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EMPLOYMENT
THE FAULTLINE IN
INDIA’S EMERGING
ECONOMY
Draft of presentation
1
To be given by
Ajit K. Ghose
The problem:
•Since the beginning of the 1980s, India’s economy has grown at a
rapid and accelerating rate. For the 30-year period of 1950-80, it
had grown at the so-called “Hindu” rate of growth of around 3 per
cent per annum. But then the “East Asian” rate of growth replaced
the “Hindu” rate; the elephant transformed itself into a tiger.
Today, India’s economy is the second fastest growing economy in
the world and one of the most important emerging economies.
•The rapid economic growth, however, has not brought about
transformative change in employment conditions in the country.
Not that employment conditions have deteriorated; they have in
fact improved. But the improvement has been rather insubstantial.
The structure of employment, for example, has changed much too
little;
traditional
low-productivity
employment
remains
overwhelmingly dominant in the economy.
2
• The rapid economic growth has also been associated with
opening-up of the economy and it is rather intriguing that the
opening-up had little effect on the growth-employment
relationship. Contrary to expectation, the opening-up actually
stimulated skill-intensive manufacturing and services rather
than labour-intensive manufacturing.
• In short, there has been a serious disconnect between economic
growth and employment over the long run. Economic growth has
been non-inclusive as a result. This much is widely accepted, if
not adequately understood. It is also widely recognised that if
growth continues to be non-inclusive, sustainability of the
growth process itself will be seriously threatened by social
tensions and political instability.
• In my presentation, I propose to do three things: (a) examine the
nature of disconnect between economic growth and employment,
(b) look for some explanations, and (c) consider policy options.
3
Table 1: Economic growth, 1983-2009/10
(average annual rate, %)
19831993/94
1993/94- 1999/00- 2004/052004/05 2009/10 2009/10
GDP at factor cost
5.2
6.3
7.3
8.6
NDP at factor cost
5.0
5.8
6.9
8.4
Organised sector
6.0
7.3
7.8
10.3
Unorganised sector
4.5
4.9
5.7
7.0
Four points to be noted: (a) since 1983, the economy has grown at a rate of
more than 5 per cent per annum; (b) growth has been accelerating over the
27-year period 1983-2010; (c) in the most recent period (2005-2010), growth
exceeded 8 per cent; and (d) relatively high and accelerating growth
occurred in both organised and unorganised parts of the economy.
4


What happened to employment in this period? The
question is not in fact easy to answer. Normally, we would
look at trends in unemployment, employment and wage
rates. But, in the context of India’s economy, these
standard indicators do not tell us much about the trends
in employment conditions.
The reason is that India’s economy has been and remains
a Lewis-type “dual economy with surplus labour” par
excellence, with two sectors - organised and unorganised –
and a large volume of surplus labour in the unorganised
sector.
5
Employment and labour market:
(A schematic description)


In the organised sector, which employs a very small proportion
of the workers in the economy, employment is much like that in
developed countries. Jobs are regular and full-time.
Government regulations influence wages, non-wage benefits and
job security. And there are trade unions that engage in
collective bargaining with the employers over all these. The
wage in this sector is much higher than the average labourincome in the unorganised sector.
In the unorganised sector, there are neither government
regulations nor collective bargaining. Most of the workers in the
sector are in self-employment and some are in casual wage
employment.
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


Systems of self-employment and casual wage employment easily
accommodate work sharing. If there are more workers than are
needed, the result is underemployment of all and not
unemployment of some. It is through work sharing that surplus
labour is accumulated and held.
Self-employment and casual wage employment are also closely
linked. Self-employed also work as casual labourers just as casual
labourers also work as self-employed. A single household often
has both self-employed and casual labourer.
Institutionalised social security is available to only a tiny
proportion of the workers employed in the organised sector.
7
Implications:


Since most people do not have access to institutionalised social
security, they must work to survive. Given the high wage and
non-wage benefits associated with jobs in the organised sector,
most people look for jobs there in the first instance. Those who do
not find work in the organised sector can find it in the
unorganised sector where additional workers can always be
accommodated through work sharing.
So, first, unemployment is a luxury good that only persons from
well-off households can afford. These persons are really waiting
in the queue for jobs in the organised sector. Thus the
unemployment rate shows the size of the queue for jobs in the
organised sector but says nothing about the excess supply of
labour in the economy. Not surprisingly, the rate is generally low
and remains quite stable over time.
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

