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End of employment generation

Haseeb A Drabu | August 07, 2003

While it is a matter of ongoing debate whether economic reforms have led to higher output growth or not, there seems to be no scope for debate on what reforms have done to growth in employment.

Official numbers very clearly show that in the last 15 years, there has been a total collapse of employment generation in the economy. The trend growth in employment is one of sharp deceleration, independent of recession or recovery.

There seems to be no alarm over the fact that the employment elasticity (the extent to which additional output creates additional demand for jobs) in the economy has dropped from 0.68 in the period 1983-88, to just 0.16 per cent between 1993-2000. A 76 per cent drop over 17 years!

This aggregate fall is made up of a fall in all sectors, except transport, storage and communication, and financing, real estate and business services. The steepest decline is in the agricultural sector where the employment elasticity has declined from 0.87 to 0.01 per cent over the same period.

What this means is that a 5 per cent growth in agricultural output that would have resulted in a 4.35 per cent employment growth in the eighties, will now lead to an employment growth of just 0.05 per cent.

In the case of manufacturing, the elasticity has more or less halved. Indeed, in a couple of sectors, primarily infrastructural, the employment elasticity is negative.

This includes, mining and quarrying and electricity, gas and water supply. Such a trend is unprecedented in India so far. By any standards, these are stark and disturbing trends.

The sharp drop in employment elasticity is in line with the National Sample Survey on employment and unemployment data. The 55th round of the NSS, held in 1999-2000, also indicates a dramatic decline in the rate of employment generation.

The rate of growth of employment, defined in terms of the current daily status (which is a flow measure of the extent of jobs available) declined from 2.7 per cent per year in 1983-94 to 1.07 per cent per year in 1994-2000, for the economy. The decline is much sharper in the rural areas: from 2.4 per cent to 0.67 per cent over the period 1994-2000.

The data of the Annual Survey of Industries, shows annual employment growth in the manufacturing industry to be well below 1 per cent per annum over the period since 1990.

All this employment data from different sources for different segments and sectors of the economy shows that the rate of growth of employment is seeing a secular decline and in all cases is well below the rate of growth of population.

Why has employment generation taken such a hit, even as output has been growing? The obvious reason is that technological change has led to changes in the pattern of labour use.

Most technological changes in Indian industry have operated to improve labour productivity and therefore have led to lower requirements of labour per unit of output.

Over the past two decades there has been a more or less continuous and stable increase in labour productivity, which implies lower use of workers per unit of output. The converse of increasing labour productivity is that employment tends to increase less than output increases.

However, when the employment elasticities take such a dip there is more to it than technology and rate of growth of output. The issue is of the composition of output and the employment intensity of growth.

The employment content of aggregate growth depends on whether or not the pattern of growth is such that sectors with relatively higher employment intensity make an increasingly larger contribution by growing faster than other sectors with low employment elasticities.

Not only has the composition of GDP changed adversely, there is also a reduction in labour use within sectors.

In an increasingly market-determined scenario, the government and policy makers cannot have much control over the composition of growth.

The compulsion to raise productivity levels so as to improve efficiency and competitiveness may not permit significant increase in employment elasticities in many lines of work.

The government has not been able to even take measures such as directly increasing employment through more public works because of the reduction in crucial public expenditure that it has undertaken as part of its fiscal adjustment programme.

If this wasn't enough, the budgetary allocations for employment schemes is lower than the budgeted amounts for the previous year, and less than half of what was actually spent in the last fiscal.

In this kind of an economic regime, it will be not be easy to raise sectoral employment elasticities. Therefore, it is the unorganised or the informal sector, which must be made to expand rapidly in order to create the additional jobs.

The urban informal sector, with elasticity of 0.5 to 0.6, has shown an employment growth of 6 per cent per annum as against the overall employment growth of 2 per cent. The irony of this is that the solution to the problem created by the 'reform sectors', is found in the 'un-reformed' sectors!

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