Employment Situation in India

R Nagaraj,Indira Gandhi Institute of Development Research,

Mumbai. Email: nagaraj@igidr.ac.in

October 2, 2007 UN Meeting 2

Economy’s Size and Structure

• India is the world’s 12th largest economy at current exchange rates, and 4th largest in PPP.

• It ranks 144th in per capita income, and its HDI ranking is 126th as its health and educational attainments are modest.

• It is still a agrarian economy with a strong domestic orientation, as exports accounts for 14% of GDP, constituting barely 1% of world trade.

October 2, 2007 UN Meeting 3

Growth and Transformation

• Economy accelerated to 5.7% p.y since 1980, more than doubling per capita income growth, as population growth slowed slightly.

• Services are the “leading sector” since 1990, contributing 53% of GDP in 2006.

• Structural transformation of workforce got under way in the 1980s, with agriculture’s share declining 15 percentage points by 2005.

October 2, 2007 UN Meeting 4

Unemployment and Poverty

• Yet, no acceleration of employment growth.• Decline in employment elasticity of growth.• Deterioration in conditions of work.

– Casualisation of workforce economy-wide,– Decline in self-employment in rural areas.

• Decline in the official measure of income poverty, but the trends are disputed.

• Persistence of nutritional poverty.

October 2, 2007 UN Meeting 5

Labour Market Size

• Consists of 430 million workers in 2004-05, growing 2% annually, with a stable worker-population ratio of 40%.

• Lower level of women’s participation in workforce (28%) – perhaps an underestimate.

• Low level of open unemployment (3.1%) – high level of disguised unemployment (or under-employment), mostly in rural areas and in agriculture.

• Child labour’s share in workforce declining – yet quite large in absolute numbers, at 13 million in 2001.

October 2, 2007 UN Meeting 6

Labour Market Structure

• Labour market consists of 3 sectors.• Rural workers constitute over 60% of the workforce.• Organised sector employs 8% of the workforce,

producing 40% of GDP. But its employment share declining.

• Thus, urban informal sector is the growing sector – represents the residual.

October 2, 2007 UN Meeting 7

Labour Legislations• Mostly deals with the organised sector. Extent of protection

and benefits for workers rise with size of firm or factory.• No national minimum wage; No economy-wide social

security.• Labour being a concurrent subject in the constitution, states

are empowered to enact separate legislations. • The legislations tend to aspirational, with limited

enforcement.• Best illustrated by the job-security law: firms employing 100

or more workers are mandated to seek the state’s permission to retrench or lay off a worker.

October 2, 2007 UN Meeting 8

Employment Growth

• Structural transformation – agriculture's share declining from 68.5% in 1983, to 55.4% in 2004-05 (table).

• But, workforce is shifting more towards services, than to industry.

• Low or declining employment elasticity.• Between 1997 and 2004, 1.8 million (6.3%) jobs

lost in organised sector including 1.2 million (18%) in manufacturing.

October 2, 2007 UN Meeting 9

Wages

• Agricultural wages have ↑ since 1980s; yet lower than the minimum wages (for lack of enforcement of the laws).

• Wages still low to overcome absolute poverty.• Casualisation of wage contracts in all sectors.• Decline in self employment, especially in

agriculture.

October 2, 2007 UN Meeting 10

Major Concerns

• Little improvement in employment scene, despite acceleration in output growth since 1980.

• Deceleration in agriculture since 1990 (Figure 1), causing agrarian distress – farmers’ suicides, political extremism.

• Alleged labour market rigidity in the organised sector.– Inadequate freedom for employers to “hire and fire”

workers.

October 2, 2007 UN Meeting 11

Alternative Perspectives on Labour Market

• Rapid industrialisation to speed up structural transformation:– Invest in industrial infrastructure.– Liberalise financial sector and foreign investment rules .– Dismantle labour market legislations.

• Refocus on agriculture and rural development with employment generation programmes.– Employment guarantee.– Step up rural investment.

October 2, 2007 UN Meeting 12

National Rural Employment Guarantee Scheme (NREGS)• Initiated in 2005-06, EGS aims at livelihood security

in rural areas of 200 (out of 500) districts.• Provide 100 days of guaranteed employment in a

year for all self selected adults for unskilled manual labour.

• Wage employment programme to create infrastructure and rejuvenate natural resources.

October 2, 2007 UN Meeting 13

NREGS II

• Implemented by local elected self-governing institutions.

• In 2006-07, Rs 11300 ($2.8 bn) are allotted for this scheme, making it perhaps the world’s largest EGS.

• As on December 2006, 536.5 million person days of employment has been generated, official data show.

