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The unemployment trap

March 15, 2004 09:44 IST

Most voter surveys conducted during the build-up to the Assembly elections held last December suggested that unemployment was high up on the list of concerns.

Surveys conducted after the parliamentary elections were announced have done nothing to contradict this. Voter surveys, of course, need to be interpreted carefully.

For example, inflation, which we all assumed was dead as a political issue, kept cropping up on the list as well. So, was the emphasis on unemployment genuine, or simply a knee-jerk response driven more by habit than by fact?

Data on inflation would support the knee-jerk interpretation. However, given the numbers on employment, the political class would be putting themselves at great risk if they ignored the voter surveys.

Conventional sources of employment data lead to three inescapable conclusions. One, employment growth over the mid-to-late 1990s fell short of labour force growth.

Two, organised sector employment, encompassing both private and public sectors, has plateaued, even showing signs of decline. Three, the share of employment in agriculture has remained relatively constant, even as the sector's share in GDP has declined significantly over the last couple of decades.

The concern with future prospects for employment is thus entirely understandable. The question is: are these patterns the consequence of fundamental factors that nobody has any control over, or are they the amenable to policy intervention, which could bring GDP growth and employment closer together?

These questions should motivate the political debate on the issue. As long as unemployment remains a primary concern, the voter is entitled to know from each party or coalition where it stands on the issue.

If fundamental and inexorable factors are at work, what does this mean for the way in which people plan their lives? If effective interventions are possible, how do they propose to implement them?

Instead, however, the debate has taken an entirely different direction. On one hand, the ruling coalition has claimed that between 2000 and 2002, 8.4 million jobs were created, which is a significant achievement, even though falling short of a more ambitious target.

The implication is that the stagnation in the preceding years has been arrested and a new growth trajectory has been initiated. There isn't very much, if any at all, detailing of where these jobs were created, in what sorts of activities, at what levels of wages and whether a significant number of them offer workers stability and upward mobility.

Presumably, voters would be interested in these things while making up their minds on the government's record. 

On the other, the Opposition has spent a lot of effort and airtime challenging the statistical validity of the claim. The challenge revolves around the comparability of the employment numbers for 2000, which were the basis of the gloom-and-doom, and those for 2002.

The former are based on a 'large sample' survey, covering about 140, 000 households. This is done roughly once every five years, the previous one having been carried out in 1994. In between, a much smaller, 'thin sample' survey of around 20,000 households is carried out, which provides continuous tracking.

In academic circles, people tend to avoid comparing large and thin samples, basing their conclusions on the five-year differences. This discretion, of course, is not for politicians.

As technically valid as the challenge may be, it sends a rather strange signal. The debate now centres around whether the claim of having generated 8.4 million jobs is legitimate or not.

One might have understood the government's unwillingness to go deeper into the underlying patterns, because they might reveal some uncomfortable realities. But, what explains the Opposition confining itself to statistical rejection?

Somehow, large sample versus thin sample comparability hardly seems to be the pivot of an aggressive campaign on an issue on which the ruling coalition clearly seems vulnerable.

Look a little deeper and there appears to be a logical explanation for this tactic. This rests on the unwavering consensus across all political formations that labour market reforms will inflict short-term political costs that will far outweigh any benefits.

Mr Yashwant Sinha, in his Budget speech of  February 2001, did offer the possibility of legislative action that would have made labour markets hugely more flexible.

His motivation was undoubtedly that the removal of certain job security-related constraints on employers would actually stimulate employment growth.

That entirely desirable and increasingly critical reform was resisted not only by opposition parties but by a variety of interests within the ruling coalition.

On no other issue, with the possible exceptions of the women's reservation Bill and the retirement benefits for one-term MPs, has there been such a cross-party consensus.

This fits directly into the context of the two questions that I had posed as being central to the whole issue of employment. There is, admittedly, a lot of fuzziness about the structural relationship between growth and employment.

The chances are that technological progression is inexorably weakening it, because virtually all new technologies are labour-saving. However, working against this tendency is the fact that market economies will always find innovative ways of making use of abundantly available resources, unless constrained from doing so by regulation.

However, on the issue of immediate intervention, there is far less fuzziness. All parties are rejecting two bodies of evidence that correlates accelerating employment growth with job market flexibility. One body comes from comparisons across countries.

Perhaps it is easy to dismiss this justification by claiming the unique conditions that prevail in India. Be that as it may. But, the second body of evidence comes from India itself.

Nobody will disagree with the fact that, whatever employment growth there has been is in the services sector, much of it informal, almost all of it unprotected by any job security regulation.

Look at this against the backdrop of the three facts about employment that were stated at the beginning -- slow growth, a stagnant organised sector and a huge overhang of labour in agriculture.

It is obvious that the economy has gone through a structural transformation in terms of the shift from agriculture to non-agriculture in terms of GDP, but has fallen far short of this in terms of its labour force.

The unwillingness of industry to absorb large numbers of workers is precisely why there are so many people still dependent on an agricultural sector that is continuously diminishing in its importance.

As long as the political consensus on preserving job security persists, no party has a workable solution to the unemployment problem. This is precisely why the debate has settled into a mock battle between superficial claims and arcane challenges.

The writer is Chief Economist, Crisil. The views expressed are personal.

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