Today's Editorial

Today's Editorial - 25 December 2023

India’s jobs crisis, the macroeconomic reasons

"We shall be satisfied if we can help by our humble efforts to lay the foundations for future work.” — Prasanta Chandra Mahalanobis.

Relevance: GS III (Economy)

  • Prelims: Mahalnobis Model; Relation between Employment and GDP growth;
  • Mains: Employment Issues;

Why in the News?

The employment challenge can no longer be met only through more rapid GDP growth, but a separate policy focus is also needed on employment.

What are the macroeconomic reasons for this crisis?

1) The symptoms of low labor demand:

  • Two types of employment prevail in the Indian economy:
    • First is wage employment which is a result of labour demanded by employers in their pursuit of profits. 
    • Second is self-employment where labor supply and labor demand are identical, i.e., the worker employs herself. 
  • A further useful distinction can also be made between wage labor and jobs:
    • The first includes all forms of labour done for an employer including daily wage work at one extreme and highly paid corporate job at the other. But, jobs generally refer to relatively better-paid regular wage or salaried employment. 
    • In other words, all jobs are wage labor, but all wage labor cannot be called jobs. When we speak of a jobs problem, we are speaking of inadequate labor demand, particularly for regular wage work.
    • The Indian economy has historically been characterized by both open unemployment (out-of-work job-seekers) and high levels of informal employment consisting of the self-employed and casual wage workers. 
    • The last is also called “disguised unemployment” because, being similar to open unemployment, it also indicates a lack of adequate employment opportunities in the formal sector.
    • This lack of opportunities is reflected by a more or less stagnant employment growth rate of salaried workers in the non-agricultural sector in the last four decades. 
    • What explains such constraints in the labor demand of the formal sector?
      • Two distinct factors determine the labor demand in the formal non-agricultural sector:
        • First, since firms in the formal sector hire workers to produce output for profit, labor demand depends on the amount of output that firms can sell. Under any given level of technological development, labor demand in the formal sector rises when demand for output rises. 
        • Second, labor demand depends on the state of technology that dictates the number of workers that firms need to hire to produce one unit of output. The introduction of labor-saving technologies enables firms to produce the same amount of output by hiring a lower number of workers.

Level of Output and Growth Rates:

  • Economic policy is generally framed in terms of output growth (think of GDP or value-added), rather than the level of output, let us examine this argument in terms of growth rates: 
  • The employment growth rate is determined by the relative strength of two factors – a) the output growth rate and b) the labor productivity growth rate (growth rate of output per worker). 
  • If the labor productivity growth rate does not change, a higher output growth rate increases the employment growth rate. 
  • In other words, policies that promote higher economic growth would also achieve higher employment growth. On the other hand, if labor productivity growth rate rises, the employment growth rate falls for a given output growth rate.
  • In India, the employment growth rate of the formal and non-agricultural sectors remained unresponsive despite a significant rise in the GDP growth rate and the value-added growth rate during the 2000s as compared to the decade of the 1980s and 1990s. 
  • The lack of responsiveness of the employment growth rate to changes in output growth rate reflects a phenomenon of jobless growth.
  • It indicates a strong connection between labour productivity growth rate and output growth rate.

2) Jobless growth with Indian characteristics:

  • Productive Economy: As an economy grows, it is generally seen to become more productive.
    • Economies of scale: The process of producing a greater amount of total output, makes the firms more capable of producing more output per worker. This happens because of what economists call “economies of scale”. 
    • As firms produce more output, they find it easier to adopt labor-saving technologies. However, the extent to which labor-saving technologies are introduced depends on the bargaining power of labor.
  • Two types of Jobless Growth Regimes:
    • Based on the tightness of the connection between output growths: In this case, the responsiveness of labor productivity growth rate to output growth rate is weak. The possibility of jobless growth in this case emerges exclusively on account of automation and the introduction of labour-saving technology. 
      • However, the employment growth rate in such regimes would necessarily increase if the output growth rate happens to increase. 
      • Under weak responsiveness of labor productivity, the positive effect of GDP growth rate on employment would dominate over the adverse effect of labor-saving technologies. 
      • Here, the solution to the jobs crisis is just more rapid economic growth.
    • Based on labor productivity growth: In the second case, especially in India, the responsiveness of the labor productivity growth rate to the output growth rate is high. 
      • Here, the positive effect of the output growth rate on employment fails to counteract the adverse effect of labor-saving technologies. The employment growth rate in such regimes cannot be increased simply by increasing the GDP growth rate. 
      • The extent to which the labor productivity growth rate responds to the output growth rate is reflected by what is termed the Kaldor-Verdoorn coefficient
      • In a recent working paper (by us), we show that India’s non-agricultural sector is characterized by a higher than average Kaldor-Verdoorn coefficient, as compared to other developing countries. 
      • It is this distinct form of jobless growth regime in India that makes India’s macroeconomic policy challenge qualitatively different from other countries.

Macroeconomic policy framework

  • The central contribution of the Keynesian revolution in macroeconomics was to highlight the role of aggregate demand as the binding constraint on employment. 
  • Fiscal policy was perceived to increase labor demand by stimulating output. 
  • The developing countries that inherited a dual economy structure during their independence, confronted additional constraints on output. 
    • The Mahalanobis strategy identified the availability of capital goods as the binding constraint on output and employment, putting forward the policy for heavy industrialization. 
    • The structuralist theories based on the experiences of developing countries highlighted the possibility of agrarian constraints and the balance of payment constraints
    • Both these constraints led to key policy debates in India, particularly during the decade of the 1970s and early 1990s.
  • Nonetheless, what remained common to all these different frameworks was the presumption that increasing the output growth rate in the non-agricultural sector would be a sufficient condition for increasing the employment growth rate in the formal sector.
  • However, the evidence suggests that the employment challenge can no longer be met only through more rapid GDP growth. Rather, a separate policy focus is needed on employment in addition to the focus on GDP growth.

Way Forward: 

Such employment policies will need both demand-side and supply-side components. 

  • For Example, firms in India find it easier to automate due to a lack of adequate skilled labor, increasing the quality of the workforce through better public provisioning of education and health care, as well as bridging the skills gap, are important. On the demand side, direct public job creation will be needed.
  • Financing such expenditures while maintaining debt stability requires the reorienting of the current macroeconomic framework in a significant way, including increasing the direct tax-to-GDP ratio by reducing exemptions and improving compliance.
  • Even more imaginative use of macro-policy to pursue a constructive employment agenda can be regarded as a crucial solution.

Mains PYQs

Q. The nature of economic growth in India in recent times is often described as a jobless growth. Do you agree with this view? Give arguments in favor of your answer. (2015)

Q. Can the strategy of regional-resource-based manufacturing help in promoting employment in India? (2019)

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