55379 India's Employment Challenge CREATING JOBS, HELPING WORKERS 2 THE WORLD BANK India's Employment Challenge India's Employment Challenge Creating Jobs, Helping Workers Poverty Reduction and Economic Management Unit, South Asia 1 THE WORLD BANK 1 YMCA Library Building, Jai Singh Road, New Delhi 110 001 Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trademark of Oxford University Press in the UK and in certain other countries. 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ISBN-13: 978-0-19-806351-3 ISBN-10: 0-19-806351-2 Typeset in AGaramond 10.5/12.7 by Eleven Arts, Keshav Puram, Delhi 110 035 Printed in India by De Unique, New Delhi 110 018 Published by Oxford University Press YMCA Library Building, Jai Singh Road, New Delhi 110 001 Contents List of Tables, Figures, and Boxes vii Acknowledgements xi List of Abbreviations xiii Executive Summary 1 Introduction 1 Structural Changes in the Indian Economy and Labour Market Developments since the 1990s 3 Meeting India's Employment Challenges 7 How Can Policy and Institutional Reforms Help Meet the Employment Challenge? 12 1. Overview and Labour Market Trends 20 Introduction 20 Trends in Labour Supply 24 Employment 29 Wages and Productivity 35 Female Labour Force Participation 38 Scheduled Castes and Scheduled Tribes 40 The Unemployment Situation 42 India's Formidable Employment Challenges 44 2. Employment in the Informal Sector 46 Size of Employment in the Informal Sector 46 Quality of Jobs in the Informal Sector 49 Informal Employment in the Manufacturing and Tertiary Sectors 50 Labour Absorption in the Agricultural and Rural Sectors 55 Policies and Regulations to Support Informal Sector Earnings and Promote Formalization 60 vi 3. Employment in the Formal Sector 64 Contents Employment in Organized Sectors 64 Why has Employment Elasticity in Formal Manufacturing been Low? 65 How has Trade Affected Employment Growth in Manufacturing? 69 Dualism in the Manufacturing Sector 72 Is Outsourcing Mitigating Dualism? 76 Why has Dualism Persisted? 78 The Tertiary Sector 81 4. What Do Regional Differences in Labour Market Outcomes Imply? 87 Introduction 87 The Stylized Facts--How Significant are Regional Differences? 88 Low Migration and Urbanization Rates 93 What is Driving the Regional Differences in Labour Market Outcomes? 95 Summing Up 103 5. Labour Regulations in India: Helping or Hurting Workers? 105 The Role of Regulations in Labour Markets 105 Labour Regulations in India and Their Enforcement 108 Assessing India's Labour Regulations 116 The Impact of Some Key Labour Regulations in India 121 Some Options for Reforming Labour Regulations 132 6. Increasing the Effectiveness of Active Labour Market Policies 140 Introduction 140 Central Public Works Programmes 142 Social Insurance Schemes 147 Employment Exchanges 153 Vocational Education and Training 156 Conclusion 164 Appendices 167 References 191 Tables, Figures, and Boxes TABLES 1.1: Population and Labour Force (in millions, UPSS) 21 1.2: Distribution of Prime-Age Workers by Status, 1983 to 2004­5 (UPS) 33 1.3: Annual Real Wage Growth (CAGR) 37 1.4: Productivity Growth (by Sector) 37 1.5: Rural Workers' and Female Workers' Wages Below Poverty Line (Wage/Salary Per Day in Rs) 38 1.6: Unemployment Rates by Status 42 1.7: Reasons for Unemployment (per cent of total) 44 2.1: Ratio of Predicted Wages for Regular Salaried Workers to Predicted Wages for Casual Labour, All India 50 2.2: Category-wise Classification of Growth and Non-Growth Industries in the Unorganized Sector 52 2.3: Growth Rate of `Person' Days, by Operation 56 3.1: Growth Rate of Value Added and Employment Elasticity 66 3.2: Relative Importance of the Wage­Employment Trade-off and the DRER Effect 67 3.3: Industries Classified by Trade Orientation 70 3.4: Manufacturing Sub-sectors, according to Exposure to International Trade 71 3.5: Relative Importance of Wage­Employment Trade-off and DRER in Employment Elasticity 71 3.6: Change in Employment Share by Factory Size, 1994­2000: Gainers and Losers 75 3.7: Contract Intensity (Per cent of Contract Labour) by Size of Factory in Six Industry Groups: 2000­1 76 3.8: Distribution of Manufacturing Employment (in per cent) 76 3.9: Product Outsourcing Intensity, by Employment Size of Factories: 2000­1 (in per cent) 77 3.10: Proportion and Distribution of Firms Subcontracting-in, by Location and Industry Group: 2000­1 78 3.11: Employment Elasticities for Different Sectors and Periods 81 viii 3.12: Household Expenditures by Education and Expenditure Groups: Values of Tables, Figures, and Boxes Dummies of Quantile Regressions (NSS 55th Round) 85 4.1: Employment and Participation Rates in Regions are Correlated across Rounds 90 4.2: Regional Convergence--Regions with Higher Initial Real Wages have Seen Slower Real Wage Growth (in % p.a.) 91 4.3: Growth of Population and Manufacturing Jobs by Size of Town 95 4.4: Participation Rates for Males and Females 100 5.1: Labour Laws and Regulations Governing Industrial Regulations 108 5.2: Amendments to the IDA 114 5.3: Industrial Dispute Reconciliation Bodies 118 5.4: State-wise Details of Number of Dispute Cases Pending in Labour Courts (October 2000) 119 5.5: Suggestions for Consolidating Labour Laws 134 6.1: Coverage Rates of Social Insurance for Organized and Unorganized Sectors, 2004 148 FIGURES 1: Real Per Capita Expenditure Plotted Against Real Weekly Earnings for NSS Regions, Estimated from Five Thick Round Surveys (1983­2004) 2 2: Real Wage Growth by Deciles, 1983 to 2004­5: High Growth in Top Two Deciles 5 3: More Than 9 Million Workers will Enter the Job Market Each Year 7 1.1: GDP and Employment Growth in India 21 1.2: Indian Labour Force (in millions) 25 1.3: All-India Worker Population Ratios and Student Population Ratios (Age Group 10­14 Years) 28 1.4: Worker to Population Ratios (UPSS) 29 1.5: Distribution of India's Workforce 30 1.6: Sector-wise Deployment of Incremental Workforce (in millions) 31 1.7: Share of Workers (UPS) by Sector in 2004­5 32 1.8: Wage Premiums by Educational Attainment 33 1.9: Rural Real Wages and Growth from 1983 to 1999­2000 36 1.10: Sources of Productivity Growth 36 1.11: Average Real Daily Wages and Wage Growth 37 1.12: Aspirations of Women (Aged 26­66) Currently Doing Domestic Work by Educational Status (1983­2000) 39 1.13: Occupational Distribution by Caste 40 1.14: Unemployment Rate in India (CDS) 42 1.15: Education-specific Unemployment Rates 1999­2000 43 2.1: Composition of Formal and Informal Sector Employment (%) 47 2.2: Ratio of Regular Salaried Wages to Casual Wages 50 2.3: Daily Real Wages in Non-agricultural Occupations (in Rs) 56 2.4: Growth Rate of Labour Productivity and Employment across States 56 3.1: Total Formal Sector Employment Levels (in Millions) and Growth 65 3.2: Employment and Real Gross Value Added in Formal Manufacturing (1974­5 to 2004­5) 65 3.3: Changes in Real Effective Exchange Rates and Domestic Real Exchange Rates (Producer Prices to Consumer Prices) 68 3.4: Growth of Manufacturing Exports 69 3.5: Trade and Employment Share (per cent) 70 3.6: The `Missing Middle' Manufacturing Firms (by Size of Employment): India Compared to Other Countries 73 3.7: India: Distribution of Employment and Productivity by Size Groups 74 3.8: Distribution of Employment by Firm Size in Manufacturing Sub-sectors 75 3.9: Employment Share of the Tertiary Sector (%) by Quintile Groups of Per Capita Expenditures, Different Rounds 83 3.10: Kernel Density Functions of Expenditure Per Capita in the Tertiary Sector, Different Rounds 84 3.11: Kernel Density Functions by Major sub-groups of the Tertiary Sector 84 3.12: Coefficients of (Dummy) Variables from Quantile Regressions on Mean Per Capita Expenditures 85 4.1: Log Household Real Per Capita Expenditures Plotted against Log Real Weekly Earnings for Regions for Five Rounds from 1983 to 2004­5 88 4.2: Male Employment Rates (in Units): Little Variation across NSS Regions 89 4.3: Employment and Participation Rates (%) for Males and Females across Different States 89 4.4: Female Employment Rates (in Units): Large Variation across NSS Regions 90 4.5: Convergence of Casual Wages: Growth from 1983­2000 against Real Wages in 1983 91 4.6: Rural and Urban Casual Wage Ratio 92 4.7: Economic Migration across States and Regions, 1997­2000 93 4.8: India's Urbanization Growth by Types of Cities 94 4.9: Decomposing Growth by Contribution of Productivity, Employment Rate, and Dependency Ratio 96 4.10: Growth of Employment and Growth of Labour Productivity by Regions-- Same Period and Previous Period 97 4.11: Employment Levels of Males and Females and GSDP Levels: Variations across Regions and Time 99 4.12: The Effect of Variations in GSDP on Male Earnings 99 4.13: Participation Rates for Females, 55th Round 101 4.14: Female Participation Rates (25 years and above) and Expected Earnings for Females and Males 102 5.1: Percentage of Contract Labour in Total Manufacturing Labour Force 116 Tables, Figures, and Boxes 5.2: Prosecutions and Convictions from Violations of the Contract Labour (Control and Abolition) Act 120 5.3: India Labour Laws Compared to Selected Countries 121 5.4: Firms Consider India's Labour Laws to be More Binding than Those of Most Other Countries 122 5.5: Ranking, by Firm Size, of Constraints to Manufacturing Growth Relative to Power Shortage Problems 122 5.6: Measuring the Costs of Regulations on Employment, By Sectors 125 ix x 5.7: Measuring the Costs of Regulations on Employment and Value-Added, by State 126 Tables, Figures, and Boxes 5.8: Measuring the Costs of Regulations on the Number of Registered Factories, by State 127 5.9: Minimum Wages and Employment 129 5.10: Clustering of Urban and Rural Casual Wages and Minimum Wages, by State (Kernel Distribution of Urban and Rural Casual Wages) 130 5.11: Rural and Urban Wages 132 6.1: SGRY Work Days per Agricultural Worker and per BPL Household, 2003­4 143 6.2: Vacancies and Placements by Employment Exchanges, 1991­2001 (in thousands) 154 6.3: Secondary School Dropout Rates in India 156 BOXES 1.1: Definition of Key Labour Market Terms Used in India and in this Report 23 1.2: Labour Market Data in India 26 1.3: International Migration from India 34 2.1: Examples of Successful SME Promotion 54 2.2: The Self-Employed Women's Association (SEWA) 58 2.3: Horticulture Development in Maharashtra 60 3.1: Determinants of Employment Elasticity 67 3.2: Wage-setting in the Public Sector 80 3.3: Composition of Employment in the Tertiary Sector 82 4.1: Does Increase in Labour Productivity Imply a Decline in Employment? 97 4.2: Relating GSDP Levels to Employment: The Need to Address Endogeneity 98 5.1: The Economic Case for Labour Market Regulations 106 5.2: Trade Unions in India 110 5.3: Special Economic Zones and Employment 115 5.4: Implementation of Core Labour Standards 117 5.5: Doing Business Indices 121 5.6: What does Economic Theory Say about the Costs of Labour Regulations? 123 5.7: Principles to Guide Labour Market Reforms 133 5.8: Amending the IDA to Simplify Dispute Resolution Mechanisms 135 5.9: Amending the IDA to Increase Labour Market Flexibility 135 5.10: Examples of Labour Market Reforms Aimed at Increasing Market Flexibility 137 6.1: Major Central Rural Employment Programmes in the 1990s and at Present 142 6.2: The National Rural Employment Guarantee (NREG) Programme 146 6.3: West Bengal's Provident Fund for Unorganized Sector Workers 147 6.4: The Government's Recent Initiatives on Social Security for Unorganized Sector Workers 151 6.5: International Experience of Vocational Education Programmes 157 6.6: Secondary Education in India 158 6.7: The Appropriate Role for the Public Sector in Training 162 6.8: Training for the Informal Sector--The Jua Kali Experience 163 Report Team and Acknowledgements This report was prepared by a team led by Ahmad Politics and Economics), K. Ramaswamy (IGIDR), Ahsan and Ashish Narain (SASPR), under the R. Srivastava (Jawaharlal Nehru University), K. guidance of Ijaz Nabi, Sector Manager. Sadiq Sundaram (Delhi University), Suresh Tendulkar Ahmed (SASPR), Michael Carter (SACIN), (Delhi University), and Jeemol Unni (GIDR). and Fayez Omar (SACIA) provided the overall guidance. Kapil Kapoor and Dipak Dasgupta The team thanks peer reviewers Kaushik Basu (SASPR) provided helpful comments at various (Cornell University), William Maloney (LACVP), stages. and T.S. Papola (Institute for Studies in Industrial Development) for their very helpful and detailed Other core Bank team members were: Amit Dar comments on an earlier draft of this report and (SASHD), Maitreyi Das (SASES), Elena Glinskaya for participating in the Review Meeting on this (SASPR), Dipak Mazumdar (Toronto University report. The team also thanks all other participants and Consultant), Philip B. O'Keefe (SASHD), of the Review Meeting who provided helpful Carmen Pages (HDNSP), Kin Bing Wu (SASHD), comments. The team also thanks the Department and Farah Zahir (SASPR), Vidya Kamath, Rita of Economic Affairs, Ministry of Finance, and Soni (SASPR, Programme Assistants), Sergiy the Ministry of Labour, Government of India, Biletsky (RA, Database and Analysis), M. Bontch for sending their comments in 2007. Finally, (RA, Data analysis and Maps), and Arpita the team gratefully acknowledges comments Chakraborty (RA, Data analysis). Zhaoyang from Sandip Sarkar, Institute for Human Hou provided very helpful research assistance in Development, New Delhi in updating this report. updating the report with 2004­5 National Sample Survey (NSS) data. This report has been prepared alongside parallel World Bank studies on Skills Development in India: This report draws primarily on background The Vocational Education and Training System, led by papers written for it and the conference on Amit Dar; on the Secondary Education on India, led labour and employment issues organized by by Kin Bing Wu; and the Development Policy the Institute for Human Development from Review Inclusive Growth and Service Delivery: 27­9 July 2006. These papers were written by Building on India's Success, led by Rinku Murgai, the aforementioned team members and by the Lant Pritchett, and Marina Wes. All four reports following economists who, however, are not have drawn a few common team members and responsible for the views in this report: Jyotsna sometimes drew on common material. Jalan (CSSS), Tirthankar Roy (Gokhale Institute of Abbreviations ADB Asian Development Bank GDP Gross Domestic Product ASI Annual Survey of Industries GoI Government of India BIRA Bombay Industrial Relations Act, GSDP Gross State Domestic Product 1946 GVA Gross Value Added BPL Below Poverty Line HYV High-yielding Varities CAG Comptroller and Auditor General IDA Industrial Disputes Act, 1947 CBMI Community-based Micro-Insurance ILO International Labour Organization CDS Current Daily Status IRDA Insurance Regulatory and CII Confederation of Indian Industries Development Authority CMIE Centre for the Monitoring of the ISIC International Standard Industry Indian Economy Classification CSO Central Statistical Organisation ITC Industrial Training Centre CSS Centrally Sponsored Scheme ITES Information Technology Enabled CWS Current Weekly Status Services DGE&T Director General of Employment & ITI Industrial Training Institute Training JGSY Jawahar Gram Samridhi Yojana DME Directory Manufacturing Enterprise JRY Jawahar Rozgar Yojana DRDA District Revenue/ District KAM Knowledge Assessment Administration Methodology DRER Domestic Real Exchange Rate M&E Monitoring and Evaluation EAS Employment Assurance Scheme MFI Micro-Finance Institution EE Employment Exchange MPCE Mean Per Capita Expenditure EGIP Employer-Generated MRTU Maharashtra Recognition of Trade Implementation Plan Unions Act EGS Employment Guarantee Scheme NCVT National Council for Vocational EPZ Export Processing Zone Training FDI Foreign Direct Investment NDME Non-directory Manufacturing FICCI Federation of Indian Chambers of Enterprise Commerce and Industry NES National Employment Service xiv NFFWP National Food for Work Programme PULP Prevention of Unfair Labour Abbreviations NGO Non-Governmental Organization Practices Act, 1971 NIC National Industry Classification SC/ST Scheduled Caste/Scheduled Tribe NREG National Rural Employment SEWA Self-Employed Women's Guarantee Association NSS National Sample Survey SEZ Special Economic Zone NSSO National Sample Survey SGRY Sampoorna Grameen Rozgar Yojana Organisation SME Small and Medium Enterprise OAME Own Account Manufacturing UHIS Universal Health Insurance Scheme Enterprise UPS Usual Principal Status OBC Other Backward Class UPSS Usual Principal and Subsidiary Status OECD Organisation for Economic VET Vocational Education and Training Co-operation and Development VRS Voluntary Retirement Scheme PRI Panchayati Raj Institution Executive Summary INTRODUCTION Although labour market outcomes in the 1990s were better than what is commonly perceived and job growth has picked up markedly since 2000, India's employment situation is still a cause for concern. In the 1990s,1 job growth in India decelerated but less sharply than official estimates suggest. Seen in terms of changes over two decades--1983­93 and 1993­2004--and taking both principal and subsidiary workers into consideration, employment growth was largely flat at 2 per cent or slightly declining--from 2.1 per cent (1983­93) to 1.9 per cent (1993­2004).2 But, labour productivity and average wage growth were higher in the latter period than in the 1983­93 decade. Then, as economic growth accelerated post-2000, employment numbers too showed an increase. However, since 2000, there has been a deceleration in the growth of wages and earnings, especially for workers whose earnings fall in the middle of the wage spectrum. Additionally, as the large number of working poor (some 105 million persons or more than a quarter of all workers in 2004) indicates, many Indian workers are still trapped in jobs with low earnings. Of the 413 million prime-aged persons in the Indian labour force in 2004­5, the overwhelming majority, about 90 per cent, are employed in low productivity informal sector jobs.3 The share of formal sector and manufacturing in total employment has remained low and strikingly unchanged over the two decades since 1983. Although the open unemployment rate, at about 2.8 per cent, is low, it is chronic in nature and markedly higher among the youth (6.7 per cent), in urban areas (5 per cent), in certain regions (for example, West Bengal), and among the better educated.4 Unemployment and underemployment, taken together, have increased since the year 2000 and now apply to more than 8 per cent of the labour force. These developments have evoked considerable public concern in India, leading to the enactment of the National Rural Employment Guarantee Act that guarantees 100 days of employment in public works to each rural household. 2 The concern caused by labour market outcomes markets (the next section); (ii) to identify key India's Employment Challenge in India is thus not misplaced. For most Indians, employment challenges (the third section); and especially the poor and marginalized, labour (iii) to make recommendations for improving is their principal asset. The tight relationship labour market outcomes (the fourth section). between wage earnings, income, and household Based on wide-ranging consultations with central expenditures across India's different regions and state government officials, private sector (Figure 1) suggests that labour markets are the representatives, trade unionists, and academics, main channel through which economic growth this report addresses six major questions in its is distributed across regions and people. Pro-poor six chapters: growth requires not only increasing the earnings of the current 105 million working poor but also · What are the main developments in India's creating productive jobs for the 90 million or so labour markets? new entrants expected to join the labour force over · What is happening to the volume and quality the next decade. The key challenge is to create of jobs being created in the informal sector? good jobs that increase productivity. Achieving · Why has formal sector employment growth, economic growth rates of 8 to 10 per cent per especially in manufacturing, been slow? annum over the next decade, as is being discussed · What has contributed to the persistence of currently, will require that labour productivity `dualism'--the large gap in productivity and grow by 6 to 8 per cent per annum.5 earnings between the formal and informal sectors--within the manufacturing sector This report analyses the available evidence on and between rural and urban areas? India's labour market developments in the · How do labour market outcomes differ across aforementioned context and with the following regions and why? What do these differences objectives: (i) to assess developments in labour imply? · How do labour market regulations affect outcomes? Specifically, which policies are the Figure 1 Real Per Capita Expenditure Plotted most binding and what reforms are needed to Against Real Weekly Earnings for NSS Regions, Estimated from Five Thick Round Surveys remove constraints? (1983­2004) · In what way can the active labour market policies pursued by Union and state governments be Log of Household Real Per Capita Expenditure made more effective? How can the skills of the 6.5 workforce be increased? 6 The report draws primarily on fresh research by a team of Indian economists and World Bank 5.5 staff. Major labour market data sets, such as the quinquennial `thick' Rounds of the National 5 Sample Survey (that is, NSS surveys from 1983 4 5 6 7 Log of Real Earnings Per Week to 2004­5), reports from the Annual Survey of Actuals Fitted values Industries, information from the Labour Bureau Source: Authors' estimates from NSS Data. of the Government of India, and the Informal Note: An increase of wage earnings explains about 66 per Sector Modules of the NSS have been used cent of the variation in household per capita expenditure by itself. for analysis in this report. Finally, the research also draws on databases from the World Bank prospects. However, this can happen only if the Investment Climate and Doing Business surveys economy is capable of providing productive jobs to and those produced by the Centre for the the 90 million or so persons in this age-group who Monitoring of the Indian Economy (CMIE). The will likely seek work over the coming decade. This database prepared by Besley and Burgess (2004) will require: (i) raising productivity and job quality was used to derive new labour regulatory indices in the informal sector, including in agriculture; (ii) that distinguish between the complexity and stimulating formal sector employment growth; rigidities caused by regulations in Indian states. and (iii) addressing persistent regional, gender, and It is worth stressing that while the discussion on social disparities in labour market outcomes. trends in the labour markets draws on the latest `thick' Round survey of 2004­5, most of the Third, meeting these challenges will require analysis of these trends draws on the `thick' Round reforms in labour market policies along two survey of NSS ending in 2000 because the latest directions. One, regulatory reforms are required `thick' Round survey was released only recently. to remove barriers to the growth of formal sector jobs and labour-intensive manufacturing. This report elaborates on three main themes. First, Current labour regulations that are intended to as noted earlier, while labour market outcomes help workers actually end up hurting them by in the 1990s were better than what is commonly constraining job growth. By imposing excessive perceived and job growth has accelerated in recent rigidity in the formal manufacturing labour years, overall outcomes still present concerns for market, the regulations create disincentives for at least three reasons. One, a comparison of the employers to create jobs. This study estimates trends in job growth over two decades, 1983/ that the Industrial Disputes Act (IDA) has 1993­4 and 1993­4 to 2004­5, suggests that job caused about 3 million less jobs to be created in growth has been flat over the long term. Two, formal sector manufacturing. Two, regulatory the spurt in employment since 2000 has been reforms need to be complemented with effective accompanied by a marked deceleration in real wage and active labour market policies that can help growth and even in a decline for many workers; workers, especially those in the informal sector, the number of working poor has increased in become more productive, obtain more protection the past five years. Three, low paying, relatively against unemployment, and enhance skills. unproductive, informal sector jobs continue to dominate labour markets. STRUCTURAL CHANGES IN THE INDIAN ECONOMY AND LABOUR MARKET Second, looking ahead, India faces formidable DEVELOPMENTS SINCE THE 1990s employment challenges. The overarching challenge Although economic growth in India accelerated is to increase the earnings of workers, especially significantly in the past two decades, structural of the 105 million who live in poverty (2004­5), changes in the economy were relatively slow, while meeting the demand for jobs by new especially compared to other fast-growing Asian entrants to the labour force. Given that 60 per economies. The economic growth rate averaged Executive Summary cent of India's population is below 30 years of age, about 6 per cent per annum since the mid-1980s. the Indian economy can enjoy a `demographic Growth accelerated further in the last three years dividend' of some 123 million persons who will and is now more than 8 per cent. There was a enter the prime working age over the next decade, rapid increase in trade and, more recently, in lowering the dependency ratio and raising growth the investment rate which increased to over 30 3 4 per cent of the gross domestic product (GDP). and transport and communications in the services India's Employment Challenge Economic development in India, from the early sector, and to some extent to manufacturing. 1950s to the present, has been broadly consistent However, contrary to expectations, employment with the experience of other countries in that the is still overwhelmingly dominated by small-scale, share of agriculture in GDP declined from more informal sector activity in all sectors, more than a than 50 per cent to less than a quarter, while decade after the liberalization of the 1990s. the shares of industry and services increased. However, in some key respects, India's pattern of While overall job growth in the 1990s slowed structural change has been different from most down, the deceleration was considerably less other developing countries. First, most of the than official estimates. Fresh estimates, based increase in economic activity took place in services, on combining data from NSS surveys with 2001 which now account for more than 50 per cent of census data, suggest that employment growth . the GDP While the share of industry increased among prime-age workers may have declined to around a quarter of GDP, manufacturing's from 2.1 per cent in 1983­93 to 1.6 per cent share increased minimally and today accounts for in 1993­2000, that is, a decline of about 0.5 less than 15 per cent of GDP compared to much , percentage points.6 Official estimates, on the other higher shares in other developing countries. hand, show a halving of the employment growth While the pace of transformation accelerated rate from 2 per cent to about 1 per cent over the after 1990, when India's largely closed and same period. An important implication of these regulated economy started liberalizing to become fresh estimates is that while the growth elasticity more open and competitive, the shares of industry of employment--the response of employment and manufacturing remained largely unchanged growth to GDP growth--declined, it did not throughout the 1990s. Second, most of the decline by nearly as much as what is implied by increases in services and industry took place in official estimates of employment trends. relatively skill-intensive and capital-intensive sectors, and less in labour-intensive industries. On the other hand, while job growth has picked up since 2000, the job growth rate has remained The structure of employment was, until recently, unchanged over the past two decades. The surprisingly resistant to change. There was little recent acceleration in job growth for the prime- shift in employment away from agriculture and age population, to about 2.3 per cent between the sector still provides employment to nearly 1999­2000 and 2004­5, reflects both supply and half of India's workers. The share of employment demand side factors. On one side, the working- in agriculture has declined, from 65 per cent in age population has increased, leading to an the early 1980s to 55 per cent at present, but increase in the number of workers looking for much less so than the decline of agriculture's jobs and a rise in self-employment. On the other . share in GDP During the same period, the share side, the job growth also reflects the acceleration of manufacturing employment has matched in economic growth since 2003, indicated by the share of manufacturing GDP and remains the growing share of construction, trade, and at less than 15 per cent of all employment. manufacturing jobs. Several factors suggest that it Between 1999­2000 and 2004­5, however, is the growing supply of workers which is mainly there were faster changes in employment, driving this growth: (i) most of the job growth especially in rural areas, away from agriculture has been in subsidiary (part-time) workers and to construction and trade, hotels and restaurants, in self-employment; growth of employment for `principal' (full-time) workers has actually slowed most workers, wage growth was slower during down; (ii) allowing for the fact that 1999­2000, a the 1993­2004 period than in the previous year when the agricultural sector contracted, may decade (Figure 2), leading to a slight increase in have led to an unusual drop in employment in the the number of working poor. Since 2000, wage rural areas, and looking at decadal changes from growth has decelerated for most workers and even 1983 to 1993­4 and 1993­4 to 2004­5, employment declined for unskilled workers. growth has remained flat or slowed down slightly; (iii) unemployment rates have increased; and The evidence on deteriorating job quality needs (iv) wage growth has decelerated markedly in to be interpreted with caution. Usually, the recent years for almost all groups of workers. evidence cited for worsening job quality is the increase in the share of informal sector workers, Wages and productivity grew across the board especially casual workers (the `casualization' of in the 1990s but both slowed down post-2000. the workforce), and the poor growth of organized Mean wages grew by 3.4 per cent per annum, formal sector jobs. However, first, it is important on average, between 1994 and 2000, tracking the to remember that in the 1990s, as wages and growth in labour productivity. However, wage productivity rose, real earnings too rose for all growth decelerated markedly in the past five years. categories of workers. In this sense, job quality At the same time, wage growth took place across improved for all categories. Second, not all jobs all wage groups--including the most vulnerable in the informal sector can be rated worse than agricultural casual worker group. There were also formal sector jobs. An examination of household indications of a convergence in real wages across expenditures shows that among the top 30 per regions during the past two decades, including cent of workers, self-employed workers fare better between rural and urban areas. Overall, in the in terms of household per capita consumption space of six years from 1994 to 2000, the number than similar, regular-salaried workers. Third, of working poor fell by 12 million to 102 million.7 although aggregate numbers do show that there Wage growth across individuals, however, was was some casualization of the workforce in unequal. Most of the wage growth took place in the the 1990s,8 this was driven by trends in a few top two deciles of wage earners and, interestingly, industries: agriculture, mining, and construction. for workers in the bottom decile. Further, for Finally, between 1999­2000 and 2004­5, there Figure 2 Real Wage Growth by Deciles, 1983 to 2004­5: High Growth in Top Two Deciles Average Real Daily Wage Rates by Deciles in 1993­4 Prices Annual Growth of Rural Daily Wage Rates in 1993­4 Prices 250 6 Real daily wage, 1993­4 (Rs) Growth of real daily wage, 5 200 4 1993­4 (Rs) 150 3 100 2 50 1 Executive Summary 0 0 10 10 n an n an 1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9 dia dia me me me me Decile Decile 1983 1993­4 2004­5 1983/1993­4 1993­4/2004­5 Source: Staff estimates. 5 6 was a converse movement where the share of value-added employment decelerated sharply in India's Employment Challenge casual workers decreased and was offset by a the second half of the 1990s. Employment in the similar increase in self-employed workers. To formal sector was also stagnant because while the the extent this movement was voluntary and public sector shed labour, adverse relative price not driven by the absence of opportunities, it changes against manufacturing, and regulatory would suggest that the quality of jobs within policies, encouraged private producers to invest the informal sector improved in recent years. in more skill-intensive techniques that increased Comparison of per capita consumption suggests productivity instead of raising employment. that self-employed workers are better off than Though the formal service sector, relatively casual workers. unfettered by labour regulations, grew rapidly, its contribution to job creation was limited by its Two major developments in the 1990s which small share in overall employment. underline the development challenges that India now faces, need to be reconciled: (i) the Despite the deceleration in job growth in the slowdown in job growth in the 1990s and the 1990s, real wages grew for several reasons. rise in real wages across all wage groups, and (ii) First, significant deceleration in labour supply since 2000, the marked increase in job growth matched deceleration in job growth, offsetting accompanied by the deceleration in wage growth. any dampening effects on wages. Second, wage The deceleration in employment growth and growth followed productivity growth; productivity wage increases in the 1990s took place because within sectors increased and workers moved from of a deceleration of growth in both labour supply less productive jobs to more productive jobs in and labour demand. Supply decelerated mainly the non-farm sectors. In particular, the fast pace because female workers in rural areas withdrew of growth in skill- and capital-intensive services, from `subsidiary' jobs in favour of housework, as well as the manufacturing sectors, increased childcare, and leisure. This happened in large productivity and wage growth in jobs which part because higher household incomes and were already high-earning. Third, wage growth spouses' earnings made it possible for them to was also faster at the high end in urban salaried do so. Happily, child labour also fell significantly, jobs due to institutional factors: firms using though some 10 million children still remained efficiency wages to retain skilled workers and the in the workforce in 1999­2000.9 In addition, the large increase in public sector salaries awarded by youth population, both men and women, withdrew the Fifth Pay Commission. Due to these factors, from the workforce in favour of schooling or while average wages grew robustly, median real leisure. Our analysis reveals, however, that part wage growth rate was relatively anaemic at less of the slowdown in the supply of labour also than 2 per cent per annum. These contrasting happened because workers became discouraged trends of deceleration in job growth and unequal and dropped out of the labour force due to fewer wage increases highlight the employment employment opportunities, leading to reduced challenges that India faces. labour supply. Demand for labour decelerated because agricultural growth fell sharply at the end Developments in labour market outcomes from of the 1990s and organized manufacturing growth 2000 to 2005 were almost a mirror image of was sluggish. Agricultural employment--still developments in the 1990s.10 Job growth in the accounting for 59 per cent of the labour force in first five years of the new century accelerated that period--stagnated as growth in agricultural to about 2.3 per cent while real wage growth decelerated appreciably and even declined for in the same direction as East Asian and Latin many workers. While regular worker jobs also American rates, as India approaches middle- increased significantly in this period, most of the income country status. In the 1990s, however, job growth took place for self-employed workers the economy generated only about 5.5 million net in rural areas and their share increased markedly. jobs per annum. This suggested that unless the Correspondingly, the share of casual workers fell. economy performed better in creating productive However, unemployment and underemployment jobs at a much faster rate, wages and earnings rates, taken together over the entire period of could become depressed while unemployment 2000­5, increased. These developments suggest rates increased. In the event, wage rate growth that the acceleration in job growth may have mainly decelerated and for some groups even declined reflected a rise in the supply of labour which was between 2000 and 2005, even with a significant absorbed by rural, non-agricultural, self-employed acceleration in job growth. This highlights the occupations. Understanding these trends and their continued importance of job quality as an issue implications requires further study. since most of the labour force continues to remain in the informal sector, working in relatively low productivity jobs. While growth in formal sector MEETING INDIA'S EMPLOYMENT CHALLENGES skill-intensive manufacturing and the tertiary India's working-age population will grow at a sectors has picked up, their contribution to overall fast rate over the next decade. The overarching job growth is limited due to their small share in challenge for the Indian economy will be to India's labour market. generate an equally fast growth of good quality, productive jobs for the new entrants. Due to What measures will be needed to meet this demographic factors, the working-age population overarching challenge? Overall, sustaining will increase by about 12 million persons a year economic growth and adjusting the pattern over the next decade. About 8 to 9 million of of growth to make it more broad-based these persons will look for jobs (see Figure 3) and employment-intensive will be the key (Sundaram and Tendulkar 2006a). The number requirements. Growth is ultimately the main of entrants to the labour force will be even driver of employment. However, growth in the higher if female participation rates increase past decade was led by skill-intensive information technology (IT) and information technology enabled services (ITES), financial services, Figure 3 More Than 9 Million Workers will Enter the Job Market Each Year telecom and retail sectors, and skill-intensive manufacturing. The employment impact of 1400 Elderly, 59+ these sectors was muted due to their relatively 1200 small share in total employment and the high 1000 level of skills they require from workers. To 800 Children 1­14 have larger employment impact, growth has 600 to be more broad-based. This can be achieved Executive Summary 400 200 Prime Working Age Population 15­59 by stimulating growth in labour-intensive 0 manufacturing and increasing productivity in 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 the low-end tertiary sectors which can absorb most of the relatively unskilled labour that Source: Derived from www.ILO Laborsta.org shifts away from agriculture. Three intermediate 7 8 measures that can help make growth more broad- the same time, it is worth stressing that average India's Employment Challenge based are: (i) raising productivity and job quality productivity in informal manufacturing still in the informal sector; (ii) stimulating formal remains only one-eighth that of formal sector sector employment growth; and (iii) addressing firms. The welfare consequences of having such persistent regional, gender, and social disparities low-productivity employment are huge--in in labour market outcomes. terms of lower output and wages, poorer working conditions, insecurity, lost tax revenues, and Raising Productivity and Job Quality in the Informal Sector constraints to financial development.12 The informal sector dominates India's labour markets and will continue to do so in the Fostering productivity and employment growth medium term. Even if the definition of the formal in the agriculture sector should continue to claim sector is stretched to include all regular and priority because of the large size of the sector and salaried workers, some 335 million workers were its continuing potential for providing productive employed in the informal sector in 2004­5.11 employment. Although, in the long term, Given the current barriers for entry into the development necessarily entails moving labour formal labour markets, the informal sector will out of agriculture and into more productive jobs remain huge in the medium term. While some in manufacturing and the services sectors, more informal sector workers, the self-employed in than half of the labour force in India currently particular, are engaged in high productivity work, remains in agriculture.13 Thus, employment most others are employed in low productivity growth in this sector will continue to have a large jobs in the agriculture and tertiary sectors. impact on overall employment growth as well as on workers' earnings through its effect on wages. Stimulating productivity growth in informal In the 1990s, employment growth in this sector sector manufacturing and the tertiary sectors is slumped due to low growth, especially in the net necessary for enhancing job growth in the short sown area, as investments in irrigation and rural term. These sectors are important both in terms infrastructure declined. There is considerable of the number of workers they employ, as also potential for stimulating demand for labour and because they are well placed to receive workers productivity in agriculture through diversification moving out of agriculture. In the manufacturing into horticulture (which has an employment sector, of a total of about 45 million workers, some elasticity of production twice that of cereals), 33.4 million are employed in unorganized sector livestock and other high-value products, and firms (Unni 2006). In the late 1990s there was rapid increasing the spread of irrigation. Irrigated farms growth in this sector--spurred by policy changes can use 50 per cent more hired labour than rain- which dismantled small-scale reservations and fed farms. The further spread of labour-intensive unleashed the forces of competition, and policies high-yielding varieties (HYVs) of rice, especially which enhanced investment ceilings and gave to the north-eastern regions where water is other concessions, allowing firms to grow and available but productivity is relatively low, offers upgrade their technology. Unlike formal sector potential in this respect. Expanding sustainable manufacturing, however, this growth in value- irrigation under the Bharat Nirman project of addition in the informal manufacturing sector was the government will help this process. Increase in passed on to workers in the form of higher wages agricultural activity will also likely lead to growth and more employment. This sector is, therefore, in off-farm employment opportunities through essential to employment-creating strategies. At second-round effects, both supply side (as more people are employed in marketing and food informality can lead to high costs in the short term processing) and demand side (as more prosperous by throwing firms and employees out of work. firms demand more goods and services). The Stimulating Formal Sector Employment fact that less than 2 per cent of India's fruits and Growth vegetables are processed, compared to about Increasing formal sector employment in India 50­80 per cent in some East Asian economies, is another key challenge. The share of formal indicates the enormous employment potential sector employment in total employment has been in this area. virtually at a standstill, even declining slightly, more than a decade after liberalization. In the Both investment and regulatory reforms are second half of the 1990s, formal manufacturing needed in the informal agriculture and non- employment growth slowed down, both because agriculture sectors to stimulate growth and overall sectoral growth was relatively slow and increase incentives for firms to become formalized. because employment elasticity fell sharply. Our At present, regulations restrict the marketing analysis suggests three factors were responsible of agricultural produce under the Agriculture for the latter: (i) an adverse movement of relative Produce and Marketing Act and the Essential prices against manufacturing producers; (ii) Commodities Act, and the gathering of forest firms investing heavily in increasing capacity products under the Indian Forest Act (Saxena as the economy opened up in the 1990s. When 2003). Storage of produce and storage rent are the expected manufacturing growth did not restricted in some large states. These restrictions materialize, particularly in the second half depress both demands, for farm produce as well of the 1990s, this had a dampening effect on as farmers' earnings. The tens of millions of employment. Trade also had an impact: while forest dwellers who depend on forestry products export-intensive sub-sectors increased their are hindered from harvesting non-timber forest share in employment growth, the share of products such as fruits, nuts, flowers, and import-competing sectors fell slightly during twigs--activities that are ecologically sustainable. this period of adjustment; and (iii) the choice International evidence suggests that governments made by firms to raise wages and productivity need to take two approaches to encourage firms of existing workers rather than employ more to become formal (World Bank 2005f). First, people. India stands in striking contrast to other they should recognize that expanding the formal countries in that it has seen relatively faster sector takes time. In the interim, governments can growth in wages rather than employment in the provide a supportive environment for the growth manufacturing sector. It is important to note of productivity and improvement in working that despite the growth in wages the current conditions in the informal sector. But to support wage bill of formal sector manufacturing firms the growth of the formal sector, it is crucial to in India is only about 8 per cent of total costs remove disincentives for growth--reserving (Business Standard, 4 January 2006). What explains sectors for small-scale firms, regulations that this? India's generous depreciation rate of 25 raise transaction costs and costs when firms Executive Summary per cent for machinery and equipment for tax grow beyond a certain size, and other regulatory purposes, compared to 10 per cent in OECD barriers discussed earlier. Second, governments (Organisation for Economic Co-operation and can gradually improve enforcement by raising Development) countries, encourages firms to be penalties for non-compliance. This approach capital intensive. This allowance, combined with requires cautious handling because eliminating labour market regulations that discourage labour 9 10 mobility, has dampened job growth in labour- Addressing Regional, Gender, and Social India's Employment Challenge intensive sectors.14 Disparities The differences in earnings across individuals, A specific task will be to mitigate dualism (or the regions, gender, and caste groups indicate some concentration of production and employment specific challenges that need to be overcome to in very small-scale and large-scale production) improve labour market outcomes. Increasing in manufacturing by accelerating growth in the wage disparity, a conspicuous development in `missing' mid-sized plant group in manufacturing. the 1990s and in this past decade, appears to arise Compared to other countries, Indian manufacturing from two sources. First, as mentioned earlier, the is marked by the concentration of value-addition dualism in labour markets segments workers-- and employment in very large-scale and very placing most workers in relatively low-paying, small-scale firms, leading to the problem of a low-productivity jobs in small- or micro-size `missing middle'. Currently, the incentive structure firms and a few in better-paying high-productivity in the Indian manufacturing sector favours small jobs in very large-sized firms. This leads to and micro industries, while the dualism in the differences in wages between the two groups, capital markets gives specific advantages to large above what can be explained by observed skill firms if they opt for capital-intensive techniques differences. Second, as India's economy becomes that result in high wage per worker and low more integrated with the world economy, the employment per unit of output. The mid-size premium on skills is increasing the divide firms are trapped in a disadvantaged no-man's between educated and uneducated workers. land. This is problematic because international The number of persons returning to school to experience shows this `middle' group is the most complete secondary education is particularly dynamic in terms of employment generation and high. At the same time, less than 10 per cent entrepreneurial development. By introducing of workers in India have completed secondary more competition, this group also promotes or post-secondary education. Real wage growth efficient manufacturing growth. among persons of managerial and executive rank-- at about 10 per cent per annum--was highest in The dualistic pattern of job growth in the tertiary the South Asian region for three consecutive years, sectors also needs to be addressed. At one end, the indicating the scarcity of these skills. Wage growth main source of growth in the formal sector has among the less-skilled, middle 40 per cent group been the rapidly expanding ITES and financial of workers, on the other hand, was a more modest sectors. But these sectors' influence on the overall 3 per cent per annum in the 1990s. labour markets is marginal given that they employ only 6 million workers out of a labour force of The large differences in labour market outcomes more than 400 million. More important in terms across India's 28 states and seven Union Territories of employment generation are sectors such as need to be addressed by focusing on lagging regions trade, hotels and restaurants, construction, and and facilitating migration.15 The differences can community services. Evidence suggests, however, be dramatic. For instance, employment rates for that the bulk of jobs created in these sectors are males can vary from 65 per cent to 83 per cent, of low productivity and also informal. Thus, as in and for females from 10 per cent in Delhi or manufacturing, workers are clustered at two ends Tripura to 50 per cent in Andhra Pradesh.16 Real of the wage spectrum, mostly at the low end. weekly earnings from rural work in one region were less than one-tenth the weekly earnings is worth stressing though that the link between in another in 1999­2000. These differences are GSDP and employment opportunities is more also persistent: employment outcomes were long-term than short-term. Over short periods, consistently poor in the north-east, the northern increasing labour productivity--which has driven states of Bihar and Uttar Pradesh, the coastal most of India's economic growth--can dampen regions of Orissa and Kerala, and the former employment growth in both urban and rural French and Portuguese colonies of Puducherry areas. In the medium term, however, regional and Goa respectively. One important exception analysis suggests, increasing productivity does to these persistent differences is real wages which not dampen employment growth. The second show a tendency to converge across regions and proximate factor driving regional differences, between rural and urban areas.17 This may help the difference in female participation rates, explain why migration and urbanization rates has a complex relationship with income. On across Indian states are low. This also suggests one hand, increases in household expenditures important barriers to improving labour market (which proxy increases in household incomes) or outcomes--for instance, low labour mobility, spouses' earnings lower female participation rates. both across regions and from rural to urban areas, On the other hand, regions that provide greater which has led to unusually low urbanization in economic opportunities for earnings by females India. In this respect, the contrast with China is have markedly higher female participation rates. dramatic: whereas the urban population in China grew by about 180 million between 1989 and A key task, in the foregoing context, will be to 2003, in India it grew by a much smaller number draw more women into the `paid' labour force. of 80 million.18 The labour force participation rates for females are unusually low in India. While they declined Two proximate factors stand out as the main further in the 1990s, and then recovered after drivers of regional differences in labour market 2000, overall participant rates remained stuck outcomes: first, economic activity levels as at low levels. While female participation rates measured by the gross state domestic product in East Asia and Latin America are around (GSDP) and, second, female participation rates. 