The economics of unemployment

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”.