Date : 26/12/2023

Relevance: GS Paper 3 – Indian Economy

Keywords: – Kaldor-Verdoorn coefficient, Macroeconomic Policy Framework, Job Crisis, Keynesian principles

Context-

India is grappling with a persistent jobs crisis, as evidenced by both official data and on-the-ground reports. The labor market in India encompasses two primary forms of employment: wage employment, driven by employer demand for profit, and self-employment, where labor supply and demand are synonymous. The focus of concern here is on wage employment, particularly in the formal sector, which encompasses relatively better-paid regular wage or salaried positions.

The Symptoms of Low Labor Demand:

Historically, India has faced both open unemployment and high levels of informal employment, often referred to as "disguised unemployment." The lack of opportunities in the formal sector is reflected in stagnant employment growth rates for salaried workers in the non-agricultural sector over the past four decades.

Macroeconomic Determinants of Labor Demand:

The demand for labor in the formal non-agricultural sector is influenced by two key factors.

• First, it depends on the output that firms can sell, tied to economic growth.
• Second, it is affected by technological advancements that determine the number of workers needed to produce a unit of output.

While policies often focus on output growth, the relationship between labor productivity growth and output growth is crucial.

The employment growth rate is influenced by the relative strength of two factors: the output growth rate and the labor productivity growth rate. In India, despite a rise in GDP growth rate during the 2000s, the employment growth rate in the formal non-agricultural sector remained unresponsive. This phenomenon is termed as "jobless growth," where higher economic growth does not necessarily translate into higher employment growth.

Jobless Growth with Indian Characteristics:

As economies grow, they typically become more productive due to economies of scale. However, the extent to which labor-saving technologies are adopted depends on the bargaining power of labor. In India, the high responsiveness of labor productivity growth rate to output growth rate results in a unique form of jobless growth. The Kaldor-Verdoorn coefficient, indicating the extent of this responsiveness, is higher in India compared to other developing countries.

The distinct jobless growth regime in India makes the macroeconomic policy challenge qualitatively different. It's not merely about pursuing higher GDP growth but addressing the specific dynamics that hinder the positive correlation between output growth and employment growth.

Macroeconomic Policy Framework:

Traditional macroeconomic frameworks, rooted in Keynesian principles, emphasize the role of aggregate demand in driving employment. In developing countries like India, additional constraints such as capital goods availability have been considered. The prevailing assumption has been that increasing the output growth rate in the non-agricultural sector would suffice to boost employment growth.

However, the evidence suggests otherwise. India's employment challenge requires a dedicated policy focus on employment, distinct from the focus on GDP growth. Policies need to address both demand-side and supply-side components. Improving the quality of the workforce through enhanced education and healthcare, bridging skill gaps, and direct public job creation are essential.

Policy Recommendations:

Enhancing Workforce Skills:

• Invest in public education and healthcare to improve the quality of the workforce.
• Bridge the skills gap through targeted training programs and partnerships with industries.

Demand-Side Measures:

• Implement direct public job creation initiatives to stimulate demand for labor.
• Promote labor-intensive sectors to absorb more workers, aligning economic growth with job creation.

Macroeconomic Reorientation:

• Reevaluate the macroeconomic framework to include employment as a central focus alongside GDP growth.
• Consider a more imaginative use of macro-policy to pursue a constructive employment agenda.

Fiscal Policy Adjustments:

• Increase the direct tax to GDP ratio by reducing exemptions and improving compliance.
• Explore innovative financing mechanisms to support employment-focused initiatives without compromising debt stability.

Challenges in Addressing the Crisis:

Fiscal Discipline vs. Public Spending:

• Balancing the imperative for fiscal discipline with the need for increased public spending poses a challenge.
• Finding innovative financing mechanisms becomes crucial to avoid compromising debt stability.

Short-Term Job Creation vs. Long-Term Skill Development:

• Balancing immediate job creation measures with long-term skill development is essential for sustained growth.
• Crafting policies that address both aspects without sacrificing one for the other is a complex challenge.

Inclusivity in the Labor Market:

• Ensuring that job creation benefits marginalized communities is pivotal for inclusive growth.
• Tailoring policies to address the unique challenges faced by various demographic groups enhances overall economic inclusivity.

Opportunities for Transformation:

Holistic Economic Growth:

• Embracing a holistic approach to economic growth that considers employment alongside GDP expansion.
• Recognizing that a thriving job market contributes significantly to sustainable and inclusive development.

Innovation in Financing:

• Exploring innovative financing mechanisms allows for increased public spending without compromising fiscal discipline.
• Leveraging technology and international partnerships for funding can open up new avenues for economic support.

Digital Transformation for Skill Development:

• Harnessing digital technologies for skill development can enhance the employability of the workforce.
• Collaborating with technology providers and educational institutions can create scalable and effective solutions.

Conclusion

India's jobs crisis demands a nuanced and comprehensive approach. By understanding the intricacies of the labor market and tailoring policies to address unique challenges, India can embark on a path toward inclusive and sustainable employment growth. Balancing fiscal discipline with increased public spending, prioritizing both short-term job creation and long-term skill development, and ensuring inclusivity in the labor market are critical steps toward transformative change. Ultimately, by embracing innovative solutions and reimagining the macroeconomic policy framework, India can navigate the challenges and harness the opportunities to create a more resilient and thriving job market.

Source- The Hindu