60 per cent, in India they are only around 30 First, over the long run, regions with higher per cent. Contrary to international experience, GSDP and higher economic growth rates show the rising rate of education among females higher employment rates and earnings and and lower fertility rates were accompanied by lower unemployment rates. This challenges declining female participation in the workforce the widespread perception of `jobless' growth. in India (about 3 per cent between 1993­4 and Interestingly, GSDP levels and economic growth 1999­2000). Two factors help explain India's appear to have a more significant effect on female low and falling female participation rates. First, employment than on male employment. A 1 per there is a positive income effect: with increased cent increase in GSDP leads to a 0.7 per cent household incomes or earnings by spouses, increase in female employment levels, a 1 per females working in subsidiary jobs in rural areas Executive Summary cent increase in urban employment, and a 0.4 quit the labour force in favour of household work, per cent increase in rural employment levels.19 leisure, or childcare.20 The second factor is the Economic activity also affects the quality of absence of employment opportunities which has jobs, as measured by earnings in rural areas. It hurt rural female participation.21 Also, the high 11 12 gender gap in wages, about 28 per cent, cannot the growth path of an upper middle-income, or India's Employment Challenge be explained by age, experience, or education--it even rich, industrialized, developed economy discourages female participation. Thus, increasing which is based on skill-intensive services and good economic opportunities will be important manufacturing? It is unclear whether India's for increasing female participation, especially in human capital and infrastructure are adequately rural areas. developed to sustain such a pattern of growth. Already, virtually all sectors of the economy are Addressing the exclusion of Scheduled Castes experiencing shortage of talent. According to a (SCs) and Scheduled Tribes (STs) from good McKinsey survey, the biggest concerns of 81 per quality jobs is an important challenge. Government cent of Indian managers are the availability of policies to reserve jobs and use affirmative action talent and high wages.22 A second issue is that have been effective in providing SC/ST groups such a growth pattern will only have a muted some advantage in getting rationed salaried public impact on poverty because the country will be sector jobs. But SC and ST workers still have a unable to provide good jobs to the 90 per cent much higher probability of being employed in of workers who have not completed secondary relatively poor quality jobs (often as agricultural education. This could exacerbate inequality labourers) and significantly lower probability of among the `two Indias' and among India's regions entering self-employed occupations (Das 2006). by concentrating growth in relatively better Improving outcomes for this group will require developed areas that already have a more skilled that special attention be paid to improving the skills labour force and better infrastructure. and educational attainments of SC and ST workers, on the one hand, and promoting policies to Adjusting India's pattern of growth to make it enhance micro-credit, self-help groups, and small more employment intensive, without lowering businesses among these groups, on the other. productivity, would require addressing some overall policy reform issues. First, reforms are HOW CAN POLICY AND INSTITUTIONAL REFORMS needed to improve the investment climate in the HELP MEET THE EMPLOYMENT CHALLENGE? country and do away with factors that currently Regulatory Reforms to Sustain Growth and dampen investment, productivity, growth, and Create Jobs job creation. The following positive measures India enjoyed a robust rate of economic growth would help considerably: better provision of in the 1990s but its pattern of growth was atypical law and order, protection of property rights, of the experience of most developing countries. corruption control, improvements in policy and Since the mid-1990s, growth was led by the tax administration, investment in infrastructure services sector, with the share of manufacturing in a sustained manner, and increased access to value-added and other jobs remaining largely finance.23 The cost of most infrastructure services stagnant. Even within manufacturing, job is estimated to be 50­100 per cent higher in growth took place mostly in the informal sector. India than in China and is a particularly binding While there has been an upsurge in formal constraint. Second, in agriculture, pricing and manufacturing growth and exports since 2004, it subsidy policies that bias incentives against is marked by the use of relatively skill-intensive labour-intensive crops and cropping practices labour; unskilled labour is used less intensively. (for example, horticulture and irrigated farm- This raises the issue: can India leapfrog the based cereals) will need to be addressed. Third, labour-intensive manufacturing stage and follow manufacturing and tertiary sector regulations, such as the small and medium enterprises (SMEs) The cost of these labour regulations is significant reservation policies, constrain factor mobility (of in terms of formal sector jobs lost. The research capital, land, and labour) by raising barriers against for this study, which tried to measure both de entry, exit, and trade, and dampen investment and jure and de facto applications of the IDA, showed competition. However, analysis suggests that even that manufacturing value-added, employment, after accounting for the dampening effect of all and the number of factories were all adversely these elements, reforming specific labour market affected in states with more restrictive labour regulations and policies which currently have an laws. Our conservative estimates, based on anti-labour bias, and making active labour market studying both de jure and de facto differences policies more effective, will generate growth and in labour regulations across states, suggest that job creation. India failed to create about 2.8 million formal manufacturing jobs because of just two clauses As in all countries, labour market regulations are in the IDA per se. Stated differently, the cost of necessary to address important market failures these two clauses alone is about 45 per cent of and to protect workers. However, India's labour all current formal manufacturing jobs. Although regulations are unusually complex. There are the cost (in terms of number of jobs lost) can be currently 47 central laws and 157 state regulations distributed almost equally between the `disputes' that directly affect labour markets. These are clause and the `retrenchment barriers' clause of often inconsistent and, at times, overlapping. the IDA, the two clauses affect different sectors in It is impossible for both firms and workers to different ways. While dispute-related regulations be aware of their rights and obligations when cost more jobs in capital-intensive industries, rules and regulations are spread over numerous retrenchment-related regulations affect labour- national and state-level Acts. There are also other intensive industries adversely. The retrenchment issues. One of the major pieces of legislation, clause is also related to job losses in more states. the IDA, creates incentives for adjudication rather than reconciliation, and has caused an Two overall goals can help make the reform of overloading of the disputes resolution system. labour market regulations in India more effective: To illustrate, in 2001, about 533,000 labour One, simplifying regulations, with special disputes were pending; over 28,000 had been emphasis on improving industrial relations, pending for more than 10 years. Other clauses smoothening dispute resolutions, and removing in the IDA make retrenchment and layoffs ambiguity and uncertainty. Two, reducing the (necessary at times because of changing market rigidities in labour markets. Specifically, four main conditions) costly, and hinder the closure of types of reforms are called for: (i) consolidating firms with more than 100 workers. This makes and simplifying labour laws from the current 47 firms more reluctant to hire in the first place. It central laws to about four--these should cover also prevents firms from redeploying resources the main themes of dispute resolution, conditions from less efficient activities and firms to more of work and welfare, wages and benefits, and efficient activities and firms. Finally, there is social security; (ii) modernizing the IDA to Executive Summary ambiguity and uncertainty surrounding the reduce the bias towards adjudication in disputes Contract Labour (Regulation and Abolition) and increasing the flexibility for employers to Act. Contract labour has become increasingly hire and fire in a way that also protects workers' important in recent years because it provides rights; (iii) resolving ambiguities concerning the firms some flexibility to hire and fire. Contract Labour (Regulation and Abolition) Act 13 14 to introduce greater flexibility; and (iv) improving The first initiative, the National Rural Employment India's Employment Challenge the labour law enforcement and inspection system. Guarantee (NREG) Act, will potentially provide The study provides detailed recommendations more protection to workers. The Act guarantees towards this end. There will also be benefits from every rural household up to 100 days' employment simplifying India's complex maze of minimum per year at the agricultural minimum wage set wage laws wherein states have to administer by each state, financed mostly by the Central 40 or so types of minimum wages. However, government. Coverage is initially to be confined to minimum wages, even in their present form, 200 backward districts, with nationwide coverage can be beneficial: while a large share of workers of all rural areas within five years. Analysis of still gets wages lower than the minimum wages, the NREG Act to date suggests a mixed picture the minimum wage laws can create a `lighthouse of costs and benefits. First, there is significant effect' by clustering workers' wages around the potential for a lean season Employment Guarantee states' minimum wages. As the affected workers Scheme (EGS). Simulations of a nationwide are generally poor, and since minimum wages 100-day employment guarantee programme do not appear to affect unemployment rates, the suggest that the lean season rural poverty rate minimum wages may actually be increasing the can be reduced from 37 per cent to around 23 earnings and welfare of poor households. per cent, or around 30 per cent on a year-round basis (Murgai and Ravallion 2005). The fiscal cost Active Labour Market Policies to Help Workers would be around 1.7 per cent of GDP annually, Regulatory reforms will be more effective if if implemented nationally. The gains would be they are complemented with programmes that progressive, with the poorest (richest) quintiles help workers obtain more marketable skills accounting for 29 (10) per cent of participants, and and some protection against unemployment. gains from EGS coming to 51 (7) per cent of pre- At present, the vast majority of workers who EGS consumption levels. The bulk of expected are in the informal sector receive neither. Major participants would be casual labourers. government interventions, in the form of employment generation through public works The design and implementation of the NREG programmes and social insurance, are limited Act need to be further refined to ensure that it in coverage and mostly ineffective. These is effective and equitable. An area of concern programmes are burdened by problems of poor is the use of state agricultural minimum wage accountability, uneven implementation, and high rates as the scheme wage rates, as the former costs. However, some promising initiatives for the are above market rates. This typically results in protection and security of the poor and vulnerable rationing (fewer jobs made available), lowering in the labour market are under way. These include: the employment generation impact, which the expanding special employment programmes for experience from the Maharashtra EGS confirms poor and less-skilled workers, widening social also applies to `guarantees'. The direct transfer security and insurance programmes to include impact of the NREG is significantly less than an informal sector workers, seeking private sector untargeted transfer due to the opportunity costs participation in employment exchanges to make of participation. An untargeted transfer, using the them more effective in matching employers and wage portion of the NREG only, would reduce workers, and strengthening programmes that poverty to around 15 per cent--as against 23 increase workers' skills and competencies. per cent from NREG. While the comparison is imperfect--as it measures only the transfer has only served to emphasize the importance of impact of NREG and not other economic strengthening the monitoring and accountability impacts--non-transfer gains from EGS would systems discussed here. need to be substantial to be larger than those from untargeted transfers. This point highlights The second initiative is to move from employment the importance of achieving significant economic programme-type safety nets towards a more returns to EGS assets and the poor to capture a comprehensive system of social protection. Past reasonable share of the gains. attempts at the national level to increase coverage in the unorganized sector, where most of the A shortcoming of previous public works workforce is concentrated, failed to achieve any programmes in India (and internationally) has significant penetration. While expanding social been the absence of evaluation of the economic security in the unorganized sector is important, impact of assets. While the NREG scheme benefits experimenting with different schemes is not from a stronger monitoring and evaluation without cost either. Future efforts should thus be (M&E) system than previous works schemes, based on a critical evaluation of existing initiatives, in order to expand the system of concurrent some of which show promise. Two types of evaluation to include robust impact evaluation insurance that stand out as somewhat more easy it will be critical to collect good baseline data to expand are life insurance (for which demand prior to the commencement of the scheme. in the commercial market already appears high Another significant improvement in NREG over among unorganized sector workers) and disability previous works schemes is the strengthened role insurance (which acts in one sense as the most of local governments or panchayats in design, extreme form of curative health insurance). implementation, and monitoring. However, Past experience suggests a cautious and gradual it will be important to develop accountability approach to the expansion of social insurance mechanisms which avoid the bundling of coverage. Although such a strategy may not be functions to specific agencies (in particular the consistent with the political desire for broad- District Rural Development Agency), which based schemes which have high announcement has contributed to implementation problems value, the financial costs of a poorly-designed in previous schemes. It also remains to be seen and rapidly expanded programme can be high, if the incentive and accountability structures as can the cost of raising expectations and failing ensure that gram panchayats (governing councils to meet them. in villages) are at the heart of NREG. A key component of such a programme will be social The third initiative, enhancing the performance insurance. Currently, the spending on this is low of India's largely ineffective government-run and the implementation concentrated. Another employment exchanges (EEs), has started in some issue is that the Act offers limited guidance on states. As of end-2004, there were 947 regular funds-flow mechanisms. If panchayats are to EEs in India, concentrated in urban areas--with be empowered, it is important for them to have some 5.3 million registered job seekers, 300,000 Executive Summary direct control over a portion of scheme funds. listed vacancies, and only about 160,000 workers The initial findings about the experience of the placed through the exchanges.24 Apart from NREG in the first two years highlighting its highly their placement function, exchanges are tasked uneven implementation across different states, with providing job counselling, training, labour 15 16 market information collection and dissemination, (for example, in West Bengal); and (iv) developing India's Employment Challenge aptitude testing of job seekers, and promotion effective rural outreach strategies for the NES of self-employment through special cells. The at the national and state levels. This may not limited assessments that are available suggest involve a physical network of more exchanges but that in the large majority of exchanges these perhaps a combination of IT-based information functions are performed poorly, often by staff services and collaboration with arms of state who do not have skills and knowledge of local governments that already have rural networks labour markets to allow for effective service. This in place. Some state employment services, such performance was reflected in the sharp decline in as the ones in Gujarat and Tamil Nadu, already both registered vacancies and placements between provide good models for increasing effectiveness 1991 and 2001. The placement rate at the all-India by expanding the role of IT in outreach, offering level, never more than 5 per cent, declined to detailed information on jobseekers, arranging almost 3 per cent in the 1990s. While the overall job fairs where jobseekers and employers engage picture is not encouraging, other states can draw directly, and strengthening job counselling from emerging good practices in two Indian states: functions which in most exchanges are desultory. Gujarat and Tamil Nadu. Both have expanded the A particularly interesting initiative in Gujarat is role of IT in increasing outreach to jobseekers the Rojgar Sahay Kendra which links a group of and employers. In particular, they are able to non-governmental organizations (NGOs) that offer detailed information on jobseekers which have knowledge of local job markets with the EE employers can sort according to their needs. jobseeker database, and intermediates between employers and jobseekers. There is a fundamental need to reorient the National Employment Service (NES) if it is to The fourth initiative is enhancing the skills and regain relevance in the current labour market. As education of workers by reorienting the vocational some government committees have noted,25 there education and training (VET) system which is is a need to focus on functions that address the currently not serving the economy's needs. This most important market failures. These include: (i) is especially important in a country like India the labour market information function which has where a large part of the workforce is stuck in been generally neglected. Timely information on agriculture, without the skills to transit to more trends in local labour markets can provide value to productive employment in other sectors. It is also both employers and jobseekers; (ii) developing a important, given that 8 million children drop out service orientation by engaging more intensively from secondary schools (between grades VI and with employers and groups such as trade unions XII) every year. At present, the 6,800 VET schools, and worker associations, to assess their needs almost all in the public sector, enrol less than 3 which cannot be met by private sector providers per cent of students at the upper secondary level. (these methods are already pursued by private Also, while these schools offer a total of over 100 employment agencies through interaction with courses in various areas--agriculture, business the human resource [HR] divisions of firms); and commerce, humanities, engineering and (iii) considering whether some functions of the technology, home science, and health and para- exchanges should be discontinued altogether. For medical skills--only 40 per cent of the available example, some exchanges operate small credit seats are utilized. Programmes operated by the schemes for jobseekers who want to pursue self- Industrial Training Institutes (ITIs) and Industrial employment--the results to date have been poor Training Centres (ITCs) to provide certificate- level crafts training also meet with only limited international experience suggests that there are success. A study by the Operational Research few successful models of vocational education at Group reported that only 28 per cent of graduates the secondary school level. It is, therefore, more of vocational education were gainfully employed. advisable to focus attention on strengthening A 2003 International Labour Organization (ILO) the secondary education programme rather than study found that none of the states covered by the expanding the vocational education programme. study had more than 50 per cent of the ITI/ITC Second, as far as technical education is concerned, graduates find wage employment, or become self- VET management, curricula, and instruction will employed, or even work in family businesses.26 At need to be restructured by introducing public­ the same time, employers in these states reported private partnerships. Reforms would also require a experiencing problems finding employees with clear demarcation between the functions of Central the right skills, implying that the graduates did not and state governments and the development of meet employers' needs (Dar 2006). A survey by effective coordination mechanisms between them. the Federation of Indian Chambers of Commerce Significant involvement by employers in the and Industry (FICCI) in late 2001 (FICCI decision-making processes of VETs is also critical 2002) also reported that 87 per cent of industry to ensure that the system is responsive to market respondents felt that VET institutions should demands. Another way to increase incentives have greater exposure to industrial practices. would be to give the institutions greater autonomy in terms of deciding on training programmes, Most significant, however, is the fact that current hiring and firing of teachers, and generating VET programmes do not meet the training needs revenues by selling goods and services. Finding of the large workforce in the informal sector, the right role for the public sector in training is arguably the group which should be its main critical. State-sponsored training may be used target. Because of its entry requirements and to address equity issues or market failures (for geographical mapping, the formal training system example, providing training for informal sector of VETs is not designed to offer skills to people workers or addressing the externalities or spillover with little or no education, and particularly not affects created due to training by firms) but may to those in the rural non-farm sectors.27 There be less needed when private capacity exists. are no other providers who fill this gap either. Most workers continue to learn trades on the job, The main emphasis on improving workers' through informal apprenticeships at their place skills will have to be in the form of expanding of work, from other low-skilled crafts people. secondary education. Worldwide, in response to International experience suggests that employers globalization and the emergence of the knowledge look for young workers who possess the basic economy, the importance of secondary education skills taught in primary and general secondary is being recognized for preparing young people education, and not workers trained in narrow for lifelong learning. A variety of research suggests vocational skills. This highlights the importance that in India also, returns to education jump at of enhancing secondary education, an area where the secondary and post-secondary levels. Yet, Executive Summary India is still lagging. while government policies have helped raise the enrolment rate for elementary schooling to Two principles should guide reforms intended 94 per cent, no such increase has taken place to improve the employability of VET graduates at the secondary level. While secondary school and the secondary-age cohort in general. First, enrolment currently stands at 54 per cent, less 17 18 than 10 per cent of the working-age population 5. The Planning Commission Report on Employment India's Employment Challenge aged 25 and above has completed secondary and (2002) estimates that 10 million jobs need to be post-secondary education. This number is low, generated annually in the economy; the estimated relative to what international experience suggests economic growth required to generate these is should be at India's income level. A variety 8 per cent to above 10 per cent. 6. This re-estimate is based on applying NSS-based of supply- and demand-side interventions are worker-to-population ratios to census-based age needed to expand access to secondary education.28 distribution of the population. Sundaram and Improving the skills of future workers requires Tendulkar (2006a) present these estimates in a expanding access to secondary education and background essay done for this report. also improving its quality. More directly relevant 7. The number of working poor is the number of for employment are curricula reforms to imbue workers in households below the poverty line. students with more problem-solving and 8. In that the share of regular workers remained entrepreneurial skills of the kind that employers stagnant or slightly declined, as did the share of seek. At the same time, it must be kept in mind self-employed workers in rural areas, while the that education also raises workers' expectations; share of casual workers increased from about 30 efforts to raise the educational level of the labour per cent to 33.4 per cent. force must be matched with efforts to increase 9. It is worth stressing though that this number the availability of the kind of jobs these workers only reflects paid child labour or child labour will demand. used to produce goods meant to be sold; it does not include the use of child labour for unpaid NOTES domestic work which may also be hazardous for 1. The 1990s refer to the period 1993­2000, that child health. is, the period between the 50th Round National 10. See Box 1.2 in Chapter 1 for a discussion on data Sample Survey (NSS) and the 55th Round NSS. issues. The 1980s refer to the period 1983­93 which 11. Estimates of the formal sector labour force vary corresponds to two other NSS Rounds. See from official estimates of 7 per cent, to other Box 1.2 in Chapter 1 for more details on data estimates of 11 per cent (Unni 2006). Some sources. researchers (for example, Sundaram and Tendulkar 2. The data used throughout this report refers to the [2006b], and also in this study) include all regular Usual Principal and Subsidiary Status (UPSS) or salaried workers, who make up 16 per cent of definition of employment measures (see Box 1.1 the labour force, in the formal sector. in Chapter 1 for details), unless specifically noted 12. Informal sector firms have less access to formal otherwise. credit. 3. See Table 1.1 in Chapter 1. 13. The last major NSS survey in 2000 suggested 4. The 2.8 per cent unemployment rate, sometimes agriculture's share was 59 per cent. The most referred to as the `open unemployment rate', is recent NSS survey (2004­5) suggests a significant long-term in nature because it refers to persons drop in agriculture's share to 53 per cent. who have been searching for or have been 14. The revenue loss from accelerated depreciation available for jobs for most of the year prior to allowance is estimated to be close to 0.8 per cent the survey. But in keeping with the international of GDP . definition of `open unemployment rate'--persons 15. This refers to the 78 regions in the NSS which who while searching for a job did not even work correspond loosely to agro-ecological areas. one hour a week--the actual unemployment rate 16. Employment rate refers to the share of the is close to 5 per cent. population in the 15­59 age group that is employed. Participation rate refers to the share of the 24. Consolidated information on private placement 15­59 working-age population that is working or agencies is not available but the Director General unemployed, that is, looking for jobs. of Employment and Training (DGE&T) estimates 17. While wages may converge, earnings--which that at least 800 existed as of the early 2000s (for depend on both wages and employment example, there are estimated to be more than opportunities--may not, due to differences in 100 in Gurgaon, Haryana, alone). India is not a employment opportunities. signatory to the ILO Convention 1996 on private 18. World Development Indicators. employment agencies. Like the EEs, these are 19. These estimates try to take into account the primarily concentrated in urban areas and in the two-way relationship between employment and formal sector, often with specific sectoral focus. economic activity--that is, the two determine 25. The 1978 Matthew Committee and, subsequently, each other. the Working Group on Employment of the 20. The effect of household expenditures (which Planning Commission, 2001. proxies household incomes) and spouses' earnings 26. However, there were significant inter-state on female participation were separately estimated differences: in Andhra Pradesh, unemployment and found to be significant. ranged from 33 per cent for ITI graduates to 21. `Expected earnings' is defined as weekly earnings more than 70 per cent for ITC graduates, while times the probability of finding a job. in Maharashtra it was around 23 per cent and 27 22. `The Job Boom', India Today, 27 February 2006. per cent respectively. 23. These were key constraints identified by firms 27. While one of the mandates of the ITIs is to train in the last investment climate survey conducted workers for the informal sector, evidence shows in India by the World Bank in 2003 (World Bank this is rarely the case (Dar 2006). 2004a). 28. See, for instance, Wu (2005). Executive Summary 19 Overview and Labour Market Trends 1 I ndian policymakers have stated as their goal the provision of `gainful and high- quality employment to at least the additions to the labour force'. In a country where the working age population is expected to grow by about 12 million persons, or close to 2 per cent, annually, till the year 2016, this constitutes a major challenge. Further, the deceleration in job growth in the 1990s, at a time when the economy grew at 6 per cent per annum, raised concerns about India witnessing `jobless growth'. This chapter argues that although labour market developments in the 1990s were not as poor as is generally perceived and employment growth picked up subsequently, India still faces formidable employment challenges. Labour supply continues to exceed labour demand and unemployment has grown by most measures. While a significant part of the labour force continues to shift out of low productivity jobs in the agricultural sector to better paying jobs, mainly in the tertiary sector, the bulk of it is still employed in casual jobs. Encouragingly, labour productivity and wages have risen and the number of working poor has declined. But, at the same time, the inequality in earnings is more marked because wage growth has been more rapid among high wage earners. The challenge facing India now is to provide employment to a growing, more educated, and young labour force, improve job quality in the informal sector, expand the formal sector, and address regional disparities in labour market outcomes. INTRODUCTION Indian policymakers have stated as their goal the provision of gainful and high- quality employment to at least the additions to the labour force. This is already a major task in a country where the working age population will increase by more than 12 million persons each year over the next decade. Approximately 8 million people will enter the labour force annually. This number will be even higher if India's low female employment participation rate increases.1 In the 1990s,2 against similar employment needs, the economy produced only about 5.3 million jobs on average each year. This number, based on the National Sample Survey (NSS) 55th Round Employment­Unemployment Survey (July 1999 to June 2000), reflected the substantial slowdown in data for 2004­5 suggests that while the overall workforce growth during the 1990s (relative to employment growth rate in recent years has been the 1980s) and caused much concern. Estimates almost double of what it was in the 1990s, it is by India's Planning Commission (2001a) show still only just managing to keep pace with labour that employment growth halved from 2 per cent supply (Table 1.1). Tellingly, the unemployment per annum in the 1983/93­4 period to about 0.98 rate increased from 7.2 per cent in 1999­2000 to per cent per annum in the 1993­4/1999­2000 8.3 per cent in 2004­5.3 period. This happened despite robust economic growth, implying a declining employment India faces an employment opportunity as well elasticity of growth (Figure 1.1). More recent as an employment challenge. The opportunity comes from the fact that the working age population is largely young and will continue to Figure 1.1 GDP and Employment Growth in India grow at the rate of 2 per cent per annum over the 10.00 9.00 next decade, even as the dependency ratio (the 8.00 7.00 ratio of dependents to workers in a household) per cent 6.00 5.00 drops significantly.4 The challenge will be to train 4.00 3.00 and educate these workers and provide them with 2.00 1.00 productive jobs. This will require a significant 0.0 1983/1993­4 1993­4/1999­00 1999­00/2004­5 acceleration in job creation, compared to the GDP Growth Employment Growth 1990s, over the next decade. In turn, this will require not just robust economic growth but a Source: CSO, NSS. Notes: Employment is measured using the UPSS concept. See change in the pattern of growth which will need Box 1.1 for explanation of UPSS and other labour market terms used in this report. to become more labour intensive. At the same Estimates from NSS surveys adjusted by population census. time, growth in productivity cannot be sacrificed Table 1.1 Population and Labour Force (in millions, UPSS) 1983 1993­4 1999­2000 2004­5 Total population 719.6 894.2 1,005.3 1,093 Population, age group 15­59 387 517.5 580.2 623.0 Male 196.4 264.9 295.9 322.8 Female 190.5 252.5 284.4 300.2 Labour Force (UPSS)*, 15­59 270.6 335.8 370 412.9 Male 181.8 228.8 257.1 280.4 Female 88.8 107 112.9 132.5 Workforce (UPSS)*, 15­59 265 328.5 360.9 402.1 Male 177.4 223.4 250.1 273.5 Overview and Labour Market Female 87.7 105 110.7 128.6 Unemployment Rate per cent (CDS)* 8.4 6.0 7.3 8.3 Unemployment Rate per cent (CWS)* - Rural Male 3.7 3 3.9 3.8 - Rural Female 4.3 3 3.7 4.2 - Urban Male 6.7 5.2 5.6 5.2 - Urban Female 7.5 8.4 7.3 9 Sources: Sundaram and Tendulkar (2006a); Bank staff estimates for 2004­5 using NSS. Note: *See Box 1.1 for definitions of UPSS, CWS, and CDS. The definition of `workers' corresponds to UPSS, unless otherwise specified. 21 22 either. Achieving annual economic growth , cent to around a quarter of GDP manufacturing's India's Employment Challenge rates of between 8 and 10 per cent to bridge the share increased minimally and now accounts for employment gap, as is being currently discussed, , less than 15 per cent of GDP much lower than will require that labour productivity also grow by in other developing countries. Second, most of 6 to 8 per cent per annum.5 the increase in services and industrial value added took place in relatively skill-intensive and capital- However, simply creating more jobs will not intensive sectors, and less in labour-intensive be enough; concerns about the quality of jobs industries. The pace of transformation accelerated have to be addressed. In the 1990s, relatively since the 1990s when India's largely closed and few jobs were created in the better paying, more regulated economy started liberalizing to become productive `organized sector',6 which is the sector more open and competitive. While it took 40 of choice for Indian workers, especially for the years for the share of agriculture to decline 25 educated. Employment in this sector grew by only percentage points to 35 per cent in 1990­1, it fell a 0.5 per cent annually from 1994 to 2000. Most further 11 percentage points between 1990­1 and jobs were created in the unorganized sector where 2003­4. Similarly, the share of services in GDP employment grew by 1.1 per cent annually but increased by 12 percentage points between 1950­1 where productivity is several times lower than in and 1990­1, and a further 11 per cent in just the the organized sector. Data on labour market trends next 13 years. Surprisingly, the share of industry between 2000 and 2004­5 shows that this pattern and manufacturing remained largely unchanged has continued; the share of regular salaried jobs through the 1990s.7 in overall jobs has remained virtually unchanged. Another issue is that within the unorganized India's employment pattern changed less rapidly, sector, the share of casual wage employment leading to large differences in labour productivity is above 30 per cent. Casual workers are at the across sectors, as shown in the following. Along bottom of the employment scale--they get lower with the changing structure of the economy, there wages, have uncertain employment prospects was a shift of workers employed in agriculture to with few benefits or pension arrangements, and more productive jobs, primarily in the services are beyond the reach of most laws designed to sector. However, this shift in labour, in relation protect labour. to the decline in GDP share, was slower in India than in other Asian countries. Also, while in most The pace of transformation of India's economy has Asian countries the share of services in GDP and picked up in recent years. Economic development employment grew at a more or less similar rate, in India, from the 1950s to the present, is broadly in India the share of services in employment grew consistent with the experience of other countries at a much slower rate than the share of services in in that the share of agriculture in the gross . GDP For example, in China, Thailand, Indonesia, domestic product (GDP) declined from around Philippines, Korea, and Malaysia, the share of 60 per cent in 1950­1 to less than 25 per cent now. the services sector in employment increased at However, in some other respects, India's pattern . a faster rate than its share in GDP But in India of structural change varied from that of most other the share of services in GDP went up by 22 per developing countries. First, most of the increase cent between 1960 and 2002, while its share in in economic activity took place in services, which employment increased by only 7 per cent during now account for more than 50 per cent of GDP . the same period (Papola 2005). Consequently, While the share of industry increased from 13 per most of the growth came from increases in labour productivity rather than increases in employment. Although employment growth declined in the Growth, in both value added and wages, was 1990s, the slowdown was more moderate than especially rapid in state-of-the-art information what was indicated by official estimates. In large technology (IT) and information technology part, the slowdown was the result of a decline enabled services (ITES), the financial sector, in `subsidiary' employment, especially among and in capital- and skill-intensive manufacturing women.8 The decline in female labour force sectors such as chemicals. participation may have been partly voluntary and partly due to rising incomes of spouses and/or This chapter examines important labour market other household members. At the same time, trends and developments in India since the early large numbers of the workforce shifted out of low 1980s. It discusses trends in labour supply and productivity jobs and entered higher productivity employment, wage and productivity growth, sectors. There was robust growth in labour and employment and underemployment (Table productivity and also, even though unequally, 1.1). It shows that labour market outcomes in the in wages and earnings. This enabled many more 1990s were not as poor as is commonly perceived. workers to move out of poverty. Box 1.1 Definition of Key Labour Market Terms Used in India and in this Report Labour Force: This includes all people who spent the year preceding the employment survey either engaged in work or seeking/being available for employment. Given that the large majority of Indian workers are engaged in casual or self-employed jobs, the NSS uses various definitions to classify the labour force, workers, and the unemployed. These include: Principal Status Workers: A worker's principal status is determined by the activity the worker spent most of his time doing in the reference period (the last 365 days). Usual Principal Status (UPS) workers are those who spent most of their time employed in their principal activity or looking for jobs. Subsidiary Status Workers: Any activity other than the principal status constitutes a worker's subsidiary status. Subsidiary status labourers/workers are those who did not have a principal activity in the preceding 365 days but spent at least some of their time employed in a subsidiary activity. Employed Workers in Usual Principal and Subsidiary Status (UPSS): Workers are classified as being employed in the principal status (UPS) if they spent a majority of their time in the preceding year engaged in gainful economic activity. Sometimes, subsidiary workers are included in this category to determine total employment on principal and subsidiary status, that is, Usual Principal and Subsidiary Status (UPSS). This category includes salaried workers, workers in household enterprises (including unpaid workers), and casual workers. Since household enterprises often employ family members who are unable to find gainful employment elsewhere, employment figures can hide substantial amounts of underemployment. Unless mentioned otherwise, most Overview and Labour Market of the analyses in this report are based on the UPSS definition of labourers and workers. Workers in Current Weekly Activity Status (CWS): The current weekly activity status of a person is the activity status obtained for a person during the reference period of seven days preceding the date of survey. A person is considered working (or employed) if he/she, while pursuing any economic activity, has worked for at least one hour on at least one day during the seven days preceding the date of survey. Workers in Current Daily Activity Status (CDS): The current daily activity status for a person is determined on the basis of his/her activity status on each day of the reference week preceding the survey. A person 23 24 Box 1.1 (continued) India's Employment Challenge is considered to be employed if he/she has been employed for four hours on any one day of the week preceding the survey. Unemployed Workers: The unemployed category includes people who sought work but did not find it during: the major part of the previous year (UPS), or major or minor part of the year (UPSS), or in the week preceding the survey (CWS). Unemployment can also be defined in man-days, that is, the number of days (measured in half days) a person was not employed in the week preceding the survey. Regular Workers, Casual Workers, and Self-employed Workers: These are defined based on the responses by surveyed workers to the relevant NSS questions. Prime-Age Workers: Workers in the 15­59 age group. Labour Force: Prime-age employed and unemployed workers. This group is the unit of analysis for this report unless mentioned otherwise. Employment Rate: The ratio of workers to the population in the same age group. For the most part, employment rate refers to the employment rate of the prime-age group as defined by UPSS. Unemployment Rate: The ratio of prime-age unemployed workers to the labour force (that is, prime-age employed and unemployed workers). Source: NSS manuals; Bank staff. Despite increases in wages and productivity, India While India's male employment participation rates faces significant employment challenges ahead. are roughly comparable to those in other countries, The most important challenge is to accelerate job female employment participation rates are low and growth. Employment has barely kept pace with display wide regional variations. This may reflect, increases in the labour force and unemployment is in part, a preferred division of labour within the growing. There is some evidence, presented later, family, with women responsible for activities that the absence of employment opportunities led inside the household and men responsible to potential workers opting out of the labour force. for outside work.10 For females, participation Thus, starting with a backlog of some 30 million in economic activity is often a subsidiary or unemployed or discouraged workers, added to occasional activity, while for males it is usually a rapidly growing labour force which has rising the principal activity (Figure 1.2). Not only is the expectations as well as skill levels, the demand for labour force participation of Indian women low, it good jobs has grown and continues to accelerate. has been virtually stagnant since the 1980s. TRENDS IN LABOUR SUPPLY Labour force growth decelerated in the 1990s In 2004, the prime-age labour force (15 to 59 but less so than official estimates suggest. The years) stood at about 413 million.9 About 75 Planning Commission (2001b) estimated (based per cent of the labour force lived in rural areas. on the UPSS definition) that labour force growth Female workers constituted about 32 per cent of declined sharply from 2.05 per cent per annum the total labour force. The main sources of labour between 1983 and 1993­4, to 1.03 per cent per market data and the issues concerning this data annum between 1993­4 and 1999­2000. However, are presented in Box 1.2. other research suggests that this appearance of a Figure 1.2 Indian Labour Force (in millions) Female Labour Force Male Labour Force 300 340 260 300 260 220 million person million person 220 180 180 140 140 100 100 60 60 1983 1993­4 1999­2000 2004­5 1983 1993­4 1999­2000 2004­5 Subsidiary Status (Female) Subsidiary Status (Male) Principal Status (Female) Principal Status (Male) Source: Sundaram and Tendulkar (2006a); Staff estimates using NSS. sharp slowdown may be the result of survey-based to rural areas in general, and rural females engaged age distribution in the national sample; more in subsidiary employment in particular. It is reliable distribution emerges from the population estimated that between 1983 and 1993, subsidiary census. Correcting for the difference moderates workers accounted for less than 10 per cent of the the slowdown--from about 1.8 per cent per total decline in employment participation. But annum to 1.4 per cent (Sundaram and Tendulkar this number increased to 30 per cent for males and 2006a). A substantial amount of the slowdown 85 per cent for females between 1993 and 2000. in labour force growth can be attributed to the However, if only those workers are included in withdrawal by subsidiary workers from the the labour force for whom engaging (or trying labour force (Figure 1.2). Supporting evidence for to engage) in economic activity was a principal this comes from Mazumdar and Sarkar (2006a) activity, the numbers show an entirely opposite who point out that the decline in employment trend: a slight acceleration of growth from 1.8 per participation rates in the 1990s was smaller for cent to 1.9 per cent for the same periods. principal status workers and larger for subsidiary status workers--defined as underemployed There has been a steady and welcome decline in workers or workers who were not employed for the number of children (less than 14 years of age) most of the past year. The subsequent period, till in the labour force. The number halved from a 2004­5, witnessed a reversal of this trend with the little over 22 million in 1983 to under 11 million in labour force growing by about 2.2 per cent per 1999­2000, and declined further to about 9 million Overview and Labour Market annum between 1999­2000 and 2004­5. Much in 2004­5. This decline in absolute numbers is all of this growth was driven again by the growth in the more remarkable since it happened despite subsidiary workers. Thus, much of the volatility the rapid growth in child population. Rural India in labour force supply appears to be driven by accounted for 93 per cent of the decline. This this category. reduction in labour force participation rates for both rural males and rural females in the 10­14 age The observed slowdown in employment group is the welcome obverse side of a significant participation in the 1990s was largely confined and beneficial rise in school participation rates 25 26 India's Employment Challenge Box 1.2 Labour Market Data in India The most comprehensive data source for national labour market data is the `Household Employment­ Unemployment Situation Survey' carried out by the National Sample Survey Organisation (NSSO). The NSSO first carried out this survey on an all-India basis in 1983. However, it did not repeat the exercise again till 1987­8. From then onwards, surveys have been carried out in one of two forms: a `Thick' Round every five years and a `Thin' Annual Round. The Thick Rounds are full-fledged surveys containing information on demographic particulars, activity status, and time disposition of all household members, along with other employment-related information. The Thin Rounds are canvassed as part of the `demographic and other statistics' block in the Consumer Expenditure Survey schedule and contain information only on demographic attributes and employment status. Until the most recent Round, wage information was not collected. An additional issue is that the annual Rounds are often not comparable to each other or to the quinquennial Round due to differences in the sampling frame. This is a result of the main focus of the annual survey not being the employment characteristics of households. Consequently, the level of non-sampling errors in the Thin Rounds is expected to be high. The Annual Rounds also canvass much smaller numbers of households. As a result, while sampling errors are not very large at the national level, at the individual state levels they are significantly larger. Consequently, reliable and comprehensive labour market information is available only once every five years. Information on employment is also available from the population census which is carried out once every decade on an all-India basis. The census divides people into two main categories: workers and non-workers. Workers are further classified as main and marginal workers. A `non-worker' is someone who has not worked at all in the year preceding the survey. A `main worker' is someone who has worked for the major part of the reference period (that is, at least 183 days in the preceding year). A `marginal worker' is one who worked for some time but for less than six months in the preceding year. Main and marginal workers together add up to form the workforce. In theory, there should be close coincidence between the workforce estimates as calculated from the census and by the NSS surveys. In practice, however, the differences are often significant. The advantage of using the census calculations is that the estimates are likely to be more reliable and are available at a much more disaggregated level than through the NSSO. The disadvantage is the infrequency of the exercise and the difficulty in comparing (especially in measuring unemployment) with the more frequent NSSO data. This report draws on some recent work that combines census-based population weights with NSSO- collected participation and employment rates, to revise estimates of job and labour force growth trends. However, all other analyses are based on standard NSSO Thick Round data or Annual Survey of Industries (ASI) data (see the following). The Annual Survey of Industries (ASI) is an indispensable source of employment information on the organized manufacturing sector. The ASI is the principal source of industrial statistics in India. This survey is conducted annually under the statutory provisions of the Collection of Statistics Act, 1953. It covers all factories employing 10 or more workers that use electricity, and those employing 20 or more workers that do not use electricity. Note, however, that this survey does not cover the informal sector and, therefore, excludes the major part of the workforce. Also, the primary unit of enumeration in the survey is an enterprise. Because of this reason, and because of the relatively limited universe for which information is collected, this data is again not directly comparable with NSSO figures. The data from the office of the DGE&T provides sector-wise data on sub-categories within the `organized' sector. This data is widely considered to be an underestimate (by up to 20 per cent) of formal private sector employment, including by the DGE&T itself, although the DGE&T considers the general trend of its data to be accurate. This report refers to DGE&T data but does not use it for analyses. In brief, Indian labour data may need improvement along the following lines: (i) producing more reliable and frequent labour statistics at a geographically disaggregated level; (ii) increasing the frequency of collection of labour data to annual and, for a few key data, to a quarterly basis; (iii) improving collection of data on formal sector employment; (iv) collecting longitudinal data to support research; (v) improving comparability across datasets; and (vi) standardizing definitions of variables. Sources: Ghose (2004); Sundaram and Tendulkar (2006a); Bank staff. by children in the same age group: by 34 points especially for women (Das and Desai 2003; for rural males and by a sizeable 89 points (per Ahsan and Pagés 2006). The poor often have no 1,000) for rural females (Figure 1.3). It is worth alternative but to work to support their families. stressing though that this data only records paid But rising income levels can potentially lead to child labour, or child labour for producing goods a preference for either more leisure or home meant to be sold, and not the use of child labour activity, particularly for women, which can lower for unpaid domestic work which can also be employment participation rates. The experience hazardous to children's health. of the United States during the post-World War II period also shows that labour force participation A major development in the 1990s was the of married women rose when an increase in withdrawal by workers, particularly females in women's own wages trumped the negative effect rural areas, from the labour force. What caused of husbands' wages on labour force participation this? Two explanations are usually advanced. (Mincer [1962], cited in Blau [1998]). Analysis The first is that there was a shift in activity status suggests that both these factors were important in towards education, especially in the case of youth. India, though the impact of education was more The 1980s and 1990s saw a rapid increase in the significant in the 1980s than in the 1990s.11 student-to-worker population ratio in the 15­29 age group in both rural and urban areas (Figure Analysis suggests that another factor which 1.3). This may partly account for the lower lowered participation rates for principal status employment participation. Interestingly, earlier workers was `discouragement' caused by lack studies among older age groups have noted that of employment opportunities. Increase in educated men are more likely to participate in the unemployment rates lowered the probability of Overview and Labour Market labour force. But for women, there is a significant employment participation by both males and decline in employment participation with higher females. Evidence from national surveys suggests levels of education. Also, rural women tend to that for females, especially in rural areas, declines face more of an `education penalty' (that is, they in participation on the principal status were are less likely to participate in the labour force closely related to worsening unemployment rates if educated) than urban women (Das and Desai (Figure 1.4). Rising educational levels that led 2003). The second explanation is that rising income to unmet expectations of finding good jobs also levels have an adverse impact on participation, played a role in discouraging workers, though 27 28 India's Employment Challenge Figure 1.3 All-India Worker Population Ratios and Student Population Ratios (Age Group 10­14 Years) All India Rural Males: 10­14 years All India Rural Females: 10­14 years 1000 300 700 300 Student Population Ratio Worker Population Ratio 250 Student Population Ratio 800 600 250 Worker Population Ratio 200 500 600 200 150 400 150 400 300 100 100 200 200 50 100 50 0 0 0 0 1983 1993­4 1999­2000 1983 1993­4 1999­2000 Student Population Ratio Worker Population Ratio Student Population Ratio Worker Population Ratio All India Urban Males: 10­14 years All India Urban Females: 10­14 years 900 120 1000 80 Student Population Ratio Worker Population Ratio Student Population Ratio Worker Population Ratio 100 800 850 60 80 600 800 40 60 400 40 750 200 20 20 700 0 0 0 1983 1993­4 1999­2000 1983 1993­4 1999­2000 Student Population Ratio Worker Population Ratio Student Population Ratio Worker Population Ratio Source: Sundaram and Tendulkar (2006b). this effect was much smaller in magnitude. In population: female workers and youth. This is India, the preferred occupation of the educated is consistent with the experience of other countries non-manual regular jobs in the organized sector which also suggests that high and persistent (Planning Commission 2001a). This is true even unemployment is accompanied by declines in for workers who have received only middle-level labour force participation rates, as workers become education. When these aspirations cannot be met, discouraged by the lack of job opportunities and some young workers may become discouraged give up searching for jobs (World Bank 2005c). In and withdraw from the labour force. While these India, women are especially vulnerable because effects became less important in urban areas by social norms and inflexible working conditions the mid-1990s, they continued to be significant restrict the range of jobs considered acceptable in rural areas. However, they were countered for them. This constrains their choices in to some extent by rising per capita household the marketplace and makes them particularly expenditure levels. While this had little effect vulnerable to tough employment conditions.13 on male participation, it encouraged female Women who do not enter the labour force work participation on the principal status, except at the predominantly within the home.14 Over 92 per top end of the income scale.12 cent of women doing domestic work say they do so from compulsion, and almost one-third of this Evidence suggests that discouragement effects are number would like to be employed--primarily strongest on the most vulnerable segments of the in part-time jobs. There is little variation in these characteristics by educational level. Thus, a that is, the workers to working age population combination of norms that determine a woman's ratio. The decline in employment rates, even place as being in the home and lack of appropriate among the prime-age labour force, indicates employment opportunities relegates a significant the inability of the country to utilize its labour number of women out of the labour force. resources to support growth. Unless this trend is reversed, India will be unable to take advantage EMPLOYMENT of its declining dependency ratio. A particularly Slow employment growth is a major concern important issue is the employment rate of females. for Indian policymakers. In the 1990s, despite Not only is the female employment rate, at less fast economic growth, employment growth than 30 per cent, unusually low compared to other declined. Based on national surveys, the Planning developing countries, it has also stagnated since Commission of India (2001a) estimated that 1987­8 (Figure 1.4). employment growth in India declined sharply from about 2 per cent per annum between 1983 and 1993­4, to less than 1 per cent per year Figure 1.4 Worker to Population Ratios (UPSS) after that till 1999­2000. However, as noted in the 50 45 previous section, these estimates were based on 40 35 an underestimate of the actual size of the labour per cent 30 25 force. After correcting for this, the decline is more 20 15 moderate--from 2.1 per cent per annum between 10 5 1983 and 1993­4 to about 1.6 per cent per annum 0 1983 1987­8 1993­4 1999­2000 2004­5 between 1993­4 and 1999­2000. Even so, the Rural Male Urban Male Urban Female Urban Female slowdown, coming as it did at a time when GDP Sources: Sundaram and Tendulkar (2006a) and Staff estimates growth was sustained, became an issue of concern. using NSS (2004­5). However, recent estimates emerging from the latest NSS survey (2004­5) suggest that this dip was a temporary phenomenon; when considered Agriculture is still the largest employer, although it over the longer term period of 1993­4 to 2004­5, has declined in importance. In 2004­5, agriculture employment growth was roughly the same as in employed about 55 per cent of the total Indian the earlier period between 1983 and 1993­4. Still, workforce, or more than 207 million workers the general slow growth in employment remains (Figure 1.5). In line with the changing structure of an area of concern. Employment growth has the economy, however, the share of the workforce barely kept pace with the growth in labour supply employed in this sector fell during the 1990s. and unemployment rates have risen. In fact, a part The decline in agriculture's employment share is of the employment growth may even be supply evident from the share of agricultural and allied Overview and Labour Market driven. This is suggested by the observation that activities in incremental workforce absorption most of the employment growth has come from during the 1990s. This share declined from 44 subsidiary and self-employed workers, while per cent in the 1980s to about 30 per cent between growth in principal workers has slowed down. 1999­2000 and 2004­5. On the whole, however, Wage growth has also decelerated post-2000. the shift away from agriculture was small in comparison to that experienced by other countries. Low employment growth and participation The slower pace of shift away from the primary rates are mirrored in a low employment rate, sector in rural areas indicates low levels of skills of 29 30 India's Employment Challenge Figure 1.5 Distribution of India's Workforce Rural: India's Workforce (UPSS, Age 15­59) Urban: India's Workforce (UPSS, Age 15­59) 120 350 100 300 250 80 million persons million persons 200 60 150 40 100 20 50 0 0 1983 1993­4 1999­2000 2004­5 1983 1993­4 1999­2000 2004­5 Primary Sector Secondary Sector Tertiary Sector Primary Sector Secondary Sector Tertiary Sector Sources: Sundaram and Tendulkar (2006b); Bank staff using NSS (2004­5). Notes: Primary sector: agriculture and allied activities, and mining. Secondary sectors: industries and construction. rural workers, resulting in their inability to obtain share of manufacturing in the total workforce better jobs in the non-agricultural sectors (Chadha stagnated at around 11 per cent in the 1990s, and Sahu 2002).15 Consistent with this view, the increasing only slightly to 12.5 per cent in 2004­5. shift from agriculture in rural areas is mainly into This happened despite a rise in the average growth construction and manufacturing which usually rate of the sector from 5.4 per cent per annum employ workers who are illiterate or literate only in the 1980s to 6.5 per cent per annum in the at the primary level. 