come down significantly, the government should focus its efforts on having specific plans to revive those sectors most affected by the COVID crisis. In the travel and tourism sector for example, the lifting of interstate travel after the 9th of June 2020 would help domestic tourism. Re-emphasizing the government’s commitment to the economic stimulus package which was announced by then Prime Minister, Dr. Mahathir, at the end of February 2020, which includes measures to stimulate the domestic tourism sector including digital vouchers for local travel, would also be somewhat helpful.[17] Starting negotiations with some countries in Asia Pacific with similarly low community transmission rates to establish special travel channels would bring back some international travellers. Singapore, for example, is establishing a fast track travel lane for business travellers and officials from China and are looking to extend this to New Zealand soon.[18] Japan is weighing the lifting of travel restrictions for visitors from Australia, New Zealand, Thailand and Vietnam (but not Malaysia).[19]

Thirdly, the government should increase its assistance to businesses and individuals beyond the already announced plans. Bank Negara’s allocation for the Special Relief Fund (SRF) should be increased beyond the RM10 billion already allocated. The Bantuan Prihatin Nasional (BPN) assistance should be extended beyond June and be given to those who have lost their jobs and livelihood and are not registered under the EIS. Other financial assistance should be also considered.

If the loss of employment figures are not taken seriously, any further action by the government may come too late and the increase in unemployment to between 8% and 14% will have serious societal as well as economic implications.

[1] (This projection was in early April so it may have been an underestimation of the economic shock of the more than 2 month Movement Control Order (MCO) / Conditional Movement Control Order (CMCO)