The economics of unemployment

| 16/10/2013

Albert Einstein once remarked that if he were given only one hour to save the world, he would spend fifty-five minutes defining the problem and only five minutes working out the solution. How might Einstein’s wisdom be applied when it comes to solving the Cayman Islands’ unemployment problem?

According to the most recent Labour Force Survey (conducted in October 2012) there were 1,925 unemployed Caymanians in the Cayman Islands labour market. But consider for a moment the significance of the word “market”.

A market is a place where buyers and sellers come together to engage in an exchange of value – normally an exchange of money for goods or services – through which both parties benefit.

One of the most critical features of a market is freedom of choice. Sellers are free to decide what to make and how much to sell it for. Buyers are free to choose between quality levels and prices. If buyers offer a price that is too low, they will be unable to find a willing seller. If sellers set their price too high, they will be unable to find a willing buyer. 

Thus sellers are incentivised to compete against one another by offering the lowest possible price and best possible quality in order to attract a buyer. This process ensures that products and services in a free market offer a reasonable profit incentive for sellers, while offering the best possible price and quality to buyers.

Thus markets harness every human being’s natural instinct for self-interest to allocate resources, generate profit, reduce prices and increase quality of all the things we buy. Adam Smith, "the father of economics", termed this unseen, beneficent force “the invisible hand of the market”. When the things we buy become less expensive and better quality, the overall result is of course an increase in our standard of living.

It is worth considering what would become of a “market” without the key ingredient of freedom of choice.

If buyers did not have freedom to choose the product with the best value for money there would be no incentive for sellers to improve quality or lower costs in pursuit of sales. Instead, the same self-interest among sellers that would normally lead to competition would work in reverse. Sellers would become complacent, raising prices and having little regard for quality, which would be bad for buyers, leading to a decline in our standard of living.

That free markets generally lead to better outcomes and rising living standards is a matter of settled fact among economists. This is not to argue against regulation. Even in heavily regulated markets buyers and sellers have the freedom to choose what to buy or sell, at what price and whether or not to engage in a trade. Without such freedom, whatever we were attempting to describe would not be a “market”.

Coming back to the Cayman Islands employment market, an economist would define the problem as follows: 1,925 sellers of labour are not able to find willing buyers.

In order to gain a better understanding of why this might be, let’s consider the reasons a seller of any product might struggle to find a buyer. According to economic theory, there are only ever four possible factors preventing a seller from finding a buyer.

First, it could be because the price of the product is too high (a “price gap”).

Second, it could be because the quality of the product is too low (a “quality gap”).

Third, it could be because buyers are not aware of the product or have bad information that makes it appear unattractive (an “information gap”).

Fourth, it could be because there is insufficient demand for the product (a “demand gap”).  In other words there are too few buyers and too many sellers.

Some readers may believe they see another possibility, that the price being offered by buyers is too low. But it is the buyer’s prerogative to buy at the price they believe to represent the best value for money. And all potential buyers must unanimously agree the price is too high (if a single buyer disagreed, the product would sell). Can they all be wrong?

Moreover, the buyer isn’t the one that has a problem — his need is being satisfied by the market. It is the seller that has a problem — he can’t sell his product. Economic theory, not to mention common sense, suggests that anyone without a good reason to change his or her behaviour will generally not.

So, to recap, our hypothetical seller has four potential issues that are preventing his product from selling: a price gap, a quality gap, an information gap, and a demand gap.

Every unemployed Caymanian is in this exact same boat, each a seller of labour unable to find a buyer, afflicted by one or more of these issues to some extent. Therefore, the war against unemployment is a war on these four fronts.

Let’s consider the issues, and potential solutions, in more detail, starting with the demand gap. First of all, does Cayman have one? Yes and no.

While most western nations are suffering from relatively high levels of unemployment, the underlying problem in each nation is basicallyarithmetic – most countries simply have more people than jobs. The Cayman Islands on the other hand is in the unique and fortunate position of having more than twice as many jobs as there are citizens in the workforce. So rather than a lack of demand for labour as such, if anything, what we have is a lack of demand for work unemployed Caymanians are willing and able to do.

