Employment Situation

in India

R Nagaraj,
Indira Gandhi Institute of
Development Research,
Mumbai.
Email: nagaraj@igidr.ac.in

Economys Size and

Structure

India is the worlds 12th largest economy at

current exchange rates, and 4th largest in
PPP.
It ranks 144th in per capita income, and its
HDI ranking is 126th as its health and
educational attainments are modest.
It is still a agrarian economy with a strong
domestic orientation, as exports accounts
for 14% of GDP, constituting barely 1% of
world trade.
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Growth and Transformation

Economy accelerated to 5.7% p.y since
1980, more than doubling per capita
income growth, as population growth
slowed slightly.
Services are the leading sector since
1990, contributing 53% of GDP in 2006.
Structural transformation of workforce got
under way in the 1980s, with agricultures
share declining 15 percentage points by
2005.
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Unemployment and Poverty

Yet, no acceleration of employment growth.
Decline in employment elasticity of growth.
Deterioration in conditions of work.
Casualisation of workforce economy-wide,
Decline in self-employment in rural areas.

Decline in the official measure of income

poverty, but the trends are disputed.
Persistence of nutritional poverty.

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UN Meeting

Labour Market Size

Consists of 430 million workers in 2004-05, growing
2% annually, with a stable worker-population ratio of
40%.
Lower level of womens participation in workforce
(28%) perhaps an underestimate.
Low level of open unemployment (3.1%) high level
of disguised unemployment (or under-employment),
mostly in rural areas and in agriculture.
Child labours share in workforce declining yet
quite large in absolute numbers, at 13 million in
2001.
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Labour Market Structure

Labour market consists of 3 sectors.
Rural workers constitute over 60% of the
workforce.
Organised sector employs 8% of the
workforce, producing 40% of GDP. But
its employment share declining.
Thus, urban informal sector is the
growing sector represents the residual.
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UN Meeting

Labour Legislations
Mostly deals with the organised sector. Extent of
protection and benefits for workers rise with size of
firm or factory.
No national minimum wage; No economy-wide social
security.
Labour being a concurrent subject in the constitution,
states are empowered to enact separate legislations.
The legislations tend to aspirational, with limited
enforcement.
Best illustrated by the job-security law: firms
employing 100 or more workers are mandated to
seek the states permission to retrench or lay off a
worker.
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UN Meeting

Employment Growth
Structural transformation agriculture's
share declining from 68.5% in 1983, to
55.4% in 2004-05 (table).
But, workforce is shifting more towards
services, than to industry.
Low or declining employment elasticity.
Between 1997 and 2004, 1.8 million
(6.3%) jobs lost in organised sector
including 1.2 million (18%) in
manufacturing.
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Wages
Agricultural wages have since 1980s;
yet lower than the minimum wages (for
lack of enforcement of the laws).
Wages still low to overcome absolute
poverty.
Casualisation of wage contracts in all
sectors.
Decline in self employment, especially
in agriculture.
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Major Concerns
Little improvement in employment
scene, despite acceleration in output
growth since 1980.
Deceleration in agriculture since 1990 (
Figure 1), causing agrarian distress
farmers suicides, political extremism.
Alleged labour market rigidity in the
organised sector.
Inadequate freedom for employers to hire
and fire workers.
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Alternative Perspectives on
Labour Market
Rapid industrialisation to speed up
structural transformation:
Invest in industrial infrastructure.
Liberalise financial sector and foreign
investment rules .
Dismantle labour market legislations.

Refocus on agriculture and rural

development with employment generation
programmes.
Employment guarantee.
Step up rural investment.
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UN Meeting

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National Rural Employment

Guarantee Scheme (NREGS)
Initiated in 2005-06, EGS aims at
livelihood security in rural areas of 200
(out of 500) districts.
Provide 100 days of guaranteed
employment in a year for all self selected
adults for unskilled manual labour.
Wage employment programme to create
infrastructure and rejuvenate natural
resources.
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NREGS II
Implemented by local elected selfgoverning institutions.
In 2006-07, Rs 11300 ($2.8 bn) are
allotted for this scheme, making it
perhaps the worlds largest EGS.
As on December 2006, 536.5 million
person days of employment has been
generated, official data show.
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NREGS III
The EGS, together with Right to Information
Act, implemented by local bodies has great
potential, say the protagonists of the EGS.
But, critics have dubbed the EGS the
massive gravy train, with enormous
potential for corruption.
On the ground, implementation is uneven
with some encouraging reports from
backward states, like Rajasthan where local
institutions seem active.
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Is labour Market Rigid?

Labour market is conceived as a small and
declining organised sector workers with
high and growing wages with job security
amid an ocean of unorganised, and
competitive labour market.
Implications?Leads to labour market rigidity:
Substitution of capital for labour,
Reducing economic growth,
Hurting labour intensive manufactures and
exports.
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Evidence?
No nominal or real wage rigidity.
In unit labour cost (Figure 2).
True in public sector too (Figure 3).

No evidence of adverse effects of job

security law.
Secular in union strength.
More lockouts than strikes (Figure 4).
In wage-rental ratio (Figure 5).
Thus, the rigidity hypothesis is suspect.
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Then What Is the Truth?

There exists functional flexibility that the unions
are prepared to negotiate. Wage agreements are
mostly linked to productivity, and incentives.
Job-security law has little bite. Evidence:
18% of organised industrial workers lost jobs 5 years,
without a murmur of protest.

Does it mean the labour market is working fine?

No.
Need for rationalisation of the labour laws.
Need for a new compact between capital and
labour under the changed economic environment.
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In Sum I
Economic growth accelerated since 1980,
without a corresponding increase in
employment.
Structural transformation has happened
since 1980s, but employment growth has
occurred more in services than in industry.
Income poverty is said to have declined,
but nutritional poverty has not, as
employment growth has not improved.
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In Sum II
Orthodoxy advocates market oriented
reforms, infrastructure investment and
deregulating the labour market to speed
up industrialisation to transform the
workforce rapidly.
Heterodoxy argues for improving
agriculture productivity which is still
1/3 of chinas to augment employment
and expand domestic market.
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In Sum III
NREGS was launched last year,
perhaps the most ambitious EGS in
the world.
With RTI and local self government
institutions, there is a better chance
of its success.
But, critics dub it as the biggest
grave train of corruption.
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In Sum IV
Reformists believe lack of flexibility in industrial
labour market is holding up industrial out and
export growth.
Evidence does not seem to support such a
proposition.
But it does not mean that the labour market is
working fine far from it.
Need to a new compact between capital and
labour in the changed economic environment
that includes income security, more rational
labour laws, and greater shop floor democracy.
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Thank You

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Figure 4: Mandays Lost by Disputes

60000
50000
40000
30000
20000
10000

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1996-97

1994-95

Strikes

1992-93

1990-91

1988-89

1986-87

1984-85

1982-83

Lockout

26

Figure 5: Wage-rental ratio

120

Index

100
80
60
40
20

20
01

99

97

95

93

91

89

87

85

83

81

Year ending

Wage-rental ratio

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GDP and Workforce Distribution

1983

1993-94

2004-05

%
GDP

%
Workfor
ce

%
GDP

%
Workforc
e

%
GDP

%
Workfor
ce

Agricul
ture

40.0

68.5

30.0

64.0

20.2

56.5

Industr
y

24.3

13.8

25.2

14.9

26.1

18.8

Service
s

35.7

17.6

48.8

21.1

53.7

24.8

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