Employment and unemployment figures are still from 68th round of NSS (National Sample Survey), that is, 2011-12. NSS has different ways of defining and measuring employment and work force—usual status, current daily status and current weekly status. It doesn’t matter which one is used. Two conclusions are obvious: (1) Especially among women, work participation rates are low—for instance, World Bank data show an Indian female work participation rate of 27, compared to 64 in China; and (2) not only does low growth mean low employment generation, even when growth picks up, jobs don’t seem to be created. For instance, one can compare employment elasticity of growth between 1999-2000 and 2004-05, with a decline in that elasticity thereafter. While growth is necessary to create jobs, growth alone will presumably not solve the problem. Why is employment elasticity of growth low, subject to the qualification that this also depends on composition of growth? A standard answer has been labour laws, especially in the organised sector. Both expressions, “labour laws” and “unorganised sector” should be used with caution. There are 50-plus Union-level statutes that directly have something to do with labour. There are also many state-level rules.

A standard definition of “organised” is application of the Factories Act. But there aren’t two neat binary worlds of organised and unorganised. Some of those 50-plus labour laws also apply to unorganised sector and there are informal contracts within organised sector. With that Factories Act definition, the Economic Survey tells us employment in organised sector (in 2012) is 29.6 million, 12 million private and the rest public. There is an entirely valid argument that labour laws in the organised sector are rigid, thereby stimulating artificial capital intensity. By this statement, one usually means statutes on industrial relations (Industrial Disputes Act (IDA), Contract Labour Act, Trade Unions Act), though it can also mean compliance costs associated with the so-called inspector raj, which is also pertinent for other statutes and also occasionally applies to unorganised sector. Assuming labour and capital can be substituted, in relative price comparisons between labour and capital, this increases costs of labour, interpreted as more than narrow wage costs. What has happened to that cost of labour post-1991? I mean the absolute cost, not the relative one. Sure, there are occasional complaints about upward wage pressures, lack of skills and labour shortages (reflected in higher wages). But I suspect these are sector-specific and region-specific complaints still.

But compliance costs associated with labour laws should also have declined. Several states have simpler procedures now and implementation of labour laws is mostly a state subject. The Union government has introduced elements like self-certification and unification of forms. Within IDA, permissions are more readily available. When were labour laws tightened? If you are obsessed with IDA, you will probably pick 1976 (Chapter V-B was introduced) or 1982/84 (threshold of Chapter V-B was changed). 1976 or 1982/84 certainly introduced rigidities and those rigidities need relaxing. But has that rigidity become worse post-1991? Not necessarily. A capital/labour choice is based on relative costs of inputs, not just absolute costs of labour. With the old GDP series, high growth years were roughly between 2003-04 and 2007-09. One explanation for high growth is reduced cost of capital, however defined—import duties, external commercial borrowings, domestic costs of debt and equity. Thus, absolute cost of capital declined, reduced relative cost of capital, pushed up relative cost of labour and drove further capital intensity. However, there is a more interesting question. Do labour laws alone distort resource allocation?

Consider policies on capital. The Budget Papers have a revenueforegone statement. In 2014-15, aggregate tax exemptions, divided into various categories, amounted to R486,452 crore. There are direct tax exemption components for corporate sector and unincorporated enterprises. If you scrutinise these, you will find several for use of capital. There are instances from indirect tax exemptions too. What else is stuff like accelerated depreciation? Can you think of a single incentive linked to use of labour? Other than tax exemptions being undesirable on other counts, this too distorts choice across inputs. I can also throw in incentives, not necessarily fiscal, on use of land. Why should we be surprised at low employment elasticity? Take the definition of MSME (micro, small and medium enterprises). Whether manufacturing or services, this is completely based on investments, that is, capital. Nothing to do with labour or employment. While growth theory has evolved, and often has human capital built into it, the popular discourse is often based on Harrod-Domar. If the investment rate is 32% and ICOR (incremental capital/output ratio) is 5, you will get a growth rate of 6.4% and so on. How many times have you seen a discussion which says what the growth rate will be if the female work participation rate increases? Or alternatively, what it will be if mortality and morbidity indicators, or skill indicators improve? I wonder if this occurs because roots of discourse originate in countries that possess a different set of relative factor endowments. It is a plausible proposition.

But my limited point is that in discussing low employment elasticity of growth, let us not look only at labour market policies. A factor input choice, to the extent inputs are substitutable, is a function of relative prices. Policies that distort costs on inputs, and thereby distort resource allocation and input choices, are undesirable. Just as they are undesirable for labour, they are undesirable for capital and land too. But oddly enough, the capital distortion argument is not articulated as much as the labour distortion one. If incentives are to be used, let us encourage use of the input India is relatively better endowed in, not the one India is relatively scarce in.

The author is Member, NITI Aayog. Views are personal

For Updates Check Editorials and Columns; follow us on Facebook and Twitter