The stark employment scene

The trend on the employment front is disturbing, and the Budget presented by the NDA government, limited by constraints of its own making, has not addressed the problem.

IT is a measure of our times, and a sad comment on our politics, that the worst employment situation in the recent history of the country merits barely a mention in both the Budget speech and the more common analyses of the Budget. Despite Finance Minister Jaswant Singh's declared attention to the "lifetime concerns" of citizens, the problem of finding a job was not referred to at all, and there was no discussion of any policy specifically devoted to job creation.

But the problem is alarming. And it is even officially recognised - after all, even the annual Economic Survey, released by the Finance Ministry the day before the presentation of the Budget, provides ample evidence of the sombre reality.

The Survey quotes the results of the National Sample Survey (NSS) on Employment and Unemployment. The 55th round of the NSS, held in 1999-2000, indicates a dramatic decline in the rate of employment generation in the latest period. The rate of growth of employment, defined in terms of the current daily status (which is a flow measure of the extent of jobs available) declined from 2.7 per cent per year in 1983-94 to 1.07 per cent per year in 1994-2000 for India as a whole.

For rural areas, the decline was even sharper, from 2.4 per cent in the previous period to less than 0.67 per cent over 1994-2000. This was well below the rate of growth of population. In both rural and urban areas, the absolute number of unemployed increased substantially, and the rate of unemployment went up as well. But in addition to this, there was a sharp decline in the rate of growth of labour force. More people declared themselves to be not in the labour force, possibly driven to this state by the shortage of jobs.

A significant part of the collapse in employment occurred in agriculture, where the employment elasticity of output growth (the extent to which additional output creates additional demand for jobs) declined from 0.7 in 1983-94 to only 0.01 in 1994-2000. Aggregate employment elasticity of output fell from 0.52 to 0.16 over the same two periods. Organised employment also has been extremely sluggish.

By any standards, these are stark and disturbing trends. So why is the government doing nothing about it? Why are the budgetary allocations for all employment schemes put together lower than the budgeted amounts for the previous year, and less than half of what was actually spent in the current year because of the increased expenditure on drought relief programmes?

Part of the reason is that the Central government is so limited by constraints of its own making - financial liberalisation and a dependence upon the whims of international investors, reduction in crucial public expenditure, especially in rural India, and so on - that it simply cannot take the more obvious measures such as directly increasing employment through more public works.

But neo-liberal economists have also found another ingenious way of trying to explain away this failure on the employment front, and even suggesting that it requires further doses of liberalisation! The mainstream policy response is that even the extensive reforms undertaken so far have been inadequate; they have not addressed some of the more politically difficult areas such as labour market policies and institutions, which can serve as major impediments to private investment.

The argument is that investment has been constrained, and employment growth has been insufficient, because of rigidities in the labour markets that adversely affect employers' sentiments particularly as regards organised sector activities. Three types of regulation are seen as especially constraining for employers: first, fairly stringent rules relating to firing workers and also for closing down enterprises, along with requirements of reasonable compensation for retrenchment; second, laws governing the use of temporary or casual labour, which enforce permanence of contract after a specified time of employment; third, minimum wage legislation, which raises the cost of hiring workers.

The neo-liberal argument in this context is that these rules which restrict hiring and firing put undue pressure on larger employers and prevent smaller firms from expanding even when the economics of their situation otherwise warrants it. This creates a dualistic set-up in which the organised or formal sector necessarily remains limited in terms of aggregate employment and most workers, who remain in the unorganised sector, are therefore denied the benefits of any protection at all.

The resulting dualism is characterised by an organised (or larger scale) sector, which has relatively low employment, and an unorganised (or smaller scale) sector, which has low investment. If aggregate economic activity is to break out of this dualism and marry the advantages of both sectors, the argument goes, it is necessary to get rid of the constraints put on large employers in the matter of labour relations.

It is sad that we have to remind ourselves that this argument had been demolished as long ago as the 1930s, when Michal Kalecki and John Maynard Keynes had pointed out that unemployment can result when the economy is operating at a low level because of low aggregate demand in the system. The total use of labour is then determined by the level of output, which is in turn determined by overall demand for goods and services.

Since this labour use is independent of the wage rate, reducing wages will not help. In fact, because of the difference between how an individual employer thinks and how the system as a whole works, reducing wages might even have the perverse effect of further reducing the people's purchasing power and, therefore, their effective demand. This would result in even lower levels of aggregate output and therefore employment.

Consider the Indian manufacturing sector. While the slow (and falling) rate of employment generation is evident in all sectors, it is also marked in manufacturing. Even the data of the Annual Survey of Industries, which presents the most optimistic picture, shows annual employment growth in the manufacturing industry to be well below 1 per cent per annum over the period since 1990.

For aggregate manufacturing, there is no evidence at all for an inverse relationship between real wages and employment. Rather, two factors seem to have been the strongest in affecting levels of employment in manufacturing: the rate of growth of output, and the technological changes which lead to changes in the pattern of labour use. Most technological changes in Indian industry have operated to improve labour productivity and therefore have led to lower requirements of labour per unit of output.

OVER the past two decades there has been a more or less continuous and stable increase in labour productivity. But these do not only reflect technological progress emerging from within the Indian economy. Rather, as noted earlier, the technological choices in Indian industry generally reflect the effects of adopting and copying (with a lag) the models of such change that emanate from developed countries.

That is why such advances have generally implied improvements in labour productivity and lower use of workers per unit of output. The converse of such increases in labour productivity, of course, is that employment tends to increase less than output increases. And this has been the basic pattern in Indian industry, which has operated quite independently of wage levels.

A look at specific manufacturing sub-sectors reveals there is typically no negative relationship between real wages and employment. In most of the manufacturing sectors, in fact, real wages are positively associated with employment, sometimes quite significantly so! This may be because when industries are growing, they go in for more technological innovation, which increases labour productivity and, therefore, allows for higher wages as well.

So, there is little systematic evidence of an inverse relationship between wage levels and employment in manufacturing industry across the range of manufacturing sub-sectors as well as for the sector as a whole. This should come as no surprise, in labour surplus economies like that of India, which are also currently suffering from under-utilised capacity owing to inadequate effective demand.

Ironically, however, insofar as there does exist a trade-off between wages and employment, it could be said to exist not for private employers, but for the public sector! Across the country, in almost all State governments and most Public Sector Enterprises, as well as in the Central government, there is an effective ban on new hiring (sometimes even for replacing retiring workers) which has been effective in many cases since 1991. This has emerged from the hard budget constraint that has been forced upon State governments and Public Sector Enterprises as part of the attempts at fiscal reform.

This has meant that while increases in public sector wages (which are legally mandated by successive Pay Commissions) are outside the control of the enterprises or the State governments, the only way to limit the wage bill at all is to contain or even reduce the public workforce. This has contributed to the decline in organised employment noted earlier, but in addition it has meant that in a country which is already desperately short of adequate public services in health, education and even basic administration, downsizing and further reduction of such services has become the order of the day.

If the Central government was really serious about increasing employment and encouraging greater access to and better quality of our public services, it would have pushed for an expansion of public employment, especially in crucial areas such as infrastructure building and repair, health, sanitation, education, and so on. Instead, the Finance Minister has ignored the problem altogether in his Budget. Rather, he may have contributed to further declines in employment through the adverse effects that many of his measures will have on small-scale enterprises.

Perhaps there is no point cavilling at the Finance Ministry in all this - the moot point is that the politics of our country still allows our current rulers to ignore this most pressing concern of the majority of our citizens. And it is up to all of us to change that.