Article: Jobless growth only in formal sectors, says Manish Sabharwal

C-Suite

Jobless growth only in formal sectors, says Manish Sabharwal

There are many steps to making India a better habitat for job creation, the most controversial but important one being labour law reform
Jobless growth only in formal sectors, says Manish Sabharwal
 

Formal sector jobless growth needs reducing the costs of formality

 

Growth is a necessity but not sufficient enough for job creation. But I think the issues around growth and employment were different at various stages of economic development. In richer countries, the technology is rapidly reducing the employment elasticity of growth i.e the number of jobs created for the same amount of economic growth. Prior to 1991, India had growthless jobs i.e. employment which was irrational, excessive and involving low productivity. Since 1991, all our job creation took place in the informal sector. Unemployment in India is exactly where it was in 1991 despite the addition of millions to the labour force. So this means 100 per cent of net job creation since 1991 has happened in the informal sector. India’s challenges are very different from the challenges faced by developed countries, who face a more existential challenge of technology greatly reducing the need for low-skilled workers. This has led to a wage stagnation at lower levels over the last two decades in Europe, USA and Japan that for now only looks like it will get worse. But India is far from the jobless growth problem for now.

Academics often say that in any argument you are entitled to your own opinion, but not your own facts. Only 7 per cent of the total employment is in the formal sector. It means that the employment of 93 per cent is not tracked but extrapolated or assumed.

India’s labour laws make an employment contract the equivalent of marriage without divorce. There are many obvious steps to making India a better habitat for job creation (infrastructure, lower regulatory cholesterol, more credit flow to SMEs, etc) but the low hanging fruit has been picked and we need to confront the difficult, controversial but important issue of labour law reform.

The primary consequence of informal growth is low productivity. If all the job creation in India had happened in the formal sector, we would have seen much higher growth rates, higher per capita and much lower poverty.

Formal sector jobless growth needs reducing the costs of formality. We have to make the employment contract more symmetric by redoing irrational legislation like the Industrial Disputes Act. We also need to reduce the amount of payroll confiscation (49 per cent of salary is currently deducted at source in a CTC world) because low wage worker cannot live on half his salary. The only way to increase the employment elasticity of growth is to make India a less hostile habitat for entrepreneurs; roads, power, ports, urbanisation, better skills and education, and much else. The ideas are all on the table. The challenges lie in courage and execution.
 

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Topics: C-Suite, Strategic HR, #ExpertViews

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