The disjunction between output and employment growth can be corrected by expanding expenditure in social sectors.
THE generation of productive and remunerative employment is probably the central process in equitable growth. This is, of course, a concern that is as old as the study of economic growth itself, and effectively underlies all the debates about the possibilities of "trickle-down". But it has acquired particular resonance in India in the recent past because of the apparent transformation of the economy and increase in its growth potential, which has surprisingly (and unfortunately) not been accompanied by commensurate increases in remunerative employment.
Despite annual gross domestic product (GDP) growth rates of 8 per cent or more in the past five years, the economy is still not generating sufficient opportunities for "decent work" to meet the needs of a growing labour force. The disjunction between output and employment growth has been linked to the effects of both trade and technology, but the two forces are increasingly intertwined. Crucially, they are also both related to the economic policy regime, which has involved a substantial degree of internal and external liberalisation, especially in terms of more open trade and capital accounts.
There are plausible reasons to expect that the pattern of manufacturing growth under an open economic regime will be such that the responsiveness of employment growth to growth in output declines. The most obvious reason is the impact of trade liberalisation on the pattern of demand for goods and services within the country. Openness and the much greater impact of entertainment and communications technology mean that the "demonstration effect" of lifestyles in developed countries is stronger than ever. So, especially among the elite, but even among other groups, new products and processes from developed countries find their way quickly to developing countries.
It so happens that such technological progress in developed countries is almost inevitably associated with an increase in labour productivity. And increasingly, producers in developing countries find that the pressure of external competition (in both exporting and import-competing sectors) requires them to adopt such technologies. This is probably the primary cause of the growing divergence between output and employment growth in the case of Indian industry and some services. Meanwhile, employment and livelihood in the primary producing sectors, and particularly agriculture, are hit by the combination of more open trade and reduced government protection of input and output prices.
These processes generate several paradoxes for India's development. These are: the fact that aggregate output growth rates have accelerated but not generated much employment; the fact that falling real wages and falling wage shares have not led to more labour being demanded by employers; the increase in petty self-employment not only in agriculture and services but even in industry, even as the corporate sector grows apace in share of income.
Indeed, the recent Indian experience makes it abundantly clear that high economic growth does not necessarily lead to high growth of employment, especially of jobs of more desirable forms. In recent times, output per worker has increased significantly in the non-agricultural sector, where output growth has been particularly high. This increase has principally been associated with an increase in income inequality, which is the result of an increase in managerial salaries and profits, even as average real wages have stagnated or even declined across most activities. For the majority of those seeking work, there has been a tendency to fall back on forms of work (including self-employment) that do not offer a decent wage and involve poor working conditions.
The common tendency is to blame technological change for this. But technological change is itself the outcome of several factors, including not just the incentives created by relative prices but also the changing structures of demand, which are in turn determined by changing shares of income. So the pattern of growth is extremely significant to ensure generation of desirable forms of employment. And in this regard, macroeconomic policies and overall growth strategies play a crucial role.
Developments over the past decade have changed perceptions across the world about the nature of desirable macroeconomic policies, especially in the context of achieving growth and sustainable employment generation. The Asian financial crisis of the late 1990s and the meltdown in Argentina at the turn of the decade showed the possibility of apparently "prudent" fiscal strategies being associated with unsustainable macroeconomic processes that created the possibilities of crises. Increasingly, there is recognition that macroeconomic management in open developing economies needs to be developed within a co-ordinated framework, so that fiscal, monetary, exchange rate and capital management policies are consistent.
But what still has to be more explicitly recognised is that economic growth, livelihood stability and employment generation must be given significance, and should not be "crowded out" by an overly narrow focus on macroeconomic stability and inflation control. Given that the pattern of growth is crucial, a moderate but sustainable rate of growth that involves employment generation and poverty reduction is preferable to a higher rate of growth that is based on greater income inequalities and has more potential for volatility and crisis.
If the primary goal is to generate productive employment that provides "decent work", this also requires industrial policies providing carefully considered incentives to promote desired investment, and financial policies including directed credit. Public expenditure that sustains and expands the productive human resource base of the country through social spending is also important. Macroeconomic policies must ensure that public expenditure in the social sectors is increased and maintained at adequate levels. This also has a critical role in employment generation.
Given these principles, the messages of the past pattern of growth and employment in India seem to be fairly obvious. Clearly, for more inclusive growth, the generation of good quality productive employment is the most critical variable. Therefore economic policies have to be more explicitly directed towards this goal, and target "decent work" generation as well as pure growth and macroeconomic stability.
The relationship between technological progress and employment generation obviously cannot be forgotten. The promotion of more employment clearly should not involve a glorification of drudgery, especially when newer technological developments open up possibilities for less arduous and tedious ways of working. It is no one's case that low productivity employment must be perpetuated, or that labour-saving technological change must necessarily be resisted. Rather, the point is to ensure that jobs are continuously created in the economy in other activities.
A critical requirement for this is public expenditure, especially (but obviously not exclusively) in the social sectors. This is typically much more employment generating than several other economic activities, and therefore also has substantial multiplier effects. There is therefore a strong case for evolving a growth strategy that allows and encourages labour productivity increases overall, while significantly expanding expenditure - and therefore income and employment opportunities - in social sectors that have a positive effect on the conditions of life of most citizens. This in turn requires a major state intervention through direct public investment and through fiscal, monetary and market-based measures that alter the structure of incentives for private agents.