Yet because economic growth (the proverbial “rising tide”) benefits all Caymanians – the unemployed, the employed and business owners – it is not just important, it is imperative for the government to create jobs in order to maintain our current standard of living. For in a service-based economy such as ours, creating new jobs is the one and only means of sustainable economic growth. 

That is precisely why it is so important that the government come up with a new work permit system that guarantees employers either a suitably qualified Caymanian or a work permit for a suitably qualified expatriate (the current system does not). No company will establish itself or grow in Cayman if it cannot be assured of the ability to hire suitably qualified employees. 

While the new immigration system should guarantee Caymanians access to job opportunities, as well as protection from discrimination, it must not be so restrictive as to come at the cost of economic growth. Otherwise the system may give the appearance it is protecting Caymanians while in reality it is holding them back.

In any case, to the extent jobseekers suffer from issues under the other three fronts described below (price, quality and information), increasing demand in itself would have no impact on unemployment because the additional demand would more than likely lead to new work permit applications. While such economic growth would still, incontrovertibly, be a good thing for Cayman, it would be cold comfort to the unemployed.

Compared to the vexing challenges of the demand gap, addressing the information gap should be relatively straightforward.

While every job not already filled with a Caymanian is required to be advertised in the newspaper, this is evidently not sufficient.

The current fall-back is the National Workforce Development Agency (NWDA), the government department tasked with introducing unemployed Caymanians to potential employers (among many other things). But the NWDA is significantly lacking in resources – both technology and manpower – to deal with the current level of unemployment. The annual budget for the department, according to the latest Annual Plan, is a mere $835,000 (a small fraction of the $10 million annual subsidy to the Turtle Farm).

Even a modest investment in technology would help close the gap. For example, every job registered with the department could be listed online for unemployed Caymanians to browse and apply for directly. This would be cheaper, easier and faster than applying for jobs via newspaper advertisement and regular mail. Those without computer access should be assisted by the NWDA. After all, the information gap cuts both ways — unemployed Caymanians may not be aware of every available job.

Improving the flow of information between the unemployed and the employers is one battle; improving the quality of the information is another. The NWDA should provide resources to Caymanian jobseekers, such as resume-writing support and interview preparation, to enable them to put their best foot forward with employers. They could also provide helpful resources to employers, for example, to ensure they accurately describe job vacancies.

The third front of the war on unemployment is the effort to bridge the quality gap.

Of course improving the “quality” of labour means up-skilling, in other words education and training. While providing more full and part time vocational training opportunities would help, the government should be realistic about the prospects for addressing the current unemployment problem through up-skilling.

Unfortunately, for the many unemployed Caymanians with family responsibilities, receiving an income is probably a higher priority than receiving an education. And in any case, the best way for someone to up-skill is by gaining work experience on the job. Hence it may benecessary for those people to find a job with the skills they have today and seek opportunities to improve them tomorrow.

If other unemployed Caymanians are able to invest more of their time in education and training, they must be given both the opportunity, and the financial assistance, to do so.  But the outcome should be a skill that is in demand and a qualification that employers value. The government should partner with the private sector at every opportunity to ensure that is the case.

Unemployed Caymanians, for their part, should make sure they take full advantage of the training opportunities that are currently available.

While improving the quality of labour, through education and training, is of limited usefulness in addressing the existing unemployment problem, it is of course critical in preventing future unemployment. To that end the government should spend time considering what, if any, role historical shortcomings in local education have played in creating the current situation and ensure they are being addressed.

The final front of the war on unemployment is the most critical and the most contentious: the price gap.

As mentioned before it is almost impossible to persuade a buyer to change their behaviour to solve someone else’s problem. Therefore, no amount of “brow-beating” employers is very likely to succeed.

A better use of resources would be to change the economic calculation to make hiring unemployed Caymanians a rational way for employers to exercise their freedom of choice. That means closing “the price gap” between what buyers are willing to offer and sellers are willing to accept.

In fact, government is already lowering the price of all Caymanian labour relative to the market through work permit fees. Work permit fees artificially raise the price of all non-Caymanian labour by between 10 and 20%. But government can only increase permit fees so high before they become unbearable for small businesses and prospective inward investors. Most believe work permit fees passed that tipping point several years ago.