Second, this also means that the employment rate simply follows
the labour force participation rate; a change in the employment
rate is a mere reflection of a change in the participation rate. So
the employment rate indicates the state of labour supply rather
than the state of labour demand. Similarly, rate of job growth is
simply the rate of labour force growth. It is not very useful to
ask if the rate of job growth has accelerated or decelerated.
Third, the observed number of persons in employment is a poor
indicator of the actual volume of labour employed because there
is substantial underemployment.
9


Finally, there is no single integrated labour market. There are
two labour markets, neither of which is in equilibrium. In the
case of the organised sector, labour supply is virtually unlimited.
In the unorganised sector, the casual wage labourers are
seriously under-employed; they look for work every day and find
it only on some of the days.
So wages are not market-clearing but are exogenously given. In
the organised sector, the wage is fixed by government
regulations and collective bargaining. In the unorganised sector,
the daily wage for casual labour is fixed with reference to output
per worker in self-employment.
10


[Self-employment is the fall-back position for the casual labourers
and casual labour is the fall-back position for the self-employed.
In self-employment, a notional output per worker per day can be
constructed as the output in a production period divided by the
number of days in the production period. This is notional because
self-employed persons are also under-employed, i.e., do not find
work to do on all days of the production period. Let q be the
output per worker in self-employment, d the number of days in
the production period, d’ the number of days of actual
employment of a casual labourer and w the casual wage rate.
Then q/d = (d'/d). w = π. w. This still leaves w undetermined. But
any arbitrary value will do because π will adjust to ensure
equality. If w is too high, some of the self-employed will want to
work as casual wage labourers, thereby lowering the value of π.
Similarly, if w is too low, some casual wage labourers will
withdraw into self-employment, thereby increasing the value of
π.]
Thus change in wage does not give any useful information about
tightness of labour markets.
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Table 2: The employed and the unemployed, 2004/05
(persons in age group 15-59)
Average age in years:
Employed
35
Unemployed
24
Average years of education:
Employed
4.4
Unemployed
8.8
Incidence of poverty:

Employed
39.0
Unemployed
27.7
The unemployed are younger, better educated and materially
better off than the employed.
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Table 3: Education and unemployment, 2004/05
(persons in age-group 15-59 years)
Rate of unemployment (%)
Level of education
No schooling
0.8
Up to primary (1-5 years)
1.9
Up to middle (6-8 years)
3.8
Up to lower secondary (9-10 years)
6.3
Up to higher secondary (11-12 years)
9.6
Tertiary (12+ years)
Overall

10.3
3.5
The rate of unemployment rises steadily with the level of
education. This is the exact opposite of what is observed in
developed countries.
13
Table 4: Underemployment of the employed, 2004/05
(persons in age-group 15-59 years)
Average number of days worked per week:
Self-employed
5.7
Casual wage employed
4.8
Rate of underemployment (%):
Self-employed
Casual wage employed
5.0
20.0
Incidence of poverty (%):

Self-employed
35.4
Casual wage employed
56.5
Underemployment exists among both the self-employed and
the casual labourers. But the level of underemployment is
much higher among the casual wage labourers than among
the self-employed.
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Table 5: Real wage and underemployment of casual labour,
1983-2009/10
(persons in age-group 15-59 years)
1983 1993/94

1999/00
2004/05
2009/10
Daily wage (2004/05
Rupees)
36.4
42.7
48.3
51.0
69.7
Rate of underemployment
(%)
21.7
16.7
15.0
20.0
18.3
[The rate of unemployment is estimated by assuming that all
casual labourers would want to work for six days in a week.]
The real daily wage of casual labourers has increased despite
persistence of high level of underemployment.
15
Table 6: Unemployment, employment and labour force
participation, 1983- 2009/10 (persons in age-group 15-59)
1983 1993/94
Unemployment rate (%)
1999/00
2004/05
2009/10
3.3
2.9
3.1
3.5
2.6
Employment rate (%)
61.3
59.1
57.4
59.7
54.3
Labour force
participation rate (%)
63.4
60.9
59.2
60.8
55.8

The unemployment rate has been low and stable. The
employment rate simply follows the labour force
participation rate.
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Relevant indicators:



What then are the indicators that can tell us if the employment
conditions have been improving or deteriorating? There are two
such indicators.
The first is the rate of growth of formal employment, i.e., regular,
full-time employment with institutionalised social security found
in the organised sector. When this is higher than the rate of
growth of labour force in the economy, there is movement of
workers from informal to formal employment, which
unambiguously improves employment conditions.
The second is output per worker in the unorganised sector.
Growth of this implies either a decline in underemployment or a
rise in labour productivity (output per unit of labour used) or
both. In all cases, there is an unambiguous improvement in
employment conditions.
17
Table 7: Structure of employment, 1983-2009/10
(persons in age group 15-59)
1983 1993/94
1999/00
2004/05
2009/10
Share (%) in total employment
of:
Regular wage employment
16.1
15.7
16.1
16.5
17.7
10.2
9.3
6.9
6.7
7.4
5.9
6.4
9.2
9.8
10.3
Casual wage employment
31.6
34.3
35.4
31.1
34.9
Self-employment
52.3
50.0
48.5
52.4
47.4
Casual and self employment
83.9
84.3
83.9
83.5
82.3
Organised sector
13.6
12.4
11.6
10.9
14.2
Unorganised sector
86.4
87.6
88.4
89.1
85.8
Regular-formal
Regular-informal
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

