THE CONTEXT: Recent technological advancements have favored skilled workers over unskilled ones, potentially exacerbating income inequality. Given India’s large low-skilled workforce, this is particularly challenging. The effects of technological change vary across sectors. In India, the services sector, especially IT and IT-enabled services, has benefited significantly from technological advancements. However, the manufacturing sector faces challenges in adopting advanced technologies while creating sufficient employment.
GLOBAL PERSPECTIVE: DEVELOPED ECONOMIES’ EXPERIENCE:
Timeline of New Technology Adoption (1980s Onwards):
1980s
Introduction of personal computers, cellular phones, and early internet usage. Technologies like industrial robots and computer-controlled machines began automating tasks in manufacturing and services.
1990s
Expansion of the World Wide Web, graphical user interfaces, and e-commerce platforms. The rise of automation technologies like assembly-line robotics and financial software systems.
2000s
The proliferation of advanced computing, cloud technologies, artificial intelligence (AI), and big data analytics. Automation extended to customer service, logistics, and healthcare.
2010s-Present
AI-driven automation, machine learning, blockchain technologies, and Industry 4.0 innovations have revolutionized production processes and service delivery.
KEY EFFECTS OBSERVED:
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- Automation of Routine Tasks: Routine manual and cognitive tasks—such as assembly-line work, clerical jobs, and customer service—have been increasingly automated using robots, AI systems, and software. This has led to significant job displacement in middle-skill sectors. In the U.S., self-checkout machines in retail and automated call-center systems have replaced thousands of jobs.
- Skill-Biased Technological Change: New technologies are inherently skill-biased, complementing high-skilled labor while substituting low-skilled labor. This has increased demand for workers adept at problem-solving, programming, and non-routine tasks while reducing opportunities for routine jobs.
- Job Polarization: Developed economies have experienced job polarization—a simultaneous growth in high-skill/high-wage jobs (e.g., software engineers) and low-skill/low-wage jobs (e.g., janitorial services), with a decline in middle-skill/middle-wage occupations. In Europe and the U.S., middle-skill jobs in manufacturing have shrunk due to automation, while demand for high-skilled professionals in IT and low-skilled workers in personal services has grown.
- Increase in Skill Premium and Income Inequality: The wage gap between high-skilled and low-skilled workers has widened significantly. Automation has increased the “skill premium,” raising wages for educated professionals while suppressing wages for less educated workers. In the U.S., automation has accounted for 50-70% of the increase in wage inequality since 1980. Workers without a high school diploma saw their real wages drop by 8.8% between 1980-2016 due to automation.
- Shift in Income Share from Labor to Capital: Automation has shifted income from labor to capital owners as machines replace human workers. Capital’s share of national income has risen across developed economies, contributing to overall income inequality. In the U.S., capital’s share increased from 20% in 1980 to 26% by 2007. This trend is more pronounced in countries with weaker labor protections, like the U.S., than those with stronger institutions, like France.
INDIAN CONTEXT: TECHNOLOGICAL CHANGE POST-1990S REFORMS:
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- Dominance of Services Sector: The services sector has been the primary driver of India’s economic growth, contributing over 50% to the country’s GDP. In FY24, it accounted for about 55% of the economy’s total size.
- IT and IT-enabled Services (ITeS) Boom: India emerged as a global leader in IT and ITeS, contributing significantly to exports and employment generation. The country’s share in digitally delivered services exports globally increased to 6.0% in 2023 from 4.4% in 2019.
- Skill-intensive Growth: The services-led growth model has favored skilled workers, leading to a rapid demand for high-skilled labor, particularly in sectors like IT, finance, and professional services.
- Limited Manufacturing Growth: Unlike many East Asian economies, India’s manufacturing sector has not experienced high growth rates, leading to concerns about “premature deindustrialization.”
- Job-skill Mismatch: The services-led growth has created a disconnect between the skills demanded by the growing sectors and the skills most of the workforce possess, leading to challenges in employment generation.
- Rapid Digitalization: India has witnessed rapid adoption of digital technologies, with initiatives like Aadhaar, UPI, and e-governance projects transforming service delivery and financial inclusion. Services exports have played a crucial role in India’s growth story, accounting for 44% of India’s total exports in FY24.
