How skilled labour shortage is leading to inequality - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

How skilled labour shortage is leading to inequality 

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In this issue:
» Now Fitch has downgraded India
» Airlines have seen an increase in yields
» Why property prices have cooled in China
» Oil consumption has risen in emerging nations
» ...and more!

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Sweeping changes have taken place in the global economy in the last three decades. One of the most significant of this has been globalization and increasing connectedness of financial markets across the world. This has had its share of positives and pitfalls. But besides capital, the landscape has changed for labour markets as well.

For instance, in 1980 the world boasted of a working population of around 1.7 bn. That number increased to 2.9 bn workers in 2010. What is more, most of the increase was attributed to the emerging world, which added around 900 m new non-farm workers, a large chunk of it from India and China. For India and China this has been a significant development and has pulled millions out of poverty although the impact has been more pronounced for China than it has for India.

But there is a flipside as well. In the emerging countries as with the developed world, various developments in the labour markets have widened inequality as well. Take the developed world for instance. The unskilled labour there is already facing competition from workers in the emerging countries. At the same time, the developed rich world has focused more on technology and innovation for which it requires more of skilled labour. Thus, a surplus of unskilled labour and shortage of skilled labour has only increased inequality. An aging population is also adding to the region's woes. In the emerging countries including India, although population has risen, the quality of education has failed to keep pace. Thus, on an average, workers in the emerging world are less educated than those elsewhere.

Given that the population of the developed world becomes more and more aged, the focus will now be on Asian economies to provide human capital. Indeed, the Economist points out that China and India will be the world's main source for skilled workers over the next two decades. But for that education will be the key. The focus will have to be on imparting skills to an ever increasing workforce. And the governments will have to adequately ramp up investments in this field if it wants the demographic dividend to work to its advantage, maintain healthy growth rates and bridge the inequality divide.

Do you think that shortage of skilled labour will have a significant impact on global growth going forward? Share with us or post your comments on our Facebook page / Google+ page.

01:26  Chart of the day
Oil prices were rather volatile not just in 2012 so far but also in 2011. Arab uprisings, civil war in Libya, tensions between the US and Iran have all combined to keep global oil markets jittery. So how has this impacted oil consumption. As today's chart of the day shows, the emerging economies still accounted for a larger share in the increase in oil consumption in 2011. Despite talks about a slowdown in China, the dragon nation topped the rest of the pack in terms of oil guzzling. Not surprisingly, the US witnessed a fall in consumption as tepid growth hampered the economy.

Data Source: The Economist

Close on the heels of S&P's 'junk' threat, has come a fresh warning. Fitch, another ratings agency of repute, lowered its ratings outlook on India citing policy failures as one of the key reasons. These announcements did not create so much a flutter as there is nothing new in what the ratings agencies have highlighted. What is appalling though is the Government's reaction to the same. You see, the first step to solving any problem is to make an acknowledgement of the same. But if the acknowledgement itself is absent, there is hardly anything that can be done.

Sadly, India's policymakers seem to be showing an exact same attitude. What else could explain their brushing off of the warnings from the ratings agencies and calling them totally biased. Infact, they also went a step ahead and called India's economy as being completely sound. This is certainly not the right approach to take. If the policymakers spend even a fraction of the time they spend on criticizing the ratings agencies in improving policy reforms, we would have been in the midst of a great economic environment we believe.

It seems there is a silver lining to the eurozone crisis. At least for a few Indian banks. The debt market in Europe has practically dried up in the face of the looming crisis. Considering this as an opportunity, Indian banks with presence abroad are growing their overseas balance sheets. But most of the loans being bought from European banks are those availed by Indian companies. This at least is helping them take care of the quality of the underlying asset. As per a business daily, Indian banks with international operations have recently acquired over US$ 1 bn of credit assets. Leading the pack are State Bank of India (SBI), ICICI Bank, Bank of Baroda and Bank of India. As long as the banks lend to worthy Indian companies, we do not see any problem. After all, the external commercial borrowing (ECBs) market has also dried up. This is because the hedging costs for forex denominated loans do not make them feasible. In such a scenario, it makes sense for Indian banks to offer domestic companies the option to borrow overseas at more competitive rates.

