India is experiencing a serious employment issue. This is evident from both government statistics and numerous local reports. The focus of this article is to study the broad economic factors contributing to India’s ongoing job crisis.
Types Of Employment
In an economy like India, we can mainly see two types of employment. The first type is wage employment. This happens when companies or businesses hire workers to make profits.
Self-Employment
- The second type is self-employment. Here, the same person is both the worker and the employer.
Wage Labour Versus Jobs
- We can also differentiate between wage labour and jobs. Wage labour includes all work done for an employer. This can range from daily wage work to top-tier corporate positions.
- However, when we talk about jobs, we’re usually referring to regular, well-paid wage or salaried employment.
The Jobs Problem
- In essence, all jobs fall under the category of wage labour. But, we can’t call all wage labour jobs. When we discuss a ‘jobs problem’, we’re typically referring to a lack of demand for regular wage work.
Unemployment In The Indian Economy
- The Indian economy is distinguished by two types of unemployment: open and disguised.
- Open unemployment refers to visible job-seekers.
- Disguised unemployment includes self-employed individuals and part-time wage workers.
- This hidden unemployment indicates a scarcity of suitable job opportunities in the formal sector.
Constraints In Labour Demand
- For about four decades, the employment growth rate for salaried workers in the non-agricultural sector has remained static.
- This trend suggests restricted labour demand in the formal sector.
Factors Influencing Labour Demand
- Labour demand in the formal, non-agricultural sector is shaped by two main elements.
Output Demand
- Companies in the formal sector hire workers to produce profit-generating output.
- The number of workers hired is proportional to the amount of output that can be sold.
- As technology standards remain constant, rising output demand increases labour demand.
Technological Advances
- Labour demand is also affected by technological evolution.
- The introduction of labour-saving technologies permits firms to maintain output levels while employing fewer workers.
Understanding Economic Policy and Growth Rates
- Economic policy is often focused on growth rates, such as GDP or value-added, rather than the absolute level of output.
- The employment growth rate is driven by two major factors: the output growth rate and the labour productivity growth rate.
The Interplay Of Output Growth And Labour Productivity
- If the labour productivity growth rate remains consistent, an increase in the output growth rate will lead to a higher employment growth rate.
- This implies that policies that stimulate higher economic growth can also promote higher employment growth.
- However, if the labour productivity growth rate increases, the employment growth rate will decrease, assuming a stable output growth rate.
Jobless Growth: A Case Study Of India
- In India, during the 2000s, the employment growth rate in the formal and non-agricultural sectors did not respond to a significant increase in GDP growth rate and value-added growth rate.
- This was different from the situation in the 1980s and 1990s.
- This lack of response of the employment growth rate to changes in the output growth rate indicates jobless growth.
- Jobless growth suggests a strong correlation between labour productivity growth rate and output growth rate.
- The reasons for this strong connection need to be explored further.
The Impact Of GDP Growth On Employment
- The effect of GDP growth on employment depends on how labour productivity rate responds to output growth rate.
- Weak Responsiveness to Labor Productivity
- In cases where labour productivity growth rate shows weak responsiveness to output growth, jobless growth emerges primarily due to automation and labour-saving technology.
- Despite this, an increase in output growth rate would lead to an increase in employment growth rate.
- The positive impact of GDP growth on employment in these situations outweighs the adverse effect of labour-saving technologies.
- The solution to joblessness here is simply more rapid economic growth.
High Responsiveness To Labor Productivity
- In situations where the labour productivity growth rate is highly responsive to output growth rate, the positive effect of output growth fails to balance the adverse effect of labour-saving technologies.
- An increase in GDP growth rate won’t result in an increased employment growth rate.
- The Kaldor-Verdoorn coefficient reflects the extent of labour productivity growth rate’s response to output growth rate.
India’s Unique Jobless Growth Regime
- India’s non-agricultural sector has a higher than average Kaldor-Verdoorn coefficient, compared to other developing countries.
- This unique form of jobless growth regime is what distinguishes India’s macroeconomic policy challenge from other countries.
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Macroeconomic Policy Framework
Keynesian Revolution And Fiscal Policy
- The Keynesian revolution in macroeconomics emphasized the role of aggregate demand in employment.
- Fiscal policy can boost labour demand by stimulating output.
Industrialisation In Developing Countries
- During independence, developing countries faced additional constraints on output due to a dual economy structure.
- The Mahalanobis strategy suggested that capital goods were the primary constraint on output and employment.
- This led to a policy emphasis on heavy industrialisation.
Structuralist Theories And Policy Debates
- Structuralist theories, based on developing countries’ experiences, highlighted potential constraints in agriculture and balance of payments.
- These constraints sparked key policy debates in India, especially during the 1970s and early 1990s.
Non-Agricultural Sector And Employment
- Different theories assume that increasing the growth rate in the non-agricultural sector leads to more jobs in the formal sector.
- But, evidence shows that only increasing GDP growth is not enough to increase employment.
The Need for Employment Policies
- We need policies that focus on employment, not just on GDP growth.
- These policies should address both demand and supply side components.
Supply Side Policies
- Firms are automating because they can’t find enough skilled labor.
- To solve this, we must improve the quality of our workforce.
- We need better public education and health care, and we need to bridge the skills gap.
Demand Side Policies
- The government needs to create jobs directly.
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Financing Policies
- We need to finance these policies and keep our debt stable.
- This needs a significant change in our current macroeconomic framework.
- We need to increase the direct tax to GDP ratio by reducing exemptions and improving compliance.
- We must creatively use macro-policy to support a constructive employment agenda.
Source: India’s jobs crisis, the macroeconomic reasons (The Hindu, December 25, 2023)