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Employment Challenges in Nepal: Trends, Characteristics and Policy Options for Inclusive Growth and Development

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The present study aims to examine employment challenges in Nepal from an inclusive growth perspective and derive some important policy lessons. For that purpose, apart from examining employment and labour market characteristics, policies and programmes, a rigorous decomposition analysis was conducted to identify the linkages between employment and growth, focusing on productive employment dimensions. The study also assesses the labour demand aspects of industrial development to explore the prospect of raising productive capacity for higher value added employment and decent work.
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Dilli Raj Khanal
Employment Challenges in Nepal:
Trends, Characterisics and Policy
Options for Inclusive Growth and
Development
South Asia Research Network
Em pl oy me nt an d S oc ia l Protection for Inclusive Growth
SR
ANET
SARNET Working Paper No.5 | 2015
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EMPLOYMENT CHALLENGES IN NEPAL: TRENDS, CHARACTERISTICS AND POLICY
OPTIONS FOR INCLUSIVE GROWTH AND DEVELOPMENT
Dilli Raj Khanal, PhD1
EXECUTIVE SUMMARY
Productive employment and decent work are now recognised as prerequisites to enhancing inclusive
growth and sustainable development. As a critical source of income, productive employment empowers
people, provides social security and strengthens social cohesion. Therefore, full and productive
employment and decent work for all—including women and young people—were included in
theMillennium Development Goals (MDGs)of 2005. In Nepal, a similar emphasis is apparent inrecent
plans, policies and programmes.
The present study aims to examine employment challenges in Nepal from an inclusive growth
perspective and derive some important policy lessons. For that purpose, apart from examining
employment and labour market characteristics, policies and programmes, a rigorous decomposition
analysis was conducted to identify the linkages between employment and growth, focusing on
productive employment dimensions. The study also assessesthe labour demand aspects of industrial
development to explore the prospect of raising productive capacity for higher value added employment
and decent work.
A quick review shows that despite the declining population growth rate in recent years, the high labour
force participation rate, including a high female participation rate, has resulted in a largely youth-driven
working population in Nepal. The rapid growth of the urban population,largely due to the marked rise in
rural migration, is an added demographic characteristic. Such phenomena have added extra pressures to
the labour market in Nepal.
Apparently, unemployment remains low in Nepal at the rate of 2.2 per cent. But very high
underemployment, in the form of self-employment without wages in general and exclusionary practices
against women and other deprived socio-economic groups in terms of both job and wages, are common
in the labour market in Nepal. The lack of elementary education and skills training, particularly among
the female workforce, has deepened labour market vulnerability. The total economically underutilised
population stands at almost 30 per cent,with 49.9 per centfrom urban areas and 26.9 per centfrom rural
locations. Within the informal sector, which makes up96.2 per centof all employment, the ratio of self-
employment to total employment is about 61.2 per cent. The ratio of female paid employmentto male
paid employment is low by 23.7 per cent. More worryingly, female employment accounts for hardly 3.5
per cent of total employment within the non-agriculture sector. Similarly, female workers earn only 60
per cent of the wages paid to male workers.
Adverse labour market conditions have resulted in very high labour mobility and migration, both internal
and external, in search of jobs and employment opportunities. In 2008, 44 per centof all households had
at least one absentee member in a family with about 29 per centbeing out-migrants. Recent estimates
1 Dr. Khanal, a former member of the Parliament and National Planning Commission, Nepal, is the Founder
Chairman of the Institute for Policy Research and Development (IPRAD). Economist Dr. Prakash Shreshtha
contributed to the study and his contribution is highly acknowledged.
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from unofficial records show that in 2011-12 more than 3 million Nepalese citizens had been abroad for
employment purposes. Survey data additionally reveal that out of the 55.8 per cent of households
receiving remittances, only 19.6 per centreceive remittances from within Nepal and the rest receive
payments from India (19.6 per cent) and other countries (69.1 per cent). Therefore, the pressures on the
domestic labour market have eased off primarily due to the massive outflow of workers. Such an outflow
has contributed to augment remittances inflows enormously overtime with contributions to, among
others, people’s livelihood, social development and poverty reduction. The labour market conditions
abroad, however, reveal that the situation is very adverse from the view of decent employment.
In order to bring about reforms in the labour market and to strengthen labour market institutions, the
Labour Act and Trade Union Act were introduced in 1992 and 1993 respectively. However, the Labour
Law 1992covers only those firms and enterprises that employ 10 or more workers and hence exclude the
informal labour market. In the act, workers’ rights and security, as well as various regulatory measures,
are provisioned. The act, however, by restricting the hiring and firing rightsof employers, has been
continuously criticised for being labourfriendly but adverse to investment. Although market distortions
caused by syndicate and carteling systems are equally apparent, the labour law includes rigid rules that
confine it to the organised sector.This has restricted the law’s ability to reduce labour market
segregation and vulnerability, induce labour market formalisation, enhance decent employment and
raise the productivity of labour force in general and female workers in particular.
Such trends are becoming pervasive despite the prioritisation of employment generation by plans,
policies and programmes. A quick review shows that the plans have set growth-led productive
employment targets despite the focus on private investment in industry; infrastructure and tertiary
sector activities follow conventional approaches without the strong backingof concrete sectoral growth
strategies and accompanying policies and programmes in a consistent way. Largely, underemployment
and the interlinked informal labour market problems are overlooked.
As an offshoot to this, programmes such as Youth Self-Employment initiated in 2008 and Karnali One
Family One Employment initiated in 2006 have failed to accomplish the intended goals. Labour intensive
public works programmes implemented in different forms are less focused, and taxation and other
policies often encourage capital intensive techniques. Various sector-specific and micro-level skills and
enterprise development, training and income generation programmes, which focus on the deprived,
including women and those in conflict-affected areas, are thinly implemented and lack wider coverage
and effectiveness. Although access to education, health and financial services has increased steadily
overtime, progress has largely been exclusionary and has disproportionately affected the employability
and income generating capability of the poor and disadvantaged.
In addition to GDP growth, employment elasticity and labour productivity patterns, decomposition
analysis, which examines employment, productivity and demographic effects on growth,provides more
insights on why there is a lack of productive employment in Nepal.
In parallel, with a decelerated average growth rate in sectors such as manufacturing, trade, restaurants
and hotel perceived as high employment generating sectors, employment elasticity reduced to 0.18
(2001-2011) from 0.60 (1991-2001). The negative elasticity of the manufacturing (4.85), electricity, gas
and water (1.83), and the restaurant and hotel (1.43) sectors, with some positive but low or moderate
elasticity in sectors like agriculture (0.25), construction (0.47), community (0.63) and transport services
(0.74), show that there are hardly any dynamic lead sectors which can be considered as both, growth
and employment enhancing.
Productivity trends also exhibit a similar pattern. Unlike the positive correlation observed between
labour productivity and change in employment share during 1991-2001,which had resulted from some
growth-enhancing structural change, the relationship became negative in 2001-2011 due to the relative
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loss of employment in sectors like manufacturing, trade, restaurant and electricity. The decomposition
analysis also shows that during 1991-2001, changes in both, employment and labour productivityplayed
a key role in the growth process. During 2001-2011, however, declining employment contributed to an
increasein labour productivity and thereby growth to some extent. The increased ratio of working age
population together with some shift toward capital intensity played a positive role as well.
Quantitative analysis examining each sector’s contribution to the level of employment growth and rate
changes further reveals that during 1991-2001 the rate of change in employment growth was higher (4.5
per cent) as against growth in levels (2.7 per cent). However, during 2001-2011, the employment rate
change declined by 10.5 percentage points as against growth in employment levels by 0.6 per cent. The
results thus show that with employment becoming precarious in recent years, people have been
compelled to seek foreign employment. The application of the Shapley method reveals that inter-
sectoral labour relocation was one the key causes for the increase in total output per worker during
1991-2001. But during 2001-2011, the inter-sectoral shift had a reversal effect on productivity growth,
indicating that labourwas moving from highly productive non-agricultural sectors to agriculture, or was
opting to remain unemployed orseek foreign employment.
A detailed analysis of the manufacturing surveys of 1997, 2002 and 2007 shows that along with a steady
deceleration in the number of manufacturing industries overtime, the overall value added growth rate
has also declined mainly due to a decrease in the output of industries such as textiles, apparel and
leather. However, despite variations, overall productivity growth has remained positive due to some
industries performing well. In the elasticity front,industries such as saw mills and furniture have reported
low elasticity, and industries such as apparel, leather, paper, rubber and plastic, metal and electrical
have moderately high elasticity. More interestingly, employment elasticity computed for two the periods
reveals that generally more workers are employed in traditional and low productive industries rather
than in modern and high productive industries. Nonetheless, unlike the trade-off arguments, the overall
correlation between labour productivity and changes in employment share indicate that they can move
in the same positive direction. Industries like chemical and rubber and plastic have reported positive
results despite the negative correlation exhibited by many other industries.
In summary, the findings of both qualitative and quantitative analysis indicate that there is a need for a
development paradigm shift in Nepal that is grounded in transformational strategic approaches for
enhancing decent work led inclusive growth, which would be key for shared benefits and improved living
standards spread more evenly across various social groups. It is also necessary for new macroeconomic
policies to take into account social aspectsand focus on enhancing the productive ability of the excluded
in general and women and youth in particular.
More comprehensive and focused private sector development policies and programmes will be required
to attract private investment in potentially productive areas. The manufacturing sector should be
revived through intra-firm and inter-industry restructuring. From the employment perspective, a focus
on micro, small and medium enterprises will be equally necessary, along with a focus on women’s
entrepreneurship development.
Policies should also work toward labour market formalisation and increasing the share of decent
employment, with a particular focus on women’s employment. In addition toincreased flexibility in the
labour market, social security, including conditional cash transfers, can help mitigatethe effects on the
poorest households. A minimum employment guarantee scheme, which aimsto ensure productive
employment for all, with a focus on the deprived including women and youth, accompanied by more
effective targeted employment programmes,is essential, particularly for raising productivity in the
informal sector. Keeping in mind that international migration is crucial to Nepal’s overall development
including poverty reduction, higher growth and sustainable development, it is necessary to ensure that
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the various problems linked to decent employment are addressed in a coordinated way internationally
as well as regionally.
I. INTRODUCTION
1.1 General Background
Work plays a fundamental role in people’s lives. Being a critical source of income, it empowers people,
gives them a sense of purpose and strengthens social cohesion. Decent and stable work provides
security to individuals and their family members. Labour is often the only available asset among the
poor. Enhancingthe employable capacity of workers on the one hand. and working rights and
opportunities on the other,strengthens equitable social relations and structures essential for inclusive
growth and sustainable development. Though the features, processes and means of decent work and
productive employment have been interpreted differently, it has become a buzzword today globally and
has been recognised as a critical ingredient of growth and development.2
As the main features of decent work include increased employment, improved working conditions and
social protection based on fundamental principles and workers’ rights, they are considered to be
instrumental for enhancing factor productivity and social inclusion. The decent work principle also
recognises informal employment as a challenge in both developing and low income countries from the
standpoint of improving livelihood conditions. It is worth noting that in 2005,the UN added a new
target—achieving full and productive employment and decent work for all including women and young
people—under the eradication of extreme poverty and hunger MDG.
The irony, however, is that despite the increased focus on productive employment in recent years,
unemployment and underemployment have emerged as the biggest problems today (ILO, 2013). The
global economic downturn after the Great Recession of 2008 was followed by sluggish but job-less
recovery, which has added toward the difficulty of addressing such a pressing problem. On the one
hand, employmentled growth in poor countries has been characterised by widespread
underemployment, survivalist activities, and persistent poverty, and on the other, the performance of
growth led employment has proved to be unsatisfactory,since the link between growth and productive
employment creation has weakened sharply (Duncan, 2011).
Based on a number of country case studies, there is a growing realisation that job creation is necessary
for boosting living standards, raising productivity and fostering social cohesion, leading to a country’s
overall development (WB, 2012). It has also been conceded that job creation and inclusive growth are
imperatives that resonate today in every country in the world - be it small, large, advanced, emerging,
developing, post-conflict or resource rich (IMF, 2013). In the context of the least developed countries
(LDCs), the primary challenge has not been unemployment per se, but rather the lack of inclusive growth
and productive employment in sufficient volume to help the working poor.This has remained a major
impediment to achieving the UN MDGs and setting the LDCs on a sustainable development path
(UNCTAD, 2013).Thus, there is increased pressureto make productive employment a central policy
objective, rather than see it as a by-product of the growth processes that aim to reduce poverty and
foster equitable, inclusive and sustainable development.3
Amidst this background, the eight goal of the Sustainable Development Goals (SDGs) set for 2015-2030is
more explicit, focused and comprehensive. It aims to promote sustained, inclusive and sustainable
2The ILO has advocated for this for several years. For details see ILO (2001 and 2002). See IHD (2014) for a detailed
account of labour market inequality issues from the inequality standpoint in the context of India and Brazil.
3 For more details on these arguments see, among others, ILO (2011), UN/UNDP/ILO (2012) and UNCTAD (2013).
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economic growth through full and productive employment and decent work for all. Equally importantly,
it sets two explicit targets for accomplishing such a specific goal. The third target of the SDGs focuses on
the need for promoting development-oriented policies that support productive activities, decent job
creation, entrepreneurship, creativity and innovation and encourage the formalisation and growth of
micro, small- and medium enterprises through various processes including access to financial services.
Similarly, the fifth target states that full and productive employment and decent work for all women and
men, including for young people and persons with disabilities, and equal pay for work of equal value has
to be achievedby 2030.
In Nepal too, employment has received some priority. In 2005, a new labour and employment policy was
introduced. But the biggest breakthrough in this area took place after sweeping political change in 2006.
Inclusive growth and development have now become buzzwords in Nepal. With a more inclusive and
participatory democratic system in place, reducing unemployment, poverty and inequality were the
specific objectives laid down in the first Three Year Interim Plan (NPC, 2007). Employment and poverty
reduction oriented sustainable and broad-based growth were the main goals set in the next Three Year
Plan (NPC, 2010). The current Three Year Plan (2013-2016) more ambitiously aims to upgrade Nepal
from being a least developed to a developing country by 2022. Like the first two plans, it also focuses on
inclusive, broad-based and sustainable economic growth (NPC, 2013). Apparently, in conformity with
these plans, policies and programmes focus on both, growth and employment.
Nepal has also implemented broad strategies as part of efforts to explore the means to accomplish the
SDGs by 2030. The next periodic plan, which is to be launched in the next fiscal year (2016-2017) will be
crucial toward that end.
