Tyranny of numbers

Rising employment since Trump’s sanctions may not last

Posted in Employment, General, Macroeconomy by Djavad on January 20, 2020

Earlier this month the Statistical Center of Iran (SCI) released the results of the latest quarterly labor force survey, which show employment continued to expand during fall 2019 (the third quarter of the Iranian year 1398). The data question the dire accounts of Iran’s economy that have appeared in western media, a point that I raised in a recent post in Project Syndicate and again this week in ResponsibleStatecraft.org (which has replaced Lobelog.com).  However, there are reasons to believe that this positive trend is short-lived, that as excess capacity is used up and new investments fail to materialize, the economy takes a turn for the worse.  Below, after presenting the new data, I discuss several challenges to employment if sanctions continue.  Some of these challenges can be overcome by domestic reform, such as banking reform to enable the flow of credit to producers, but others are not under the control of the government, such as moving money internationally.

The table below shows that total employment has increased by about half a million since the second quarter of 2018 when Trump sanctions hit.  More importantly, employment in tradable sectors, which I wrote about earlier, has continued during the fall quarter.  Industry, about half of which is manufacturing, increased its share in total employment by 1.6 percentage point during the six quarters in the following table.  Manufacturing proper increased its share from 17.6 percent in 2017/18 to 18.2 percent in 2018/19 (the year ending in March 2019). Both are signs that the devaluation has helped restructuring the economy away from oil and toward the type of production that creates jobs, not just income.


Notes. The top hals is employment in millions, the bottom half are percentages.
Source: Statistical Center of Iran, various quarterly reports.

The increase in employment has made a small dent in the unemployment rate.  Unemployment for the 15+ population fell to 10.6 percent this fall, from 12.05 percent in summer 2018, and unemployment for those in the 18 to 35 age range was down by 1.4 percentage points for men and 1.2 percentage points for women. Both signs that employment is responding to the changing price structure.

What do employment data say about economic growth?  I expect that the current Iranian year (ending in March 2020) will turn out to be better than forecast by the IMF and the World Bank (declines of 9.5 and 8.7 percent, respectively), but I am less optimistic for next year. Iran will be lucky to reach the international institutions’ forecast of zero to 1 percent growth for 2020/21.

The positive trends in employment are in large part thanks to Iran’s reliance on market forces in adjusting to the shock of sanctions.  Letting the rial devalue and prices rise accordingly has provided huge incentives for domestic producers.  But, continuing this trend requires more than rising profit margins in domestic production.  The increase in employment so far is mostly the result of increased utilization of existing capacity, not new investment.  Investment in 2018/19 amounted to only 14 percent of the GDP, barely enough to repair existing capital.  in It is hardly surprising that producers have taken advantage of much higher prices for traded goods and the lower real wage of workers to expand production.  Also likely is that the supply of intermediate goods than run Iran’s manufacturing is coming from inventories.  But what happens when spare capacity and inventories of imported intermediate goods run out?

For employment and output to expand, three things must happen.  First, producers must be willing and able to expand production capacity.  Willingness will come with optimism about the future, something which is in short supply in the current atmosphere of rising tensions in the region.  Their ability to expand depends in large part on being able to secure the necessary financing, which the ailing banking sector may not provide.

Second, producers must be able to secure new spare parts, for which they need a fresh supply of foreign exchange.  So far, they seem to have access to foreign exchange at a reasonably stable rate (despite a 15-percent drop in the value of the rial since November).  Clearly, Iranian exporters have been very creative in finding foreign markets despite the sanctions, keeping the supply of foreign currency to the official market (known as nima) going.  Whether they can continue to do so in the coming months in the face of tightening sanctions is a tough call.

Third, the government must be able to lead economic growth by new investments of its own.  Iran’s private sector has always followed, not led, the public sector in previous episodes of economic growth.  If this were to happen next year, investment will be down by quite a bit, because public investment is being cut.   The mood among austerity-minded government economists is that to keep inflation from rising, the government must retreat.  According to the proposed budget for 1399 (2020/2021), total expenditures are expected to be down by 26 percent in real terms, compared to 1396 (2017/18), and development expenditures by much more — 46 percent.

 

CORRECTION: The 1.4 million increase in employment in the original post has been corrected to half a million which is what the table shows. Apologies for my mistake in reading the numbers in the table.

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