Skills & Employment

Context: Despite robust economic expansion, the employment ratio of India has fallen more than other south Asian nations. This has re initiated the debate around the phenomenon of jobless growth in India.

Associated concepts:

• Employment rate: It is a macroeconomic statistic that measures the civilian labor force currently employed against the total working-age population of a country. Present employment rate of India is 37 percent.
• Jobless growth: Jobless growth refers to a situation in which an economy experiences economic growth (typically measured by GDP or other economic indicators), but this growth does not lead to a proportional increase in employment opportunities or a decrease in unemployment rates.

Reasons for jobless growth in India:

• Mismatched Skill Sets: There exists a gap between the skills demanded by the industries and those possessed by the workforce. The education system often fails to equip students with the necessary skills for the job market, leading to unemployment or underemployment.
  • A study by the National Sample Survey Organization (NSSO) found that a significant percentage of graduates in India were unemployed or underemployed due to a lack of relevant skills.
• Labor Market Rigidities: India's labor laws are often criticized for being rigid and complex, making it difficult for businesses to hire and fire workers. This discourages formal job creation and incentivizes informal employment.
  • The World Bank's Ease of Doing Business report consistently ranks India low in terms of ease of hiring and firing workers due to stringent labor laws.
• Informal Sector Dominance: A significant portion of India's workforce is employed in the informal sector, which often lacks job security, social protection, and decent wages. Economic growth may not translate into formal job creation, leading to jobless growth.
  • According to the International Labour Organization (ILO), the informal sector in India accounts for a significant portion of employment, particularly in sectors such as agriculture, construction, and small-scale industries. Despite economic growth, many workers remain trapped in low-productivity, informal jobs with little job security or social protection.
• Technological Disruption: Automation and technological advancements have the potential to replace labor-intensive jobs, particularly in sectors such as manufacturing and agriculture, without creating equivalent new job opportunities.
  • There are case studies of decline of jobs due to the impact of Industrial Revolution 4.0, AI, ML, Robotics and 3-D printing etc. There are also examples of job losses among urban women due to violence, travel time etc. and rural women due to mechanization of agriculture.
• Slow Pace of Industrialization: India's industrial sector has not grown at the pace required to absorb the burgeoning workforce. This has resulted in a significant portion of the population being employed in low-productivity sectors such as agriculture.
• Population Growth: India has a large and growing population, which puts pressure on the job market. Despite economic growth, the pace of job creation may not keep up with the expansion of the labor force.
• Infrastructure Bottlenecks: Inadequate infrastructure, such as transportation, power, and logistics, can hamper the growth of industries and limit job creation opportunities.
  • Manufacturing sector in India faces challenges related to inadequate infrastructure, such as power shortages, poor transportation networks, and inefficient logistics.
• Policy Challenges: Inconsistent or ineffective government policies, including regulatory hurdles, bureaucratic red tape, and lack of investment in key sectors, can hinder job creation and economic growth.
  • The implementation of the Goods and Services Tax (GST) in India faced initial challenges, including compliance issues and administrative complexities. These challenges affected businesses, particularly small and medium enterprises (SMEs), leading to disruptions in supply chains and impacting job creation in the informal sector.
• Unemployment rate rising with education levels: With rising education levels, the aspirations of the youth are rising, they are not satisfied with the indecent and low-quality jobs and seek better quality jobs.
  • As per an IIM Lucknow study, the unemployment rate for the illiterate and less educated class (below primary) was 0.57% and 1.13% respectively while, for the highly educated class (graduates and above), it was 14.73% in 2020–21 for the age group ‘15–29 years.

Suggestions and way forward:

• Gender-related laws: Legislation promoting gender equality in workplaces, pay, and marriage increases women's labor supply and mobility, based on studies (Braunmiller et al. 2023a, 2023b; Roy 2019), often measured using World Bank's Women, Business, and the Law indices (Hyland, Djankov, and Goldberg 2020).
• Efficient land markets: Policies improving land tenure security, documenting land rights, and transparently resolving land disputes enhance efficiency (World Bank 2007). Success depends on local conditions, implementation quality, and community involvement (Deininger 2003).
• Openness to international trade: Streamlining border procedures, reducing trade barriers, improving logistics, and attracting foreign direct investment can boost trade openness (Ohnsorge and Quaglietti 2023; World Bank 2023b).
• Competitive product markets: Simplifying labor and tax regulations, removing subsidies for state-owned firms, and promoting private sector dynamism enhance competition (World Bank 2020).
• Infrastructure investment: Investing in infrastructure boosts employment by reducing travel costs and times, facilitating market access, and enhancing productivity (Lakshmanan 2007, 2011).
• Improved human capital: Enhanced skills enable easier employment transitions, especially from agriculture to non-agriculture sectors.
• Female labor force participation and exports: Export-oriented sectors, driven by open trade policies, tend to promote gender equality and attract women into the workforce (Hoyos, Bussolo, and Núñez 2012). Examples include Bangladesh's garment sector and India's business processing and outsourcing industry (Jensen 2012). Similar trends are observed in Morocco, Tunisia, and Turkey (Klasen 2019).

