Tuesday, January 8, 2013

India's Jobs Crisis

Amidst all talk of the need for second generation of reforms in India, we should not overlook the fundamental reality that the sustainability of India's economic growth, indeed its democratic polity itself, would depend on how it is able to manage the transition from agriculture to manufacturing and services for the majority of the 60% of population currently working in the former. This boils down to job creation, especially in manufacturing. And it is here that the alarm bells are ringing the loudest.

The most alarming signal is this graphic taken from a CRISIL report which shows that job creation slowed down even as growth rate increased. In the five years from 1999-00 the economy grew at 6% and created a net 92.7 million wage and self-employment jobs, whereas in the next five years from 2004-05 the net job creation declined to just 2.2 million even as the economy grew at an average rate of 8.6%. The biggest problem was the decline in the numbers joining the self-employed category by 25.5 million in the later period. The report finds that the majority of this fall in self-employed jobs was in agriculture. The role of NREGA in this shift is undeniable.

Even within the regular jobs, job creation fell dramatically in that engine of formal economic growth, urban areas. The number of urban regular jobs created fell sharply from 13.7 million in the 1999-2005 period to just 5.5 million in the 2004-10 period.

The biggest concern was the performance of the creating sectors like manufacturing, which were supposed to create the jobs required to help the country make the transition from a predominantly primary to a secondary and tertiary sectors. In many of these sectors, even as sectoral growth rate rose, the employment growth rate actually declined.

The report also contains another graphic that highlights how employment intensity, or the number of people employed for every Rs 100000 of real output, has been falling. It has been falling steadily in all sectors except construction. In fact, for the economy as a whole, it has fallen from 1.71 in 1999-2000 to 1.05 in 2009-10. While on the one hand, it is a reflection of productivity improvements, it also underscores the magnitude of the job creation challenge, even when growth is robust.

In this context, Livemint draws attention to a Planning Commission report which points to an alarming decline in employment elasticity in recent years. The Mint report writes,
The Planning Commission says that employment elasticity has come down “from 0.44 in the first half of the decade 1999–2000 to 2004–05, to as low as 0.01 during the second half of the decade 2004–05 to 2009–10.” An employment elasticity of 0.01 implies that with every 1 percentage point growth in GDP, employment increases by just one basis point. (One basis point is one-hundredth of a percentage point.) It’s as good as saying that the extraordinary growth during those years didn’t lead to any employment growth at all. What is worse is that employment elasticity of growth was much higher during the pre-reform period. The 10th Plan document has a table that shows employment elasticity for the economy as a whole was 0.68 during the period 1983 to 1987-88; this fell to 0.52 if we consider the period 1983 to 1993-94, implying a slowing down during the later years; and it went down to a mere 0.16 during 1993-94 to 1999-2000, which led to much worrying about jobless growth at that time. But employment elasticity during 2004-05 to 2009-10 is even lower than during the late 1990s. The bang we used to get for the buck is now an almost inaudible whisper.
Historical growth trajectories of countries show that as the economy grows and diversifies, the non-formal sector would shrink. But in India's case, exactly the opposite appears to be happening,
The total net increase in employment between 2004-05 and 2009-10 was 2.72 million. But the increase in informal employment during the period was 4.62 million. That means not only were the new jobs all created in the informal sector, but there was some shrinkage in formal sector employment as well, with jobs shifting to the informal sector. Indeed, in the decade 1999-2000 to 2009-10, formal sector jobs shrunk by two million and the entire job growth was in the informal sector. Nearly 93% of the workforce in 2009–10 was in informal employment, compared with 91% in 1999–2000. Not only are jobs hard to get, their quality too has worsened. 
Construction sector, where employment is predominantly non-formal
Many of the new jobs in the informal sector were in the construction industry. Between 2004-05 and 2009-10, there was a reduction of 14 million jobs in agriculture and five million in manufacturing. Most of the persons displaced found jobs in construction, where employment went up by 18 million. And since most of the construction industry is in the informal sector, the trend explains the growing share of informal employment.
It is a no-brainer to realize that job creation is India's biggest challenge in the years ahead. It is at the same time a massive economic, social, and political problem. Failure here will have consequences for the social and political order in the country.

Update 1 (24/1/2013)

Mint reports of an alternative explanation for the fall in jobs created during the 2004-09 period. It points to research which shows that the main reason for this decline was an improvement in the rural economy, which led many women to quit agricultural work. It writes,

Of the 59.5 million jobs created during the first half of the previous decade, nearly a third was in agriculture, at a time when the sector was in distress and agricultural growth was near-zero. Most of the new farm jobs in that period went to “self-employed females”. The majority of such workers were “unpaid”, which means they worked mostly for their relatives or husbands, without compensation. The rise in such low-quality jobs was a reflection of rural stagnation. As the rural economy improved in the second half of the decade and wages shot up, especially for males, women quit distress jobs. The fact that these women could afford not to work even in the drought year of 2009 suggests a rapid reversal of rural fortunes in the last decade. Thus, despite an increase in 22.3 million jobs in the non-agricultural sector, the overall increase in employment in 2004-09 appears poor because of the withdrawal of 21.1 million agricultural workers. The spread of education is also partly responsible for the declining LPR (the sum of employment and unemployment rates): most young males and nearly a third of women missing from the workforce chose to study rather than work. 
Update 2 (1/12/2013)
Mint has an excellent series on structural changes in India's labor market, based on the latest NSSO survey findings. This graphic has the changes in sectoral composition of jobs in India.
This graphic shows the changes in urban wages over the 2004-05 to 2011-12 period...
... and this in the rural areas...
... and this the female labour force participation trends. In the period, female labor force participation rate has declined by seven percentage points to 22.5%, one of the lowest in the world.