1990s, and even faster since then (Appendix 1.5). Further, as discussed in more detail in the next The decline in the share of agriculture in chapter, most of the increase in manufacturing employment was offset mostly by gains in the employment took place in very small-scale services sector and, lately, in the secondary sector. informal enterprises. The Indian experience In the 1980s, the `personal, community, and was in marked contrast to the experience of business services', `trade, hotels, and restaurants', other developing countries, especially those in and construction sectors made up for nearly 84 per East Asia, where manufacturing was the major cent of the decline in agricultural employment. In source of employment for workers moving out the 1990s, increase in the employment share of of agriculture. the last two sectors (hotels and restaurants, and construction) together balanced out three-fourths Compared to the 1980s, the 1990s saw more new of the total decline in agricultural share. The biggest jobs being created in middle productivity sectors change in the new century, however, came from (construction, trade, etc.). Figure 1.6 compares the growing importance of the secondary sector. the deployment of annual increments to the Between 1999­2000 and 2004­5, manufacturing workforce between the two periods, 1983 to and construction together accounted for 40 per 1993­4 and 1993­4 to 2004­5. Industry divisions cent of all incremental employment. are placed according to their gross value added (GVA) per worker. In terms of new employment The share of manufacturing in employment generated in the 1990s, relative to the 1980s, changed little over the past two decades. The there was a notably beneficial shift away from Figure 1.6 Sector-wise Deployment of Incremental Workforce (in millions) 38.5 38 28 18.3 11.1 Millions 18 11.9 5.8 9.2 5.8 4.6 4.2 8 5.3 4.0 0.9 2.0 0.7 0.4 0.3 0.4 ­2 2.0 1.7 ­1.0 7.6 1.6 7.1 3.9 1.0 2.9 0.2 0.3 0.1 ­0.2 1.2 2.5 ­4.2 ­0.4 ­9.8 ­12 83­94 94­05 83­94 94­05 83­94 94­05 83­94 94­05 83­94 94­05 83­94 94­05 83­94 94­05 83­94 94­05 83­94 94­05 Agriculture Construction Trade, hotels, and Manufacturing Community, Transport, Mining & Electricity, gas, Financial restaurant social, and storage, and quarrying and water supply insurance, personal services communication real estate, and business services informal formal Source: Bank staff using NSS. low productivity sectors towards the middle their effect is likely to be small, given that these productivity sectors such as manufacturing, sectors employ only about 5 million workers, or construction, trade, hotels and restaurants-- about 1.5 per cent of India's labour force (see where labour productivity was 2.5 to 3.5 times Figure 1.7 for distribution of labour force by higher than in agriculture. At the very top end, sectors). This slowdown in productivity growth employment declined in high productivity sectors after 2000 has important implications for wages, like mining and quarrying, and the electricity, gas, as discussed later. and water supply sectors. These are dominated by the public sector and were believed to be Further, employment within the manufacturing overmanned (Planning Commission 2001a). and tertiary sectors still shows signs of dualism, However, the financial and other business services with most jobs clustered at the low productivity category, the highest productivity sector in the end and some growth taking place in high economy, did better in terms of generating new productivity and high skill-level jobs. This dualism, jobs relative to the 1980s. which continues to persist even a decade after liberalization, reflects the continuing barriers and Since 1999­2000, the evidence shows, productivity disincentives to entry in the formal sector, especially growth has decelerated. If the 1993­4 to 2004­5 in manufacturing. An important challenge will be period is disaggregated into two periods--the to stimulate growth in manufacturing, especially period before 1999­2000 and the period since--it in the `missing middle' group of plants/firms Overview and Labour Market is possible to see that overall productivity growth (see Chapter 3). Though not as marked as in slowed down markedly in almost all sectors in manufacturing, evidence indicates that job growth the latter period. Productivity growth in the in the tertiary sector also reflects dualism. At one tertiary sector especially declined from 10 per end is the formal sector where the main source cent per annum to less than 4 per cent per annum of growth has come from the proliferating ITES between the two periods. While there was a sector. But its pull on the overall labour market surge in employment in the high productivity can only be marginal given that it employs only IT and ITES sectors, in terms of overall impact 1 million workers out of a labour force of more 31 32 India's Employment Challenge Figure 1.7 Share of Workers (UPS) by Sector in 2004­5 Rural areas Urban areas Financial, Transport, Farming Agrl' Allied Insurance, real 1% Mining and storage, and of crops estate, and Quarrying communication business services Community, Community, 6% social, and 1% 3% 1% social, and Trade, hotels, personal services personal services Manufacturing and restaurant 5% 19% 24% 7% Farming Financial, of crops Insurance, real Construction 65% estate, and 6% business services Electricity, gas, 6% and water supply 0% Transport, Manufacturing storage, and Electricity, 8% communication gas, and water 9% supply Mining and 1% Quarrying Construction 1% 9% Agrl' Allied Trade, hotels, and 4% restaurant 24% Source: Derived from NSS estimates. than 400 million. More important in terms trade, hotels and restaurants, transport, storage, of generating employment are trade, hotels and communications. and restaurants, construction, and community services. But, as evidence suggests, the bulk of The share of organized sector employment fell jobs created in these sectors are informal and in the 1990s, largely on account of declining of low productivity (see Figure 1.7). Thus, as in public sector employment, but also due to manufacturing, workers in the tertiary sector too sluggish growth in private sector jobs. In India, are clustered at two ends of the wage spectrum. the debate on quality of jobs has often focused on a visible indicator: `formal' or `organized' Job growth since 1993­4 is higher in urban areas sector employment. An important Planning though the bulk of the workforce lives in rural Commission report (2001b) noted that growth areas. There are other important differences also in organized sector employment slowed down among urban and rural locations. In the urban from 1.2 per cent per annum between 1983 areas, the fastest growing sector in terms of and 1994 to 0.53 per cent between 1993­4 and employment is the tertiary sector. Job growth is 1999­2000 (Table 1.2). More recently, private particularly good in trade (especially retail trade) sector employment growth was also stagnant and the hotels and restaurants sub-categories. between 2000 and 2003. While these trends There is, however, virtually no change in the raise serious concerns, the numbers need to be share of the secondary sector, except in the share interpreted with some caution. The estimates are of construction. The experience of rural areas based on information collected by the DGE&T is different from that of urban areas in that the and are widely believed to be underestimates, shares of both construction and manufacturing especially when it comes to the private sector.16 have risen as fast as those of sub-sectors like Also, a significant part of the deceleration was Table 1.2 Distribution of Prime-Age Workers by Figure 1.8 Wage Premiums by Educational Status, 1983 to 2004­5 (UPS) Attainment 0.9 1983 1993­4 1999­ 2004­5 0.8 2000 0.7 Self-employed 0.6 log rupees (per cent) 52.3 50.0 48.3 52.4 0.5 0.4 Regular Workers 0.3 (per cent) 16.1 15.7 16.2 16.5 0.2 0.1 Casual Workers 0 (per cent) 31.6 34.3 35.5 31.1 1987 1993­4 1999­2000 upto primary secondary graduate Total (in millions) 232.7 300.6 332.3 378.9 Source: Calculations from NSS. Source: Narain (2006). on account of the public sector which lost an share in incremental workforce), but this trend estimated 30,000 jobs over the period. This was subsequently reversed itself (see Table 1.2). a consequence of the severe fiscal constraints the government faced at that time and the over- The labour force became more educated in the manning in the sector which became hard to 1990s. The average number of years of schooling sustain in a more competitive economy. of a prime-age worker went up from 3.2 years in 1987­8 to 4.5 years in 1999­2000. This increase The share of regular wage employment has was, in part, thanks to the concerted efforts by remained unchanged. Sundaram and Tendulkar the government to increase the reach of primary (2006b) argue that the supply of organized sector education and eradicate adult illiteracy. The jobs, which are of superior quality compared to number of workers with less than five years of informal sector jobs, can be approximated from education came down steeply from 80 per cent the number of workers reporting themselves to of the total labour force in 1983 to 67 per cent be earning regular wages/salaries in the national in 2004­5. The total number of graduates in the sample surveys.17 Support for this proposition workforce also increased from 7.4 million to 23.4 also comes from Glinskaya and Jalan (2006) who million over the same period (Appendix 1.7). show that regular wage jobs are clearly better Most new entrants to the workforce since the than casual wage jobs, and at least as good as self- 1990s have completed primary school (Sundaram employment. Since the 1990s, growth in regular and Tendulkar 2006b). Overall, the increase in wage employment has been the fastest among all educational levels has also possibly contributed employment categories. But it is still slower than to an increase in the prospects and earnings of it was in the 1980s (Appendix 1.6). The share of Indian labour migrating abroad (Box 1.3). Overview and Labour Market regular wage employment has gone up marginally in recent years--an indicator of improved quality. The tertiary sector is the largest employer of However, even at the start of the new century, graduates. In both rural and urban areas, `community, regular wage jobs accounted for only about 16 per social, and personal services' employed by far the cent of total employment. The 1990s also saw an largest number of graduates, some 8.8 million increase in the number of casual workers in the in 1999­2000. However, because these services rural, but not the urban, workforce (in terms of are heavily dominated by the public sector, the 33 34 India's Employment Challenge Box 1.3 International Migration from India International migration is one of the most important factors affecting economic relations between countries in the twenty-first century. In the late 1990s, migration from India was estimated to be about 0.12 per cent of the country's total population. Migrants ranged from low-skill workers to highly skilled ones, with a large part of the semi-skilled and unskilled population concentrated in the Gulf countries. Many of these people migrated during the oil boom of the 1970s and 1980s. In the 1990s, migration of highly skilled workers, particularly IT workers who went on temporary work permits to Australia, Canada, and the United States, increased significantly. The remittances sent home by migrant workers showed a spectacular increase in recent years (see Figure B1.3.1). In 2003, according to official estimates, the remittances amounted to about $22 billion or approximately 3 per cent of India's GDP. In addition, there may have been further remittances, through unofficial channels, of as high as 65 per cent of this amount. This makes remittances from Indians living abroad one of the largest sources of financial flow into the country, much higher even than foreign direct investment. It is possible that the sudden increase in these remittances in the late 1990s may have been the result of better incentives becoming available to send and invest money in India's growing economy, the easing of exchange regulations and controls, and measures taken by the Indian government to attract foreign deposits. At the household level, literature suggests, remittance incomes help meet a variety of family needs. These might be in the form of increased consumption of food, housing, and durable items, or increased investment in education and business. In this manner, remittances support a wide variety of development purposes-- improving family welfare, reducing economic vulnerability, and boosting the local economy. When they lead to increased investment in local businesses or the education of young children, they can also contribute to output growth and have multiplier effects on the rest of the economy. A recent World Bank study estimated that in South Asia, a 10 per cent increase in total remittances (official and unofficial) from abroad led to a 0.9 per cent decline in poverty levels. Two factors are important in determining Figure B1.3.1 Remittances Flows to India the developmental impact of migration: the 25.00 educational level of migrants and the presence 20.00 of investment opportunities at home. $ billion 15.00 10.00 Given the benefits, India may have a lot to gain 5.00 from migration. Private sector firms in the country have played a significant role in promoting 0.00 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 migration. At the state level, some governments 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 have set up `manpower corporations' to promote labour export from their states. The Central government, however, has assumed no such role, though it provides support to expatriate workers through its diplomatic posts. However, one issue that remains is the poor quality of remittance services available to migrants. Though India has a good network for channelling remittances to domestic recipients, the transaction costs of dealing with the formal system are relatively high. Informal transfer systems are, therefore, prevalent because of their speed and low cost, but remain vulnerable to abuse. India also has a stake in pre-empting potential protectionism and locking in the current open international trade regime in services through World Trade Organization (WTO) negotiations, especially on Mode 4. Sources: World Bank (2005d). government's fiscal difficulties in the 1990s led to in secondary schools, there is an opportunity to a decline in their share of graduate employment-- expand secondary education in the medium term from 48 per cent to 41.1 per cent of graduates (Wu 2005). by 1999­2000. Manufacturing, trade, and the hotels and restaurants sectors raised their share WAGES AND PRODUCTIVITY of graduate employment. Manufacturing was the Wages and earnings increased across the board second largest absorber in 1983 with 0.87 million in the 1990s, leading to a marked decline in the graduates but was displaced from this position numbers of the working poor. In a country like by the `trade, hotels, and restaurants' category India, simply looking at employment rates can which employed 3.1 million graduate workers as be misleading because most workers, especially of 1999­2000. The expansion was predominantly males, have no option but to take up any work in urban. More than 5 million graduates were also order to survive. Employment numbers conceal absorbed in 1999­2000 by three more industries: significant underemployment, particularly in agriculture and allied industries (2.5 million); subsistence farming and in low productivity jobs financial, insurance, real estate, and business in the informal sector. Hence, it is also important services (2.4 million); and transport, storage, and to look at real wages. Between 1993­4 and 2004­5, communications (1.1 million). real wages grew, even if highly unequally, in most occupations. But the growth of wages in this period Overall, however, the Indian labour force is was slower than that observed between 1983 and mostly unskilled compared to workers in other 1993­4. Much of this was due to the slowdown emerging economies. Almost 43 per cent of the in the growth of regular wage employees. Casual Indian labour force is illiterate. The average real wage growth, however, was equally rapid in number of years of education for the population both periods under comparison. On the positive group aged 25 and above is 3.6 (Barro and Lee side, in the 1990s, there was also a reduction in 2000). Only 17 per cent of this adult population male­female wage disparities. Urban and rural has had some secondary education, much lower casual wages also converged in this period, mainly than its income level would predict. This number due to rural wage growth (Figure 1.9). is only half that of China. Education outcomes are even worse for females (Barro and Lee 2000). A Rising wages led to a decline in the number similar picture emerges when India's educational of working poor in the labour force, from 115 performance is benchmarked using Knowledge million or 36 per cent of the workforce in 1993­4, Assessment Methodology (KAM). India comes to 104.4 million or 23 per cent of the workforce out ahead of other South Asian countries (except in 2004­5 (Sundaram and Tendulkar 2006b). Sri Lanka) and the Africa region, but lags behind However, it is important to note that wages were countries such as China, Mexico, South Africa, not observed for all segments of the workforce, Overview and Labour Market and Russia. particularly the self-employed who constitute more than 50 per cent of the workforce. These indicators point to the need for India to catch up, especially at a time when the demand In the 1990s, the acceleration in wage growth for skills is increasing with liberalization and tracked the acceleration in labour productivity globalization. Given that there are currently 200 of about 5.4 per cent per annum (1993­4 to million children in the elementary school-age 2004­5). Figure 1.10 shows the productivity group of six to 14, and 87 million 15­18-year-olds growth originating in each sector, weighted by 35 36 India's Employment Challenge Figure 1.9 Rural Real Wages and Growth from 1983 to 1999­2000 Average Real Daily Wage Rates by deciles in 1993­4 Prices Annual Growth of Rural Daily Wage Rates at 1993­4 Prices 250 6 Real daily wage, 1993­94 Rs Growth of real daily wage, 200 5 4 1993­4 Rs 150 3 100 2 50 1 0 0 1 2 3 4 5 6 7 8 9 10 n n 1 2 3 4 5 6 7 8 9 10 n n dia mea dia mea me me Decile Decile 1983 1993­4 2004­5 1983­94 1993­4/2004­5 Source: Staff Estimates using NSS. sector during the 1990s is likely to be a statistical Figure 1.10 Sources of Productivity Growth artefact, reflecting as it does the relatively large Panel A: By Sectors (weighted) increase in public sector wages by the Fifth Pay 9.00 Commission.18 The small role of productivity 8.00 Annual Growth (per cent) 7.00 growth in the manufacturing sector in driving 6.00 5.00 overall productivity growth is remarkable. This 4.00 3.00 2.00 reflects the large share of low productivity small- 1.00 0.00 scale manufacturing in this sector, discussed in ­1.00 more detail in the next chapter. Community, social, and personal services Agriculture Mining & and water supply quarrying Manufacturing Electricity, gas, Trade, hotels and restaurants Transport, storage, and communication Financial, insurance, real estate, and business services Construction ­2.00 Between 2000 and 2005, however, both wage growth and productivity growth decelerated, 1983­93 1993­2004 markedly so in some sectors. On average, real wages actually declined in urban areas for both Panel B: Within and Across Sectors Movement male and female casual workers in this period, 80% 73.5% while wage growth in rural areas decelerated 70% 60% 46.6% markedly (Table 1.3). (Notably, wage growth 50% 39.6% 40% in rural areas had seen significant acceleration 30% 20% 10.0% 13.8% 16.5% over the previous period between 1983 and 10% 0% 1993­4.) The decline in wage growth since 2000 Within Sectors Between Sectors Interaction has mirrored the deceleration in productivity 1983­93 1993­2004 growth in most sectors (Table 1.4). As also noticed Source: Staff estimates using NSS. by other observers, productivity growth has decelerated in all sectors, and even reversed in key the share of the labour force. Most of the labour sectors such as construction, and less expectedly productivity growth in recent decades took place in finance and real estate. due to growth in trade, hotels and restaurants, electricity, mining and quarrying, and community While real wages grew, on average, in the past two and personal services. The growth in the last decades, the growth was highly unequal. While wages of most income deciles increased by about Table 1.3 Annual Real Wage Growth (CAGR) 2 per cent per annum between 1993­4 and 2004­5, Rural Urban Rural Urban wage growth in the top two deciles was higher at Casual Casual Casual Casual Non- Male Non- Female 3.4 per cent and 4 per cent. Across almost all wage agricultural Worker agricultural Worker deciles, wage growth was higher between 1983 Male Female Worker Worker and 1993­4 than over the next decade. The only 1983 to exception was the bottom income decile where 1987­8 3.0 2.8 2.0 3.2 wages grew faster in the latter period (Figure 1987­8 to 1993­4 1.2 0.7 1.7 1.3 1.11). Some analyses suggest that this robust 1993­4 to growth of the lowest decile contributed to the 1999­2000 3.2 3.0 4.6 4.9 1999­2000 decline of inequality in wages among male casual to 2004­5 2.8 ­0.8 2.5 ­0.6 workers between 1983 and 1999, mostly through 1983 to 1993­4 2.6 2.1 2.2 2.7 a reduction in regional differences (Dutta 2005). 1993­4 to Overall, however, the gap between the bottom and 2004­5 3.3 1.3 4.0 2.6 top wage earners grew. What caused this? There Source: Staff estimates. Table 1.4 Productivity Growth (by Sector) 1983/ 1987­8/ 1993­4/ 1999­2000/ 1983/ 1993­4/ 1987­8 1993­4 1999­2000 2004­5 1993­4 2004­5 1. Agriculture ­4.3 19.4 13.2 10.2 1.3 2.2 2. Mining & Quarrying ­0.2 27.0 56.4 10.2 2.3 5.6 3. Manufacturing 15.1 29.4 42.0 8.3 3.9 4.4 4. Electricity, Gas, and Water Supply 27.8 20.1 82.5 13.7 4.2 7.6 5. Construction ­31.1 38.6 -1.8 -8.6 ­0.4 ­1.1 6. Trade, Hotels, and Restaurants 5.2 15.2 31.7 9.2 1.8 3.7 7. Transport, Storage, and Communication 19.8 11.1 22.4 9.7 1.0 3.0 8. Financial, Insurance, Real Estate, and Business Services 21.1 8.4 26.0 ­12.5 2.6 1.0 9. Community, Social, and Personal Services 21.5 3.6 54.0 33.7 2.2 7.5 Tertiary Sector (6­9) 17.3 15.7 60.5 20.8 3.0 6.8 Sources: Mazumdar and Sarkar (2008). Figure 1.11 Average Real Daily Wages and Wage Growth Average Real Daily Wage Rates by deciles in 1993­4 Prices Annual Growth of Rural Daily Wage Rates at 1993­4 Prices 250 6 Real daily wage, 1993­94 Rs Growth of real daily wage, 200 5 Overview and Labour Market 4 1993­94 Rs 150 3 100 2 50 1 0 0 1 2 3 4 5 6 7 8 9 10 n n 1 2 3 4 5 6 7 8 9 10 n n dia mea dia mea me me Decile Decile 1983 1993­4 2004­5 1993­4 1993­4/2004­5 Source: Staff Estimates using NSS. 37 38 is some evidence that wage inequality increased Male­female wage differentials have declined India's Employment Challenge mostly among male regular workers and a large but remain significant. Evidence of this decline, part of it is explained by differences in workers' in the case of rural casual labour, comes from ages and educational levels (Unni 2006). Sundaram and Tendulkar (2006b). Yet, in most occupations, especially manual ones, women's Despite the increases in earnings during the wages are about one-half those of men. What 1990s, average wages for casual workers in rural explains this difference? Evidence suggests that India today are close to or even below poverty line even after accounting for regional, individual, wages. In rural areas, both the lowest and average occupational, and industry characteristics, male wages for casual labour by males remain below workers in 1999­2000 earned 64 per cent higher and at the poverty line wage levels, respectively. wages than female workers (Narain 2006). A Average wages for casual female workers in both separate exercise that decomposed the weekly rural and urban areas are only about 60 per cent wages of men and women in casual labour for of poverty line wages (Table 1.5). the 55th Round (1999­2000) into differences attributable to individual characteristics and other factors, found that only 27.5 per cent of Table 1.5 Rural Workers' and Female Workers' Wages the difference in casual wages between male and Below Poverty Line (Wage/Salary Per Day in Rs) female workers could be explained by human Actual Wage Estimated capital and location attributes (Das 2006). Such a Average Lowest Poverty-Line discriminatory labour market may induce women Rural male to stay out of the labour force, especially if other Regular employees 127.3 44.5 32.6 family members are earning. Casual labourers 45.5 39.3 46.6 Rural female FEMALE LABOUR FORCE PARTICIPATION Regular employees 113.9 28.2 32.6 Casual labourers 29.4 28.2 48.7 Women's participation in the labour force in India Urban male has been flat or even declining. Women's labour Regular employees 169.5 60.2 43.9 force participation in South Asia is low compared Casual labourers 63.3 49.7 62.7 to developing country standards and India is no Urban female Regular employees 140.2 33.9 43.9 exception. Participation rates for women in the Casual labourers 38.2 29 65.5 region range from about 16 per cent in Pakistan, Source: Ghose (2004). 23 per cent in Bangladesh, to over 78 per cent in Notes: (1) All workers are in the age group 15­59. (2) In rural areas, the lowest wages are in the Nepal. In India, they remain stubbornly close to occupation of cultivation; in urban areas, lowest 25 per cent. Multivariate analyses at the household wages are for household service. (3) The assumptions used to estimate poverty-line level, using NSS data from 1983 to 2000, show that wages are as follows: · Poverty-line expenditure per capita in 1999­2000 for both urban and rural women, demographic was Rs 335.46 in rural areas and Rs 451.19 in variables such as age, childcare responsibilities, urban areas. · The average number of dependents was 1.5 for and marital status have significant negative effects regular employees and 1.8 for casual labourers. on participation. Interestingly, for women, there is · Each worker got paid only for the days actually worked. a significant decline in employment participation · A male casual labourer found work for 4.7 days with higher levels of education. Rural women per week while a female casual labourer found work for 4.3 days per week. Regular employees, tend to face a greater `education penalty' than male or female, worked 6 days per week. urban women; that is, the more educated they are, the less likely they are to work outside the jobs for educated women is low. Hence, educated home. There are also large regional variations, women, who mostly belong to the higher socio- with the southern and western regions associated economic strata, prefer to opt out of the labour with much higher participation by women in the force rather than accept low-status jobs. There labour market. also seems to be an income effect at play here: our analysis finds that the higher a husband's Both demand side and supply side explanations income, the lower the probability of his wife have been articulated for the low labour force participating in the workforce (see Chapter 4 for participation by Indian women. The demand side further discussion). argument rests on cultural mores and the values of status and seclusion in the region, which may What are the employment preferences of women? be preventing higher status households from Women who do not enter the labour force allowing women to go out and work. For instance, predominantly work within the home. Descriptive family honour in most parts of India rests on statistics from various rounds of the NSS show restricting women to the home, thus affecting that over 92 per cent of women doing domestic their ability to work outside the house (Chen work say they do so from compulsion. Of these, 1995). Basu (2005) argues that a woman's choice over 65 per cent say they do domestic work because also has an in-built `reinforcement property' there are no other members in their households in that the household tends to prefer whatever who will take on their duties. The responses do she does. Thus, cultural attitudes may tend to not vary by educational status. However, almost reinforce themselves. The supply side argument one-third of the women who do only domestic postulates that the supply of well-paying, secure work would prefer to be employed--primarily in Figure 1.12 Aspirations of Women (Aged 26­66) Currently Doing Domestic Work by Educational Status (1983­2000) 80 72.1 69.3 70 65.0 60 50 Per cent 40 28.1 29.6 30 26.6 27.5 25.1 22.5 20 Overview and Labour Market 10 2.5 2.0 1.6 3.1 3.4 3.6 0 % women who will Type of work Regular Full-time Regular Part-time Occasional Occasional accept work in Full-time Part-time addition to domestic work All Primary completed Post-primary Source: Das (2006). 39 40 part-time jobs (Figure 1.12). Again, there is little characteristics. The SCs are typically landless India's Employment Challenge variation by educational levels (Das 2006). Thus, a labourers while the STs have historically been combination of norms that determine a woman's forest dwellers whose mainstay is subsistence place in the home and of a lack of appropriate agriculture. An analysis of occupational groups employment opportunities seems to relegate indicates that the SCs remain restricted to many women out of the labour force. caste-based occupations; this trend also plays out within the public sector. Thus, the SCs SCHEDULED CASTES AND SCHEDULED TRIBES dominate the manual occupations of sweeping Caste has historically been the key axis of and cleaning which were historically assigned to stratification in India. Caste is believed to be them in the caste hierarchy. Other occupations, responsible for major inequalities in India, notably non-agricultural semi-skilled jobs, also particularly in terms of restricting access to areas tend to be influenced by caste. The STs are as diverse as education, health, technology, and less beset by this demarcation since they were jobs. Caste is especially important for labour traditionally assigned a role outside the pale of markets because it has, at once, both a ritual and the caste system. Since the STs, for the most an occupational logic. Due to historically strict part, own some land for subsistence agriculture, rules that have governed the division of labour they have a high likelihood of being agriculturists and the relations between castes in India, certain (Das 2006). Recent evidence also points to caste castes or sub-castes undertake or perform only having a significant effect on the low occupational specific occupations. mobility in the Indian labour market (Munshi and Rosenzweig 2005). Caste has a significant impact on employment participation rates, occupational choice, and Controlling for other characteristics, the SCs and mobility. Labour force participation rates for STs are more likely to work as casual labourers both Scheduled Castes (SCs) and Scheduled and less likely to be self-employed, other than Tribes (STs) are higher than for their non-SC/ST as farmers (Figure 1.13). Job opportunities in counterparts, even after controlling for other rural areas are limited for all workers and so Figure 1.13 Occupational Distribution by Caste 70 52.70 60 50 41.15 Percentage 40 35.65 38.05 28.55 30 21.10 20 13.50 12.11 10 7.85 12.57 5.13 5.15 1.52 1.53 1.53 1.25 3.12 3.22 0 Professional, technical, Clerical Sales and service Agricultural workers Other Manual Out of the Labour and administrative Force/Unemployed SC ST Non-SC/ST Source: Das (2006). the effect of being an SC or ST on the type of Rising educational levels and the government's employment undertaken is muted. However, in affirmative action policies have had a positive villages, land-ownership patterns are important impact on the STs and on rural SC women. While since even lucrative non-farm jobs have a basis the SCs/STs continue to lag behind in educational in agriculture. For the SCs and STs who do not attainment, this and other disadvantages have own land, the only employment option is casual diminished over time, particularly since the labour. In urban areas, however, the SCs/STs have 1990s (Desai and Kulkarni 2005). These rising an advantage in obtaining regular salaried jobs educational attainments, combined with the which are still predominantly in the public sector government's reservation policy have had a where the government's reservation policies positive impact on the likelihood of STs obtaining favour them. regular salaried jobs, a category for which there is a dearth of candidates relative to the quotas. Real upward mobility for the SCs/STs seems to occur once they migrate to urban areas. However, where supply exceeds reservations, as Regression results suggest that the SCs/STs have in the case of SCs, they either crowd into casual an advantage in getting better quality employment labour or, if they can afford to, stay out of the in urban areas. At the same time, these results labour force altogether. The supply of educated need to be interpreted with caution. The fact SC labour outstrips demand, leading to a glut of that formal jobs need more than just education educated SC men in both urban and rural areas, is well-accepted. In addition, workers need access and of educated SC women in urban areas. In to information, social networks, knowledge this case, the multiplied effects of education on about rules and procedures, etc. Contacts and caste suggest that SC men suffer a disadvantage in networks are important for successful entry obtaining regular salaried jobs if they have post- into the formal salaried market since the flow primary education. This would appear to indicate of information herein often lacks transparency. that the reservation policies have created a system Thus, the educated SCs/STs, who migrate to of rationing of jobs for the SCs and, since they towns and have social networks, possibly enjoy cannot penetrate the non-reserved public sector a selection bias. jobs, placed a cap on their access to regular jobs (Das 2006). The situation has implications for the One of the most significant affirmative action structure of the reservation policies which may, policies in India is caste-based reservations in in fact, be penalizing educated SC men and, as the public sector. These reservations exist for anecdotal evidence on the `creamy layer' of SCs regular salaried work in the public sector and in suggests, fostering an elite within them. publicly funded education. Preferential treatment for the SCs/STs (and more recently for Other THE UNEMPLOYMENT SITUATION Overview and Labour Market Backward Classes or OBCs) in other ways and In India, low open unemployment rates can often in areas such as relaxation of the age bar, waiver be misleading. Going by the UPS definition, the of applications fees, special coaching, and quotas number of unemployed persons in India steadily in public employment and poverty alleviation increased from around 7.8 million in 1983 to 12.3 programmes also has a bearing on educational million in 2004­5. This places the unemployment attainment and labour markets. However, the rate at about 2.8 per cent, a number that has shown impact of reservations is a controversial issue; it little variation since 1983 (Appendix 1.10). The is also not easy to measure. low unemployment rate is, however, misleading 41 42 India's Employment Challenge Figure 1.14 Unemployment Rate in India (CDS) Table 1.6 Unemployment Rates by Status 9 8 Self- Casual Regular All employed Labourers Employees Employed 7 Persons 6 Male 5 21.7 0 10 per cent 5 4 Female 21.7 28.3 0 21.7 3 Employed 2 Persons 11.7 25 0 13.3 1 Source: Ghose (2004). 0 Note: The estimates are based on the assumption that all workers 1983 1987­88 1993­94 1999­00 2004­05 would want to work eight-hour days, six days a week. Source: Report of the Steering Committee of Labour and Employment, Planning Commission (2001b), Staff Estimates using NSS (2004­05) Underemployment rates are much higher for females than for males. on many counts. First, low unemployment rates can reflect workers stuck in low value-added Long-term open unemployment rates are and poorly paid work. Second, according to the particularly high among the youth, the better UPS definition, only those people are considered educated, and in urban areas. Youth in the unemployed who spent more than six months of 15­29 age group account for an overwhelming the year looking for or being available for work. proportion (over 80 per cent) of unemployed on This definition, therefore, captures only long- the UPS status. This may, in part, be related to term unemployment. Understood this way, far poverty. Low family incomes force people to enter from being low, the number of unemployed the labour market at a relatively young age and this at any given time is very high. Two alternative can increase youth unemployment. At the same approaches, based on CWS (which corresponds time, prolonged and unsuccessful job searches to the international definition of unemployment) by young family members may themselves and CDS, rely on a shorter reference period contribute to poverty. Youth unemployment and can better capture both underemployment is also a cause for concern because it prevents and short-term unemployment. According to new entrants to the labour market from gaining the CWS definition, the unemployment rate in experience and developing labour market skills India had increased to about 5 per cent in 2004; (World Bank 2005c). In India, where formal by the CDS definition, the unemployment rate opportunities for acquiring skills are limited and increased from 7.3 per cent in 1999­2000 (Figure most training happens on the shop floor, this may 1.14) to 8.3 per cent in 2004­5. be even more of an issue. Underemployment, rather than unemployment, Unemployment rates are significantly higher for presents a more accurate picture of the employment urban workers than for their rural counterparts. situation in India. Combining the distinct This reflects both the higher capacity of urban notions of CWS and CDS, unemployment workers to sustain unemployment and, possibly, rates suggest that underemployment can be as disguised unemployment in rural areas. It may high as 13 per cent, on average, for all workers, also reflect the fact that job seekers take a longer and 25 per cent for casual labourers (Table 1.6). time job searching, especially if there is a higher Figure 1.15 Education-specific Unemployment Rates 1999­2000 Crafts Diploma Med. Diploma Engg. Diploma Agri. Diploma Crafts Graduate Med. Graduate Engg. Graduate Agri. Graduate Graduate & above Higher Secondary Middle Primary Just literate Not literate Over All 0 5 10 15 20 per cent Source: Mathur and Mamgain (2004). probability of their being rewarded with good the educated indicate that India is underutilizing jobs after the search process. Interestingly, in rural its human capital. Surprisingly, unemployment areas, unemployment rates are usually higher is highest among workers holding technical among males than females; the situation is the diplomas. These diplomas, by design, are meant reverse in urban areas. to cater to specific, identified labour market needs. The evidence thus strongly suggests a mismatch Education of workers and unemployment are between labour market requirements and the positively related. Unemployment rates in India training provided. are lowest among illiterates; they rise progressively with education. They are now highest for workers Unemployment is mostly caused by the lack of with graduate and above degrees (Figure 1.15). work opportunities for casual labour (47 per cent), This all-India picture also holds at the state level followed at a distant second by lack of work in self- where, without any exception, unemployment employed firms (Table 1.7). Some 17 per cent of all Overview and Labour Market rates among secondary and above educated unemployed, 28 per cent of female unemployed, workers are much higher than among workers and 20 per cent of youth unemployed cite lack of with middle school and below education. While work in self-employed firms as the reason for their disguised employment among workers with low being unemployed. On the other hand, some 14 education level attainments may explain part of per cent of the urban unemployed and 25 per cent the story, the high rates of unemployment among of the graduate unemployed cite quitting work as 43 44 India's Employment Challenge Table 1.7 Reasons for Unemployment (per cent of total) Quit Loss Layoff Firm Lack of Work in Lack of Work Other Job of Job Closed Self-employed as Casual Firms Labourer All 7 3 1 4 17 47 21 Rural 5 2 1 2 18 52 21 Urban 14 8 1 13 15 25 25 Males 7 3 1 5 13 45 26 Females 5 2 0 1 28 53 11 Illiterate 3 1 0 1 20 57 18 Less than Primary 4 2 0 4 15 54 20 Primary 6 2 1 4 16 53 18 Secondary 11 5 2 8 16 31 27 Graduate 25 12 1 10 14 6 31 Young (15­30) 8 3 1 4 20 43 22 Middle-aged (31­50) 6 3 1 5 12 51 21 Old (50­64) 4 2 1 2 12 63 17 Source: Staff estimates using NSS. the reason for their unemployment. Only about is to be better utilized, employment growth has 13 per cent of urban unemployed and 2 per cent to pick up in the more productive formal sector, of rural unemployed cite the closure of firms the destination of choice for these workers. An where they were working as the reason for their important challenge is to improve the quality of being unemployed. jobs in the informal sector. In recent years, since 2000, while employment growth has markedly INDIA'S FORMIDABLE EMPLOYMENT accelerated, it has been accompanied by an equally CHALLENGES marked deceleration in wage growth. Moreover, Although labour market outcomes in the 1990s the share of formal sector employment has were not as poor as is generally perceived and remained unchanged. In short, India needs to employment growth has accelerated in recent simultaneously accelerate the pace of job creation years, India still faces formidable challenges in in the economy and improve the quality of jobs labour markets. The employment-to-population generated as well. ratio in India was always low to start with. In NOTES addition, unemployment, by some indicators, worsened over the 1990s and in recent years. 1. Participation rate is the share of the population in the 15­59 age group that is working, searching There are also worrying indications that tough for work, or is willing to work. labour market conditions may be discouraging 2. The 1990s refer to the period from 1993 to 2000, vulnerable segments of the population, particularly based on the timing of the main National Sample youth and women, from participating in the Survey (NSS) on which most labour market labour force. Education levels are rising among analyses are based. the workforce, increasing workers' expectations, 3. This is measured by the Current Daily Status but employment opportunities have not kept pace (CDS) definition as per official practice. If the and the country's human capital base is being international definition of Current Weekly Status underutilized. If this more educated workforce (CWS) is considered, then rural unemployment rates for both males and females increased from 3 employment participation is driven by factors to 4.5 per cent over the same period (see Box 1.1 other than those for men. for explanation of CDS and CWS). In urban areas, 13. Occupational concentration is among the highest on the other hand, unemployment rates were 5.7 for female workers, especially in rural areas. This per cent for males and 9 per cent for females in may be a consequence of their being concentrated 2005­6 (Economic Survey, Government of India, primarily in agriculture and allied occupations 2005­6). (Sundaram and Tendulkar 2006b). 4. Planning Commission of India (2001a, 2001b, 14. Within the home, women undertake a range 2002); estimates based on International Labour of activities that contribute to the economic Organization (ILO) database. welfare of the household; these are listed in the 5. Planning Commission of India report (2001b) surveys. estimates that 10 million jobs need to be generated 15. Three-fourths of rural workers are educated only annually in the economy. The growth required to till the primary level or less. The proportion of generate these will need to be 8 per cent to above such workers in urban areas, however, is only 4 10 per cent per annum. per cent. 6. `Organized sector' usually refers to the government 16. Reporting is mandatory for all public sector units or establishments employing more than 10 and large private sector units, and voluntary for persons. units employing less than 24 workers. However, 7. World Bank macroeconomic data set. lax enforcement and low responses from private 8. See Box 1.1 for definitions of key labour market sector units lead to under-reporting. terms used in India and in this report. 17. This is based on the observation that 88 per cent of 9. Based on UPSS definition (see Box 1.1). workers in non-agricultural organized enterprises 10. Since household activities are not classified reported regular wage status in the 55th Round, the as economic activity, this depresses female only round where worker-reported affiliation by employment participation rates. type of enterprise was also reported. Also, at least 11. The role of income and substitution effects, 50 per cent of workers with regular wage status, in employment opportunities and earnings by every population segment (male/female and rural/ workers and their spouses is discussed at greater urban), were located in the organized sector. length in Chapter 4. 18. The public sector accounts for close to one- 12. The fact that household income affects third of employment in community and public participation on subsidiary and primary status services. differently for women suggests that women's Overview and Labour Market 45 Employment in the Informal Sector 2 T he informal sector employs about 90 per cent of the Indian labour force. Further, most of the increase in employment in the 1990s was also absorbed by the informal tertiary and manufacturing sectors. Although this is widely regarded to imply a decline in welfare, this chapter argues that these developments need to be interpreted more cautiously. There is little doubt that the bulk of the increase in informal sector employment in the tertiary sector was involuntary, in the sense that the labour market entrants would have preferred regular, formal jobs. Compared to the formal sector, most of the increases in informal tertiary and manufacturing employment were in low productivity jobs. However, there was also a large shift in employment from the agricultural sector to more productive jobs in the informal tertiary and manufacturing sectors. Within the informal sector, job growth was robust in sub-sectors with rising productivity. These developments were reflected in the growth of casual wages in the 1990s. Finally, the top end of self-employed jobs (also regarded as part of the informal sector) was estimated to be as well-paying as top regular salaried jobs. The last section of this chapter argues that the agriculture sector still has considerable potential in generating a new round of jobs--by expanding high-yield cereal production in the relatively water abundant northeast, through diversifying into more labour-intensive commercial crops. Finally, recommendations are made to improve the quality of jobs in the informal sector, to lower barriers to entry to the formal sector, and to stimulate agricultural sector jobs. SIZE OF EMPLOYMENT IN THE INFORMAL SECTOR The vast majority of India's workforce is employed in what is often called the `informal' sector. In India, the term `informal sector' is of recent origin and has been in use only during the last two decades. A careful analysis of this sector is essential to understanding Indian labour markets. Not only does the informal sector provide employment to the vast majority of the country's workforce, it will also continue absorbing most of the additions to the workforce in the medium term. Hence, a careful evaluation of the potential of this sector, the quality of jobs that it can generate, and the constraints to its growth is essential. This the National Sample Survey (NSS) (1999­2000) chapter focuses on the informal sector, generally suggest a figure somewhere between 86 and 89 known in India as the unorganized sector.1 After per cent.2 Not only is this sector large, it is also discussing the size of the sector, the chapter the sector targeted by policymakers to absorb presents an assessment of the quality of jobs most of the additions to the country's workforce produced in this informal sector. Subsequently, (Planning Commission 2002). the chapter turns to trends and prospects for informal sector employment in the manufacturing The informal sector is large, partly because the and tertiary sectors and in agriculture. bulk of the country's workforce is employed in the primary sector and almost 99 per cent In theory, the formal sector can be distinguished of employment in this sector is informal. Not from the informal sector by the presence of surprisingly, almost half of informal sector legal protection and formal recognition by the workers are in the primary sector (Figure 2.1). government. Other criteria include: size of However, even in the other two sectors, informal establishments, capability of workers to organize employment accounts for the majority of themselves into unions, and the systematic manner employment: about 65 per cent in the secondary in which production processes are organized. In sector and about 50 per cent in the tertiary practice, however, because an exact definition is sector. By comparison, the formal sector is hard to establish, the informal sector is most often small, accounting for just about 11 per cent of defined in terms of what it is not; that is, it is not total employment in the economy. The public organized sector employment. According to the sector accounts for 69 per cent of formal sector Indian definition, employment in the government employment. The bulk, but not all, of public or in establishments employing more than 10 sector employment is in the tertiary sector. workers constitutes `organized' employment. Since most public sector employment is in While official estimates suggest that the informal the tertiary sector, this partly explains the large sector could account for as much as 93 per cent share (60 per cent) of the tertiary sector in of total employment, other definitions based on formal employment. Figure 2.1 Composition of Formal and Informal Sector Employment (%) Informal Sector Employment 2004­5 Formal Sector Employment 2004­5 Primary Sector 11% Tertiary Sector Employment in the Informal Sector 28% Primary Sector 45% Secondary Tertiary Sector Sector 28% 61% Secondary Sector 28% Source: Staff estimates using NSS. 47 48 There is a close association between organized female workers became more likely to report India's Employment Challenge sector employment and regular wage employment; being regular workers, especially in urban areas. this can be used to approximate trends in formal employment. Since information on the types Within the informal sector also, the share of of establishments employing workers was not self-employed and casual workers remained adequately collected in earlier Rounds (before the largely stable over the two decades, though in 55th Round) of the NSS, a rigorous delineation the 1990s there was a decline in the proportion between formal and informal sectors, using the of self-employed workers and a corresponding definition of enterprises under the Factories Act, is increase in the proportion of casual workers. The ruled out. However, it has been argued that of the decline was of the order of about 4 percentage three types of workers distinguished in the NSS points (Glinskaya and Jalan 2006).4 This led to of successive Rounds--regular wage employees, concerns about the growing `casualization' of casual wage workers, and the self-employed--the the workforce, though recent data again shows overlap between formal sector workers and regular a turnaround. At the same time, the situation is wage employees is considerable (Sundaram and worrisome because around a third of workers find Tendulkar 2006b). Trends in this category may employment as casual labour, and casual jobs are thus be a good proxy for examining trends in often at the bottom of the pile in terms of wages formal sector employment. To facilitate analysis, and job security. self-employment and casual employment, the two kinds of employment that tend to dominate in The increase in the share of casual workers in the the informal sector, are used to approximate the 1990s was driven by trends in a few industries. informal sector in the rest of this chapter. First, the trend towards casualization has been driven by trends in a few important industries: Between 1983 and 2004­5, the share of regular wage agriculture, mining, and construction. In these, the employment in overall employment remained shift to casual jobs may have been associated with stagnant at the aggregate level. Underlying this increased commercialization (in agriculture and aggregate picture, however, was the fact that for mining) and the choice of industrial `technology' both urban and rural workers, there was a small (in construction). If so, the welfare implications decline in the share of regular wage employment. are not immediately clear. At the same time, The overall share was maintained only because there were a number of `sunrise' industries (for of the increasing share of urban workers in the example, manufacturing and financial services) workforce, for whom regular wage employment which created good quality self-employment jobs was more significant than for rural workers. for both men and women, in both urban and rural Thus, in both urban and rural areas, informal areas. Apart from a few industries, most others employment became more important. Growth also saw an increase in the proportion of workers in job categories was also different for different employed in regular salaried jobs. age groups. While the proportion of older male workers with salaried jobs increased over time, The national samples also appear to suggest that the number of young and middle-aged salaried there is a life-cycle pattern in employment that workers fell sharply.3 This is of some concern could partly account for the shift from casual work since regular employment is the preferred choice to self-employment. Young male workers (15­30 of workers, especially the educated section of years old) in rural areas are more likely to work as the workforce. Encouragingly, however, young casual labourers and become self-employed once older. A similar pattern exists among urban males, educated workers, and the rising share of workers except that for this group the movement in later in the remaining three higher-level education life is somewhat more pronounced towards regular groups. This has translated to improved welfare salaried employment. This life-cycle movement is levels for all categories of workers. much less pronounced for females, in both urban and rural areas. If this hypothesis is correct, the One way of assessing changes in the quality of growing share of casual employment may be a jobs is to examine how the proportion of workers reflection of a growing young workforce. living below the poverty line (BPL) has changed in different segments of the workforce. Let us QUALITY OF JOBS IN THE INFORMAL SECTOR consider casual employment first. The number of Apart from concern about jobless growth, the casual BPL households increased in the 1980s but, other big issue in India is the quality of jobs. In in absolute terms, declined in the 1990s. Thus, for the Indian context, regular salaried employment this most vulnerable segment, the 1990s registered is the most desirable form of employment for an improvement over the 1980s. For self- workers from the point of view of earnings, employed workers, average annual increments to stability of employment, and availability of some BPL households came down in the 1990s; so this social security. It is followed by self-employment segment too fared better compared to the 1980s. which has variable returns but little security. At These two segments together accounted for 96 per the bottom of the pile is casual wage work which cent of the incremental workforce in the 1980s offers the lowest levels of earnings and has the and 86 per cent of the incremental workforce in least stability. National surveys also show that the 1990s. The only segment that did worse in though there is a wide distribution of income the second period (1993­2000) compared to the levels within each of the major categories of 1980s was, surprisingly, the regular wage/salaried employment, casual workers have jobs that are workers, for whom the decline in increments to of `lower quality' as measured by household per BPL households was much sharper in the 1980s. capita consumption. This is true for all industries This is not surprising when we consider that the and in both rural and urban areas. In the case of major share of regular wage workers is employed self-employed workers, earnings are better than in the relatively high-paying public sector and those of salaried workers in many industries there was indeed a decline in new employment (Glinskaya and Jalan 2006). in this sub-segment in the 1990s. An increase in the share of casual workers does An important, related question is: how not necessarily imply a deterioration in the disadvantaged are workers in the informal sector quality of jobs. Differences in human capital compared to their counterparts in the formal Employment in the Informal Sector characteristics largely explain the differences sector? This can be gauged, in part, by focusing between the welfare of casual workers, on the one on the earnings of wage earners only (Figure 2.2); hand, and self-employed and salaried workers, individual earnings are better defined for this on the other. Over time, the human capital group compared to self-employed workers. Using stock of all workers has increased. The improved the wage earnings of regular and casual workers educational composition of the workforce is as a proxy for the gap between the formal and reflected in the somewhat sharp reduction in informal sectors, evidence from the NSS surveys the percentage of illiterate workers, slow decline shows that earnings of regular salaried workers in the numbers of literate and primary-level were almost 2.5 times higher than those of casual 49 50 India's Employment Challenge Figure 2.2 Ratio of Regular Salaried Wages to Table 2.1 Ratio of Predicted Wage for Regular Casual Wages Salaried Workers to Predicted Wages for Casual Labour, All India 4.5 4 3.5 Sector Rural Male Rural Female 3 2.5 1993­4 1999­ 1993­4 1999­ 2 2000 2000 1.5 1 Agriculture 2.40 2.48 1.77 0.50 0.5 Non-agriculture 4.81 2.47 8.71 3.66 0 1983 1987­8 1993­4 1999­2000 2004­5 All 5.11 3.09 4.05 4.94 Urban Male Rural Male Urban Female Rural Female Urban Male Urban Female Source: Staff estimates using NSS. Agriculture 3.28 2.54 2.81 8.49 Non-agriculture 1.92 1.89 2.01 3.57 All 2.16 2.15 2.08 4.73 workers in 2004­5, and this gap has grown since Source: Computed from Unni (2006). the 1980s. The relative wage gap varies across the industry groups in urban areas. It is higher in the service sectors, being greatest in business and Another factor which may have contributed to financial services, compared to manufacturing. rising differentials is the rising premium for skills during the 1990s. The ratio of skilled to unskilled However, average wage comparisons are also worker wages (defined in terms of levels of affected by differences in individual characteristics education) showed an increase between 1993­4 like sex, age, level of education, and other social and 1999­2000, implying a movement towards and economic barriers to entry into the formal skilled workers. This was true for all the one- and informal sectors. Unni (2006) fitted earnings digit industry groups (Unni and Rani 2004). The functions separately for regular and casual workers improvement in the skill premium implied an to arrive at predicted wages for these workers. Her increase in the earnings gap between skilled and results show that after controlling for individual, unskilled workers. To the extent regular workers household, and other characteristics that may were more likely to be skilled and in the formal affect the wages of the workers, the absolute sector, the rising skill premium also implied a differences between the predicted and actual rise in inequality of earnings between formal and wages of regular and casual workers were quite informal sector workers. large for both men and women. But, over time, these differences declined for men and increased INFORMAL EMPLOYMENT IN THE only for women in urban areas. This difference MANUFACTURING AND TERTIARY SECTORS in the trends of the predicted and actual wage In 2000­1 there were 14.8 million enterprises gaps between regular and casual workers can in the manufacturing sector, employing 45.7 be explained in terms of the changing structure million workers. Of these, only 1 per cent of of labour demand. The evolution of the gap enterprises and 26 per cent of workers were in the between predicted and actual wages suggests organized sector.5 Two-thirds of the workforce in that the demand for women in regular jobs the unorganized sector worked in own-account increased while the demand for males in casual enterprises, based on self-employment and, jobs increased faster than the demand for them primarily, family labour. Less than 20 per cent of in regular jobs (Table 2.1). workers were employed in larger unorganized enterprises with 6­10 workers each. In rural areas, while generating quality employment (Category unorganized employment was more strongly A). These included organic industries (food and dominated by own-account enterprises (79 paper), chemicals (including pharmaceuticals and per cent), while in urban areas the picture was cosmetics), metal-based industries, and machinery. more balanced. Over the 1990s, the structure of Another group of industries (Category B) grew in unorganized manufacturing remained more or terms of value-added but faced declining labour less stable, with only a slight decline in the share productivity. This group included industries such of own-account enterprises. as tobacco, wood products, and wearing apparel. Only a small, third group of industries (Category While own-account enterprises had a large share C) did not grow in terms of value-added at all. in employment, they produced only 39 per cent The improvement was relatively broad-based, of value-added in the unorganized sector. The with most industries moving up the ladder. most productive enterprises were the relatively It is also interesting to note that this upswing larger ones employing 6­10 workers each; they happened despite the continuing de-reservation produced almost the same share of value-added of industries which were earlier reserved for the as own-account enterprises, but with a workforce small-scale sector. that was a third of the size of the latter. The growth in wage earnings and employment In the mid-1990s, unorganized manufacturing across the different manufacturing groups in the did better than its organized counterpart, both in informal sector mostly reflected productivity terms of wage growth and employment growth. growth, but there were exceptions.6 In Category The average per annum rate of growth of wage A industries, the benefits of growth were earnings in the unorganized sector, 5.1 per cent, transferred to the workers in the form of growth was much higher than that of the organized in employment and/or higher wages. In Category sector earnings, 1.2 per cent (Unni 2006). B industries, there were different experiences. Similarly, while there was a virtual stagnation In some industries (wearing apparel, wood and in employment in the organized manufacturing rubber products), both employment and wages sector, employment in informal manufacturing grew despite declining labour productivity; in grew by 2.1 per cent per annum. others (tobacco), employment grew even as wages declined. Overall, it seems clear that in the case The mid-1990s period also saw a lot of churning of some growing industries (Category A), growth in unorganized manufacturing. In the early part in employment was mainly due to pull factors. of the decade, a few industries in the sector saw In the case of other categories of industries (B growth in value-added, employment, and labour and C) push factors were likely more important Employment in the Informal Sector productivity. Unni (2006) categorizes these as (Unni 2006). Category A industries (Table 2.2). Most of the sector saw declining value-added. However, by Despite the faster growth of labour productivity and the mid-1990s, the unorganized manufacturing earnings in the unorganized manufacturing sector, sector found its feet and grew rapidly in terms of the gap between the organized and the unorganized both value-added and employment. In this period, sectors remained large. This issue is discussed