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Macro-Employment Policy Conundrums: Analysing Indian Economy at 71

The Quint
By Professor  

The recently released Economic Survey report reflects the nature of few structural weaknesses in India’s macro-economic fundamentals. Dismal performance in areas of social infrastructure, employment and human development indicators signal towards a direction of economic growth mediated without developing social opportunities for all. Let’s discuss the existing trends in India’s macro-employment situation.

The volume of labour force in India today (going by 2011/12 estimated levels) is approximately 500 million (leaving out subsidiary workers who constitute 37 million or so). Around 91% of the labour force is of working age (aged 15-59) which is largely male (around 78%) and predominantly rural (around 68%).

If we simply look at the evidence on employment patterns (see Ghose 2016) over the last decade, the change in demographic transition or what we often call the ‘youth bulge’ has had no effect on the labour force employment rate.

While the share of youth in the working age population base (i.e. 15-59) has increased substantially between 1983- 1999/2000 and 2000-2010 periods, this ‘demographic dividend’ has hardly impacted the macro-employment picture across the organized sectors. The current employment and labor-market scenario reflect this.

Current Employment Scenarios

 

Comprehensive data on employment and unemployment in organized and unorganised areas for India is available with large lags from the National Sample Survey Organization (NSSO) and Labor Bureau, making it difficult to study effects of more dynamic factors like changes in real wages, capital investment and new technological capacities on employment pattern or sector-wise labour productivity.

Decrease in Employment Growth in Private Sector

In Figure 1, we observe how in spite of a marginal increase in total employment growth rate (in organized area), there is a decrease in levels of employment growth within the private sector.

Labour Force Participation Significantly Lower in Women

Figure 2 (above) gives a very detailed picture on the rate of employment growth for persons (female and male) aged 15 and more in rural and urban areas. The Labour force participation rate (LFPR) in rural areas seems to be higher than LFPR levels in urban areas.

LFPR of females is significantly lower than males (both in rural and urban areas). Some underlying reasons responsible for the poor gender performance in labour force participation rate have been discussed earlier. The Worker Population Ratio (WPR), similar to LFPR levels also indicates a weaker labour force participation rate for women to men (in proportion of their respective population).

The table drawn out below (for details, see here) gives us a sector-wise employment situation (segregated gender-wise) where manufacturing, trade and education have the highest proportion of employees. In terms of gendered distribution of employees, most parity is seen in sectors of education and health; whereas, highest variance can be seen in sectors of manufacturing and trade.

Agricultural Sector Has Potential to Increase Employment

Figure 4 and Figure 5 further provide a more detailed, fragmented view of the sector-wise employment structure. The share of unorganized and organized employment has risen in 2011-12 from the year 1999/2000, due to rise in employment in manufacturing and services.

At the same time, from the numbers given here, there is greater potential to increase employment opportunities within agriculture and construction to boost the economy’s growth capabilities.

 

High Gender Inequality in Labour Force Participation Rate

From the data it seems evident that a transformative scale of social investment (through political capital and public discussion) is required in reducing the exacerbating effects of low female-male labour force participation process, both in rural and urban areas. Unfortunately, the two sectors in these areas where one observes maximum gender parity i.e. in education and health, public expenditure (spent as % of GDP) is the lowest (i.e. less than 3 percent on education and 2 percent on health).

Increase in public and private spending in these two sectors will substantially increase the labour force participation rate and productivity levels. The Economic Survey Report supports this as well, in its chapter on Social Infrastructure, Employment and Human Development. Further, the organization of employment structure requires a closer, periodic monitoring of employment numbers across sectors to address such short term cyclical problems. Ten year or Five-year lags in data on a dynamically changing employment scenario dissipates most macro-patterns evolving from the short-term gendered constitution of organized labour force.

Threat to Labour-Intensive Sectors from Automation

With a rapid scale of technological advancement in areas of information technology, robotics and artificial intelligence there is a significant threat developing to India’s more labour-intensive sectors in terms of displacement of workers (female and male) in manufacturing, trade, services where the majority of the working population is employed. The rate of transformation seen in the nature of work and skills needed from the new labour entering the job market presents challenges for both the public and private sector.

However, in an effort to increasing a country’s economic competitiveness and capacities, a techno-pessimistic attitude remains counter-productive, warranting a need to map existing factor endowments (in sectors where supply of labour is in surplus) with new technological capabilities.

For employers and entrepreneurs in sectors like manufacturing or agri-business, keeping abreast of new technology and capital-intensive methods of production remains vital for cost efficiency purposes. Still, with a greater reliance to meet cost efficiency via capital-intensive methods of production, absorption of new labour (with traditional skill sets) becomes difficult.

This cyclical short-term effect warrants effective interventions from the state in areas of tech-skill development; incentivising cost efficient, labour-intensive techniques of production which matches the employer-employee needs better.

For example, in the case of India where bulk of the working population is young, technological innovations and advancements (especially in

areas of e-commerce, IT, manufacturing) need to be endogenously shaped in a way where supply-demand gap in labour market is minimised for minimal displacement. To achieve this, increasing employment elasticity through effective policy intervention remains vital.

Tackling Low Employment Elasticity

Employment elasticity is a measure on the percentage change in employment, associated with a 1% change in economic growth levels. It helps us ascertain the growth of employment opportunities in relation to a country’s growth performance.

In the Indian scenario, with a service led expansion of growth (in the 1990s), the organized manufacturing sector took a hit where – a) industries producing for the domestic market became increasingly dependent on the imported-inputs; b) export-oriented industries recorded poor growth. Over the last decade or so, the manufacturing scenario did improve its performance not because through technological advancement but with a high capital intensity i.e. by greater substitution of capital over labour.

This increase in capital intensity without technological change has lowered the employment elasticity levels (across sectors in India). Growth may increase by 1% but employment opportunities may not grow proportionally, making it difficult for existing and new workers to explore high income opportunities and remain underemployed. We can study this trend by closely monitoring the growth of real wages.

To increase employment elasticity by reducing capital intensity (or substitution of capital for labour), any capital subsidies (in form of tax relief, interest subvention or overvalued exchange rate) need to be substantially reduced or corrected for. Additionally, reforms in labour regulations are needed in allowing more flexible contract arrangements for employers to hire employees, as incentives to keep industries more labour-intensive (where labour supply is in surplus).

There is an urgent need for the visible hand of the state to address some of the pressing issues affecting the employment scenario in India. A minimal focus on education at all levels and its association with the skill development and job-creation process has driven the employment scenario to a wedge where structural changes are needed with long-term measures. Further, in a transitioning economy like ours, any government intervention at a macro level requires a periodic, short-term monitoring of trends in employment scenario to compliment a long-term realisation of fuller employment.

(The author is Assistant Dean (Academic Affairs) and Executive Director, Centre for New Economic Studies, Jindal School of International Affairs. He can be reached @prats1810. This views expressed above are the author’s own.