Opinion | Our unemployment crisis demands structural solutions

With the Great Lockdown extended for two more weeks, albeit with some relaxations, the economic costs of India’s fight against covid-19 can be seen in rising joblessness. By the Centre for Monitoring Indian Economy’s (CMIE’s) latest estimates, unemployment rate has shot up to 27.1%, the highest ever on record.

By CMIE’s Consumer Pyramids Household Survey, employment fell by 114 million in April. In March, it had dropped to 396 million. Even large, well-endowed firms have reported large employment losses. The picture is grimmer in the micro, small and medium enterprise (MSME) sector, where 70% of 40,000 firms are estimated to have no reserves and must use cash inflows to pay employees. The informal sector is worse off.

Apart from the seriousness of this challenge, a structural issue that affects India’s workforce is the contractualization of work. This is an “endo” (“end of contract”) arrangement by which workers are employed across sectors on short-term ad hoc contracts that deprive them of social security benefits, wage hikes and tenure security. Unlike their regular—more permanent—counterparts, contractual workers are signed on almost a 5-5-5 arrangement: i.e. in three cycles of five-month contracts, subject to renewal every five months. A case in point is the contractualization of teachers in higher education. The University of Delhi alone has an estimated 4,500 ad hoc instructors.

This culture of ad-hocism has also seen the emergence of a “no-work, no-pay” attitude. A company that makes greater use of such contracts often has a higher turnover rate of personnel, creating a disruptive operational environment, resulting in higher costs of training and errors. From a contractual employee’s perspective, higher anxiety levels and psychological burdens imposed by the need to either retain an existing contract or look for a new job often mean a diminished ability to contribute with high productivity and commitment.

But how did contractualization become so rampant across sectors and economies?

One reason, as discussed by noted labour economist Suresh Naidu in his work on labour markets in the US, is the decline in private (and public) sector worker union density. For example, in the US, as Naidu states, private sector union density has fallen below 7%. New research evidence also suggests that high union density has played a vital role in ensuring a fairer employment relationship between employers and prospective employees, while compressing the income distributional inequities and lowering intergenerational income persistence. Simply put, de-unionization catalysed a rapid neo-liberal contractualization of the workforce, allowing firms to maximize profitability through cuts and savings on labour costs, inadvertently affecting the employment landscape—making it far more exploitative of the average worker.

Why do unions matter? As Naidu, and also labour economist Arindrajit Dube argue, the presence of unions makes a lot of sense in a labour market with a monopsony (single dominant employer) and/or in a market for goods and services with an oligopolistic structure (with very few sellers). A monopsony generally implies that unions can obtain wage raises within limits without necessarily costing jobs; and replace the individual labour-supply curve facing the firm with a much more equitable bargain between employers and employees.

More broadly, a monopsony also means that labour market interventions become the site of economic redistribution, in addition to (or instead of) taxation, and so politically organized workers become an important constituency for redistribution via the labour market. Besides a power over wages, the default rule in an employment relationship is that employers have the right to command workers on shop floors. This, according to Naidu and Dube, results in plenty of inefficiently allocated control rights, as there are many workplace decisions where workers have superior information on their cost of doing things.

A union-driven contract can, therefore, reallocate these decision rights toward an efficient division that reduces labour conflict. Union-based contracts raise efficiency.

India’s unemployment challenge calls for a more introspective, structural discussion. For once, the “invisible” plight of our jobless millions has become “visible” because of data in the news. This crisis presents an opportunity to look at how our deeply fragmented labour market can be reformed to everyone’s benefit.

A progressive approach would require the adoption of policy measures such as offering more socially-protected worker contracts (say, safeguarding health, unemployment insurances as benefits); implementing premium wage-rates (say, double for contractual hires as against others); extending the probation period to more than a year (to do away from the 5-5-5 uncertainty of short-term contracts); ensuring greater legal representation to workers and awareness of their concerns; and incentivizing the formation of unions for minority workers across social categories of gender, class, race, etc.

In general, we need to secure a better future for workers. Private sector union density must increase in medium and large organizations, and this would help make the design of contracts more protective and fair. We should aim to safeguard worker interests while enhancing the long-term value of the employee-employer partnership for firms to accrue productivity gains.

Deepanshu Mohan is associate professor of economics at OP Jindal Global University