A remarkable feature of the current growth slowdown in India is that it has not made getting labourers any easier for employers. Reports of labour shortages keep pouring in from across the country even today.
The scarcity of unskilled labour in an economy classified as “labour surplus” is a great paradox, and especially so, when growth in aggregate demand has slowed. Indeed, the rapid rise of real wages among both farm and non-farm labour over the past few years indicates scarcity rather than surplus.
The easy and lazy explanation for this is the Union government’s Mahatma Gandhi National Rural Employment Guarantee Scheme. But with an annual allocation below 1% of the gross domestic product, and job creation amounting to roughly 2% of rural jobs, the impact of this scheme is limited.
A structural transformation holds the key to India’s labour market paradox. The transformation is being driven by three key factors.
First, rising educational attainments and aspirations have led many young men and women to schools and colleges rather than to work. This has played a significant role in shrinking the current labour force.
Second, as a recent Ambit Capital report observed, traditional labour supplier states such as Madhya Pradesh and Bihar have registered higher-than-average growth rates in the past few years, incentivizing many young labourers to stay back. The growth has been particularly rapid in labour intensive sectors such as construction. Literacy growth is also faster in these states.
Finally, the growth of “census towns” in the past decade and the improved pace of rural road construction in the past few years has changed the patterns of migration, and the bargaining power of those at the bottom of the pyramid. The work options have multiplied, and are now available within a daily commute.
Even in the farm sector, better productivity growth, a supportive global commodity cycle and higher procurement prices have raised incomes, enabling landowners to share gains with labourers, who are scarcer in number. This has raised the economy-wide reservation wage.
These changes mirror a once-in-a-lifetime transition of an economy, with the labour force moving away from low-productivity jobs, a process first described by the Nobel Prize-winning economist Arthur Lewis.
In general, such a shift is welcome and greatly anticipated but India’s case deserves a few words of caution. Although the wheels of change will run for a while, the lack of enough quality jobs for an educated workforce can thwart a complete “Lewisian” transformation, and turn aspirations into frustrations very quickly. Also, in the medium term, rising wages can skew inflation heavily.
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