Kathmandu University: Labor Policies of Nepal - An Economic Report

This report provides a comprehensive analysis of Nepal's labor policies, examining the labor market dynamics and the challenges faced in achieving effective labor management and mobilization. It delves into the high unemployment rates, the reliance on foreign employment, and the impact of the Labor Act 2074. The report investigates the country's failure to invest in productive sectors and the lack of skilled manpower, considering gender equality aspects. It also explores the adverse outcomes of over-dependence on foreign employment and remittance. The report further analyzes the impact of COVID-19 on the labor market and government responses, offering implementable solutions and policy recommendations to address the issues. The analysis covers various economic concepts, including labor market equilibrium, unemployment, and wage rates, to provide a complete insight into how Nepal can overcome its unemployment challenges and achieve economic progress.

Running Head: LABOR POLICIES OF NEPAL 1
Labor Policies of Nepal
Submitted by:
Shristi Joshi (197037)
Chetram Bajaj (197011)
Alisha Gadtaula Sharma (197087)
Smriti Chaulagain (197022)
Sameer Basnet (197015)
Group 3
KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT (KUSOM)
Pichhe Tole, Gwarko, Kathamndu
Submitted to:
Ms. Anupama S. Panta
Visiting faculty- Nepali Economics
Bachelor of Business Administration (BBA- Honors)
January 8, 2021

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Acknowledgement
We would like to express our sincere gratitude to Kathmandu University School of
Management (KUSOM) and its management for providing us with such wonderful opportunities
to broaden our horizon and we also express our deep sense of thankfulness to our respected
Faculty of Economics Mrs. Anupama Shrestha Panta for helping us prepare such edifying report
analyzing the Labour Policy of Nepal.
Carrying on with this Report helped us enhance our understanding about how the Labour
Market of Nepal works and how various government plans and policies create undeniable
impacts. Through the process itself we learnt a lot about how to scrutinize the reports and what
details should be included while preparing the report analysis, the acknowledgment for which
goes entirely to the faculty.
We would hence like to acknowledge the University and the Faculty for such great
opportunity and support throughout the process of this report creation. Last but not least, we
would also like to take this opportunity to convey our heartfelt appreciation to everyone involved
in this assignment for their inspiration and valuable suggestions.
Thank you.

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Abstract
The report presents the detailed analysis of the Labour Policies of Nepal. It shall not be
something new mentioning that Nepal has for long failed to properly mobilize country’s most
important assets, its human resource. Unemployment rates booming and with yearly labour
intakes of almost 3 Lakhs, the country struggles with creating the space for these job seekers of
the country, almost every year. This report presents an overall analysis of “Why” and “How”
Nepal has failed to achieve its target of Labour management and mobilization. Labour Policies
and Acts being enacted every year however comes with plenty of loop holes to which this report
presents implementable solutions and policy suggestions. The failure of the country to invest in
productive sectors, inability in creation of skilled manpower having higher education with not
ignoring the aspects of gender equality has been the major unanswered issue of the country.
Talking about the so called country’s positive attribute which always brings it to the top of the
list – Foreign Employment and Remittance, this report brings us the unaccepted adverse
outcomes of over dependence on it. So, with policy loop holes, unsystematic and ineffective
Labour Market analysis, this report provides a complete insight into how Nepal can get over its
unemployment form and bring economic triumph.
Key Words: Labour Policy, Labour Market, Unemployment, Foreign
Employment, Remittance, Aggregate Demand (AD), Aggregate Supply (AS), Gross Domestic
Product (GDP), Money Demand (MD), Money Supply (MS), International Labor Organization
(ILO), Central Bureau of Statistics (CBS), Aggregate Expenditure (AE), Short Run Aggregate
Supply (SRAS), Short Run Phillips Curve (SRPC), United States dollar (USD), Nepal Rastra
Bank (NRB), Ministry of Finance (MoF), United Nations Educational, Scientific and Cultural

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Organization (UNESCO), Fiscal Year (FY), Nepalese Rupee (NPR), Marginal Propensity to
Save (MPS)

