BackWhere will jobs in industry come from?
Policy recommendations based on favouring one industry over anotherlabour-intensive over capital-intensive or SMEs over large enterpriseswill not create the jobs the country needs
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There is near unanimity about the importance of the manufacturing sector in creating jobs for India’s rapidly increasing workforce. What is not so clear is where these jobs will come from. In a labour-abundant economy such as India, one would typically expect labour-intensive industries to flourish and drive employment growth. However, this has not been the case. Data from the Annual Survey of Industries (ASI) indicates it is the capital- and skill-intensive industries that have grown fast in the last decade (2000-11) while the growth of labour-intensive industries has been relatively sluggish. This fact combined with the declining labour intensity of production and increasing automation of production processes, in both labour- and capital-intensive industries, has raised doubts about the ability of the manufacturing sector to create jobs.
While these trends have been largely attributed to India’s inflexible labour market regime, it is worth noting that labour laws have not become more rigid over the last decade. With unstoppable changes in technology, the increasing capital intensity of production is inevitable and firms cannot resist from adopting new technology only to preserve jobs. Therefore, the conventional wisdom to focus on labour-intensive industries to create more jobs needs to be re-examined. Over the last decade, the two industries which saw the fastest growth of employment were makers of apparel and motor vehicles. Of these, the latter is conventionally classified as capital-intensive, suggesting that the obsession with labour-intensive industries for employment creation may be misplaced. Instead, it is important to see how technological progress will reshape the nature of jobs and how investment in education can provide workers with skills complementing technological innovations.
Another critical aspect of the debate on job creation is whether it is small and medium enterprises (SMEs) or large enterprises that generate more employment. Historically, India has supported its small sector as it has believed that these enterprises would use labour-intensive methods of production, thereby generating faster employment. The policy of reserving production of some goods to smaller enterprises was the cornerstone of India’s manufacturing policy for about sixty years. Between 1997 and 2007, 600 out of more than a 1,000 items were de-reserved, as it was argued that small firms making reserved products resisted from growing or upgrading their technology as they would have to stop making those products if their investments grew beyond the permissible limits for small firms.
Despite large scale de-reservation, there has been no significant change in the size distribution of firms, with smaller firms occupying a disproportionately large share of total firms. Using ASI data, we find that approximately 75% of the total firms in the organized manufacturing sector hired less than 50 workers (small firms). In contrast, the share of large firms (those hiring more than 100 workers) did not exceed 15%. From an employment generation perspective, too, we find that the share of small enterprises in total manufacturing employment has been significantly smaller than that of large enterprises in the last decade. What is more, the share of small enterprises in total employment has fallen over this period while that of large firms has risen. We also find that the employment growth in small firms is smaller than that in large firms. Importantly, changes in employment tend to hide a considerable amount of job creation and destruction. Though conventional wisdom says most job creation comes from small enterprises, recent literature has shown that job destruction is equally important in their case as churn is the norm among small units. Thus, the general claim that SMEs are the main creators of jobs in net terms is questionable.
It has been argued in the recent literature that what is more important than size of the firm is the age of the firm and that younger firms exhibit higher rates of net job creation. For US data, Haltiwanger, Jarmin and Miranda (Who Creates Jobs? Small vs. Large vs. Young, 2010), find that smaller firms are associated with higher employment growth primarily because of their youth, and once they control for age, the higher employment growth of smaller enterprises disappears. In the case of India , Harrison, Leslie & Nataraj (In with the Big, Out with the Small: Removing Small-Scale Reservations in India, 2014) find that young establishments grow quicker than old establishments, large establishments grow quicker than small establishments and that employment growth has been highest for younger and larger enterprises. This suggests that policy targeting smaller enterprises is unlikely to lead to greater employment growth, but that encouraging new young entrants could accelerate job creation.
As such, policy recommendations based on favouring one industry over another—labour-intensive over capital-intensive or SMEs over large enterprises—will not create the jobs the country needs. What is more important is to provide an enabling environment for businesses to grow through improved infrastructure, skill development, reduction in costs of doing business, in particular the barriers to entrepreneurship, and easy access to finance. Such measures will not only encourage the entry of young firms but also allow all enterprises, irrespective of size, to flourish and generate the jobs India needs.
Radhicka Kapoor is an economist at the Indian Council for Research on International Economic Relations (ICRIER).
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