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Welcome to Thoughts on the Market. I'm Chetan Aiya, Morgan Stanley's chief Asia economist. Today, Asia's young workforce is facing a significant challenge. How a soft labor market will shape everything from consumer demand to social stability and long term growth. It's Tuesday, October 14th at 2pm in Hong Kong. Across Asia, a concerning trend is emerging. The region's younger generations face mounting challenges in the job market. Asia's Youth unemployment averages 16%, which is much higher than the US rate of 10.5%. Youth unemployment rates are running two to three times higher than the headline unemployment rates. The underlying situation is even weaker than what is represented by unemployment rate. And within Asia, the challenge is most acute in China, India and Indonesia, the three most populous economies. Youth unemployment rates for these three economies are running close to double compared to the other economies in Asia. Now let's take a closer look at China. The urban Youth unemployment rate that is for 16 to 24 year olds has steadily increased since 2019. What's driving this rise in unemployment? A mismatch in labor demand and supply. The number of university graduates surged 40% over the last five years to close to 12 million. But economy wide employment has declined by 20 million over the same period. Entry level wages are sluggish and automation plus subdued services growth mean few fewer opportunities for newer entrants. Turning to India, their unemployment rate is the highest in the region at 17.6%. Employment creation has been subdued. And on top of it, India also faces another issue. Underemployment. Post Covid primary sector, that is farming and mining, employment rose by 50 million reaching a 17 year high. Note that these jobs are relatively low productivity jobs. And this is explained by the fact that primary sector accounts for less than 20% of GDP. But it employs about 40% of the workforce. That's a sign of COVID induced underemployment. How fast must growth be to tackle the unemployment challenge? In our base case, India's GDP will grow at an average of 6.5% over the coming decade. And this will mean that India will be one of the fastest growing economies globally. But this pace of growth will not be sufficient to generate enough jobs to keep unemployment rates stable. India needs an average growth of 7.5%. And to address the issue of underemployment, the required run rate in GDP growth must be even higher at 12%. Shifting to Indonesia, its youth unemployment rate is the second highest in the region. Moreover, close to 60% of jobs are in the informal sector. And many of these jobs pay below minimum wage. Similar to India. Both these trends signal underemployment. The key reason behind this challenge is weak investment growth. Indonesia's investment to GDP ratio has dropped meaningfully over the last five years. So what's the way forward? For China, shifting towards consumption and services could reduce labor market mismatches. And for India and Indonesia, boosting investment is key. India in particular, needs much stronger growth in its industrial and export sectors. If reforms fall short, policymakers may need to fall back on increasing social welfare spending to manage social stability risks. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or a colleague. Today.
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