(a) Self-employment and casual wage employment have been
and remain overwhelmingly dominant. (b) The organised
sector employs only a small proportion of the workers. (c) An
even smaller proportion is in formal employment. (d) So not all
of the workers employed in the organised sector are in good
jobs. Nevertheless, even the workers who do not have good jobs
in the organised sector have better jobs than those in the
unorganised sector.
For much of the period, growth of formal employment as also
of organised sector employment fell short of the growth of
labour force in the economy. So the share of good jobs in all
jobs became progressively smaller. Only in the last period –
2005-2010 – is a process of labour transfer from informal to
formal employment and from unorganised to organised sector
observed. The extent to which this is a new trend rather than a
19
random event is difficult to judge.
Table 8: Employment growth, 1983-2009/10
(persons in age-group 15-59)
Regular wage employment
1983-
1993/94-
1999/00-
2004/05-
1993/94
2004/05
2009/10
2009/10
1.8
2.5
3.0
3.2
Regular-formal
1.2
-0.3
2.9
4.0
Regular-informal
1.1
5.6
3.1
2.6
Casual wage employment
2.8
1.1
1.9
4.1
Self-employment
1.6
2.4
1.8
-0.3
Casual and self employment
2.0
1.9
1.8
1.4
Organised sector employment
1.2
0.8
4.2
7.2
Unorganised sector employment
2.1
2.2
1.7
0.9
Total employment
2.0
2.0
2.1
1.7
Labour force
2.0
2.1
2.0
1.5
20
Table 9: Growth of output and wage per worker, 1983-2009/10
(in 2004/05 prices for persons in age group 15-59)
1983-
1993/94-
1999/00-
2004/05-
1993/94
2004/05
2009/10
2009/10
NDP per worker
Organised sector
4.8
6.5
3.6
3.1
Unorganised sector
2.4
2.7
4.0
6.1
The economy
3.0
3.8
4.8
6.7
2.8
2.2
2.0
6.4
Regular-formal
2.6
5.0
Regular-informal
0.0
5.9
3.7
6.4
Organised sector
1.5
3.1
Unorganised sector
2.8
5.9
2.7
5.7
Real wage per day:
Regular wage employment
Casual wage employment
The economy
1.5
2.0
1.6
2.3
21
• Output per worker in the unorganised sector
increased at an increasing rate.
• Real wage grew in both sectors. But growth was
faster in the unorganised sector. Noticeably, wage
growth was linked to growth of output per worker in
the unorganised sector, but no such linkage is
observed in the organised sector. The strong wageproductivity linkage in the unorganised sector is
easily explained in terms of the linkage between selfemployment and casual wage employment. In the
case of the organised sector, we do not have reasons
to expect a wage-productivity linkage. Both the
government regulations and the system of collective
bargaining make wage growth wholly exogenous.
22
Table 10: Structure of wage employment, 1999/00-2009/10
(persons in age-group 15-59, percentage distribution)
1999/00
2004/05
2009/10
Organised sector
Government/public
Regular-formal
85.0
82.2
81.0
Regular-informal
12.0
12.4
13.2
3.0
5.2
5.8
Regular-formal
38.8
37.0
30.9
Regular-informal
32.1
35.4
37.0
Casual
29.1
27.6
32.1
Regular-formal
59.3
60.9
52.3
Regular-informal
23.1
23.3
26.9
Casual
17.6
15.8
20.8
Regular-informal
16.5
19.9
16.8
Casual
83.5
80.1
83.2
Casual
Private
Overall
Unorganised sector

23
Slow wage growth in the organised sector is explained by the growing
importance of informal employment in the sector.
Summary:


Employment conditions improved somewhat basically because
there was decent growth of labour productivity in the
unorganised sector, which increased labour-incomes. There
was no labour transfer – from informal to formal employment
and from unorganised to organised sector – except in the most
recent 5-year period. Hence the persistence of the
overwhelming
predominance
of
traditional
forms
of
employment as also of serious underemployment.
So, very low employment intensity of growth in the organised
sector has been the central problem. This hovered around 0.2
except during 2004/05-2009/10 when it was as high as 0.7 (it is
hard not to feel that this might be an aberration). The “formal
employment elasticity”, of course, was even lower.
24
Explanation:


