Opinion
Enterprise and employment: We need dynamic firms to generate jobs
Summary
- India’s shift from lower middle-income to upper-middle income status would require a major shift in the economy’s employment structure. To absorb a fast-growing labour force, government support should focus on business dynamism and not just firm size.
In a variant of a story that has played out across many locations in recent years, Mumbai last week saw 110,000 women camp outside the Mumbai University sports ground, adjacent to the iconic Wankhede Stadium. They had come to India’s financial capital in the hope of getting one of the 1,257 posts for women police constables in the city.
One common explanation for the rush to bag a government job is the wage premium on offer. A police constable starts her job earning ₹30,000 a month, which is far higher than what new employees get on average in cities.
The prospect of stable employment is an added incentive. Yet, such a scramble for government employment is also a symptom of the lack of quality jobs in an economy that has otherwise had a good run since the pandemic.
A few weeks earlier, nearly 2,000 young aspirants landed outside a hotel in the Gujarat town of Bharuch in the hope of getting one of the 10 jobs on offer. No wage premium was reported here.
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The jobs issue has gained political resonance, with state governments promising to increase the number of people they hire and the Central government now providing wage subsidies to companies that take on new employees.
A lot of economic research shows that insipid job creation in an economy has a lot to do with business dynamism—and the policies that either support or hinder it.
The new World Development Report, an annual research publication from the World Bank, has as its focus the middle-income trap, or why most countries stumble after robust economic growth takes them to what the multilateral lender defines as upper middle-income status.
Only a few, such as South Korea which has an average income of $30,000 for every citizen, have continued along their high-growth paths to become rich countries. Leaping across the chasm will be a challenge for China right now and for India a decade later.
In a background paper written for the World Development Report, Charles Gottlieb, Markus Poschke, and Michael Tueting provide informative data on the structure of employment by firm size across various country income groups.
The structural transformation between lower-middle income countries and upper-middle income countries is especially important for Indian readers, since India is expected to become an upper middle-income country by the early years of the next decade.
The share of workers in medium-sized firms (10-50 employees) does not change much. However, there is a dramatic fall in the share of workers in small firms (less than ten 10 employees) and a matching increase in the share of workers in large firms (more than 50 employees).
It is no secret that India right now has an employment structure that is heavily skewed towards tiny enterprises that find it difficult to grow. Many of these businesses have been set up as acts of distress entrepreneurship because of the lack of adequately paying jobs. India needs dynamic firms to absorb its growing labour force.
The new World Bank report shows that what matters is not just firm size, but also the ability to grow. This in turn means that governments seeking to incentivize job creation should screen firms by some metric of value addition rather than just size.
The example of the US is instructive. In that country, the average firm grows by a factor of seven in case it survives for 40 years. Firms in developing countries grow by a factor of less than three in the same time-frame; the average Indian tiny enterprise barely grows at all.
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The typical Indian startup—think of a local workshop backed by meagre family savings rather than the wannabe unicorn lavishly funded by venture capital—is stagnant over its extended life-cycle.
The issue is not just the failure of governments to let inefficient firms exit, but also the tricky issue of why these tiny enterprises are started in the first place—as a last resort against personal unemployment, out of necessity rather than business opportunity.
There are two important lessons here for policymakers. First, it is young firms rather than small enterprises that drive job creation in an economy. Manish Sabharwal of Teamlease Services has a neat analogy from the human world.
There are firms that are infants who will grow with proper nutrition, and then there are firms that are dwarfs whose stature is limited. Second, government support should be focused on firm dynamism rather than just size. Dynamic firms create jobs, and many of them just happen to be small.
The implicit message of the chart on this page is as follows. A country can move from low-income to lower middle-income status with minimal changes in its employment structure. People can climb the income ladder by being slightly more productive in their existing jobs.
The shift from lower middle-income to upper-middle income status involves a major shift in the employment structure, or the reallocation of labour on a large scale. The best vehicle for this is young and dynamic firms that are keen to take on more workers.
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Firm dynamism is an underrated issue in the ongoing discussion on how the Indian economy can provide jobs for a growing workforce that aspires to move ahead in life.
