Get moving on job-friendly growth

Lack of sufficient job growth has been a weakness of economic reform in India. This is apparent in public perceptions, as reported in opinion polls: jobs are a top concern for India?s citizens. The perception alone is enough to suggest that job creation requires attention, since political support is critical for successful economic reform. Sidestepping arguments about precisely how good or bad the employment numbers are, we can broadly agree that a given level of growth is better, the more new jobs it generates. If job generation spurs faster growth, then all the better. Job-friendly growth might silence critics of reform among a section of the intelligentsia, and start to get broader buy-in from the aam aadmi (and aam aurat). It is critical in view of the demographic profile, with a working-age bulge now appearing in the population.

Begin with some basic official numbers. We focus on employment, to avoid the statistical problems that bedevil unemployment rate calculations. Orga-nised sector employment in 1991 was 26.7 million in 1991 (19.1 public and 7.7 private). By 1997, this had grown to 28.3 m (19.6 public and 8.7 private). However, in 2003, the numbers had shrunk: 18.6 m public sector employees, 8.4 m private and 27 m total. While the reduction in public sector employees represented a welcome squeeze in an era of large deficits and public sector pay hikes, it can hardly have been popular. The reduction in private sector jobs can be explained at least partly by a cyclical downturn in industry, and not by economic reform. But again, that is no comfort for job seekers. According to these figures, organised sector job growth has been disappointing. What can be done?

Basic microeconomic theory is a big help. First, the public sector cannot be counted on as a job creation machine. It has done its best over the past five decades, at the cost of its own efficiency and of being a drag on the rest of the economy. Incentives for its employees are just not right. The sector has a role in providing physical and institutional infrastructure, but India must look to the private sector for job creation. While the small-scale sector has generated job growth as high as 7% a year, it remains shackled by policies that preserve inefficiently small scales of operation and are disincentives to expansion and job creation.

The rest of industry is hampered even more, by labour laws that needlessly raise the cost of hiring and severely restrict job growth. And these laws act as a disincentive for small firms to grow into their shadow. Theory tells us that raising the cost of labour will reduce employment, other things being unchanged. Empirical studies with firm level (e.g. a joint CII-World Bank study in 2002) and industry level (e.g. an analysis by Philippe Aghion and Robin Burgess in 2003) data strongly suggest inefficient labour laws, coupled with predatory implementation, negatively affect productivity.

Any counter argument about worker welfare should note what the earlier numbers indicate, that organised private sector workers represent a small minority, a labour aristocracy, of the workforce. It is possible to come up with reforms that protect worker welfare more intelligently than the current set of laws. The counter argument of political infeasibility can be finessed by allowing ?grandfather clauses? in new laws to protect incumbents, while allowing a more sensible regime for additions to the workforce. (A similar approach can work for incumbent firms in small-scale industry). The failure to significantly reform labour laws in these 15 years represents a failure of imagination and attention, rather than any real constraints. It is the majority of the workforce that has suffered.

Making labour less costly increases the quantity demanded. If labour is more productive, then the demand for it also increases. Labour productivity increases with greater physical capital, managerial ability or education and training. If domestic savings are insufficient, then foreign savings can substitute as a capital source. These have been coming into India, but cannot be fully absorbed due to institutional failures in the financial sector and government fiscal imprudence, that forces a relatively tight monetary policy.

There is no shortage of managerial talent in India?much of it is being exported. The big constraint is human capital. Currently, government jobs in India (except for the elite services and the armed forces) rarely provide opportunities for developing productive human capital. Software and BPO have shown what can be done by industry-led training. However, there is a tremendous supply bottleneck in India?s higher education. The government?s traditional response seems to be based on the assumption that private sector incompetence or malfeasance mirrors its own. Thus, for example, private and foreign investment in higher education, which would generate jobs by both, expanding education and by raising the productivity of entrants to the workforce, are government-constrained in ways that make no sense. In this respect, the recent CNR Rao committee report on foreign entry in higher education is a grave disappointment.

So, critics who note the shortcomings of economic reform on job generation are half right. But the answer is not in backtracking or hand-wringing, but more reform, in labour laws and in education. A complementary process is needed for job growth in agriculture and rural India (see the comprehensive 2002 ILO study of K Sundaram and Suresh Tendulkar). But creating more organised private sector jobs, good ones that are productive and human-capital enhancing, is both imperative and feasible through intelligent reform.

The writer is professor at the University of California, Santa Cruz