The introduction of a reasonable minimum wage would help, because, like work permit fees, it would spread the cost of bridging the price gap for the lowest earners among all buyers, rather than asking a small minority to pay over the odds. While such a measure is controversial in the business community, minimum wage laws have been introduced in most western countries without calamitous consequences.

Although it is somewhat unlikely that a person unwilling to work for $4 per hour would suddenly be motivated by the prospect of earning $5 per hour, unskilled Caymanians should not be made to compete on price with foreign workers prepared to live in squalor.

It would also be helpful for unemployed Caymanians to know the current market rate for their skill level. Some people that have lost lucrative jobs in declining industries may have unwittingly tied themselves to the mast of unrealistically high expectations. Others may have gone from job to job in the buoyant employment market of the 2000’s and failed to adjust their expectations to the “new normal” wage levels that have prevailed since the beginning of the global recession in 2009.

Whatever the reason, every unemployed person ought to know what the market considers a fair wage in order to know what wage to seek or accept. The NWDA, in cooperation with the private sector, should have resources that allow them to determine market salary levels with reasonable accuracy for jobseekers they assist. 

Any jobseeker unwilling to work at the market rate for their skillset should not be eligible to receive government assistance (from NWDA or Social Services). Neither should anyone else that is effectively unemployed as a matter of personal choice.

The most problematic subset will be those people no employer wants to employ at any price: the so-called and infamous “unemployables”. Those with deal-breaking criminal records or psychiatric problems; serial job hoppers; those without decent employment references; in short those most in need of government assistance.

Programs such as Passport2Success (which should be expanded in resources and scope) can go some way to addressing the quality gap for those people in terms of basic “employability skills”. 

However, the country will need to decide what is to become of these people. If the government wishes them to become productive members of society, it will need to provide a viable pathway to employment. This will involve a combination of remedies including counselling, social intervention and pro-active monitoring. But ultimately, some kind of direct government subsidy may well be required in order to provide private sector firms with an economic incentive to engage with government agencies and facilitate a return to work.

The alternative to providing a viable pathway to productive private sector employment is for such people to be marginalised and forced to live on government hand-outs indefinitely. It is surely better for the government to temporarily pay an employer to hire and train an unemployed Caymanian than to pay them to stay home.

While many will balk at the suggestion of any new investment designed to reduce unemployment (in the form of subsidies or new government resources), consider that the government rakes in more than $60 million dollars a year in revenue from work permit fees alone. Better to invest a few million dollars of that back into the Caymanian workforce than to decline, drive away or forgo a few million dollars worth of work permits in the hope that frustrated employers will suddenly “see the light” and hire people they have so far exercised their freedom not to.

After all, Einstein also said “the definition of insanity is doing the same thing over and over again and expecting a different result”. 

Category: Viewpoint

Comments (28)

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  1. Foreign Devil says:

    Well done Adam.Realy good stuff man. I hope our leaders in the goverment read this.

    • Anonymous says:

      Mr Neilson excellent writing, you could use it for a text book in a class on the subject.

      And in an ideal situation everything you say would make sense. However the Cayman situation is not ideal.

      From the Caymanian side there are people that dont have the necessary educational standards. Yet because they are Caymanians they get jobs.

      On the expat side there is a lot of hiring of their own people regardless of educational standards.

      This is about who you know and who will do what for you.

  2. Anonymous says:

    That is the problem – following Einstein – our politicians have spent the last 55 years defining the problem, and are about to spend one year trying to fix it.

  3. Anonymous says:

    You learned all your economics from Google or Youtube then?

    • Anonymous says:

      What is important is that the writer learnt something.  Try it yourself sometime, you may like it.

      • Anonymous says:

        Those who can't reach your level will always try to pull you down to theirs.  

        This article was very interesting, thank you.

    • Ya Mon says:

      Ladies and Gentlemen, I give you Xxxxwit the Critical Critic.  Educated by reading tea leaves and toilet paper, he's guaranteed always to have something useless to add to the discussion.