The slowdown in the economy has hurt nearly every sector. The airlines sector is no exception. In fact, the sector has been one of the biggest losers. This is because the passengers cut down their travel budgets during times of slowdown. This is reflected in the drop in airline traffic that occurred in the month of May 2012. Traffic dipped to 54.48 lakhs in May from 54.96 lakh in April this year. Therefore one may expect the revenue per passenger to dip down as well. However this has not been the case.

The airline yields have actually gone up during this period. A big reason for this is that turbine fuel prices have actually cooled off in recent times. At the same time, ticket prices have continued to be high. To add to this, most airline companies have rationalized their capacities as well. As a result, there are lesser number of empty seats. The combination of these two factors has helped boost revenue per passenger and hence the airline yields. But it is unlikely to continue in this direction for too long. The civil aviations ministry has already asked airlines to cut down their fares or rationalize the disproportionate increase that we have seen. As a result, most companies have hinted that they may look at cutting the rates in near term. This combined with lower traffic would result in lower yields.

Homebuyers in India, especially in Mumbai have been praying for correction in property prices for long. But that has not been the case as China has pipped it to the post first. Property prices in China have already started sliding. Property developers in the country are offering lower prices in as many as 54 cities out of 70 cities, tracked for the government record. Middle class Chinese buyers were going through an affordability crisis. And experts have been discussing the possibilities of a property price bubble in China for long. So how is it that home prices are coming down in China?

Digging deeper reveals the truth that the phenomenon is not a real market dominated by simple economic theory of demand and supply. The cool-down has been engineered by the Chinese Government. The government has taken several cooling measures in the recent time to curb property prices.

No doubt, this is a step in the right direction. The repercussions of the property bubble bursting would have been too much just after the global financial and debt crisis. However, it poses a greater risk to the Chinese growth story. After all, housing market has been a major plank of the Chinese economy. What if, the planned moderation in the prices also results into a crash? This thought is more than enough to make investors across the world jittery.

In the meanwhile, the Indian stock markets were trading well above the dotted line as buying activity increased during the post noon trading session. Stocks from the oil & gas and FMCG spaces were amongst the investors' favourites today. At the time of writing, India's benchmark index, the BSE-Sensex was trading higher by about 150 points or 0.9%. Stock markets in other major Asian economies ended on a weak note with Japan and Hong Kong closing lower by about 0.8% and 0.3% respectively.

04:56  Today's investing mantra
"Investing without research is like playing stud poker without looking at the cards." - Peter Lynch
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5 Responses to "How skilled labour shortage is leading to inequality"


Jun 19, 2012

Shortage of skilled labour is a time-bomb waiting to explode, if concrete actions are not taken now. Government must encourage PPP model to ramp-up the education infrastructure and incentivise the investors in this field. This is high time Govt. prioritizes skill and competency development programs.

Like (1)


Jun 19, 2012

"Fitch, another ratings agency of repute, lowered its ratings outlook on India citing policy failures as one of the key reasons."

While I can agree with Fitch in this instance, I don't believe it is an agency of repute. Just like S&P and Moody's, Fitch has sold its soul to the Devil. It pretends to issue objective ratings while being paid by the companies it rates. Talk about conflict of interest. There's only one honest ratings agency in the US and that is Egan-Jones.

Like (1)

anupam garg

Jun 19, 2012

wrt chart of the day...the phenomenal decline in oil consumption of US can't be just cos of tepid growth...the change is way too much to be attributed to that factor...usage of substitutes?

Like (1)


Jun 19, 2012

With respect to Demographic Dividend, I feel India has at best another 10 years before this advantage runs out. Demographic Dividend is just the large fan-out of population from older to younger generation. i.e. When a family has more than 2 kids, you can expect demographic dividend when the kids reach working age. But the govts family planning policies (hum do hamare do!) attack this 'Dividend' frontside.
Once the next generation decides to have 2 or less kids, the Demographic Dividend ends. In rural areas, now the 2-kid generation has grown up, and guess what, they're not having more than 2 kids of their own.

Like (1)

Nadir Godrej

Jun 19, 2012

Rapid progress in online education will ensure that the future labour force is well educated at an affordable cost.

Like (1)
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