EDITORIAL ANALYSIS : India’s jobs crisis, the macroeconomic reasons – INSIGHTSIAS

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Source: The Hindu

  • Prelims: Current events of national importance(Different social service Schemes, unemployment, MGNREGA)
  • Mains GS Paper II & III: Social empowerment, schemes for vulnerable sections, development and management of social sectors/services.

ARTICLE HIGHLIGHTS

  • There are many indications everywhere that India continues to be going through a jobs crisis.

 

Puucho ON THE ISSUE

Context

Unemployment:

  • National Sample Survey Organization (NSSO) defines employment and unemployment on the following activity statuses of an individual:
    • Working (engaged in an economic activity) i.e. ‘Employed’.
    • Seeking or available for work i.e. ‘Unemployed’.
    • Neither seeking nor available for work.
    • The first two constitute the labour force and unemployment rate is the percent of the labour force that is without work.
  • Unemployment rate = (Unemployed Workers / Total labour force) × 100
  • Unemployment occurs when a person who is actively searching for employment is unable to find work.
  • Unemployment is often used as a measure of the health of the economy.
  • The most frequent measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labour force.

Types of Unemployment in India:

 

Types of employment that prevail in an economy(such as India):

  • Wage employment which is a result of labor demanded by employers in their pursuit of profits.
  • Self-employment where labor supply and labor demand are identical, i.e The worker employs herself.
    • All jobs are wage labor, but all wage labor cannot be called jobs.

Indian economy:

  • The Indian economy is characterized by the presence of both open unemployment (out of work job-seekers) as well as high levels of informal employment
  • It consists of the self-employed as well as casual wage workers.
    • The last is also called “disguised unemployment”
      • Being similar to open unemployment: It indicates a lack of adequate employment opportunities in the formal sector.
    • The 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.

Reason for constraints in the labor demand of the formal sector?

  • The labor demand in the formal non-agricultural sector is determined by:
    • Firms in the formal sector hire workers to produce output for profit, labor demand depends on the amount of output that firms are able to sell.
    • Under any given level of technological development, labor demand in the formal sector rises when demand for output rises.
    • Labor 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 labor-saving technologies enables firms to produce the same amount of output by hiring a lower number of workers.

Employment growth rate:

  • It is determined by the relative strength of two factors:
    • The output growth rate
    • The labor productivity growth rate (growth rate of output per worker).
    • If labour productivity growth rate does not change, higher output growth rate increases employment growth rate.
  • Policies that promote higher economic growth would also achieve higher employment growth.
    • If the labor productivity growth rate rises, employment growth rate falls for a given output growth rate.
  • In India, the employment growth rate of the formal and non-agricultural sector remained unresponsive despite a significant rise
    • In the GDP growth rate
    • 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.
  • It indicates a strong connection between labor productivity growth rate and output growth rate.

Jobless growth:

  • It is based on:
    • The tightness of the connection between output growth
    • The labor productivity growth.
  1. The tightness of the connection between output growth:
    • The responsiveness of labor productivity growth rate to output growth rate is weak.
    • Jobless growth emerges exclusively on account of automation and the introduction of labor-saving technology.
  • Employment growth rate would necessarily increase if output growth rate happens to increase.
  • Under weak responsiveness of labor productivity, the positive effect of GDP growth rate on employment would dominate over the adverse effect of labor-saving technologies.
  1. The labor productivity growth(case of India):
  • The responsiveness of labor 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 labor-saving technologies.
    • Employment growth rate cannot be increased simply by increasing GDP growth rate.

Kaldor-Verdoorn coefficient:

  • It reflects the extent to which labor productivity growth rate responds to output growth rate.
  • India’s non-agricultural sector is characterized by a higher than average Kaldor-Verdoorn coefficient, as compared to other developing countries.
  • It is this distinct form of jobless growth that makes India’s macroeconomic policy challenge qualitatively different from other countries.

Keynesian revolution in macroeconomics:

  • It highlighted the role of aggregate demand as the binding constraint on employment.
  • Fiscal policy was perceived to increase labor demand by stimulating output.
  • The developing countries that inherited a dual economy structure during their independence, confronted additional constraints on output.

The Mahalanobis strategy:

  • It identified the availability of capital goods as the binding constraint on output and employment
    • putting forward the policy for heavy industrialisation.

 

Government Initiatives:

Way Forward

  • The employment challenge can no longer be met only through more rapid GDP growth.
    • A separate policy focus is needed on employment in addition to the focus on GDP growth.
  • Employment policies will need both demand side and supply side components.
    • For example: In India firms find it easier to automate due to a lack of adequate skilled labor
  • Increasing the quality of the workforce through better public provisioning of education and health care, as well as bridging the skills gap, are important.
    • On the demand side, direct public job creation will be needed.
  • Financing 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
  • A more imaginative use of macro-policy to pursue a constructive employment agenda.

 

QUESTION FOR PRACTICE

How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country?(UPSC 2016) (200 WORDS, 10 MARKS)

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