India’s economic growth is promising, but job creation remains significant challenges. Addressing these issues requires a focus on mass education, industry specific skill development, conditions for labor-intensive manufacturing along with creating a safer environment for women in the workforce.

Context: Recently, Narayana Murthy, founder of leading Information Technology firm Infosys, argued for Indian workers to work for 70 hours a week for boosting India's economic growth.

He based this on the experience of Germany and Japan during the 1950s, these two countries experienced sharp economic uptick after the World War II due to a dedicated workforce. Long working hours is expected to boost the productivity of Indian economy and the workforce, leading to economic growth.

However, there is a competing opinion among a section of economists that merely boosting working hours will not boost the Indian economy.

These group of competing economists argue that supply-side strategies such as more production, more working hours are not sufficient to life the Indian economy, as the main issue with the Indian economy is the lack of demand.

Thus, the key to lift the Indian economy is employing demand side strategies which will increase demand for goods and services and therefore demand for more production.

What is Demand-Side Economics?

According to Keynesian economics, total output is determined by aggregate demand, which is demand for the total volume of goods and services produced in the economy. The demand for labour is a function for this demand.

Firms are guided by profit motive and will employ more labour only if there is increased demand for their products and services. Firms that employ more labour while aggregate demand has not increased will find themselves with unsold goods. Thus, there is a need for demand side interventions to boost employment in India. 

Reasons for low or fall in demand in Indian economy

• Structural issues: Agriculture which employs around 45% of India's workforce, only accounts for 16% of India's GDP. While the services sector which accounts for around 65% of India's output only employs a smaller labour force. This means that vast majority of India's labour force employed in the agricultural sector is left with small disposable incomes to buy goods and services. (Note: According to Situation Assessment Survey of Agricultural Households in rural areas conducted by NSO conducted in 2018-2019, average monthly income of an agricultural household stands at Rs 10,218).
• Informalisation of workforce: Majority of Indian workers are employed in the informal sector with low wages and low social security. (Note: According to PLFS survey, close to 90% of workers are employed in the informal sector). The situation is made worse by the fact that minimum wages are currently not applied on much of informal sector and the informal sector is characterized by low wages, which is even more pronounced for casual workers in the agricultural sector. All these factors reduce the buying power of vast majority of Indian population and hence low demand for goods and services.
• Widespread income inequality: According World Inequality Database, the share of top 1% income earners in India's pre-tax national income increased from 10% in 1983 to more than 21% in 2013. However, the share of bottom 50% declined drastically from around 22% to 15% in the same period. 
• Rising global inflation and food inflation: Rising inflation has led to reduced disposable incomes with vast majority of the low- and middle-income households. The inflation has been particularly high in food commodities. Since, expenditure on food is necessary, it has meant that less is left with households to expend on further goods and services leading to reduced aggregate demand. 
• 'Just in time' supply chain strategy which allows manufacturing firms to hold low or minimal levels of inventory of materials. This has been employed by companies to maximize efficiency and cost savings. This has allowed companies to produce less and in the face of rising global inflation and slowing global demand further reduce output. 
• Low labour productivity in India: In today's globalized economy, all inputs into the production of goods and services are available to all countries via trade. Thus, the competitiveness of an economy is ultimately determined by productivity of its workforce and the physical infrastructure that complements the labour force. Productivity of labour force is determined by the health and skill base of the labour force. Indian workers are at a disadvantage when compared to most successful Asian economies in both the above categories.
• Marginalisation of women: India’s female labour force participation rate is way below to the comparable economies of India. Currently, this stands at about 17%. Thus, a vast majority of females lack regular incomes to procure goods and services leading to low demand as 50% of Indian population does not have the disposable incomes to buy goods and services.

What can be done about this?

