Labour market’s changing times

Labour market’s changing times

India’s labour market is in for a vigorous shake up over the next few years. The inexorable march of market forces, and their interplay with the structural and political dynamics of the country, could end up drawing many unemployed persons into the job market.

India is still far from creating mass jobs in large-scale manufacturing. But over the medium term, absorbing such unutilized human capital will help preserve the economy’s competitiveness in an environment of rapid growth. Institutions will also change, as a result. This transformed institutional setting, connecting and integrating fragmented labour pools, could also potentially trigger a virtuous cycle of employment growth.

Consider the following developments.

The first is the emergence of public-private partnerships in job search, placement and training through employment exchanges— which were defunct until now. The successful revival of the Mangalore exchange in late 2009 through a state government-private firm tie-up has encouraged its replication across other districts in Karnataka. The private staffing services firm, TeamLease, brought technology and expertise that expanded the exchange’s scope to include training, skill development, counselling, and so on; it also increased outreach through active advertising. Monthly new registrations have doubled since, and 25% of enrolled workers were placed over eight months. Compare this with a less than 1% placement overall in exchanges across India.

Nothing succeeds like success: With a demonstrated capability of this magnitude, TeamLease is reported to have approached other states that are likely to adopt the same model. The whiff of future profits has attracted more private players; for example, another staffing firm, Manpower Inc., has been reported to pitch for similar ventures with the Union and Haryana state governments. Empirical studies elsewhere show that public employment services are successful in getting the unemployed to work; heterogeneity matters, so the channels through which these services work must be tailored to specific problems.

A sense of the magnitude can be had from the statistics. According to TeamLease Services’ India Labour Report 2009, around 40 million workers are registered at 968 exchanges across the country. Revitalizing these exchanges could result in drawing at least 10% of the labour force—around 420-470 million, according to the 61st round of the National Sample Survey, 2004-05—into the fold over the next two-three years. This does not factor in potential new registrations. Moreover, around 100 million, or 25%, of the workers were educated up to the secondary level, and many of them can be successfully trained and deployed through this mechanism; more than half of enrolled aspirants at exchanges, for instance, are not classified under any occupational group. This can help alleviate labour shortages, wage costs and attrition rates in the medium term.

A second force—structural—can further alter the labour market: Aadhaar, the project that seeks to confer a unique biometric identity to every citizen. Nearly 86% of the country’s workforce is engaged in the informal sector, and close to two-thirds of the contract labour in manufacturing is hired informally. In the absence of identity proofs, such hiring relies heavily upon hearsay, family connections, and community and personal contacts. On the supply side, too, lack of identity proof is a huge drawback for casual workers, who make up 33% and 15%, respectively, of the rural and urban workforce. Such a situation increases risk of exploitation, especially when workers migrate, and hence disincentivizes migration. An identity card is, therefore, a much-needed passport for a job in the informal sector, and the unique identity database can help unite fragmented, heterogeneous labour pools scattered across the country.

Making identification of workers easier will also organize employment services, and have a positive impact on wages and jobs. Besides, it will help bridge the geographical disparity in labour demand and supply between states. Since nearly 40% of the demographic dividend that India will reap until 2050 will come from labour-surplus states such as Uttar Pradesh, Bihar and Madhya Pradesh, Aadhaar could catalyse rural migration and reduce the labour surplus in agriculture.

The momentum so created will also interact with the political dynamics of “inclusive growth". The most important dimension of this inclusivity—employment—has begun to take shape with the Annual Report to the People on Employment issued in July by the government. The political willingness to report progress on job creation indicates the potential of translating this into an electoral payoff in future. That political will can significantly influence aggregate outcomes; a simple illustration is the steady rise in public investment and credit to the agriculture sector since 2004 and the rebalancing of the terms of trade in favour of agriculture through successive increases in support prices. Thus, if political preferences shift to job creation/provision, then increased investment in skills and training, and even broader consensus on easing restrictive labour legislation, could be expected to follow.

It is difficult to sum up the effects of these changes and predict magnitudes. Aggregate labour market outcomes depend on the actions of innumerable individual workers and firms, as well as their mutual interactions; how these exchanges evolve and how information is generated and diffused across heterogeneous segments play a large role in determining the outcome. The job of the policymaker, then, is to address the underlying fundamentals—investing in the quantity and quality of human capital, and raising the level of initial conditions.

Renu Kohli is an economist and a former staff member at the International Monetary Fund and the Reserve Bank of India

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