KP said...

Dear Gulzar,

Interesting post - I think it mirrors the critics of development who differentiate between GDP as an outcome and also as an indicator of employment.

Clearly it does not follow - where financialization and automation go hand in hand.

This always gets me thinking about the counterfactual to the massive employment generation - the mass of low level jobs in the IT industry - in the 80's and 90's and the BPO wave in the 00's.

Was a chance combination of history (english language), technology (80's computerization) and private enterprise (90's liberalization and low tax and other generous policies in the sector) and an extension of a business paradigm that was made feasible through advances in communication (internet, outsourcing).

That to me seemed like a once in a lifetime combination - and except towards the latter part of the growth the government was a spectator or so it seemed.

Did we exploit the opportunity well enough - no products ? / indian local IT for governance / IT for services in urban areas??. I am not sure.

Am I missing something here? Did we get lucky ? Or was our success however limited - planned ? Did it pan out as intended ? Whose intent was it anyway ??

regards, KP.

Anonymous said...

I doubt the numbers on sectoral GDP or employment are measured with adequate precision and consistency to make time-series inferences. The numbers on GDP could be tolerable, but those on employment, where labor in most sectors is informal are most likely measurement error and biases.

Priya Shah said...

Great post...i doubt with the numbers given...but still overall unemployment is india's major problem ...i agree!!

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solitude said...

Isn't this a case for the argument favoring continuation of subsidies?

KP said...

Dear Gulzar,

Coming back to this post - maybe the underlying disquiet is - what was the contribution of policy to the solution.

As always in India the state flails about with various policy measures and the underlying perversion of anything that constitutes delivery of policy ( cloaked as economic inefficiency / rent and other euphemisms) - and the resulting statistics is then post-facto rationalized into a plan,intent and performance(?). ( By the nature of definition the very existence of any output - being performance)

So while the statistics - I take that as true and its results a given from the data - reveal a gap. What does it say about policy direction ? Do governments control anything in an economic framework where all other outputs are unpredictable - except that financial gamers ( well intentioned or otherwise) can see rich pickings in almost any policy initiative - successful or otherwise.

Would that be the larger policy question here ??


Anonymous said...

Off-topic, but a recent news report puts daily wages of workers on $3 billion Chennai metro rail project are $4-$5. Even shocking is that none of these workers are on the payrolls of CMRL or its contractors. I wonder what makes it difficult to bring construction workers on major urban projects into formal/organized employment? By requiring contractors to bring these workers directly onto company's payroll, it would be possible to monitor and enforce decent wages and allowances. Further, it would make it easy for these workers to access their entitlements such as PDS, public schooling, and low income housing. No amount of robust macroeconomic outcomes such as GDP and employment rate can help if the majority citizens continue to languish outside the scope of organized employment markets.

gulzar said...

Thanks for the comments. I too have doubts about the unorganized sector employment data.

KP, the point about what caused the IT boom in the nineties is well taken. I am with you that happenstance, more than any conscious plan, contributed to it. And you make a very good point that we may not have made much use of that great historical window. Our e-Governance initiatives are an apology given our advantages. And I believe even our star IT firms, in states where they have been e-Governance implementers for many years now, have been huge sub-standard disappointments.

I also have long held a belief similar to yours on the true efficacy of government policies. And I also believe that the usual dismal outcomes have less to do with general government inefficiencies (though they also play a part) and more to do with the complex dynamics created by social and political issues in the implementation environment.

Anon, the big problem in public construction works is that we do not explicitly recognize sub-contracting.In this case, that parcel of work would have been given by CMRL to some sub-contractor (or even sub-sub-contracted out!) and he has no incentive to keep paying formal wages and other benefits to those workers. In fact, he is not even formally part of the agreement between the government and the contractor.

Anonymous said...

Thanks Gulzar. But what is your opinion on a regulation requiring contractors working on all public projects to adhere to a stated wage level and pay them weekly thru pay checks and direct deposits. At least for large public projects running into several crores, this would not unduly burden the contractor or the sub-contractors.

gulzar said...

anon, I agree with you on that. But it is easier said than done. Most of these works are actually done by sub-contractors and sub-sub-contractors. They are not even parties to the contract. The complete set of transactions at these levels are non-formal. This arrangement suits everyone, as it maximizes the returns to capital at the cost of labour.

Enforcement led approach to solving this is likely to create more corruption and leave the problem unsolved. A better approach would be to start with acknowledging all these subordinate contracts and providing space for them in the original contract. This will bring in subordinate contractors into the formal network and increase accountability. It is then easier to increase the pressure on them to comply with labor laws. Right now they are not even legally part of the contract.

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Jobs said...

Yes, unemployment will always remain India's biggest problem till people are not ready to change and start taking things seriously.