The symptoms of low labour demand
It is useful to distinguish the two types of employment that prevail in an economy such as India.
The first is wage employment which is a result of labour demanded by employers in their pursuit of profits.
The second is self-employment where labour supply and labour demand are identical.
A further useful distinction can also be made between wage labour and jobs.
The first includes all forms of labour done for an employer including daily wage work at one extreme and highly paid corporate jobs at the other.
All jobs are wage labour, but all wage labour cannot be called jobs.
When we speak of a jobs problem, we are speaking of inadequate labour demand particularly for regular wage work.
The Indian economy has historically been characterised by the presence of both open unemployment (out of work job-seekers) as well as high levels of informal employment.
The last is also called “disguised unemployment” because, being similar to open unemployment, 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.
The labour demand in the formal non-agricultural sector is determined by two distinct factors.
First, since 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.
Second, 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.
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.
Jobless growth with Indian characteristics
As an economy grows, it is generally seen that it also becomes more productive.
In the process of producing a greater amount of total output, firms become capable of producing more output per worker.
This happens because of what economists call “economies of scale”.
As firms produce more output, they find it easier to adopt labour-saving technologies.
But the extent to which labour-saving technologies are introduced depends on the bargaining power of labour.
We can make a distinction between two types of jobless growth regimes based on the tightness of the connection between output growth and labour productivity growth.
In the first case, the 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.
Under weak responsiveness of labour productivity, the positive effect of GDP growth rate on employment would dominate over the adverse effect of labour-saving technologies.
In the second case, which happens to be the Indian one, the responsiveness of labour productivity growth rate to output growth rate is high.
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.
Macroeconomic policy framework
The central contribution of the Keynesian revolution in macroeconomics was to 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.
The Mahalanobis strategy 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.
But the evidence suggests that the employment challenge can no longer be met only through more rapid GDP growth.
Rather, a separate policy focus is needed on employment in addition to the focus on GDP growth.
Such employment policies will need both demand side and supply side components.
Financing such expenditures while maintaining debt-stability requires the reorienting of the current macroeconomic framework in a significant way, including increasing the direct tax to GDP ratio by reducing exemptions and improving compliance, and a more imaginative use of macro-policy to pursue a constructive employment agenda.
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