The costs of failing on the job creation front
Former Chinese president Hu Jintao had famously confided to his US counterpart George W. Bush that the one issue that kept him awake at night was creating enough new jobs to maintain social stability. It is a concern that has—or at least should have—resonated with Indian leaders as well. The Chinese government has for long considered creating 10 million jobs a year a prime goal of economic policy, as people moved from farms to modern enterprises. This has for long been the standard playbook for countries escaping mass poverty.
Bharatiya Janata Party president Amit Shah struck a different note in a recent speech. He said that it would be impossible to provide jobs to everybody in a country of 1.25 billion people. He added that the Narendra Modi government would try to bridge the gap in job creation by promoting self-employment. However, the recent three-year action plan released by NITI Aayog does well to reiterate the importance of creating high-quality jobs in industry and services.
The new population forecasts put out by the UN underline the scale of the task before the Indian government. By the end of this decade, India will have around 800 million people between 20 and 65 years of age—or what can be loosely considered to be the potential labour force. The actual labour force will be smaller, especially given the fact that far too many Indian women are trapped at home, even in comparison to their peers in other developing countries. Less than a third of Indian women are part of the labour force. Indonesia, for example, has more than half its female population working outside the kitchen.
The potential Indian labour force will continue to rise in the coming decades. The median forecast put out by UN demographers suggests that there will be slightly more than a billion people in the working-age cohort by 2050. In other words, India will add 200 million new members to its potential workforce over the next three decades. That will be the peak. The number will then start declining to current levels by the end of the century.
These numbers once again highlight a fact that is widely accepted now. India has a great demographic opportunity because it will have a growing population in an ageing world. It also risks social turmoil in case there are not enough jobs for the growing labour force.
How has India been doing till now? The fact that the Indian labour market is predominantly unorganized means that all data has to be dealt with carefully. On the one hand, we have survey data that is muddied by the entry of women into the labour force to supplement family incomes in times of distress and their subsequent exit once the economic situation reverts to normal. The survey data often leads to mistaken conclusions about jobless growth—a possibility that is incompatible with rising wages in recent years.
On the other hand, a recent study by the McKinsey Global Institute—helmed by Rakesh Mohan and Anu Madgavkar—presents a more positive story of structural transformation. The number of people in agriculture fell by 26 million in the four years to 2015. However, this was more than compensated for by the 33 million new jobs created in non-farm sectors. There are two significant takeaways from their research. One, the fact that what matters in the process of development is not just the quantity of jobs created but also their quality. Two, most of the quality jobs created between 2011 and 2015 are in service industries such as trade and hospitality, construction, transport, and education and health. This means that factory job creation continues to be weak (it is important to remember that the rural housing boom was an important contributor to job creation in the first decade of this century).
India needs to push ahead with job creation even in the face of known unknowns such as the impact of robotics on the labour market. The alternative that Shah mentioned in his speech last month—self-employment—is as yet untested. The latest economic census shows that the median economic unit in India is too small to either boost productivity or hire more people.
The failure to absorb the growing working-age population as well as the millions leaving farming has important consequences for social stability. The inability to manage the jobs challenge will in effect mean that governments will be forced to use fiscal tools to buy social peace—be it consumption subsidies or unemployment dole or loan waivers. That could be the most profound political economy paradox in the coming decades.
Does the Narendra Modi government have a strategy to deal with the jobs challenge in India? Tell us at email@example.com