SKILL STRUCTURE CHANGES IN INDIAN ECONOMY (2000-2018):
Overall Skill Upgrading Trends: Absolute decline in low-skilled employment, indicating “absolute skill upgrading” rather than just relative changes. Increase in the shares of middle-skilled and high-skilled employment.
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- Low-skilled employment declined by 60 million workers.
- Middle-skilled employment increased by 62 million workers.
- High-skilled employment grew by 57 million workers.
Sector-wise Changes:
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- Agriculture: Witnessed a decline of 17 million workers between 1995 and 2019, primarily low-skilled. However, it still accounts for 43% of total employment, indicating the need for further structural transformation.
- Manufacturing: Added only 15 million jobs between 1995 and 2019. Experienced significant skill upgrading, with increased demand for high-skilled workers and reduced demand for low-skilled workers. Accounted for nearly 39% of employment in organized sectors by 2021.
- Services: Emerged as the primary driver of economic growth, contributing over 50% to GDP. IT/BPO sector showed impressive growth of 152% in employment between 2021-2023. Business services increased employment from 1.6 million in 1995 to 14 million in 2019.
- Construction: Added 46 million jobs between 1995 and 2019, mostly low to middle skilled. Showed 42% growth in employment between 2021-2023 in the organized sector.
- Trade: Added 33 million jobs between 1995 and 2019. Experienced 22% growth in employment in the organized sector between 2021-2023.
Comparison with Developed Economies’ Experience:
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- Job Polarization: Unlike the U.S. and Europe, India has not experienced job polarization (growth in high and low-skill jobs with a decline in middle-skill jobs). Instead, India shows a pattern of “mid-upgrading” with growth in low-mid and high-paid jobs.
- Low-Skill Employment: While developed economies saw growth in low-skill service jobs, India experienced an absolute decline in low-skill employment across most sectors.
- Middle-Skill Jobs: Contrary to the decline in middle-skill jobs in developed economies, India saw an increase in middle-skill employment.
- Technological Impact: The impact of automation and digital technologies on India’s job market has been less pronounced compared to developed economies. This is partly due to India’s lower technological penetration and the prevalence of informal employment.
- Skill Premium: Unlike developed economies where skill premium (wage gap between high and low-skilled workers) increased sharply, India’s data does not show a clear rise in skill premium, possibly due to an oversupply of skilled labor.
- Sectoral Shifts: While developed economies experienced a significant shift from manufacturing to services, India’s growth has been primarily services-led from the beginning of its liberalization period.
Factors Driving Skill Structure Changes in the Indian Economy:
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- Skill-Biased Technological Change (SBTC): This refers to the phenomenon where technological advancements favor skilled over unskilled labor, leading to a shift in the demand for labor. In India, the post-1990s economic reforms facilitated the import of advanced technologies from developed countries, which were inherently skill-biased.
- Capital Deepening: It refers to increased capital per worker, which often leads to enhanced productivity. While capital deepening generally increases productivity, it has also led to a relative reduction in low-skilled labor demand. Capital deepening in sectors such as mining and construction increased the share of high-skilled labor while maintaining or even increasing low-skilled employment in absolute terms.
- Product Upgrading: In India, industries have increasingly focused on higher-value products that require more skilled labor. This has led to an increase in middle-skilled employment as well as high-skilled jobs in sectors like electronics and pharmaceuticals. This upgrading process aligns with India’s broader economic strategy of moving up the value chain in global markets.
- Structural Change: Structural changes have led to a relative shift towards middle-skilled jobs as well as high-skilled jobs while reducing low-skilled job opportunities. For instance, while agriculture’s share of employment declined, sectors like IT and business services expanded rapidly. The structural shift towards services has been associated with rising income inequality as high-skill jobs proliferate while low-skill jobs diminish.
IMPACT ON EMPLOYMENT IN INDIA:
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- Employment Growth: Aggregate employment increased by approximately 59 million, translating to an annual growth rate of about 0.8%. This growth was insufficient compared to the rising labor supply.
- Labor Supply Growth: The non-student population, representing potential workers, grew by about 234 million, or 1.9% annually. This stark contrast indicates that the demand for labor did not keep pace with the growing supply, leading to heightened competition for jobs.