Nepal’s drive toward economic liberalisation that began in the early 1990s has been strongly focussed
on augmenting growth and promoting employment. Needless to add that based on simple tariff and
openness criteria, Nepal stands as one of the most liberalised countries in the South Asian region today
(GoN, 2004; Khanal et al., 2012). In service sector liberalisation, Nepal is ahead of many other South
Asian countries (Khanal, 2012). Increased efforts have been made to mobilise private investment for
taping into Nepal’s development potentials. The New Industrial Policy 2010, for instance, prioritises
promotion of private investment, both domestic and foreign, for accelerating industrialisation in Nepal
(MoI, 2010). Many facilities, including tax concessions and rebates, are provisioned in it. Additional
facilities are granted to domestic resource based industries, with extra facilities granted to industries
established in remote areas. The Foreign Investment and Technology Transfer Act 1991 amended twice -
in 1996 and 2005 - aims to createa favourable environment for foreign investors. To promote large scale
investment, a high level investment board under the chairmanship of the prime minister was established
in 2010.
The Labour Act, introduced in 1992, envisages healthy industrial relations and provides job security to
labourers in the organised sector with added provisionsforthe right to form associations and bargain
collectively. Various institutional reforms in the labour market were provisioned in the act,in order to
correct anomalies or distortions in the labour market and enhance employment and labour productivity.
Along with the deepening of problems in the labour market and in the employment front, the debate on
interrelated issues has intensified in recent years.
Unlike many other South Asian countries, Nepal has performed poorly on both growth and employment
fronts. Growth in the last 35 years (1975-2010) has been merely 4 per cent on average, with agricultural
and non-agricultural sectors growing at a rate of 2.5 and 5.6 per cent respectively (Khanal et al., 2012).
During the last three years (2010-2013), the growth rate has remained almost the same, with further
deceleration in the growth of the non-agricultural sector at 4.8 per cent on average (NPC, 2013). A closer
review of the period after liberalisation, bifurcated into 1990-2000 and 2001-2010, indicates that in
addition to the downward trend in the average growth rate, large variations have been observed in
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sectoral growth performance. The performance of the employment sector has been even poorer, more
so in recent years. Unlike the growth of employment at a rate of 2.7 per cent during the period of 1981
to 1991, such a growth rate has decelerated to just 0.66 per cent during the period 2001-2011 (CBS,
2012).
As reported by the labour force survey (CBS, 2009), the labour force participation rate was relatively high
at 83.4 per cent, with 86.8 per cent and 67.3 per centrecorded in rural and urban areas respectively in
2008.. Compared to the relatively lower female participation rate in urban areas at58.5 per cent, the
female participation rate in rural areas remained fairly high at about 80.1 per centin 2008 (CBS, 2009).
The high participation rate has been confirmed by recent NLSS data (CBS, 2011). Despite the slowdown
in the population growth rate from 2.1 per centin 1991-2001 to 1.35 per centin 2001-2011, the share of
working age population (i.e., 15 to 59 years) has gone up to 57 per cent from 54 per cent during the
same period. Similarly, the share of youth population (15 to 39 years)4constitutes around 40.43 per cent
of the total population,with 4 to 4.5 lakhs of new labour entering the labour market additionally each
year. Another phenomenon is the rapid growth of urbanisation at 5 per cent per annum, which is the
highest in the South Asian region. The share of urban population reached 17 per cent in 2011 from 13
per cent in 2001 (CBS, 2012).
Despite the tremendous need for decent work and employment generation, sectoral employment
patterns show an opposite structural shift. For instance, during 2001-2011, the share of agricultural
sector employment increased to 66.67 per cent from 65.7 per cent. On the other hand, there was only a
marginal decrease in the output share of this sector from 38 per cent(2001) to 35 per cent(2011). In
sectors like electricity, employment growth fell by as much as 16.0 per cent on average annually, despite
output growth of 4.3 per cent during the same period. The employment share of the manufacturing and
trade sectorsalso decreased to 3.7 and 1.3 per cent per annum, as against 0.40 and 0.7 per cent growth
in output respectively. The employment share of real estate and finance declined during the same
period, despite some rise in the output share. The only sector which registered relatively higher
employment growth was the transportation sector. In this sector, compared to output growth of 4.6 per
cent, growth in employment was 4.3 per cent per annum over 2001 to 2011.
A positive development, however, is partly found in the wage front. Nepal Living Standard Survey (NLSS)
data show that during the period 1995 to 2010,there was a sharp rise in wages with a rapid increase in
agricultural wages compared to non-agricultural wages. The wages in the agricultural sector rose by 4.25
times as against the 3.55-fold increase in the later (CBS, 2011). Interestingly, consumer prices rose by 2.9
times during this period (NRB, 2013), indicating some real wage increments. The Doing Business Survey
also indicates that the minimum wages of workers aged 19 years increased to US$ 75.9 per month in
2014 from almost US $30 in 2008 (World Bank, 2014). The NLSS datafor 2010-11 also points out that
there is no longer alarge gap between agricultural and non-agricultural wage rates. As the survey
indicates, the urban wage rate compared to the rural wage rate is higher by only 8 per cent in the
agricultural sector and by 28 per cent in the non-agricultural sector. But a larger gap between the male
and female wage rate has been reported by the survey, with the male wage rate being higher by 37 per
cent in the agricultural sector and by51 per cent in the non-agricultural sector (CBS, 2011).
If underemployment and informal employment had been lower, these increments in the wages would
have contributed very positively to the upliftment of the the living conditions of the working poor. The
ground reality, however, is very different. The Labour Force Survey 2008, for instance, shows that the
share of informal employment is very high in Nepal. In the agricultural sector, its share is as high as 99.7
per cent. Even in the non-agricultural sector, it is 86.4 per cent. Out of this, only 39.7 per cent are paid
employees. Among the rest, 36.5 per cent are self-employed without regular pay and 19.8 per cent are
family members. Relatively, more female workers are engaged in the informal sector (91 per cent)
4 In Nepal people in the age group of 15 to 39 are defined as youths.
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compared to male workers (83.8 per cent).Amidst such a phenomenon, the share of underemployment
and disguised unemployment is extremely high. Among the employed, 32 per cent work less than 40
hours in a week. Out of the 30 per cent of total economically active population classified as
underutilised, 49.9 per centcomes from the urban areas and 26.9 per centfrom the rural areas (CBS,
2009). The highparticipation rate together with very high underemployment conditions have compelled
more than 1,500 youths to leave the country (other than India) every day in search of jobs abroad (MoF,
2015).
Thus, a quick review of overall performance in terms of output and employment in light of plan
objectives, changed priorities and policy developments depicts that, compared to many other countries
of South Asia, Nepal faces deep problems. This is a very critical area considering Nepal’s endeavours
towards inclusive growth and sustainable development.
Moreover, the devastating earthquake of 2015 has posed added challenges for reviving the economy
from the standpoint of augmenting both growth and employment. Nearly 9,000 people lost their livesin
the earthquake and over 505,577 private houses were destroyed. More than 3 million people were
severely affected, and in total, almost 8 million people were affected in one way or the other by the
earthquake. The Post Disaster Needs Assessment (PDNA) of the National Planning Commission stated
that the loss and damage totalled about Rs. 717 billion, comprising productive assetsand wealth losses of
Rs. 513 billion, personal income losses of Rs. 17 billion, and income and revenue foregone or losses of
Rs. 187 billion. In all, more than two dozen sectors were badly affected andan additional 0.7 million
people were pushed below the poverty line.According to the report,there was a huge requirement for
resources for the reconstruction and rebuilding of the economy (NPC, 2015).
1.2 Rationale of the Study
One of the earliest insights revealed by the literature on economic development is that development
brings about structural change. Studies point that the countries that have managed to pull out of
poverty and have acquired wealth are those that have succeeded inexpanding beyond agriculture and
other traditional products. Citing the experience of East and South East Asian countries,they add that
when labour and other resources move from agriculture into modern economic activities, both
productivity and income rise and expand rapidly overtime, leading to structural transformation and
sustainable growth and development (McMillan and Rodrik, 2011). One of the key characteristics of
structural transformation are changes in the sectoral composition of output and employment, with the
manufacturing sector playing a leading role in driving economic growth.
Following Kuznets (1973), it is commonlyheld that the process of economic growth is typically
accompanied by changes in economic structure,which in turn leadsto a shift from agricultural to non-
agriculturalsectors and subsequently from industry to services, as well as a shift from self-employment
to wage employment in more formal sectors. The Lewisian Model additionally shows that employment
growth in modern industries facilitate the shift of surpluslabour from traditional sectors like agriculture
to more dynamic high productivity sectors with resultant productivity growth in the less dynamic sectors
too (Lewis, 1954 ).
But it is worth noting that the structural change that was expected to accompany neo-liberalism led
financialisation preceded by trade liberalisation and globalisationhas not taken place across developing
and low income countries. Despite the sharp decline in the share of agriculture output over the years, no
commensurate reduction in employment in this sector has taken place in most of these countries. This
has been marked by exacerbated informal employment, casual work contracts and vulnerable self-
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employmentaccompanied by low or declining real wages leading to persistence or even a rise in the
share of working poor.5
A recent study on structural change and productivity growth shows that the bulk of the difference
between Asia’s recent growth, on the one hand, and Latin America’s and Africa’s, on the other, is
explained by variations in the contribution made by structural change to overall labour productivity. The
most striking finding of this study is that in many Latin American and Sub-Saharan African countries,
broad patterns of structural change have served to reduce rather than increase economic growth since
1990 (McMillan and Rodrik, 2011).
Many recent studies have broadly concluded that the pattern of growth taking place in most of
developing countries has been detrimental to enhancing employmentled inclusive growth and
development.6 Conversely, the structure of the labour market and labour market institutions have
equally affected development patterns and growth outcomes in many countries. The labour market
institutions associated with regulations governing individual and collective employment relations and
unemployment protection, have generally been found to affect overall and sectoral growth patterns.
Poor and segmented labour markets, characterised by large informal sectors with high levels of self-
employment or underemployment,which in turn affect working conditions and wages, have also
affected labour productivity and growth markedly. Similarly, labour market policiesnot only affect the
dynamics andcharacteristics of labour supply and the quantity and quality of the jobs created, but also
the efficiency of jobplacement, contracting processes and the living conditions and prospects of the
unemployed(Weller, 2009, ILO; 2008 and 2011).However, despite such causal relationships, very few
studies have examined the relations, for instance, between economic growth, employment, and poverty
reduction in a broad framework even at the global level.7
In the Nepalese context, a few studies have attempted to examine employment, growth and labour-
related issues in one way or the other following simple descriptive or quantitative approaches. A
study,while examining the growth, investment and employment nexus,foundthat very low employment
elasticity (0.363)together with declining labour productivity in the services sector specially after 2000
contributed to the overall deceleration in t labour productivity (Khanal,2007). An ADB study, after
assessing Nepal’s critical development constraints, pointed out that a lack of productive employment
opportunities is the biggest impediment to inclusiveness in economic growth (ADB, 2009).One of the
problems pointed out by the study relates to labour law. The study points out that labour rigidity has
discouraged investment, including investment in new technology, diversification of products and the
hiringof more skilled workers. A Youth Survey of Nepal by British Council (2010) shows that about 40.75
per cent of youth lack income earning opportunities. A review of NLSS data shows that despite the
increased productive abilities of youth through enhanced access to education, health and drinking water
facilities overtime, no commensurate employment opportunities in the labour market have been made
available to them, reinforcing the theory that serious anomalies are persisting or manifesting in the
labour market (CBS, 2011). Assuming that wage level above the international extreme poverty line (i.e.
$1.25 per day) is equivalent to productive employment, a study finds that the share of working poor in
Nepal is more than 50 per cent (Duncan, 2010). A study by Islam (2012) further shows that raising
worker productivity is a major issue in addressing the challenge of employment in Nepal. It suggests that
unless more employment-intensive sectors that offer prospects of faster growth are prioritised, trade-
offs between productivity and employment growth may manifest.
5A closer review in the context of LDCs is found in ILO (2011). For a critical review on India based on both theory
and practice, see Ghosh (2013).
6 See Duncan (2011), Kucera and Roncolato (2013), Islam (2013) and UNCTAD (2013), among others.
7Some of the studies following this broad framework and covering demographic, employment and productivity
effects include Gutierrez et al.(2007), Hull (2009) and ILO (2012).Gutierrez et al.(2007) attempts to identify the
determinants of productivity as well.
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Some studies point out that labour market rigidity and poor industrial relations adversely affect labour
productivity growth and employment generation in Nepal (ADB, 2009; World Bank, 2012). However, the
opinions of employers and trade unions on the root causes and ramifications differ (New Business Age,
2012). The chief problems encountered in industrial relations include politicization of workers issues,
limited dialogue and inter-union rivalry, difficulty in establishing an official trade union, weak labour
institutions and lack of implementation capability (Nepal, Acharya and Neupane, 2013). Another study
based on the World Bank Doing Business indicators points out the need for eliminating the conflicting
provisions in the law, decreasing the agencies dealing with businesses, implementing a clear policy
orientation and strengthening institutions for a well-functioning market (Adhikariet al., 2013). Still more
comprehensive in-depth studies are yet to be carried out in the interrelated areas.
The United Nations Conference on Trade and Development Report (2013) provides a perspective on
employment status and problems from the standpoint of productive employment (UNCTAD, 2013). It
points out that the number of young people of working age in Nepal is currently increasing by 550,000 a
year,8 and by 2020 it will climb to 633,000 a year. It adds that economic growth in LDCs such as Nepal
has not been inclusive, and its contribution to poverty reduction has been limited because not enough
‘quality’ jobs have been generated - that is, jobs offering higher wages and better working conditions -
especially for young people. Employment in vulnerable circumstances without formal work
arrangements, decent working conditions and adequate social security is cited for this. One of the
primary causes for this is that the current process of structural change in LDCs like Nepal cannot provide
the surplus population released from agriculture productive employment elsewhere.
Thus, based on a review of the earlier studies and general trends, it is found that the labour market in
Nepal is characterised by a rapidly growing labour force, high levels of underemployment largely driven
by the informal labour market, low productivity levels and a high working poor population amidst excess
supply of unskilled workers in the labour market. In Nepal’s context the problems have compounded
because of very slow growth and structural rigidity in both economic and employment fronts. These
underscore the need for more rigorous analysis to identify policy options from the standpoint of
enhancing productive employment, a prerequisite for inclusive growth and development.
