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Tackling the other kind of unemployment

By Ishita Misra

The growth in the working age population that was not in school in India was 1.9% between 2005- 2012. In the same period, the net annual job growth rate was only 0.6%. In other words, only 3 million people got a job out of the 13 million people entering the workforce every year. However, the employment surveys of the National Sample Survey Office (NSSO) have reported low and stable rates of unemployment for more than three decades. Observing this paradox, the NITI Aayog flagged disguised unemployment as a bigger problem for India than unemployment.

Underemployment in India and its effects

Disguised unemployment or underemployment, is a situation where a job is insufficient for the worker and results in underutilisation of the worker. The consequence of such underutilisation is low productivity of the workforce which inhibits the economy from growing to its potential. The low productivity can be seen in every sector.

According to the NSSO survey, 49% of the total workforce was employed in agriculture but it contributed to only 17% of the GDP in 2011-12. In 2010-11, 72% of the workforce employed in manufacturing contributed to only 12% of the manufacturing output. Furthermore, 98% of the workforce in the service sector in 2006-07 produced just 62% of the outcome.

The ‘missing middle’

One of the main causes for underemployment in India is the presence of a large number of small and large enterprises but comparatively very few medium-sized enterprises, a phenomenon known as the ‘missing middle’. The most prominent reason behind the lack of medium-sized industries is the labour laws applicable to them.  There are 45 national laws and 170 state statutes that directly deal with the labour market issues in India. These laws form a complex web of overlapping, and sometimes contradictory rules and regulations. To escape these complex regulations, the small enterprises often avoid scaling up to medium size enterprises and use techniques like hiring temporary workers that fulfil their needs but invariably lead to underemployment.

Medium-sized industries typically employ unskilled labour, which constitutes a majority of the workforce in the country. This presents an opportunity for workers in agriculture (suffering from underemployment), to move towards manufacturing without even having prior skills in manufacturing activities. This shift could not only reduce underemployment but also improve productivity by optimising the worker to capital ratio in both the sectors.

Developing robust medium-sized industries 

Making labour laws less stringent can be a big boost for the creation of high productivity jobs and decreasing underemployment by initiating the development of medium-sized enterprises. Initiatives like ‘Make In India’ will also have a positive impact by making it easier for entrepreneurs to start businesses and for small enterprises to scale up.

An increase in medium enterprises can help India increase the productivity of the manufacturing sector and its share in merchandise export. The Vice Chairman of Niti Aayog, Arvind Panagariya, recently mentioned that moving one percentage point workers out of agriculture into manufacturing can increase the GDP by 1.5%, at the current productivity levels, in each sector. The increase in GDP will enable the government to increase the expenditure on education, health, and infrastructure and further develop the economy.

In contrast with China

According to the NITI Aayog, attracting big firms from China will also help combat underemployment. Development of the manufacturing sector in China was a major contributing factor in its economic development. This resulted in China becoming a hub for manufacturing firms all over the world. However, China now has a workforce that is ageing and demanding higher wages. In comparison, workers in India are younger and willing to work with lower wages. Due to the large workforce and competitive wages, India can successfully attract big firms and create well-paid jobs for unskilled and semi-skilled workers.

India only has a 1.7% share in the global merchandise export, a small value compared to the 13% share belonging to China. Decreasing underemployment will not only increase the income of labourers but will also boost the economy.

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