The employment situation is very dismal in India. Often the minimum wage laws are blamed for this; it is argued that these laws reduce jobs. The proponents of the law, however, argue that there is a need to ensure a minimum standard of living for the workers. Do we have to choose one of the two views or is it possible to reconcile the two views?

The onus now is on the firms to pay a minimum wage. However, the role of paying a minimum “wage" or ensuring a minimum standard of living can be, as the Nobel laureate Milton Friedman and Lady Juliet Rhys Williams had argued, shifted from the employer to the public exchequer. This is not to absolve the business sector or the rich of their social responsibility. It is only to ensure that the labour market clears in the absence of a minimum wage law. The social responsibility of the affluent can take the form of more taxes to the exchequer, and the additional taxes can be used to finance the gap between the market clearing wage and the minimum “wage". Relatedly, the public authorities need to improve public administration so that the tax collection goes up.

All this is important but not sufficient.

Nearly half of the labour force is, as professor A.K. Ghose reports, self-employed in India. It is not plausible that all the self-employed people in India are entrepreneurs; if India had so many entrepreneurs (and a decent redistributive policy), it is unlikely that there would be persistent low standards of living on a large scale. An entrepreneur is associated with initiative, insight, vision, foresight, fresh thinking, conviction and stamina, and with specific concepts like creative destruction. In contrast, a self-employed person is anybody who is working for oneself instead of working for a wage or salary in an organization run by others, which is the case of wage employment.

In a developed country like the US, self-employment is much less; it is, as two economists Steven F. Hipple and Laurel A. Hammond report, 10.1% of the labour force. Unlike India, in a country such as the US, the two terms—self-employment and entrepreneurship—may be used somewhat interchangeably. Also, in the US, if a job is not available, then a person would be unemployed (or leave the labour force). In India, if a person does not have a job, he (and sometimes she) typically becomes self-employed.

To understand self-employment in India, we need to consider not just labour but capital as well. We have two stylized facts here. First, there is large self-employment. Second, non-financial savings are large. The two stylized facts are, as research by this author (with Prof. Manoj Pant and Prof. Prabal Ray Chowdhury) has shown, related.

Broadly speaking, there are two kinds of households. One set has hardly any savings or wealth while households in the other group have some assets. The first group has no choice but to take up whatever jobs are available, even if these are low-paying and casual in nature. The other group, though relatively better placed, has its own difficulties.

Consider a household with labour and some wealth in India. It is well known that it is usually hard to find a good job. However, it is less well realized that there is a somewhat similar story in the context of the deployment of the other resource namely, wealth. This is because the macro-financial system is not very well developed in India. The real returns on bank deposits are usually very low, if not negative—thanks to inflation and financial repression. The non-bank financial institutions and instruments can be risky, information-sensitive and inaccessible. The stock market is risky and difficult to understand for most people. Gold can be a store of value but it does not provide an income stream. Real estate can provide an income stream but the investments can be large and risky—thanks to black money.

In any case, there is another issue viz., utilization of the other resource, that is, labour if wealth or funds are invested in any of the ways considered above. What to do? Given the lack of suitable jobs and given the lack of suitable avenues for investment, people opt for self-employment and use their funds in owner-managed enterprises. This is, a fortiori, the case, given that it is relatively easier to evade taxes for the self-employed than in the case of true entrepreneurs who operate with the help of independent-minded professionals, possibly on a large scale, which makes tax evasion difficult.

Self-employment and owner-managed enterprises can take various forms. Owner-managed enterprises can include units run by hawkers, shopkeepers, merchants in wholesale trade, and distributors. There can be workshops, and small and medium enterprises; these can be in agricultural, manufacturing or service sector. So, the size and nature can vary considerably.

Self-employment is large in India also because government policies encourage owner-managed enterprises. This is clear from the policies related to small and medium enterprises; it is also clear from the de jure and de facto policies related to, say, street vendors in India.

Yet another reason for large self-employment in India is that we do not have appropriate training and education, a credible certification process, and a flexible and discerning way of recruitment. Many skilled and talented people are not well recognized. So, they migrate or they need to set up on their own here even if they are not entrepreneurs.

Self-employment is huge in India; it is the elephant in the room. It is time we paid more attention here. We have been missing the woods for the trees in our discussions on definitions, concepts, measurement, and theories related to wage employment.

Published with permission from Ideas For India, an economics and policy portal.

Gurbachan Singh is visiting faculty at the Indian Statistical Institute (Delhi Centre) and Ashoka University. Comments are welcome at views@livemint.com

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