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Table of Content:-
ABSTRACT………………………………………………………………………….....................3
1. Introduction……………………………………………………………………………………7
1.1 Introduction………………………………………………………………………………..7
1.2 Problem Statement………………………………………………………………………...8
1.3 Objectives of the study…………………………………………………………………….9
2. Conceptual Understanding…………………………………………………………………...11
3. Research Methodology………………………………………………………………………15
4. Status of Labor Market and Labor Policies in Nepal………………………………………...16
4.1 Labor Market of Nepal…………………………………………………………………...16
4.2 Current Labor Policy of Nepal…………………………………………………………...18
4.3 Impact and Challenges: Labor Act 2074………………………………………………...24
5. Labor Market and Labor Policies in response to COVID……………………………………28
5.1 Labor Market during COVID……………………………………………………………28
5.2 Government’s response…………………………………………………………………..29
6. Analysis………………………………………………………………………………………32
7. Conclusion…………………………………………………………………………………...41
7.1 Summary of findings…………………………………………………………………….41
7.2 Policy recommendation………………………………………………………………….42
7.3 Limitations of the study………………………………………………………………….47
7.4 Managerial Implications of the study……………………………………………………48
8. References……………………………………………………………………………………50

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9. Annexure…………………………………………………………………………………….52
9.1 Annexure 1……………………………………………………………………………….52
9.2 Annexure 2……………………………………………………………………………….61

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Labor Policies of Nepal
1. Introduction
1.1 Introduction
The labour market of Nepal has been growing rapidly despite a certain fall in the
population growth rate. Between 2008 and 2013 (CBS, 2009 and CBS, 2014) the population
aged 15- 59 grew by an estimated rate of 2.25 percent per annum, which translates into an annual
labour of 3, 68.000, with which every year the Nepalese people and the economy face the heat of
unsystematic labour market mobilization in the country. The country has for long been unable to
play the right economic policy strategies to bring in track the broken labour market and create
robust economic situation for the annual labour intakes. A country with the labour force of
around 16.8 million has almost 68% still involved in the agriculture, struggling their lives with
traditional tools which most other national has forgone decades ago. The situation is even
tougher for rest of the labour population struggling to find a space to fit into the labour market
itself, let alone finding a good job. The country has not solely ignored this struggle in the labour
market and has brought enough plans, policies and acts to fill the pages. However, the reasons
for the long followed ineffectiveness of these policies still remain an unanswered question.
The first Labour Act being enacted in 2048 has been followed by several amendments
and new policies, the most recent one being Labour Act 2074. However, none of these seem to
have an answer to the miserable situation of Nepal and its Labour Market which indicates an
urgency of having a flexible and productive labour policy. The country’s inability of capitalizing
on its productive sectors that holds the capacity of large employment pool creation adds onto the

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wound already created by not so worthy policies. The sectors like industries and services are still
to be developed to the extent that it can actually mobilize the unemployed population of Nepal.
One major aspect that acts as major hindrance to flourishing employment opportunities in Nepal
is the lack of high end skill manpower. Most people of Nepal lack higher education along with
the fact that most don’t even carry a skill to be employed. If the gender bias spectrum is to be
considered here the situations looks vulnerable. Only 22 percent of working-age women are
employed in Nepal and for every 100 employed males, there are only 59 employed females. This
leads to the travel of most manpower of Nepal to foreign nations seeking jobs which often leads
them to some low wage jobs due to lack of skills and efficacy. Foreign employment on an
average contributes to almost 25% of the GDP of Nepal that shows how miserably the country
has failed to create domestic employment. The foreign employment actually on the outer shell
looks like a great deal to Nepal and its people, a source that generates annual revenues in
billions. However it has plenty of economic repercussions which the country has to realize
instead of being blindfolded. The country needs to analyze the need of the market and root cause
or issue of labour market instead of building policies based on symptoms. Nepal still has a long
way to go before it actually creates a suitable labour market. However, the sooner it realizes the
significance of domestic employment generations and policy efficacy, the better.
1.2 Problem Statement
Nepal has for long been a country to mostly rely on Agriculture while most other nations
have years ago started capitalizing on the industrial development. It still lacks enough
development of industries and productive sectors that can cater thousands of annual labour
intakes in the country. It has been struggling to properly mobilize the huge manpower pool that it

