The labor unions have been a serious drag to the development of industrial sector in Nepal. Their demand for wage hike and other services are never-ending, leading to closure of many domestic as well as foreign companies. When the militant labor unions were shutting one firm after another by raising unreasonable demands, I argued if the they would ensure that labor productivity increases with wage hikes. Though some of the union bosses were angry at me for allegedly being insensitive to their demands, they could not furnish a credible answer.
Now, lets see if labor productivity has increased in Nepal. The data from Enterprise Survey 2009 shows that it hasn’t. Real annual sales growth was 2 percent, annual employment growth was 7.6 percent, but annual labor productivity growth was negative 3.9 percent (wages increased by substantially more than the inflation rate). In Bhutan and Sri Lanka, employment, sales and labor productivity growth have been positive. Nepal already has unusually high wage overheads.There is evidence that when real wage growth outpaces labor productivity growth, employment creation is suppressed. We might soon see this happening in Nepal as firms start closing down due to rise in labor cost without a proportional increase in labor productivity.
Looking at sector-wise performance, it appears that labor productivity was negative in manufacturing, retail and services sectors. In small, medium and large firms as well, though real annual sales growth and annual employment growth were positive, annual labor productivity growth was negative.
| Enterprise Survey 2009 | ||||
| Subgroup | Subgroup level | Real annual sales growth (%) | Annual employment growth (%) | Annual labor productivity growth (%) |
| Overall | 2 | 7.6 | -3.9 | |
| Sector | Manufacturing | -0.9 | 0.9 | -1.8 |
| Retail | -1.3 | 14.1 | -13.3 | |
| Other Services | 5.6 | 9.5 | -1.4 | |
| Size | Small (5-19) | 0.5 | 6.8 | -4.2 |
| Medium (20-99) | 11.3 | 13 | -2.7 | |
| Large (100+) | 2 | 2.5 | 0 | |
