The Hindu Business Line : Job creation: Not just an economic problem

Even as jobs have to be created to accommodate India's ever-increasing population, technology developments are destroying existing ones. The issue, therefore, is not merely adding enough jobs but also creating replacements for those lost. As the obstacles to employment growth are numerous, says P. V. Indiresan, the remedy also has to be many-sided.

LIKE housewife's chores, maintaining full employment is a never-ending problem. Unlike in developed countries where the population is shrinking, in India, additional jobs have to be created all the time to accommodate the ever-increasing population. In addition, technology developments destroy existing jobs. Hence, the issue is not merely adding enough jobs to support the increase in population but also to create replacements for jobs lost due to technological obsolescence.

Many people feel that the solution to the unemployment problem lies in maximising supply. It is true that in the normal course, when employment increases, the supply of goods and services will increase. The converse is not necessarily true: When supply increases, employment may or may not increase.

Supply may be increased without increasing employment both by tightening the slack in the production system and by increasing productivity. Even otherwise, jobs may not grow due to insufficient demand — either because prices are too high, or consumer preferences change. Often, full employment is less a problem of increasing supply and more a case of increasing demand.

In general, increasing supply is a relatively simple purely economic problem, no more than finding enough capital to finance the increase in production. On the other hand, increasing demand is beset by a complex of psychological, social, cultural, and even political hurdles in addition to economic ones. That is why job creation is not a problem of economics alone; it requires the combined expertise of a number of disciplines.

Obstacles to employment growth are many and complex. One, poor infrastructure is, and has been recognised as a major impediment. Two, though wages are low, ours remains a high-cost economy as labour productivity is lower still.

Apart from insufficient skills and poor training, archaic labour laws, restrictive labour practices as well as obsolete technology and bad management have raised labour costs beyond tolerable limits. Three, poor technology and inefficient management waste capital too, and thereby raise interest costs.

Four, complex, overbearing administrative regulations and procedures, and outright corruption have raised transaction costs sky high. Five, political corruption and interference have converted otherwise viable businesses into non-performing assets. Six, legal and administrative systems have made the situation worse by making it virtually impossible to close down incurable businesses, thereby making banks too sick. Seven, to make a bad bargain worse, for their own survival, lending institutions have been forced to keep interest rates needlessly high, further retarding growth.

We seem to be particularly inept in handling technology obsolescence. That defect appears to be a cultural inheritance we have no tradition of hygienic waste disposal: Our forefathers did not bother to build efficient water closets; they did not care to treat sewage hygienically nor did they bother to dispose off any other kind of waste scientifically. More often than not, they left the waste to rot and let nature manage the waste with little help from human effort.

The same culture prevails with employment waste too. Thanks to the caste system, all jobs were inherited, and job security was automatic. Caste culture provided also economic protection to the jobless. Hence, the problem of managing employment waste too never arose. We still leave that problem unattended in the mistaken hope that time will heal the wounds of skill obsolescence somehow or other. Instead of healing by itself, outmoded labour becomes a festering sore.

Neither do we value time. We do have a strong fervour for auspicious time but no real concern of maximising the use of time. We are prepared to wait patiently for hours and days and months for an auspicious hour to arrive rather than use time efficiently. That cultural trait is probably the main reason why we are bothered so little by transaction costs.

Not only are delays endemic, administrative rituals, restrictive practices, outright corruption and legal interference all combine to slow down project implementation. Meanwhile, wages have to be paid for idle labour; interest costs mount exponentially; installed but unused equipment depreciate, and become obsolete too. It is not unusual for interest costs during construction to top all other costs.

Job growth may be restricted due to structural problems too. Demand may not grow not because people do not want the product, nor because they cannot afford the price but because it is physically impossible for them to use it. For instance, many people living in Mumbai do not buy cars merely because the roads are not there. Slum dwellers are often quite well off but cannot buy many household durables only because they have no place to keep them. Thus, congestion too destroys demand, and the jobs that would have been supported thereby.

Even as hundreds of thousands remain unemployed or under employed, employers complain that skilled workers are hard to get. Evidently, education is not matching the demand for skills.

Thus, obstacles to employment growth are many, and of many types. Hence, the remedy also has to be many-sided; simplistic solutions are unlikely to produce the desired results. In particular, we have to clear the following bottlenecks that obstruct job growth:

1 Transaction costs in general and delays in particular.

2 Deadwood - industrial, business.

3 Deadwood - Obsolescence of skills.

4 Irrelevant education and training.

5 Congested habitat.

6 Inadequate infrastructure.

7 Culture of obstruction, even corruption.

As a rule, bottlenecks are located at the top. They are often the result of a cynical collusion among top administrators, politicians and businessmen as well as low-level gatekeepers in charge of the highways of commerce.

Such people indulge in malpractices because they secure thereby private benefits at the expense of the general public. There are two possible approaches for remedying the situation: One, make it more rewarding to clear the bottleneck than to create it; two, impose a deterrent penalty on the beneficiaries of bottlenecks.

Rewards are bound to be expensive as they will have to top the benefits already enjoyed by the beneficiaries of bottlenecks. Hence, it would be better to make administrators and politicians suffer an unwelcome penalty whenever they create bottlenecks. Some suggestions to this effect are given in the Table.

Normally, unemployment is treated as a problem in macroeconomics and dealt through fiscal incentives and monetary measures. In truth, the problem has more microeconomic complications than macroeconomic ones.

People who derive private benefits at public expense retard job growth even more than macroeconomic infirmities. Incentives and rewards are unlikely to induce them to reform.

Only penalties, penalties that target specific obstructionist groups (time wasting bureaucrats, unimaginative businessmen, irresponsible labour leaders, irrelevant educationists, inconsiderate employers, indifferent politicians and the nexus of corrupt politicians and bureaucrats) are likely to produce results. As the Bhagavadgita indicates, the objective should be both paritraanaya saadhoonaam and vinaashaayacha dushkrutaam — not merely rewarding the good but destroying the bad too.

However, one kind of reward is still worth considering. Pay all legislators a fee in proportion to the tax collected in their constituency. That will give them an incentive to support development. The time is probably right for doing so because politicians have started to feel that development is as important as caste for winning elections.

(The author is a former director, IIT Madras. Response may be sent to: indresan@vsnl.com)

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