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intakes every single year which leaves the nation to be vulnerable with high unemployment rate.
The situation seems worst when years of acts and policies do no good to the issue of
unemployment, most of which are created without proper analysis of the need of the market. The
country is still struggling with a population which is mostly unskilled or semi-skilled with the
situation of female segment being worst. The lack of domestic jobs leaves no option to the
people other than leaving the nation for foreign employment; mostly with no/less skills creating a
great struggle abroad. Despite the annual receipt of remittance in billions, the country is still
unable to settle its repercussions. Its hard time now that the country needs to build on its
domestic industries and other productive sectors which can mobilize its human resource. Along
with this the country needs to properly analyze the labour market and the core issues of it for
forming effective policies. The poor situation of the labor market and ineffectiveness of the
policies have been accelerated by the ongoing pandemic. It is very important for the policy
makers to identify what actually needs to be done to cope up with the ineffectiveness policies
and the ever rising supply of laborers with very few employment opportunities. Hence, this
report will act as a basis for the formulation of the policies and major findings that need to be
considered to improve the situation of the labor market and the policies as well.
1.3 Objectives of the study
 To give a detailed overview of the Labor policies in Nepal incorporating the loop holes in
them and suggestions on how the policies need to be framed to cater to the huge pool of
Nepalese workers ensuring their development and proper mobilization.
 To identify the challenges that the policies face during the phase of implementation and
how the policies turn out to be unsuccessful to bring about positive effects in the
economy.

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 To know about how the immobilization of the workers in the labor market affects the
country’s economic outlook and development of the sectors that hold an account of
improving the country’s position in the race of development and prosperity.
 To understand the roles that the government play in the country’s ability to maximize the
resources for optimal production through the formulation and implementation of different
policies among which labor policies happen to be one of the most important one to be
handled with proper insights during the pandemic when people are jobless.
 To analyze how the proper labor laws can effectively mobilize the labor market that acts
into play in driving the economy towards achieving maximum output level with the
development of every possible sector.

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2. Conceptual Understanding
Our term paper has been based on different economic theories and concepts to analyze
the Nepalese labor market and the policies that are made in regards to the proper mobilization of
labor and development of the labor market. The theories and concepts will be discussed briefly
below:
One of the most important concept used in this paper is the labor market. Labor market
simply gives the idea regarding the supply of labor which is provided by the employees and the
demand for labor which is provided by all the employers in an economy. The labor market stays
in an equilibrium point when the demand for labor and the supply of labor seems to be equal
which means that all the workers of an economy are properly mobilized.
The concept of labor market brings many other economic concepts like unemployment,
underemployment, wage rate, etc. Unemployment is a term that defines the people of an
economy who are willing to work for their survival but are unable to find any jobs. Whereas,
underemployment defines a state of people in which an individual is involved in a work which
does not define his/her abilities, actual trainings and financial needs or is involved in a job that is
not a full-time. Similarly, wage rate defines the amount of money that is to be paid to the
workers for each unit of their labor input which is measured either on hourly basis or on the
number of units of output they produce. Many governmental agencies take wage rate as a very
important aspect for the economic prosperity since it is the factor that determines the people’s
income which eventually gets added to the country’s National Income. For example, Nepal has
set a minimum wage rate of Rs 13,450 a month so that people would be able to survive and the
country’s economic transactions continue.

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Vicious cycle of poverty is another important concept that represents how the poverty
among the people in the country causes further poverty and how it traps the country in its cage
unless an external intervention acts in play in order to break the cycle. The events that the cycle
holds are: Low income, low demand, low investment, low employment and low output level that
are never ending in nature if any one event comes into play.
The IS-LM model that stands for “Investment (I)-Saving (S)” and “Liquidity
preference(L)-money supply (M)” is a macroeconomic model that defines the nature of how the
good’s market (IS) interacts with the money market (LM). This model is used in the analysis part
of our paper where the model shows how the immobilization of the workers in the labor market
affects the good’s market with lower demand and how the government’s policy fail to maintain
the IS-LM equilibrium. The good’s market is the interaction of the companies and households to
buy and sell the goods and services which is only possible when the people of the country have
enough disposable income in their pockets. When this purchasing power of people shrinks and
becomes null, the good’s market has to face downturns as there is no demand for goods and
services due to no consumption of the people which decreases the output of the country’s
production sector and hence the national income of the country ultimately decreases. The
government of the country pays a major role in handling the existence of the good’s market
where it can consciously increase the people’s purchasing power by employing expansionary
fiscal policy which would mainly revolve around providing transfer payments to the needy ones.
The concept of AD-AS curve has been majorly used in the paper which illustrates how
the national income varies along with the price level when the economy faces different events
such as unemployment of the people due to irrational labor policies and government’s