a large number of industries shifted categories and in more detail in Chapter 3. How can these grew in terms of value-added and productivity, sets of findings be reconciled? Two points seem 51 52 India's Employment Challenge Table 2.2 Category-wise Classification of Growth and Non-Growth Industries in the Unorganized Sector Specification 1989­90 to 1994­5 1994­5 to 2000­1 Category A 1 Growing value-added, Fabricated metals; Fabricated metals; Food products; growing employment, and Office, accounting, and Paper products; Publishing, growing labour productivity computing machinery printing, and reproduction of recorded media; Chemical and chemical products; Basic metals; Other non-metallic mineral products; Machinery and equipment; Electrical machinery; Radio, television, and communications equipment and apparatus; Motor vehicles 2 Growing value-added, declining Leather products Leather products; Textiles; Transport employment, and growing equipment; Other manufacturing labour productivity Category B 3 Growing value-added, growing Wearing apparel Wearing apparel; Dressing and employment, and declining (excluding tailoring); dyeing of fur; Tobacco products; labour productivity Dressing and dyeing of fur Wood products Category C 5 Declining value-added, growing Food products; Basic ­ employment, and declining metals labour productivity 6 Declining value-added, declining Tobacco products; Cotton ginning; Medical, precision, employment, and growing Radio, television, and and optical instruments; Watches labour productivity communications and clocks equipment and apparatus; Transport equipment 7 Declining value-added, declining Rubber and plastic Rubber and plastic products; employment, and declining products; Other non- Office, accounting, and computing labour productivity metallic mineral products; machinery; Leather products Paper products; Cotton ginning; Textiles; Wood products; Publishing, printing, and reproduction of recorded media; Chemical and chemical products; Machinery and equipment; Electrical machinery; Medical, precision, and optical instruments; Watches and clocks; Motor vehicles; Other manufacturing Source: Unni (2006). particularly relevant. First, the productivity and order of 3:1, or even more, after controlling for the wage gaps between the organized and unorganized human capital attributes of labour. Thus, a short sectors were huge to start with. Detailed evidence period of higher rate of growth in unorganized presented by Little et al. (1987) shows that the sector wages would not have been sufficient to wage gap between the classes of enterprise at the produce a significant dent in the wage gap. Second, extremes of the wage ladder could have been of the the wage gap increased differentially for different types of unorganized enterprises, though probably higher in these off-farm activities and there is a the least for the registered small-scale sector reduction in the incidence of poverty.8 But this (DMEs)7 (see Table 2.2). absolute improvement in living conditions is accompanied by a perceptible trend of increasing The major player in the absorption of labour outside inequality--with the increase in differentials agriculture since the 1990s is not manufacturing, favouring the skilled and the more educated, and but the tertiary sector. The importance of the also the better-off sections of the self-employed. tertiary sector in employment generation has increased in spite of a significant negative trend A particularly important issue is the problem of in the growth of public services. However, an the `missing middle' firm size. In manufacturing, important question is: is labour being absorbed while there has been some redistribution of at a reasonable or growing income level in the employment from the largest to smaller size tertiary sector or is it being pushed into it for lack groups within the organized sector, the structure of alternative opportunities? The next chapter of employment on the whole displays conspicuous provides detailed analysis on this point. However, `dualism'. There are two prominent modes or evidence suggests that there has been an outward concentrations of employment, at the low and shift in the distribution of earnings in the tertiary high ends of the spectrum, and a large, persistent sector, so that earnings at all levels have increased. differential in productivity (and earnings) between Labour absorption has also been proportionately these two groups. The scenario underlines the larger in the first and fifth income quintiles of difficulty faced by smaller firms in graduating the distribution, with relatively less absorption to become middle-size units. This is explored in the middle range. This implies an increase in in more detail in the next chapter. A similar inequality in the bottom half of the distribution-- phenomenon of the `missing middle' is suggested a trend more prominent in the urban economy. by the data on earnings distribution presented for Disaggregating the tertiary sector by its 1-digit the tertiary sector (see Chapter 3). components, it is seen that these effects are mild in consumer services, but much more striking in The persistence of dualism reduces economic business services and the public sector. welfare, from both the efficiency and equity points of view. Dualism is a constraint on the healthy, The overall evidence, thus, is that there has been long-run development of the economy. It suggests a movement of labour from low productivity a need for policies that ease constraints on the agriculture to the higher productivity tertiary growth of small enterprises. Credit, technology, and manufacturing sectors where earnings are and labour regulation are critical areas which higher and rising. This development can be are particularly relevant here (see Box 2.1 for a Employment in the Informal Sector broadly considered to be welfare improving and, discussion on successful international experiences to some extent, voluntary. However, the non- in promoting small and medium enterprises, or agricultural sectors have seen a relatively higher SMEs). The development of sub-contracting is rate of employment growth in the informal or one way in which the large-scale sector seeks to unorganized sector. The welfare implication of rectify the problem of dualism. There is some this has to be interpreted carefully. On the one evidence of this happening in recent years in hand, the trend cannot be equated to decline in India but there are important concerns about the the returns from working, since casual wages are specific way in which the sub-contracting system 53 54 India's Employment Challenge Box 2.1 Examples of Successful SME Promotion While large firms in India may be important for setting the pace of economic and technological change, the experience of the 1990s shows that most new employment will continue to be generated by small and medium enterprises (SMEs). What does international experience tell us about how SMEs grow, and what is their relationship with larger firms? What can be learnt from public initiatives to promote SMEs in countries which have done so successfully? Open, competitive sub-contracting seems to be the dominant pattern of relationship between large firms and SMEs in India currently. Large firms are disinclined to combine the different stages of manufacture in- house, with expensive permanent employees, and hence source some components and services from SMEs. The advantage of this approach is that it allows costs to be driven down to meet domestic and international competition. The disadvantage, however, is that the jobs generated are mostly low-paid and insecure. There are also economic costs to not investing in and upgrading labour. Conditions in Mexico are similar to India--99 per cent of firms are small- and medium-sized enterprises. The Integral Quality and Modernization Program (CIMO--now renamed as PAC), established in 1988, has been reaching small- and medium-size enterprises and assisting them with upgrading worker skills, improving quality, and raising productivity. All states and the Federal District of Mexico have at least one CIMO unit each. Most units are housed with business associations that contribute office and support infrastructure. The promoters organize workshops to provide training and technical assistance services, identify potential local and regional training suppliers and consulting agents, and actively seek out enterprises to deliver assistance on a cost-sharing basis. CIMO is expanding in two directions--assisting enterprises with specific sectoral needs and providing an integrated package of services that includes information on technology, new production processes, quality control techniques, marketing, and subsidized training. Alternative examples come from countries like Italy, Germany, Japan, Denmark, and Spain where a significant share of production takes place in SME clusters. These clusters combine the advantage of smallness with economies of scale and scope, which big firms enjoy. They can give small firms the strength to choose between supplying to large firms and competing with them. This can lead to rapid economic growth, good wages, and good jobs. Such flexible specialization, however, requires some degree of trust between entrepreneurs, and between them and their workers. Some networks of firms, including innovative and successful ones in fast-developing industries, develop based on economic interest and personal friendship. Others develop within business associations of firms in the same industrial sector or because they share the same place, like an industrial estate. However, in most cases, effective networks of cooperation, capable of making SMEs competitive in national and world markets require deliberate policies from national or local governments to encourage this kind of development. In Italy, Germany, and Denmark, this `push' came from the government (a) providing collectively `real services' like training, consultancy, and design, which single SMEs could not afford by themselves; and (b) encouraging and supporting consortia or other local arrangements, which gave clusters of inter-dependent SMEs access to European and world markets. In Italy, local and regional governments, working with private enterprises and sometimes trade unions, set up institutes to provide technical services, research and development testing, feasibility studies, and advice on management and marketing. The strategy was to develop what already existed in the region and then to find ways of diversifying into new fields and markets. In Germany, the state government promoted the setting up of a network of technology transfer centres closely linked to local chambers of commerce. These centres are demand-driven and almost self-funded. They usually specialize in particular industries and technologies, and often refer clients to other centres with the necessary expertise. In Spain, the Valencian regional government established a high-profile agency named Impiva. Impiva has two kinds of institutes: technological institutes and local business innovation centres. Some technological institutes are designed to help a distinct industrial sector. Others aim to develop particular technologies, like biomechanics or optics, which are used in diverse industries. Each institute is linked to an association of entrepreneurs who elect a majority of its supervisory board and determine the services the institute will provide for a fee. The institutes are meant to become self-financing. Sources: Holmstrom (1999); Tan et al. (2004). develops in an economy. We discuss this in more strength. Agriculture accounted for a mere 23 per detail in the next chapter. cent of the increase in employment over the 1993­9 to 2000 period, declining massively from its 44 LABOUR ABSORPTION IN THE AGRICULTURAL per cent share during the 1983­93 period. There AND RURAL SECTORS were also important changes in the structure of Rural employment, which accounts for a little employment within agriculture. Records reveal more than three-fourths of all employment in a surprising slump in non-cultivation related India, is overwhelmingly informal in nature and employment in the 1990s, after rapid growth over dominated by agriculture. In 2004­5, about 56 the 1983­93 period. This slump, in `person' days per cent of rural workers were self-employed, of employment generated, affected all activities while another 36 per cent were casual workers.9 except forestry. The decline came on the back of Further, while rural employment is diversifying a fall in growth of cultivation-related employment into sectors such as transport, storage and (Table 2.3). Whatever employment was generated communications (3 per cent of all employment came mainly from activities such as forestry and in 2004­5), construction (6 per cent), trade and plantation. The agricultural and allied sectors hotels (7 per cent), and manufacturing (8 per cent), regained some strength after 2000, accounting for agriculture and allied activities still account for 70 30 per cent of new rural employment generation per cent of rural employment. Generating rural, between 1999­2000 and 2004­5, but not to the non-farm employment will require improving level witnessed in the 1980s. the investment climate for small and medium industries, as discussed earlier, and addressing The migration of labour from agriculture to non- regulatory barriers that constrain non-farm activity farm jobs was mostly a result of `pull' factors, not Employment in the Informal Sector in rural areas. In the medium term, however, the `distress driven'. While both agricultural and non- role of agriculture will remain critical, both because farm rural casual wages grew steadily in real terms, of its large share in employment and because non-farm rural casual wages consistently exceeded growth in agriculture will create a demand for farm wages (Figure 2.3). This suggests that more non-agricultural goods, services, and jobs. non-farm opportunities were available, pulling labour away and also tightening the labour market Growth in agricultural employment slumped in agriculture. Such a shift may also indicate between 1993 and 2000, before regaining some declining underemployment in agriculture. 55 56 With agriculture likely to remain the primary India's Employment Challenge Table 2.3 Growth Rate of `Person' Days, by Operation employer of India's labour force in the medium Operation 1983 1987­8 1983 1993­4 1983 term, its employment prospects remain a critical Type to to to to to 1987­8 1993­4 1993­4 1999­ 1999­ issue. Currently, the sector employs about 52 2000 2000 per cent of the total workforce. Though shifting Total some part of this workforce out of the sector and Cultivation 0.9 2.5 1.8 0.5 1.4 Forestry ­5.8 ­3.3 ­4.4 2.0 ­2.1 into more productive jobs in manufacturing and Plantation 3.0 11.3 7.7 0.4 5.0 services will be necessary, the scope for doing Animal so in the medium term is limited. Thus, raising husbandry 2.2 2.8 2.5 ­0.3 1.5 the demand for labour within agriculture, while Fisheries ­3.4 9.1 3.6 ­7.9 ­0.8 raising productivity, is important. Here, there Agriculture other than has to be a crucial distinction between labour- cultivation 3.5 7.7 5.9 ­2.5 2.7 using and labour-saving ways of increasing Total agriculture 1.4 3.7 2.7 ­0.2 1.7 productivity of labour. Some types of change (for Non- example, mechanization of specific agricultural agriculture 6.8 0.7 3.2 3.2 3.2 operations) may increase labour productivity Total 2.7 2.9 2.9 0.7 2.0 but will do so at the cost of reducing the demand Source: Srivastava (2006). for labour, as Figure 2.4 shows. Other types of agricultural developments, however, could increase productivity at the same time as they increase the Figure 2.3 Daily Real Wages in Non-agricultural use of labour. These could include: the spread of Occupations (in Rs) labour-intensive HYV rice production to the north- 45 40 eastern regions where water is more available and 35 30 current productivity is low, more emphasis on 25 20 15 sustainable irrigation (like the government's plans 10 5 under the Bharat Nirman Yojna), and further 0 1983 1987­8 1993­4 1999­2000 2004­5 diversification into high value-added and more Rural ag. Casual Rural non-ag. Casual Urban Casual Source: Staff estimates using NSS. Figure 2.4 Growth Rate of Labour Productivity and Employment across States Overall, the shift of labour away from agriculture o is a part of the structural transformation of a KE developing economy. Still, as district-level studies TN show, some of the movement may also represent a distress-induced shift--by self-employed KA MP WB agricultural workers leaving farming to become RA HA PU MA casual labourers. The slowdown in agricultural OR UP AP BI growth, falling productivity, uncertainty of crop 0 GU yields due to low rainfall (especially in rain-fed ­2 areas), degradation of lands, and the depletion of ­6 ­4 ­2 0 2 4 water resources worked as factors that pushed Source: Srivastava (2006). marginal farmers away from agriculture. labour-intensive products. Srivastava (2006) is likely to depend upon the rate of increase of studied variations in labour use in crop cultivation mechanization, wage levels, growth in wages, per net sown hectare across states, in the four tightness in labour markets, extent and growth of years for which NSS data are available. His results non-farm employment, and area under medium- suggest that a 1 per cent increase in the growth large farms. Also, changing attitudes towards rate of labour days in cultivation, per hectare of manual agricultural work are quite evident from sown area, requires a growth rate of 2.5 per cent a number of studies. The growth in education in gross irrigated area, or an annual shift of 0.4 and rural incomes, in conjunction with the per cent in favour of labour-intensive crops, or a disinclination of workers to perform manual 5 per cent growth rate in agriculture productivity agricultural work, may be leading to a general (agriculture value-added) per hectare per year. withdrawal of the workforce from agriculture, and the withdrawal of specific segments of the The analysis suggests that for the country as a agricultural workforce (women, children) in whole, increase in agricultural value-added has a some areas. large positive impact on labour use, per acre, in crop cultivation. This would imply that agricultural Future Prospects growth has been and is still very labour-intensive. An important implication of this analysis is One of the primary features of the agricultural that agricultural growth so far has been labour- situation in the 1990s was the slowdown in the rate intensive and the decline in employment, of growth of the sector. Several reasons have been observed in the second half of the 1990s, was put forward for this. Some of the prominent ones partly due to a slowdown in agricultural output. are: slowdown in public investment in agricultural Thus, employment can be expected to accelerate infrastructure, irrigation, agricultural extension with the recovery of output growth in the sector. research, and so on. Irrigation may even have Nevertheless, employment prospects would be declined in some areas due to lack of maintenance. enhanced with the following: This is likely to have manifested itself in a slowing down of growth in both gross cropped area and · Further spread of labour-intensive HYV rice, agricultural productivity. especially in the north-eastern regions where water is more available but productivity is Another important reason that may have led to a currently low. slowdown or even decline in employment growth · More emphasis on sustainable irrigation in agriculture is the increasing use of labour- (similar to what the government is currently saving technological changes. These manifest planning under Bharat Nirman) through public themselves through high rates of mechanization and community investments in the expansion, Employment in the Informal Sector and switchovers to crops and agricultural practices maintenance, and rehabilitation of irrigation that require less labour. The cost-of-cultivation systems. data, collected by the Ministry of Agriculture, · Diversification of agriculture: Some products, show low and negative employment elasticity for such as horticulture, have almost twice the many crops, especially in the north-western states. labour intensity as cereals (see Box 2.3). While The impact of these changes would also depend horticultural production growth is already upon the predominant presence of relatively accelerating, policy attention will help to sustain large employers in any region. Thus, the extent this trend. It will be important to strengthen to which labour-saving practices are adopted links to market outlets (for example, through 57 58 investments in roads, markets, electricity, · Off-farm employment, such as animal India's Employment Challenge and information systems) so that farmers can husbandry, increases the incomes of rural produce more crops and livestock products for families and also improves the economic the market. To help farmers cope with changing welfare of families that are dependent on markets and production systems, investments agriculture by reducing the pressure on must be made in financial systems for managing farmland and exclusive agricultural activities. risk (for example, futures markets, crop Thus, developments which increase off-farm insurance schemes, warehouse receipt systems, employment should be encouraged, even if commodity exchanges, and social safety nets). they reduce employment in the crop-producing · Supporting the growth of agro-processing: sector. A good example of a promising initiative Currently, only 2 per cent of fruits and vegetables to promote off-farm female employment are processed in India compared with 30 per comes from the Self-Employed Women's cent in Thailand, 70 per cent in Brazil, and 80 Association (SEWA) movement in India (see per cent in Malaysia. Box 2.2). Box 2.2 The Self-Employed Women's Association (SEWA) The Self-Employed Women's Association (SEWA) was set up in 1972 in Ahmedabad, Gujarat, as a membership organization of poor women working in the informal sector. From its small beginning in 1972, SEWA's membership has grown to over 1.2 million members in seven states in India. Recently, more than 100,000 new members have joined each year. A structure has evolved that gives SEWA great flexibility to grow and respond to its members' needs. Apart from their participation in the union's formal election and governance arrangements, members are engaged in three main ways: (a) through a union, with both urban and rural branches, that helps members demand fair treatment and access to justice, markets, and services; (b) through cooperatives that help members produce and market goods, and build their assets; and (c) through member services, which are financed partly through user charges, partly by donors, and partly by government departments that have been unable to provide the services for which they are responsible by law. Cooperatives SEWA cooperatives in rural areas help women improve the quality and designs of the handicraft and woven items they produce for sale. In most cases, the women are already highly skilled in embroidery and weaving or other crafts. SEWA's task is mainly to ensure consistent quality and timely delivery. Cooperatives have also promoted new agricultural products and techniques that add value to traditional products. For example, tree nurseries are a new activity in areas where traditional tobacco workers are being displaced. Milk cooperatives improve cattle breeding, as well as milking and milk handling techniques, raising the value of sales. Salt farmers are being shown how to produce higher-value industrial salt rather than lower-value edible salt. Cooperatives also provide their members with information on market prices for traditional and new products. SEWA has also become directly involved in marketing what its members produce. By far, the largest cooperative is SEWA Bank. At the end of fiscal 2003­4, deposits totalled $14.4 million in 257,000 accounts, and there were 53,000 outstanding loans totalling $3.9 million (for an average loan size of about $73). Historically, SEWA Bank's loan recovery rate has been about 96 per cent. In 2003 and 2004, the Bank started innovative mobile `doorstep banking' arrangements so that members would not have to interrupt their daily livelihood activities to go to the bank. It also offers training courses in financial planning. SEWA Bank has introduced the habit of regular saving to tens of thousands of poor women. Members pay significant interest rates to SEWA Bank (currently over 20 per cent a year, while the rate of inflation is around 5 per cent), but no longer feel powerless and exploited by moneylenders. Member Services SEWA concentrates its member services in four areas: health care, childcare, insurance, and housing. In SEWA's experience, the security of a poor woman's livelihood is not complete without access to these four basic goods. If a government-provided service functions well, then SEWA disseminates information on how to use it; if a service needs improvement or reorientation, SEWA tries to influence decision-makers accordingly. If all else fails, it provides the service on a sustainable basis. SEWA has pioneered the provision of insurance for poor women, drawing on both the SEWA Bank and government insurance companies. Typically, a woman saves Rs 1,000 (about $22) and puts the money in a fixed deposit. The annual interest pays the premium and ensures uninterrupted coverage, which includes maternity benefits, as well as payments in the event of illness, death, and loss of property. In 2003, more than 110,000 members were covered: over 6,000 claims were paid for a total of close to $180,000 (with the average payment being about $30). SEWA is now planning an insurance cooperative, drawing on the example of the SEWA Bank. Key Factors behind the Success SEWA's impressive record in scaling up its membership and activities over the past three decades offers useful lessons. First, member-based organizations promote ownership and help ensure that activities are based on members' demands and needs. Such organizations can harness hitherto untapped energy and generate it anew once members attain self-confidence and learn new skills. Second, an organization based on values must emphasize them constantly. If it does so, it can maintain consistency of purpose and function very flexibly. Values generate strong loyalty among staff and members, as well as support from the wider public, and underpin the patience and perseverance required to change difficult policy environments. Third, a flexible style of working encourages learning and innovation and, therefore, facilitates adaptation to changing circumstances, including the ability to see crises as opportunities. At the same time, flexibility motivates high performance and low turnover among staff, and makes it possible to take advantage of partnerships with external actors. Finally, leadership skills are crucial, not only to define and uphold the vision of an organization, but also in establishing management and behavioural practices that minimize social distance between the management cadre and the organization's members (or clients). Moreover, with proper attention to training and practical research, an organization can find and develop new leaders among its members or clients, despite their poverty and lack of formal education, and in this way ensure its continuity and growth. Source: Blaxall (2007). Employment in the Informal Sector POLICIES AND REGULATIONS TO SUPPORT rural activities in particular: marketing of INFORMAL SECTOR EARNINGS AND PROMOTE agricultural produce is restricted under the FORMALIZATION Essential Commodities Act and the gathering of Completing the agenda of market reforms by forest products is restricted by the Indian Forest changing policies and regulations that currently Act (Saxena 2003). At present, farmers in Punjab, constrain trade, marketing, and large-scale Haryana, Andhra Pradesh, and Karnataka can be production will be crucial for raising employment prevented from selling their produce outside their and earnings in the informal sector, including states. Storage of produce is restricted in states in agriculture. Regulations affect two important such as Gujarat (for pulses), Maharashtra, Kerala, 59 60 Andhra Pradesh, and West Bengal. Storage rent currently accounting for more than 5 per cent India's Employment Challenge is regulated by the states' cold storage regulations of national gross domestic product (GDP), can in West Bengal, Uttar Pradesh, and Bihar. All be more narrowly targeted to promote high these restrictions serve to depress demand for value, labour-intensive crops. A good example farm produce, as well as farmers' earnings. In the of the success of regulatory reforms is the licensing case of forestry, some 100 million forest dwellers requirements for milk processing in Uttar whose livelihoods depend on forestry products Pradesh--the easing of these requirements led are prevented from harvesting non-timber forest to a doubling in milk processing capacity in four products like fruits, nuts, flowers, and twigs-- years. Another example of a more comprehensive activities that can be pursued in a sustainable government intervention is the Maharashtra manner. The harvesting of prosopis, its conversion horticulture promotion programme (Box 2.3). into charcoal, and its transportation for sale-- activities that can potentially provide significant Over the long term, however, informality can off-farm employment--face numerous restrictions impose considerable costs on the economy; policies in states such as Gujarat and Tamil Nadu. will be needed to encourage the informal sector to become formal. Informality is encouraged in an Regulatory reforms that address these barriers will economy when firms seek to avoid the transaction increase employment and the earnings of the poor costs of complying with regulations concerning in the informal sector. This includes amending Acts registration, licensing, tax administration and tax such as the Essential Commodities Act, phasing policies, and laws that reduce flexibility. Firms out levies and monopoly controls, de-reserving can also have an incentive to stay informal to be agro-based and food-processing industries, more competitive vis-à-vis formal sector firms de-controlling sugar and removing sugar from that have to comply with regulations. In the long the list of commodities distributed through the run, however, the costs of informality can be public distribution system (PDS), and removing high for firms and for the economy. Firms may restrictions on the export of agro-products. avoid official taxes but may end up incurring Subsidies for food distribution and inputs (such higher costs from making payments to corrupt as fertilizers), and procurement schemes such officials or private extortionists due to their lack as the minimum support price (MSP) policies, of legal status and bargaining power. Informal Box 2.3 Horticulture Development in Maharashtra The Maharashtra Horticulture Development Programme, which is linked with the state's Employment Guarantee Scheme (EGS), aims to accelerate the expansion of horticultural production and generate additional employment in rural areas. While food crops can provide employment of approximately 100 to 115 `person' days per hectare per year, horticulture production requires up to 275 `person' days per hectare per year. The programme, applied to 25 fruit crops, spices intercropped in coconut plantations, and medicinal and aromatic plants, was open to all farmers, with a minimum required area per project. The scheme provided 100 per cent subsidies on wages and material inputs (planting materials, fertilizers, and agrochemicals) to small and marginal farmers, Scheduled Castes (SCs), Scheduled Tribes (STs), and other ethnic minorities, on a declining scale--the subsidies were phased out by the third year. All other farmers received subsidies of 100 per cent on wages and 75 per cent on material inputs, on a declining scale, over three years. Wages were given in cash while the material inputs were supplied in kind. The `grant' or subsidy averaged Rs 7,709 ($161) per farmer beneficiary. To support the scheme, the government of Maharashtra implemented complementary initiatives that ensured the supply of key inputs and services. During the first seven years of the project, 140 government nurseries and 24 nurseries in four agricultural universities were established to supply high-quality planting materials. Planting material supply was further expanded by the entry of approximately 1,670 private nurseries. Pesticide residue testing laboratories of international standards were established in Pune and Nagpur. A website (agri.mah.nic.in) on agriculture-horticulture was launched by the Department of Agriculture to disseminate information about the programme. A Central government­sponsored scheme for sprinkler and drip irrigation facilitated the expansion of horticulture and floriculture production. In view of water scarcity conditions in many areas, the scheme aimed to increase efficiency in water use. The drip/ sprinkler scheme provided subsidies equivalent to 75 per cent of cost of equipment for all farmers and 90 per cent of costs for SCs/STs, up to a limit of Rs 32,000 per individual, the cost of which was shared between the Central and state governments with a ratio of 75:25. Public and private investments further supported the growth of the sector. The Maharashtra government's investments in infrastructure, such as building the Pune­Mumbai expressway and other roads, and upgrading airport and port facilities, reduced transportation costs and helped to increase the competitiveness of Maharashtra's products domestically and in the export market. Private sector initiatives and investments also contributed. Large farmers and corporate investors in horticulture and floriculture--who invested in supporting marketing infrastructure such as pre-cooling facilities, cold storage, refrigerated transport, and agro-processing--promoted production and organized supply from other (smaller) farmers to meet the bulk requirements for export and local demand, and provided technical advice to meet export-quality requirements. Increased private participation in input supply (fertilizers, agrochemicals, and improved seeds) increased the accessibility of key farm inputs to farmers. Commodity marketing organizations, including Mahagrapes, Mahamangoes, and the Western India Floriculture Association, were instrumental in promoting exports of local products. The programme has been a success from both the horticulture and employment perspectives. Of the 1 million hectare increase in area planted with fruits in the state between 1989­90 and 2000­1, 96 per cent was supported through the horticulture-linked EGS scheme. It directly created an estimated 213 million `person' days of work, or approximately 807,000 `person' years (assuming 220 days of work per year) over the past decade. Since the fruit orchards, once initiated, would normally require continuous employment to Employment in the Informal Sector meet day-to-day labour needs, the scheme also opened opportunities for permanent full-time employment for agricultural labourers. In addition, the increased fruit production generated positive multiplier effects in terms of increased labour demand arising from increased demand for inputs and marketing services (transport, storage, packaging, processing, and trading). In the future, in view of the rapid uptake of the technologies, the challenge will be to more exclusively target assistance to poor, small, and marginal farmers who are more capital constrained. Source: World Bank (2005d). 61 62 sector firms have less access to and face high compliance, however, the government will need India's Employment Challenge costs of capital, unreliable access to electricity, to be careful. Eliminating informality can lead to and business services. By becoming formal, high costs in the short term by throwing firms and firms can enjoy the benefits of property rights workers out of jobs. Rather, the spirit should be to and contract enforcement, and access to finance, encourage growth and increase the incentives for infrastructure, and tax concessions offered by firms to become formal, because this will enable governments. These conditions, in turn, translate them to gain access to services and benefits and to lower investments and productivity growth in grow faster. the economy as a whole. NOTES International evidence suggests that governments need to take two approaches to encourage firms 1. Henceforth, the terms `unorganized' and `informal' to become formal (World Bank 2005f). First, are used interchangeably. 2. The NSS 55th round provided information on recognizing that formalization will take time, the the affiliation of workers with different types of Government of India can provide a supporting establishments, public and private, and the class environment for the growth of productivity of employment size to which they belonged. and improvement in working conditions in the Information on UPSS workers was broken down informal sector. The key step here will be to into `formal' and `informal' categories on the basis remove disincentives to growth--such as reserving of the following criteria: (i) all employees in public sectors for small-scale firms, regulations that raise sector undertakings were considered to be in the transactions costs and costs when firms grow formal sector; (ii) private sector wage workers beyond a certain size, and other regulatory barriers working in units that had electricity and employed discussed earlier. The other prominent example 10 or more workers, or units with no electricity but of a regulation that taxes firm growth in India is employing 20 or more workers, were considered Clause VB of the Industrial Disputes Act which to be in the formal sector; and (iii) self-employed severely restricts the rights of firms employing workers with higher secondary or more education more than 100 workers to retrench labour. The were considered to be in the formal sector. costs of this Act are discussed in detail in Chapter 3. This is not surprising given that over two-thirds of the salaried sector is public enterprises; the 5 of this study. In general, procedures can be public sector had very high rates of hiring in the simplified (Chen 2006). Governments can directly 1980s which slowed down in the mid-1990s. and indirectly (for example, through private sector 4. This category includes own account (that is, self- associations) provide business services and access employed) workers and unpaid family workers. to capital for informal sector firms to grow. Second, 5. The data on the organized sector is obtained the Indian government can gradually improve from the Annual Survey of Industries (ASI). The enforcement by raising incentives for firms to ASI collects two separate sets of data called the join the formal sector and impose penalties for Census Sector (referring to a census of enterprises non-compliance with formal sector regulations. employing more than 100 workers each) and the A whole range of tax and regulatory reforms that Factory Sector (referring to a sample survey of reduce concessions to informal sector firms, and enterprises employing 10­100 workers each). lower taxes, social security contributions, and We have used both sets to show the structure regulatory burdens on formal sector firms, can of the industry, but in a later limited analysis be employed for this purpose. In implementing of organized sector data, only used the Census Sector data. the second step to increase the penalties for non- 6. Unni (2006) distinguishes three categories of 7. DME stands for Directory Manufacturing industries, designated as follows: Category A Enterprises, meaning enterprises registered in consists of growth industries with improving directories and employing six to nine workers quality of employment. There are two groups each. of industries within it--both have growing 8. See Maloney (2004) for evidence from Latin value-added and labour productivity, but one America on how the informal sector can be has growing employment (A.1) and the other viewed as an unregulated micro-entrepreneurial has declining employment (A.2). Category B sector with voluntary participation by workers, comprises growth industries that have declining and not as a residual from the segmented formal labour productivity, but show growing value- sector. added. Category C has the non-growth industries 9. World Bank staff estimates. (declining value-added), with declining labour productivity and declining employment. Employment in the Informal Sector 63 Employment in the Formal Sector 3 T his chapter examines the trends in formal sector employment in the secondary and tertiary sectors in India over the last two decades. In formal manufacturing, an analysis of the elasticity of employment to gross domestic product (GDP) shows that three factors were responsible for low employment growth in the 1990s: (i) an adverse movement of the terms of trade against producers; (ii) the adjustment of the economy to trade liberalization in the early 1990s--while export-intensive sub-sectors witnessed increased employment growth, import-competing sectors saw a slowdown in employment, and; (iii) the choice made by formal sector firms to raise wages and productivity of existing workers rather than increase employment. The tertiary sector accounts for most of the growth in formal sector employment in recent years in India. But, like manufacturing, employment in this sector too displays a dualistic pattern. At one end are the main sources of growth in the formal services sector--the rapidly evolving information technology enabled services (ITES) and financial sectors. But the pull of these sectors on overall labour markets is muted, given that they employ only 7 million workers out of a labour force of more than 400 million. Instead, most jobs are being created in the trade, hotels and restaurants, construction, and community services sectors where the bulk of the jobs are informal and of low productivity. Thus, as in manufacturing, workers in the tertiary sector are clustered at two ends of the wage distribution scale. EMPLOYMENT IN ORGANIZED SECTORS1 Employment growth in the formal (`organized') sectors in India has been disappointing in spite of a fairly healthy rate of growth of output. Although likely an underestimate, according to official figures, employment in the organized sector grew minimally from 26.7 million in 1991 to 28 million in 2001, and then declined to 26.4 million in 2004. Manufacturing employment fell from 6.3 million in 1991 to 5.7 million in 2004.2 The bulk of manufacturing jobs today remain in the informal sector.3 As with manufacturing, employment in the formal services sector (according to official estimates) grew minimally from 15.7 million in 1991 Figure 3.1 Total Formal Sector Employment Levels (in Millions) and Growth Formal Sector Employment (in millions) Growth in Formal Employment 30.0 3.0 Agriculture Industry Services Total 2.5 25.0 2.0 1.5 20.0 1.0 15.0 0.5 0.0 10.0 ­0.5 1976­80 1981­90 1991­2001 1991­95 1996­2001 ­1.0 5.0 ­1.5 0.0 1981 1991 2000 2003 1981 1991 2000 2003 1981 1991 2000 2003 1981 1991 2000 2003 Total Agriculture Industry Public Private Manufacturing Services Source: DGE&T estimates. These are considered to be underestimates, including by the DGE&T itself. to 16.8 million in 2000; the most recent estimates Figure 3.2 Employment and Real Gross Value Added put it at 16.7 million (Figure 3.1) out of a total in Formal Manufacturing (1974­5 to 2004­5) prime-age workforce of 412 million. 7.00 6.95 Low elasticity of employment and persistent dualism 6.90 Log of EMP are the key reasons for low employment growth in 6.85 the formal manufacturing sector.4 Overall, the share 6.80 of all manufacturing jobs in total employment 6.75 has remained largely unchanged. Even during the 6.70 period of relatively rapid growth between 2002 and 5.90 6.00 6.10 6.20 6.30 6.40 6.50 6.60 6.70 6.80 6.90 7.00 2005, employment elasticity of output was less than Log of GVA 0.3. This chapter attempts to answer four main Source: Mazumdar and Sarkar (2006c). questions: (i) Why has employment elasticity been Note: GVA = Gross Value Added. so low in manufacturing? (ii) How has international trade impacted employment growth and elasticity? Between 1974 and the present time, it is possible (iii) Is dualism still persisting in manufacturing to distinguish between five periods, or distinct and, if so, why? (iv) What role is sub-contracting breaks, in the value of employment elasticity: Employment in the Formal Sector playing in mitigating dualism? The last section of (i) 1974­80, when employment elasticity had a this chapter addresses issues related to employment high positive value of 0.99; (ii) the 1980­6 period growth in the services sector. of `jobless growth' when employment elasticity actually turned negative (with an average value WHY HAS EMPLOYMENT ELASTICITY IN FORMAL of ­0.16); (iii) the reform period of 1986­96 MANUFACTURING BEEN LOW? which saw a recovery of employment elasticity In fact, not only has employment elasticity been to positive values (increasing to 0.33), although low with respect to output, it has been fluctuating it was significantly lower than the value attained over time (Figure 3.2). in the first period; (iv) the post-reform period, 65 66 called the Domestic Real Exchange Rate India's Employment Challenge Table 3.1 Growth Rate of Value Added and Employment Elasticity [DRER]). These translate the value of the wage bill, measured in producer prices, Period Value Added Employment into consumer prices, the value relevant to Growth (% p.a.) Elasticity I 1974­80 3.99 0.99 workers; and II 1980­6 6.21 ­0.16 (iii) the trade-off between employment increase III 1986­96 10.65 0.33 and real wage increase. Given the growth of IV 1996­2002 1.75 ­1.42 the real wage bill, as determined by the V 2002­5 12.54 0.28 variables and DRER, the parties in the Source: Mazumdar and Sarkar (2006c). wage bargaining process (employers and employees) have the option of realizing their 1996­2002, when elasticity turned substantially objective either in the form of employment negative at a time when output growth also increase or wage increase--or in various slowed down; and (v) the last period, since 2001, combinations of the two. when elasticity has again turned positive, albeit to a modest 0.28 (Table 3.1). The three variables affecting elasticity are influenced by different sets of factors. The Employment growth in manufacturing was movement of the DRER is affected by the product obviously influenced by the rate of growth of market conditions which set the price trend of the output or value-added. But, given this, what final manufactured goods (Pp), and by the factors determined employment elasticity? The analysis which affect the price of consumer goods (Pc). in this chapter suggests two main factors: (i) The behaviour of the other two variables--the manufacturing producers faced adverse terms wage bill growth and the employment­wage of trade for most of this period because the trade-off within the wage bill--depends largely prices of consumer goods used by workers on labour market conditions. Typically, firms increased faster than the prices of manufactured have the incentive to choose more capital- products received by producers, and; (ii) the intensive techniques if these can increase their producers chose to use more capital-intensive profit rates through faster productivity growth. techniques of production, leading to wage growth This would result in a higher share of profits substituting for employment growth (this trend or a lower share of wages, both of which lower has reversed since 2002). By using a model to employment elasticity, other things remaining decompose elasticity of employment (see Box 3.1 the same. As Table 3.2 shows, the choice made and Appendix 3.1), three important elements that by Indian manufacturers to opt for higher wage determine the value of the employment elasticity growth rather than higher employment growth can be identified: was an important factor in keeping employment elasticity low. What determines whether the (i) the trend in the share of wages in value-added, as benefits of growth will flow down to workers in determined by the rate of growth of the wage the form of employment growth or wage growth? bill relative to value-added, in current prices If strong trade unions are biased towards the facing the producer ( in Box 3.1); welfare of those already employed, wage growth (ii) the relative rates of increase in the producer and would be preferred to employment growth. A consumer price indices (P p/P c--sometimes similar outcome is likely if employers are wary Box 3.1 Determinants of Employment Elasticity The equation below quantifies how the different elements affecting the growth rate of employment or employment elasticity are related: . . . . . . . L / v = + (Pp ­ Pc ) /v ­ w /v (1) . where L stands for growth of labour, v for growth of manufacturing value-added, Pp for growth of producer prices, Pc for growth of consumer prices, and w for growth of wages. The left side of the equation shows the ratio between employment growth and value-added growth, that is, employment elasticity. The first term on the right side of the equation defines the rate of growth of the wage bill relative to the growth rate of output, and hence determines the trend of the share of wages over the time period considered. The second term on the right side of the equation, the relative movement of the producer and the consumer price indices (that is, the DRER), translates the wage bill growth into real terms (from the point of view of the workers). . . The negative relationship between w and L clearly shows the wage­employment trade-off, that is, the way the growing wage bill cake is divided between wage increase and employment increase. Source: Mazumdar (2003). of expanding their complement of permanent Table 3.2 Relative Importance of the Wage­ labour. The practical importance of these different Employment Trade-off and the DRER Effect elements, based on the decomposition model of Box 3.1, is presented in Table 3.2. Period L­w P­P p c Employment Elasticity I 1974­80 1.32 2.38 0.99 Because the trend in domestic real exchange II 1980­6 ­4.84 ­2.59 ­0.16 is an important factor in determining elasticity III 1986­96 1.71 ­0.46 0.33 of employment (Table 3.2), macroeconomic IV 1996­2002 ­3.62 ­3.85 ­1.42 V 2002­5 2.69 2.61 0.28 management becomes additionally important. Source: Mazumdar and Sarkar (2009a). Table 3.2 shows that the adverse movements of producer prices, relative to consumer prices, Employment in the Formal Sector contributed significantly to making manufacturing terms of trade can be adversely affected. As Figure employment elasticity negative in two periods: 3.3 (left panel) shows, this indeed happened in the 1980­6 and 1996­2002. This relative movement of mid-1990s: real effective exchange rates stabilized prices, however, depends not only on labour market and have even appreciated slightly since then. conditions but also on overall macroeconomic This was associated with an adverse movement factors. For instance, if real effective exchange rates of producer prices, relative to consumer prices. appreciate, or do not depreciate enough to maintain Econometric estimates show that after controlling manufacturing competitiveness, the domestic for time trends, there is a robust relationship 67 68 India's Employment Challenge Figure 3.3 Changes in Real Effective Exchange Rates and Domestic Real Exchange Rates (Producer Prices to Consumer Prices) 114.5 200 Predicted Domestic Real Exchange Rate Index of Exchange Rates 150 114.45 100 50 114.4 0 80 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 Year Real Effective Exchange Rates 50 100 150 200 Producer Prices to Consumer Prices, manufacturing Real Effective Exchange Rates Producer Prices to Consumer Prices, non-manufacturing Source: Estimated from Mazumdar and Sarkar (2006c) data and Reserve Bank of India (RBI) data on real exchange rates. between real exchange rate appreciation and with at least a core body of tenured workers adverse movements in the DRER (Figure 3.3, whose size is slow to respond to changes in the right panel), which in turn lowers employment current demand for labour. Like the stock of elasticity. Thus, one policy implication will be to fixed investment, the firm's stock of `permanent' keep real exchange rates competitive by guarding workers is built up based on its perception of against inflation, especially in prices of consumer expected demand. If current demand deviates from goods. This in turn has implications for fiscal the expected demand, the firm adjusts the labour policy. Higher deficits, government borrowing, input for the period in question by varying the and inflation tend to appreciate real exchange number of hours worked or by using temporary rates. If the government's expenditure is directed workers, rather than adjusting the stock of labour. disproportionately towards consumption, as was When manufacturing growth accelerates in a the trend in India during the 1990s, this too would sustained manner, as it did from 1986 to 1996 turn the DRER against producers and discourage and between 2002 and 2005, it increases expected the growth of jobs. If government policy raises demand and leads to employment growth food prices in an artificial manner, that will also overtaking wage growth. lower manufacturing elasticity. An important implication here is that job security The other policy implication is that the wage­ legislation (as buttressed by the state-supported employment trade-off needs to be managed, so legal system) that increases the `fixed' cost of hiring as to not create a bias against employment. There permanent labour, tilts the wage­employment is a cyclical pattern in the wage­employment trade-off against employment. If the fixed cost is trade-off (as measured by the difference between high, firms become cautious about changing the the growth rates of employment and wages), complement of workers in the permanent roster which has an important bearing on the oscillating and the role of expectations about future demand values of employment elasticity (Table 3.2). Such becomes stronger. In this case, employment a pattern suggests that firms treat their labour elasticity is likely to have cyclical swings with force as a `quasi-fixed' factor--a firm operates changes in business expectations, as it happened in the case of India. As noted, the reform period product wages. This leads to another important (period III in Table 3.2) and the post-2002 period policy conclusion: the government needs to take witnessed higher expectations about future a broader and more comprehensive outlook on growth, leading to an increase in output and the consequences of policies. While increase of investment growth. But while the share of wages farmers' prices might be desirable from some showed a downward trend with the increase angles, its adverse effect on manufacturing, and in the investment rate, employment elasticity, particularly employment in this sector, has to be while positive, was not very high at 0.33. The recognized. Finally, the impact of another major employers' perception of labour as a `quasi-fixed' development, the growth of international trade, factor is likely to have slowed the tilt towards on employment needs to be considered as well. employment increase. Conversely, the substantial slowdown in industrial growth in the post- HOW HAS TRADE AFFECTED EMPLOYMENT reform years (period IV in Table 3.2), drastically GROWTH IN MANUFACTURING? reduced expectations of future growth and led India underwent significant trade liberalization in to negative employment elasticity as employers the 1990s. Mean tariffs for manufacturing declined started to shed labour. A distinct reduction in the from 71 per cent in the early 1990s to 29 per cent power of labour unions in enforcing job security in 2001, to about 15 per cent in recent years. The might also have contributed to the large fall in share of trade in gross domestic product (GDP) employment, even as the persistent fear of the increased from 16 per cent to over 30 per cent in fixed cost of labour and uncertainty about future the same period, and export growth has accelerated labour policies encouraged labour-shedding. sharply in recent years (Figure 3.4). Thus, a key Thus one policy implication is the importance issue is the impact that trade liberalization had of continued labour reforms for employment on employment growth in manufacturing and expansion in manufacturing. on employment elasticity. Analysis reveals that export-oriented industries likely experienced Employment reduction over 1996­2002 (period higher employment growth and employment IV in Table 3.2) was related to stagnation in the elasticity. However, overall employment growth value-added in manufacturing. It is obvious has remained low and export patterns have not that while the growth rate of manufacturing been as labour-intensive as expected, but rather output slowed down in real terms, a more skill-intensive and capital-intensive. We draw important factor was the DRER turning against on two recent studies to first show how trade manufacturing. It is also apparent that this was impacted employment growth and elasticity, and partly due to the slackening of producer prices, particularly in the domestic market. But the Figure 3.4 Growth of Manufacturing Exports Employment in the Formal Sector other major development was the increase in Export of Manufactures: India consumer prices as the `minimum support prices' 4.8 of key agricultural commodities were increased Log of Export Values 4.7 in the post-reform years. A turning of the terms 4.6 4.5 of trade towards agriculture could be expected 4.4 to strengthen the domestic market for industrial 4.3 4.2 goods. But this effect, if any, seems to have been 1995 1996 1997 1998 1999 2000 2001 2002 2003 Years swamped by the direct effect of the increase Source: Ramaswamy (2006). in the price of wage goods, leading to higher 69 70 then analyse the route through which elasticity An industry is classified as export-oriented if its India's Employment Challenge was impacted. net exports to output ratio is significantly positive and it figured on the list of leading net export We examine the impact of trade on employment earners in the manufacturing sector in 1999. growth and elasticity by first classifying industries An industry is classified as import-competing according to their trade orientation, as presented if the net exports to output ratio is significantly in Table 3.3 (Ramaswamy 2006). Industries are negative.5 Import-competing industries must classified as export-oriented, import-competing, satisfy an additional criterion: their import share and `others' based on the following criteria: first, in total manufacturing output needs to be more all the 4-digit International Standard Industry than 1 per cent. The remaining industries are Classification (ISIC) industries are ranked in grouped under the heading `others'. terms of net exports, and each industry's export share in total manufactured exports is estimated. The results presented in Figure 3.5 are revealing. Second, net exports, net exports to output, and Looking at the averages of employment growth in export to output ratios for each industry are three periods--the pre-trade reform period (1989­ calculated. Two industry groups are specially 91), the post-reform period (1995­7), and the most identified--automobile (including the tyres recent period for which data is available (1999­ and tubes industry) and food (including food, 2001)--two points are evident. First, the export- beverages, and tobacco)--for their importance in oriented industry group is the only group where India. The automobile sector in India has recently employment share has increased. But the increase emerged as a global outsourcing hub for many in its share, from 25 per cent of manufacturing leading automobile manufacturers in the world employment to 30 per cent over one decade, is not and thus deserves to be looked at separately. The remarkable. Second, while employment share in food sector needs to be considered separately import-competing industries has decreased, the because food is an agro-product-based industry. decrease is marginal. Finally, quite remarkably, the automobile parts and tyres industry, which has Table 3.3 Industries Classified by Trade Orientation shown rapid expansion in recent years, shows a loss in employment share, indicating the high capital- Category Key Industries intensity of the techniques used there. Export-oriented Textile Fabrics, Apparel, Footwear, Import-competing Drugs & Pharmaceuticals Paper, Iron & Steel, Electrical & What are the effects of international trade on Non-electrical Machinery, Office & elasticity of manufacturing employment? Here, Computing Machinery, TV & Communications, Watches and Plastic Products Food, Beverages, Grain Mills, Wine, Soft Drinks, Figure 3.5 Trade and Employment Share (per cent) and Tobacco Cigarettes 35.0 Petroleum Refining Petroleum Refining Products 30.0 and Coal Products (Naphtha, Gasoline, Diesel, etc.), 25.0 Coal & Coke Products 20.0 15.0 Auto & Tyre Four-wheelers, Two-wheelers, 10.0 Bicycles, Tyre & Tubes, Auto 5.0 0.0 Components Export Import Food Autos and Others Others Wood Containers, Cane, Paper, Oriented Competing Processing Tyres Rubber Products, Cement, Glass, 1989­91 1995­7 1999­2001 Soap, and Cosmetics Source: Ramaswamy (2006). Source: Based on Ramaswamy (2006). Table 3.4 Manufacturing Sub-sectors, according to Exposure to International Trade Technology Level/ Import Export Exposed Size of Sector Trade Exposure Ratio NIC Code Penetration Ratio Ratio (per cent) High Technology/Exposed 38 25.31 28.37 46.50 5.46 Medium Technology/Exposed 30+35 29.50 6.05 33.76 31.77 to 37 Low Technology/Exposed 23 to26; 2.73 15.79 18.09 23.35 28+29 Medium Technology/Domestic 31 to 34 11.08 3.83 14.48 23.86 Low Technology/Domestic 20, 22, 27 1.35 2.98 4.29 15.55 All 14.30 8.54 21.62 100.00 Definitions Import Penetration = (Value of Import)/(Value of Output ­ Value of Export)*100 Exposed Ratio = (Value of Export)(Value of Output)*100 Exposed Ratio = (Value of Import + Value of Export)(Value of Output)*100 Source: Mazumdar and Sarkar (2006c). Table 3.5 Relative Importance of Wage­Employment Trade-off and DRER in Employment Elasticity Sub-group L. ­ W. Pp. ­ Pc. Employment L. ­ W. Pp. ­ Pc. Employment (Wage­ (DRER) Elasticity (Wage­ (DRER) Elasticity Employment Employment Trade-off ) Trade-off ) 1986­7 to 1995­6 1995­6 to 2001­2 High Technology/Exposed 3.83 ­1.07 0.37 ­5.72 ­2.36 8.05 Medium Technology/Exposed 6.16 ­4.29 0.46 0.42 ­4.55 0.13 Low Technology/Exposed 0.51 0.84 0.40 ­3.29 ­6.34 ­1.01 Medium Technology/Domestic 1.38 ­0.85 0.27 ­3.88 ­4.69 ­0.98 Low Technology/Domestic 1.30 0.21 0.43 ­2.25 ­1.28 ­0.04 All 1.94 ­0.46 0.33 ­3.35 ­3.85 ­1.42 Note: Both output growth and employment growth are negative in this case, producing the positive elasticity. again, a five-group classification of manufacturing · Starting in the mid-1990s, elasticity of sub-sectors (see Table 3.4 drawn from Mazumdar employment fell slightly in all categories, except and Sarkar [2006c]) is used in decreasing order in the case of low technology exposed industries of their exposure to trade, which in turn depends and medium technology domestic industries on export ratio and import penetration and the where the elasticity increased slightly. Employment in the Formal Sector level of technology employed in the sector. Table · Sectors more exposed to trade experienced 3.5 shows how the two main components, the higher employment elasticity in both periods employment­wage trade-off and the movement (1986­7/1995­6 and 1995­6/2001­2). Notice of producer prices relative to consumer prices, that this happened even when in some exposed affected the elasticity of the different groups and sectors, producer prices fell sharply relative how this changed in two periods--1986­7 to to consumer prices. Moreover, it was only 1995­6, and 2001­2 to 2004­5.6 the medium exposed group that maintained a positive elasticity of employment (the high The following points follow from this analysis: exposed group had a positive elasticity only 71 72 because both employment and output fell in In sum, while employment elasticity declined India's Employment Challenge the second period). across the board and then increased for all but · Significantly, the tilt in the employment­wage one of the groups, it appears to have been related trade-off towards wage growth in the post- to the degree of exposure to trade. In the more reform period seems to have been particularly exposed industries, the choice of techniques strong in the `exposed' category. This suggests that tilted towards higher wages instead of that the search for competitiveness, in the increased employment (which is consistent with wake of liberalization, induced firms in firms adjusting to raise skills and productivity this category to opt for smaller bodies of of workers) was the more important factor workers with high wages. This type of labour behind reducing elasticity in the immediate post- deployment contrasts with the alternative adjustment period. The converse was true in the of a more labour-intensive solution. If so, second period when manufacturing exports took the expectation that liberalization was likely off. In the more exposed industry groups, the to increase employment by increasing the recent significant increase in the DRER has helped profitability of labour-intensive products was to increase elasticity. In the less exposed domestic at least partly thwarted. Firms exposed to more industries, the converse was important in reducing international competition may have found it elasticity in the 1990s. Overall, however, the important to increase product quality by raising elasticity of employment and employment growth labour productivity. It is likely that institutional were higher in the more exposed industries. factors which raise the fixed cost of employing labour also contributed to this outcome. DUALISM IN THE MANUFACTURING SECTOR · Although the adverse changes in producer The consequence of limited employment growth prices, relative to consumer prices, were fairly in the formal manufacturing sector was that widespread, the changes were relatively larger workers were absorbed either in the tertiary in the two `domestic' sectors. This suggests that sector or in unorganized manufacturing. Since the adverse price shift might have been more the gap in labour productivity and earnings due to a slackening of the domestic market between the unorganized and the organized for manufactured goods produced by these sectors is large, this lead to the phenomenon of industries. This general negative swing may `dualism' in manufacturing. There are two aspects also have been partly fuelled by the increase to this `dualism'. The first is the productivity in `minimum support prices' for agricultural gap and distribution of employment between commodities. The need to have a general the unorganized sector, on the one hand, and equilibrium framework for the consequences the organized sector, as a whole, on the other. of price policies is brought out by these The second is that within the organized sector, results. the distribution of employment is skewed · The updating of this analysis, with recent heavily towards large firms, with relatively small data covering the period 2002­5, suggests representation by small and medium enterprises. that employment elasticity has increased and Consequently, taking organized and unorganized become positive in all the groups, except the manufacturing together, the distribution of low technology domestically-oriented group. employment is strongly bi-polar with two peaks of On the other hand, employment elasticity has employment, one at the low end and the other at recovered most strongly in the low technology the high end of the size spectrum, and a wide range trade-oriented group. of size-groups with relatively smaller numbers of workers in the middle. This is the phenomenon arises when modern industry is superimposed on of the `missing middle' firm size in India. a largely agrarian economy with a high man­land ratio, but also having a large presence of traditional Underscoring the dualism in the manufacturing industry, albeit at a low level of productivity sector is the striking `missing middle' firm size in (historical Japan, the Philippines, and Indonesia). India. A review of the size structure of manufacturing Figure 3.6 shows how Indian manufacturing in Asian countries reveals three major types. One is employment was concentrated in the two extreme where small, medium, and large firms play more modes. While the picture presented in Figure 3.6 or less equally important roles and the productivity refers to the 1980s when countries other than India differential between the size classes is small. The had developed to a higher level of GDP per capita, second is the pattern in which the distribution of earlier data available for a few countries shows employment by size-groups is distinctly skewed that India had a more marked dualistic pattern towards large firms. India belongs to the third than what these other Asian economies showed type--the `dualistic' structure. In this, it shares in their early stages of development. The Indian the experience of the typical Asian pattern which pattern resembled that of Japan where `dualism' Figure 3.6 The `Missing Middle' Manufacturing Firms (by Size of Employment): India Compared to Other Countries India Korea 1989­90 1986 500+ 500+ 200­499 200­499 100­199 100­199 50­99 50­99 10­49 10­49 5­9 5­9 0 10 20 30 40 50 0 10 20 30 40 50 Percentage distribution of employment Percentage distribution of employment Hong Kong Malaysia 1982 1981 500+ 500+ 200­499 200­499 Employment in the Formal Sector 100­199 100­199 50­99 50­99 10­49 10­49 5­9 5­9 0 10 20 30 40 50 0 10 20 30 40 50 Percentage distribution of employment Percentage distribution of employment Source: Mazumdar and Sarkar (2006c). 