1.3 Objectives of the Study
The main objective of the study is to examine employment challenges in Nepal and arriveat some policy
options from the standpoint of enhancing productive employment for inclusive growth and
development. The specific objectives are:
1. Assess the key characteristics of employment and labour market conditions in Nepal,
2. Review major employment and labour market policies and programmes,
3. Undertake an empirical analysis to identify the linkages between employment and growth
patterns, taking structural transformation into special account, with a focus on productive
employment aspects,
4. Analyse the labour demand aspects of industrial development with a focus on the prospect of
raising productive capacity for higher value added employment and decent work, and
5. Draw some important policy implications.
1.4 Methodology and Data Sources
Both descriptive and quantitative methodological approaches have been followed in the study. The
descriptive approach includes a thorough review of the characteristics of employment in Nepal and
8Although these numbers seem to be on the higher side compared to the official estimates which show 0.4 to 0.45
million adding in the labour market annually, they indicate the severity of the problem.
10
labour market conditions as well as the various policies and programmes carried out to augment
employment directly or indirectly. Using quantitative analysis, employment, productivity and the
demographic effect on growth have been assessed exhaustively, apart from estimating traditional
employment elasticity and labour productivity ratios taking time intervals into special account. A
separate quantitative analysis, which studies elasticity and productivity, has been used to identify high
value added or growth-enhancing manufacturing industries from the point of view of productive
employment. This includes the use of correlation analysis to gauge the relationship between
employment and productivity.
Population censuses, various survey reports and published secondary data are the main data and
information sources. Various earlier studies have also been used for the study purposes.
1.5 Structure of the Report
This introductory chapter is followed by a review of employment characteristics and labour market
conditions in Nepal in the next chapter. In the Chapter 3, labour market policies and other ongoing
policies and programmes directed toward promoting employment have been critically reviewed.
Quantitative assessments on the linkage between employment and the growth pattern based on, among
others, decomposition analysis have been made in Chapter 4. Chapter 5 is devoted to examining the
prospect of high value added and decent employment-led industrialisation based on manufacturing
survey data from different periods. In the last chapter, conclusions and recommendations are presented.
II. KEY CHARACTERISTICS OF EMPLOYMENT AND LABOUR MARKET CONDITIONS IN NEPAL
2.1 Labour Supply and Demographic Characteristics
Despite fluctuations, population growth has been steadily decreasing in Nepal. The growth rate
decreased from 2.7 per cent in 1971-1981 to 2.1 per centin 1981-2001. The Census of 2011 shows that
the population growth rate further declined to 1.35 per cent in 2010-2011. Out of the total population of
26.49 million in 2011, the share of terai population was 50.27 per cent followed by hills at 43 per cent
and mountains at 6.73 per cent respectively. A shift in the sex composition had also taken place
overtime,withthe percentage of malesper 100 female reducing to 94.2 per cent in 2011 from 99.8 per
cent in 2001.
Another phenomenon to be noted is that Nepal has the highest pace of urbanisation in South Asia. With
annual growth of 5 per cent per annum, the share of urban population has reached 17.1 per cent in 2011
from 13.1 per cent in 2001 as a result of migration from rural to urban areas, among others. This has
posed additional problems for the burgeoning labour market from the point of view of decent
employment, consideringthe predominance of the informal labour market which is largely made up of
unskilled labour.
A big demographic change in terms of age structure is taking place in Nepal despite the falling
population growth rate. As of 2011, the population of the 0-14 years age group accounted for 34.91 per
centof the total population, and the population of the 60 years and above age group formed 8.09 per
cent. The share of the working age population (15 to 59 years) was 57 per cent as of 2011, an increase
from 54 per cent in 2001. Youth(15 to 39 years as per the Nepalese definition)formed 40.43 per cent of
the population, and 15-24 year olds made up about 19.97 per cent. If the 15-24 years population
accounts for 20 per cent of the total population, such an age group is often considered to be vulnerable.
Because of changes in the demographic structure, almost 4 to 4.5 million youth enter the labour market
each year.
11
The addition of such a high number of workers to a labour market each year is partly due to a high
labour force participation rate. More recent NLSS data show that the labour force participation rate has
gone up to 80.1 per cent in 2011 from 75.2 per cent in 1996. The female participation rate has also
increased considerably overtime (Table 2.1),from 66.4 per cent(1996) to 79.4 per cent(2011).
Table 2.1 Labour Force Participation Rate among Male and Female and Unemployment
Male Female Total
1996
2004
2011
1996
2004
2011
1996
2004
2011
Employed %
71
77.3
78.3
63.7
71.7
78.3
67.2
74.3
78.3
Unemployed %
Participation Rate 75.2 80.4 80.9 66.4 74.4 79.4 70.6 77.2 80.1
Unemployment
Rate 5.6 3.9 3.2 4.1 3.6 1.5 4.9 3.8 2.2
Source: NLSS 1995-1996, 2003-2004 and 2010-2011
2.2 Characteristics of Employment and Labour Market Conditions
Employment data collected and compiled based on the total hours spent in a particular enumerated
week shows that there is no unemployment problem as such in Nepal. As shown in Table 2.1, the
unemployment rate which was 4.9 per cent in 1996 reduced to 3.8 per cent in 2004 and further went
down to 2.2 per cent in 2011. It, however, conceals some unique characteristics of the employment
situation in Nepal and structurally driven labour market conditions.
Time related underemployment is estimated to be about 6.7 per cent. A detailed breakdown by age
group shows that the underemployment rate among 20-29 year olds is high at 8.1 per cent. Labour
underutilisation predominantly affectsthe 15-29 years age group with more than 35 per cent
underemployment in such an age group. The survey reports indicate that the unavailability of jobs,
inadequate earnings and skills mismatch are the main reasons. For the youth aged 20 to 24 years, labour
underutilisation rises up to 46 per cent. Underemployment of the 15-19 years and 25-29 years age
groups are estimated to be 35.3 per cent and 39.1 per cent respectively. On the whole, among employed
persons, 32 per centof workers worked less than 40 hours in a week in 2008, compared to 27 per cent in
1999. Out of 30 per cent of the total economically active population classified as underutilised, 49.9 per
centcomes from urban areas and 26.9 per centfrom rural areas (CBS, 2009). This partly indicates that the
large inflow of youth from rural to urban areas, compounded by the absence of employment
opportunities in urban areas, is aggravating youth underemployment in urban areas more pervasively.
An ILO estimate in 2001 showed that out of total employment, the wage and salary component formed
just 24.6 per cent. It indicates that the share of self-employment is 66.5 per cent, in which the share of
own accounts workers is reported to be 62.7 per cent. All together, the share of vulnerable employment
is estimated to be as high as 71.6 per cent (Table 2.2).
12
Table 2.2 Status in Employment and Vulnerable Employment,* 2001
Status
Share in total employment
Wages and salaried workers
24.6
Self
-
employed
Employers
Own-account workers
66.5
3.8
62.7
Contributing family members
Vulnerable employment 71.6
Source: International Labour Office,Key Indicators of Labour Market, Sixth Edition, ILO, Geneva.
*Vulnerable employment is defined as the sum of two employment status groups - own account workers
and contributing family workers.
Moreover, the Labour Force Survey 2008 shows that informal employment is extremely high at 96.2 per
cent. In agriculture, 99.7 per centof employment is informal. In the non-agricultural sector, the ratio is as
high as 86.4 per cent. Out of the total employed, 39.7 per cent are paid employees, 36.5 per cent are
self-employed without regular pay, 19.8 per cent are family members and the remaining are employers
and others (Table 2.3). Out of the total, the share of female paid employees is low at 23.7 per cent. The
share of female workers as contributing family members is high at 40.6 per centas against 9.1 per cent
among males. Relatively, more female workers are engaged in the informal sector (91 per cent) as
opposed to male workers (83.8 per cent). Moreover, the latest NLSS survey (CBS, 2011) shows that the
ratio of self-employment to total employment has remained at 61.2 per cent.
Table 2.3 Status in Employment, 2008
Status
Share in
total
employment
Male
Female
Paid employee
39.7
48.1
23.7
Self
-
employed with regular employees
3.4
Self-employed without regular employees 36.5
37.7 34.2
Contributing family members
19.8
40.6
Other 0.6
0.6 0.6
Total
100.0
100.0
100.0
Source: Nepal Labour Force Survey (NLFS), 2008
The Labour Force Survey (CBS, 2009) further shows that more than half the workers employed in
‘elementary occupations’ and ‘subsistence agriculture’ never attended school. Among those employed in
the above sectors, more than two-thirds of female workers had never attended school. In contrast,
about 37 per cent of those classified as professionals had completed undergraduation. Out of paid
employees, almost 11 per cent received payments on a piece-rate basis. This proportion among the
crafts and related trade and elementary occupation sectors was 32 and 28 per cent respectively.
Workers in occupations that requireda low skill level were paid on a daily basis as opposed to the
monthly payments made to professionals, technicians, clerks and machine and plant operators. The
survey results also indicate that the average monthly earnings of paid employees are higher than that of
daily workers. Another phenomenon revealed by the Labour Survey was that the monthly earnings of
female workers were just 60 per cent of what male workers receive. Female earnings were found to be
low particularly in occupations like agriculture, crafts and related trades and elementary occupations in
which women are largely employed.
13
Such a situation is more precarious in the informal market, since it largely relies on unskilled labour. Of
the lowskills occupation groups, the service workers group is largest and accounts for as much as 90.7
per cent of total informal sector jobs.Women tend to be largely employed in this sector. Time related
underemployment estimates classified by occupation show that 68.4 per centof female workers are
employed in subsistence agriculture followed by 17.2 percent in elementary occupations and only 14.4
per cent in other occupations. By industry, underemployed females (on the basis of time) are
concentrated in agriculture, hunting and forestry sectors (86.6 per cent) as opposed to other industries
(13.2 per cent) (CBS, 2009).
Moreover, exclusionary practices based on caste and gender continues to affect the Nepalese labour
market. As will be discussed later, contemporary policies and related institutional and structural factors
exacerbate the problem. For instance, out of the total female labour force, only 2 per cent were in the
formal non-agricultural sector in 1999. No noticeable improvement has taken place overtime as the
share hardly reached 3.5percent in 2008 (CBS, 2009).
A comparative study examining the representation of minority groups such as Madhesi and Dalits in
various institutions further indicates that the problem is quite serious and challenging. In 1999, despite
holding a share of 22.1, 30.9 and 8.8 per cent in the total population, the representation of these
minority group, the Madhesi and Dalits, in the public and private sectors as well as politics and civil
society organisations was 0.5, 0.5 and 0.1 per cent respectively. In 2005, their share declined or
stagnated despite the rise in the share of their population (Tiwari, 2008). Public sector reservations
introduced in 2006 have partially attempted to address inclusionary practices in employment. But
pervasive inequality and discriminatory practices, compounded by limited job creation, has constantly
perpetuated vulnerability in the labour market.
Thus, it can be concluded that Nepal faces adverse employment characteristics and labour market
conditions from the standpoint of productive employment, which is key to inclusive growth. Within a
highly segregated labour market that is facing a high level of underemployment, female workers are
more likely to workin low quality jobsfor very low wages in the service sector. Illiteracy and a lack of skills
training, exacerbated by continued exclusionary practices in the form of caste, ethnicity and gender
discrimination, have compounded productive employment problems among female workers in Nepal.
2.3 Labour Mobility and Migration
Labour mobility and migration, both internal and external, has massively increased overtime in Nepal.
The demographic changes and very unique labour market conditions in Nepal have contributedtoward
this.
The Census of 2001 shows that out-migration from mountain, hill and terai regions were 16.8, 68.4 and
14 per cent respectively. The corresponding ratios for female workers were 17.4, 69.4 and 13.2 per cent
respectively (CBS, 2002a). The Labour Force Survey 2008 provides more insights into the extent of
migration in Nepal. It reveals that out of all households, 44 per cent had at least one absentee member
in Nepal. It further shows that out of such households, the percentage of households with out-migrants
is more than 29 per cent and with in-migrants is 19 percent. The proportion of all households receiving
remittances was 56 per cent with the average per capitanominal remittance being NRs.
9,245.Interestingly, most remittances (58 per cent) were fromwithin the country, followed by other
countries (23 per cent)and India (19 per cent)(CBS, 2009).
Nepal’s migration trends and its features have been exclusively examined by a World Bank survey
carried out in 2009 (World Bank, 2011). The survey findings show that migrants comprise 15 per cent of
the resident Nepali population, most of them aged 20-44 years, with two-thirds of these migrating for
work, predominantly abroad. The resident population at the time of the survey (2009) was estimated to
14
be about 27.5 million. Out of this, the total migrant population was estimated to be in the
neighbourhood of 4.2 million (Table 2.4). Out of two-thirds migrants going abroad (about 2.9 million),
2.1 million or about three-quarters of them were found to be going mainly for work.
Table 2.4 Numbers of Migrants in Nepal Relative to the Total Population (2009)
Migration status Estimated number
(000s) Per cent of resident
population Per cent of total
population
Members temporarily away
from home
Work migrants abroad
2,137.1
Work migrants in Nepal 771.2
2.8
2.4
Non
-
work migrants
1,195.2
Migrant children <5 years 132.4
0.5
0.4
Total migrant population
4,236.0
15.4
13.3
Members currently at home
Return migrant from abroad
817.2
Return migrant from Nepal 279.9
1.0
0.9
Non
-
migrant
24,213.8
88.0
76.3
Children <5 years 2,194.5
8.0
6.9
Total resident population
27,505.4
100.0
86.7
Total
population (including
migrants)
31,741.3
100.0
Source: World Bank, 2011.
Among the migrants, most domestic and foreign migrants were found to be from rural areas within terai
and hill regions, almost 10 times the number of migrants from urban areas (Table 2.5). Domestic
migrants largely moved from rural areas in the hills to urban areas, whereas foreign migrants mostly
came from the terai region.
Table 2.5 Number of Work Migrants Abroad by Place of Origin: Rural--Urban, Ecological Belt and
Development Region (000s)
Migrants abroad
Migrants in Nepal
Total migrants
By rural--urban sector
Rural
1,937
744
2,680
Urban 200 28
228
By ecological belt
Mountain 92 90
182
Hill
963
392
1,355
Teri 1,082 289
1,371
By development region
Eastern 606 279
885
Central
477
237
714
Western 589 174
763
Mid
-
Western
240
64
304
Far-Western 225 17
242
Source: World Bank, 2011.
Recent estimates on out-migration indicate that during the period between 1994-1995 and 2011-2012,
almost 2.44 million people had gone abroad, primarily for employment purposes. Additionally, unofficial
records report that more than 3 million Nepalese citizens may have gone abroad for foreign
15
employment by the end of 2011-12. It has also been pointed out that out of the 276,787workers who
had travelled abroad for employment in the second quarter of 2012-13, 16,713were women (MoF,
2013). The out-migration of women for foreign employment was negligible a few years ago as there
were some legal restrictions as well.
