March 1, 2024

Lukmaan IAS

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INDIA’S JOBS CRISIS, THE MACROECONOMIC REASONS

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THE CONTEXT: There are many indications everywhere that India continues to be going through a job crisis. Both official data sources as well as many on-the-ground reports point to this fact.

Two types of employment that prevail in an economy such as India.

1. Wage employment: It is a result of labour demanded by employers in their pursuit of profits.

2. Self-employment: Here labour supply and labour demand are identical, i.e., the worker employs herself.

A further useful distinction can also be made between wage labour and jobs.

1. Wage labour: It includes all forms of labour done for an employer including daily wage work at one extreme and highly paid corporate jobs at the other.

2. Jobs generally refer to relatively better paid regular wage or salaried employment. In other words, all jobs are wage labour, but all wage labour cannot be called jobs.

The labour demand in the formal non-agricultural sector is determined by two distinct factors:

1. Demand for output: Firms in the formal sector hire workers to produce output for profit, labour demand depends on the amount of output that firms are able to sell. Under any given level of technological development, labour demand in the formal sector rises when demand for output rises.

2. State of technology: Labour demand depends on the state of technology that dictates the number of workers that firms need to hire to produce one unit of output. Introduction of labour-saving technologies enables firms to produce the same amount of output by hiring a lower number of workers.

Employment growth rate is determined by the relative strength of two factors:

1. Output growth rate: Policies that promote higher economic growth would also achieve higher employment growth.

2. Labour productivity growth rate i.e growth rate of output per worker: If labour productivity growth rate rises, employment growth rate falls for a given output growth rate. If labour productivity growth rate does not change, higher output growth rate increases employment growth rate.

Macroeconomic policy framework

  • Keynesian theory: It highlight the role of aggregate demand as the binding constraint on employment. Fiscal policy was perceived to increase labour demand by stimulating output. The developing countries that inherited a dual economy structure during their independence, confronted additional constraints on output.
  • Mahalanobis strategy: It identified the availability of capital goods as the binding constraint on output and employment, putting forward the policy for heavy industrialisation.
  • The structuralist theories based on the experiences of developing countries highlighted the possibility of agrarian constraint 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.

Reasons for this crisis:

  • Low labour demand: There is inadequate labour demand particularly for regular wage work.
  • Disguised employment: The Indian economy has historically been characterised by the presence of both open unemployment and disguised employment. It means high level of informal employment consisting of the self-employed as well as casual wage workers. 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.
  • Jobless growth: In India, the employment growth rate of the formal and non-agricultural sector 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 employment growth rate to changes in output growth rate reflects a phenomenon of jobless growth.

Two types of jobless growth regimes based on the connection between output growth and labour productivity growth.

1. Responsiveness of labour 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. But employment growth rate in such regimes would necessarily increase if output growth rate happens to increase. Here, the solution to the jobs crisis is just more rapid economic growth.

2. Responsiveness of labour productivity growth rate to output growth rate is high: This is the case in Inda. Here, the positive effect of output growth rate on employment fails to counteract the adverse effect of labour-saving technologies. Employment growth rate in such regimes cannot be increased simply by increasing GDP growth rate.

THE WAY FORWARD:

  • Both demand and supply side reforms: Such employment policies will need both demand side and supply side components. At the same time, direct public job creation will be needed.
  • Bridging the skill gaps: There is a need for adequate skilled labour and increasing the quality of the workforce through better public provisioning of education and health care.
  • Reorienting macroeconomic framework: Financing expenditures while maintaining debt-stability requires the reorienting of the current macroeconomic framework in a significant way. It can include increasing the direct tax to GDP ratio by reducing exemptions and improving compliance.

THE CONCLUSION:

With the given scenarios, the employment challenge can no longer be met only through more rapid GDP growth. There is a need for separate policy focus on employment.

UPSC PREVIOUS YEAR QUESTIONS

Q) Faster economic growth requires increased share of the manufacturing sector in GDP, particularly of MSMEs. Comment on the present policies of the Government in this regard. (2023)

Q) Is inclusive growth possible under market economy? State the significance of financial inclusion in achieving economic growth in India. (2022)

MAINS PRACTICE QUESTIONS

India is witnessing jobless growth in current times. In this respect, analyse India’s recent economic performance and its impact on job creation.

Source: https://www.thehindu.com/opinion/lead/indias-jobs-crisis-the-macroeconomic-reasons/article67671927.ece

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