73 74 had existed for a long time in manufacturing, with employed in very large firms (1,000 and above). India's Employment Challenge a large concentration of employment at the low The distribution is, however, still strongly bi- and top ends. polar, with the two types of employment size firms concentrated at the two extremes (those But the peculiarity of the Indian pattern is that it employing 5­9 people and those with 500+ had an exceptionally large productivity differential employees) and accounting for 40 per cent and between the largest and smallest size groups--of close to 25 per cent of employment respectively. the order of 8:1 compared to 3:1 in the case of Japan Further, over time, the productivity differentials by before its era of post-War growth (Broadbridge size-groups seem to have changed even less than 1966: Table 16, p. 56). India also contrasts employment patterns (Figure 3.6). If anything, dramatically with the case of Taiwan which had the extreme `dualism' noticed in India, compared a much more even distribution of employment to other Asian countries, seems to have worsened by size classes in the course of its manufacturing since 1984­5, though much of the deterioration growth, and a productivity differential between occurred in the first half of the 1980s. large and small units no more than that of Japan. Even in Korea, where distribution of employment From a welfare point of view, the Indian pattern of in formal manufacturing was heavily skewed manufacturing employment distribution is least towards large firms during the country's early satisfactory of the several types discussed. For one stage of development, the productivity differential thing, the `missing middle' means that the bulk of was not larger than that of Japan or Taiwan; it the labour force is stuck in very small firms (Figure continued to be moderate as state policies worked 3.7, Panel A) with low productivity (Figure 3.7, towards a redistribution of employment in the Panel B). Second, the industrial structure offers small­medium sector over the last three decades limited opportunity for small firms to graduate of the twentieth century. to middle-sized units. This is a serious drag on the formation of dynamic entrepreneurship, Recent data shows that dualism has persisted particularly of the type oriented to searching and the concentration of the Indian labour force for new technology and new markets. Third, in the bi-polar mode continues to the present from an efficiency aspect, the wide difference day (Figure 3.6, Panel A). The only change in wages, which the dualistic structure implies, over the period covered seems to have been the points to a loss of output and welfare. Fourth, this significant reduction in the number of workers pattern produces a significantly higher degree of Figure 3.7 India: Distribution of Employment and Productivity by Size Groups Panel A: Distribution of Employment (in per cent) in Manufacturing Panel B: Index of Labour Productivity by Size of Firms Firms by Employment Size Groups 45 120 40 100 35 80 30 60 25 40 20 15 20 10 0 5 6­9 10­49 50­199 200­499 500+ 0 6­9 10­49 50­199 200­499 500+ 1984­5 1994­5 2000­1 Source: Mazumdar and Sarkar (2006c). inequality in the distribution of earnings than a digit) industry groups, the largest share of workers more equal size distribution of firms would. is found in the group of firms employing 10­99 workers (Figure 3.8). When 2000­1 figures are It is worth emphasizing that the persistence compared with those from 1994­5, it is seen of dualism in India appears to cut across most that there was a loss in the share of employment manufacturing sub-sectors. Data disaggregated in the 100­199 class for as many as 13 out of 18 by sectors show that in 14 of the 18 large (two- industries (Table 3.6). Figure 3.8 Distribution of Employment by Firm Size in Manufacturing Sub-sectors 100% 80% 60% 40% 20% 0% Food Beverage, tobacco Cotton Textiles Other Textiles Jute Textile Products Wood Paper Leather Chemicals Rubber Non-Metallic Minerals Basic Metals Metal Products Machinery Transport Equipment Miscellaneous Repairs 10­99 100­199 200­499 500­999 1000­1999 above 2000 Source: Annual Survey of Industries, 2000­1, and Central Statistical Organisation (CSO). Table 3.6 Change in Employment Share by Factory Size, 1994­2000: Gainers and Losers Employment Size Class of Factories 10­99 100­199 200­499 500­999 1,000­1,999 Above Workers 2,000 Food 3.5 ­4.7 ­2.0 ­5.6 2.3 5.4 Beverage & Tobacco ­48.9 ­3.4 ­4.7 ­11.5 2.4 63.0 Cotton Textiles 5.0 ­6.5 ­4.3 ­3.1 ­5.4 ­1.0 Other Textiles 0.1 ­1.6 7.2 ­3.0 ­6.7 ­1.4 Jute 0.6 ­0.1 ­0.5 0.9 ­4.4 3.3 Textile Products ­11.3 ­9.4 18.8 5.8 4.3 4.7 Wood ­12.8 1.9 4.9 1.7 2.3 0.0 Paper 13.0 ­3.4 1.5 ­5.5 ­4.9 ­0.2 Employment in the Formal Sector Leather ­4.1 ­11.7 16.7 0.9 5.3 ­4.3 Chemicals ­11.8 4.9 5.7 0.1 ­2.5 1.5 Rubber 19.0 ­8.7 0.2 ­4.0 1.6 ­5.8 Non-metallic Minerals 3.0 ­3.5 0.9 ­0.5 3.0 ­1.7 Basic Metals 5.3 ­4.0 ­4.3 ­7.2 ­0.5 3.0 Metal Products 1.9 0.2 7.4 ­1.9 1.3 ­6.4 Machinery 4.4 ­4.5 6.7 ­0.4 1.4 ­9.0 Transport Equipment 7.4 1.4 1.3 2.5 0.1 ­15.7 Miscellaneous ­5.7 ­7.3 7.8 ­3.8 ­6.2 15.5 Repairs 50.9 ­0.2 ­1.5 ­5.9 ­4.7 ­27.4 Source: Estimates based on Tables 3.1 and 3.2. 75 76 India's Employment Challenge Table 3.7 Contract Intensity (Per cent of Contract Labour) by Size of Factory in Six Industry Groups: 2000­1 Employment Export-oriented Import-competing Food Auto & Tyre Petroleum Others Size-Class 0­9 3.0 2.5 5.8 1.2 3.7 4.4 10­99 10.6 11.6 21.2 8.6 10.5 22.7 100­99 18.7 18.9 17.7 16.2 19.4 18.6 200­99 14.6 15.6 21.3 18.1 36.5 14.1 300 and above 7.6 16.1 38.2 6.2 15.3 19.6 Source: Ramaswamy (2006) The fall in the share of firms employing 100­199 workers in a large number of industries, may have Table 3.8 Distribution of Manufacturing Employment (in per cent) been partly due to the rising practice of using contract labour. A look at disaggregated groups of Organized Sector Share of Employment industries shows that contract intensity in export- No. of workers in firms 1984­5 1994­5 2000­1 oriented or import-competing industries peaked 100+ workers 10.0 11.8 10.2 10­100 workers 15.0 18.4 16.3 in the 100­199 group (Table 3.7). This happened Total Organized 25.0 30.2 26.5 probably in response to firms searching for more Unorganized Sector Share of Employment flexible ways to increase output. DME (6­9 workers) 9.7 12.8 14.1 NDME (1­6 workers) 65.2 9.2 10.4 As noted in the beginning of this chapter, dualism OAME (family operated) 47.9 49.0 Total Unorganized 74.9 69.8 73.4 also exists and has persisted between the organized Total 100.0 100.0 100.0 (also known as `registered') and the unorganized Source: Unni (2006); NSS Unorganized Sector Survey Module. sectors. Unorganized sector firms are those which Note: OAME: A manufacturing enterprise which is run without use power and employ less than 10 workers, the any hired worker employed on a fairly regular basis, is termed Own Account Manufacturing Enterprise (OAME). threshold size of registered sector firms. Their NDME: A manufacturing enterprise which employs at least one hired worker on a fairly regular basis, and less than six workers employment share is very large--nearly three- (household and hired workers taken together), is termed Non- fourths of the manufacturing labour force--and Directory Manufacturing Enterprise (NDME). DME: A manufacturing enterprise which employs at least one the productivity gap between them and organized hired worker on a fairly regular basis, and between six and nine workers overall (household and hired workers taken together) sector firms is huge (Table 3.8). In the early post- is termed Directory Manufacturing Enterprise (DME). reform years, when organized sector employment share increased marginally, the productivity gap between unorganized and organized sectors manufacturing sector enhanced efficiency, both in widened even more. In the more recent period, the static and dynamic aspects, by the vital system between 1994 and 2001, the employment share of outsourcing (Little et al. 1987). But while there of the organized sector tended to fall. is some evidence of this happening in Indian manufacturing, a good deal of outsourcing is in the IS OUTSOURCING MITIGATING DUALISM? nature of `capacity outsourcing' in response to the Although the outsourcing of production from perceived limits to grow beyond the threshold size, formal sector firms to informal sector firms can and not driven by a need to increase efficiency. mitigate dualism, this does not appear to be the experience in India. For instance, it is well In India, most outsourcing takes place by small, known that the Japanese system of dualism in the unregistered firms. In the case of the food industry, · Besides sub-contracted production work, Table 3.9 Product Outsourcing Intensity, by Employment Size of Factories: 2000­1 (in per cent) unorganized sector firms were also linked through service contracting. The Unorganized Employment Export- Import- Auto Food Others Manufacturing Sector Survey captured the Size oriented competing 0­9 22.1 26.2 ­ 36.2 11.2 `receipts from services provided to others, 10­99 8.8 11.4 27.6 12.5 11.8 including commission charges'. From this, 100­99 6.1 9.1 7.7 7.4 4.7 the subcontracting-in of services undertaken 200­99 7.7 6.2 ­ 10.5 5.6 by firms can be estimated. About 67 per cent Above 300 6.3 3.4 4.0 8.6 4.2 of firms reported undertaking sub-contracted Total 6.3 4.0 6.0 10.0 5.1 service activities, with DMEs (firms with Source: Estimated from Ramaswamy (2006). Note: Product outsourcing density is defined as the ratio of the value 6­9 workers) less likely to undertake this of goods sold in the same condition as purchased to the value of activity compared to the NDME (firms products and by-products in a firm. with 1­5 workers) and OAME firms. Such service contracts were not necessarily regular small firms procure as much as 36 per cent of their arrangements between two firms and were output from other firms (Table 3.9). This suggests probably only indicative of market interactions that firms have a strong incentive to not expand between firms. beyond the size group of 9, to avoid becoming · Is the sub-contract undertaken by a firm registered firms. `vertical' or `horizontal' sub-contracting? In `vertical' sub-contracting, the firm is fully This issue can also be looked at from the viewpoint dependent upon the parent firm/middleman/ of the firms in the unorganized sector which do contractor to supply the raw material, design, the sub-contracted work. Using the questions and equipment. This can be called a form canvassed in the `Unorganized Manufacturing of transfer of technology between firms. Sector Survey' of 2000­1, Unni (2005) reported In `horizontal' sub-contracting, the firm is that 30 per cent of unorganized sector firms independent and sources its raw material, undertook sub-contracted work (Table 3.10). design, and equipment on its own. According The industries in which this percentage was to Watanabe (1983), the majority of Indian particularly high were: tobacco products (National firms which undertook sub-contracting Industrial Classification, NIC, code 89), textiles work were `vertical' sub-contractors and (NIC 56), chemical products (NIC 67), and office only 1.6 per cent of the 30.7 per cent firms accounting and computing (NIC 64). Other key involved in sub-contracting could be called points revealed were: the `horizontal' types. Employment in the Formal Sector · The distribution of sub-contracted firms by Vertical sub-contracting can facilitate the transfer place of work showed that an overwhelming of technology because the sub-contracted firm number of them (81.2 per cent) operated supplies raw material, equipment, and sometimes from home. Only 15 per cent operated from the design also. But this is not the case in business premises. In the chemical industry, India. According to the 2000­1 unorganized the percentage of home-based firms was as manufacturing survey, while 88 per cent of firms high as 95, suggesting that modern industry received raw material from contractors, only 7 per had clearly penetrated the lowest segments of cent were supplied equipment. The designs were the informal sector. specified by contractors for 93 per cent of firms. 77 78 India's Employment Challenge Table 3.10 Proportion and Distribution of Firms Subcontracting-in, by Location and Industry Group: 2000­1 Industry Proportion of Distribution of Sub-contracting Firms Sub-contracting Firms by Location Total At Home Outside No Fixed Total Premises 14. Cotton Gin, Cleaning & Bailing 8.3 6.9 93.1 0.0 100 15. Food Products 3.6 71.1 23.5 5.4 100 16. Tobacco Products 89.3 99.1 0.8 0.1 100 17. Textiles 55.5 89.7 10.3 0.1 100 18. Apparels 17.4 70.5 29.4 0.1 100 19. Leather Products 23.7 66.2 33.8 0.0 100 20. Wood (except Furniture) 11.3 58.9 16.3 24.8 100 21. Paper & Paper Products 42.0 80.2 19.8 0.1 100 22. Publishing, Printing 39.6 31.7 68.3 0.0 100 23. Coke, Refined Petroleum 0.3 0.0 100.0 0.0 100 24. Chemical Products 66.8 95.9 4.1 0.0 100 25. Rubber Products 42.6 59.0 40.9 0.0 100 26. Non-metallic Mineral Products 5.6 69.4 29.6 1.0 100 27. Basic Metals 36.5 36.9 63.1 0.0 100 28. Fabricated Metal Products 22.1 39.8 59.7 0.4 100 29. Machinery and Equipment 22.0 25.2 73.9 0.9 100 30. Office Accounting & Computing 63.6 0.0 100.0 0.0 100 31. Electrical Machinery 32.0 57.0 43.0 0.0 100 32. Radio, TV, Communications 46.8 44.8 55.2 0.0 100 33. Medical, Precision, Optical 37.7 33.5 66.5 0.0 100 34. Motor Vehicles 48.1 7.3 92.7 0.0 100 35. Other Transport Equipment 42.7 22.7 77.3 0.0 100 36. Furniture & Other Manufactures 35.4 52.1 37.8 10.1 100 37. Recycling 44.2 61.0 39.0 0.0 100 Total 30.7 82.0 15.3 2.6 100 Sources: Data from Unorganized Manufacturing Sector Survey, 2000­1, New Delhi, CSO; Unni (2006). These numbers were similar across different their `dependent' status and become independent sizes of firms for both design specification and producers that seek out the mother firms--a equipment supply, but there was a slight variation development that underlies the success of the with regard to the supply of raw material. A Japanese model of sub-contracting. significantly higher proportion of OAME firms received raw materials, compared to NDME and WHY HAS DUALISM PERSISTED? DME firms. The vertical linkages of raw materials Dualism in manufacturing has persisted even after and design specifications were much higher in 15 years of liberalizing reforms. This suggests modern industries than in traditional industries. that the factors that created dualism have not Across industry groups, more modern industries altered significantly, despite significant policy were supplied with equipment compared to changes. One change in the post-reform period traditional industries. was the virtual elimination of the reservation of specific product lines as the excusive purview of Overall, these findings suggest that sub-contractors the small-scale sector. Second, the liberalization in Indian manufacturing are yet to graduate from of imports of consumer goods also profoundly altered the monopoly of small-scale producers saving techniques, leading to higher labour in these markets. A third change was that efforts productivity and wages (see Chapter 5 for were made to reduce the strength of capital market more on this). Finally, wages in the public segmentation. Despite these, surprisingly, available sector, which dominates employment in the survey data show that the size structure of industry formal sector, are set above the market rates has hardly changed in the last 25 years. for most workers. This is another factor that segments the labour market in all sectors. It The fact that there is little change in the size can also lead to unemployment as educated structure of the manufacturing industry implies, workers queue up and wait for public sector possibly: (i) segmentation of factor markets-- jobs (see Box 3.2). in labour and capital--is more important · Capital market segmentation and a generous in supporting dualism than product market depreciation allowance make the availability segmentation which the reservation policy and cost of capital significantly more favourable encouraged, and (ii) once the specialization by for large firms. This group of factors works small and large firms in different segments of the in the same direction as labour market product market has been firmly established, it is segmentation, in inducing firms to adopt more difficult for firms to alter their market positions capital-using and labour-saving methods. easily, especially in the short to medium term. The net effect is to strengthen forces which increase the small­large differential in labour There are four important reasons for the emergence productivity and wages. and persistence of the Indian pattern of dualistic · Product market segmentation differentiates industrial structure: between small and large firms by the quality of the products (even in the same general · The first is labour market segmentation which category) in which they specialize. Smaller ensures that wage levels (even after controlling firms opt for low-quality, labour-intensive for human capital attributes or skill levels of sub-categories of products which cater to the workers) increase sharply with firm size. Even needs of low-income groups. The result is a if there are some economic reasons for the further strengthening of the factors that create prevalence of this size­wage relationship (for the gap in labour productivity (value-added example, efficiency wages could be higher in per worker) between large and small firms. larger units due to the cost of managing larger groups of workers), there can be no doubt that Reservation policies have been largely abandoned in these are cemented, and indeed augmented, the post-reform years since 1997, both by increasing by institutional factors. For example, for a the size of investment permissible to qualify as a Employment in the Formal Sector long time in many industries, wage boards small-scale industry and by `de-reserving' specific were responsible for setting wage levels. Their sectors. In any event, the impact of this policy lost its rulings on wage levels for different classes of bite with the liberalization of imports and increased firms were based partly on the levels of labour competition in the market for consumer goods, productivity attained. This strengthened the which were the mainstay of the small-scale sector high productivity­high wage nexus found in in manufacturing. larger firms. At the same time, labour laws also impact through inducing large firms However, there still exist a number of fiscal with more capital assets to invest in labour- subsidy programmes and policies that discourage 79 80 India's Employment Challenge Box 3.2 Wage-setting in the Public Sector Wages of Central government employees are revised on the recommendations of the Pay Commissions, specially appointed at intervals of approximately 10 years by the federal government. For state government employees, State Pay Commissions are appointed by the respective states, which may endorse in full or partially the recommendations of the Central government's Pay Commissions. (In the central public sector undertakings, there are periodic wage settlements between management and workers, four years being the typical duration of a wage agreement.) The recommendations of the Pay Commissions usually revolve around fixing a minimum pay, determining maximum pay, neutralizing the rise in the cost of living (dearness allowance), and establishing vertical and horizontal pay scales. The Fifth Pay Commission was constituted in 1995 and its recommendations were implemented starting 1996. In fixing the minimum salary in the government, the Fifth Pay Commission took the basic pay fixed by the Fourth Pay Commission (1986) and the dearness allowance as on 1 January 1996, and suggested adopting a compensation factor of 30.9 per cent, by which the per capita net national product had grown during the period 1985­95. For the lowest functionaries, it worked out an increase of 3.25 times in nominal pay, much higher than that suggested by consultants. In fixing the maximum salary, the Fifth Pay Commission sought to reverse the consequences of the first four Pay Commissions' concerns about whether the maximum salary in government should be reduced in view of the inordinately high disparity ratio. The practice of offering only partial neutralization for increased cost of living at the higher levels and complete neutralization at the lower levels would explain, partly, this fall in disparity ratio in current prices between the maximum pre-tax remuneration and the minimum pre-tax remuneration going down progressively from 54.5 in 1948 to 8 in 1996. (The post-tax disparity ratio in current prices came down even more drastically from 41 in 1948 to 6.1 in 1996.) The Commission also compared the existing scales with those in the private sector and in public sector undertakings. It noted wide differentials between the salaries of senior functionaries in the government and their counterparts in private and public undertakings. Substantial erosion in the real income of senior-level government officials was noted. The Commission tried to bridge the gap, to some extent, between the top-level government employees and their counterparts in private or public undertakings by trying to retain the pre-tax disparity ratio between the minimum and maximum salary at the Fourth Pay Commission level of 10.7. To achieve this, it advocated a 100 per cent neutralization of cost of living at higher levels. For the higher cadres, it introduced the concept of full neutralization of cost of living and giving allowances and pensions net of income tax; in fact it recommended a uniform neutralization of dearness allowance at the rate of 100 per cent to all employees at all levels, as the erosion in the real value of salary at the highest level was found to be severe by the Fifth Pay Commission. The new basic pay, both for maximum and minimum salaries, was about 3.25 times higher than the unrevised pay. In addition, the Commission recommended de-linking pay from position in the hierarchy, meaning that a person could enter into a higher pay scale based on experience, without another post being created for him/her in the hierarchy. firm growth. For instance, there are fiscal and job security apply to units above the critical size. credit market benefits to enterprises below a Enterprises graduating out of the protected small certain size. Thus there are built-in disincentives sector thus face extra costs, even as they are for enterprises to go beyond this size limit. In denied the benefits of fiscal subsidies and other addition, labour laws on wages, benefits, and programmes. This causes a polarization of the industrial structure even within the same sector-- Taking the public and private sectors together, small-scale and large enterprises have increasingly tertiary sector employment has grown faster than occupied different niches of the market in the manufacturing employment since the 1980s. The same industry. differential in the growth rates of employment has been much higher with respect to agriculture. But THE TERTIARY SECTOR employment growth in the tertiary sector fell in Absorbing close to 40 per cent of the increase in the second half of the 1990s, relative both to the labour force between 1983 and 2004, the tertiary 1987­93 period and the longer 1983­93 decade. sector has been the leading sector in India's This was entirely due to a decline in employment economic growth, both in terms of output and in the public sector in the latter half of the 1990s. employment. Employment in the sector doubled Table 3.11 shows that compared to the 1983­93 over this period, compared to an increase of only decade, the decline in employment growth in 43 per cent in the case of the manufacturing sector. financial services in the second half of the 1990s The employment elasticity in the sector as a whole, was marginal. All other groups increased their rate in the post-reform period (1993­2004), was of growth of employment. Particularly strong were significantly higher than in all of manufacturing increases in the trade and hospitality sectors. (Table 3.11). However, the tertiary sector is still heavily dominated by the public sector which It is possible to give estimates of employment in the accounts for 70 per cent of jobs in rural areas and formal and informal sub-sectors in tertiary activities 59 per cent of jobs in urban areas. on the basis of some accepted criteria. Estimates for Table 3.11 Employment Elasticities for Different Sectors and Periods Growth Rate of Growth Rate of Elasticity of GDP (% p.a.) Employment (% p.a.) Employment NIC Industry 1983/ 1987­8/ 1993­4/ 1983/ 1987­8/ 1993­4/ 1983/ 1987­8/ 1993­4/ 93­4 1993­4 1999­ 93­4 1993­4 1999­ 93­4 1993­4 1999­ 2000 2000 2000 1 Agriculture & Allied Activities 2.7 4.8 2.9 1.4 2.2 0.7 0.503 0.459 0.250 2&3 Mining, Quarrying, and Manufacturing 5.8 6.1 5.2 4.2 3.8 ­4.2 0.726 0.628 ­0.806 4 Electricity, Gas, and Water 5.2 5.2 7.3 2.0 1.4 1.9 0.382 0.262 0.262 5 Construction 7.9 7.9 6.9 3.9 3.9 ­2.3 0.488 0.499 ­0.331 6 Trade, Hotels, and Restaurants 4.6 5.3 6.4 5.5 0.1 6.4 1.183 0.024 1.007 7 Transport, Storage Employment in the Formal Sector & Communications 5.3 5.6 9.2 3.9 3.4 6.3 0.741 0.608 0.691 8 Financial, Insurance, Real Estate & Business Services 5.8 5.6 9.4 3.5 3.5 5.4 0.608 0.629 0.570 9 Personal, Business, and Community Services 9.62 10.5 8.4 5.3 4.4 5.6 0.555 0.416 0.666 6+7+ 8+9 Tertiary 5.4 4.9 8.6 3.6 4.4 ­1.2 0.663 0.900 ­0.137 All Sectors 6.4 6.5 8.8 3.8 3.9 3.1 0.590 0.597 0.346 Source: National Accounts for GDP and NSS for Employment (based on UPS employment estimates). 81 82 1999­2000 show that the formal sector accounted · Productivity differentials between sectors. India's Employment Challenge for a quarter of tertiary employment in the rural The average productivity in the tertiary sector areas and more than a third of employment in the as a whole is pulled up by the high value in urban economy. Even after the decline in public the financial sub-sector, but seems to be about sector employment in the post-reform period, the level of manufacturing (in 2000) in most this sector still accounted for more than half of sectors, except trade (where it is 20 per cent formal tertiary employment in the urban areas and lower). more than 70 per cent in the rural (see Box 3.3). · There is indeed some evidence to support the In the absence of time-series data for the formal general perception that some sub-groups like and informal sectors in the tertiary sector, trends in consumer services have witnessed a relatively low- and high-paid employment in the sector have large influx of labour, pushing down their been analysed by looking at changes in the entire relative productivity to some extent, while distribution of earnings in this sector over time. The others like business services have improved issue has been examined from several angles: their position due to demand factors. Box 3.3 Composition of Employment in the Tertiary Sector The 55th (1999/2000) Round NSS made it possible to identify workers in the public sector by obtaining information on the establishment types in which workers were employed. In this study, workers in all public and semi-public establishments have been grouped as being in the formal sector. The 55th Round survey also reported, for the first time, the employment sizes of the establishments in which workers were employed. For the purpose of this study, all establishments employing more than 10 workers are considered to be in the formal sector. For the large group of the self-employed, the usual classification in terms of the workers' education has been adopted. Those with lower secondary education or less education are considered to be in the informal sector and the more highly educated (which includes professionals) are taken to be in the formal sector. These criteria help give a rough picture of the composition of tertiary sector employment for 1999­2000, as presented below: Figure B3.3.1 Formal and Informal Employment in the Tertiary Sector, 1999­2000 100 80 percentage 60 40 20 0 Rural Formal Rural Informal Urban Formal Urban Informal Public Private Regular Wage Casual Wage Self-employd Source: Mazumdar and Sarkar (2006b). Figure 3.9 Employment Share of the Tertiary Sector (%) by Quintile Groups of Per Capita Expenditures, Different Rounds Panel A: Rural Panel B: Urban 30% 65% 25% 60% 20% 55% 15% 50% 10% 5% 45% 0% 40% 1 2 3 4 5 1 2 3 4 5 38th 50th 61st 38th 50th 61st Source: Mazumdar and Sarkar (2009b). Note: Rounds 38, 50, and 61 correspond to NSS in 1983, 1993­4, and 2004­5 respectively. Is labour being pulled or pushed into the tertiary in the tertiary sector (see Figure 3.9). The slopes sector? It is possible to get some idea about this by of the graphs increase between 1983 and 1993 looking at the share of main family earners in the (the 38th and the 50th NSS Rounds)--more tertiary sector, in different quintiles of the income prominently in rural areas. But between 1993 and distribution curve, for successive NSS rounds. 2004 (the 50th and 61st NSS Rounds), the graph Figure 3.9 (Panels A and B) throws some light on for the rural sector shows a more or less parallel where jobs have been created--at the low end or movement outwards, with some suggestion that uniformly across household quintile ranges. the movement was largest in the fifth quintile. In the urban sector, the differential movement by A major change seemed to take place in the post- quintile groups is quite striking at the two ends of liberalization period in the nature of jobs created the distribution scale. There was a sharp increase in the tertiary sector, both in rural and urban in the share of tertiary earners both at the lower areas. In the 1980s, jobs were created in the upper (second) and the highest (fifth) quintiles, at the quintiles in rural areas. But in the post-reform expense of the middle (third and fourth) quintiles. period (1993­2004), the graph shows distinctly This suggests that the tertiary sector is absorbing larger movements in the lower two quintiles, labour disproportionately at the lower and upper indicating that most new employment was created ends of the earnings distribution scale. While the in lower income jobs. In the urban areas, the category of consumer services is represented at picture is somewhat similar in that during the the low end, business services play the dominant Employment in the Formal Sector pre-reform period, more jobs were created in role at the high end. the upper income quintiles (except for the top- most quintile). In the post-reform period, the job The fact that more tertiary sector employment creation was more or less evenly spread out over has been created in the lower quintiles does not the income scale. mean that there has been immiserizing growth in the tertiary sector, in the sense that earnings in the In the 1980s, across rural and urban locations, sector have not become depressed. This is brought more jobs were created in the higher quintiles out clearly by the graphs of the kernel distribution 83 84 functions in Figure 3.10. The movement of the distribution--with relatively less absorption India's Employment Challenge the distribution of mean household per capita of labour in the middle range. This implies an expenditures for the successive Rounds brings increase in inequality in the bottom half of the out two important points: (i) there is an outward distribution--a trend more prominent in the shift of the distribution in the tertiary sector so urban economy. Disaggregating the tertiary sector that earnings at all levels have increased and (ii) further (Figure 3.11), it is seen that these effects are there have been proportionately larger increases mild in consumer services, but much more striking in the numbers in the first and fifth quintiles of in business services and in the public sector. Figure 3.10 Kernel Density Functions of Expenditure Per Capita in the Tertiary Sector, Different Rounds Panel A: Rural Panel B: Urban 400 300 k density mpce 30_c 200 100 0 0 500 1000 1500 2000 0 500 1000 1500 2000 x 43rd round 50th round 55th round Source: Mazumdar and Sarkar (2009b). Figure 3.11 Kernel Density Functions by Major sub-groups of the Tertiary Sector 6 7 400 300 200 k density mpce 30_c 100 0 400 8 9 300 200 100 0 0 500 1000 1500 2000 0 500 1000 1500 2000 x 43rd round 50th round 55th round Source: Mazumdar and Sarkar (2009b). Note: NIC 6: Trade, Hotels, and Restaurants; NIC 7: Transport, Storage, and Communication; NIC 8: Finance, Real Estate, and Business Activities; NIC 9: Public, Community, and Personal Services The finding that labour is being absorbed more Figure 3.12 Coefficients of (Dummy) Variables from in the lower and upper parts of the earnings Quantile Regressions on Mean Per Capita Expenditures distribution scale raises the question: is `dualism' 0.2 greater in the tertiary sector? As noted earlier, 0.15 `dualism', in terms of the gap between low 0.1 and high earners, is high in manufacturing in the Indian economy. If the dualism is stronger 0.05 in the tertiary sector, then the `net' tertiary­ 0 0 1 2 3 4 5 6 manufacturing differential, after controlling Tertiary Secondary for other major determinants of earnings (like human capital attributes), would be expected to Source: Mazumdar and Sarkar (2006b). increase when moving up the scale in earnings distribution. Quantile regressions on the 55th differential is, all along, higher for tertiary sector Round of the NSS were used to estimate the net workers. The gap between the agricultural and differential at the five quintiles of the distribution.7 tertiary sectors increases in the middle range and Dummies for the sectors (with primary as base) diminishes somewhat only at the highest quarter were used in the regressions, along with a set of of the distribution. other explanatory variables. The latter included education, age, sex, and urban/rural location. The conclusion is that dualism is quantitatively The exercise was done separately for mean per more important in the tertiary sector when the capita expenditures (MPCE) of households (in `net' earnings of the lowest quintile are compared which the characteristics of the `main earner' with those of the higher quintiles--except that the were used for the explanatory variables) and for difference is reduced for the highest quintile. There monthly earnings of regular wage earners. There is, thus, some support for the popular perception were some differences in the sets of explanatory that the tertiary sector is home to a body of low- variables used in each case. earners, more so than the secondary sector. The coefficients of the tertiary and manufacturing NOTES dummies at the different quintiles are given in 1. Organized sector workers are defined as those Table 3.12 and they are graphed in Figure 3.12. working in private establishments employing They show the `net' difference in MPCE with more than 10 workers and those working in the respect to the base, the agricultural sector. The public sector. The organized sector is generally referred to as the formal sector. All other workers are considered to be in the unorganized or Table 3.12 Household Expenditures by Education informal sector. In this chapter, we also consider Employment in the Formal Sector and Expenditure Groups: Values of Dummies of Quantile Regressions (NSS 55th Round) other definitions of the formal sector in order to analyse trends. Coefficients of Dummies 2. Economic Survey, 2005­2006. (Base = Primary) Q5 Q25 Q50 Q75 Q95 3. While another source, the Annual Survey of Mean Per Capita Household Expenditures Industries (ASI), estimates current organized Tertiary 0.048 0.08 0.108 0.128 0.172 manufacturing employment to be around 11 Secondary 0.024 0.05 0.064 0.079 0.145 million out of a total manufacturing workforce Source: Mazumdar and Sarkar (2006b). of 46 million, the overall picture does not change Note: Q = quintile. significantly. 85 86 4. Dualism refers to the concentration of employment it was left out in consideration of the fact that this India's Employment Challenge in very low productivity jobs at one end and high was a period of adjustment. productivity jobs at the other end. 7. The quantile regression technique estimates the 5. Significance is determined by the relative magnitude coefficients of the explanatory variables, not just of the export-output and import-output ratios of at the mean values as in ordinary least squares the manufacturing sector. estimation, but at each of their five quintile values. 6. While data is available for the period in between, What do Regional Differences in Labour Market Outcomes Imply? 4 N ot only are there significant differences in labour market outcomes across India's states and regions, but these differences have also been persistent. Employment outcomes have been consistently poor in the north-eastern states, the northern states of Uttar Pradesh and Bihar, the coastal regions of Orissa and Kerala, and the former French and Portuguese colonies of Pondicherry (now Puducherry) and Goa respectively. One important exception to these persistent differences is real wages, which show a slight tendency to converge across regions, and more robustly across rural and urban areas. This helps to explain why migration rates across Indian states have been unusually low, as have been urbanization rates. Two proximate factors stand out as the main drivers behind regional differences: first, differences in economic activity (that is, gross state domestic product [GSDP] levels) and economic growth, which appear to affect employment, earnings, and unemployment rates significantly, contrary to the widespread perception of `jobless' growth. The second proximate factor is the differences in female participation rates, which in turn depend largely on the opportunities for employment and earnings. However, the GSDP and employment nexus is not robust in the short run, indicating the role of regulations, which differ from state to state, in affecting labour market. INTRODUCTION Labour market outcomes vary significantly across India's 28 states and seven Union Territories.1 The differences can be dramatic--for instance, male employment rates can vary from 65 per cent to 83 per cent, and female participation rates from 10 per cent to 53 per cent.2 In 1999­2000, rural weekly earnings in one region were less than one-tenth of weekly earnings in another. Not only are these differences large, they have persisted over the past two decades. In this context, some important questions would be: What can regional differences tell us about the determinants of labour market outcomes in India? What role do economic growth and economic activity levels play in affecting labour market outcomes? Why do female participation rates vary so dramatically across India's states and regions, and what light can this 88 THE STYLIZED FACTS--HOW SIGNIFICANT ARE India's Employment Challenge Figure 4.1 Log Household Real Per Capita Expenditures Plotted against Log Real Weekly REGIONAL DIFFERENCES? Earnings for Regions for Five Rounds from 1983 to 2004­5 Labour market outcomes and trends differ across India's regions in four respects. First, there is 7 striking regional clustering of employment Log of Real Household Per Capita 6.5 outcomes. The north-eastern states of Arunachal Pradesh, Assam, Nagaland, Tripura, Manipur; Expenditures 6 the northern states of Uttar Pradesh and Bihar; the coastal regions of Orissa and Kerala; and 5.5 the former Portuguese and French colonies of Goa and Pondicherry respectively, have low 5 4 5 6 7 employment rates (Figure 4.2). On the other hand, Log of Real Earnings Per Week the southern states of Andhra Pradesh, Karnataka, Irpce Fitted values and Tamil Nadu, and the western states of Gujarat Source: Estimates derived from the NSS 55th Round. and Maharashtra show higher employment rates. Note: An increase in wage earnings explains about 66 per cent of the variation in per capita household expenditures by itself. These trends largely mirror the participation rates across the same regions, indicating the close correlation between employment rates and phenomenon throw on the decline in female participation rates (Figure 4.3). participation rates in the 1990s? Second, variations in female employment and This chapter attempts to deepen our understanding participation rates are markedly higher than of the determinants of labour market outcomes those for males. These variations drive most of by analysing regional differences. The motivation the regional differences (Figures 4.3 and 4.4). is two-fold: first, by being able to examine the The coefficients of variation of employment and variations in labour market outcomes across states participation rates for females are nearly four times and NSS regions, and the changes in them over a those of men. In addition to low employment and period of time, this analysis can help shed light on participation rates in the north-eastern regions the determinants of labour market outcomes in (including Tripura), Uttar Pradesh, and Bihar, India in general; second, understanding regional female employment rates are also very low in variations is important for its own sake because West Bengal and, perhaps not that surprisingly, it brings into focus the regional dimensions of in prosperous Punjab (Figure 4.4) as well. Once employment issues. Regional perspectives can be again, female employment and participation rates advantageous, for instance, in providing evidence of are much higher in the prosperous western states the importance of labour force earnings in per capita of Gujarat and Maharashtra, and the southern household expenditures which, in turn, determine states of Karnataka, Andhra Pradesh, and Tamil household welfare and poverty. Figure 4.1 highlights Nadu. One implication of this pattern is that it the dramatically tight link between labour earnings makes it difficult to attribute the low participation (the product of employment and wages) and rates in West Bengal, specifically, and India, household consumption, and thus, poverty rates generally, simply to higher school attendance rates and welfare. Before proceeding further, it may be because school attendance rates are also high in worth highlighting a few significant key facts. the western and southern states. Figure 4.2 Male Employment Rates (in Units): Little Variation across NSS Regions N DATA NOT AVAILABLE JAMMU & KASHMIR W E S HIMACHAL PRADESH PUNJAB CHANDIGARH UTTRANCHAL HARYANA DELHI ARUNACHAL PRADESH SIKKIM UTTAR PRADESH RAJASTHAN ASSAM NAGALAND BIHAR MEGHALAYA MANIPUR JHARKHAND TRIPURA WEST BENGAL MIZORAM MADHYA PRADESH GUJARAT CHHATTISGARH male employment DAMAN & DIU DADRA AND NAGAR HAVELI ORISSA 72% - 74% MAHARASHTRA 75% - 78% 79% - 81% 82% - 83% ANDHRA PRADESH 84% GOA 85% 86% - 87% KARNATAKA ANDAMAN & NICOBAR 88% PONDICHERRY 89% LAKSHDWEEP TAMIL NADU KERALA 90% - 93% Source: Estimates derived from the NSS 61st Round. Figure 4.3 Employment and Participation Rates (%) for Males and Females across Different States Male Female What do Regional Differences in Labour Market Outcomes Imply? Delhi Arunachal Pradesh Tripura Nagaland Chandigarh Manipur Bihar Tripura West Bengal Himachal Pradesh Goa Meghalaya Haryana Haryana Uttar Pradesh Sikkim Jammu & Kashmir Mizoram Assam Jammu & Kashmir Punjab Uttar Pradesh A & N Islands Delhi Arunachal Pradesh Goa Pondicherry Kerala Manipur Maharashtra Sikkim Rajasthan Daman & Diu Orissa Lakshdweep Lakshdweep Kerala Madhya Pradesh Orissa Pondicherry Dadra & Nagar Haveli Punjab Madhya Pradesh Assam Gujarat West Bengal Karnataka Tamil Nadu Rajasthan Karnataka Maharashtra Andhra Pradesh Tamil Nadu Chandigarh Himachal Pradesh Daman & Diu Nagaland Gujarat Andhra Pradesh A & N Islands Meghalaya Dadra & Nagar Haveli Mizoram 0 .2 .6 .8 1 0 .2 .4 .6 Employment Rate Participation Rate Employment Rate Participation Rate Source: Estimates derived from NSS 55th Round data. Notes: Employment rate refers to the share of the population in the 15­59 age group that is employed. Participation rate is the share of the population in the 15­59 age group that is working or searching for work. 89 90 India's Employment Challenge Figure 4.4 Female Employment Rates (in Units): Large Variation across NSS Regions DATA NOT AVAILABLE N JAMMU & KASHMIR W E HIMACHAL PRADESH S PUNJAB CHANDIGARH UTTRANCHAL HARYANA DELHI ARUNACHAL PRADESH SIKKIM RAJASTHAN UTTAR PRADESH ASSAM NAGALAND BIHAR MEGHALAYA MANIPUR JHARKHAND TRIPURA WEST BENGAL MIZORAM MADHYA PRADESH GUJARAT CHHATTISGARH DAMAN & DIU ORISSA Female Employment Rates DADRA AND NAGAR HAVELI MAHARASHTRA 12% - 21% 22% - 28% 29% - 32% ANDHRA PRADESH 33% - 38% GOA KARNATAKA 39% - 45% ANDAMAN & NICOBAR 46% - 49% 50% - 57% PONDICHERRY LAKSHDWEEP TAMIL NADU 58% - 61% KERALA 62% - 68% 69% - 74% Source: Estimates derived from the NSS 61st Round. Table 4.1 Employment and Participation Rates in Regions are Correlated across Rounds Correlation between One Round and Previous Round Employment Indicators Real Wages Employment Participation Unemployment Urban Urban Rural Rate Rate Rate Male Female Male Female Male Female Salaried Casual Casual 0.8266 0.8971 0.7955 0.8924 0.6485 0.5581 ­0.1143 ­0.0547 ­0.0819 Source: Estimated from NSS Data--38th, 43rd, 50th, and 55th Rounds. Third, regional differences are persistent. There different in 34 regions out of 78 regions in 2000) are few signs of convergence in employment compared to the 50th Round (when 32 regions rates or participation rates across regions. If we were significantly different in 1993). Particularly use the threshold of one standard deviation from noteworthy is the increasing divergence from the the Indian average to classify regions as being all-India average in rural employment rates in significantly different from all-India averages, the the 55th Round, compared to the 50th Round. number of regions significantly different has either The persistence in employment indicators is also stayed the same or increased in the NSS 55th confirmed when we see that employment and Round (male employment rates were significantly participation rates are highly correlated across Figure 4.5 Convergence of Casual Wages: Growth from 1983­2000 against Real Wages in 1983 log of real wages, 1983­2000 1.5 1.5 log of real wages, 1983­2000 1 1 .5 .5 0 0 ­.5 ­.5 2 2.5 3 3.5 4 2 2.5 3 3.5 4 log real wage in 1983 log real wage in 1983 Source: Ahsan and Pagés (2006). Table 4.2 Regional Convergence--Regions with Higher Initial Real Wages have Seen Slower Real Wage Growth (in % p.a.) Rounds Urban Urban Rural Rural Rural Casual Rural Casual Salaried Casual Casual Agricultural Salaried Industry Industry Industry Agriculture Operations Industry 38­50 ­1.06 ­0.64 ­1.07 ­1.21 ­0.19 ­0.68 50­55 ­1.13 ­1.24 ­0.97 ­0.95 ­0.20 ­0.92 38­55 ­1.03 ­1.03 ­0.87 ­0.99 ­0.24 ­0.97 Source: Ahsan and Pagés (2006). Note: All estimates are statistically significant. What do Regional Differences in Labour Market Outcomes Imply? Rounds (Table 4.1). Employment and participation inequality was low to begin with. Convergence rates tend to show persistence across the different in wages is also indicated by econometric tests of Rounds, in sharp contrast to real wages which are convergence which show that regions that had not correlated across Rounds. the lowest wage rates in 1983 had higher growth in wages in the next 17 years for which data is Fourth, in contrast to employment indicators, available. Conversely, regions which had higher real wages are showing signs of convergence, real wages in 1983 experienced lower growth even though there are still substantial differences rates later on (Figure 4.5). This is also seen in in wage rates across regions. Wage inequality the significant negative relation between growth appears to be falling across regions for all categories rates of real wages and initial wages. Table 4.2 of casual wages. There was a drop in measures presents the estimates which show that wages are of inequality--coefficient of variation and gini converging. Significantly, the convergence is least coefficients--in all three casual wage categories, for wages in agricultural operations. Given that rural, agricultural, and urban, between 1993 agricultural productivity varies widely depending and 2000. Although there was a slight increase on agro-ecological conditions, a slower degree of in regional inequality in salaried wages, the convergence is not unexpected. 