  4. Anonymous says:

    I am an american born in brooklyn. I have 2 of my 6 kids living in Canada. One was working in Cayman in a trust company. They liked him he had a good atitude, he was making a decent wage while living at home, HS diploma. He went to college went back to same company and went to work in Canada. In fact most of the people who were working in Cayman went to work in Canada. 

    Problem started after recession ,my son was making promotions 3 of them as he had the "expertise" plus pay raises three of them. He was handling multi million dollar a/c on a daily basis. Then the hammer fell 10% drop on their bottom line. Just about all of the crew from Cayman were let go as they downsized the company. Lucky his wife had quit the company and worked for another group. They went back to visit one day to see if any of the old staff was there? Nope only top management. What a surprise? All the new staff came from IRELAND. They hired them because they accepted less pay.

    Well if one would believe that economic principle would rule greedy owners and managers, then yes. But of course its only true if you leave out the social aspect of it ( fight or flee ).

    Fight for whats right !! Or flee and give up. No one as a foreigner in the USA,Canada or the Cayman Islands has the right to not use its citizens for labour that is needed to survive in their own country. 

    Only through Gov't laws will the protection for jobs be guaranteed. Otherwise as work permit holders become citizens the cycle continues.

    The only gap that is a problem here is COST OF LIVING. The other major problem here is pension. Each company should have to pay double when they don't pay the 5% contribution. Nothing else proves my point better then the greediness of these companies who didn't pay their loyal hard working people. They did everthing right and they still got shafted.

  5. Anonymous says:

    I concur with most of your suggestions as they are well thought out and do make economic sense. However, in any analysis of an unemployment situation we must also account for the "human" factors that are often left out of economic theory. For example, in Singapore (2nd largest financial center in the world) where it is well established that there are highly educated and qualified local job seekers, sufficient demand for labour, and no dispute over the price and quality of the labor, many international companies still refuse to hire local persons and instead hire expats which costs more to recruit and employ.. As a result, the singapore government has recently announced new and tougher measures to ensure non-discrimination against local applicants. Thus, proven that governments cannot rely on any business to always make logical, economic or moral decisions when it comes to employing persons and must ensure that the freedom to employ is balanced and operates fairly to its local population. In sum, we should develop or strengthen our laws against discrimination of local persons while assisting businesses to source their labour needs.

    • Anonymous says:

      That doesn't prove anything of the sort.  It proves that companies want to hire the best candidate regardless of nationality and that populist governments will attempt to prevent them, even in supposedly sophisticated countries.

      The fundamental problem is that EVERYONE thinks he or she is the best candidate for ANY job and therefore the ONLY possible reason they weren't hired was discrimination.  Discrimination I tells ya!

      So the employer wants to pay to relocate someone and go through the expense and hassle of a work permit application just to indulge some petty prejudice?  OR, perhaps, just perhaps, the explanation is the too simple, too obvious and too innocent….

      You just weren't the best candidate for the job.  

       

    • Anonymous says:

      Yes, and CIG says that is the problem here. We all know that 90 % it is not, there are other factors. 10% may have a case. Same rules apply.

    • Anonymous says:

      I agree with you. Also, a big part of the problem is that company A is not forced to follow the employment and labor laws. (see recent headlines re non-payment of pension, and the same likely applies to healthcare, ovetime pay etc). Thus, company A is able to undercut the pricing of their competitors (company B, C & D), forcing them eventually to downsize or go out of business altogether, resulting in loss of jobs for locals and expats alike.

      The locals will not be hired by company A because company's A method of employing cheap foreign labor has been successful and they will continue to do so. Therefore, more locals are out of jobs and many of the expats who have also lost their jobs in Company B, C & D are not leaving the Island (because there is no real enforcement on that front from immigration), now trying to fly under the radar and get "days-jobs" or whatever, just not to have to go back home, resulting in further driving the wage down as pure desperation sets in.

