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Home >Opinion >Columns >State job quotas are a symptom of a bigger unemployment crisis

It is ironic that, in the context of a strong, centralizing Union government, with the ruling dispensation either in power or in contention for it almost all across India, economic policy parochialism at the level of states seems to be on the rise. Recently, Haryana legislated a regulation that requires private employers to reserve 75% of new jobs that pay 50,000 or less per month for candidates with a long record of residence in the state, or were born there. A similar measure is in the works in Jharkhand, and such proposals are being bandied about in the lead-up to assembly elections in Tamil Nadu. Other states are sure to jump on the bandwagon soon.

While the constitutionality of such laws in a federal nation that’s a union of states, guaranteeing freedom of movement to its citizens, is doubtful, they will create additional uncertainty for business, and act as an added deterrent to new domestic and foreign investment. As a matter of basic economics, it is a trite observation that limiting workers’ freedom of movement among states, by restricting employers’ freedom to hire out-of-state workers, will impose an economic cost. In the jargon of economics, such rules will prevent the efficient allocation of labour across states, harming workers, employers and perhaps even consumers (if the rules lead to an increased cost of doing business that firms pass on to their customers).

It is also a truism that a big underlying problem in India is a staggering lack of good jobs. With approximately a million new people entering the workforce every month, there are simply not enough well paying and productive jobs to which these would-be workers could be matched. The result is mass unemployment, either overt or in the form of under-employment disguised as employment. Both these lead to large pools of idle young people (mostly men), and are well established causes of social conflict and even criminality, as amply documented in the scholarly literature on what’s casually called ‘time pass’.

It must also be noted that India’s economic development paradigm since liberalization in 1991 has not been of the labour-intensive, job-creating variety, in contrast to almost all other development miracles, most notably in East Asia and China. Rather, for a complex set of reasons, including cumbersome and costly labour regulations that retarded formal job creation and discouraged the selection of labour-intensive production techniques, India’s growth has been driven by its comparative advantage in areas such as information technology and high-end manufacturing, sectors that do not create nearly enough new jobs, given India’s youthful demographic profile and its fast-growing workforce.

Evidently, in the midst of such a jobs crisis, state-level leaders will do what is politically expedient for themselves, which is to try securing a larger share of a small number of new jobs for their own residents; it is, after all, these individuals who are part of the relevant voting pool, not out-of-state workers who are registered to vote in their home states. The political economy literature also teaches us that, when a few sub-national jurisdictions pursue such policies, others will follow. This is what is known as a ‘race to the bottom’. So, we should fully expect more of the same in the coming months.

However, a satisfactory analysis of these new job reservation laws must go beyond such observations, and contend with the reality that state-level leaders have relatively few levers with which to attract inward investment that could lead to the creation of plentiful new jobs. Rather, in the context of the goods and services tax (GST) introduced in 2017, Indian states have been deprived of the usual fiscal tools that may be deployed to attract new investment and foster new business creation. The fall-back has been upon other measures that could improve the ‘ease of doing business’, but these are not an overnight fix, and they, too, require considerable fiscal space, such as to improve the quality of infrastructure or provide vocational or other forms of training to potential new workers.

It would be salutary for the Centre to take note of these new fissiparous tendencies in the Union, which, allied with other potentially divisive forces, hold the possibility of considerable social disharmony and worsening inter-state friction. In a world in which the pie is stagnant or shrinking, there will be a grab by each state for a larger slice for itself. By definition, this is a zero-sum situation, in which one may gain only at the expense of someone else. It is only in a world in which the very pie itself is growing that everyone’s slice will grow, creating a positive-sum situation in which it is advantageous for all to cooperate in ensuring the collective and individual good.

It is worth recalling, as Harvard economics professor Benjamin Friedman taught us, that periods in history that have seen the greatest social disharmony and internecine conflict are those that were characterized by economic stagnation. Economic growth, by contrast, tends to foster great social harmony, especially when the fruits of it are shared relatively equitably.

While India’s projections for next year look optimistic, the country has yet to regain its economic mojo after several years of stagnating growth, worsened last year by the blow of covid and the resultant lockdown. In this context, it is imperative for the Union government to focus closely on the parlous economic situation.

Vivek Dehejia is a Mint columnist

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