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The threat of jobless growth hovered over India through most of the 1990s and the early years of this decade. It is now receding fast—but perhaps not fast enough.

That hiring is strong is also indicated by strong wage growth in recent quarters, not just in high-profile industries such as software and banking, but also in low-quality service jobs such as drivers and maids. There are also signs that rural wages are rising.

The macro data bears this out. Employment grew at 1.6% a year between 1994 and 2000. Job creation has increased since then, growing at 2.5% a year from 2000 to 2005. In absolute terms, India added 11.3 million new jobs a year in the first five years of this decade. This compares well with China’s seven million new jobs or Russia’s 0.7 million new jobs.

Looks impressive. But a closer look at the numbers shows that India still has many miles to go before it can meaningfully start pulling people out of low productivity farm jobs and into the industrial and service economies— or from the stagnant to the dynamic parts of the economy.

First, the 2.5% growth in employment in recent years has to be compared with the slightly higher rate of growth in the labour force. In other words, the number of people coming into the national job market is slightly more than the jobs being created to absorb them. Second, there is clear evidence of a widening gender divide, as the unemployment rates of urban and rural women have climbed despite strong overall employment growth.

However, there is little doubt that the pick-up in job creation is good news. The question is: Why has this happened?

The most obvious reason is that growth has picked up as well. The Indian economy is now growing at 9% a year, rather than 6%. So there is nothing extraordinary about the fact that employment growth, too, has increased in the same proportion. In more technical terms, there is no evidence, as yet that the employment elasticity of growth has increased.

The longer-term challenge is to push the rate of new job creation far higher than the rate of growth in the labour supply. That alone will generate enough opportunities to pull people out of the farm; and they can then find themselves in better-paid but low-skill employment.

These millions of new jobs are not likely to be created in large-scale manufacturing industry, where mechanization and higher labour productivity are the magic mantras. This is not something that the Indian policy establishment readily accepts; it is still trapped in the 1950s-style thinking.

We should pay attention to the fact that China creates fewer jobs for every unit of GDP growth than India does, despite (or perhaps because of) its industry-led growth model. High-end services, too, are insignificant in the larger scheme of things, especially since most Indians have few skills to get jobs in areas such as software or banking.

The best bet is jobs in certain employment-intensive sectors such as construction, organized retailing and agro-services. It is unfortunate that these sectors are still bound with all sorts of outdated or unnecessary regulations.

The best way to ensure that growth is truly inclusive is to help create new employment opportunities that will allow millions of Indians to escape their current low-wage and low-productivity traps. Dramatic reforms in real estate, retail and agriculture are needed for the good of the aam aadmi.

How should employment growth be increased further? Write to us at views@livemint.com

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