      In a nutshell, it doesn't matter how fancy or simple we make the economics of Cayman out to be……….if Government would have enforced the laws that were in place for the last 10 plus years, we wouldn't be in the position we are in today because:

      a) where there was a qualified Caymanian interviewed for a job, that Caymanian should have been hired. Now all of the sudden it is that the Caymanian has to be better than every Expat  applying for the job………an Expat should not be able to apply where there are qualified Caymanians……..

      b). companyies employing permit holders would have ensured to train a Caymanian sucessor to the work permit holder so that once their term was up they would have had a qualified Caymanian in place to take over as they would have not been able to take out another permit to replace a previous permit holder

      c) company's would have been more likely to start on a level playing field, rather than being screwed over for actually following the law

      d). unemployed Expats would have been made to leave the Island, rather than lingering around for years, working and residing illegaly in Cayman

      e.) Temp Agencies would have been better regulated rather than being able to take out one temporary permit after another with no control or oversight as to where those people are placed. Some working with the same companies for years – that is not a Temp position!

      In summary – you can make all the changes you want and set up all the new procedures and models you want, but as long as they are not being enforced, it really doens't matter!

    • Anonymous says:

      Well put! 

      It's always easy to suggest that the problem may be skill-set or education, however, why are Caymanians with the necessary skill-set, education and attitude still unemployed?

      Most of the time, it has nothing to do with skill-set and education as I've seen time after time, expats with no education or comparable education, being hired instead…..even when the Caymanian has egerly agreed to work at the same salary or wages.  

      Discrimination is alive and strong in Cayman!

  6. Anonymous says:

    Excellent article explaining what most already realise, but some refuse to accept.

  7. Anonymous says:

    Excellent viewpoint!

  8. Anonymous says:

    The problem is the central premise of market economics.  Cayman is not even close to free market for anything.  There are huge barriers to entry of capital from abroad, oligopolies operating in virtually every market and a workforce with unreasonable and ingrained expectations which are derived from non-market forces.

    • Anonymous says:

      The sad thing about this article is that those who really need to read this will not take the timeto read it. They refuse to understand and it seems that no one can tell them otherwise.

    • Anonymous says:

      It may be oligopolies in some areas but there is quite a bit of competition (more than would would find in a smilar sized community in Britain or Canada or probably USA ) in respect to grocery stores, hardware stores, restaurants and filling stations. As for huge barriers to capital from abroad, all of the six or seven retail banks, with exception of CNB, are foreigh owned, our electricty company is majority foreign owned as most of our telecommunications providers  . In England and Canada, retail banking is dominated by four or five banks, all being English or Canadian banks in each respective country. The same is relatvely true for USA .The food store business in England, Canada and USA are dominated by three or four outfits for each of those countries though there is considerable foreign investment in the food store buisness in Canada (Safeway being a subsidiary of Safeway of USA) and in England (Asda being a subsidiary of Walmart of USA) .

      • Anonymous says:

        You trying to say that supermarkets is not an oligopoly in Cayman?

        • Anonymous says:

          Yes as though Foster's may be the leader. Kirks has  a large sized food sore and Hurleys is fairly well sized so one has three choices in food stores plus there is Cost u  Less (foreign owned or partially foreign owned)  who sells bigger pack items and also there are convenience stores at the filling stations. Which town  in England or Canada of sixty thousand population would have more choices? In addition, all of the Foster supermarkets as well as Kirks and Hurleys are as modern as any food store in North America (Canada or USA) and probably more modern than any in England

          • Anonymous says:

            More modern than the UK? Have you ever been there?!

            • Anonymous says:

              I have never been to Britain but given the general British disdain for commerce , I would not expect any small British town of sixty thousand to have food store facilities on par with those in Cayman.

          • Anonymous says:

            Three market participants.  Massive barriers to entry. Very high prices.  Oligopolistic profits. 

          • Anonymous says:

            I still own a property in a town of around 30,000 in the UK – there are 4 supermarkets (different chains), one low cost/ package store, at least 3 independant grocery/ convenience stores, 5 petrol stations (all different chains) one independant DIY store, 4 independant pharmacies and one chain pharmacy and several dozen other retail businesses (including clothes shops, bakeries, cafes, restaurants, liquor stores and sundry others). I would say that was pretty standard for the UK. Also, having recent experience of UK food stores, I would disagree with your view that Kirks and Hurleys are "more modern" – though that is just a personal opinion. Competition prevents them from raising their prices whenever they feel like it.