Thus, these trends additionally corroborate the extent of the deepening problems in the Nepalese
labour market as revealed by the Census and other sources. They clearly show that if the pressure on the
labour market has eased, it is primarily due to the massive outflow of workers. It is also worth noting
that internal migration from rural to urban areas has been partly induced by the creation of new
opportunities in urban areas resulting from some spill-over from such inflows. The role of remittances,
as revealed by the recent NLSS data, substantiates this. The recent NLSS estimates that Nepal received
NRs 259 billion9(in nominal terms) in the form of remittances in 2010, comprising 20 per cent from
internal and 80 per cent from the external sources. Out of the external sources, 11 percent is estimated
to have come from India alone. All in all, it is reported that remittances make up 31 per cent of the
income ofhouseholds that receive remittances. At the same time, it is also estimated that out of the
total, about 79 per cent of remittances received by the households are used for daily consumption, 7 per
cent for loan payments, 5 per cent for acquiring household property, 4 per cent for education and only
small proportion of 2 per cent is used for capital formation (CBS, 2011).
Despite the big contribution made by workers to the national economy through remittances, most
workers are reported to work in dismal conditions. For instance, a study by the Institute for Policy
Research and Development (IPRAD),which examined recruitment and placement processes as well as
level of wages and facilities in relation to contracts, indicates that a system of fraud and cheating is
rampant in the recruiting or selection processes. The study further points out that workers frequently
face discrimination in the host countries in terms of low wages, less facilities and risky work
environments, and above all, almost half of the workers are deprived of jobs as per the agreement or
contract (IPRAD, 2008). This simply means that the lack of decent employment is a big problem in the
foreign employment front as well.
The excessive dependence on foreign employment during a time of increased political instability and
conflict in many countries indicates the possibility of increased labour vulnerability in Nepal.
Animmediate rapid assessment of the likely effects of the financial crisis of 2008 corroborates such a
possibility (Khanal, 2008). The study shows that in the event of a prolonged global crisis, jobs, foreign
exchange earnings and remittance inflow losses could be extremely high in Nepal with very adverse spill-
over effects on labour market conditions. The current international political environment poses a bigger
threat in terms of labour market shocks in Nepal.
9 The balance of payments data of the Central Bank show that in the first nine months of 2013-2014, total
remittances inflows were in the order of Rs 397.8 billion, indicating an inflow of almost Rs. 1.5 billion daily. Total
inflows in 2012-2013 were Rs. 434.6 billion (NRB, 2014).
16
III. AN OVERVIEW OF LABOUR MARKET INSTITUTIONS, LABOUR AND EMPLOYMENT POLICIES AND
PROGRAMMES
3.1 Labour Law and Labour Market Institutions in Nepal
The role of labour market institutions,which are driven by the labourlaw and other arrangements,
including employment protection, minimum wages, unionisation (including collective bargaining) and
unemployment benefits schemes, have been high debated and are a centre of policy discussion.
Focusing on the economic costs of regulations, a widely-held view is that labour regulations, instead of
creating a healthy environment for job creation and labour productivity growth, generate adjustment
problems or costs, create dualistic labour markets and drive informality among others(Blanchard and
Wolfers, 2000). Another view, broadly guided by the institutional approach and based on some
evidences, argues that labour market institutions play a positive or beneficial role not only in terms of
protecting workers’ employment conditions, but also in improving both economic efficiency and income
distribution.10 It is argued that the unionisation of workers and the principles of collective bargaining
help overcome unequal power relations in the labour market, enhance returns to labour, protect
individual workers against discrimination, ensure minimum wages and enforce labour regulations.11 Such
an argument has received prominence gradually in the policymaking world today, as the focus has now
shifted to decent work and productive employment rather than unemployment or the lack of jobs per
se.There are also apprehensions about such arguments as they often simplify or overlook the unequal
economic and social structures and relations that affect decent work and productive employment.12
Like in many other countries, the debate on the role and type of labour market institutions required has
been continuing in Nepal since the beginning of market oriented reforms in the early 1990s. The
flexibility or rigidity of labour laws is at the centre of debate. Employers are persistently lobbying for
greater labour market flexibility with regard to hiring and firing rights. It is argued that such laws, by
hindering reforms in production organisations as per changing market conditions, hinder growth in both
output and employment. On the other hand, trade unions refute such an argument and point out that
for the sake of higher profits through elimination of the workers right such a demand is being pushed.
They further point out that job security and other workers’ minimum rights, added to work incentives,
contribute to labour productivity and higher output growth, leading to an increase in the employment
capacity of firms and industries. Thus, the debate is often caught in between these two schools of
thought. In Nepal, despite the increased thrust on productive employment, problems of policy clarity
have prolonged debates.
The Labour Act of 1992 and the Trade Union Act of 1923 form the legislative foundation of the labour
markets in Nepal. The Labour Law of 1992 covers all organised sectors, including construction, transport
and services, and covers different aspects of labour markets. One distinguishing feature of the law is that
it covers only those firms and enterprises that employ10 or more workers. Labour market regulations
and workers’ rights are specifically provisioned in it. The right to form associations,the right to collective
bargaining as well as the right against gender discrimination are important features of the act. With the
legislation of the Labour Court Regulation Act in 1995, the labour court was established. Wages haves to
be fixed based on a tripartite agreement as per the law.
More broadly, the Labour Law of 1992deals with matters relating to employment and job security,
working hours and minimum wages, the welfare of employees, employer--employee relations and the
10 Varied arguments citing empirical studies are eloquently presented in Cazes and Verick (2010).
11 For arguments along those lines seeILO (2012).
12A critical view on similar arguments in the context of India is found in Ghosh (2013). A thorough discussion on the
likely ramifications emanating from inequalities and discrimination is found in IHD (2014).
17
settlement of labour disputes. Labour Regulation, 1993 further clarifies issues regarding security of
profession and service, remuneration and welfare provisions, health, cleanliness and safety, etc. The
Bonus Act of 1974, as amended subsequently, provides a legal basis for the payment of bonuses to
workers and employees of factories and commercial establishments.
The Labour Act of 1992 provisions that a worker must be granted a permanent work status after six
months of employment, making it difficult for the employer to dismiss workers after they have been
made permanent. The provision obligates firms to obtain government approval for firing and laying off
of workers. The law has a tendency of pressure employers to hire employees on a permanent basis
rather than allowing them to explore alternative hiring arrangements. The dismissal of employees is
often found to be expensive,making business expansion difficult, and thereby employment. The fixing of
minimum wage is also regarded to be detrimental from the standpoint of investing in human capital, as
this system often creates a discouraging work environment by limiting the wage gap between skilled and
unskilled workers. There is also a tendency to explore compliance avoidance strategies, partly due to
increased business complexity and the cost of compliance.13For similar reasons, the act has been
consistently criticised by the business community as being ‘more regulatory than promotional’, which
they claim is detrimental to investment and employment generation. From the perspective of trade
unions, however, the anti-dismissal provision of the act is justified specially from the point of view of
social security and job safety for workers.14
International studies more broadly support or advocate the view that Nepal’s labour laws are labour
friendly but do not support investment. A detailed World Bank survey,that examines the investment
climate in Nepal,particularly private sector development, points out that the labour market in Nepal is
characterised by rigid regulations and unionisation. It argues that such a policy approach reduces the
incentive to hire workers through formal contracts and adds that this usually results in low job creation,
high levels of unpaid work and underemployment and higher migration abroad for work. It adds that the
law also provisions minimum wages with very little differentiation across skill levels,which has adverse
effects on labour productivity and investments in human capital. It also indicates that large firms
constrained by labour regulations are often subject to trade union actions motivated by certain political
intentions (World Bank, 2012a). An ADB study, which focused on the constraints caused labour market
conditions, provides many insights into the compounding problemsin related areas. According to it,
employer’s perceptions on obstacles to investment efficiency vary widely by location, size of the firm
andthe economic sector. While employers in the large scale manufacturing sector believe there to be
many labour problems, those in smaller scale enterprises or in the service sector, which is the largest
and fastest growing part of the economy, do not. It points out that the tradition of collective bargaining
is both recent and undeveloped; that human resource management and business management generally
are often weak; and that trade unionism in Nepal, as elsewhere in South Asia, is structured along
ideological lines. It adds that labourmanagement relations are hampered by multi-unionism at the
workplace, with inter-union rivalries as each union attempts to outbid the others for gains and
membership. It observes that for more flexible labour laws greater social protection is demanded by the
workers. One of the interesting findings is that like the unions, employers’ associations are equally
politicised (ADB, 2009).
In Nepal, institutional frameworks and arrangements that enforce the law are usually quite complicated,
which is often overlooked or neglected as a result of the debate about rigidity or flexibility. In the
tripartite system, the government, employer’s agencies and trade unions are responsible for
negotiations through bargaining processes. From the government side, theMinistry of Labour and
Transport Management is mainly responsible with the backing and support of other ministries
depending on the specific issue. From the employer’s side, the private sector is representedby the
13For such findings see Khanal and Dahal (2007).
14A brief review of labour law from both employers and employees is found in ILO, 2011.
18
Federation of Nepalese Chamber of Commerce and Industry (FNCCI). But with the creation of the
Confederation of Nepalese Industries (CNI), both organisations performsimilar roles, which sometimes
leads to some ambiguities. Moreover, like the multi-unions, there are also very active employer’s
associations in some key sectors like transport and retail trade. Some of these associations are
accustomed to imposing syndicate systems which the FNCCI often opposes, but with little success. In
many instances, the government has remained a silent spectator. Many retail trade related organisations
follow carteling and syndicate systems uncompromisingly. There is also a tendency to create monopolies
in the private sector following the deregulation or divestment of public sector enterprises. The
institutional capacity for enforcement has also been very weak and is often neglected. The market
imperfections and market capturing practices due to weak regulatory institutions often underminefirm’s
efficiency and productivity. All these factors make collective action problematic though the situation is
almost always portrayed as one arising from labour related issues. Despite attempts to provide different
perspectives, even sometimes contradicting its own findings, the Doing Business indices of the World
Bank clearly reveal that there are other bigger problems than the labour ones. The Doing Business
Report, based on 2015 data, shows that out of 189 countries, Nepal is ranked at 99, which is lower than
Sri Lanka (107), India (130) and Pakistan (138). Out of the 10 indices, enforcing contracts (152), getting
credit (133), getting electricity (131) and paying taxes (124) are more problematic than employing
workers (World Bank, 2016).
At the same time, the debate on the labour market often ignores or undermines the severity of the
problem caused by the predominance of the informal labour market. Despite difficulties in estimating
the size of the informal sector accurately, based on the Nepal Labour Force Survey 2008, it is estimated
in the neighbourhood of 96 per cent (CBS, 2009). The most challenging feature of this sector is that there
is virtually no social security arrangement for informal workers in Nepal (Khanal, 2012). Even more
alarmingly, among the informal workers, unskilled workers in general and female workers, Dalits,
marginalised ethnic groups, minorities and people living in remote or backward areas in particular are
the ones who are mostly deprived in terms of social security. Apart from the absence of guaranteed
minimum wages, there are no social security related facilities available to workers in the informal sector.
Although trade unions have been lobbying to legislate regulations for the informal sector, no rules
ensuring social security for informal sector workers have been enacted so far. This means that the labour
flexibility debate covers only a tiny section of the labour force working in the organised sector.
Moreover, there are also indications that the use of contracts is pervasive in the organised sector,
reinforcing the possibility of a greater prevalence of informalisation in one form or the other than what
is revealed by the survey data. Despite a commitment to a minimum wage floor as per the ILO
declaration on Fundamental Principles and Rights at Work which covers all workers, regardless of
whether they are in the formal or informal economy, Nepal is yet to fully implement such a
commitment. Countries like Thailand and the Philippines have successfully implemented the minimum
wage floor principle as a part of the social security rights guaranteed to informal workers.
Thus, the predominance of the informal market and the lack of social security rights for informal workers
indicates that decent work and productive employment is very crucial from the standpoint of pro-poor
and inclusive growth in the context of Nepal. This again stresses the need for serious consideration on
how informal employment and working poverty could be integrated into a broader development
strategy. In such a new strategy, the transition to formality, decent work and productive employment
should beat the forefront, which again is linked to policies and programmes, among others.
3.2 Labour and Employment Policies and Programmes
Employment generation was one of the four pillars of the Tenth Plan (2002-2007), which was formulated
under the Poverty Reduction Strategy Paper (PRSP) framework. As an offshoot, a new Labour and
Employment Policy was introduced in 2005. It aims to alleviate poverty by creating income generating
employment by exploring and tapping into new opportunities and potentials. The policy focuses on
19
eliminating forced labour practices, including bonded labour, and establishing congeniallabour relations
by introducing international labour standards at the workplace in both formal and informal sectors.
Investment in employment stimulating economic sectors,generating youth targeted employment and
promotion of self-employment are some of the strategies envisaged in it.
A major breakthrough in this area took place after the historic political change of 2006. Grounded in a
more inclusive and participatory democratic system, plans and programmes have focused on
employment generation, particularly growth induced employment. Specific programmes targeting
deprived socio-economic groups, most backward areas and youth are part of the overall strategy.
Enhancing the employable capability of workers also forms part and parcel of such a new orientation in
which access to vocational education, training and skill enhancement is emphasised.
For instance, reducing unemployment, poverty and inequality were the specific objectives laid down in
the first Three Year Interim Plan (NPC, 2007). Employment and poverty reduction oriented sustainable
and broad-based growth were the main goals set in the next Three Year Plan (NPC, 2010).The Approach
Paper of the current Three Year Plan (2013-2016) following the changed global focus, stresses on
inclusive, broad-based and sustainable economic growth (NPC, 2013).15
In order to achieve broad-based and inclusive growth, recent policies and strategies focus on more
equitable and inclusive access to education and health. Similarly, there is an increased focus on more
labour intensive sectors and activities. Infrastructure programmes also prioritise employment
generation. Recently, apart from the focus on youth employment, new initiatives,including the minimum
100 days employment generation programme, have been launched. For financial inclusion and enhanced
access to financial services, priority sector credit and special credit facilities have been made available to
the deprived. Group based credit is being made availableto women through rural development banks
and micro credit institutions.
The country’s major policy and programme initiatives from the standpoint of enhancing inclusive growth
and augmenting employment are as follows:
i. Growth Inducing Employment
A review of plan documents, policies and strategies implementedafter the political change of 2006,
indicate that higher growth has been the primary focus of the plans, under the assumption that this will
simultaneously lead to employment generation. For instance, in the first Three Year Interim Plan (2007-
2010), based on the estimated employment elasticity of about 0.64, employment growth was projected
to be 3.5 per cent per annum along with a targeted growth rate of 5.6 per cent. In the subsequent Three
Year Plan (2010-2013), assuming almost 0.65 employment elasticity, employment growth of 3.6 per cent
was envisaged with the targeted growth rate of 5.5 per cent. Although the details of the job creation
agenda in the current Three Year Plan (2013-16) are yet to be brought out, it envisages employment
growth of 3.2 per cent under the assumption of slightly lower employment elasticity at 0.53 amidst a
planned growth rate of 6 per cent. In all these projections, employment growth is assumed to be very
high compared to labour force and population growth. It has been stated in plan documents that the
targeted growth led employment thus generated will contribute to enhancing productive employment
by reducing both unemployment and underemployment levels.