91 92 India's Employment Challenge Figure 4.6 Rural and Urban Casual Wage Ratio 3 2.5 2 1.5 1 0.5 0 1983 1987­8 1993­4 1999­2000 Urban Salaried to Casual Urban to Rural Casual Source: Estimated from NSS data. Within each region, however, there are two jobs) create market segmentation and shore up contrasting trends. Differences between casual salaried wages, as elaborated in Chapter 5. wages in rural and urban areas largely disappeared in the 1990s. However, salaried and casual wages LOW MIGRATION AND URBANIZATION RATES began to diverge (Figure 4.6 shows urban casual Given the significant differences in labour market and regular wages). Seen across the last four conditions across different regions, India's Rounds, the ratio of urban to rural off-farm unusually low economic migration rates present a casual wages declined as the growth rate of rural puzzle. Overall, while about 1.8 per cent of India's casual wages exceeded that of urban casual wages. population migrated on average each year between While the growth rate of agricultural wages was 1997 and 2000, only about 0.3 per cent did so due lower than that of off-farm casual wages, it was to economic factors. A small number of them, still higher than the growth rate of urban casual 0.3 per cent, did so outside of their districts or wages. Indeed, once human capital attributes and states. In comparison, some 5.5 per cent of the US the differences in cost of living are taken into population migrated across the county or across account, there is little difference between rural and states in a similar period.3 urban casual wages. Further, most states replicate the pattern of narrowing urban­rural wage A look at the pattern of migration from and to differences. Unlike casual wages, urban salaried different regions in the map of India in Figure and casual wages show a divergence on average 4.7 confirms that migration rates are low across and across different regions. As noted earlier in many regions. In three years, from 1998 to 2000, Chapter 3, a substantial part of this divergence most regions showed less than 1 per cent net cannot be accounted for by skill and human in- or out-migration. Chandigarh, Goa, Daman capital differences, though these have certainly and Diu, Haryana, Punjab, Delhi, Mumbai, and contributed. Regulatory barriers and public sector the Kolkata areas showed the maximum inflow, salaries (which account for most of the salaried exceeding 1 per cent of the total labour force in the Figure 4.7 Economic Migration across States and Regions, 1997­2000 Source: Estimated from NSS data, 55th Round. three years from 1998 to 2000. Overall, though, rates are significantly inversely related to net Maharashtra and Gujarat showed in-migration of economic migration rates. In sum, low migration around 0.5 per cent and 0.2 per cent respectively. rates appear to be related to low prospects for Northern Tamil Nadu, Andhra Pradesh, parts of increases in earnings after migration. Madhya Pradesh, and less expectedly, Mizoram What do Regional Differences in Labour Market Outcomes Imply? and Nagaland, also show in-migration. The Another issue related to labour markets in India main out-migration regions were Bihar, western is low urbanization rates. Even in the larger Rajasthan, and Jammu and Kashmir. Kerala, metropolitan areas of Mumbai, Delhi, Kolkata, Karnataka, and southern Tamil Nadu were also and Chennai, which attract the highest rates of regions from where out-migration took place. migrants, the in-migration rates, about 1.5 per cent of the population per annum, are low (Figure The trend of real wages converging across regions, 4.8 presents a picture of rural to urban migration). on the one hand, and growing unemployment rates Further, the share of economic migration to urban in major urban areas, on the other, can help explain areas was stagnant from 66 per cent in the mid- why migration rates have not picked up. While 1990s (Figure 4.8 A) to 62 per cent in 2000 (Figure wage differences are high, they are converging 4.8 B). Compared to other Asian countries such and do not appear to significantly affect migration. as China, Indonesia, Vietnam, Pakistan, and However, urban casual wages--the best proxy of Bangladesh, India has the lowest rate of urban spot-market wages--are positively related to in- population growth (Figure 4.8 C). China provides migration. On the other hand, unemployment a dramatic contrast: urban population grew by 93 94 India's Employment Challenge Figure 4.8 India's Urbanization Growth by Types of Cities Panel A: Share of Economic Migrants, 1995­8 Panel B: Share of Economic Migrants, 1998­2000 150.0 120.0 100.0 100.0 80.0 37.9 34.1 60.0 50.0 26.7 24.7 40.0 13.1 62.1 7.4 65.9 20.0 43.1 27.2 34.9 22.8 0.0 0.0 Rural Urban Total Rural Urban Total % Going to Urban Areas % Going to Rural Areas % Going to Urban Areas % Going to Rural Areas Panel C: Growth Rate of Urbanization, 1990­2003 (in per cent) Panel D: Urban Population in Millions 5 800 686.5 4 600 498 447.5 3 400 311.1 301.3 216.9 2 200 a a sh sia n m di in ta 0 na e ne Ch In k is lad et do Pa India China Low Income Vi ng In Ba Growth Rate 1990 2003 Source: Migration estimated from NSS 1999­2000 and urbanization from WDI data. Note: The third bar showing `Low Income' in Panel D refers to all low income countries (as defined by the World Bank). close to 190 million from 1990 to 2003. In India, enough to create jobs that are better paying than the corresponding number was about 87 million, those in rural areas. or less than half. Not only has urbanization slowed down, there Urbanization slowed down in India in the 1980s is also evidence that job and population growth and 1990s as casual wages in rural and urban areas have shifted away from large metropolitan cities converged. Demographic projections in 1981 and rural areas to mid-size towns. Decomposing estimated that India's urban population would urban growth by size of cities (Table 4.3), we can be about 31 per cent of the total population in see that there is a significant shift of jobs from 2001. In reality, it turned out to be only 27 per rural centres and large cities to secondary towns cent of the population, that is, lower by about 40 and, to a lesser degree, to sub-urban areas of the million persons (Mohan and Dasgupta 2005). Part large cities (or peri-metro areas). The implication of the answer as to why urbanization rates have of these developments has to be interpreted been low would appear to lie in the converging carefully. The growth of large cities (100,000 trend in rural­urban wages. As the gap between or more) is not fast enough to accommodate rural and urban wages narrows, and the urban the movement of labour and population out of unemployment rate grows, the expected earnings rural areas, hence this population is now moving from migration are falling. It follows then that to secondary cities (with population between the incentives to migrate to cities are declining 20,000 and 50,000). Given that these town sizes accordingly. There may be important implications are probably too small to take advantage of to these developments. Urban infrastructure and agglomeration externalities, there is a particular service development may not be growing fast need to develop peri-metro areas. Table 4.3 Growth of Population and Manufacturing Jobs by Size of Town District Type Population, 1991 Percentage Share Percentage share Percentage Share (in millions) of Population of Manufacturing of Manufacturing Employment in 1989 Employment in 1996 Metropolitan centres (100,000 + persons) 40.4 5.1 15.7 13.5 Peri-metro (50,000­ less than 100,000 persons) 21.7 2.7 3.9 8.3 Secondary cities (20,000­ less than 50,000 persons) 100.2 12.6 10.4 21.1 Tertiary cities (10,000­ less than 20,000 persons) 86.5 10.9 7.5 10.2 Towns and rural centres (less than 10,000) 549.2 68.8 62.4 46.9 Source: Authors' estimates from census. WHAT IS DRIVING REGIONAL DIFFERENCES IN which fell markedly from 0.52 between 1983­4 LABOUR MARKET OUTCOMES? and 1993­4 to 0.19 between 1993­4 and 1999­ Two proximate factors play key roles in driving 2000, such a concern is not misplaced. But regional differences in labour market outcomes. how accurate is this statement when we look From the demand side, economic activity or, within states and regions? Studying differences more specifically, differences in GSDP levels in labour market outcomes and growth across and economic growth play a key role in the long regions provides a good handle for addressing the term in explaining differences in employment employment­output relationship. levels and earnings. From the supply side, the differences arise primarily because of variations Across states economic growth is almost entirely in female labour force participation rates across driven by labour productivity growth. Figure 4.9, different regions, with male participation rates which decomposes per capita income growth What do Regional Differences in Labour Market Outcomes Imply? remaining relatively invariant. A step deeper, in the larger Indian states, shows that quite differences in female participation rates depend on remarkably, labour productivity has increased at employment prospects and wages across regions in a very high rate of above 4 per cent a year, in 12 a complex manner. If opportunities and wages for out of 17 states. At the same time, employment female employment increase, female participation to working-age population ratios have declined in increases. On the other hand, increases in earnings all states but three. Moreover, Figure 4.9 shows of spouses and increases in household wealth that employment rates have typically fallen less (measured by household expenditures) create (or increased more) in those states that have the increased incentives for females to leave the labour lowest gains in productivity. force. These issues are discussed in more detail in the following section. Across the world, productivity gains do not necessarily cause a decline in employment rates. The Role of Economic Activity In popular perception, productivity growth causes A major policy issue in India is that economic lower employment growth. In reality though, growth in the 1990s, at the all-India level, was productivity growth and employment growth are seen to be `jobless'--meaning it did not create related in a more complex manner. In the short enough employment opportunities. Measured run, an increase in productivity translates, by by the simple employment elasticity of growth, definition, into lower employment elasticity--that 95 96 India's Employment Challenge Figure 4.9 Decomposing Growth by Contribution of Productivity, Employment Rate, and Dependency Ratio GSDP per capita = (GSDP/Employment) + (Employment/Working-age pop.) + (Working-age pop./Total population) Assam Bihar Uttar Pradesh Orissa Punjab Haryana Madhya Pradesh Maharashtra Andhra Pradesh Delhi Kerala West Bengal Rajasthan Tamil Nadu Gujarat Karnataka Himachal Pradesh 0 2 4 0 2 4 ­2 0 2 ­2 0 2 % % % % Source: Bank staff estimates. is, lower employment growth for a given level of in the current period disappears when we relate output growth. However, output can also increase labour productivity growth in the previous with technological growth, implying that firms can period to employment growth in the current do more with the same resources. What happens period. The right panel in Figure 4.10 indicates to employment then depends on whether firms that the relationship between lagged productivity decide to produce the same with less workers, growth--productivity growth five to six years or produce more with the same or even more earlier--and current employment is positive workers. The decisions of the firms depend on and significant. It suggests that regions that how much more output can be put in the market had productivity growth in the past can, after a and whether the firms want to try and substitute period of adjustment, generate relatively high away from labour in the production process. The employment growth compared to regions which outcomes in India strongly suggest that firms are had relatively low productivity growth in the past. taking advantage of technological advances to The relationship between labour productivity substitute away from labour in the production and employment growth is largely the result of process, something that will also be discussed in elasticity of employment (Box 4.1). the next chapter. This is strongly related to current labour regulations and policies. The lack of short-run correlation between economic activity and employment levels is The inverse relationship between labour highlighted again when state GSDP levels are productivity growth and employment growth related to employment levels, separately for Figure 4.10 Growth of Employment and Growth of Labour Productivity by Regions--Same Period and Previous Period Growth of Employment and Same Period Labour Productivity Growth of Employment and Previous Period Labour Productivity 1.5 1.5 Growth of UPS employment Growth of UPS employment 1 1 .5 .5 0 0 ­.5 ­.5 ­4 ­3 ­2 ­1 ­4 ­3 ­2 ­1 Log of Labour Productivity in Same Period Log of Labour Productivity in Previous Period Source: Bank staff estimates. Box 4.1 Does Increase in Labour Productivity Imply a Decline in Employment? It is commonly perceived that if an economy is able to produce the same level of goods and services with less labour, this leads to a decline in employment rates. However, this is not necessarily the case; it depends on what is driving the labour-saving process. For example, if excessively high labour costs drive employers to substitute labour for a less expensive factor (for example, capital), then this process of labour-saving is associated with a decline in employment in firms that undertake such labour substitution. If, instead, the underlying factor is an increase in the capacity of workers to produce more with the same factors, either because workers are learning new production techniques or because new technologies allow workers to be more productive, then there need not be a decline in employment rates. The final outcome on employment What do Regional Differences in Labour Market Outcomes Imply? depends on the price elasticity of the goods produced by such workers. For goods where large increases in production do not imply a large decline in their price, increases in the productivity of labour will result in an expansion of employment. This is because while fewer workers are needed to produce the same goods, more goods can now be produced at lower costs. Instead, if the gains in productivity occur in sectors where an increase in production leads to a sharp decline in prices, firms will be reluctant to increase the production of goods and will consequently need fewer workers. Notice, however, that even when some employment losses are likely to occur in this case, they need not be long-lasting. This is because increases in productivity lead to lower prices which, in turn, boost the ability of workers to consume other goods, in turn boosting the demand for workers to produce such goods. A successful and smooth process is such in which workers who lose jobs in one sector as a result of productivity growth, can be quickly re-employed in another thriving sector. Clearly, for this smooth process to take place: (i) cost reductions brought on by increases in productivity need to be passed on to consumers; (ii) workers need to have sufficient skills so they can quickly adapt to working in other sectors; and (iii) some form of income protection needs to be in place to protect the incomes of workers while they search for other jobs. 97 98 India's Employment Challenge Box 4.2 Relating GSDP Levels to Employment: The Need to Address Endogeneity A key issue in estimating the relationship between GSDP levels, employment levels, participation rates, and earnings is the endogeneity of GSDP, wages, and earnings; that is, these variables can have a two-way relationship because they affect each other. For example, not only do GSDP and wages determine employment, but employment also determines GSDP and wages. Or, these variables can be jointly determined by another third set of factors. Econometric techniques such as two-stage least squares and the use of instruments can help address endogeneity problems, though they have their own pitfalls. In the estimates presented in this chapter, GSDP, wages, and earnings are estimated as being determined by the structure of the economy (share of industry), infrastructure variables, and credit flows as instruments. Similarly, earnings are also instrumented in estimating the relationship between participation and earnings. Thus, endogeneity is accounted for. Then, using predicted GSDP and wages, a significant relationship is found to exist between GSDP and employment and earnings, and between labour force participation and earnings of workers and their spouses. Source: Bank staff ; see Appendices 4.1 to 4.4. women and men and for rural and urban areas, in urban areas. A 1 per cent increase in GSDP controlling for regional fixed effects. This study leads to, on average, a 0.4 per cent increase in male looked at changes across the levels of states' employment levels. The effect is much weaker, , GSDP changes in GSDP across time, and took though still significant, in rural areas where the care to account for the fact that employment also elasticity is 0.2 per cent compared to urban areas, determines GSDP levels (see Box 4.2). In doing where the elasticity is 0.8 per cent (see Appendix so, the effects that other economic variables such 4.1). Figure 4.11 shows the average increases in as availability of credit, roads, power, and irrigation male (left panel) and female employment (right have in determining GSDP were also considered. panel) against the increase in the log of the state Then, changes in GSDP caused by changes in . GSDP It is evident from the left panel, from the these variables were linked to employment. The fitted quadratic curve, that the increase in GSDP results of this exercise, provided in Appendix 4.1, leads to an increase in the employment of males suggest a lack of correlation between GSDP and but at a declining rate: that is, elasticity falls as any of the employment variables, when regional GSDP levels increase. fixed effects are included and only the time variations around the state means are considered. The long-run impact of differences in GSDP levels (The results are substantially different if the fixed is more marked on female employment than on effects are not included.) male employment, and is significant both in rural and urban areas. For female workers, a 1 per cent In the long run, however, there is an important increase in GSDP leads to a 0.7 per cent increase relationship between employment and growth. in employment levels, a 0.8 per cent increase in The results, without regional fixed effects, urban employment, and a 0.5 per cent increase in indicate that across states, levels of GSDP have a rural employment. Analysis suggests that, unlike in significant impact on employment levels of males the case of males, the relationship between GSDP Figure 4.11 Employment Levels of Males and Females and GSDP Levels: Variations across Regions and Time Males Females Elasticity of number of males UPSS employed (age: 25­59) Elasticity of number of females UPSS employed (age: 25­59) with respect to GSDP with respect to GSDP 16 15 Number of UPSS employed females Number of UPSS employed males 14 (age: 35­95) in logs (age: 35­95) in logs 12 10 10 8 5 6 8 10 12 6 8 10 12 GSDP in logs GSDP in logs Source: Estimated from Appendix 4.1; Ahsan and Pagés (2006). Figure 4.12 The Effect of Variations in GSDP on Male Earnings Elasticity of earnings with respect to GSDP without controls Elasticity of earnings with respect to GSDP (with controls) 2 Male Casual non-Agriculture Earnings 8 Male Casual non-Agriculture Earnings 7 1 in logs | X 6 in logs 0 5 ­1 4 What do Regional Differences in Labour Market Outcomes Imply? ­2 2 ­.1 ­.05 0 .05 .1 .15 6 8 10 12 GSDP in logs GSDP in logs coef = 1.9343715, se = .908699, t = 2.13 Source: Estimated from Appendix 4.2. levels and females earnings is linear--that is, there by 1.4 per cent for agricultural jobs held by males is no evidence of declining elasticity (Ahsan and (see Appendix 4.2). Figure 4.12 presents this Pagés 2006). This has important implications point in the following way: the left panel shows because it suggests that there is a pool of female that earnings and GSDP levels are unrelated if workers for whom higher level of economic activity the estimates are made without accounting for opens up employment opportunities. other factors such as education levels or tribal and caste groups. But once these factors are accounted In the short run, gains in GSDP contribute to for (as in the right panel of Figure 4.12), the gains in earnings in rural areas. Increase in GSDP relationship is very clear. This relationship is also levels by 1 per cent increases earnings by nearly 2 visible when we correlate changes in earnings per cent for rural casual non-agricultural jobs, and with changes in GSDP across states. 99 100 In sum, the results indicate that across states, the There are two issues here. First, the large variation India's Employment Challenge recent period has been characterized by strong in female participation rates has to be understood: GSDP and labour productivity growth, though the coefficient of variation for female participation relatively small gains in employment rates. In the rates is some 15 to 20 times higher than that for long run, however, strong gains in productivity men, even though female participation rates are and output are related to higher employment. uniformly lower than those of men (Table 4.4 While in the short run, firms can do the same and Figure 4.13). Female participation rates are amount of work with few workers, in the long particularly low in Bihar, Uttar Pradesh, Jammu run the higher earnings and profits brought on and Kashmir, and parts of the north-eastern by economic growth will create a demand for region. Second, it is necessary to understand goods and services that will require more labour why female participation rates declined over the for production. As to how long this transition will 1990s. This is puzzling, given the increase in the take and how important growth is for increasing education level of the female labour force, the employment, will depend, among other things, on decline in fertility rates, and India's already low two major factors: whether growth brings more female participation rates (compared to East Asian women into the labour market and whether firms and Latin American countries). make use of increased opportunities to produce more instead of cutting down on labour. The Two factors have been identified to account for the first issue is analysed in the next section. Labour decline in female participation rates (Sundaram institutions and policies are dealt with in the and Tendulkar 2006a): following two chapters of this report. Understanding Regional Variations and · First, the rise in secondary and high school Trends in Female Participation Rates attendance by females--that is, members of Understanding the differences and trends in female the age group 15­25 have opted for education participation rates--which account for most of the over work. regional variations--is of vital importance. If India · Second, the effect of higher incomes--as wage is to grow at a sustained rate and reach the ranks of rates (for male spouses) increase, women middle-income economies, female participation workers drop out of the labour force to spend rates will likely have to increase significantly. more time on housework or on leisure. Table 4.4 Participation Rates for Males and Females Rural Urban Variable Mean CV Mean CV Prime-age Male, 0.8925 0.0539 0.8235 0.0607 15­59 years 91 57 59 79 Male (excluding school population), 0.9764 0.0199 0.9637 0.0190 25­59 years 55 59 66 26 Prime-age Female, 0.5486 0.3689 0.253 0.3583 15­59 years 92 57 506 85 Female (excluding school population), 0.5887 0.3514 0.2884 0.3562 25­59 years 16 26 71 56 Source: Estimated from NSS data. Note: CV= Coefficient of variation. Figure 4.13 Participation Rates for Females, 55th Round N Jammu & Kashmir W E Himachal Pradesh Punjab Arunachal Pradesh S Uttar Pradesh Rajasthan Bihar Nagaland Gujarat Madhya Pradesh West Mizoram Bengal Female Participation 0.11 - 0.23 Orissa 0.23 - 0.3 Maharashtra 0.3 - 0.37 0.37 - 0.43 0.43 - 0.5 Goa 0.5 - 0.54 Andhra Pradesh 0.54 - 0.56 Karnataka 0.56 - 0.61 0.61 - 0.66 Andaman & Nicobar Islands 0.66 - 0.76 Not Available Kerala Tamil Nadu Source: Authors' estimates. Participation rates measured as a share of the 15­59 age group, working or seeking work. Further, decisions to marry, which often take place household incomes which can take place due between the ages of 15 and 25, may also lead to to increased earnings by spouses or from other women dropping out of the labour force. sources; female labour can then opt out of the labour force to do housework or enjoy leisure. The What do Regional Differences in Labour Market Outcomes Imply? A careful look at the evidence (see Chapter 1), `substitution effect' refers to the better incentives though, suggests that education can only partly women have to work--the availability of good jobs explain the decline in participation. Of greater and higher earnings. Which of these effects is at importance is the decline in the participation rate play, and if both are at play, which is dominant? of prime-age females in part-time or `subsidiary' If the `substitution effect' is dominant then the occupations, and an increase in the time they spend scope for including more women in the labour on housework or leisure. A better understanding of force increases if they can be provided with the reasons for the low participation rate of females greater opportunities for employment. is thus important. Two approaches have been used to answer these Specifically, it is crucial to ascertain whether questions in this report. The first approach women are withdrawing from the labour force estimates the determinants of participation rates voluntarily, because the incomes of households for females aged 25 years or older, by testing the are increasing (the `income effect'), or whether relationship of both female wages and spouses' they are doing so for lack of opportunity: jobs wages with participation rates, to capture and good earnings (the `substitution effect'). The `substitution' and `income effects' respectively. `income effect' refers to the effect of the rise in A positive relationship between female wages 101 102 and female participation rates would highlight Hence, in this first approach, it is the lack of India's Employment Challenge the presence of `substitution effects'. A negative opportunities that is highlighted as explaining relationship between spouses' wages/household low levels of female participation. expenditures and female participation rates would point to `income effects'. In order to filter In the second approach, `expected earnings' are out any possible role played by decisions to go used as a composite measure of labour market to school or decisions to marry, only females in conditions: the prospects for employment the age group 25 or older are considered here. and earning an average market wage. Variables Unemployment rates are included to measure are constructed to represent female and male opportunities (specifically, the absence thereof) expected earnings by multiplying wages with the in the labour market. Finally, household per capita probability of employment. Female `expected expenditures are used instead of spouses' wages, earnings' represent `substitution effects' and also after taking into account female wages. The capture the employment opportunities available results, presented in Appendix 4.4a, are clear: to women. Men's `expected earnings' represent · Urban unemployment and overall high `income effects'. In sum, the higher the `expected unemployment rates for females appear to earnings' for females, the greater the incentives discourage participation. Thus, low urban for females to participate in the labour force; the unemployment rates are partly explained by greater the `expected earnings' for males, the lack of opportunities. greater the scope for females to drop out of the · Higher wages encourage female participation labour force, leading to a decline in participation in rural casual work--again stressing that rates. The effects are quite clear and consistent: opportunities are important. female `expected earnings' in rural areas robustly · Men's wages appear to have little impact increase participation. Figure 4.14 presents the on female participation rates, indicating the key results, with the detailed results presented weakness of the `income effect' in this model. in Appendix 4.4. Figure 4.14 Female Participation Rates (25 years and above) and Expected Earnings for Females and Males Elasticity of Female Participation Rates with Respect to Expected Elasticity of Female Participation Rates with Respect to Expected Earnings for Females Earnings for Males 1 Male Casual Agriculture Earnings in log|X .5 Female Participation Rates in log|X .5 0 0 ­.5 ­.5 ­1 ­1 ­.4 ­.2 0 .2 .4 ­.4 ­.2 0 .2 .4 Expected Earnings for Females in logs|X Expected Earnings for Males in logs|X|X coef = .92576571, se = .14429932, t = 6.42 coef = ­.68487742, se = .10729855, t = ­6.38 Source: Bank staff estimates. The results are clear and similar to the first also need to be promoted by policy in regular approach: the left panel in Figure 4.14 shows that salaried jobs. The possibility of more efficient, an increase in the `expected earnings' for females well-regulated child care arrangements would has a significant impact on increasing female also likely encourage the entry of women into participation, across regions, after taking other the labour force. variables (education, caste, etc.) into account. The right panel shows that increasing `expected SUMMING UP earnings' for male casual workers in rural areas, Regional differences in labour market outcomes and salaried workers in urban areas, reduce female are striking in India and have persisted over the last participation after a certain point. However, the two decades. The exception is real wages which effect is weaker and does not hold for work in show signs of converging across regions and across urban areas--that is, higher `expected earnings' rural and urban areas. The latter fact, combined from casual urban work do not lead to lower with unemployment in states, may help explain participation rates. It is only higher `expected why economic migration rates and urbanization earnings' from urban salaried work that lower the rates are unusually low in India. Some policy participation rate of urban women. implications can be drawn. How can female participation be increased? From Foremost among these is the fact that economic the analysis of household-level factors, some growth and activity levels have been important policy conclusions seem to emerge. As expected, in causing good labour market outcomes, though earnings are important. First, unexplained wage in a somewhat nuanced way. When regional differentials among males and females have to be differences are taken into account, growth has not reduced. This requires enforcement of equal pay been `jobless'. In the short run though, growth for equal work (as mandated in the Constitution), has had a muted effect on employment. Increasing especially in the casual labour market; it also labour productivity, which leads to growth, is requires galvanizing the legal system to respond associated with lower employment growth as What do Regional Differences in Labour Market Outcomes Imply? to complaints about the infraction of this law. an immediate effect. But in the medium term, Policymakers also need to take a fresh look at increasing productivity does not adversely affect minimum wages and whether the lower wages employment growth. Over the longer term, the set for women may actually be harming women relationship between growth and employment is in the labour force. Second, it is likely that low clearer. States with higher levels of GSDP are also quality of education and lack of technical skills states which have created more urban employment are hampering women's entry, at full potential, and rural earnings in the case of males. Given that into the new services sector. Thus, it may be male unemployment rates are negligible in rural necessary to focus on higher education and areas, this result is understandable. The effect technical education for women. Third, since the of differences in GSDP levels is more striking majority of women are employed in agriculture or for female employment, which is low in India agriculture-based occupations, policy also needs on average. Higher GSDP levels lead to higher to address issues that would enhance women's female employment in rural and urban areas. productivity in the agricultural sector. Fourth, almost 30 per cent of Indian women would like to This analysis also reveals that increasing enter the labour force, but as part-time workers. employment opportunities for females will help Thus, flexible work hours and part-time work to arrest the decline in female participation rates. 103 104 Although there is some evidence of `income Given that poor employment outcomes are India's Employment Challenge effects' that lead females to drop out of the labour persistently clustered in the northern, north-eastern force, economic opportunities are the strongest and some coastal regions, a regional focus on factor affecting female participation. growth and employment is called for. Investment in infrastructure--power, road, irrigation, and credit The analysis in this chapter also highlights facilities--which is found to affect GSDP positively, the importance of urbanization and domestic can lead to higher employment prospects. Related migration. The narrowing of the wage gap between to this is the need to improve the investment rural and urban areas, in each region, and higher climate in these regions, a key aspect of which is unemployment rates have lowered urbanization labour market-related regulatory reforms. Also, it rates. Conversely, impediments to urbanization is important to enhance the effectiveness of active lower the growth of employment and higher labour market policies. In the next two chapters, wages. At present, slow urban development is we turn to regulatory reforms and active labour also slowing down manufacturing growth--with market policies that can improve India's labour about half of new manufacturing jobs being market outcomes. created in rural areas. A complementary approach would be to facilitate economic migration, both NOTES to regions that are more dynamic and also to 1. This refers to the 78 regions in the NSS, which urban areas. Policies that can mitigate obstacles correspond loosely with agro-ecological areas. to domestic migration, through better safety nets 2. Employment rate refers to the share of the and insurance for migrants, will also improve population in the 15­59 age group which is labour market outcomes by allowing workers to employed. 3. US Bureau of the Census, Geographic Mobility: work in areas where there are more opportunities March 2000 to March 2001. and higher returns. Labour Regulations in India Helping or Hurting Workers? 5 A growing body of evidence suggests that labour regulations in India are unusually complex and costly. Research conducted for this chapter suggests that some current regulations hurt workers by preventing good jobs from being created, especially in the manufacturing and formal sectors. These regulations discourage manufacturing sector growth, encourage informality, and deepen dualism (division or extreme disparities, especially between formal and informal sectors). They also foster inequality between a very small segment of workers in the organized sector and the vast majority, about 90 per cent of workers, in the informal sector, as well as between regions. Indeed, manufacturing firms employing more than 100 workers identified labour to be as big a constraint to their growth as the availability of power (electricity). Reforming labour markets should involve the following: simplifying regulations; reforming the dispute resolution processes in the Industrial Disputes Act (IDA) to reduce transaction costs; and ensuring that workers in both formal and informal sectors are protected and get adequate compensation by introducing broader and more effective employment programmes and social insurance (this topic is discussed in the next chapter). The aim should be to protect workers, not jobs. THE ROLE OF REGULATIONS IN LABOUR MARKETS Well-functioning labour markets will be key to achieving equitable growth in India. First, growth prospects will depend not only on the economy's ability to provide employment opportunities to the 80 million new entrants to the labour force over the coming decade, but also to employ them in good, productive jobs. Second, the impact of growth on reducing poverty and promoting equity will depend on the extent to which labour markets help create employment opportunities, with good wages for the majority of people whose main source of earnings is their labour. It is evident from the previous chapter that labour market earnings in India's regions are closely correlated to household expenditures and welfare. But how well labour markets perform in meeting the goals of growth and equity will depend, in turn, on the quality of labour regulations in India--the theme of this chapter. 106 Regulations influence labour market performance have costs attached to them, there are strong India's Employment Challenge in several ways. First, by affecting the efficiency economic arguments for most countries in the and flexibility with which workers can be allocated world having regulations and for the existence of among various jobs, regulations affect the international labour conventions (see Box 5.1). productivity and wages of workers and the profitability of firms. Second, by changing the In India, 45 Central laws and 170 state statutes deal costs of adjusting production, regulations can directly with labour market issues. These laws--a influence the ability and incentives of firms and few dating back to the nineteenth century--regulate labour markets to create jobs. Third, by providing minimum wages, hours of work, benefits, safety, protection against sudden and arbitrary job losses security, conditions of employment, dismissal, trade and poor working conditions, regulations can unions, and other aspects of industrial relations. As enhance the welfare and productivity of workers. is widely recognized now, these numerous laws Fourth, by determining the processes by which have created an unusual complexity in labour wages are set, regulations affect the earnings of markets through overlapping and sometimes labour (from the point of view of workers) and contradictory mandates, and inconsistencies in hence labour supply, and the cost of labour (from basic definitions of commonly used concepts the point of view of employers) and hence labour and terms such as factory, worker, workmen, demand. Fifth, by affecting industrial relations employees, and employer. These complexities between workers and employers, regulations can have been further compounded by a long trail of help or hinder profit and employment prospects. judicial decisions that have interpreted these laws, It is worth stressing here that although regulations sometimes in an inconsistent manner. Box 5.1 The Economic Case for Labour Market Regulations The economic case for labour market regulations arises from the need to correct labour market failures, that is, situations where the free market does not lead to outcomes that maximize social welfare. Specifically, labour market regulations and policies address: · Asymmetry in market power between employer and employee that can lead not only to inadequate protection of workers, unsafe working conditions, and low wages, but also to inefficient economic outcomes. · Information failures--lack of knowledge on the part of workers about existing opportunities and lack of information among firms about workers and credit market failures. These failures may lead to lack of opportunities for workers and high costs to firms. In both cases, output and employment will be less than the potential. · Insurance market failures--around the world, information asymmetries prevent the emergence of private unemployment insurance markets. Labour regulations (by means of severance payments and other mechanisms) and labour policy (through unemployment insurance) address such failures by protecting the incomes of workers in the event of them losing their jobs. · Spillovers from labour markets that affect other markets and society in general--for instance, unemployment lowers incomes for all, not just the unemployed. Unemployment can also strain the social fabric, creating political instability and adversely affecting social interests. · Misalignment of private and social incentives--for instance, by improving poor working conditions or stopping child labour. These may be costly for firms and employers but are beneficial for employees and society as a whole. This chapter surveys the main labour laws and creation--the severity of the impact depending on regulations and assesses their impact on labour the labour intensity of the industry. On average, it is markets and job creation in general. It concludes estimated that current regulations could have cost that current labour regulations lead to several India almost 40 per cent of existing formal sector unintended and adverse consequences: (i) manufacturing jobs. This chapter also provides ambiguity and uncertainty in the interpretation evidence that although the Contract Labour of labour laws; (ii) high administrative and (Regulation and Abolition) Act, 1970, introduced judicial costs in enforcement; (iii) large output a certain measure of flexibility in manufacturing and employment costs; (iv) inequality resulting labour markets, ambiguity surrounding the status from dualism between the formal and informal of this law lends to uncertainty regarding its use sectors; and (v) regional differences and disparities and a large variation in its application across in labour market outcomes. different states. There are two overall effects. First, evidence As a consequence, labour laws have actually presented in this chapter shows that these reduced the welfare of workers as a whole. regulations constrain the growth of jobs, especially Labour regulations have not increased the share of in the formal and manufacturing sectors. They also income going to workers (labour share). Instead, promote informality and dualism which, in turn, a constant labour share has meant that any gains lead to inefficiencies as labour and other resources in wages and working conditions have quickly are not allocated efficiently. Second, in trying translated into lower job creation. With growing to protect about 26 million jobs in the formal labour supply, the scarcity of formal sector jobs sector, these laws fail to protect the employment has fuelled income insecurity--the loss of a conditions of the remaining 390 million workers formal sector job is associated with a very low in the informal sector. For instance, despite the probability of re-employment in a similar type average 40 or so minimum wages that are in of job. Better regulations would enable more job force in the typical Indian state, large segments of creation and higher income gains for workers. the labour force receive below minimum wages. Finally, these regulations have not been helpful to This chapter provides recommendations for the cause of industrial peace. In 2004, 482 major regulation reform with a view to balancing cases of work-stoppage cost industry 15 million the need to provide income security and good man-days. The ratio of workers involved in major working conditions to formal sector workers with work-stoppages (strikes and lockouts) to total the need for providing more jobs, good jobs, and factory workers was in the range 8 to 10 per cent preferably formal sector jobs to the vast majority between 1995 and 2001. In China, by comparison, of workers in the informal sector. Chapter 6 the ratio was consistently near zero. discusses active labour market policies that can provide employment protection and better Labour Regulations in India Two kinds of laws have had particularly pernicious benefits to informal sector workers. effects on the growth of manufacturing and formal sector jobs in India: laws concerning dispute LABOUR REGULATIONS IN INDIA AND THEIR resolution mechanisms and laws restricting ENFORCEMENT retrenchment and layoffs of workers (including Labour market regulations were first introduced those arising from closures of firms). Both these in India in 1880 when the Factories Act was aspects have had a significant adverse effect on job legislated. Driven in part by the English textiles 107 108 manufacturers' concerns about `evening' the Schedule lie in the exclusive purview of the India's Employment Challenge competition between the growing Indian textiles Central government and Parliament. Prominent industry and its competition in England, and in among these Central laws are the regulations on part by a nationalist desire to protect the interests labour and safety in mines and oilfields, ports of Indian labour, from early on regulations placed and insurance, and telecommunications. The more emphasis on employment protection and less important labour regulatory issues lie in the on the efficiency of labour markets and on dispute Concurrent List shared by the Centre and states-- settlement (Pagés and Roy 2006). Historically, `trade unions, industrial and labour disputes' the principle of `employment protection' was (item 22 on this list); `social security and social subsumed under the principle of `social justice': insurance, employment and unemployment' (item Employment security was enhanced in the formal 23); and `welfare of labour, including conditions sector not only by a whole range of new laws, of work, provident funds, employers' liability, but also by cases where judges referred to `social workmen's benefits, compensation, invalidity and justice' to interpret laws. Removing or changing old age pensions, and maternity benefits' (item laws became politically difficult, with the result 24). However, the implementation machinery for that demand for new laws led to a proliferation enforcing these concurrent list laws rests almost of laws. exclusively with the state governments. While most labour regulations are the concurrent Although many in number, Indian labour laws responsibility of the Central government and cover four main areas: industrial relations, the state governments, the implementation of working conditions, wages, and social security and regulations is almost wholly the responsibility of welfare (see Table 5.1). The rest of this section state governments. The Constitution's Article 246 discusses these four laws. divides legislative powers for promulgating labour laws between the Centre and the states. But most Industrial Relations labour laws are listed on the Concurrent List, List Industrial relations between employers and III, where both Parliament and state legislatures employees are covered by several Acts, of which the have the powers to make laws. Only the economic two most important are: (i) The Trade Unions Act, activities enumerated under List I of the Seventh 1926, which specifies the conditions that a trade Table 5.1 Labour Laws and Regulations Governing Industrial Regulations Laws and Aim Coverage Regulations Industrial Disputes Provides procedures and institutions for settling disputes. Sets Existing industry in all of Act, 1947 out conditions for recruitment, discharge, and dismissal of workers. India. Chapter Vb of the Act applies to establishments that employ 100 or more workers Trade Unions Act, Provides legal and corporate status to registered trade unions and All India 1926 provides immunity to office-holders of these unions from civil and criminal liability. Bombay Industrial Specifies the nature of collective bargaining in the textile industry of State of Maharashtra Relations Act Maharashtra, cooperative banks, and the Bombay Electric Supply and (BIRA), 1946 Transport Undertaking of Maharashtra. These industries are not subject to the IDA, except in cases of retrenchment, closure, and dismissal. Source: Pagés and Roy (2006). union needs to satisfy in order to be recognized Vb) for retrenchment and layoffs of employees. under the Act, and (ii) the Industrial Disputes In practice, such authorization is rarely granted. Act (IDA), 1947. Of minor importance are three Retrenched workers also receive priority in case other Acts: the Bombay Industrial Relations of new recruitment. Closure of units (firms) also Act (BIRA), 1946; the Administrative Tribunals requires prior authorization as per Clause 25-0. All Act, 1985; and the Maharashtra Recognition of establishments that are going to close are required Trade Unions and Prevention of Unfair Labour to provide one month advance notice and severance Practices Act, 1971. The objectives of the major pay equivalent to 15 days of work per year of Acts and their coverage are presented in Table 5.1. completed service to workers who have completed more than one year of service at the firm. The IDA is probably the most important law governing the Indian labour market. The The provisions of the Trade Unions Act, largely IDA specifies a multi-tier conciliation-cum- unchanged since their enactment, facilitate trade adjudication system, created and maintained by union activities. Any seven or more `workmen' can the state governments. Although the system is apply for registration as a union; the `workmen' invariant in principle, its working changes from need not work for the same employer. In 1926, the state to state. The lowest and most immediate year when the Act was legislated, the implicit idea tier consists of conciliation officers and boards behind allowing outside members into unions appointed by the government. This tier was in place was that trade unions were not organizations even before the IDA was enacted. The conciliation of workers but organizations for workers. This officer either settles the dispute or sends a `failure notion was widely held among nationalistic circles report' to the government. The emphasis in the in the late-interwar period and it influenced early Act, however, is less on encouraging conciliation, labour legislation (see Box 5.2 for a discussion on and more on adjudication. The dispute then goes trade unions in India). to the labour court and further to an industrial tribunal. The labour courts deal with disputes The coverage of the Trade Union Act has that affect workers. The industrial tribunals, apart gradually extended beyond industry. Through the from working as appellate bodies, deal with cases application of case laws, workers in government that affect all workers in an industry. Therefore, undertakings and religious trusts who made cases dealing with wages usually go to tribunals. In goods and services for sale were brought under rarer cases disputes go to national tribunals, which the Act. Civil servants `engaged in the tasks of the are centrally administered bodies empowered to sovereign and regal aspects of the Government' deal with cases of potentially national significance. were excluded from the purview of the Act (Tamil There is some uncertainty about the status of Nadu Non-Gazetted Government Officers' labour court orders. Although the government Union, Madras v. Registrar of Trade Unions, can in principle suspend orders, in practice this Madras, 1962­63). It was also clarified that Labour Regulations in India option is not used often. `industry' would have the same meaning in the Trade Union Act as it does in the IDA; that is, In addition to setting up adjudication systems, the `any business, trade, undertaking, manufacture, IDA imposes significant restrictions on employers or calling of employers' (Section 2j of IDA) or, regarding retrenchment and exit of workers. essentially, any commercial organization. Thus, Units employing more than 100 workers require even though the IDA explicitly excludes hospitals, authorization from the government (Chapter educational institutions, universities, charitable 109 110 India's Employment Challenge Box 5.2 Trade Unions in India Trade unions have long been important in India. The 1950s and mid-1960s saw both public sector employment and unionism expand significantly. Unionism was aided by the important role assigned to the public sector which facilitated the creation of centralized unions with strong political affiliations. In the mid-1960s, reforms were also made in the IDA which gave greater legal footing to collective bargaining. However, in the 1980s, the union movement became more fragmented with decentralized bargaining emerging in some parts of the country. This reflected, in part, the growing role of unions which were independent of political parties and competed with traditional politically affiliated unions. The 1990s saw unions being further forced to make greater compromises in the face of economic liberalization and frozen, or sharply reduced, hiring in the public sectors where they had traditionally been dominant. In recent times, the increased reliance on contract labour (with very low unionization rates) and the rise of features such as voluntary retirement schemes also weakened the position of unions. In the private sector, unions now tend to focus more on job security than they did in the past, when wages and other conditions were the main issues. These pressures have also encouraged more coordination among unions. Official data on the total number of members belonging to registered unions and their share in the organized sector workforce shows a decline over time as far as period averages go (Figure B5.2.1). There are, however, sharp annual fluctuations that emerge from 1980 onwards, suggesting the growing unreliability of these estimates. Household-level data are a more reliable source, particularly for the unorganized sector. The NSS 55th Round Survey found that around 8.6 per cent of Indian workers were members of trade unions or associations. There were substantial state variations, with Kerala having a union/association membership of 22 per cent, while Madhya Pradesh had a density of only 5.7 per cent. Also notable is the fact that trade unions were not equally present in all sectors, but where they were present, membership tended to be strong. Therefore, while only around 15 per cent of workers reported having a union or association in their work activity, around 58 per cent of workers said they were members of unions in places where there was a union presence. Figure B5.2.1 Official Trade Union Membership Numbers and Rates (various years) 10000 4 9000 3.5 8000 3 7000 2.5 6000 5000 2 4000 1.5 3000 1 2000 1000 0.5 0 0 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 Members % of OS Source: Pocket book of Labour Statistics (various editions), Labour Bureau, Shimla. An Asian Development Bank (ADB)-financed survey conducted in 2004, which covered a nationally representative sample of organized and unorganized sectors, also found that trade union membership was strongly concentrated among workers in the urban organized tertiary sector (7.9 per cent) and among workers with higher education levels (5.4 per cent). Union membership in the unorganized sector was low, only about 2.2 per cent. Not surprisingly, given the urban and organized sector bias of membership, the poorest people had very low membership rates. Average membership rates kicked in only above the 50th percentile of income distribution among workers. Though overall membership is small, unions can potentially play an important role in settling disputes through conciliation and arbitration. The Second National Commission on Labour made a number of recommendations to improve the effectiveness of conciliation. The reasons why arbitration has failed to catch on in a significant way to date are well understood (see Hazra [2005]). Apart from the supply-side issue of there being too few qualified arbitrators, the absence of a legal framework for determining a representative union in a firm (except in a few states) is problematic. Overall, there is a lack of adequate grievance-redressal options within firms and beyond that would promote more rapid settlement of disputes. Some measures which could help unions remain relevant in the new environment are: · Strengthening the legal framework for collective bargaining, which could have benefits for both employers and workers, provided there is scope for bargaining to remain decentralized and at the firm level where preferred.1 A key element of this would be to create provisions for the recognition of unions in the workplace to represent workers' interests in bargaining. A second issue would be to clarify the legal status of collective agreements. These have no direct legal force in Indian law, except insofar as they are formally endorsed as the outcome of conciliation proceedings. · Addressing factors that undermine the link between trade union representatives and workers (see Hazra [2005] and Nath [2005]). With the exception of a few states such as Rajasthan and Maharashtra, there is no provision for trade union recognition in the bargaining and dispute settlement processes. This results in fragmentation among worker representatives and lack of clarity about whom employers should negotiate with (union formation requires only seven workers, with no lower limit on the share of enterprise workforce in a particular union). There is also a lack of internally democratic procedures in trades unions. Under the Trade Unions Act, 1926, office bearers of unions are not required to be elected by secret ballot of members, a procedure common in most countries. Similarly, there is no requirement of approval from the membership for initiating activities such as strikes, amending the rules of the union, or maintaining a political fund. A further dimension to this is the lack of requirement for union representatives to come from the enterprise workforce. All these features increase the risks of unions pursuing agendas which go beyond the interests of the workers they represent. They also undermine the accountability of union management, which in turn reduces the appeal of union membership for workers. · In order for unions to become more appealing to unorganized sector workers, it is necessary that unions strongly emphasize service provision for their members. While all unions are committed to expanding Labour Regulations in India their memberships in the unorganized sector, this has largely failed to happen to date, particularly in rural areas. In this respect, the experience of non-governmental organizations (NGOs) such as the Self-Employed Women's Association (SEWA), which are transforming into unions, provides lessons. The membership of these unions is being driven by a demand for services (for example, social security schemes) which the unions can provide or facilitate. Particularly for unorganized sector workers, it is likely to be the appeal of different services which the union can provide or intermediate that will facilitate expansion in membership. 111 112 institutions and welfare organizations, clubs, types of casual workers, and set out rules India's Employment Challenge cooperatives, and research institutes, these have regarding leave, disciplinary action, layoffs and come to be covered by the Act because of court retrenchment, and other minor issues. rulings over the years. The Contract Labour (Regulation and Abolition) Working Conditions Act, 1970, another key law in industrial relations Working conditions are governed principally today, is a major source of regulatory ambiguity. by: (i) the Factories Act, 1948; (ii) the Industrial Initially created with the objective of gradually Employment (Standing Orders) Act, 1946, which abolishing casual labour hiring, this law is now specifies the form of the employment contract; being used extensively--in many but not all and (iii) the Contract Labour (Regulation and states--as the primary recourse by employers Abolition) Act, 1970. Of minor importance is the and state governments to increase labour market Apprentices Act, 1961. flexibility within the existing legal regime. Notably, the original purpose of the Act was quite The Factories Act governs the health, safety, and the opposite. welfare of workers in factories and plantations that use power and employ 10 workers or more Wages (20 workers or more if firms do not use power). The principal laws relating to wages are: (i) However, Section 85 of the Act empowers state the Payment of Wages Act, 1937 and (ii) the governments to extend the provisions of the Act Minimum Wages Act, 1948. Of lesser importance to smaller factories. In several states, small-scale are the Payment of Bonus Act, 1965, and the and seasonal factories such as rice and oil mills Equal Remuneration Act, 1976. The Payment and textile powerlooms have been brought under of Wages Act, 1937, is again a Central act, the the Act by the use of this provision. The Act, enforcement of which is a state responsibility, which requires all units to file annual returns except in mines, railways, oilfields, ports, and about their activities, extends to the whole of air transport which lie in the central sphere. The India and includes service sector units employing Act specifies the standard wage period (a month intellectual labour. Separate acts cover mines and or less), payment day, permissible deductions, railways workers. In 1987, a major amendment mode of payment, and inspections. It applies incorporated elements of occupational health and to workers below a certain salary range. The safety into the Factories Act. Minimum Wages Act, 1948, is a Central act, the enforcement of which is a state responsibility, The Industrial Employment (Standing Orders) except in mines, railways, oilfields, ports, and air Act, 1946, requires employers with industrial transport. This Act specifies minimum wages (and units that employ 100 or more workers (excluding is also empowered to specify the length of the managers and supervisors) to ensure that working working day) in `scheduled' employment (that is, conditions conform to `model standing orders'. those jobs explicitly identified in a schedule). The Like the Factories Act, this is a Central act but statutory minimum wage is set based on proposals the states are empowered to change some of its by Central and state advisory boards. provisions. Many states apply the Act to units below the specified size and even to shops and Social Security and Insurance establishments. The `model standing orders' Coverage of workers by formal social security distinguish between `permanent' and various and insurance programmes is extremely limited and covers less than 10 per cent of India's limiting the number of `outsiders' in the executives labour force. The principal laws here are: (i) the of trade unions, and prohibiting professional Workmen's Compensation Act, 1923, which politicians from becoming members of the specifies compensation that employers need executives of trade unions. More recently, in to pay on account of injury by accident at the March 2005, the Union cabinet decided to amend worksite or because of occupational diseases. An the Factories Act, 1948, to allow women workers important provision of the Act is the liability of to do night shifts. This was done in view of the the principal employer in case of contract labour fact that there are already a large and growing employment; (ii) the Employees State Insurance number of female workers in the information Act, 1948, extends to workers who earn less than technology industry and in export-oriented a certain salary limit in factories covered under manufacturing units. the Factories Act and commercial establishments employing 20 or more persons. It requires Even bolder initiatives have occurred at the contributions from both employers and employees state level. In June 2000, the government of for insurance covering sickness, maternity, Maharashtra announced a fairly broad-based death, and disablement; and (iii) the Employees labour law reform package, the highlights of Provident Funds Act, 1952, applies primarily to which were: (i) raising the employment limit factories and specifies deposit-linked provident of a `factory' that is subject to the Factories Act, funds or pension schemes. from 10 or 20 to 50; (ii) restricting trade union size, restricting number of trade unions to one Reform of Labour Laws per company, laying down minimum conditions There has been little legal or de jure liberalization for registration, and restricting links between in labour regulations in India despite demand unions and political parties; (iii) rationalization of from industry and recommendations by several visits by government inspectors; (iv) raising the government commissions. Even the cautiously permissible extent of contract labour employment; worded recommendations of the National and (v) abolishing the Maharashtra Recognition Labour Commission (2002) exceeded the limits of Trade Union (MRTU) and Prevention of on changes placed by the national trade unions. Unfair Labour Practices (PULP 1971) Acts `as the As a result, Indian labour regulations, formulated required purpose is being efficiently served with during a period when India was largely a the use of the Industrial Disputes Act, 1947.' Uttar closed economy unexposed to international Pradesh amended its own UP IDA, 1947, to raise competition and when the arrival of information the threshold of applying Clause Vb of IDA from technology had not speeded up business processes 100 to 300. The government of Punjab introduced enormously, have remained largely unchanged for fast-track courts, called Labour Lok Adalats, which the past 50 years.2 cleared more than 11,000, or two-thirds, of the pending cases in the labour courts and tribunals in Labour Regulations in India Some liberalization has taken place in recent three rounds of hearings since 2000. The Andhra years. The IDA has been revised the maximum Pradesh government announced its intention to number of times, but these revisions have more introduce liberalized labour laws for designated often been aimed at making laws more stringent special economic zones (SEZs).3 rather than liberal (Table 5.2). The Trade Unions (Amendment) Act, 2001 (Act No. 31 of 2001), The SEZs are another possible means to introduce was aimed at reducing the multiplicity of unions, labour policy reforms. For example, in China, 113 114 India's Employment Challenge Table 5.2 Amendments to the IDA Central Major Change/Clause Introduced Amendments 1953 Layoff compensation 1956 Layoff compensation rules detailed 1965 Section 29: Penalty on employers for breach of Section 25 (layoff compensation) introduced. 