Papua New Guinea: Employment, Wages and Economic Development

Citation

Gibson, J. (2001), "Papua New Guinea: Employment, Wages and Economic Development", International Journal of Social Economics, Vol. 28 No. 3, pp. 308-310. https://doi.org/10.1108/ijse.2001.28.3.308.1

Most commentators express disappointment with the post‐Independence economic performance of Papua New Guinea (PNG). A low and variable growth rate coupled with a slow rate of structural transformation, deteriorating public institutions and infrastructure and rapid population growth have created widespread problems of underemployment and poverty in both rural and urban sectors. In Papua New Guinea: Employment, Wages and Economic Development, Theodore Levantis presents the thesis “that Papua New Guinea’s failure in terms of economic development has its roots in the labour market policy of the 1970s and the policy towards law and order thereafter” (p. xi). However, despite the generality of this thesis, the book concentrates mainly on the urban sector, specifically on the link between minimum wages policy, unemployment and crime.

This linking of wage‐setting institutions with unemployment and crime makes this short book potentially interesting for economists who may not otherwise consider developments in PNG. The incorporation of the economic determinants and costs of crime into empirical analysis has extended to the stage where Levantis has adapted a CGE model of the PNG economy to study the question of the optimal expenditure on law and order, although these results are only alluded to in the book. Instead, the book concentrates on the emergence of the law and order problem in PNG from the 1972‐1975 period, when urban unemployment resulted from a doubling of minimum wages for unskilled workers in urban centers compared to the wages for rural workers.

This rise in urban wages was due to the inauguration of a Minimum Wages Board under the Australian administration, and appears to have stifled urban private sector employment and caused migration from rural areas. Strict regulations inherited from Australia also prevented the emergence of a vibrant urban informal sector. The absence of a reliable social security system further limited incomes for the urban unemployed. Levantis argues that as a result, the urban unemployed turned to crime, as evidenced by the 17‐fold increase in the PNG crime rate from 1972 to 1990. This increase in the crime rate greatly exceeds the change in neighbouring Pacific countries, so PNG cities now have victimization rates for crimes of larceny that exceed those of noted trouble spots such as Johannesburg and Rio De Janeiro. The resort to crime was made easier because of the lack of resources devoted to law enforcement. Survey evidence collected by the author also indicates that the earnings available in the illegitimate sector of the urban economy are almost as high as are those for unskilled workers in the formal sector. These relatively high returns to illegal activities and their wide availability – 15 percent of the urban labour force are claimed to have crime as their primary source of income – are suggested as reasons for the failure of high levels of urban unemployment to choke‐off rural‐urban migration.

In addition to describing the on‐going effects of the pre‐Independence minimum wage changes, Levantis analyses the 1992 deregulation of the urban labour market (Chapters 2 and 3). This deregulation replaced the urban minimum wage for new workers with a national minimum wage that was only one‐third as high as the minimum wage available to existing urban workers. In Chapter 2, it is argued that this adjustment was successful in increasing employment in the urban private sector, despite underlying macroeconomic conditions that were not conducive to growth. Chapter 3 contains a theoretical analysis that supports the hypothesis of gradual adjustment in the urban labour market as firms slowly switched towards paying the market clearing wage rate. The analysis in these two chapters is timely because of the proposal to reconvene the Minimum Wages Board and the widespread belief (unfounded, according to Levantis) that the 1992 reforms had little impact and so could be reversed without having much effect on the economy.

The last three chapters report the results of a 1998 labour market survey carried out by the research institutes publishing the book. Results from this survey are also compared with a survey carried out by Levantis in 1995. Much of the material in these chapters is descriptive and sits somewhat uneasily with the policy analysis and analytical treatment in the rest of the book. However, the need to present these descriptive results comes from the almost complete absence of official statistics on the PNG labour market in the 1990s. Chapter 4 contains results suggesting that the real wages of low‐skilled and middle‐level workers fell by approximately 20 percent between 1995 and 1998 while formal private sector employment grew by 12 percent. This is consistent with the earlier argument that the 1992 deregulation continues to produce employment benefits due to the gradual nature of the wage‐setting adjustment by firms. However, caution is needed in interpreting these employment growth figures because only one‐quarter of enterprises contacted by the survey responded.

Chapter 5 discusses youth unemployment. A controversial point is made in this chapter, namely that the youth unemployment problem in urban PNG is not due to the lack of demand from the formal labour market, but a lack of supply because youth can earn better rewards in illegitimate activities: “youth in Papua New Guinea’s urban centers are simply not interested in formal employment” (p. 70). This claim relies heavily on the finding from the 1995 survey that 79 percent of male youth who were surplus to formal labour in urban areas chose crime as their principal means of earning an income, and 48 percent of underemployed young females chose prostitution. Because this result has underpinned much of the research agenda of the author, it is disappointing that the methodological details of this 1995 survey are not discussed in the book. Because of the significance of youth crime and unemployment, it would be very useful to have other surveys replicate the finding that very high proportions of young people are engaged in illegitimate activities.

Chapter 6 presents the survey results for the rural formal sector, which is mainly plantation agriculture and forestry. The survey results suggest some convergence of rural and urban wages although few conclusions can be drawn because of the lack of information on rural prices.

Overall, Levantis has succeeded in writing a very clear book that will appeal to both specialists and non‐specialists. With the exception of the second half of Chapter 3, most of the material is non‐technical, and throughout the text, the analysis is supported by tables and charts. Indeed, the 90 pages contain over 45 charts.

However, the book suffers from having too bold an objective, from which it must necessarily fall short. The thesis that urban wage‐setting institutions have contributed to urban underemployment and crime, and thereby hindered economic development, is a reasonable one. But with only 15 percent of the population in urban centers, the source of poor development in PNG cannot just be found there. Indeed, a more serious consideration of the rural sector in PNG weakens some of the claims made in the book. Crime is a serious problem in the villages and on the highways, as well as in the towns, but it is difficult to put the blame for that crime on the Minimum Wages Board of 1972‐1975, since there was little change in the real value of the rural minimum wage. Moreover, rural Papua New Guineans migrated to the urban areas not just because of high minimum wages, but also because of the breakdown of infrastructure and government services in rural areas. But if other researchers build on the insights presented by Levantis, they may make more progress in explaining the poor development progress of Papua New Guinea, and possibly of other crime‐ridden developing countries.