The growth, in turn, is assumed to be driven by higher investment. Apart from prioritising government
investment in production sectors like agriculture as well as physical and social infrastructure, the private
sector is expected to pump in investment. Both, strategies and market oriented reforms, are directed
15 It is worth noting that despite the increased prioritisation of employment generation with a focus on productive
employment, no specific goal like in other areas as per MDGs is found.
20
toward promoting private investment in small and medium manufacturing industries, infrastructure
development and the expansion of tertiary sector activities. Investment in infrastructure facilities and
enhanced access to social and financial services, on the part of both, public and private sectors, as well
as by cooperatives and community organisations grounded on equity and inclusiveness principles, are
assumed to augment growth and employment. The popular assumption is that such an approach, aided
by a robust employment policy,will provide decent jobs and employment to the growing labour force
including women and deprived socio-economic groups. It is also assumed that such an approach will
facilitate the formalisation of employment in the labour market.
Notwithstanding the importance attached to growth and employment by the plans, backed by targeted
investment and accompanying broad strategies and policies, the biggest problem is that no attempts
have been made to establish a proper linkage between the projected investment in various programmes
and their likely implications on employment generation. This has resulted in serious lapses in setting
employment targets. The lapses are found in the performance reviews and progress reports as well. The
problem primarily lies in the methods used to make employment targets. Still, employment generation
projections are based on employment elasticity, which again is derived by simply regressing the
extrapolated economically active population against aggregate GDP or value added by sector. It
therefore simply overlooks the time factor or the number of hours employed per day or week and
month while assuming employment. This simply means that the underemployment dimension, which
needs to be addressed for true productive employment, is largely overlooked in such a mechanistic
approach despite apparent thrust on it. As obvious, such lapses have had wider ramifications for
employment objectives and their realisation. The lapses, from a future strategy and policy standpoint,
are again repeated when plan performances are evaluated. In such an exercise as well, crude
employment elasticity figures are simply multiplied with the realised growth rate to arrive at a
measureof additional employment generation. Consequently, despite the plan priority and added policy
focus, the decent employment dimension is generally overlooked when both macro and sectoral
perspectives are taken into account. As an offshoot, the problem of underemployment of women and
the working poor in the informal sector receives less attention from both strategic and policy point of
view. it deserves.
ii. Specific Employment Programmes
Apart from prioritising employment friendly investment and some employment generating programmes,
the programmes focus on training, skill formation, entrepreneurshipand micro-enterprise development.
Some of them aim at creating employment as a part of income generation.The last Three Year Plan
(2010-2013), for instance, emphasised micro finance, entrepreneurship promotion, skill development,
appropriate technologypromotion, self-employment and micro enterprise development
programmes.Over the last several years, numerous training and skill development programmeshave
been implemented to enhance the self or wage employment capacities of the deprived, women and
those in conflict affected areas. Among such programmes, vocational and skill development and training
programmes, both short term and long term, have received priorities which focus on Adibasi, Janajatis,
Madhesis, conflict affected women, internally displaced and conflict affected people. Special skill
oriented training programmes are also regularly conducted by the Ministry of Agriculture, Ministry of
Industry and Ministry of Labour. Similarly, both bilateral and multilateral donors, including the DFID,
SDC, GIZ, JIACA, SNV, ILO, UNDP, World Bank and ADB,have been supporting special income generation
programmes that also contribute to job creation. For example, the World Bank funds the Poverty Fund
introduced in 2002 as a part of PRSP; this is the largest income generation programme targeted at the
deprived and women. Similarly, the UNDP supports the micro enterprise development programme
implemented more than a decade ago. The programme focuses primarily on income generation through
promotion of commercial agriculture and agro-enterprises. Lately, the government also initiated a 100
days employment guarantee programme in 2012 through an Act in 2012, similar to the one
implemented in the neighbouring country of India. The important features of some of the
21
programmesthat are aimed exclusively at productive employment generation and enhancing
inclusiveness through employment opportunities are presented below. Some of the public works
programmes (PWPs) aimed at creating temporary employment opportunities are also discussed below.
a.Inclusiveness in employment opportunities:Nepal society is characterised by deep rooted exclusion and
discrimination,driven by its social structure. The Nepal Gender and Social Exclusion Assessment (GSEA)
Report, 2006 has identified six dimensions of social exclusion in Nepal. These dimensions include:
gender, caste, ethnicity/race, language, religion and geo/political. Although the form of exclusion in each
dimension is found to be different, women from subordinate castes are reported to facethe most
exclusion. Based on this data, the Interim Constitution of Nepal 2007 guarantees the right to equality.
Clause 3 of Article 13 mentions that
nothing shall be deemed to prevent the making of special provisions by law for the
protection, empowerment or advancement of women, Dalits, ethnic nationalities
(Adibasi--Janajati), Madhesi or farmers, labourers or those who belong to a class
which is economically, socially or culturally backward or children, the aged, disabled
or those who are physically or mentally incapacitated.
Recognising exclusionary practices in employment as one of the principle forms of discrimination that
prevent the deprived from participating in decision making processes, a reservation system in the civil
service was introduced, with 45 per cent of seats reserved for the disadvantaged. Of these, 33 per cent
are reserved for women, 27 per cent for the Adibasi--Janajatis (ethnic nationalities), 22 per cent for
Madhesi(terai people), 9 per cent fortheDalits, 5 per cent for disabled and the rest 4 per cent for
backward areas.
An evaluation study shows that in the first five years, 10,809 candidates were selected for the civil
service. Of these, only 3,561candidates, or 33 per cent, were selected on the basisof inclusiveness
criteria. A study evaluating the reservation policy indicated that though more women were selected
through the system, the percentage of Madhesis,disabled and candidates from remote areasselected
was below the allotted percentage (Dhakal, 2012). Minority groups may not have the necessary
qualifications to apply for these roles currently, which may explain why the number of selected
candidates is lower; however, such a policy may have a long term positive impact on enhancing
productive employment and promoting inclusiveness.
b. Karnali One Family One Employment Programme:The Karnali Employment Programme is one the
employment programmes designed to reach backward and remote areas. The programme was
introduced in 2006 and was implemented in five districts (Jumla, Mugu, Kalikot, Dolpa and Humla) in
Karnali, which is the most marginalised and underprivileged region in the country. In 2011, the
programmewas extended to the adjoining districts of Jajarkot, Achham, Bajhang and Bajura, which are
also extremely backward. Initially, NRs. 180 million was allocated to the one family, one employment
programme with a scheme of 100 days employment per year through public works programmes. The
programme aims to reach very poor households that have no employment opportunities or regular
sources of income. The programme is solely financed by the government and managed by the Karnali
Region Development Unit of the Ministry of Local Development (MoLD).
An evaluation report by the NPC shows that the total amount allocated to the programme from 2006-
2007 to 2010-11 was NRs. 1,056 million. Together with the budget of 2011-12, it amounted to NRs.
1,316 million. The report indicates that out of the total allocated budget, around 85 per cent was spent.
But in terms of accomplishment, it generated only 13 days of employment per person in a year (NPC,
2012). This means that the programme almost failed to fulfil its objectives. The programme
encompassed many lapses and shortcomings. The major problem is that a top down process is followed,
as the total budget was fixed by the centre in an a priori fashion following some incremental approach
22
rather than based on performance based criteria. This is done simply to give the impression that the
government is serious about providing for the welfare of the poor by allocating more resources to
backward areas. Hence, the budget allocation is not backed by concrete programmesthat follow bottom
up participatory approaches from the grassroots. Similarly, though it targets the poor on paper, it
benefits the non-poor also for political reasons. Third, as partly evident from the NPC evaluation, there is
no effective progress reporting or monitoring mechanism through which accountability could be
strengthened to check the misuse of funds or prevent the use of funds for purposes other than the
intended objectives of the programme. The experience, thus, indicates that ongoing practices will have
little positive impact on employment generation.
c. Youth Self-Employment Fund: The youth self-employment programmethrough creation of a fund was
announced in the budget of 2008-09 by the first elected government formed after the Constituent
Assembly Election in 2008. The youth employment fund is now called the Youth and Enterprises Self-
Employment Fund. In the beginning,NRs. 500 million was allocated to the fund. The programme aims to
promote self-employment and vocational training among unemployed youths through collateral free
periodic loans, up to a maximum of 2 lakhs per person, at concessional interest rates from banks and
financial institutions. The programmecovers multiple industries including farming and agriculture,
operation of rickshaws, arts services, traditional skills, ‘onevillage one product’ and skill formation. For
the mobilisation and operationalisation of the fund, coordination between government and non-
government organisations, banks and financial institutions is also envisaged by the programme.
The banks, financial institutions and cooperatives are required to deposit one-third of the mandated
credit flow to the deprived sector in this fund. The fund acquires this amount as a loan at 5 per cent
interest rate per annum. The deposited amount is re-financed through banks and financial institutions
for self-employment programmes at 7 per cent interest rate. The banks and financial institutions are
then allowed to invest the amount received through refinanced loans at 12 per cent interest rate. There
is also a provision 60 per centwrite off of the interest as subsidy upon timely repayment of both the
principle and interest as scheduled.All loan recipients under the self-employment programme are
required to be insured mandatorily.
When it was launched, several young people rushed to take the advantage of the programme. The
government, at the time of launching, had promised self-employment opportunities to 700,000 youths
across the country. More than 622,000 youths applied for the programme across the country in a very
short span of time. But there were reports that around 326,000 candidates were waiting for government
supportto commence their businesses despite completingthe necessary orientation training through the
various districts’ subsidiaries of Chamber of Commerce and Industry.16The irony is that the programme
had been politicised from the very beginning, and hence successive governments did not prioritise it.
Reports of massive misuse of funds also defamed the programme. The training programmewas also not
effective. The new and upgraded version of the programme, including reforms in the training curriculum,
were initiated again in 2012 after a gap of three years. Under the new loan scheme, two cooperatives
from each of the 240 constituencies and four from each district were selected and funded, with the aim
of providing self-employment to 50,000 youths per year. In order to avoid accusations that the amount
had been distributed to political workers, the involvement of the Rastriya Banijya Bank, Agriculture
Development Bank and Nepal Bank Ltd was made mandatory. A government report shows that by the
end of the fiscal year 2011-12, around Rs. 2.71 billion had been invested in the programme. A media
report quoting the vice-chairman of the fund shows that a target of providing self-employment to 50,000
people was fixedfor 2012-13.17 The government report shows that out of the approved fund of NRs. 590
million distributed to 20 banks and financial institutions for the operation of self-employment
programmes in FY2011-12, Rs. 420.04 million was released leading to the self-employment to
16 This was reported in the Rising Nepal of 1st April, 2012 which is government run paper.
17 There was a media report on 4th Aug 2012 quoting the vice-chairman of the Fund.
23
4,206persons. It has been claimed that under the Youth and Small Entrepreneur Self-Employment Fund,
about 13,862 youths were able to achieve self-employmentby mid-June 2013 (MoF, 2013). Such a claim
contradicts other reports which state that in the three years prior to 2012-13, only 3,000 youths were
employed through the programme and almost Rs. 5 billion went unclaimed.18 Over politicisation, lack of
clarity about the programme modality, including the absence of an integrated approach toward skill
development, clear rules about fund uses and an accountability system have made the programme
debatable and ineffective.
d. Public Works Programmes: A number of programmes that use labour intensive techniquesforasset
creation processes also provide temporary employment. These programmes vary in size, geographical
spread and coverage in terms of penetration within districts.They also vary with regard to their primary
focus, with some aiming to create infrastructure, some employment, and others to contributing to social
protection or food security outcomes, and a fewto addressing multiple objectives simultaneously.
These programmes share design similarities since they all pertain to the construction of physical
infrastructure and provide employment on similar, although not identical, terms with some
discrepancies in wage levels and duration of employment (ranging from 13 to 150 days). The
infrastructure created comprises mostly bridges, roads, rails and other social and economic
infrastructure, in addition to community facilities, irrigation and flood mitigation interventions such as
river training.
The World Food Programme (WFP) supported Rural Community Infrastructure Works (RCIW) is the
longest-standing programme, initiated in 1996 with support from German Technical Cooperation Agency
(GIZ), and covers 21 food-insecure districts. In addition to the RCIW, a number of other PWPs are
currently being implemented under the aegis of the Ministry of Federal Affairs and Local Development
(MoFALD), with some degree of design and operational autonomy. The most significant among these in
terms of district coverage is the Decentralized Rural Infrastructure Livelihood Project (DRILP),
implemented in 25 districts under the DoLIDAR section of MoFALD. It aims to reduce poverty in conflict
affected areasand focuses on vulnerable populations, particularly Dalits, women and children. The first
five-year phase of the DRILP was completed in October 2011. The second phase (2012-2017) is currently
under implementation, funded by ADB with technical support from SDC. SDC is also supporting the
District Roads Support Programme (DRSP), together with the World Bank. There are also some
collaborative public works programmes under implementation across the districts.19
e. Employment Guarantee Programme:In 2012, a new employment guarantee programme, broadly
similar to the one implemented in India, was launched. The Employment Guarantee Bill, drafted by the
NPC, was approved by the cabinet and then forwarded to the legislative parliament through the Ministry
of Labour and Employment. But due to the suspension of the legislative parliament, it is still pending. It
proposes to guarantee employment for 100 days, and also provisions at least 50 days of unemployment
allowance if employment for 100 days could not be provided.
f. Access to Assets, Physical, Social and Financial Services:The importance given to more equitable and
inclusive access to physical, social and financial services has reaped benefits, and steady progress in
terms of enhancing inclusive growth and productive employment has been made in those areas. NLSS
findings show that in the areas of physical and social services, access has increased overtime across
various regions, including backward regions, castes and ethnicities as well as rural and urban areas (CBS,
2011). This is further corroborated by the Nepal Human Development Report 2014 (Sharma, Basu and
Khanal, 2014). However, there is a clear indication that the access to education and health is highly
disproportionate and discriminatory across gender, caste, ethnicity and geography. There is also a large
18 This was also reported in the Rising Nepal of 1st April, 2012.
19 For details see Harris, McCord and K.C., 2013.
24
gap between rural and urban areas. Recent poverty estimates that use a multidimensional approach also
indicate that poverty is still above 42 per cent (Oxford, 2014).In terms of access to financial services, the
problem is quite large. Still, 80 per cent of households in Nepal are deprived of institutional credit from
the banking system despite their marked expansion in recent years (CBS, 2011). On the other hand, land
distribution has remained highly skewed (CBS, 2012), and there are no direct policies as such that could
enhance access to assets more equitably.
