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On Generating Employment

Arvind Panagariya

  ECONOMISTS, with the possible exception of macroeconomists, are ill at ease when asked to pronounce on aggregate employment in the economy. This was driven home to me many years ago when, during a talk by T N Srinivasan of Yale University, I happened to ask what the implications of his model were for employment. “If your question is about the impact on employment in a particular sector,” TN responded, “I can answer it. But if it is about economy-wide employment, I am afraid it falls in the realm of macroeconomics, which I regard as non-economics.”

 Therefore, when the Planning Commission decided to appoint a Task Force on Employment Opportunities in January1999 with the charge to recommend strategies leading to 100 million additional jobs over the next decade, it showed good judgement by placing this burden on the broad shoulders of Montek Ahluwalia. Ahluwalia was not only directly involved in the policy reforms at the highest level during 1990s, he is also well known for his scholarly work in an earlier incarnation during 1970s.

 Because of its large and growing population, the threat of “employment problem” is never far from the minds of policymakers in India. Yet, there are good reasons for the ambivalence of economists towards such a threat. The old saying that the child is born not just with a mouth to eat but also two hands to work carries much wisdom.

 Even with fixed supplies of other factors of production, we can accommodate extra workers by expanding labour-intensive activities. And if the supplies of other factors can be expanded, which is certainly possible in the case of physical and human capital if not land, the expansion of jobs is that much easier.

 When aggregate unemployment is observed for prolonged periods, the principal reason for it in modern times is an unduly high real wage. If employers have to pay workers more than the value of output they contribute, they shy away from employing them in the first place. Such ultra-high wages exist in India only in the organised sector; in other sectors, wages are in line with productivity so that they are able to absorb the available workers.

 Unemployment statistics in the task force report submitted by Ahluwalia this past July support this view. The report identifies four different measures of unemployment. Depending on which of these measures is chosen, unemployment rate in India in the year 1999-00 is placed between 2.23 to 7.32 per cent of the total labour force. The corresponding range for other years is not dramatically different: 2.47 to 8.18 per cent in 1977-78 and 1.90 to 6.03 per cent in 1993-94. Growth in the labour force has not led to a dramatic rise in the unemployment rate. Nor has India’s unemployment rate been hugely out of line with that in other countries including the United States.

 The task force report is wise to recognise, albeit implicitly, the futility of producing a catalogue of policies that will maximise the quantity of jobs. Instead, it chooses to focus on policies that can help deliver high-quality, high-wage jobs. And that translates into policies that will promote faster growth of GDP and increase labour productivity.

 To stimulate growth, the report suggests raising the rate of investment from 24 to 29 per cent of GDP through increased government savings and foreign investment, enhancing efficiency through increased domestic competition and further trade liberalisation, and promoting infrastructure development and banking and finance reforms. Among the policies to raise labour productivity, it advocates specialised technical education, entrepreneurship training, and improved vocational education. The only major employment expansion programmes the report advocates are those targeting the poor.

 So central is the link between growth and high-quality jobs to the report that sectoral and labour market policies advocated by it as measures for “employment promotion” are indistinguishable from the economic reforms proposed by others as necessary for growth. For example, the report makes a very strong pitch for the reform of labour laws and the introduction of genuine bankruptcy laws. On labour laws, it goes farther than the promise made by the finance minister in the last year’s budget, arguing that the effective ban on the employer’s right to retrench workers be lifted from all firms, not just the firms with less than 1,000 workers. It correctly argues that limiting the reform to firms with less than 1,000 workers will leave the most labour-intensive activities still subject to the existing draconian regime and, thus, continue to discourage entry of new firms into these activities.

 To restore the balance between the rights of employers and workers, the report recommends simultaneously the repeal of the Sick Industrial Companies Act and the Bureau of Industrial and Financial Restructuring (BIFR) process. In their place, the report recommends the introduction of a genuine bankruptcy law. Currently, the BIFR process and subsequent court proceedings are so slow that by the time they reach a conclusion, owners have tunnelled their assets leaving both workers and creditors without recourse.

 While the report is, thus, the most comprehensive and clear-headed road map of reforms to come out of a government agency in recent times, occasionally it shies away from taking a bold stand. For instance, though it recommends trimming the small-scale industries reservation list, the report stops well short of advocating complete end to the policy.

 The Abid Hussain Committee, whose persuasive arguments the report recalls, had recommended such an end more than five years ago. The Committee’s arguments apply with greater, not less, force today. With import licensing abolished, the goods produced by large-scale foreign enterprises are now sold in our markets. Therefore, there is little defence for holding back our own large-scale firms from producing and selling similar products. The report also advocates considerable expansion of subsidies to the small-scale enterprises to “level the playing field” without confronting the issue whether or not such a policy is justified on efficiency grounds.

Economic Times, 26 February 2002

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