The Hindu Business Line : Search for efficiency — A war for workable workers, this!

In a dynamic economy, as new industries come up and old ones phase out, there will be retrenchment. But there is no cause for concern, as with a little bit of retraining one can easily fit into a new job profile.

Does the real world behave the way economic theorists assume in their models?

According to economists, restructuring is an essential requirement for economic growth. In a growing economy, there will be "frictional unemployment". Workers will lose jobs in the sunset industries. But there will be new jobs in the sunrise sectors. This is a sign of a dynamic economy, not a stagnant one. It will, undoubtedly, cause some short-term adjustment costs while people take time to move from old to new occupations.

Retraining facilities: A boon

Economists also recognise that the skill requirements in the new jobs may well be different from those in old ones. However, this is not a serious problem so long as retraining facilities are available. For instance, when the world switched from horse-driven cars to automobiles, the coachmen lost jobs.

But a lot more jobs were created in the auto and related sectors. Some of the coachmen, after retraining, may well have found jobs as car drivers. History is replete with such episodes. So, in the restructuring game, the Government's role would be to provide adjustment assistance and to retrain temporally displaced workers.

But does real life experience support this vision? According to the US Bureau of Labour Statistics, within two years after a layoff, two-thirds of the laid off workers have found jobs again.

Of those two-thirds, only 40 per cent, on average, earn as much as they had in their old jobs. It implies that out of 100 workers that get displaced, only about 27, on an average, get jobs that pay the same (or more) as in earlier jobs. The rest earn less or do not find any jobs.

Over a period of three and a half years of survey, it is found that there were 2.6 job seekers for every job opening. In fact, that ratio would have been even higher, according to the Bureau, if the calculation had included the millions of people who stopped looking for work because they did not believe that they could get decent jobs.

Those who give up searching for jobs out of frustration are no longer regarded as job seekers in labour statistics. Consequently, the officially recorded unemployment rate goes down.

Demand greater than supply

How much less is the majority of laid off workers earning? The problem is that, overall, the demand for jobs is greater than the supply. This excess-demand for jobs or excess supply of workers is most acute in the relatively high skill sectors of the labour market, such as airlines mechanics.

On the other hand, the unfilled vacancies are concentrated in the low skill segments such as hamburger flippers at McDonalds and shop floor workers at Wal-Mart.

Most of the unfilled jobs pay low wages. In fact, in 2003-04, more than 55 per cent of the hiring was at wages of $13.25 an hour or less, which is considered barely above the poverty level income for a family of four in many parts of the US.

Instead of moving up through job switch, a downward mobility of workforce is visible in the US. Many of the high-skill laid-off workers are being forced to take up lower skill jobs with lower wages. These workers, despite being educated and skilled, could not find jobs commensurate with their ability or expectations.

Lack of education: No excuse

So, lack of education or skills is not the reason for their inability to find jobs. Even in high-tech jobs such as software engineering, downward mobility is taking place where a Ph. D ends up doing the job, which a Master's degree holder can do equally well. Under the prevailing excess supply of skilled workers, retraining facilities have not helped much. The basic problem here is not lack of education or skills. Hence, adding more education or new skills would not necessarily improve the lot of the job seekers.

Take, for instance, the case of United Airlines mechanics (as reported in New York Times) to understand the processes at work. The airlines mechanics are nearly at the top of the skill spectrum among blue-collar workers in the US.At one time the workers at United were earning $31 an hour due to dramatic improvement in efficiency.

But then some militant labour leaders at United thought that they could further improve their pay packets by hard bargaining and using devices such as go slow at work. Earlier, this would have worked. The management would be forced to come to a settlement with the union.

But now the management has other options. Instead of cutting costs through internal economies of scale, (i.e. by doing a larger volume of work in-house) it alternatively reduces costs by outsourcing work from inexpensive sources (by sending planes to be serviced elsewhere at lower costs).

This is not only a feasible but also an acceptable solution these days.The workers were late in realising the implications of this new option available before the management. By the time they realised the folly of their actions, it was too late.

After a series of job cuts, the union had to accept drastic cuts in pay packets, just to prevent job losses for even more workers. Everywhere the trend was to reduce the workforce and improve labour productivity, while keeping wages in check.

What kind of retraining facility was made available to them? The unemployed workers were taught to improve their skills in resumé-writing and personal interviews. The counsellors also urged them to spend only on basic needs (such as food, housing, medical insurance) and cut down on luxuries (such as cable TV) and gave them lessons on how to manage their mounting debt.

In other words, they were being taught to adjust to a life at a much lower standard of living than they were used to. Many of the participants in these workshops stopped attending after a few sessions.

All these vividly demonstrate that the real world does not behave the way the economists assume in their models. Many of the losers would remain losers while the gainers would be others who may even belong to a foreign country. Even if the gains are more than the losses, andthe society as a whole is better off in some sense, it is of little comfort to the losers.

One may argue that India is one of the countries that is benefiting from the global search for efficiency and cost cutting. But India too will lose out to less expensive countries, especially as the salaries of Indian professionals are skyrocketing. Good times may not be here for long.

(The author is a former Professor of Economics, IIM Calcutta. He can be contacted at alokray15@yahoo.com)