Thus, compared to some other South Asian countries that have succeeded in promoting higher growth
and productive employment through, among others, minimum job guarantees and job insurance
policies, Nepal faces bigger problems in terms of both, growth and interlinked productive employment.
A failure to enable an investment environment has encouraged the private sector to divert their
resources toward non-tradable consumable and unproductive activities leading to an adverse effect on
the quality of growth and thereby on productive employment.20 The simultaneous growth and
employment analysis in the next chapter provides more insights on this.
IV. AN EMPIRICAL ANALYSIS OF LINKAGES BETWEEN EMPLOYMENT AND GROWTH PATTERN
(STRUCTURAL TRANFORMATION) WITH SPECIAL FOCUS ON PRODUCTIVE EMPLOYMENT ASPECTS
4.1 Overall and Sectoral Growth Performance and Current Growth Engines
Table 4.1 presents the overall and sectoral growth performance of the Nepalese economy for the period
of 1991-2013. As shown in the table, the average growth of GDP decelerated sharply to 2.7 per cent in
2001-2010 from 4.4 per centin 1991-2000. Despite some improvements in 2011 and 2012, it again
decelerated in 2013, with the growth rate slowing to below 4 per cent. The trend also portrays wider
fluctuations in the growth rate from one year to another, largely due to changing monsoon conditions. In
the agricultural sector, the growth was 2.2 per cent during 1991-2000 and 2.32 per cent during the
period of 2001-2010, indicating a low growth rate.
Amidst the expedition of liberalisation in the beginning of the 1990s, which was characterised by
deregulation, privatisation, free trade, limiting the role of the state and opening the economy to foreign
investment, there was some growth momentum in the non-agricultural sector,where the growth rate
stood at 6.16 per cent on average during the period 1991-2000. However, such a pace could not be
maintained in the following years. The growth rate tumbled down to a mere 2.95 percent during 2001-
2010, primarily due tothe decade long conflict (1996-2006) in the country. At the same time, the abrupt
and narrow focused liberalisation programme induced urban-centric capital intensive activities,
immature sequencing and above all a negligence of institutional and structural constraints. This affected,
among others, the investment environment and contributed to the poor performance of the non-
agriculture sector (Khanal et al. 2005 and 2012).
20 To review the role of investment patterns and other determinants on sectoral growth, see Khanal et al. (2012).
In the study, sectoral decomposition analysis to examine the effect of capital and labour on sectoral growth and
productivity has also been made.
25
Table 4.1 Sectoral Growth Rate (1990-2013)
1991
-
2000
(%)
2001
-
2010
(%)
2011
(%)
2012
(%)
2013
(%)
Agriculture, fisheries and forestry
Mining and quarrying
Manufacturing
Electricity, gas and water
Construction 5.6
2.7
4.8
0.2
1.6
Trade, restaurant and hotel 5.6
0.7
2.0
3.4
9.2
Transport, communication and
storage 7.3
4.6
5.2
5.7
6.7
Finance and real estate
Community, social services and
others
Non
-
agriculture GDP
Total GDP
Source: Economic Survey (1992, 2012 and 2014), Ministry of Finance, Government of Nepal
The subsector performance breakdown provides more insights into the underlying reasons for the low
but fluctuating growth rate. Interestingly, during 1991-2000l, all the subsectors within the non-
agricultural sector grew by more than 5 per cent. The manufacturing sector recorded growth of 8.6 per
cent followed by transport, communication and storage (7.34 per cent) and electricity, gas and water
(7.09 per cent). But due to their relatively low contribution to the overall growth in terms of GDP at17,
11.1 and 2.4 per cent respectively, the average growth rate could not go beyond 4.4 per cent in this
period despite it being higher than the long term growth rate of around 4 per cent (Table 4.2). During
this period, the contribution of the agricultural sector to total GDP was 20.1 per cent.
Contrarily, all the non-agricultural subsectors registered a deceleration in growth during 2001-2010.
During this period, the performance of sectors like manufacturing and trade and restaurant and hotel
has been disappointing, with the average growth rate decelerating to less than one per cent. Only
community and social services grew at a growth rate of above 5 per cent during the same period. In
terms of contributing to growth, the contribution of the agricultural sector to the total GDP increased
further to 30 per cent. Among the non-agricultural subsectors, the contribution of community and social
services to total GDP was 25.6 per cent. This was followed by finance and real estate at 16.2 percent and
transport, communication and storage at 14.3 per cent. On the other hand, the contributions of
manufacturing; electricity, gas and water; and trade, restaurant and hotel accounted for just 1.1, 3.2 and
3.9 per centof the GDP respectively. The contribution of the construction sector to the total GDP also
declined from14.3 per cent during 1991-2000 to 6.0 per cent during 2001-2010. Thus, during 2001 to
2010, the performance of almost all the non-agricultural subsectors was poor, hardly catching up to
even the stagnated agricultural sector.
Some improvements in the growth rate took place in 2011-2013, in addition to some changes in the
sectoral contributions to the overall growth rate depending on the growth performance of the particular
sector. For instance, in the year 2013, the trade, restaurant and hotel sector made the largest
contribution to the overall GDP growth at 36.9 per cent. In this year, a sharp reduction in the agricultural
sector’s contribution was compensated by this sector.
Table 4.2 Sectoral Contribution to GDP Growth
26
1991
-
2000
(%)
2001
-
2010
(%)
2011
(%)
2012
(%)
2013
(%)
Agriculture, fisheries an
d forestry
20.1
30.2
40.1
39.5
11.8
Mining and quarrying 0.6
0.5
0.2
0.5
0.7
Manufacturing 17.0
1.1
7.0
5.5
3.4
Electricity, gas and water 2.4
3.2
2.5
4.3
0.1
Construction
14.3
Trade, restaurant and hotel
14.1
10.7
36.9
Transport, communication and
storage
11.1
14.3
12.4
12.3
17.9
Finance and real estate
11.6
16.2
11.1
Community and social services 11.0
25.6
15.7
18.9
17.8
Non-agriculture GDP 79.9
69.8
60.0
60.6
89.0
Total GDP 100
100
100
100
100
Source: Economic Survey (1992, 2012 and 2014), Ministry of Finance, Government of Nepal
The overall sectoral growth and accompanying sectoral contributions to the growth pattern clearly show
that structural change has not only progressed at a slower pace, but has also emergeddifferently
compared to the structural change that has taken place in advanced and newly emerging countries in
the course of take-off and rapid development. For instance, the share of the manufacturing sector
reduced from 7 per cent in 1991 to 6.7 per cent in 2013 (Table 4.3). Similarly, the growth of the
construction sector, which partly mirrors the transformational process in the economy, witnessed a
sharp fall in its share from 10.5 per cent in 1991 to 5.7 per cent in 2013. Sectors such as trade, restaurant
and hotel; transport, communication and storage; finance and real estate; and community and social
services only witnessed a rise in their share in total GDP. All these trends, accompanied by wider
fluctuations, indicate that no sector has emerged as a leading dynamic sector from a sustainable growth
perspective. In this respect, the disappointing performance of the manufacturing sector has been an
important factor. High production and transaction costs, poor and low quality infrastructure, high
interest rates and other policy biases, rigid labour laws and over politicisation of labour unions, and a
very weak regulatory system have encouraged market distortions and immature liberalisation policies.
These policies have failed to take into account the threat of cheap products from other countries and
have contributed to augmenting de-industrialisation in Nepal. The decade long conflict which created
hurdles and forced industries to close down also contributed to this.
Table 4.3 Sectoral Share in GDP
1991 (%)
2001 (%)
2011 (%)
2013
(%)
Agriculture, fisheries and forestry 46.5
38.0
35.0
34.4
Mining and quarrying 0.5
0.6
0.4
0.4
Manufacturing
Electricity, gas and water
Construction
10.5
11.4
Trade, restaurant and hotel
10.7
11.2
14.1
14.7
Transport, communication and storage
5.7
7.4
9.4
9.8
Finance and real estate 9.5
9.8
12.2
12.1
Community and social services 8.3
10.0
13.7
14.1
Non
-
agriculture GDP
53.5
62.0
65.0
65.6
27
Total GDP
100.0
100.0
100.0
100.0
Source: Economic Survey (1992, 2012 and 2014), Ministry of Finance, Government of Nepal
4.2 Overall and Sectoral Employment Performance and Main Employment Sources
The employment performance of the Nepalese economy has been assessed based on data on the
economically active population obtained from the population census. For comparison purposes, data of
the three population censuses, viz., 1991, 2001 and 2011 have been used. Out of the total working age
population, 73 per cent were employed in 1991, which increased to 77 per cent in 2001. However,
thereafter, the ratio declined to 67 per cent. This clearly indicates that the growth in employment has
been slower than the growth in population. Another phenomenon, as revealed by the employment
pattern, is that no discernible changes in the employment structure have been observed overtime.
Despite some reduction in the share of agricultural employment, it is still a dominant sector as two-
thirds of the economically active population are still engaged in this sector, though the percentage has
reduced from 81.2 per cent in 1991 to 66.7 per cent in 2011. On the other hand, the share of
manufacturing employment has gone down sharply in recent years from 8.8 per cent in 2001 to just 5.5
per cent in 2011. Now, after agriculture, community and social services is the largest employment
generating sector with a 12.8 per cent share in total employment. Despite a reduction in its share from
2001 to 2011, the trade, restaurant and hotel sector still occupies third place with a share of 8.1 per cent
in total employment.
Table 4.4 also presents the rate of growth of employment in different sectors over the periods of 1991-
2001 and 2001-2011. As the figures indicate, overall employment growth reduced to 0.6 per cent in
2001-2011 from 2.7 per centin 2001-2011. It shows that the slower sectoral growth in the later period
took a heavy toll on employment generation. Another interesting phenomenon is that despite some
sectors growing moderately, their employment demand remained low. The combined effect resulted in
job-less growth during 2001-2011.
Table 4.4 Employment Growth and Employment Share in Sectors
Employment share
Employment g
rowth
(Annual average)
1991
(%)
2001
(%)
2011
(%)
1991
-
2001 (%)
2001
-
2011 (%)
Agriculture, fisheries and forestry 81.2 65.7
66.7
0.8 0.7
Mining and quarrying 0.0 0.2
0.3
17.4 5.1
Manufacturing 2.0 8.8
5.5
16.0 -3.7
Electricity, gas and water supply
23.1
-
16.0
Construction
18.9
Trade, restaurant and hotel
12.2
-
Transport, communication and
storage
10.5
Financial and real estate
11.8
Community and social service and
other 11.6 8.6
12.8
0.0 4.2
Total 100 100
100
2.7 0.6
Source: Calculated based on economic survey data of various years
The linkage between economic growth and employment can be better understood by examining overall
and sectoral employment elasticity patterns. Such estimates are presented in Table 4.5. The estimates
show that during 1991-2001, the employment elasticity of the whole economy was 0.64. Thereafter,
elasticity declined sharply and reduced to just 0.18 during in 2001-2011. The negative elasticity of 4.85,
28
1.83 and 1.43 in the manufacturing; electricity, gas and water; and trade, restaurant and hotel sectors
respectively were mainly responsible for this. Conversely, the low or moderate elasticity in sectors like
agriculture (0.25), construction (0.47), transport (0.74) and community services (0.63) also contributed
to the low elasticity. Elasticity in sectors like real estate and finance was found to be very low at 0.05,
which again indicates that these sectorsare highly capital intensive. The employment elasticity numbers
further corroborate the theory that it is not just low growth, but also the pattern of growth, that has
been instrumental in creating the job-less growth situation in Nepal. The declining elasticity
pattern,compounded by wider fluctuations, show that there is hardly any sector that could be regarded
as a dynamic lead sector from growth and employment perspectives. Nonetheless, under the existing
pattern, the construction, community services and transport sectors could be considered as meeting
both objectives even if minimally.
Table 4.5 Employment Elasticity
1991
-
2001
2001
-
2011
Agriculture, fisher
ies and forestry
0.32
0.25
Mining and quarrying
3.70
1.50
Manufacturing
2.15
-
4.85
Electricity, gas and water supply 3.93
-1.83
Construction 3.76
0.47
Trade, restaurant and hotel 2.58
-1.43
Transport, communication and storage 1.55
0.74
Financial
and real estate
2.60
0.05
Community, social service and other
0.00
0.63
Total
0.64
0.18
Source: Calculated based on economic survey data of various years
4.3 Sources of Income, Earnings/Wages and Factor Distributional Pattern
A closer examination of the income sources of households reveals the ramifications of job-less growth
and changes in employment patterns overtime (Table 4.6).In addition to some noticeable increments in
the share of non-farm per capita income (from 21.2 in 1996 to 37.2 per cent in 2011), accompanied by a
sharp reduction in the share of per capita farm income (from 58.4 in 1996 to 27.7 per cent in 2011),
during the period 1996 to 2011, the inflow of remittances gradually emerged a big income source (from
7.6 in 1996 to 17.2 per cent in 2011). NLSS data further reveal that the share of agriculture wage income
has gone down to 35 per cent in 2011 from 53 per cent in 1996 (CBS, 2011).
Table 4.6 Sources of Household Income in Nepal, 1995-96, 2003/04 and 2010/11
(Average per capita income at 1995-96 prices; in NRs)
Income by Sources
1995
-
96
%
2003
-
04
%
2010
-
11
%
Farm income
4,491
58.4
7,217
47.6
11,540
27.7
Non-farm income 1,630
21.2
4,154
27.4
15,497
37.2
Remittances income 584
7.6
1,668
11.0
7,165
17.2
Housing income 807
10.5
1,516
10.0
6,457
15.5
Other income
177
606
1,000
Total
7,690
100
15,162
100
41,659
100
Source: NLSS 1995/96, 2003/04 and 2010/11
29
A positive phenomenon from the standpoint of wage employment is that wages has steadily increased in
the labour market in recent years, partly due to the massive outflow of youth in search of jobstothe Gulf
countries and other places. In terms of nominal wages, the wages in agricultural sector rose to Rs. 170
per day in 2011 from Rs. 40in 1996. Similarly, non-agriculture wages rose to Rs. 263 from Rs. 74 during
the same period. In other words, the rise in agricultural wages was 4.25 times against the 3.55 times
increase in non-agricultural wages (CBS, 2011) amidst a 2.9 fold rise in consumer prices (NRB, 2013). This
clearly indicates that there has been a real increment in the wage level. The Doing Business study also
indicates that the minimum wage level of a 19 year old worker has increased to US$ 75.9 per month
from almost US$ 30 during 2008-2014 (World Bank, 2014). NLSS data further shows that the gap
between urban and rural wages has narrowed in the agricultural sector to 8 per cent. However, the
difference in rural and urban wages persists in the non-agricultural sector, with urban wages higher by
almost 28 per cent. An even higher wage gap persists between male and female workers, with the male
wage rate higher by 37 per cent in the agricultural sector and by 51 per cent in the non-agricultural
sector (CBS, 2011).