1971 Revision of layoff rules for mines that close because of exhaustion of resources. 1972 Chapter Vb is introduced. Sixty days' notice required for closure of industrial undertakings employing more than 300 workers. 1982 A number of changes based on the National Commission on Labour (1969) recommendations. The most important change is the revision of Vb in view of the Excel Wear case in which the Supreme Court rejected the government's right to refuse closure. The government is now empowered to refuse or grant closure to units employing 100 or more workers. 2002 Amendments to Sections 2(a) and 2(s) defining `appropriate government' and `workmen'. Higher salaried employees brought under the Act; the state governments are the appropriate governments to issue orders refusing or granting permission for retrenchment, closure, or layoffs. Major state clauses and amendments Industrial Disputes (West First introduced requirement of prior notice for closure of undertakings with 50 or more Bengal Amendment) workers. Generalized in the 1972 Central amendment. Act, 1971 Layoffs, retrenchment, · Government is authorized to force an undertaking to maintain `continuity and normalcy' and closure of work (West Bengal). · Maharashtra and Andhra Pradesh stipulate compensation payments before closure. · Permission required for retrenchment and closure of undertakings with 50 or more workers (West Bengal), 100 or more workers (Karnataka), 300 or more workers (Maharashtra and Rajasthan), and later brought down to 100 workers in most states. · Notice required for 90 days before closure (West Bengal, later Maharashtra). · Closure is valid when it occurs due to non-renewal of licenses (Maharashtra). · Full compensation to workers for retrenchment on any ground other than discontinuance of power supply (Maharashtra). financial, legal, labour, and other policy reforms the SEZs as `designated duty free enclaves to be were introduced and tested first within the SEZs treated as foreign territory for trade operations and before being extended to the rest of the economy. duties and tariffs'. The most important change Internationally, export processing and other zones of the new law is that it offers a highly attractive are witnessing increasing share of trade flows and fiscal incentive package consisting of (i) exemption are employing a growing number of workers. In from custom duties, central excise duties, service 1986, there were 176 zones across 47 countries; tax, central sales taxes, and securities transaction by 2003, the number had increased to over 3,000 tax to both the developers and the units; (ii) tax across 116 countries. Export processing zones holidays for 15 years (currently the units enjoy a (EPZs) have a long history in India dating back to seven-year tax holiday); that is, 100 per cent tax 1965. In 2000, the government replaced the old exemption for five years, 50 per cent for the next EPZ regime by a new scheme of `special economic five years, and 50 per cent of the ploughed back zones' (SEZs) with several lucrative incentives/ export profits for the next five years; and (iii) 100 benefits that were not available in the earlier per cent income tax exemption for 10 years in a scheme. In 2005, it enacted the SEZ Act and the block period of 15 years for SEZ developers. States SEZ Rules were notified in February 2006 (see Box have the right to modify the form in which existing 5.3). The commerce ministry's website described labour laws apply here. Box 5.3 Special Economic Zones and Employment There is a variety of reasons why countries have gone for economic zones. These include export promotion, attraction of foreign investment, development of depressed regions, and policy reform experimentation. In China, financial, legal, labour, and other policy reforms were introduced and tested first within the SEZs before being extended to the rest of the economy. The main rationale for the Shannon Free Zone in Ireland, in contrast, was to establish a `growth pole' in the economically distressed southern part of the country. India has not remained immune to these developments. In 2005, it enacted the SEZ Act and the SEZ Rules were notified in February 2006. The commerce ministry's website described the SEZs as `designated duty free enclaves to be treated as foreign territory for trade operations and duties and tariffs'. The most important change of the new law is that it offers a highly attractive fiscal incentive package. There has been a tremendous rush to set up SEZs since the Act came into effect in February 2006. The Ministry of Commerce claims that these zones are expected to attract investment of about US$ 20 billion, including FDI of US$ 5 billion, and create additional 500,000 direct jobs. The supporters of the SEZ Act claim that promotion of SEZs is an attempt to deal with infrastructural deficiencies, procedural complexities, bureaucratic hassles, and barriers raised by monetary, trade, fiscal, taxation, tariff, and labour policies. Under the given socio-economic and political institutions, the establishment of industrial enclaves (SEZs/EPZs) is seen as an important strategic tool for expediting the process of industrialization. These claims notwithstanding, the policy has come under heavy criticism. Dissenters contend that the policy would be misused for real estate development rather than for generating exports. Concerns have also been expressed on the displacement of farmers by land acquisition; loss of fertile agricultural, forests, or coastal land; a huge revenue loss to the exchequer; and adverse consequences of uneven growth. Many contend that the SEZ Act was framed without giving sufficient attention to the ancillary issues, such as for massive land acquisition. International evidence suggests that the role of SEZs in employment generation is often relatively marginal. In most countries SEZs are not a major source of employment and they account for less than 1 per cent of the global workforce. Their role in employment generation in India too has been muted: compared to the 30 million jobs created in 15 SEZs in China, India EPZs have created less than 100,000 jobs (see Table B5.3.1). The SEZ Act may entail significant revenue losses and also set the stage for tax exemptions in other sectors. The Ministry of Finance has estimated that SEZs will lead to a revenue loss on account of direct and indirect taxes of around 0.4­0.6 per cent of GDP a year. Estimates by the National Institute of Public Finance and Policy (NIPFP) suggest similar numbers. Moreover, the SEZ Act may well set the stage Table B5.3.1 India's EPZs have not been as Effective in Generating Employment as Zones in Other for further tax exemptions in other sectors. Countries in the Region Importantly, the inclusion of IT in the SEZ Act has contributed to re-igniting the debate on No. of Total Empl. Investment Zones (2000­3) (US$ million) Labour Regulations in India extending the tax holiday in the IT sector beyond Bangladesh 6 2,138,341 750 2009. At the same time, international experience China 15 30,000,000 43,560 shows that tax incentives by themselves will not India 8 95,000 NA attract investment. This is supported by both Malaysia 14 322,000 NA econometric studies and surveys of investors, Pakistan 22 410,540 815 which are generally in agreement that investors Philippines 34 820,960 387 do not consider tax incentives as a determining Sri Lanka 12 461,000 2,627 factor in their location decisions. Source: RIS (2006). 115 116 Enforcement of Laws and De Facto Reforms However, more than the decline in inspections, India's Employment Challenge Although de jure reforms have been limited, de the evidence of the widespread use of bribes facto there has been perceptible liberalization. At (or rents) collected by inspectors from factories the state level, where the implementation takes (where managers report labour legislations to place, de facto labour regulations appear to have be more of an obstacle to growth) is eroding the undergone a fair amount of liberalization. Signs application of these laws. of weakening law enforcement are appearing in ineffective and corrupt inspections and an Industrial disputes declined significantly during increasing recourse to contract labour. A shift in the 1990s, with exceptions in some states. But the stand of the judiciary may also be contributing the number of man-days lost in such disputes has to a more flexible application of the law. The increased since 1997, suggesting the continuing incidence of voluntary retirement and contractual costs of the IDA. employment has increased. Firm-level bargaining Core Labour Standards has increased too, suggesting some decline in India has ratified four out of the eight ILO core the penetration of national trade unions, which labour standards. These include: the Forced Labour usually lead the resistance to legal reforms. Convention (No. 29), Abolition of Forced Labour Convention (No. 105), Equal Remuneration In particular, the significant increase in the use Convention (No. 100), and Discrimination of contract labour (see Figure 5.1), rent seeking, (Employment Occupation) Convention (No. 111). and corruption has reduced the bite of the IDA, The remaining four that have not been ratified so though there are considerable variations across far are: Freedom of Association and Protection of states. There has been a large decline in the Right to Organize Convention (No. 87), Right to number of factories inspected (inspections are Organize and Collective Bargaining Convention the key instrument for enforcing labour laws), (No. 98), Minimum Age Convention (No. 138), again with considerable variations across states. and Worst Forms of Child Labour Convention (No. 182). Box 5.4 discusses issues related to the implementation of the core standards. Figure 5.1 Percentage of Contract Labour in Total Manufacturing Labour ASSESSING INDIA'S LABOUR REGULATIONS Contract Labour (as %) Unweighted average per year for 28 states Some Key Issues 25 Notwithstanding some liberalization and the easing of enforcement in recent years, there is 20 increasing awareness, supported by research, that Indian labour laws are stiflingly complex 15 and restrict growth of the manufacturing and formal sectors in particular. Work done by 10 several national commissions and government- 2002 1998 1999 2000 2001 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 appointed working groups, business and trade groups, firm-level surveys, and recent research on Source: Annual Survey of Industries. labour issues in India, all point in this direction. Box 5.4 Implementation of Core Labour Standards India is a founder member of the ILO and has ratified 39 of its conventions. ILO instruments have also provided guidance in the formulation of domestic legislation and government measures aimed at protecting and advancing workers' interests. So far, the Government of India (GoI) has ratified four of the eight core labour standards. Conventions 87 and 98 have not been ratified, with the government citing its own inability to promote the unionization of government servants given the political nature of trade unions in the country. On minimum age, existing laws mandate different minimum ages for employment in different sectors-- bringing these into conformity would be a prerequisite for ratifying Convention 138. The government is considering the possibility of enacting an omnibus legislation that would designate 14 years as the minimum age for entry into all occupations, other than agriculture in family and small holdings that produce for self- consumption. Similarly, on the child labour convention, the government is examining the feasibility of ratification. It should be noted that in the Indian Constitution, labour is a concurrent area between the Central and state governments--this makes it necessary to build consensus and coordination internally before any major legislation or ratification can be undertaken. At the same time, India has declared that it remains committed to giving effect to the principles contained in the core conventions, whether or not they have been ratified. In this spirit, national legislation (the Trade Union Act, the IDA) largely fulfils the requirements of freedom of association and collective bargaining, though the absence of clear rules regarding recognition of bargaining agents and the status of such agreements remains problematic (see Box 5.2). In the case of child labour too, Article 24 of the Indian Constitution mandates that no child below the age of 14 can be employed in any factory, mine, or other hazardous job. The Factories Act, 1948, also prohibits the employment of children below the age of 14 years. In addition, in 1986, the government passed the Child Labour (Prohibition and Regulation) Act, which further listed occupations and processes where children cannot be employed. These include activities like slaughterhouses, carpet weaving, wool cleaning, cloth printing, and dyeing and weaving, which were not covered in the previous Acts. These actions by the government underscore the legislative intent to progressively eliminate child labour in India. The government also recognizes that significant progress in this regard cannot be made without tackling the socio-economic milieus which force children to work. It has formulated a National Child Labour Policy to design a specific programme of action in this regard. There is also a Central Advisory Board which reviews progress and recommends further action. Besides, the government also runs programmes, directly and through voluntary organizations, to rehabilitate child workers. The government has also redoubled efforts to put children in schools by improving access and providing free mid-day meals in schools. In addition, there are many state-level initiatives, such as the Andhra Pradesh Integrated Action Plan to Eliminate Child Labour. This is innovative in that it defines child labour not as `working kids', but more broadly as children out of school, thus getting around the vexed issue of what types/extent of child work actually constitute a harmful situation. Despite these efforts, child labour remains a significant issue. According to NSS, slightly fewer than 11 million children remained in India's workforce in 1999­2000, mostly in rural areas, employed in agricultural activities. Labour Regulations in India For instance, the report of the Second National become outdated and anachronistic' (Planning Commission for Labour criticized labour laws as Commission Report 2001b). Further, a growing being `ad hoc, complicated, mutually inconsistent, body of research, discussed later, shows how if not contradictory, lacking in uniformity of labour regulations complicate dispute resolution definitions and riddled with clauses that have and restrict retrenchment and layoffs of workers 117 118 in manufacturing, effectively constraining disincentives for employers to hire more labour India's Employment Challenge the growth of the manufacturing sector and on a permanent basis and encourage the use of manufacturing jobs. The existence of these laws contract labour or casual labour. This law also helps partly explain why the Indian manufacturing creates incentives for employers to choose more sector is so small relative to that of many other capital-intensive techniques and increase wages countries. instead of employment. Overall, there are three main issues. First, there Section 9A of the IDA also restricts the flexibility are too many laws. Some 47 Acts directly regulate of firms to quickly adjust to changing market working conditions, wages and benefits, industrial conditions. It requires employers to provide relations, social security, and insurance. States have three weeks' written notice for changes in (i) shift as many as 40 minimum wages, corresponding work; (ii) grade classification; (iii) technology that to different types of workers. This multiplicity may affect labour demand; and (iv) occupation, of laws--several of them overlapping and process, or department. The worker then has the sometimes inconsistent in their definitions--leads right to dispute such changes, leading to the costs to ambiguities in interpretation. This in turn not of dispute resolution. only creates difficulties in enforcement but also provides opportunities for discretionary behaviour, Third, the design of labour dispute settlement rent-seeking, and corruption. Specifically, it processes in the IDA creates incentives to creates conditions for the `inspector raj' to operate adjudicate disputes rather than reconcile them. and extract rents (bribes) from industry. It has The IDA makes provisions for dispute settlement a particularly pernicious effect on small- and in three stages: (i) negotiation; (ii) mediation; and medium-scale industries for which these costs are (iii) adjudication--involving seven tiers of officers disproportionately high. Further, the numerous (Table 5.3). The first stage involves voluntary laws, by cross-referencing one other, often extend communication between the disputants. The Act the mandate of labour laws to organizations far provides for works committees to be constituted different from manufacturing enterprises.4 for the purpose of mediating. These bodies are internal to firms. However, if a significant number Second, clauses in Chapters Va and Vb of the of outsiders are represented in the union, then IDA impose inordinately high administrative conciliation marginalizes the unions and other costs on retrenching or laying-off workers and on closing firms. These administrative costs are Table 5.3 Industrial Dispute Reconciliation Bodies among the highest in the world (Doing Business in 2006 [World Bank]). For instance, Section · Works Committees, 25-0, which makes it mandatory for employers to · Conciliation Officers, refer cases of retrenchment due to firm closure · Board of Conciliation, · Courts of Inquiry, to state governments, has been in the eye of a · Labour Courts, legal storm for nearly 50 years on account of · Industrial Tribunals, and the barriers it creates for failed firms to close · A National Industrial Tribunal. their operations. Chapter Vb and Clause 25-0 Source: Debroy (2005). effectively make labour a fixed factor. They create outside political actors. It is then in the union's Table 5.4 State-wise Details of Number of Dispute interests to sabotage conciliation. Second, and Cases Pending in Labour Courts (October 2000) more important, the majority of cases of dispute concern discharge, dismissal, and retrenchment. Major States No. of No. of Cases Cases Pending for The legal provisions of the IDA are so protective Pending More than of workers that they expect to gain more from 10 years Assam 189 138 the courtroom than from conciliation efforts. Bihar 5,200 566 As a result, the number of pending court cases Delhi 28,837 2,342 concerning labour disputes is huge (around Gujarat 133,916 8,616 533,000 at the end of the 1990s). Kerala 3,450 63 Karnataka 17,457 2,924 Maharashtra 142,345 11,508 Numerous, and often conflicting, court decisions Madhya Pradesh 89,341 0 on labour disputes have increased uncertainty Punjab 14,784 110 about the interpretation of labour laws. This Rajasthan 20,066 775 has raised transaction costs, created large rents Tamil Nadu 21,713 150 Uttar Pradesh 22,539 10,303 in enforcing these laws, and lowered investors' West Bengal 2,225 283 confidence (Debroy 2005; Pagés and Roy 2006). Total (All States and Enforcing the IDA has also become more Union Territories) 533,038 28,864 unwieldy and complex with the state governments Source: Ministry of Labour. and courts intervening more in enterprise-level disputes and raising the costs and rents to labour laws. As a result, Indian clothing plants regulators. This has resulted in excessively long typically have 10­20 per cent of the capacity of waiting time for resolving labour disputes. Labour Chinese plants and work at lower levels of efficiency termination disputes that should in principle take (Business Standard, 19 February 2005). no longer than three months to decide, in practice sometimes take as long as 10 years with, at times, The uncertainty surrounding some of the labour 2,000 pages of reported materials being submitted laws also leads to high transaction costs, a most for review (Khan 2005: 90). Disputes referred to prominent example of which comes from the high courts too can lie pending for as long as 10 Contract Labour Act. The most important example years (Table 5.4). of this is the large number of prosecutions and cases concerning the Contract Labour (Regulations and An important consequence of these costs imposed Abolition) Act. While the Contract Labour Act by the IDA is that firms are encouraged to remain provision has been interpreted by firms and small and thus outside the purview of the law. many states as a means of introducing flexibility Interviews suggest that medium- and small- in the labour market, leading to a marked increase scale firms are threatened by permanent loss of in the use of contract labour in many states, Labour Regulations in India business and clientele due to prolonged disputes. the provisions of the law contain considerable A recent McKinsey report on India's textile ambiguity regarding the legality of using contract industry pointed out that Indian manufacturers labour. Section 10 of the Act prevents firms from often set up multiple small plants instead of outsourcing most core functions or hiring workers a single big one in order to take advantage of easier on temporary contracts for more than 120 days 119 120 (anyone so employed can demand permanent The uncertainty surrounding the use of contract India's Employment Challenge employment from the company). The prohibition labour even extends to the new information of contract workers in `core' areas follows from technology enabled services (ITES) firms which a Supreme Court judegment (Standard Vacuum use many contract labourers in non-core services. Refinery Company v. their workmen, 1960) which These firms face the prospect of standing in prohibited temporary labour in tasks that were violation of the Contract Labour Act or being (i) perennial; (ii) necessary for the work of the compelled to add contract workers to their regular factory; (iii) sufficient to employ a considerable workforce.5 number of whole-time workmen; and (iv) being done in most concerns by regular workmen. International Comparisons with Indian Labour Regulations These detailed rules on the use of contract labour India comes across as one of the most restrictive are backed up by strong discretionary enforcement countries in the world in terms of regulations powers vested in government bodies. A Central governing retrenchment and layoffs. These Advisory Board and a State Advisory Board, comparisons are based on the Doing Business consisting of the labour commissioners and indicators, a publicly available database based on nominees of the governments, have the discretion a detailed study of employment laws across the to determine whether the work involving contract world.6 Besides providing other information, labour is of a perennial nature and justifies the use this data summarizes information on legal of casual, in place of permanent workforce. On provisions related to hiring, hours of work, and the advice of such Boards, state governments can retrenchment of workers. These provisions are issue orders prohibiting contract labour and/or assigned scores which increase progressively as its absorption in the core workforce. A series of labour laws are revealed to be more pro-worker government notifications has extended the scope (see Box 5.5). According to these measures, Indian of this prohibition to individual industries and labour laws are atypically restrictive in those fields of service. From 2001 to 2002, there were close provisions that refer to worker retrenchment to 4,000 prosecutions and over 2,000 convictions and, within this group, those that effectively deny arising from the use of contract labour, which firms authorization to retrench. On the other affected nearly half a million workers (Figure 5.2). hand, neither do provisions related to hours of work, nor those related to the hiring of workers, Figure 5.2 Prosecutions and Convictions from appear to especially favour workers or restrict Violations of the Contract Labour (Control and employers, relative to the rest of the world. India Abolition) Act scores 20 on the rigidity of hours index, well below 7,000 the international median score of 40 and the 6,000 5,000 international average of 37.4. Indian scores are 4,000 also much lower than the mean of the group of 3,000 2,000 comparators, with the exception of Malaysia and 1,000 Nepal which have similarly unrestricted laws on 0 No. of No. of No. of No. of Contract hours of work (Figure 5.3). Inspections Prosecutions Convictions Labourers Covered (000) 1995­6 2001­2 While Indian labour laws exert little restriction on hours of work, they impose high administrative Source: Ministry of Labour. costs on dismissal. Indian labour laws impose high Box 5.5 Doing Business Indices The first index (Difficulty of hiring) measures how difficult it is for employers to offer non-standard contracts, that is, they have to hire workers using modalities other than open-ended, permanent contracts. A higher score indicates higher difficulty in hiring through alternative contracts. A second index (rigidity of hours) measures legal provisions pertaining to hours of work. It compares countries in aspects related to overtime, restrictions on night work, and length of the work-day and work- week. Countries where employers face more restrictions on hours of work are given a higher score. A third index (difficulty of firing) measures legal and administrative constraints on dismissals. Finally, the rigidity of employment index provides the simple average of the above three indices. Figure 5.3 India Labour Laws Compared to from a survey of 1,900 firms that were asked about Selected Countries the various constraints to growth that they face, 120 including those from labour regulations. The 100 results of this combined Confederation of Indian 80 60 Industries (CII) and World Bank Investment 40 Climate Survey (see World Bank 2004a) can be 20 used to assess, first, how constraining labour 0 Difficulty of Rigidity of Difficulty of Rigidity of Firing Costs regulations are relative to other factors. Second, hiring index hours index firing index Employment (weeks of Index wages) how do responses regarding labour regulations India China Turkey Bangladesh United States and other constraints in India compare with those from other countries? Figure 5.4 shows the Source: World Bank (2006a). average response to labour laws (as an obstacle question) across all countries for which the administrative constraints on dismissals relative survey is available. All surveys were conducted to most countries in the world. in the period starting at the end of the 1990s and continuing into the early 2000s. It is interesting On a scale of 1 to 100, India scores 70 on the that India (along with Kenya, Indonesia, Poland, restrictions on dismissals index, well above the and Brazil) is one of the countries which rates international median of 30 and the international high in terms of how much of an obstacle average of 31.3. Indian firms also experience much firms consider labour laws to be. Somewhat higher bureaucratic restrictions on dismissals surprisingly, Chinese employers rate China's than firms in the sample of comparator countries. labour regulations to be at least as binding as the However, retrenched workers in India receive ones in India, while objective measures of labour Labour Regulations in India fairly low compensation compared to those in regulations, such as the ones presented in the other developing countries. World Bank Doing Business Report, classify India as a country with more stringent regulations THE IMPACT OF SOME KEY LABOUR than China. REGULATIONS IN INDIA How important are labour regulations in the eyes Importantly, the perception of constraints posed of employers? The information on this is available by labour regulations varies greatly according to 121 122 India's Employment Challenge Figure 5.4 Firms Consider India's Labour Laws to be More Binding than Those of Most Other Countries Averge ICA score on perceptions of labour regulations 2.5 2 1.5 1 0.5 0 K a Erit n za rea erb an Ar i j a n Eth enia de ia jik n rg Ge tan Re gia ca lic Cr ua Mo oatia Bu ova Slo ria ce cu ia nia or Alb FYR Uk nia mb e Ug dia Es da ec un a ep r y Ro ublic hu a erz Lat a eg via va ala a ep ia Tu lic d M B rkey te us nd o Alg ras Pa eria la n Ta desh Gu amb a ate ia ilip ala Ind s Ch ia K a on a Po sia Br d il e az Cz H toni Lit ani i Slo M in Z ni in Ind eny Ca rain Ho negr ta Ta atio ng ta lan Fe iop Ma E ven an k R ys h R ga do ad pin Ni pub ub on elar rag Az khst lga an e Ph m u yz or a ov a o kis is Ba kis ld a nz m m , r be Uz dH an Ky ssi an an Ru ia ia rb sn Se Bo 0 = no obstacle to 3 = major or very severe obstacle Source: Estimated from Investment Climate Survey of 2002; Ahsan and Pagés (2007). firm size. Overall, given that Indian firms score Figure 5.5 Ranking, by Firm Size, of Constraints labour regulations to be a minor to moderate to Manufacturing Growth Relative to Power obstacle (that is, a score between 1 and 2), it Shortage Problems may appear that labour problems are not very 140.0 120.0 significant in comparison to other obstacles. 100.0 80.0 However, when perceptions of labour constraints 60.0 by firms are broken down by firm size, labour 40.0 20.0 regulations are highly significant for the larger 0.0 Uncertainty Electricity Tax Rates Tax Admin Labour Reg Cost of Finance Policy Corruption firms for which most regulations apply. Large firms consider labour issues to be as big 1­9 Workers 10­19 Workers a constraint as electricity. Infrastructure and, in 20 to 99 Workers 100 or more workers particular, unreliable and insufficient supply of Source: Computed by authors from Investment Climate Survey; power have been identified as major constraints for Ahsan and Pagés (2007). the future growth of India. For instance, Krueger and Chinoy (2002: 31) note that, `By the end of the 2002 Investment Climate Survey show that the decade, the growth of the 1990s had already firms with more than 100 workers consider labour pushed infrastructure utilization well above the regulation to be as important a constraint to their optimum. It is then noticeable that the data from growth as electricity shortages'7 (Figure 5.5). What Are the Economic Costs of costly rigid labour regulations can be in terms of Regulations? foregone production and job growth in formal Recent research provides mounting and clear manufacturing, and deepened dualism, and how evidence on the adverse impact of restrictive they can reduce the mobility of labour. In one of labour laws. A priori, economic theory would the early works on the impact of labour regulations suggest several reasons why poorly designed labour in India, Fallon and Lucas (1991 and 1993) showed regulations can be costly in terms of growth and how labour demand fell significantly due to jobs lost (see Box 5.6). Empirical research on the amendments to the IDA in 1976, which made it impact of labour regulations in India first started binding on firms to seek government permission in the early 1990s and has grown considerably before retrenching regular workers. This law in the last two years. This literature shows how reduced the mobility of labour. Box 5.6 What does Economic Theory Say about the Costs of Labour Regulations?8 Higher adjustment costs: By restricting changes in the use of labour, a key factor in production, regulations hinder firms from adjusting output and labour in response to changes in demand and market conditions. Consequently, firms may be unable to produce at the most efficient scale of production. Higher labour costs and wage stickiness: Protecting jobs of existing workers and deterring recruitment of new workers creates a wage premium for formal sector workers over casual workers that is unaccounted for by skills, experience, or other human capital attributes. Further, regulations restricting labour retrenchment or layoffs can also result in wage rigidity in the formal sector, creating unemployment. Higher transaction costs and rents: When administrative and judicial procedures dominate recruitment, retrenchment, and industrial relations, transaction costs increase for both firms and workers. This is because instead of simple and transparent financial compensatory mechanisms being used, the use of administrative or legal procedures can result in rent-seeking or bribe-taking by inspectors. Reduced incentives to invest: Excessively protective labour laws reduce the returns to capital, leading to reduced investment and capital accumulation. Uncertainty: Complicated regulations that are enforced mostly through administrative rules create uncertainty for investors. This leads, in turn, to lower investments (because investments are costly to reverse), lower hiring of regular and permanent workers, and reduced training of workers. Slower growth of jobs and employment in the formal sector: The sum total of effects leads to slower growth of production and jobs in the sectors affected by the laws. Labour Regulations in India Lower productivity: By hindering the movement of labour from less productive to more productive jobs, regulations can lower overall economic and labour productivity, adversely impacting wages and growth. Off-setting factors: Simple, transparent regulations that rely more on financial compensatory mechanisms can lead to increased welfare of workers, more harmonious industrial relations, and less uncertainty for investors and workers--leading to overall better outcomes than when markets are entirely unregulated. 123 124 Recent research, focusing on differences in labour measure the costs of IDA regulations that (i) make India's Employment Challenge laws among Indian states, shows how states that labour disputes costly and (ii) raise retrenchment increased the stringency of the IDA experienced costs through the Vb clause. The main results are a decline in formal sector manufacturing value- the following: added and employment (Besley and Burgess 2004). Building further on this work, Hasan et · Overall, India loses out on 2.8 million jobs in al. (2003) find that states with more stringent the formal manufacturing sector due to the labour regulations have lower demand elasticities IDA per se, which is about 45 per cent of the and these elasticities are less affected by trade 6.4 millions jobs that currently exist in the reforms. A recent work (Lall and Mengistae formal manufacturing sector. 2005) that analysed plant-level data in 40 of · The costs, in terms of jobs lost, are caused India's major cities using a measure for the almost equally by the disputes-related sections enforcement of laws, suggested that an inadequate of the IDA and the retrenchment barriers investment climate (principally inadequate power clauses in the IDA. supply and the rigidity of labour laws) results in · However, the disputes-related regulations lower productivity at the plant level and lower cost more jobs in capital-intensive industries manufacturing development in the states most (top panel of Figure 5.6), while retrenchment- affected by these laws. related regulations cost more jobs in labour- intensive industries (bottom panel of Figure Recent research, which tries to measure both 5.6). de jure and de facto applications of the IDA, has · Retrenchment-related regulations affect jobs also shown how manufacturing value-added, in more states (top panel in Figure 5.7) than employment, and the number of factories are all disputes-related regulations. This is due, in part, adversely affected in states with more restrictive to the fact that some states have implemented labour laws. This research assesses the impact laws that reduce the costs of labour disputes, of state amendments to the IDA on output, resulting in employment gains. But no state employment, wages, labour share, and number of has implemented laws that reduce the costs of factories in the manufacturing sector of such states retrenchments. during 1959­97. Some states made amendments · West Bengal and Maharashtra pay, by far, the to reduce the costs of labour disputes while other biggest costs in terms of jobs lost--accounting states passed amendments that made labour for more than half of gross job losses. disputes more costly.9 As mentioned earlier, · States such as West Bengal, Maharashtra, state amendments that increased the cost of Gujarat, and Rajasthan pay the costs in terms of labour disputes or retrenchment, above the cost thousands of factories that do not exist because stipulated by the Central Act, resulted in declines of the IDA regulations. This is because these in registered manufacturing employment and states have more stringent labour regulations output in that state, relative to the states that relative to the rest of states. did not implement such changes. There is some evidence that the use of contract labour across Quite surprisingly, restrictive regulations do not different states in the 1990s may have helped to make formal sector workers, as a whole, better off. reduce adjustment costs for firms, but did not do Restrictive regulations on employment adjustment away with all the effects of regulations. Figures increase wages but not enough to compensate for 5.6 through 5.8 present the results of research that the decline in formal jobs. As a consequence, total Figure 5.6 Measuring the Costs of Regulations on Employment, By Sectors Effect on Employment by Industry of an IDA Amendment Making Resolution of Disputes More Costly Computed Using 1997 Employment Levels by Industry Electricity generation and transmission Beverage, Tobacco Rubber, plastic, petroleum Total employment losses = 1,453,508 jobs Leather, leather products Metal products and parts Basic Chemicals Water works & supply 3 Other manufacturing equipments Wood, furniture Basic Metals and Alloy industries Non-Metallic products Apparel Paper, paper products Machinery & equipment Food Transport equipment and parts Repair of capital goods Cotton, Silk, Jute textiles ­300000 ­250000 ­200000 ­150000 ­100000 ­50000 0 50000 100000 Effect in Employment by Industry of an Amendment in IDA Making Retrenchment More Costly Computed Using 1997 Employment Levels by Industry Electricity generation and transmission Beverage, Tobacco Total employment losses = 1,436,188 jobs Rubber, plastic, petroleum Leather, leather products Metal products and parts Basic Chemicals Water works & supply Gas generation and distribution Other manufacturing equipments Wood, furniture Basic Metals and Alloy industries Non-Metallic products Apparel Paper, paper products Machinery & equipment Labour Regulations in India Food Transport equipment and parts Repair of capital goods Cotton, Silk, Jute textiles ­800000 ­700000 ­600000 ­500000 ­400000 ­300000 ­200000 ­100000 0 100000 200000 Source: Ahsan and Pagés (2007). 125 126 India's Employment Challenge Figure 5.7 Measuring the Costs of Regulations on Employment and Value-Added, by State Effect of State Labour Reforms on Organized Manufacturing Employment, by State Tamil Nadu Andhra Pradesh Kerala Karnataka Madhya Pradesh Uttar Pradesh Punjab Jammu & Kashmir Haryana Bihar Assam Orissa Rajasthan Gujarat Maharashtra West Bengal ­700000 ­600000 ­500000 ­400000 ­300000 ­200000 ­100000 0 100000 200000 IDA amendments on Hiring and Firing Laws IDA amendments on Disputes Laws Effect of State Labour Reforms on Organized Manufacturing Value Added, by State (Values in Rs Lakhs of 1997) Tamil Nadu Andhra Pradesh Kerala Karnataka Madhya Pradesh Uttar Pradesh Punjab Jammu & Kashmir Haryana Bihar Assam Orissa Rajasthan Gujarat Maharashtra West Bengal ­600000 ­500000 ­400000 ­300000 ­200000 ­100000 0 100000 200000 IDA amendments on Hiring and Firing Laws IDA amendments on Disputes Laws Source: Ahsan and Pagés (2007). Figure 5.8 Measuring the Costs of Regulations on the Number of Registered Factories, by State Effect of State Labour Reforms on the Number of Factories Registered by State Tamil Nadu Kerala Uttar Pradesh Punjab Jammu & Kashmir Haryana Bihar Assam Madhya Pradesh Karnataka Gujarat Orissa Andhra Pradesh Rajasthan Maharashtra West Bengal ­4000 ­3500 ­3000 ­2500 ­2000 ­1500 ­1000 ­500 0 500 1000 1500 Hiring and Firing Laws Labour Disputes Laws Source: Ahsan and Pagés (2007). payments to formal workers decline and the labour instance, records show there were only 151 share (the share of a company's value-added that closures in the manufacturing sector that goes to workers) does not increase. Dispute- affected 11,599 workers. In the same year, related laws are even more costly for formal sector another 133 retrenchments and 236 layoffs, workers as they reduce both employment and respectively, led to 3,668 workers and 26,231 wages, and therefore, total payments to workers workers being laid off (Khan 2005). Overall, (Ahsan and Pagés 2006). this makes for a job destruction rate of about 1 per cent of the private sector labour force Dispute-related laws have large adverse effects on in formal manufacturing. Similarly, data from labour productivity, mostly driven by declines in the annual India Labour Yearbook (various investment and capital­output ratios. The lengthy years in the 1990s) reveal the total job flow-- procedures and uncertainty involved in dispute including voluntary separation and entry-- resolution reduce incentives to invest. In turn, to be around 14 per cent in the 1990s. In Labour Regulations in India lower capital­output ratios result in lower labour comparison, gross worker flows for the formal productivity rates and lower wages for workers. sector in OECD (Organisation for Economic Co-operation and Development) countries Some additional evidence points to the effect of can range from 60 per cent in Germany to regulations on reducing the mobility of labour: about 80 per cent in the US. Middle income countries, such as Mexico and Brazil, have · Separation of workers happens markedly less gross worker flows of 65 per cent and 80 per in India than in other countries. In 2001, for cent, respectively. 127 128 · Firm-level surveys reveal that `labour hoarding' benefits' of being protected by employment India's Employment Challenge can be as much as 17 per cent; that is, firms protection legislation, and on the other side are may have as many as 17 per cent more workers the vast majority of informal or unorganized sector than their desired number of labour force. workers who work for much lower wages and have · To avoid disputes, firms are willing to pay two little or no social protection. This is evident from to six times the legally mandated compensation the persistent real wage premium of about 28 per for retrenching or laying-off workers. Instead cent that exists for salaried workers over casual of the mandated two weeks of wages for each workers, even when they have similar human year of service, firms often offer up to four­six capital characteristics. weeks of wages as compensation. The dualism in India's manufacturing sector Restrictive regulations and labour laws also spills over to the tertiary sector through two contribute to inequality by perpetuating dualism channels. First, by discouraging growth of the between the formal and informal sectors. With formal manufacturing sector, in particular, and the the exception of chapter Vb in the IDA, most manufacturing sector in general, regulations push a regulations, including labour regulations, become large number of workers towards low-end tertiary binding in manufacturing firms which have more sector employment. Second, regulations can also than 10 workers (if power or electricity is used) directly impinge on the services sector through or 20 workers (if no used) registered under the the broader application of laws such as the IDA, Factories Act. The impact of this is seen starkly something that was not originally intended. For on the overwhelming share of workers (about instance, clauses in the Shops and Establishment 75 per cent) in firms or plant sizes of below 10 Act sometimes overlap with those of the IDA and workers--the bulk of employment is in firms some court decisions have extended the reach of that remain unregistered. In contrast, less than 20 the IDA to cover tertiary sector activities. per cent of workers in a sample of fast-growing East Asian countries work in such small firms. Contrary to the adverse impact of some clauses More generally, as seen in Chapter 3, Indian of the IDA, preliminary analysis suggests that manufacturing sector firms continue to show a minimum wages for unskilled workers can be highly bi-modal size structure: the bulk of the welfare-enhancing in India. Minimum wages may firms are low-productivity small enterprises at be supporting the wages of less skilled workers, one end and on the other, upper end, are relatively without apparent costs to employment. However, large firms with high productivity. minimum wage regimes need to be streamlined. With individual states having as many as 40 Recent data suggests that dualistic trends are or more minimum wages in place, set by both persistent in the manufacturing and tertiary Central and state governments, minimum wage sectors. In manufacturing, for instance, only 2 per regulations in India are as complex as other labour cent of firms belong to the formal organized sector. laws. Within the agricultural sector alone, there are But the share of employees working in these firms minimum wages for ploughing, weeding, sowing, has declined to 25 per cent of all manufacturing transplanting, harvesting, winnowing, threshing, sector employment (Unni 2006). Thus, on the picking, and herding. In the construction industry, one side are the more productive, relatively better the Central government has set eight minimum paid, salaried, formal sector workers (14 per cent wages which are differentiated by the thickness of the Indian labour force) who enjoy the `insider of around an inch of the stones meant to be broken. There are also floor minimum wages direction over the period between 1993­4 and for unskilled workers which have been set by the 1999­2000 (Figure 5.11). This is the case even state governments. after controlling for state-fixed effects which take into account other factors that determine the level One result of this complexity is that minimum of minimum wages. wages laws are not well-enforced. A large share of workers, some 40 per cent of agricultural On average, minimum wages did not seem to workers and 21 per cent of urban casual workers ration jobs in the 1990s. A separate exercise (see left panel of Figure 5.9), get wages below the shows that unemployment (usual principal status lowest minimum wage (typically the one set for [UPS]) and underemployment (current daily unskilled casual workers). These figures likely status [CDS]) rates in the different states do not underestimate the lack of compliance since in appear to be related to minimum wages.10 Such most states, minimum wages are considerably results are consistent with our finding that real below the average wages of casual agricultural wages do not affect casual employment levels or and urban workers (right-hand side panel in employment rates. A preliminary conclusion of Figure 5.9). this analysis is that minimum wages for unskilled workers can be welfare-enhancing as they raise The data suggests the strong effect minimum wages for unskilled poor workers without wages have on supporting wages for unskilled increasing unemployment significantly. Such a casual workers in urban and rural areas. In most conclusion is only tentative in that it needs to states, casual wages tend to be concentrated be supported by further analysis. However, it around the minimum wage for unskilled workers points to an under-researched area of major policy (Figure 5.10). The data also shows that casual importance as it can imply that a streamlined wages for agricultural and urban workers, as regime of minimum wages can be welfare- well as minimum wages, moved in the same enhancing for those in more need. Figure 5.9 Minimum Wages and Employment Panel A: Share of workers getting wages below the state Panel B: Minimum wages as a percentage of average minimum wage for unskilled workers wages in NSS regions 76.9 78.0 Urban 21.6 80.0 62.9 61.2 59.3 57.7 Casual 21.7 60.0 Rural Non- 15.7 40.0 Labour Regulations in India agriculture 16.5 20.0 Rural 40.6 Agriculture 40.8 0.0 Rural Non- Agricultural Urban Casual farm Wages Wages Wages 1993­4 1999­2000 1993­4 1999­2000 Source: Wage data from NSS. Minimum wage data from Indiastat.com 129 130 India's Employment Challenge Figure 5.10 Clustering of Urban and Rural Casual Wages and Minimum Wages, by State (Kernel Distribution of Urban and Rural Casual Wages) Andhra Pradesh Bihar 150 200 kdensity Urban_Wage, area = 1347 kdensity Rural_Wage, area = 4710/ kdensity Urban_Wage, area = 3056 kdensity Rural_Wage, area = 4440/ 150 100 100 50 50 0 0 Min. wage = 25.96 100 300 500 Min. wage = 27.3 100 300 500 700 x x Daily Wage Daily Wage Rural Urban Rural Urban Note: excluding 1% of highest earners within +/­4 standard deviations Note: excluding 1% of highest earners within +/­4 standard deviations Madhya Pradesh Gujarat 60 150 kdensity Urban_Wage, area = 2321 kdensity Rural_Wage, area = 2333/ kdensity Urban_Wage, area = 2371 kdensity Rural_Wage, area = 3591/ 40 100 20 50 0 0 Min. wage = 39 100 300 500 658 Min. wage = 50 200 300 400 500 600 700 x x Daily Wage Daily Wage Rural Urban Rural Urban Note: excluding 1% of highest earners within +/­4 standard deviations Note: excluding 1% of highest earners within +/­4 standard deviations Haryana Karnataka 6 kdensity Urban_Wage, area = 512 kdensity Rural_Wage, area = 519/ 60 kdensity Urban_Wage, area = 2167 kdensity Rural_Wage, area = 2525/ 4 40 2 20 0 0 Min. wage = 74.61 200 300 400 500 600 700 800 900 1000 Min. wage = 21.5 100 300 500 x x Daily Wage Daily Wage Rural Urban Rural Urban Note: excluding 1% of highest earners within +/­4 standard deviations Note: excluding 1% of highest earners within +/­4 standard deviations Figure 5.10 (continued) Kerala Maharashtra 15 150 kdensity Urban_Wage, area = 4787 kdensity Rural_Wage, area = 3865/ kdensity Urban_Wage, area = 1669 kdensity Rural_Wage, area = 2044/ 10 100 50 5 0 0 Min. wage = 23.4 100 300 500 700 Min. wage = 45 200 300 400 500 600 700 800 900 1000 x x Daily Wage Daily Wage Rural Urban Rural Urban Note: excluding 1% of highest earners within +/­4 standard deviations Note: excluding 1% of highest earners within +/­4 standard deviations Orissa Punjab 100 20 kdensity Rural_Wage, area = 2594/ kdensity Urban_Wage, area = 1343 kdensity Rural_Wage, area = 1223/ kdensity Urban_Wage, area = 781 80 15 60 10 40 5 20 0 0 Min. wage = 40 100 300 500 700 Min. wage = 69.25 200 300 400 500 600 700 800 900 979 x x Daily Wage Daily Wage Rural Urban Rural Urban Note: excluding 1% of highest earners within +/­4 standard deviations Note: excluding 1% of highest earners within +/­4 standard deviations Rajasthan Tamil Nadu 25 80 kdensity Urban_Wage, area = 1386 kdensity Rural_Wage, area = 1326/ kdensity Urban_Wage, area = 3635 kdensity Rural_Wage, area = 3972/ 20 60 15 40 10 Labour Regulations in India 20 5 0 0 Min. wage = 50.36 200 300 400 500 570 Min. wage = 32.69 200 300 400 500 600 700 800 x x Daily Wage Daily Wage Rural Urban Rural Urban Note: excluding 1% of highest earners within +/­4 standard deviations Note: excluding 1% of highest earners within +/­4 standard deviations 131 132 India's Employment Challenge Figure 5.10 (continued) Uttar Pradesh West Bengal 80 80 kdensity Urban_Wage, area = 2653 kdensity Rural_Wage, area = 3529/ kdensity Urban_Wage, area = 2445 kdensity Rural_Wage, area = 2975/ 60 60 40 40 20 20 0 0 Min. wage = 40 100 300 500 Min. wage = 58.9 200 300 400 500 600 666 x x Daily Wage Daily Wage Rural Urban Rural Urban Note: excluding 1% of highest earners within +/­4 standard deviations Note: excluding 1% of highest earners within +/­4 standard deviations Source: Authors' estimates based on NSS 55th Round data. Figure 5.11 Rural and Urban Wages Panel A: Rural Agricultural Wages and Minimum Wages, by Regions, Panel B: Urban Casual Wages and Minimum Wages, by Regions, in 50th and 55th Rounds in 50th and 55th Rounds 150 150 100 100 50 50 0 0 0 20 40 60 80 100 0 20 40 60 80 100 Minimal wage by state (Source: indiastat.com) Minimal wage by state (Source: indiastat.com) cmrwca Fitted values cmuwci Fitted values Sources: NSS and Ministry of Labour for minimum wages. Note: Adjusted R squared for the two estimates at 0.85 and 0.75 respectively. SOME OPTIONS FOR REFORMING LABOUR lowering manufacturing value-added and jobs. REGULATIONS But the indirect costs, in terms of the spillover Recent research and employer surveys suggest effects on tertiary sectors like services, trade, that the costs of labour regulations are high--both hotels and restaurants, and construction, can also in terms of growth of jobs in general, and in be significant. The complexity and ambiguity terms of growth of good formal sector jobs in of labour laws not only lead to efficiency losses particular. The direct costs mainly arise from for the economy but also undermine their effectiveness in protecting workers' welfare the country a window of opportunity to reform its and security. By widening the gap in earnings labour laws. What are some of the ways by which between the formal and informal sectors, labour India's labour markets can be reformed? regulations also increase inequality between a small section of formal sector workers and the The Way Forward vast ranks of unorganized sector workers. Before suggesting specific reforms, it is useful to outline some general principles that labour market It is widely recognized by now that labour reforms should follow. These are presented in regulations in India need reform. A rapidly growing Box 5.7. and increasingly open economy faces higher opportunity costs from restrictive labour laws. At In the case of India, the preceding analysis the same time, it is also easier to reform labour suggests labour market reforms should address laws in a growing economy where workers have four priority areas: greater opportunities for finding jobs and are less concerned about moving from their current ones. A (i) streamlining and simplifying labour laws; more prosperous economy can also make available (ii) reducing market rigidities by modernizing more resources to provide temporary support for the IDA; workers who have to change jobs or re-train in (iii) resolving ambiguities concerning the order to increase their employment prospects. The Contract Labour (Regulation and Abolition) current phase of rapid growth in India thus offers Act; and Box 5.7 Principles to Guide Labour Market Reforms Having balanced objectives. Labour market reforms should balance the objective of protecting the rights of workers with the objective of promoting investment, productivity, and growth. This is because in the long run, investment and growth of productivity and earnings are the best jobs programmes that a country can introduce. However, no less important are short-run welfare goals that ensure workplace safety and humane working conditions, protection against arbitrary action by employers to eliminate jobs or reduce wages, and provision for the rights of workers to form associations to protect their rights. Basing policy reforms on well-identified market and policy failures. Given political and capacity constraints, reforms are costly and should only be based on good research that identifies exactly the market and policy failures that regulations need to address. Objectives and instruments should be well-distinguished. For instance, it should be clear that labour market flexibility is not an end in itself but rather a means to create more jobs and better outcomes. Labour Regulations in India Reform legislation should be flexible so that unforeseen and undesired consequences can be easily mitigated. The clearer the distinction between objectives and instruments for reforms, the more effective reforms can be. Identifying the winners and losers from the reforms, and providing compensation as needed. Even when reforms have clear net gains, they can still hurt some groups of workers and employers. The challenge for the government is to organize assistance to compensate the losers. Source: Pagés and Saavedra (2002). 