India needs to create well paying jobs

The Economic Survey 2015-2016 stresses that India being in the midway through its demographic dividend is providing an economic growth in terms of the working age share of the population. Hence to exploit this dividend and meet the growing aspiration of those entering the labor force, India’s Economy needs to create enough “good jobs”- jobs that are safe and pay well, and encourage firms and workers to improve skills and productivity.

It may be noted that of the 10.5 million new jobs creative between 1989 and 2010, only 3.7 million-about 35 percent – were in the formal sector. In this period total establishments were increased by 4.2 million. However jobs informal sector have come down possibly due to increased use of contract labour. Thus, the challenge of creating the good jobs of India could be seen as a challenge of creating more formal sector jobs which also guarantee workers protection.

Though, in the survey, medium sized formal sector manufacturing firms have reported labour regulations to be a significant barrier to growth and specifically “dismissal norm under the Industrial Disputes Act” and “the cumbersome nature of compliance with labour regulations in general”

Contract workers has increased from 12 per cent of all registered manufacturing workers in 1999 to over 25 per cent 2010 on account of firms attitude to negotiate with labour regulations just to boost their production without facing any kind of labours unrest.

The survey has suggested that productivity in the apparel sector can be substantially improved by relocating capital from less productive to more productive firms. Incidentally formal apparel sector firms in India are about 15 times more productive than there informal sector counterparts.

However, India’s apparel sector is dominated by informal firms where approximately 2.0 million establishments employing about 3.3 million workers, dwarfing the formal apparel sector’s 2800 firms which employ 330,000 workers. Apparently this sector is now in process of relocating its units in second and third tier towns and cities.

This business model of moving factories to workers has a number of commercial and social advantages-it involves spreading economic development to underdeveloped areas, reduces spatial mismatch in the labour market and can improve competitiveness by raising firms’ access to lower cost labour. Moreover, about 70 per cent of the employees of India’s largest apparel exporter are women.

Recent studies have estimated that India’s GDP would grow by an additional 1.4 per cent every year if women were to participate as much as men in the economy. To boost economy the centre has to ensure that labour regulation is worker-centric, by expanding workers choice and reducing mandatory taxes on formal sector employment.

The survey has also suggested improving the function of EPFO (Employees Provident Fund Organization). Policymaker should consider whether lower earners should be offered the same choice- of whether to contribute part of their salaries to the EPF- which the rich have.

This would both introduce competition in the market for savings, which may improve EPFO’s service standards, and allow the poor-some of whom may be liquidity constrained- to optimize as per their own personal requirements. To be clear, the employer’s 12 per cent contribution to EPF/EPS would be unaffected.

The only difference would be that employees could choose whether or not to save 12 per cent of their salary into EPF or keep it as take home pay. Such a change would effectively reduce the tax on formal sector labour while leaving informal sector labour costs unchanged. In a relative sense, it would therefore reduce the cost of hiring workers in the formal sector and incentivize more people into formality, where productivity levels and growth are higher.

In a nutshell, India’s most pressing labour market challenge going forward will be to generate a large number of good jobs. These jobs tend to be formal sector jobs. Two obstacles to formal sector job creation are regulation- induced taxes on formal workers and spatial mismatch between workers and jobs.

Encouragingly, firms and workers are finding solution to deal with these obstacles that are even more varied than the obstacles themselves. Meeting the challenge ahead will require more of such ingenuity, and the private sector, state governments and the Centre will all have important roles to play.