IMAGE: Dimitris Tamvakos
Nepal’s economy brims with paradoxes, for those who care to notice. Its cities are bustling with construction sites, yet contractors complain of a shortage of workers. Schools and universities churn out graduates, but companies struggle to fill skilled positions. Factories sit half idle, while one in five young Nepalis is out of work. This is not simply the story of a developing country on the cusp of transformation. It is a portrait of serious dysfunction.
The roots of Nepal’s labour-market woes run deep. Just 14% of the working-age population has completed secondary education or higher. A literacy rate of 66%—with wide gaps between men and women—limits the country’s ability to upgrade its human capital. Meanwhile, technical and vocational training stays peripheral. University classrooms overflow, yet many graduates find themselves either unemployed or in jobs that make little use of their education.
The predictable consequence is outward migration. Hundreds of thousands of Nepalis, both skilled and unskilled, leave every year for work abroad. The Gulf states, Malaysia, South Korea and Japan draw the biggest share. Millions more cross the open border into India, where the paperwork is simpler and the cultural barriers lower. Remittances account for nearly a quarter of GDP—a financial lifeline, but one that does little to build domestic capacity. The labour market is hollowing from both ends: the educated leave while industries at home increasingly rely on imported workers from India, who accept lower wages and fewer protections.
Yet even this imperfect equilibrium is made more precarious by the tangle of labour laws, union politics as well as regulatory ambiguity. The Labour Act of 2017 was supposed to simplify things. It introduced standardised procedures for hiring and firing; clarified collective bargaining rights; and outlawed discrimination in the workplace. In principle, the law strikes a balance between protecting workers and enabling enterprise. In practice enforcement is sporadic and outcomes muddled.
One big problem is that the Act still makes it difficult to dismiss workers. Businesses tend to resort to short-term contracts—even for permanent roles—to sidestep the risk of being saddled with staff they cannot legally shed. The state, meanwhile, sets a poor example. Workers in government-owned enterprises are entitled to generous severance packages, regardless of productivity. Some firms have been required to retain employees even after ceasing operations altogether. Unsurprisingly, unemployment insurance does not exist.
Political interference is a further impediment. Labour unions, though technically independent, are inextricably linked to political parties. The biggest and most militant—the All Nepal Trade Union Federation (ANTUF)—is aligned with the Maoists. It has a history of confrontation and a reputation for ignoring contracts and flouting legal procedures. Disputes between rival union factions have occasionally turned violent. Although union-led strikes have declined in frequency and duration, the mere threat of agitation tends to deter employers from taking necessary decisions, particularly in sectors prone to politicisation.
The government hopes that Special Economic Zones (SEZs), which ban strikes outright, will attract investment and create jobs. Two are partially operational, with plans for up to 15. But investor interest has been tepid, not least because the regulatory environment outside the zones is unpredictable and the benefits within them are limited by geography and scale. Moreover, labour law exemptions granted to SEZs apply narrowly and do not tackle the wider disconnect between legal frameworks and economic realities.
Efforts to improve labour governance have been half-hearted. Inspectors are few and under-resourced. Child labour persists in informal industries such as brickmaking and carpet weaving, notwithstanding official commitments to eradicate it. Nepal formally acceded to the UN’s Palermo Protocol in 2020, but its own legal definition of trafficking is at odds with international norms. Meeting the labour standards required to retain preferential trade terms with the United States, worth $3.9m in exports in 2023, will mean more than bureaucratic compliance.
The constraints on foreign talent are equally puzzling. Work permits for non-Nepali employees are capped in both number and duration, with renewals contingent on temporary departure. For most industries, particularly those requiring specialised expertise, this raises costs and deters long-term planning. Hiring Indian workers is simpler due to the open border, but even this is an imperfect solution, as it does little to upgrade the domestic workforce or transfer skills.
Meanwhile, the tools for resolving workplace disputes are clunky. Mediation and arbitration mechanisms are in place, but their credibility depends on how they are administered. In smaller towns and rural areas, oversight is minimal and outcomes can be arbitrary. Legal remedies for unfair treatment exist on paper, but navigating the system takes time and persistence—and often political connections.
None of this is lost on the country’s business community. Investors—both local and foreign—have grown adept at working around the rules rather than with them. Many firms operate informally or semi-legally, bypassing taxes and regulations, as well as union obligations. Although this keeps businesses afloat, it perpetuates a dual economy and deprives the state of the resources it needs to modernise its institutions.
Nepal’s labour policy sits at the uncomfortable intersection of populism, protectionism and inertia. Political parties use unions as levers of influence, and successive governments have tinkered with legislation without confronting its contradictions. What is missing is a coherent strategy to match skills to sectors; to balance rights with responsibilities; and to make the domestic labour market an engine of development rather than a source of instability.
In theory, the ingredients exist: a young population and nascent export industries. But until labour reform is treated as a central plank of economic policy—and not a matter of political patronage or crisis response—Nepal will continue to export its workforce and import its solutions. ■