October 2, 2007 UN Meeting 14

NREGS III

• The EGS, together with Right to Information Act, implemented by local bodies has great potential, say the protagonists of the EGS.

• But, critics have dubbed the EGS “the massive gravy train”, with enormous potential for corruption.

• On the ground, implementation is uneven – with some encouraging reports from backward states, like Rajasthan where local institutions seem active.

October 2, 2007 UN Meeting 15

Is labour Market Rigid?

• Labour market is conceived as a small and declining organised sector workers with high and growing wages with job security – amid an ocean of unorganised, and competitive labour market.

• Implications?Leads to labour market rigidity:– Substitution of capital for labour,– Reducing economic growth, – Hurting labour intensive manufactures and exports.

October 2, 2007 UN Meeting 16

Evidence?

• No nominal or real wage rigidity.• ↓ In unit labour cost (Figure 2).

– True in public sector too (Figure 3). • No evidence of adverse effects of job security law.• Secular ↓ in union strength.• More lockouts than strikes (Figure 4). • ↓ In wage-rental ratio (Figure 5).• Thus, the rigidity hypothesis is suspect.

October 2, 2007 UN Meeting 17

Then What Is the Truth?• There exists functional flexibility that the unions are

prepared to negotiate. Wage agreements are mostly linked to productivity, and incentives.

• Job-security law has little bite. Evidence:– 18% of organised industrial workers lost jobs 5 years, without a

murmur of protest.• Does it mean the labour market is working fine? No.• Need for rationalisation of the labour laws.• Need for a new compact between capital and labour under

the changed economic environment.

October 2, 2007 UN Meeting 18

In Sum I

• Economic growth accelerated since 1980, without a corresponding increase in employment.

• Structural transformation has happened since 1980s, but employment growth has occurred more in services than in industry.

• Income poverty is said to have declined, but nutritional poverty has not, as employment growth has not improved.

October 2, 2007 UN Meeting 19

In Sum II

• Orthodoxy advocates market oriented reforms, infrastructure investment and deregulating the labour market to speed up industrialisation to transform the workforce rapidly.

• Heterodoxy argues for improving agriculture productivity – which is still 1/3 of china’s – to augment employment and expand domestic market.

October 2, 2007 UN Meeting 20

In Sum III

• NREGS was launched last year, perhaps the most ambitious EGS in the world.

• With RTI and local self government institutions, there is a better chance of its success.

• But, critics dub it as the biggest grave train of corruption.

October 2, 2007 UN Meeting 21

In Sum IV

• Reformists believe lack of flexibility in industrial labour market is holding up industrial out and export growth.

• Evidence does not seem to support such a proposition.• But it does not mean that the labour market is working fine

– far from it.• Need to a new compact between capital and labour in the

changed economic environment that includes income security, more rational labour laws, and greater shop floor democracy.

October 2, 2007 UN Meeting 22

Figure 1: Growth in Agriculture output, 1980-05

3.22.9

3.8

3

3.6 3.6

2.32

2.72.2 2

3.6

1.2 1.1 1.3 1.31

2

All Crops Foodgrains Non-foodgrains

Cereals Rice Wheat

Crops

Per c

ent p

er y

ear

1981-90 1991-00 1991-05

October 2, 2007 UN Meeting 23

Thank You

October 2, 2007 UN Meeting 24

Figure 2: Unit labour Cost in Registered Manufacturing

0

20

40

60

80

100

120

140

Year ending

Inde

x

Unit labour cost

October 2, 2007 UN Meeting 25

Figure 3: Unit labour cost in public sectorExcluding electricity

0

0.2

0.4

0.6

80 82 84 86 88 90 92 94 96

Fiscal year ending

Rat

io

Unit labour cost

October 2, 2007 UN Meeting 26

Figure 4: Mandays Lost by Disputes

0

10000

20000

30000

40000

50000

60000

1982

-83

1984

-85

1986

-87

1988

-89

1990

-91

1992

-93

1994

-95

1996

-97

Strikes Lockout

October 2, 2007 UN Meeting 27

Figure 5: Wage-rental ratio

0

20

40

60

80

100

120

81 83 85 87 89 91 93 95 97 99

2001

Year ending

Inde

x

Wage-rental ratio

October 2, 2007 UN Meeting 28

GDP and Workforce Distribution  1983 1993-94 2004-05

% GDP

% Workforce

% GDP

% Workforce

% GDP

% Workforce

Agriculture

40.0 68.5 30.0 64.0 20.2 56.5

Industry

24.3 13.8 25.2 14.9 26.1 18.8

Services

35.7 17.6 48.8 21.1 53.7 24.8