Employment, Jobs

Job Quality

A long-term employment policy must also focus on the quality of jobs that are created.  Only the creation of more productive jobs will raise the income and living standards of the common man.  Thus we are left with only one feasible option: Fast, productive, self-sustaining, labor-intensive growth. Recent research shows, that world wide, 77% of the reduction of poverty can be attributed to economic growth. Similar results are obtained in India

Dualism and underemployment is a historically observed facet of highly populated low-income Asian countries.  Except for specific segment of the labor force and specific locations the major issue is not unemployment but low productivity of employment.   In other word, as the per capita income increases, the issue of quality of jobs rises in importance relative to the number of jobs created.   International experience demonstrates that in general higher productivity jobs are associated with one or more of the following characteristics: A more complex organization, greater scale (in terms of capital or output), better quality of inputs and outputs, and higher average educational or skill level of workers.  Many of our past economic policies have, directly or indirectly, thwarted the natural process of economic evolution, which increases the proportion of higher quality jobs created as incomes rise.

Economic Growth

New productive jobs can only be created by economic growth. It is therefore essential to have a policy environment that sustains investment and growth.   The focus has to be on creating an environment that stimulates, rather than hinders and thwarts, entrepreneur ship and investment.  Faster growth requires faster investment: All red tape and impediments to translation of entrepreneurs’ investment intentions into reality therefore slow economic growth and delay the creation of new jobs.

Other things being equal the faster the growth the quicker the pace of job creation. A distorted policy structure also distorts the linkage between economic growth and employment growth by distorting the sectoral growth pattern and the choice of techniques.  Often the effect of these distortions is not obvious to the general observer: Thus protection of capital intensive industries biases the economic environment against labor intensive industries, against agriculture & against exports and thus weakens the link between economic growth and employment growth.  A system that forces life-time employment in the hiring company will ensure that the fewest possible new jobs are created by such companies: Even the most capital-intensive plant may be seen as less risky as losses can be limited by shutting it down.  Policy reforms are therefore essential both for raising the rate of growth of the economy and for ensuring that the rate of growth of high quality/productivity employment is commensurate with it.  These include the promotion of competition, private development of infrastructure, fiscal incentives for capital intensity, basic education and generation of usable skills.  The most important direct hindrance to creation of jobs in modern, organized industry and services is rigid labor laws.

Labor Laws

There are two basic objectives of labor laws.  The more fundamental and universal aspect relates to work environment and its effect on the job safety and health of the workers.   Labor laws must therefore protect workers against hazardous substances and dangerous work.  Labor laws must also ensure that any injuries or damage to health sustained at work is adequately treated and/or compensated.   Laws against child labor and for protection of women at work also fall within this general category.  These benefits, which are today available only to a small set of organized labor, should be progressively extended to all workers. The multiplicity of Central and State laws covering this topic also need to be integrated into a single law to facilitate the mobility of workers across state boundaries and make it easy for companies to create jobs.

The second objective of labor laws is social security or security of employment.  Labor laws across the world differ in the extent to which they provide directly for employment security.  In most developed countries unemployment insurance is provided through a separate social security system.  In addition to the trade-off between higher security for employees and higher cost to employers, the key issue is the flexibility of the overall system. 

The labor laws and procedures relating to the organized sector in India became excessively rigid during the seventies & eighties.  As a consequence the inability to shed labor during economic recession became a major factor in the creation of organized sector jobs.   Employers are wary of increasing employment, even when the economy is passing through a boom period, for fear of not being able to shed the additional employment when there is a downturn.  Consequently, most of them avoid too much dependence on labor, opting instead, for a more capital-intensive technique than is warranted in a labor abundant economy.  In effect, by increasing the transaction cost of shedding labor, the labor laws & procedures increase the overall costs of hiring labor.  

The reforms needed for introducing greater flexibility in the labor market to encourage faster growth of organized employment, include those relating to closure of units and lay-off of workers and the law for contract labor.  Industrial Disputes Act should be modified so that employer does not need the permission of the Courts or of State governments to either lay-off workers or close a unit for economic reasons, such as lack of demand and losses due to high cost.  Instead, the employers should be allowed to work out a severance pay in all labor contracts issued at the time of employing a worker.  To facilitate a consensus on this issue existing employees as of date of passing of a new act could be grand-fathered.

The contract labor act needs to be amended to allow all services to be procured from specialized service companies who are held responsible for their own labor (i.e. labor laws specifying apply to the 'specialized labor service supply company" not to the company that hires its services). The Employee Provident Fund (EPF) act should be amended to abolish the mandatory 12% contribution and the employee pension scheme(EPS) made voluntary with employees having the freedom to join the New Pension Scheme (NPS) or annuity policies from private or public Insurance companies (eg LIC). The EPFO's poor management and employee harassment has made it into a money sink, with a median retirement amount of only Rs. 25,000 and 50 million orphan accounts to which interest is no longer credited. The EPS liabilities were last estimated to be Rs 50,000 crore more than its assets.[1]  The Employee State Insurance (ESI) Act should be modified so that employees can buy health insurance from any IRDA regulated health insurance company (public or private) of their choice. The five year limit for eligibility for gratuity should be abolished so that an annual or monthly payment option is created.

The Apprenticeship Act should be amended to treat apprentice ship as a training/ learning activity, rather than a job  with a panoply of labor law related restrictions and requirements.  Restrictions on allowable Trades, duration of training, caps on numbers and licenses for each apprentice must be removed and practical training separated from theoretical training.  The Employment exchange Act should be modified to mandate/facilitate a change from a brick and mortar approach to a digital-internet-mobile phone system of facilitating contact between perspective seekers and hirer.

Basic Education & Job Skills

In promoting modern jobs we should not forget that most people are currently engaged in self employment and in the service sector.  These jobs will remain important, particularly for rural youth and migrants from rural to urban and semi-urban (census towns) areas, even if labor laws are made more flexible.  For this every child/youngster must be able to read, write and do simple arithmetic (3 R s).  The key here is to focus on outcomes rather than on the formal ladders of secondary  and tertiary education. This in turn must be the basis for imparting job skills to every youth in this country. There are known to be about 4000 recognized skill categories. A framework for national certification of these skills must be propagated urgently.  Government must also take all necessary steps to facilitate the establishment of private training establishments to implement the imparting of these skills.  In particular the government must take responsibility for training of trainers.  The Public-Private National Skill Development must play the role for which it was set up.

Even NAREGA could be re-oriented to link with institutions that training unskilled workers for regular unskilled jobs in  manufacturing and/or providing training for low-skill occupations in agriculture and services (including in self-employment).


[1] Data is from, M Sabharwal in The Indian Express, Op-Ed page, February 10, 2014, who also shows that an employee earning Rs 5,500/month pays almost half his/her salary in such mandatory deductions ('regressive benefits regime').