Notwithstanding some encouraging developments in the wage front amidst continued wage gaps
particularly between male and female workers, the wage share in the main sector of employment
revealsthat wage hikeshave benefitted majority of working population only marginally. As shown in
Table 4.7, the share of self-employment in agriculture had reduced to 61.2 per cent in 2011 from 70.6
per cent in 1996. Likewise, along with the rise in the share of extended economic work21 from 9.4 per
cent in 2004 to 10.7 in 2011, the share of wage employment in the agriculture sector has reduced to 2.8
per cent in 2011 from 12.2 per cent in 1996. On the other hand, only a modest increase in the share of
non-agricultural sector wage employment has taken place during this period, from 9.5 to 12.6 per cent.
Interestingly, the share of self-employment in the non-agricultural sectorslightly exceeded in 2010-11
compared to the share of wage employment in the agriculture sector in 1995-96.
Table 4.7 Main Status Employment
1995
-
(%)
2003
-
(%)
2010
-
(%)
Wage employment in agriculture
12.2
Self-employment in agriculture 70.6
64.3 61.2
Wage employment in non
-
agriculture
10.2
12.6
Self
-
employment in non
-
agriculture
12.7
Extended economic work
10.7
Total 100
100 100
Source: NLSS 1995-1996, 2003-2004 and 2010-2011
Such a sectoral employment structure,as well as wage employment pattern, has been detrimental to the
overall distributional gains supposed to be resulting from the increased wage rate in the labour market.
One of the indicators used to examine distributional gains is factor distribution or returns to labour and
capital in the form of operating surplus and compensation given to employees. National accounts
estimates indicate that the factor distribution or returns to labour and capital has moved in the opposite
direction. According to the estimated compensation paid to employees and operating surplus, the share
of the former in total value added has gone down steadily from 46.7 per cent in 2001 to 38.1 per cent in
21 The work not falling into agriculture and non-agriculture category is included in this.
30
2011. On the other hand, the share of operating surplus in the total value added has risen to 58.6 per
cent in 2011 against 50.4 per cent in 2001 (Figure 4.1).
Figure 4.1: Share of Compensation of Employees and Operating Surplus in GDP
Source: Economic Survey (2005 and 2014)
A comparison of the per capita income of the lowest and other deciles groups, against the per capita
income of the highest deciles group, shows that a very adverse income distribution pattern has
manifested in Nepal. In 1996, the per capita income level of the 10th highest deciles group was 20.5
times higher than that of the lowest income group. In 2011, its per capita income level jumped to 26.4
times the per capita income level of the lowest deciles group. A rough calculation based on the
cumulative per capita income share by deciles group reported in the NLSS of 2011 reveals that income
inequality measured in the form of the Gini coefficient is in the neighbourhood of 0.51( Khanal, 2011)22
for Nepal.
4.4 Structural Change, Labour Productivity and Employment
Development history and the experiences of many countriesindicate that structural changes play a
critical role in a country’s rapid development. The shifting of labour and other resources from agriculture
and other traditional products to modern economic activities is considered an inevitable step to
enhancing overall productivity and incomes and speeding structural transformation and economic
prosperity (McMillan and Rodrik, 2011).
Somestructural changes have gradually taken place in the Nepalese economy too. Whether such
changes enhance economic growth and employment is a question to be asked. A quick look at labour
productivity shows that some improvements have taken place between 1991 and 2011. But the labour
productivity gaps between different sectors are typically very large. The agricultural sector, which
absorbs more than two-thirds of the labour force, has the lowest labour productivity despite some
improvement overtime. Labour productivity in the financial and real estate sectors is very high, but the
employment generated by this sector is very low (Table 4.8 and Figure 4.2). The labour productivity of
the finance and real estate sector was 28 times higher than that of agriculture in 2011. Among the non-
agricultural sectors, the community and social services sector had the lowest productivity, but in terms
of employment it is the largest sector after agriculture.
22 In Nepal, there is a system of estimating inequality based on consumption differences among deciles group
derived from NLSS. The Ginicoefficient reported based on the consumption approach for 1996, 2004 and 2011 are
0.322, 0.414 and 0.328 respectively. These cannot be considered the best measures.
Compensation of
employees, 2001, 45.
0
Compensation of
employees, 2002, 44.
8
Compensation of
employees, 2003, 44.
2
Compensation of
employees, 2004, 43.
2
Compensation of
employees, 2005, 42.
2
Compensation of
employees, 2006, 40.
2
Compensation of
employees, 2007, 39.
2
Compensation of
employees, 2008, 38.
9
Compensation of
employees, 2009, 37.
0
Compensation of
employees, 2010, 36.
6
Compensation of
employees, 2011, 35.
6
Operating surplus/
mixed
income, 2001, 48.6
Operating surplus/
mixed
income, 2002, 48.8
Operating surplus/
mixed
income, 2003, 49.3
Operating surplus/
mixed
income, 2004, 50.0
Operating surplus/
mixed
income, 2005, 50.8
Operating surplus/
mixed
income, 2006, 53.2
Operating surplus/
mixed
income, 2007, 53.6
Operating surplus/
mixed
income, 2008, 53.7
Operating surplus/
mixed
income, 2009, 54.9
Operating surplus/
mixed
income, 2010, 54.0
Operating surplus/
mixed
income, 2011, 54.9
Compensation of employees
Operating surplus/ mixed income
31
Table 4.8 Sector-wise Labour Productivity (Annual Output per worker at 1991 Price)23
1991
(000s)
2001 (000s)
2011 (000s)
Agriculture, fisheries and forestry
11.5
14.6
Mining and quarrying
243.5
56.8
47.2
Manufacturing
52.6
22.2
36.3
Electricity, gas and
water supply
69.5
10.9
166.7
Construction 310.7
43.5
53.0
Trade, restaurant and hotel 50.4
38.8
49.2
Transport, communication and storage 129.1
80.6
95.3
Financial and real estate
525.0
264.5
413.7
Community and social service and others
11.7
23.3
30.6
Total
15.8
20.2
27.3
Source: Calculated based on value added data from economic survey of various years and population
census data of CBS
Figure 4.2 Labour Productivity Ratio (Relative to Agriculture Sector)
Source: Author’s calculations
Figure 4.2 presents the ratio of labour productivity relative to agriculture overtime across sectors. Except
for the community and social services sector, which has very low productivity, the labour productivity of
23 Per worker productivity has been calculated using sectoral gross value added figures.
1991, Agriculture,
Fisheries and
Forestry, 1
1991, Mining and
Quarrying, 26
1991, Manufacturi
ng, 6
1991, Electricity, g
as and water
supply, 7
1991, Construction
, 33
1991, Trade, Resta
urant and Hotel, 5
1991, Transport, C
ommunication and
Storage, 14
1991, Financial
and Real Estate, 57
1991, Community
and Social Service
and other, 1
2001, Agriculture,
Fisheries and
Forestry, 1
2001, Mining and
Quarrying, 5
2001, Manufacturi
ng, 2
2001, Electricity, g
as and water
supply, 1
2001, Construction
, 4
2001, Trade, Resta
urant and Hotel, 3
2001, Transport, C
ommunication and
Storage, 7
2001, Financial
and Real Estate, 23
2001, Community
and Social Service
and other, 2
2011, Agriculture, Fish
eries and Forestry, 1
2011, Mining and
Quarrying, 3
2011, Manufacturing, 2
2011, Electricity, gas
and water supply, 11
2011, Construction, 4
2011, Trade, Restauran
t and Hotel, 3
2011, Transport, Com
munication and
Storage, 7
2011, Financial and
Real Estate, 28
2011, Community and
Social Service and
other, 2
1991 2001 2011
32
other sectors declined in 2001 from 1991 and slightly revived again in 2011. In 2011, labour productivity
was highest in the financial and real estate sector (28 times), followed by electricity, gas and water
supply (11 times), and transport, communication and storage (7 times). Despite declines over time, the
labour productivity of the manufacturing sector was twice the productivity of the agricultural sector in
2011. Similarly, labour productivity in construction was four times higher than the productivity of the
agricultural sector in the same year. The low productivity at aggregate and sectoral level, including the
wider fluctuations caused by persistence of larger inter-sectoral productivity gaps with higher
productivity in low employment absorbing sectors, pose major challenges from the standpoint of
changing employment patternsin higher productive sectors.
It is well known that labour productivitycan be increased either by raising productivity within sectors
through capital accumulation, technological change, reducing misallocation across plants, or through
moving labour from low productivity to high productivity sectors (McMillan and Rodrik, 2011). The
second type of effect emerges through structural changes that result in the reallocation of labour across
different sectors. When employment changes positively correlate with the productivity level, this may
have a positive impact on overall productivity amidst structural changes. Hence, examining the
productivity performance of individual sectors may be misleading when there is a large gap in the labour
productivity and employment shares of various economic activities. A high rate of labour productivity
growth within an industry can have quite ambiguous implications for overall economic performance if
the industry’s share of employment shrinks rather than expands. Studies indicate that if the displaced
labour end up in activities with lower productivity, the economy wide growth will suffer. Large inter-
sectoral productivity gaps, therefore, are regarded to be detrimental to higher economic growth. In view
of the large inter-sectoral labour productivity gap, it is important to take into consideration such
dimensions in the Nepalese context.
In Figure 4.3 and 4.4, the relative productivity of sectors (end of period) against the change in their
employment share is presented for the period between 1991-2001 and 2001-2011. As the studies
indicate, a negative correlation between the direction of labour flow and the labour productivity of
individual sectors indicates growth reducing structural change and vice-versa (McMillan and Rodrik,
2011). Figure 4.3 shows the positive correlation between labour productivity and change in employment
share in 1991-2001. This indicates that there was some growth-enhancing structural change –that is,
workers moved from agriculture to productive non-agricultural sectors. This was the period when the
liberalisation programme was launched and speeded up. During this period, the communication,
transportation, finance and manufacturing sectors expanded amidst a more open and liberal
environment.
But along with the intensification of internal conflict and political instability, supply side bottlenecks
emanating from poor infrastructure and energy shortage, as well as the escalation in production and
transaction costs, gradually affected both, employment share and labour productivity. As Figure 4.4
depicts, there was a negative correlation between labour productivity and change in employment share
during 2001-2011. During 2001-2011, there was a relative loss of employment in sectors like
manufacturing, trade and restaurant and electricity. The sector that experienced the largest
employment gain was community and social services. However, this sector has a high level of informality
and is also the least productive. The employment share of the agricultural sector also increased
marginally during 2001-2011. In this way, the Nepalese economy has been witnessing some reversal
structural changes as a result of a phenomenal decline in employment in potential sectors, leading to a
return to agriculture, among others. Amidst severe energy shortages and sour industrial relations,
import competition has caused many industries to contract and release labour to less productive
activities and informality, which has also driven the trend of foreign employment. An overvalued
exchange rate,caused by the maintenance of a pegged exchange rate, fixed against the valueof Indian
currency,and with no change in the rate since 1993, also seems to affect the manufacturing sector in
33
Nepal. Probably because of reverse structural change and the lack of employment for the growing
population, the outflow of youth has continuously increased.
Figure 4.3: Correlation between Sectoral Productivity and Change in Employment Shares in Nepal
(1991-2001)
Source: Authors’ calculation
Notes: Fire is finance and real estate, tran is transport, cons is construction, trad is trade, manu is
manufacturing, elec is electricity, min is mining, coms is community services and agr is agriculture.
Figure 4.4 Correlation between Sectoral Productivity and Change in Employment Shares in Nepal
(2001-2011)
dEAP, -0.16, -
0.52
dEAP, 0.00, 1.17
dEAP, 0.07, 0.09
dEAP, 0.01, -
0.58
dEAP, 0.02, 1.28
dEAP, 0.06, 0.17
dEAP, 0.01, 1.52
dEAP, 0.00, 2.53
dEAP, -
0.03, 0.20
y = 4.125x + 0.651
R² = 0.068
Log of Sectoral Labor
Productivity/Total Labor
Productivity
Change in Employment Share
Agr
Fire
Tran Cons
Min
Coms
Elec
Trad Manu
34
Source: Authors’ calculation
4.5 Decomposition of Per Capita GDP Growth
A simple decomposition of per capita GDP into three major components enables us to understand the
association of growth with changes in productivity, employment rate and demography. Following
Gutierrez et al. (2007), per capita GDP, Y/N = y can be expressed as:
=
……………………………………………….(1)
or,
=…………………………………………….(2)
where Y is value added, E is employment, A is the working age population and N is the total population.
The ratio =/ corresponds to output per worker, =/ corresponds to the share of the working
age population employed and =/ corresponds to the share of the working age population. The
decomposition can be extended to multiple sectors as
=
……………………………………………….(3)
or,
=
where the sub-index stands for the sector of economic activity.
Following the Shapley decomposition, we can have
dEAP, 0.01, -
0.63
dEAP, 0.00, 0.5
5
dEAP, -
0.03, 0.29
dEAP, -
0.01, 1.81
dEAP, 0.00, 0.6
7
dEAP, -
0.02, 0.59
dEAP, 0.01, 1.2
5
dEAP, 0.00, 2.7
2
dEAP, 0.04, 0.1
2
y = -9.045x + 0.818
R² = 0.037
Log of Sectoral Labour Productivity /
Total Labor Productivity
Change in Employment Share
Fire
Elec
Tran
Coms
Manu
Trad Cons
Min
Agr
35
∆
=+̅+
where , ̅ and are the marginal contributions of each component to the observed change in per
capita value added. Similarly, equation (3) can be written as
∆
=
+̅
+
Here, ̅ would be the amount of growth that can be linked to changes in the employment rate as
measured by the ratio between total employment and the working age population. The component
reflects changes in the demographic structure of the population. Moreover, the term ̅ denotes the
amount of growth that can be linked to changes in the share of employment in each sector. The term
denotes the amount of growth that can be linked to productivity changes in sectors.
A decomposition analysis for the period of 1991-2001 and 2001-2011 has been done. Table 4.9 presents
the main data used for the aggregate decomposition. Data on the value added are at 1991 prices.
