Are job subsidies needed?

Are job subsidies needed?
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First Published: Tue, Feb 05 2008. 11 50 PM IST
Updated: Tue, Feb 05 2008. 11 50 PM IST
These labour laws protect a few hundred thousand workers at the expense of the millions who are trying to get jobs.” That was what a Nepalese Maoist recently told Shanta Devarajan, chief economist for the South Asia region at the World Bank.
This exchange is part of a post on Devarajan’s blog. It is about a meeting between Devarajan and Nepalese Maoist leader Baburam Bhattarai. They seemed to agree on a lot of things, especially that inequality in South Asia was worsening because of the slow growth in agriculture and the lack of employment growth, above all in sectors that can churn out manufactured exports. It was a strange meeting of minds—one an economist trained in the neoclassical tradition and the other a Marxist from Jawaharlal Nehru University. (The quote with which this article starts is not from Bhattarai, but a colleague of his.)
The theoretical case for growth through labour-intensive exports is pretty clear. Trade allows a country to do what it is good at. A country such as India, which is abundant in labour and short of capital, will ideally use its resource endowment to specialize in products that use more labour. Scarce capital is thus saved. The rapid growth of South Korea, Thailand, China and many other Asian countries provides ample empirical?backing to this theory.
But investment in labour-intensive industries such as toys or textiles can be limited because of laws that make it difficult for companies to lay off workers. So, companies will replace men with machines. We have seen that in India. That’s what the Nepalese Maoist was alluding to, when he said current labour laws protect the few lucky to get regular employment, but harm those who want such jobs.
But the point is a larger one—about inclusive growth. The International Monetary Fund, in its new staff report on India released this week, says income and consumption inequality has increased in India since the early 1980s. “Inclusive growth will…be essential to build political consensus for growth-oriented reforms, given growing perceptions of rising inequality and the lack of a well-functioning social safety net.”
Inclusive growth is often equated with subsidies or fancy schemes such as the national rural jobs guarantee scheme or higher spending on health and education. And we may well see this same misconception being repeated in the new Union Budget that will be unveiled at the end of this month.
Actually, the most effective way to ensure that more Indians share the benefits of high growth is to shift them from low-productivity to high-productivity activities. The only way this can happen in a sustained manner is to create jobs in employment-intensive sectors such as textiles, retailing, construction, etc. In other words, move people from farms to assembly lines, checkout counters and construction sites.
The debate on inclusive growth should actually be a debate about job creation. In a lecture he gave in New Delhi this month, economist Edmund Phelps said jobs for the poor would lead to more distributive justice. “High wages enable workers to solve various problems, participate in the economy and live with dignity,” the Financial Express quoted the 2006 Nobel laureate and professor of political economy at Columbia University as saying.
Phelps then repeated a suggestion that he had made on several earlier occasions: The government should offer tax breaks to companies that created low-skill jobs. This idea has usually been discussed with reference to Europe, where unemployment among the young is fairly high. Phelps does not agree with the consensus view that a more flexible labour market will increase employment. “The limitation of this approach, however, is that a free market for labour will neither eradicate unemployment nor transform marginal, low-end workers into high-productivity, high-wage employees,” he has argued in a newspaper oped.
Instead, said Phelps: “The best remedy is a subsidy for low-wage employment, paid to employers for every full-time low-wage worker they hire and calibrated to the employee’s wage cost to the firm. The higher the wage cost, the lower the subsidy, until it has tapered off to zero. With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid out as direct or indirect labour compensation. People could benefit from the subsidy only by engaging in productive work—that is, a job that employers deem worth paying something for.”
I’m not sure employment subsidies would work in a country like India, given the corruption in our society and misuse of such schemes.
But Phelps’ larger point is worth embracing—true inclusion comes from employment with decent wages.
(Your comments are welcome at cafeeconomics@livemint.com)
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First Published: Tue, Feb 05 2008. 11 50 PM IST