- Sectoral Disparities: While employment in low-skilled jobs declined by 60 million, middle-skilled employment increased by 62 million, and high-skilled employment rose by 57 million. However, the growth in middle-skilled and high-skilled jobs still fell short of the corresponding increases in their respective labor supply categories.
- Labor Force Participation Rates: The overall LFP rate has declined across skill categories. For low-skilled workers, LFP remained close to employment rates, indicating that those employed were less likely to be unemployed. In contrast, participation rates decreased more significantly for middle- and high-skilled workers than employment rates.
- Unemployment Rates: The unemployment rate for middle—and high-skilled workers increased during this period. This rise can be attributed to a mismatch between job seekers’ skills and employers’ demands. As industries increasingly adopted technology and automation, many skilled workers found themselves without suitable job opportunities.
IMPACT ON INCOME INEQUALITY IN INDIA:
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- Skill Premium Trends: empirical evidence indicates that the wage premium for skilled workers has not increased markedly during this period. This stagnation can be attributed to an oversupply of skilled labor relative to demand, which has limited the ability of skilled workers to command higher wages.
- Comparative Analysis: In contrast to developed economies where technological change has consistently raised the skill premium due to a shortage of skilled labor, India’s labor market has experienced a different trajectory. The growing supply of educated workers has outpaced demand, leading to a relatively stable skill premium despite significant technological advancements.
- Capital’s Increasing Share: Data indicates that capital’s share in GVA has seen modest increases over the years. While labor’s share experienced slight declines, particularly in sectors like agriculture and construction, capital deepening has significantly shifted income distribution towards capital owners.
- Sectoral Variations: In manufacturing and services, technological change led to small increases in labor’s share; however, overall trends suggest that capital accumulation has predominantly benefited capital owners. This phenomenon aligns with findings from advanced economies where technological advancements have similarly favored capital over labor.
THE WAY FORWARD:
Skill Development and Education Reform: Expand and modernize Industrial Training Institutes (ITIs) and align their curricula with industry needs. The recent Budget 2024-25 announcement to upgrade 1,000 ITIs is a step in the right direction. Enhance industry-academia partnerships to ensure skill development programs are aligned with market demands.
Promote Inclusive Technological Adoption: Implement targeted policies to encourage technology adoption in labor-intensive sectors, focusing on augmenting rather than replacing human labor. Support the growth of the agro-processing sector, which can create rural employment opportunities while leveraging technology.
Strengthen Social Safety Nets: Expand the coverage of social security schemes to include informal and gig economy workers. The e-Shram portal, which has registered 29.86 crore unorganized workers, can be leveraged for this purpose. Strengthen and streamline existing schemes like Ayushman Bharat and Pradhan Mantri Shram Yogi Maan-dhan Yojana to provide comprehensive social protection.
Foster Entrepreneurship and Innovation: Establish entrepreneurship schools in rural areas to democratize innovation and tap into the potential of Tier-II and Tier-III cities. Through programs like Stand Up India, provide targeted support for women entrepreneurs and those from marginalized communities.
Labor Market Reforms and Flexible Work Arrangements: Effectively implement the four new labor codes, focusing on simplifying compliance and extending protections to informal workers. Develop a comprehensive policy framework for platform and gig economy workers, addressing social security issues and fair working conditions.
THE CONCLUSION:
While technological change in India has led to skill upgrading and modest increases in labor income inequality, it has not significantly increased capital’s share in gross value added, suggesting that structural changes associated with services-led growth have been the primary driver of rising income inequality.
UPSC PAST YEAR QUESTIONS:
Q.1 Account for the failure of manufacturing sector in achieving the goal of labour-intensive exports rather than capital-intensive exports. Suggest measures for more labour-intensive rather than capital-intensive exports. 2017
Q.2 Economic growth in the recent past has been led by increase in labour productivity. Explain this statement. Suggest the growth pattern that will lead to creation of more jobs without compromising labour productivity. 2022
MAINS PRACTICE QUESTION:
Q.1 Technological change has significantly influenced employment patterns and income inequality in India, particularly in the post-reform period. Discuss.
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