First Appeared in The Economic Times on January 24, 2012
By: Kalpana Kochhar, Chief Economist, South Asia, World Bank
India’s economic growth has added over 7 million new jobs every year for almost a quarter of a century. Workers have seen their wages—adjusted for prices - rise by nearly 3 percent a year. Poverty rates among wage workers and the self-employed have fallen. Going forward, with swelling numbers of new entrants -- and more women entering the job market as was the case during East Asia's rapid growth --the country will need to create up to 10 million new jobs each year for the next two decades.
Not only does India need to create more jobs, but the quality of jobs will also need to improve. A recent World Bank report, “More and Better Jobs in South Asia”, finds that little has changed since the early eighties in the proportion of the employed in the three broad employment types -- the self-employed, casual laborers, and regular wage and salaried earners.
There has been little upward mobility between these broad categories. The self-employed, many of whom are in farming, make up half of the employed, while casual laborers, who are paid on a casual, daily, irregular or piece- rate basis, account for a third. Regular wage and salaried earners, who receive a regular wage or salary from a job in the public or private sector and usually earn leave and supplementary benefits, have remained largely unchanged at a sixth.
While it is easier to absorb new entrants into jobs of lower productivity, it will be more challenging, but critical, for India’s future success to meet the people’s rapidly rising aspirations by creating jobs of higher quality. This, then, is the crux of India’s employment challenge. Continued high growth, though very desirable, cannot necessarily be relied upon to meet India’s enormous employment challenges.
What, then, needs to be done to maintain the momentum of job creation while improving quality? Clearly, there is little alternative to reform. The report suggests that, among other things, sustained attention to the three 'E's, electricity, education and entry/exit of firms, can make an important difference.
Electricity: Managers of firms which create jobs identify electricity, corruption and the tax administration as the three main constraints on their ability to operate and grow. The use of generators to offset uncertain power supply—a costly solution for any firm—is greater in India than in countries at similar levels of income. Unfortunately, this has only gotten worse between 2005 and 2010. Reforms will therefore need to encourage not only public but also greater private investment in the power sector to reduce these crippling shortages. Improving the governance of power utilities will be equally important. Improving the availability of power would help firms to expand and create jobs.
Education: Another priority will be equipping the work force with the analytical and behavioral skills that employers demand -- and too often miss. This requires upgrading the quality of learning across the board -- in primary and secondary schools, universities and training institutions. In fact, the greatest payoffs may well come from interventions before children enter formal school.
This is because India has among the world’s highest prevalence of malnutrition in children under five -- higher even than Sub-Saharan Africa -- when measured by wasted (low weight for height), stunted (low height for age) and underweight (low weight for age) children. Policy interventions in early childhood must therefore address nutrition, hygiene, early cognitive stimulation and effective pre-school programs, especially for the disadvantaged. Not to do so will be to risk irreversible cognitive impairment among large sections of the people resulting in reduced job prospects in the labor market.
Entry and exit of firms: It has also been found that employers engaged in formal manufacturing in India rely more on contract workers than on regular wage and salaried earners. This is partly because of India’s prevailing labor regulations, which enterprise managers say are a more severe constraint to the operation and growth of their businesses than in other countries at similar levels of income. When asked which labor regulations most affected the operation of their businesses, nearly one in three firms in India for whom labor regulations were perceived as a moderate or severe constraint reported that restrictions on dismissal are a constraint to hiring.
The high cost of dismissing regular workers evidently hinders firms from hiring them.
For a larger number of India’s workers to access the security, opportunity, and benefits of a regular salaried job, these high costs, which protect only a minority of workers, need to be lowered. This would also need to be accompanied by stronger labor market programs and institutions to cushion both formal and informal workers from labor market shocks and improve their future earning potential.
Such a broad reform agenda is indeed feasible. Future generations will thank today’s leaders for having used this opportunity to create progressively better jobs that will bring higher standards of living.