Thus, economists have argued to employ following strategies to boost demand in the Indian economy, thus boosting India’s economic growth. Some strategies are:

• Tap the global markets or world demand: Indian economy should expand exports to meet the global demand which will mean investing in infrastructure and competitiveness of Indian exports.  
• Controlling food inflation: For boosting domestic demand, it is essential that food inflation is controlled by reducing food wastage and raising productivity of labour and other inputs in agricultural sector by infusion of capital and technology. This will allow households to spend on non-agricultural goods and services. Thus, generating demand needed to boost production and create employment.
• Increasing incomes of those at the bottom of pyramid: People at the bottom of the pyramid have a high marginal propensity of consume. Hence, increasing their incomes will lead to multiplier gains in the demand situation. This can be done by:
  • Increasing and widening the ambit of minimum wages for those at the lowest levels of employment for a decent living. Minimum wages can index to the consumption expenditure of a relatively better-off group of workers. 
  • Greater formalization of the economy. 
  • Linking MGNREGA wages to minimum wages will enhance the floor for casual workers in rural and urban areas, thus expanding their incomes and thus ultimately demand. 
  • Greater participation of women and provision of transfers like pensions and universal basic incomes can be deployed to boost demand.
• Stepping up public investment and government expenditure: If other actors of economy i.e., firms and households are not willing to consume, enhanced government spending can generate demand for goods and services. Government expenditure can crowd-in and put more money in the pockets of middle and lower classes. This along with lowering the overall levels of taxation can put more money in the hands of people to spend. These strategies will boost demand for goods and services in an economy and lead to employment creation.
• In the monetary policy: For increasing demand in the economy, an expansionary monetary policy should be followed by Central Banks. This means reducing interest rates which will increase the demand for goods and services in the economy and create employment opportunities. 

Ideally, a mix of demand and supply side strategies need to be employed to for a sustainable growth of the Indian economy.

However, the preponderance of market-economics has forced countries like India to overtly focus on supply side strategies. However, there is a need to bring balance by employing supply side policies.

What are Impact Bonds?

• Impact bonds are innovative financing instruments that leverage private sector capital and expertise, with a focus on achieving results. 
• It shifts the focus from inputs to performance and results. 
• Rather than a government or a donor fina­ncing a project upfront, private investors (risk investors) initially finance the initiative and are repaid by outcome funders only if agreed-upon outcomes are achieved.

Skill Impact Bond

• It is a public-private partnership model in India for the skilling and employment sector.
• As an innovative outcomes-based financing tool that leverages private sector capital and expertise, the Skill Impact Bond shifts its focus from inputs like training and certification to outcomes like job placement and retention for India’s youth.
• The collaboration also aims at strengthening the capacity of India’s technical and vocational education ecosystem through knowledge exchange, evidence and data generation and mainstreaming good practices.
• Under the Skill Impact Bond:
  • Risk Investors such as NSDC provided upfront working capital to the trainers to implement skill development programmes. 
  • Service Providers deliver skilling interventions to improve employment outcomes. 
  • Outcome Funders repay risk investors initial investment for each positive outcome achieved. 
  • Third-party Evaluator: The employment outcomes are assessed by an independent third-party evaluator.
• Targets: To skill and provide employment to 50,000 youths over four years. Sixty per cent of the youths will be women and girls. 
• Sectors: The trainees are being skilled and provided access to wage employment in sectors that are recovering from the Covid-19 economic shock, such as retail, apparel and logistics.
• Nodal Authority: It is pioneered by National Skill Development Corporation (NSDC) under the aegis of the Ministry of Skill Development and Entrepreneurship (MSDE) and a coalition of mission-aligned partners.
• Objective: To transform the way skill training programmes are implemented in the country, with major emphasis on bridging the gap between skilling and employment, especially for women.

Evaluation

• Until May 2023, the Skill Impact Bond had skilled more than 18,000 first-time job seekers from low-income families, of whom 72 percent were women. 
• The first cohort of the Skill Impact Bond also indicates a better retention rate in jobs, as one in two women who have enrolled in the training have continued to work in wage employment for three months.
• This is in stark contrast to other skilling initiatives, as the retention rate in employment hovers at as low as 10 per cent, once the training gets over. 
• Post-placement tracking and guidance such as regular check-ins with candidates and migratory assistance are unique features under the impact bond that helps women adapt to new environments and challenges, thus reducing dropouts.

About National Career Service Portal

• This portal is launched by the Labour Ministry to provide placement for diploma & degree holders.
• This portal facilitates the registration of job seekers, job providers, skill providers, career counsellors, etc.
• The portal provides job-matching services in a highly transparent and user-friendly manner.
• These facilities along with career counselling content will be delivered by the portal through multiple channels like career centres, mobile devices, CSCs, etc.
• The project would be capable of meeting the varied demands and requirements of the youth for information on education, employment and training and will be supported by a multi-lingual call centre.
• The portal will also make available information on local service providers available to house hold and other consumers for services like driving, plumbing, carpentry, etc.