The UPA government has admitted that its first term — that coincided with the best years of India’s growth, the yardstick by which all future expansion must be measured — did not live up to expectations on the employment front. This does more than show up the hollowness of the policymakers’ earlier claim to the contrary. The admission was made to a query posed by the Parliament’s Standing Committee on Finance.

Testing economic “truths”

At stake is not so much the Government’s reluctance to accept the evidence on “jobless growth” as certain economic principles that we have embraced as abiding, almost axiomatic, truths. The experience of the period 2004-2009 most definitely casts doubt on their validity.

One of the fundamental assumptions that has underscored policymaking for the last two decades, exercised the minds of captains of industry and kept economist-planners busy with regression models, has been a direct relationship between growth, increasing productivity (total factor productivity) and employment.

Innovation is seen as the lubricant of rising productivity that speeds up output which, in the long run leads to higher employment, even if in the short run labour is displaced.

Utopia for whom?

In an ideal situation, some might even call it utopian: higher factor productivity could lead to lesser hours of work for the same volume of manpower now, with new skills to produce more in less time. Assuming real wages remain the same, that would mean more leisure time, surely something to aspire for?

But that does not happen because of other closely related factors, which the simple equation between growth and productivity and employment does not take into account. Technological refinement enables higher output per worker, but also fosters newer owner-aspirations: market expansion, higher profitability and increasing shareholder value. Corporate goals distort the inner logic of innovation and the introduction of newer technology in work processes and supply chains.

More work, less jobs

A realignment of goals — higher profits and shareholder value based on lowering costs, and other efficiency criteria — encourages retrenchment or at best a realignment of the contract between employee and employer.

High total factor productivity, under the circumstances, does not generate employment or at any rate, traditional secure forms of employment. Not in America as various studies have found, and certainly not in India, as disparate bodies such as the ILO and the Finance Ministry’s latest Economic Survey discovered.

What studies in America and the India have discovered is a decoupling of employment from the causal chain of rising productivity and economic growth.

This was never always so either in America or India: there were periods in both societies when the three links in the chain held firm. In both economies, one highly developed and the other emerging from the shadows, the rupture took place almost precisely in the same period — the decade of 1990s onwards.

The section on India in ILO’s 2012 report on Global Employment Trends suggests 1991 as the watershed year before which the link held: productivity and employment had grown at similar rates.

Then “as global and domestic economic conditions improved, increased labour productivity took over as the driver of growth in the region (South Asia).”

This was true particularly in “…India where total employment grew by only 0.1 per cent over the five years to 2009/10 (from 457.9 million in 2004/5 to 458 million in 2009/10) while labour productivity grew by more than 34 per cent.”

The Economic Survey expresses the same sentiment; low productivity and high employment in agriculture and the reverse in finance and brokerage sectors, the most productive in the economy. The policy that suggests itself is, of course, to increase investments in agriculture (modernising it) thus expelling excess labour into the industrial world. But here is the twist.

The flaw in the ointment

Indian industry, the Survey finds, has high employment but low value addition. This leads to an “alarming” conclusion: “…while workers are being added to industry, the productivity of the jobs they are going into has not been high.” In part, this is because the sector includes low-productivity construction “and the booming construction sector has accounted for a large share of the jobs created in industry.”

Here comes the revelation: “However, an additional problem is that few of the jobs in industry are formal (emphasis added) or being created by the comparatively more productive large firms.”

In US, decoupling celebrated

The links between productivity and employment are equally debatable in America, the crucible of productivity and innovation. The decline in manufacturing jobs accompanied by high productivity has, in fact, been celebrated by US policymakers and some economists as a repeat of how American agriculture became, with just a handful of “farmers”, the food-supplier to the world.

Innovation and high productivity have not just led to increased output by fewer workers but also reworked global supply chains, thus enabling offshoring of jobs.

A study by the Economic Policy Institute’s Robert E Scott done in August 2012 calculated the loss of American jobs to China in the ten years to 2011 at 2.7 million, of which more than 77 per cent were from manufacturing. Writing in The New York Times , MIT professors Erik Brynjolesson and Andrew McAfee cite economist Jared Bernstein’s data about the gap between rising productivity and employment since the end of the 1990s — a gap they suggest will grow.

The end of the 1990s? Wasn’t that the dawning of the digital age?

comment COMMENT NOW