Table 4.9and Figure 4.5 below present the results of the decomposition of aggregate per capita growth
into its main components. Table 4.9 shows the contribution in absolute observed growth in per capita
GDP at 1991 prices as well as the per cent contribution. The results show that during 1991-2001, almost
65 per cent of the change in per capita value added was linked to changes in productivity. Change in
employment was also important, accounting for 23 per cent of observed growth. Thus, the growth
during 1991-2001 was not ‘job-less’. The remaining 12.1 per cent of growth was linked to the changes in
the structure of the population, i.e., the increase in the proportion of working age population.
Table 4.9 Decomposition of Growth in Per Capita Value Added (1991-2011)
1991-2001 2001-2011
Change in
per capita
value added
(@1991
price in Rs.)
% of total
change in
per capita
value
added
growth
Change in
per capita
value
added
(@1991
price in
Rs.)
% of total
change in
per capita
value
added
growth
Total growth in per capita GDP
1
,898
.7
100
2
,159
.4
100
Growth linked to output per worker
1
,232
.1
64.9
3
,035
.2
140.6
Growth linked to changes in
employment rate
437.3
23.0
-
1459.0
-
67.6
Growth linked to changes in the
share of population of working age 229.3 12.1 583.2 27.0
Source: Authors’ calculation
Figure 4.5 Aggregate Employment, Productivity and Demographic Profile of Growth (1991-2011)
36
Source: Author’s calculations
Contrary to 1991-2001, the employment rate went in the opposite direction during 2001-2011. A large
portion of people were out of work. A decline in the per capita value added due to the fall in the
employment rate was compensated by an increase in productivity. Increases in the working age
population contributed to an increasein per capita value added to 27.0 per cent in 2001-2011 from 12.1
per cent in the previous period. In this way, there has been ‘job-less growth’ during the later period.
Thus, the rise in per capita value added during 2001-2011 has been mainly due to the rise in
productivity, driven by increasingly capital intensive nature of production in different sectors.
4.6 Role of Sectors to Employment Generation and Per Capita GDP Growth
To compute which sectors contributed to employment generation and to per capita GDP growth, we
decompose the change in employment rate (e) by sectors as
∆=

where ei =Ei/A represents the change in employment in sector I as a share of total working
population. This analysis gives us a simple measure of which sector contributed more to changes in the
employment rate.
Table 4.10 presents the data on employment by sector. All sectors registered absolute growth in the
number of employed during 1991-2001. Likewise, except agriculture and community, social and other
service, all sectors gained in terms of total employment during that period. In contrast, three sectors -
manufacturing; electricity, gas and water; and trade, restaurant and hotel - registered a decline in
employment during 2001-2011. Only the community, social and other service sector gained in terms of
share of total employment during 2001-2011. Total employment grew by 2.7 per cent and the
employment rate increased by 4.5 percentage points during 1991-2001. However, despite the absolute
increase in employment by a meagre 0.6 per cent, the employment rate declined by 10.5 percentage
points during 2001-2011. It shows that getting employment has become precarious in recent years in
Nepal, compelling people to seek foreign employment.
1991-
2001, Growt
h linked to
output per
worker, 64.9
1991-
2001, Growt
h linked to
changes in
employment
rate, 23
1991-
2001, Growt
h linked to
changes in
the share of
population of
working
age, 12.1
2001-
2011, Growth
linked to
output per
worker, 140.
6
2001-
2011, Growth
linked to
changes in
employment
rate, -67.6
2001-
2011, Growth
linked to
changes in
the share of
population of
working
age, 27
2001-
2011
37
Table 4.10 Employment by Sectors of Economic Activity, 1991-2011
Economic sectors
Employment
(in,000)
Employment growth
(annual %)
Employment/Pop. of
working age (e)
Change in
e
in
each sector
1991
2001
2011
1991
-
2001
2001
-
2011
1991
2001
2011
1991
-
2001
2001
-
2011
Agriculture, fisheries and forestry
5,961
.8
6,504
.7
7,047
.3
58.98
50.69
44.45
-
8.28
-
6.24
Mining
and quarrying
2
.4
16
.0
28
.0
17.4
0.02
0.13
0.18
0.10
0.05
Manufacturing
150
.0
872
.
2
581
.5
16.0
-
1.48
6.80
3.67
5.31
-
3.13
Electricity, gas and water supply 11.7
148.2
25.4
23.1
-16.0
0.12
1.16
0.16
1.04
-0.99
Construction 35.7
286.4
340.9
18.9
1.6
0.35
2.23
2.15
1.88
-0.08
Trade, restaurant and hotel 256.0
984.7
856.9
12.2
-1.3
2.53
7.67
5.40
5.14
-2.27
Transport, communication and storage 50.8
161.6
258.8
10.5
4.3
0.50
1.26
1.63
0.76
0.37
Financial and real estate
20
.8
76
.7
78
.5
11.8
0.21
0.60
0.49
0.39
-
0.10
Community and Social Service and other
850
.3
849
.6
1,353
.4
8.41
6.62
8.54
-
1.79
1.92
Total
7,339
.5
9,900
.1
10,570
.7
72.61
77.15
66.67
4.55
-
10.48
Source: Census Survey and Authors’ calculation
38
Further, during 1991-2001, the employment rate declined in agriculture and community and
social services (Table 4.10 and Figure 4.6). However, during 2001-2011, such a drop was
observed in almost all sectors except transport, communication and storage; community and
social services; and mining and quarrying.
Figure 4.6 Contribution of Each Sector to Changes in Employment Rate (1991-2011)
Source: Author’s calculations
In Table 4.11, the contribution of sectoral employment changes to growth in total per capita
output is presented. Out of the contributions of Rs. 437.3 (or 23.03 per cent) due to changes in
the employment rate during 1991-2001, the contribution of the manufacturing sector was Rs.
510.9 followed by the trade, restaurant and hotel sector at Rs. 494.4. Sectors like agriculture and
community and social service contributed negatively as a result of employment contraction in
these sectors. On the other hand, except for community and social service; transport,
communication and storage; and mining and quarrying, changes in per capita output to the
changes in employment were negative during 2001-2011.
Table 4.11 Contribution of Employment Changes to Overall Change in Per Capita GDP (1991-
2011)
Contribution to
changes in per capita
GDP
Pe
r
cent
of total
changes in per capita
GDP
1991
-
2001
2001
-
2011
1991
-
2001
2001
-
2011
Agriculture, fisheries and forestry -796.7 -868.9 -41.96 -40.24
Mining and quarrying
0.52
0.33
Manufacturing 510.9 -435.8 26.91 -20.18
Electricity, gas and
water supply
99.9
-
138.5
5.26
-
6.41
1991-
2001, Agricultur
e, Fisheries and
Forestry, -8.28
1991-
2001, Mining
and
Quarrying, 0.10
1991-
2001, Manufact
uring, 5.31
1991-
2001, Electricity
, gas and water
supply, 1.04
1991-
2001, Constructi
on, 1.88
1991-
2001, Trade, Res
taurant and
Hotel, 5.14
1991-
2001, Transport,
Communication
and
Storage, 0.76
1991-
2001, Financial
and Real
Estate, 0.39
1991-
2001, Communit
y, Social and
other services, -
1.79
2001-
2011, Agricultur
e, Fisheries and
Forestry, -6.24
2001-
2011, Mining
and
Quarrying, 0.05
2001-
2011, Manufact
uring, -3.13
2001-
2011, Electricity
, gas and water
supply, -0.99
2001-
2011, Constructi
on, -0.08
2001-
2011, Trade, Res
taurant and
Hotel, -2.27
2001-
2011, Transport,
Communication
and
Storage, 0.37
2001-
2011, Financial
and Real
Estate, -0.10
2001-
2011, Communit
y, Social and
other
services, 1.92
2001-2011
1991-2001
39
Construction
180.7
-
11.4
9.52
-
0.53
Trade, restaurant and hotel 494.4 -315.9 26.04 -14.63
Transport, communication and
storage
72.8
51.9
3.83
Financial and real estate
37.6
-
14.3
1.98
-
0.66
Community, Social and other services -172.2 266.7 -9.07 12.35
Total 437.3 -1459 23.03 -67.57
Source: Authors’ computation
4.7 Sectoral Productivity Changes and Their Contribution to Per Capita GDP
This section performs decomposition of productivity in terms of sectoral employment shifts and
changes in productivity within sectors by
=
…………………………………………………………(4)
where Yi is value added of sector, Ei is employment in sector I and E is total employment. The
equation states that the total output per worker is the weighted sum of output per worker in all
sectors, where the weights are simply the employment share of each sector.
Using the Shapley approach, changes in aggregate output per worker can be decomposed into
changes in output per worker within sectors and movement of labour between sectors (inter-
sectoral shift). An increase in productivity within a sector increases average productivity, but the
size of the increase depends on the size of each sector, i.e., its share in total employment.
Similarly, inter-sectoral shifts of labour from low productivity sectors to high productivity sectors
also increases the average productivity.
Table 4.12 gives the contribution of each sector as well as of inter-sectoral employment shifts to
the observed growth in total output per worker. The growth of total productivity by Rs. 2,961.6
for the period of 1991-2001 was driven by an increase of Rs. 2,520.8 from the agriculture and
community and social services sectors and a decrease of Rs. 10,433.6 across all other sectors. A
more discernible aspect of the pattern is that inter-sectoral labour relocation was one of the
primary causes for the increase in total output per worker which comes out to be Rs. 10,874.5.
Such a positive inter-sectoral effect indicates that there was a movement of labour from lower
than average productivity sectors to above average productivity sectors during 1991-2001.
During 1991-2001, labour exhibited a tendency to move to manufacturing; trade; restaurant and
hotel; construction; and electricity, gas and water sectors. All these sectors reported labour
productivity higher than average.
Table 4.12 Decomposition of Output/Worker into within Sector Change in Output/Worker and
Inter-Sectoral Shifts
Contribution to change in total
output per worker
1991-2001 2001-2011
Agriculture, fisheries and forestry 1,390.9 2,142.7
Mining and quarrying -177.9 -19.5
Manufacturing -1735.8 1,022.8
Electricity, gas and water supply -487.8 1,371.9
40
Construction
-
4106.9
307.0
Trade, restaurant
and hotel
-
1896.4
974.4
Transport, communication and storage -503.2 315.3
Financial and real estate -1525.7 1,161.7
Community and social service 1,129.9 809.3
Inter
-
sectoral shift
10
,874
.5
-
820.9
Total change in output per worker
2
,961
.6
7
,264
.9
Source: Authors’ calculation
The inter-sectoral shift had a reversal effect on productivity during 2001 to 2011. The
productivity turned into a negative effect during this period. This indicates that labour moved
from highly productive non-agricultural sectors to agriculture or remained unemployed and
largely opted for foreign employment. Amidst job-less growth or a massive decline in
employment in some sectors, an increase in labour productivity was observed in all sectors
except mining and quarrying,largely due to an increase in total output per retained worker
during 2001-2011. It seems more capital intensive techniques in industries and service sectors,
including the use of computers and information technology, also partly contributed to the
increase in productivity in these sectors. Out of the increased productivity, one-third was
generated from agriculture. Among non-agricultural sectors, electricity, gas and water
contributed more, which was followed by the manufacturing and the finance and real estate
sectors.
4.8 Combining Effect of Change in Employment Rate and Productivity
Table 4.13 and Table 4.14 combine the exercise to see the intricacies of change in per capita
GDP which is the result of changes in productivity, employment share, inter-sectoral shifts and
demographic change during the two periods, viz., 1991-2001 and 2001-2011. While Table 4.13
shows the change in per capita GDP and its components in absolute values, Table 4.14 presents
the same in per cent. Sectoral contributions are decomposed into (i) the contribution of within
changes in output per worker (first column); (ii) the contribution of changes in employment
(second contribution); and (iii) contribution of the sector to inter-sectoral employment shifts.
The final column show the total effect of the sector.
As evidently clear from the tables, except for agriculture, all the other sectors contributed
positively to the increase in per capita GDP during 1991-2001. There was an increase in
employment in almost all the non-agricultural sectors, resulting in a positive effect due to the
inter-sectoral shift of labour from low productivity to high productivity sectors during that
period. However, the period 2001-2011 was quite different. There was a fall in employment in
almost all sectors, which resulted in negative contributions to the change in per capita during
2001-2011. The contribution of the inter-sectoral shift became negative in this period, indicating
that workers moved towardthe low productivity agriculture sector and opted for foreign
employment. Hence, there was a fall in per capita GDP in sectors like manufacturing; electricity,
gas and water; and trade, restaurant and hotel. Positive contributions from the community and
social services; transport, communication and storage; and finance and real estate sectors
helped increase per capita GDP during 2001-2011. Anincrease in the working age population
also contributed to growth in per capita GDP during that period. However, except for
community and social services and mining and quarrying, all the other sectors reporteda
negative contribution in terms of change in employment toward growth in per capita GDP. This
shows a situation of shrinking employment amidst rising population, especially the working age
population. Thus, the decomposition analysis shows that without a radical transformation of the
development strategy, productive employment-led higher growth will be difficult to accomplish.
41
Table 4.13 Growth Decomposition, Contribution to Total Growth in GDP (Value Added) Per Capita
1991
-
2001
2001
-
2011
Contribution
of within
sector
change in
output per
worker
Contribution
of change in
employment
Contribution
of inter-
sectoral
shift
Total
Contribution
of within
sector
change in
output per
worker
Contribution
of change in
employment
Contribution
of inter-
sectoral
shift
Total
Agriculture, fisheries and forestry
578.7
-
796.7
-
661.0
-
879.1
895.2
-
868.9
52.9
79.2
Mining and quarrying -74.0
9.8
82.1
17.9 -8.1
7.2
22.5
21.5
Manufacturing -722.2
510.9
1,030.7
819.5 427.3
-435.8
-406.9
-415.4
Electricity, gas and water supply -203.0
99.9
222.6
119.6 573.2
-138.5
-472.1
-37.4
Construction
-
1708.6
180.7
1
,894
.1
366.2
128.3
-
11.4
67.4
184.3
Trade, restaurant and hotel
-
789.0
494.4
974.7
680.2
407.1
-
315.9
-
340.6
-
249.3
Transport, communication and
storage
-
209.3
72.8
420.5
284.0
131.7
51.9
301.7
485.4
Financial and real estate
-
634.7
37.6
777.3
180.2
485.4
-
14.3
-
46.0
425.1
Community and social service 470.1
-172.2
-216.9
81.0 338.1
266.7
478.0
1,082.8
Subtotal -3292.1
437.3
4,524.2
1,669.4 3,378.2
-1459.0
-342.9
1,576.2
Demographic Components