What explains the low employment elasticity in the organised
sector? A popular explanation points to “labour market
rigidities”. There are government regulations that make
dismissal or even redeployment of workers difficult. These
difficulties allegedly act as strong disincentive to hiring and
focus employers’ mind on substitution of machines for workers.
There are studies which appear to support this view. But there
are other studies, including one of my own, that do not support
it.
25

The main problem with this explanation is that private
enterprises in the organised sector do not face much rigidity
in practice. And these enterprises dominate manufacturing.
The evidence: the share of formal employment in these
enterprises was only 39 per cent even in 1983 and fell to 31
per cent by 2010. [Look back at Table 10] Much of the formal
employment in the economy (59 per cent in 2009/10) is in
services in government/public sector, where rigidities are
important but would have existed even without the labour
regulations. [Rigidities in government/public sector would be
found in most countries and are not particular to India.]
26



My own view is that there is more than one factor involved.
The first is that the relative price of unskilled labour vis-à-vis
skilled labour is too high (or the relative price of skilled vis-àvis unskilled labour is too low) in the organised sector. While
government regulations and collective bargaining make the
price of unskilled labour relatively high, massive subsidisation
of higher education makes the price of skilled labour relatively
low.
Admittedly this is a hypothesis rather than an empirically
substantiated proposition at this point. But some sketchy
evidence can be cited. In 2004/05, an illiterate person who
happened to have a job in the organised sector earned a wage
that was 2.6 times that earned by an illiterate person in the
unorganised sector. On the other hand, within the organised
sector, a person with tertiary education earned 2.5 times the
wage earned by a person with no schooling.
27

The high relative price of unskilled vis-à-vis skilled labour
explains well the fact that the opening-up of the economy has
stimulated growth of skill-intensive manufacturing and
services
rather
than
growth
of
labour-intensive
manufacturing. It is the organised sector that trades with the
rest of the world. Thus the comparative advantage that
matters is the comparative advantage of the organised sector
and not the comparative advantage of the economy as a
whole. And the comparative advantage of the organised
sector actually lies in skill-intensive activities.
28


A second factor is the absence of a wage-productivity linkage
in the organised sector. Regulations and collective bargaining
make wage growth exogenous rather than link it to
productivity growth. Employers, therefore, have everything to
gain by focusing on growth of labour productivity, which
always increases the share of profit in value added.
A third factor is the infrastructure bottleneck. This imposes a
serious
constraint
on
growth
of
labour-intensive
manufacturing, which needs to be undertaken on large scale
and requires availability of reliable and low-cost transport
services and electricity to be competitive.
29
Policy options:




It is clear that “business as usual” will not do. India faces a
formidable employment challenge and this must be met.
Apart from the huge challenge of shifting a large part of the
labour force from bad to decent jobs, there looms a
“demographic challenge”. A surge in prime-age population is
expected. In all probability, this will mean a large growth in
labour force.
What, then, are the policy options?
One: Leave the growth process in the organised sector alone
and use the growing fiscal resources to finance special
employment schemes and social protection measures for
workers in the unorganised sector. These measures, together
with economic growth in the sector, which hopefully will
continue, will sustain the growth of labour-incomes in the
unorganised sector. If labour transfer does not occur,
employment conditions in the unorganised sector must be30
substantially improved.


Two: Leave the unorganised sector alone and
undertake reforms in the organised sector with a view
to increasing the employment intensity of growth. The
reforms would include not just reduction or
elimination of rigidities but also reduction/elimination
of subsidies on higher education and increased
attention to primary and secondary education. Such
reforms, by altering the relative price of unskilled vis-àvis skilled labour, will increase the employment
intensity of growth in the organised sector and result
in labour transfers from the unorganised to the
organised sector.
Whichever of these two options is chosen, large-scale
investment
in
agriculture
and
in
physical
infrastructure must be organised. This simply is not
optional.
31


On political economy grounds, the first option is more
feasible (the second would be fiercely resisted by the
middle class) and the government has in fact already
adopted it. And the observed trends during 2005-2010
suggest some movement in a desirable direction.
What remains unorganised as yet is large-scale
investment in agriculture and physical infrastructure
though there has been much talk of this. Without this,
the recent trends will not be sustained. Food price
inflation, it is to be noted, is already a major problem.
This has already rendered the special employment
schemes rather ineffective. And a wage-price spiral is
most likely to emerge.
32