133 134 (iv) improving enforcement of laws to make meanings of which are ambiguous and variable India's Employment Challenge them more effective, while reducing among Acts--should be clarified and harmonized. transaction costs and rents for firms. Concepts should be broad and comprehensive and give room to very few exceptions and ambiguities. Rationalizing and Consolidating Labour Laws If the objective is to provide a minimum set of Perhaps the greatest consensus between rights and obligations, it is unclear why employers government, labour, and industry is in the case and workers in certain sectors or industries (say of this reform. The existence of 55 Central labour hospitals or educational institutions) should be laws and more than 100 state laws is causing exempted from or devoid of such obligations extraordinary confusion and complexity. It is and rights respectively. As stated by Debroy (2005: impossible for either firms or workers to be aware 37­76), while there may be debates on the nature of their rights and obligations when rules and of regulations, `unification and harmonization regulations are spread over so many national- and is an issue on which there should be no lack of state-level Acts. The current 47 Centrally enacted consensus'. Harmonization and consolidation labour laws can be consolidated into four Acts are also two of the recommendations submitted centred on industrial disputes, wages and benefits, by the Second National Commission on Labour conditions of employment, and social security (2NCL). (Table 5.5). Modernizing the IDA Alongside consolidation of laws, key concepts Next to simplifying and consolidating labour laws, such as workmen, industry, and factory--the which can take some time, modernizing the IDA is a priority. IDA reforms should focus on two main areas. First, the disputes resolution mechanism Table 5.5 Suggestions for Consolidating Labour Laws should be simplified to reduce time and resources Current Laws Possible Consolidation into consumed in disputes (see Box 5.8). New Law Industrial Employment Terms and Conditions of (Standing Orders) Act, Employment and Disputes The second major reform of the IDA should Industrial Disputes Act, Mechanism aim at protecting workers rather than protecting Trade Unions Act. jobs. Change, transformation, and upgradation Factories Act, Conditions of Work are the engines of economic growth. In order to Maternity Benefits Act, and Welfare Workmen's foster growth while ensuring the livelihoods of Compensation Act, workers, governments are turning to mechanisms Contract Labour that protect the incomes of the workers rather (Regulation) Act. Minimum Wages Act, Wages and Benefits than their jobs. This, in turn, implies that current Payment of Wages Act provisions aimed at ensuring job security have (1937), to be transformed into mechanisms that protect Payment of Bonus Act (1965). the incomes and welfare of those workers who Employees Provident Social Security are adversely affected by technological change or Funds Act, market fluctuations. Some specific measures are Employees State Insurance Act, suggested in Box 5.9. Payment of Gratuity Act. Source: Federation of Indian Chambers of Commerce and In addition to amending the IDA, India may also Industry (FICCI). consider other broader measures to undertake Box 5.8 Amending the IDA to Simplify Dispute Resolution Mechanisms · Only rights-based disputes should be adjudicated. By distinguishing between `rights disputes' (those disputes that are based on a legal right)--and 'interest disputes' (disputes which are not based on any existing rights), transaction costs can be lowered by limiting dispute cases. Disagreements belonging to the `interest disputes' category should be solved by means of collective bargaining or, if that fails, conciliation and arbitration mechanisms (Nath 2005). · Strengthening grievance-handling mechanisms at the enterprise level. The grievance-redressal mechanism at the enterprise level provided by Section 9C is not generally enforced. Employers and employees often fail to recognize it. Accordingly, Section 9C could be enforced better after suitable procedural amendments. The aim should be to provide greater authority and incentives to Conciliation Officers to resolve disputes at their level or at the Conciliation Board level. · Providing Conciliation Officers with the powers currently awarded to the Conciliation Board. Conciliation should be made a compulsory step to adjudication in industrial dispute cases. Appropriate training and incentives can be given to officers to enable them to resist pressures from interested groups (Hazra 2005). · Reintroducing the Labour Appellate Tribunals which were abolished in 1954. This will reduce the work of higher judiciary, that is, High Courts and the Supreme Court, which consumes considerable time and cost. · Addressing the shortage of well-trained presiding officers in labour courts and tribunals (Hazra 2005). · Fixing the limit of filing disputes to, say, one year after occurrence of disputes (by amending Section 10 of the IDA). The aim should be to reduce the burden on the courts and discourage the filing of non- genuine claims. · Making industrial dispute decisions enforceable within 30 days after they have been communicated in writing to all parties, as in civil court cases. At present, Section 17 of the IDA makes laws enforceable 30 days after publication of the decision; this can often delay implementation. Box 5.9 Amending the IDA to Increase Labour Market Flexibility · Eliminating the requirement for firms employing 100 or more workers to seek prior permission from governments for layoffs would be the first best solution. Such arbitrary thresholds only create strong disincentives for firms to grow above the thresholds. This in turn prevents firms from enjoying economies of scale at a time when India's manufacturing trade is increasing. The threshold for all industrial establishments, plantations, and mines, employing 100 workers or more, having to seek prior permission from the appropriate government before layoffs, retrenchment, or closure, should be increased to at least 500 workers. Anything less than this reduces incentives for firms to grow and, in the process, create jobs. It should be noted that investment climate data suggest that increasing the threshold from 100 to 300 will not be effective in solving the problem but will involve similar Labour Regulations in India political costs. · Waiving the condition of prior government permission for retrenchment under Section 25N, if workers accept compensation higher than that prescribed by the IDA. · Removing the requirement for prior government permission for layoffs (Section 25M) and replacing it with Section 25C. · Eliminating Section 25G which requires that employers should start retrenchment by laying off the last person hired. In the current, fast-changing work environment, this section penalizes firms that seek to 135 136 Box 5.9 (continued) India's Employment Challenge hire and maintain workers with the latest up-to-date skills, relative to firms that rely on experience. This creates disincentives because it secures the jobs of older and more experienced workers, even if they do not perform in their jobs. · Eliminating the requirement of notice for change of service (Sections 9A and 9B of IDA) under which employers cannot change the terms and conditions of service without 21 days' notice. This can be replaced with a requirement of notice for a smaller period. · Increasing compensation for retrenchment and firm closure. The current compensation contemplated in the IDA is well below the standards of developing countries. Although it is in line with compensations prevalent in developed countries, workers in industrial countries have access to other forms of unemployment insurance. A compensation equivalent to one month's salary per year of work, with an upper maximum of 8­12 months' pay, would be in line with international standards.11 · Building funds for a rainy day would allow the very meagre compensation that workers now receive in case of closure (Section 25FFF) to be increased to the same level as compensations awarded for retrenchment. To make this possible, firms that default on their contributions should be penalized for breaching the law. A slightly different alternative, already in effect in some Latin American countries (Colombia, Peru, Ecuador, and somewhat differently in Brazil), is to create individual accounts for each worker in which firms deposit a certain percentage of the worker's wage every month. The funds accumulated in the individual accounts are available to the worker in case the worker is retrenched, laid-off or quits, or in case of firm closure.12 · Making job search assistance and training available to workers affected by retrenchment. The most successful income-support mechanism for a worker who loses his/her job is to find a similar or better job as fast as possible. Labour policy should assist workers to this end. labour market reforms. Malaysia, perhaps, offers Reducing Uncertainty by Making Contract one of the more extreme models of introducing Labour Law Clearer labour market flexibility by allowing specific Reducing regulatory uncertainties surrounding contracts to be freely negotiated between workers the use of contract labour is another priority. and firms. The lead article of the 1995 Employment Currently, the Contract Labour (Regulation Act in Malaysia states: `Every employee must be and Abolition) Act is designed to prohibit and given a written contract of employment which discourage the use of contract labour, thereby states the terms and conditions of employment, introducing considerable uncertainty in the including the notice period required to terminate working of this increasingly important contractual it.' This is an example of a legal system that gives arrangement. There is a need to formalize contract freedom to employers, workers, and unions labour. The main instrument for implementing to enter into mutually satisfying contracts. By this would come from restricting the application allowing unions to advise workers on contracts, of Section 10, Chapter 3 of the Contract Labour the interests of the workers are also protected. (Regulation and Abolition) Act, 1970, under The role of the state is limited to providing a which, currently: legal framework that respects and enforces these contracts. Examples of reforms in other countries (1) Notwithstanding anything contained in the Act, are provided in Box 5.10. the appropriate Government may, after consultation Box 5.10 Examples of Labour Market Reforms Aimed at Increasing Market Flexibility Slovakia Main Reforms · Pre-reform: No part-time contracts; term contracts could not be extended; limit of 150 hours of overtime a year; approval by union for firing a worker; retraining before dismissal; union approval for flexible work time; and approval by union for group dismissals. · Now: Part-time contracts for students, women, and retirees; extension of term contracts possible; limit of 400 hours of overtime, with worker consent; no approval for shifting hours in a four-month period; no notification/retraining requirement; and notification for group dismissals. Colombia 1990 · Reduction in severance payments (from one month of last salary for each year worked, to a monthly contribution equivalent to one month of yearly salary into a severance account). · Wider definition of fair dismissals (extended to include non-compliance with company regulations/instructions). Also employees with less than 10 years of service cannot sue company for unfair dismissal. · Extended use of temporary contracts (permitted to be used for periods of less than one year; can be renewed up to three times). · Faster process for mass dismissals (reduction in advance notice requirement). 2002 · Employers permitted to hire workers by the hour. · Severance payments for employees with 10 years of service reduced to 45 days' pay for first year, and 20 days' pay for each year thereafter. Thailand Labor Protection Act enforced in August 1998. Covers working hours, wages, severance pay, child labour, holidays/leave, female workers, and so forth. Key changes introduced were: · Employee Welfare Fund created to assist employees who become unemployed or face other problems. Contributions made by employer, employees, government, and income from penalties. · Severance pay enhanced. Workers fired because of no fault of their own are entitled to severance pay depending on their tenure of employment. This payment was enhanced for those with more than six years of service. Provision for special severance pay in case firm relocates. with the Central or a State Board, prohibit by government makes the final decision regarding notification in the National Gazette, employment this. This is leading to uncertainty even among Labour Regulations in India of contract labour in any process, operation or other firms in the ITES sector. The way to resolve this work in any establishment. may lie in clearly identifying certain specialized and supporting occupations that `naturally' tend Although the appropriate government is required to use contractual work for a variety of industries. to consider whether the `contracted' work is Such a list could include: cleaning, security, incidental for the industry, trade, or business, maintenance, housekeeping, laundry, loading, or whether it is `perennial' to the operation, the information technology, support services for 137 138 ports, airports, hospitals, and export-oriented · Inspections should be targeted and publicly pre- India's Employment Challenge units in SEZs. A second issue is that contract law announced. Firms to be inspected should be prohibitions are being applied to establishments selected based on formal complaints raised as small as those employing 20 or more workmen. by workers' representatives. For firms where Raising the threshold over which the Contract no complaints are raised, inspections should Labour (Abolition and Regulation) Act applies be targeted based on an assessment of which would be another way to introduce flexibility. firms are more likely to evade the law. The list of firms to be inspected every month should Improving Enforcement be posted on an official, public list in advance, At present, labour laws are not very effective in and an inspection order should be signed by providing protection, security, and benefits to the labour commissioner to be valid. Priority workers due to weaknesses in the enforcement should be assigned to firms where workers machinery. Not only do regulations raise have raised a complaint. Firms that engage transaction and adjustment costs for firms, in irregular payments to inspectors or those they also provide scope for rent-seeking and that do not report irregular behaviour on corruption. Hence, a key area of reforms would the part of inspectors should be made liable. be strengthening labour inspections and labour Inspections for the numerous labour acts law enforcement. The aim of the reforms should should be merged in a consolidated inspection be that firms should not have to devote too that covers all labour acts. much valuable time in dealing with inspections, · Inspections should focus on technical assistance and inspectors should not be able to use their and not just sanctions. This, in turn, requires powers to extract unofficial payments. With this that inspectors be appropriately trained to objective in mind, the following reforms can be able to perform. On this issue, the ILO be considered. recommends that the inspectorate not be funded from revenues generated from fines, First, the system of multiple inspections under as this inhibits the educational/promotional different laws may be replaced with an optional role of the inspectors. Some initiatives, such `self-certification' system, the enforcement of as employer-generated implementation which can be selectively (risk-based) or randomly plans (EGIPs), have produced good results enforced through inspections and audits. The self- in other countries. Employers can tailor selection system can be given force by requiring implementation plans and policies to suit legal affidavits, laying the responsibility on the their needs. They report to the inspectorate CEO, and specifying a few crucial laws that are on progress against self-defined benchmarks amenable under this. Alongside, the current system in their annual plans for improving working of multiple registers and records may be replaced conditions. Compliance is more likely since with one register for each broad area covering employers and often, as recommended, workers muster rolls, accidents, and wages. The process of `own' the strategy. Other useful strategies are filing many returns can be reduced drastically by providing special educational components and switching over to a system of single filing. information provision to small and medium firms. For those firms that do not opt for `self-certification' · Other important measures are: (i) building systems, the inspection regime can be reformed a culture of compliance through mass media on the following lines: campaigns and education in business schools and (ii) professionalizing inspections by providing Consequently, all activities can be defined as adequate training and compensation. industrial and under the purview of the IDA. In practice also, organizations as different as In conclusion, reforming labour market regulations panchayat samitis, hospitals, real estate companies, which hinder the creation of jobs is one of two key operators of tubewells, religious institutions, etc., have been considered to be industries, making, approaches for addressing India's employment in principle, laws applicable to industries also challenge. The other part will be to help workers by applicable to these institutions. providing more protection against unemployment 5. Interview with IT firm in Bangalore, February and uncertainty, and giving them the skills that 2005. are in demand by employers. Increasing the 6. See http://rru.worldbank.org/DoingBusiness. effectiveness of active labour market policies will 7. Although most firms rank labour regulations as help to achieve these goals. The next chapter takes 99.5 compared to 100 for power, statistically there up this issue. is no difference between the two scores. 8. See Basu (2006) for a theoretical exposition of NOTES how India's labour market regulations, especially 1. Note that Indian employers are not obliged to the provisions of the IDA, can harm labour bargain collectively. The question of whether it market outcomes. is desirable for them to do so is not addressed 9. For example, in 1988 Tamil Nadu introduced here. However, facilitating bargaining where an amendment that increased the power of both parties are agreeable would be desirable, conciliation officers in terms of enforcing whatever the position on obligation of bargain attendance, compelling the production of in good faith. documents, and issuing commissions for the 2. There have been a number of state amendments examination of witnesses. Examples of laws that to the IDA; most often the laws were changed reduce the costs of disputes are: (i) eliminating with the objective of increasing protection of the need for the parties to refer labour disputes workers. to the government prior to referring them to a 3. (Business Standard online, 24 May 2005): `In the tribunal, and (ii) granting the government the race for new investments, the state is expected to power to transfer any industrial dispute pending go all out in modifying the labor laws', the online before a tribunal to any other tribunal constituted report of Business Standard said. by the state government for adjudication. 4. For instance, Section 2i of the IDA states: 10. This accounted for other omitted factors. See `Industry means any systematic activity carried chapter 1 for definition of these terms. on by cooperation between an employer and his 11. It should be noted that a level of compensation workmen (whether such workmen are employed of 45 days and 60 days of compensation per year by such employer directly or through any agency, of service, in case of restructuring sick industries including a contractor) for the production, supply and profit-making companies, respectively, is or distribution of goods with a view to satisfy above the norm in both developing and developed Labour Regulations in India human wants...whether or not--(i) any capital countries. has been invested for the purpose of carrying on 12. For more information on the operation of these such an activity; or (ii) such activity is carried schemes, see Heckman and Pagés (2004) and on with a motive to make any gain or profit...' IADB (2003). 139 Increasing the Effectiveness of Active Labour Market Policies 6 I ncreasing labour market flexibility will be most effective in creating good jobs if it is complemented with policies that help workers obtain social protection, skills, and help in finding good jobs. Increasing social protection for workers in the informal sector who are mostly not covered by these policies, and for workers affected by regulatory reforms, should be a priority. Presently, the major government intervention in this regard is employment generation through public works programmes. However, despite their progressive incidence, the employment and income effects of public works programmes have been limited historically. The programmes have been beset by problems of poor accountability, uneven implementation, and design issues. The government's commitment to a major expansion of public works through the NREG Act has considerable potential to provide protection and reduce poverty through employment but only if its many design innovations can be delivered in practice. More broadly, India is also poised to move from its current reliance on safety net programmes to a more comprehensive system of social protection which promotes risk management among unorganized sector workers to reduce their vulnerability. But serious administrative challenges and high transaction costs have to be overcome first. Social insurance coverage should be expanded in a phased manner which takes account of constraints and adjusts programmes in the light of initial experience. The government has also made substantial efforts to establish a vocational training system to fill the skills gaps in the economy. This system, however, suffers from a lack of proper targeting and an overly bureaucratic approach which stresses delivery over quality. In order to make it more relevant, the system needs to be made more flexible and responsive to market needs. There is also a need to reassess where public interventions are most needed and the forms these interventions should take. INTRODUCTION The close correlation between labour earnings and poverty in India has created a demand for active labour market policies. These are especially necessary to improve conditions for vulnerable groups such as the poor, the young, and women, particularly in rural areas where employment tends to be seasonal. There is also a strong equity rationale for such policies since one of the major a new phase of expansion in public works spending. factors driving both chronic and transient poverty This is being driven, in large measure, by a shift in India is the uninsured risk faced by households towards greater Central financing. Though the from loss of work due to unemployment, poor rate of expansion is unlikely to be sustained, health, or injury.1 In turn, such uninsured risks reversal is also unlikely, given legal commitments. and associated credit and insurance market failures This puts the country at an interesting stage in may be contributing to workers remaining in low the evolution of social protection spending. While productivity employment in the unorganized public works programmes provide some form of sector and making poverty more persistent.2 In social protection in rural areas, urban areas remain the current situation, where there is a need to mostly outside the reach of these programmes. reform labour regulations, there is an additional At the same time, there is considerable scope for rationale for such policies. Public interventions to increasing social insurance coverage in urban provide social security and employment support to areas as well. Another thing of note is that the workers, some of whom may face increased risk of increased commitments to NREG, combined unemployment due to reforms, may be necessary with existing significant spending on other to build up acceptance of such reforms. social protection programmes, will raise social welfare spending (as a share of GDP) to a level Public works programmes have a long history, which international evidence suggests is about dating back to the colonial period, starting with as high as countries reach. This, together with famine relief works. Since the late 1970s, they have democracy and the opening of the economy, been an increasingly important component of the suggests that future expansions in social protection Indian safety net, with a succession of Centrally spending are likely to come through the expansion sponsored and state-specific workfare programmes. of social insurance rather than through social Most schemes operate largely in rural areas where assistance. they perform a social assistance function and provide, possibly, an insurance-like element. It is Given the high rate of informality of Indian difficult to form a comprehensive picture of public labour markets and the low levels of income, the Increasing the Effectiveness of Active Labour Market Policies works programmes across India because there is current coverage by social insurance is predictably a multiplicity of schemes. There have also been very low and concentrated in the organized sector. frequent changes in the names and guidelines of At the same time, the public sector and the non- these programmes, though in practice this has not government and private sectors are all making implied any fundamental change in approach. The efforts to expand social insurance coverage. The 1990s saw two major policy shifts though. The first GoI has, in recent years, increased its efforts to was an increase in the role of the panchayati raj expand social security among unorganized sector (local government) institutions (PRIs). The second workers. It has tabled a bill--The Unorganized was a shift from scheme-based commitments to Sector Workers' Social Security Bill, 2007-- providing work in rural areas through a legislatively before Parliament on social security in this sector, backed 100-day employment guarantee, the newly its most ambitious effort to date. launched national NREG Act. This chapter concentrates on the major active After the decline in real spending that started in labour market programmes of the government. the mid-1990s, India appears to have now entered These can be broadly grouped under (i) public 141 142 works programmes; (ii) social insurance for from the late 1980s to date. Nominal spending India's Employment Challenge workers; (iii) employment exchanges; and (iv) on these increased rapidly during the 1980s but training workers to increase their employability. was broadly stable in the mid-1990s. This means It discusses the labour market impacts and that as economic growth picked up, expenditure shortcomings of these policies and makes on the schemes, both as a share of GDP and total recommendations. Central government spending, fell. At its lowest level, the share of expenditure on these schemes CENTRAL PUBLIC WORKS PROGRAMMES in 2002­3 was a third of what it was in the early In terms of spending, public works, confined 1990s--about 3.5 per cent of Central spending. largely to rural areas, are the most important This trend has reversed in recent years and if the element of the government's active intervention NREG is rolled out as rapidly as is anticipated, in labour markets. Box 6.1 lists the major rural the spending share can be expected to further works schemes run by the Central government increase sharply. Box 6.1 Major Central Rural Employment Programmes in the 1990s and at Present · Jawahar Rozgar Yojana (JRY), from 1989 to 1999, was a centrally sponsored scheme (CSS) targeted at below poverty line (BPL) households in rural areas, with preference given to Scheduled Castes/ Scheduled Tribes (SCs/STs) and women. The financing for this programme was split 80:20 between the Centre and states respectively, and the wages to materials ratio was 60:40. The District Revenue/District Administration (DRDAs) and zila parishads (ZPs) were the main implementing agencies through line departments and gram panchayats (GPs). · Employment Assurance Scheme (EAS), from 1993 to 2001, was a CSS that initially focused on 261 districts and gradually expanded to provide nation-wide rural coverage by 1997. The EAS committed to provide 100 days of lean season employment per year, for up to two adults per rural family. It was financed on the basis of an 80:20 Centre and state split. As with JRY, the wages to materials ratio was 60:40 and the DRDAs and ZPs were the main implementing agencies through line departments and GPs. · In 1999, the JRY was restructured into the Jawahar Gram Samridhi Yojana (JGSY), with the main difference being that the creation of demand-driven community infrastructure moved from being a secondary objective to the primary objective, and conversely rural employment generation became the secondary objective. · In 2001, the EAS and JGSY were merged into the Sampoorna Grameen Rozgar Yojana (SGRY), which has a target of providing 100 days' employment, per year, per rural household. Financing is split 75:25 between the Centre and the states respectively, and PRIs have in principle been given an increased role in its implementation. · In late 2004, the National Food for Work Programme (NFFWP) was introduced in 150 backward districts with a massive increase in funding to Rs 5,400 crore in the 2005­6 budget. · The National Rural Employment Guarantee (NREG) Act was passed in August 2005 and commenced implementation in February 2006. It initially covered 200 backward districts with commitment to national rural coverage within five years of launch. This is the first legislated national rural employment programme and it commits to 100 days' guaranteed employment per rural household, annually. The funding split is 90:10 between the Centre and states respectively, and PRIs are the primary implementing agencies. The programme is self-targeting, designed to encourage the participation of the target population and deter participation by others. Source: O'Keefe (2006). Public works programmes can potentially Figure 6.1 SGRY Work Days per Agricultural Worker improve labour market outcomes in several ways. and per BPL Household, 2003­4 Other than the direct benefits (cash or kind) to 30 participating households, they may also have a 25 Days public works positive spillover impact on overall wages which 20 could be felt by non-participating households. 15 There may also be indirect benefits from the assets 10 created under the scheme. Depending on their 5 0 scale and comprehensiveness, such programmes AP Assam Bihar Chhat Guj Har HP J&K Jhark Karn Ker MP Maha Oris Punj Raj TN Uttar UP WB may also perform an insurance function by acting as an effective minimum wage. Other potential Ag. workers BPL HHs effects stem from the skills development of Source: O'Keefe (2006). workfare participants, either directly through work provided or indirectly through training provided to workfare participants (though this Why have the employment effects of public works, has not been emphasized in Indian programmes so far, been less than expected? With the recent to date).3 Such programmes could also impact major expansion of the public works programme gender and other social and economic relations, through the NREG, it is important to assess the for example, through increased female labour reasons why historically there was such a large force participation. However, in India as well gap between programme expectations and actual as internationally, the focus of policymakers has outcomes. First, potential employment effects overwhelmingly been on the direct transfer effect were overestimated to start with because, in arising from employment generation and of the practice, the actual share of wages in expenditure economic impact of the assets created. was lower than the recommended 60 per cent. Reliance on contractors further whittled away The direct employment effects of these public at this share. Second, national surveys show that works programmes, prior to the NREG, were public works wages were often significantly higher Increasing the Effectiveness of Active Labour Market Policies far lower than those stated in the objectives. The than the average wages of casual agricultural official numbers show that the average annual workers, their best comparator (Deshingkar employment under JRY was 16 days of employment and Johnson 2003; Murgai and Ravallion per BPL household; 15 days of employment per 2005). Public works wages also rose rapidly registered EAS worker between 1992 and 1999; over the 1990s, at a time when real spending and, at best, about seven days of employment on these programmes declined; this further per rural household annually under SGRY from hurt employment generation. Apart from these 2001 to 2004. Underlying these averages were issues, the persistence of major implementation large inter-state variations in coverage, but even problems--lack of accountability in workfare relatively better performing outliers such as Assam design, financing, and management--reduced the and Orissa generated less than 10 days of work potential impact of the programmes. Assessments per agricultural worker, and none but Assam and by the government and others point to significant Karnataka generated more than 15 days SGRY leakages, in part due to poor monitoring and employment per BPL household (Figure 6.1). evaluation of programmes, both administrative This, when the official numbers are likely to be and through mechanisms such as social audits, overestimates due to the method of calculating and the lack of reliable records (in particular, of employment generation.4 muster rolls of funds).5 143 144 Do public works programmes provide some households may benefit relatively more from India's Employment Challenge insurance to the target population? Even if increased public works and be hurt relatively employment generation through workfare more by cuts in works spending (Lanjouw and programmes is small, they can still play an Ravallion 1999). important safety-net role if they reach the people who need them the most, at the time when they The timing of public works programmes has need them the most. This should be one of the often not matched the timing of the need for most important objectives of well-designed such programmes. There have been consistent schemes. The evidence in India suggests that difficulties in matching peak periods of public where the coverage is good, workfare programmes works provision with periods of lowest do play a positive insurance function. Most of market demand. In Maharashtra, public works the evidence comes from Maharashtra, which employment drops sharply during the monsoon has been running an employment guarantee when market-based work is also least likely to be scheme (EGS) for some time. A 1980s study available. This is also consistent with the findings from Maharashtra found that income variability in Rajasthan and Orissa where public works are among landless agricultural households, in typically carried out January­March when the villages where EGS was available, was half the opportunity costs of labour are high. Part of the level of villages where it was not (Walker and Ryan problem is that certain work cannot be executed 1990). Farmer studies in Maharashtra also found during the lean season due to the monsoons. that there was greater adoption of higher-risk Public expenditure management practices, which higher-return agricultural practices in the state, concentrate disbursements for works in the though what percentage of these can be attributed final quarter of the fiscal year, make the problem to the EGS is open to debate (O'Keefe 2006). more acute. Most public programmes (other than JRY) are Historically, the insurance effects of Central public aimed primarily at the poor. The main targeting work programmes have also been low due to their mechanisms for most schemes have been the patchy geographical and household coverage. wage rates and work requirements under the Despite commitments to full rural coverage, the programmes. The programmes appear to be share of villages covered by employment schemes mildly progressive. For example, in 1999­2000, 57 is far less than complete. The assessment of EAS per cent of beneficiaries of employment generation for 1993­7 found that only 53 per cent of villages programmes lived in households with monthly had any EAS works, with the numbers for some per capita incomes equal to or less than Rs 400, states being much lower. Analysis from the 2002 compared to an overall population share of 45 per NSS village data also confirmed that partial cent (O'Keefe 2006). Interestingly, programmes spatial coverage had continued, with only 48.5 explicitly targeted at poor households appear to per cent of villages (56.4 per cent of population) achieve no better outcomes than self-targeting, reporting any public employment programmes in even when the wages paid by these programmes 2001. Coverage is also not consistent. Strikingly, are above market wages. This is consistent the proportion of villages covered in all the four with findings on targeting performance from assessment years from 1993 to 1997 was only 5.4 other developing countries; it suggests that the per cent. This is consistent with anecdotal reports choice of method is less important than effective of rotation of public works between different implementation. Evidence suggests that poor areas/villages. Thus, in terms of local availability, public works to date have been a rather unreliable potential and justify its costs. Initial field-based source of employment in most of India. studies of NREG implementation suggest that it will take some time to consolidate the good Evidence suggests that public works prior to the practices reflected in the implementation to NREG did not help ease gender differences in be included in programme design. 7 These participation. Female labour force participation include: operationalizing the anticipated roles in SGRY appears to have been lower than general of communities in a meaningful way; making rural female participation rates. The all-India the `guarantee' stronger through provision of share of SGRY female participants was only 12 unemployment allowance where necessary; per cent, which is similar to the Comptroller continuing to work on the difficult issue of and Auditor General's (CAG) report findings on mobilizing demand for work from the poor; JRY and EAS of only around 16 per cent female increasing transparency in implementation to beneficiaries (the target share was 30 per cent). In reduce corruption; and staffing and equipping states such as Uttar Pradesh, Bihar, and Punjab, administrative support systems. female participation in public works was less than 2 per cent. Clearly, an important range of issues Public works, set to become an expanded will need to be addressed to make the new NREG component of the social safety net in India, are more effective (see Box 6.2). one of the easiest instruments for providing social protection in rural areas. They combine elements Overall, it is too early to make conclusions about of social assistance and insurance and possibly the effects of the NREG on parameters such as have a productivity-enhancing impact through poverty, labour markets, and the local economies. asset creation. However, the experience so far Nonetheless, relative to previous public works suggests that the delivery of works will need to schemes, there are a number of design features undergo major improvements if their potential in the NREG which are very sensible, and in effects are to be realized in a manner that justifies many states there has been greater political and their significant fiscal costs (see Box 6.3). Their institutional commitment to trying to `make opportunity costs, in terms of foregone spending Increasing the Effectiveness of Active Labour Market Policies the scheme work'. Administrative data show on a range of alternative public services including that the NREG generated significant demand education, health, and nutrition interventions, from rural households in its first 18 months of will be high. It is also important to realize the implementation, with 66 million rural workers limitations of these programmes. First, they are not issued with job cards and around 20 million likely to be major drivers of rural employment and people provided with work. This is a major productivity growth, and should not be viewed as achievement in programme coverage relative such. Rather, they can--if better implemented--be to prior public works schemes. That said, the a useful tool at the margin for poverty alleviation summary of initial implementation experience and for providing some level of insurance to the suggests that implementation is highly variable poor. Even here, such programmes can, at best, across (and even within) states and that there be only one risk management strategy for poor remain major challenges in implementation. households. Such households will continue to rely on informal sources of support and look While the NREG has the potential to reduce towards different types of public interventions for poverty through workfare, ongoing improvements additional risk protection. It is in this context that in implementation will be needed to realize this the other major public intervention--providing 145 146 India's Employment Challenge Box 6.2 The National Rural Employment Guarantee (NREG) Programme The NREG is the GoI's most ambitious public works initiative. Financed almost wholly by the Central government, it guarantees every rural household up to 100 days' employment per year at the agricultural minimum wage. Coverage was initially confined to 200 backward districts, and expanded to 330 districts in 2007, with nation-wide rural coverage planned within five years of launch (from February, 2006).6 Analysis to date suggests a mixed picture of costs and benefits. First, there is significant potential for a lean season NREG. Simulations of a nation-wide 100-day employment guarantee suggest (Murgai and Ravallion 2005): · The lean season rural poverty rate can be reduced from 37 per cent to around 23 per cent, or to around 30 per cent on a year-round basis. · The annual fiscal cost will be around 1.7 per cent of GDP, if implemented nationally at a wage rate of around Rs 60 per day at current prices. · Gains should be progressive, with the poorest 20 per cent of the rural population accounting for 29 per cent of participants. For them the gains from the EGS, direct and indirect, would be 51 per cent of their pre-EGS consumption levels. The bulk of participants are expected to be casual labourers. There are, however, issues about scheme design that influence effectiveness, efficiency, and equity: · Using the state agricultural minimum wage rates as the scheme wage rates is likely to be problematic. If scheme rates are above market rates this typically results in `rationing' (that is, the demand for scheme jobs is greater than available jobs so they have to be `rationed' according to some criteria). The experience from the Maharashtra EGS confirms that this `rationing' could also apply to `guarantees'. · Participating in the NREG, for many, implies giving up work that they are already doing and also the income from this. The additional income they get from the NREG, therefore, is lower than what they would receive if they did not change their current employment and the wage portion of the NREG was simply distributed to everyone on a pro-rata basis. Using this option would reduce poverty to around 15 per cent--as against 23 per cent from NREG. While the comparison is imperfect--as it measures only the transfer impact of NREG and not the other economic impacts--it implies that the non-transfer gains from NREG would need to be substantial for it to be better than an untargeted transfer. The point highlights the importance of achieving significant economic returns from the NREG assets and for the poor to capture a reasonable share of the gains. · A significant improvement in the NREG over previous works schemes is the strengthened role of panchayats in design, implementation, and monitoring. However, it will be important to develop accountability mechanisms that avoid the bundling or concentration of functions with specific actors (in particular DRDAs), which has contributed to implementation problems in previous schemes. It remains to be seen if the incentive and accountability structure ensures that GPs are at the heart of NREG implementation. In addition, the Act offers limited guidance on funds flow mechanisms. If GPs are to be empowered, it will be important for them to have direct control over a portion of scheme funds. · The scheme benefits from a stronger monitoring and evaluation (M&E) system than previous works schemes, including funds earmarked for this purpose. In order to expand the system of concurrent evaluation to include robust impact evaluation, it will be critical to collect regular surveys for evaluation purposes. Source: O'Keefe (2006). Box 6.3 West Bengal's Provident Fund for Unorganized Sector Workers Since 2001, West Bengal has operated a Provident Fund for workers in the unorganized sector, not including agricultural workers. By mid-2005, enrolment was almost 640,000, with a further 60,000 membership applications pending. Membership is open to wage and self-employed workers in designated industries/ activities (which are expanding over time), whose family income is no more than Rs 3,500 per month (though the means test appears to be rather informal). The key feature of the Fund is that it is a defined contribution scheme. Members contribute Rs 20 per month, with a matching contribution from the state government. Interest accrues in the account at a rate designated by the government (the Employee Provident Fund Organization rate is being used to date). Accrued principal and interest are paid to the worker at age 55 years, or at death, or when there is no account activity for six months. Rapid expansion has been driven by a highly decentralized distribution network and governance structure, with support from trade unions and political parties in mobilizing awareness and interest. Collection agents are typically public workers who are incentivized with a Re 1 payment for each enrolee. The state government covers the administration costs of the Fund. While the West Bengal experience shows great promise, particularly given its defined contribution basis, it remains to be seen whether the promotion and distribution success it has achieved is replicable in states with less stable political institutions. Source: ILO (2004) as cited in O'Keefe (2006) social security to unorganized sector workers-- coverage by social insurance is predictably low becomes important. and concentrated very heavily in the organized sector. Even within the organized sector, coverage SOCIAL INSURANCE SCHEMES is concentrated in the public sector. Table 6.1 International evidence suggests that as countries provides coverage estimates of different social become richer, social insurance usually accounts insurance types for the organized and unorganized for an increasingly higher share of GDP In this . sectors in 2004. It should be noted that apart context, India is at an interesting threshold in from life insurance, contributory initiatives for Increasing the Effectiveness of Active Labour Market Policies the evolution of social protection; international other types of social insurance, in both public experience suggests that it is likely to start moving and commercial sectors, have achieved minimal away from reliance on public safety net programmes coverage in the unorganized sector. The singular towards greater provision of social insurance. At exception of life insurance may give an indication, the same time, country experience also shows from the demand side, on where attention should that major coverage expansions typically do not be focused in terms of sequencing expansion of come from voluntary social insurance systems. public intervention. More formalized labour markets, where mandated participation can be enforced, are associated with Most of the employed in the unorganized sector, higher coverage rates of social insurance. In India, especially the poor, face an array of uninsured however, the bulk of the workforce is employed risks that renders them highly vulnerable to in the unorganized sector; this will be a challenge shocks. Presently, the effect of public safety nets in expanding coverage. is limited and the poor rely on family, jati (caste), and other informal support networks to tide Given the high rate of informality of Indian labour over shocks. The risk-sharing functions these markets and the general low level of income, networks perform are, however, far from perfect. 147 148 India's Employment Challenge Table 6.1 Coverage Rates of Social Insurance for Organized and Unorganized Sectors, 2004 Organized Sector Coverage (%) Unorganized Sector Coverage (%) Public Schemes Employees' Provident Fund 25.1 0.18 Employees' Pension Scheme 12.2 0.02 Government Pension Scheme 48.7 0.24 Government Provident Fund 54.0 0.21 Contributory Provident Fund 4.0 0.02 Any Formal Pension Coverage Around 95 per cent Less than 1 per cent Commercial Schemes Life Insurance (endowment) 54 23 Personal Accident Insurance 3.6 1.2 Private Health Insurance 2.0 0.5 Non-life General Insurance 2.8 1.4 Source: O'Keefe (2006). It is more effective in the case of individual shocks smoothing and more from their help in reducing rather than those which affect the group as a destructive coping strategies (Gertler and Gruber whole, and for small and intermediate rather than 1997; Chetty and Looney 2005). The vulnerability catastrophic shocks. The role that such informal of households to shocks also has a wider economic institutions play also declines with increased effect--credit and insurance market failures may labour mobility. Migration and marriage outside be important factors in limiting the ability of rural the community, for example, often trigger loss of workers to seek more productive employment access to support systems. opportunities, both outside traditional occupations and away from home. It is evident from surveys that uninsured shocks impact the welfare of households. This is The public sector (central and state governments), particularly the case with health shocks, especially non-government sector, and private sector are for the poor.8 Data indicate that at least 24 per all involved in efforts to expand social insurance cent of Indians who are hospitalized fall into to unorganized sector workers, most of whom poverty as a result. There are also concerns that have little or no coverage. Various approaches credit market failures lead to coping mechanisms, are being tried with differing degrees of success which may turn transient poverty into long- in terms of reaching scale, achieving financial term and even inter-generational poverty. This viability, and providing financial protection. Each may happen, for example, if transient poverty approach has potential advantages and drawbacks, induces the withdrawal of children from school or some inherent to the intervention (for example, pushes people into debt bondage. Evidence from viability in the face of co-variate and/or catastrophic countries such as Indonesia shows that the benefits idiosyncratic shocks for genuine community- of social insurance in poor countries may come based initiatives) and others a product of specific less from their direct contribution to consumption design and/or implementation features. The main initiatives discussed in this section are: (i) is financing through contributions. Contributions welfare and provident funds for unorganized may be either tripartite (between government, sector workers at both Central and state levels, employers, and workers) or bipartite (between both occupation-specific and generalized for the employers and employees). In cases where the sector; (ii) national schemes for unorganized government contributes, the dominant method sector workers outside the welfare fund model; is direct contribution. Contribution rates exhibit and (iii) non-governmental organization (NGO) dramatic variations--from very low amounts to and community-based initiatives, which range rates more akin to formal sector contribution from coverage of specific insurance types (most rates (see Appendix 6.1). Management of the often health) to somewhat more bundled social funds is either tripartite or rests solely with the insurance packages. government, for roughly equal proportions of documented funds. Welfare Funds Welfare funds are traditionally occupation-specific Welfare funds may have a potential as vehicles and provide a range of benefits for members. The for expanding social insurance to some segments earliest fund dates back to 1946, though welfare of the unorganized sector, if some key design funds have proliferated since the late 1970s. It and implementation challenges can be met. is difficult to obtain a comprehensive picture of They are most likely to work in segments which such funds due to their typically decentralized are amenable to a cess, and/or those segments nature, both geographical and occupational, and where there is a strong presence of intermediary attention here is restricted mainly to documented organizations which can share the transaction funds. Most discussions about welfare funds have intensity inherent in a wide-membership/low- been centred around the Kerala funds (of which contribution scheme. They are, however, less likely there were more than 20 in the year 2000) and to succeed where employers feel reluctant to allow the Central government funds (of which there a formal registration process for workers, given are five with direct Central financing, and one the potential costs associated with quasi-formality. under a Central act but which is implemented Other issues and challenges that can constrain their Increasing the Effectiveness of Active Labour Market Policies and financed at the state level). However, in use are inherent in the nature of these funds: terms of total coverage, welfare funds in other states--initially the southern and western states · These funds are often small and, as a result, but spreading in recent years to the north and administrative costs are high: between 25 and 54 east of the country--have had an increasing share per cent of fund value.9 The high administrative of participating workers since the 1990s. The costs and the inherent concentration in the membership, contribution structure, and benefits risk pool suggest a weak capacity to absorb provided in a sample of these funds are presented significant shocks which affect the entire sector. in Appendix 6.1. In theory, these challenges can be surmounted through group insurance with larger and The financing of welfare funds follows two basic diversified commercial insurers, but in practice models. Some are financed through either a proper it is unclear as to what extent this avenue has cess or excise duty. This is the mode for all Central been exploited to date. government welfare funds. The more common · Welfare funds typically cover entitlements mode though (for 24 out of 30 documented funds) ranging from education and housing support 149 150 to benefits such as medical cover and pensions, for agricultural workers. Another major initiative India's Employment Challenge so that their pure social insurance focus is was the Universal Health Insurance Scheme diluted. (UHIS), launched in 2003 and targeted at poor · An initial examination suggests little correlation households. In 2004, the government introduced between contribution rates and benefits. The a social insurance scheme for unorganized sector scope of benefits provided in many funds workers (excluding agricultural workers), with may therefore lead to inadequate financial the intention of targeting 2.5 million workers in protection for any specific type of benefit. For 50 pilot districts nation-wide. It provides for old the pensions portions of schemes, the large age, medical, and accident insurance. Membership majority are defined-benefit programmes, in both schemes is voluntary. Both are funded by with benefits typically expressed in nominal contributions primarily from the government and rupees and hence subject to deterioration in partly from the covered parties. Unfortunately, real value. these schemes have had negligible penetration. · Similarly, for the more insurance-like benefits, there appears to be no actuarial basis for A recent initiative that uses a different approach is determining contributions. This raises concerns linking participation in anti-poverty programmes about their long-term viability. with social insurance. This can be seen in the social insurance component of the SGSY credit scheme The emerging experience of the West Bengal targeted at BPL individuals and self-help groups. Provident Fund for unorganized sector workers This approach has the advantage of providing presents a promising case of a fund which appears effective mandatory coverage for a sub-group to have got around a number of these design issues of the poor, though the extent of its financial by relying on a defined contribution (rather than sustainability is less clear. defined benefit) approach to pension payments (see Box 6.3). While not a welfare fund per se, A final and important element of public sector it is a most interesting model of a contributory attempts to expand insurance cover for the approach which is likely to avoid the financial unorganized sector is crop insurance. Although viability problems of welfare funds, and may this is not addressed in any detail here, research provide lessons for future reforms throughout on different efforts is rather negative on the the country. effectiveness of major public schemes to date.10 Despite repeated major initiatives to expand Other Government Initiatives subsidized crop insurance, penetration has been The Central government has, in recent years, relatively low, estimated at around 12 per cent of increased its efforts to expand social security farmers nationally in 2002. Several concerns recur to unorganized sector workers through non- in assessments, including lack of actuarial viability, welfare fund mechanisms (Report of the Planning low awareness of schemes among some categories Commission [2002], headed by S.P Gupta). It . of farmers, partial coverage of crop types, and launched the Krishi Shramik Samajik Suraksha complex administration. Yojana scheme in 50 selected districts in 2001. This scheme closed in February 2004. It was operated Though the coverage of previous initiatives through the Life Insurance Corporation of India here is by no means comprehensive, some and covered life, survivor, and pension insurance preliminary conclusions may be drawn. First, the Box 6.4 The Government's Recent Initiatives on Social Security for Unorganized Sector Workers In 2006 and 2007, the GoI did considerable work to develop proposals for expanding social security to the unorganized sector, with a strong focus on health, life, and disability insurance, together with benefits for old age. This came from the strong commitment in the GoI's Common Minimum Programme for improving social insurance in this sector. A first proposal was made by the National Commission on Enterprises in the Unorganized Sector (NCEUS) in 2006 and, building on this, the GoI in mid-2007 submitted a draft Bill on the subject to Parliament. The Bill provides for several types of social insurance, with particular emphasis on BPL workers and their families. In contrast to some of the earlier approaches for reform in this area, the GoI's proposals place more emphasis on the intermediary and other implementation arrangements necessary to make different insurance schemes functional for the target population. They also give states a stronger role in defining the specific institutional arrangements of schemes. Finally, the proposed phased expansion of programmes takes into account fiscal realities. These features increase the chances of a scheme being implemented. At the same time, there will be a need for a massive implementation agenda to make the draft Bill workable, including strong outreach efforts, building capacity of states and partner intermediaries such as micro- finance institutions, NGOs, and others to help workers access programmes, and working with insurers and health providers to put in place workable systems for service provision and claims processing. There will also be a need for coordination by the Centre to develop the elements of common platforms such as beneficiary identification systems. frequent rollover of Central insurance schemes is account these lessons in its new initiative for social problematic, especially when trust in the whole security for unorganized workers, which it has notion of insurance is low and information recently submitted to Parliament for consideration dissemination is weak. This `start­stop' approach (Box 6.4). is likely to discourage future participation. NGO and Community-based Social Insurance Increasing the Effectiveness of Active Labour Market Policies Second, there have also been design problems which have limited their usefulness. Most of Initiatives these schemes take up health insurance first. Given the very low coverage rates achieved to date While the need for this is clearly high, this is one by the Central government initiatives outlined of the most challenging areas of social insurance earlier, community-based micro-insurance even in developed countries. Starting coverage (CBMI) initiatives assume greater significance with life insurance may be more feasible. Third, as a potential channel for the expansion of social as with welfare funds, it is not apparent that the security in the unorganized sector. Estimates of contributions for various schemes are based on the scale of social insurance provision by NGOs an informed assessment of claims information and other community-based actors (for example, from existing insurance products. Last, most MFIs and health facilities) vary from a coverage Central schemes, to date, have failed to address the figure of around 3 million to around 5 million. fundamental issue of high transaction costs and the Most of the schemes are small, though the largest need for establishing decentralized distribution have achieved significant memberships. The networks. The government is seeking to take into Yeshasvini scheme in Karnataka, for example, had 151 152 enrolled 2 million farmers in 2004­5 after only Karnataka and Dhan in Tamil Nadu) and more India's Employment Challenge one year of operation. occupationally based programmes (for example, Tribhuvandas Foundation).12 The last model is The primary focus of most schemes has been one where the founding organization is both health insurance, though some schemes also cover the direct insurer as well as the main provider associated costs such as loss of income and life of the insured services. Examples include Action and accident insurance. Most work on a voluntary for Community Organization, Rehabilitation participation basis. In terms of financing, all CBMI and Development (ACCORD) in Tamil Nadu, schemes require contributions. However, there is Kasturba Hospital Scheme in Maharashtra, and a range--both of the level of contribution required Students' Health Home in West Bengal. Of and the extent to which it is subsidized. In the these, the insurer-agent model appears to have best cases, contributions cover the bulk of medical the most potential for broadening coverage. It claims under the schemes and administration appears to combine the benefits of large-scale costs are covered by donor support. At the other pooling of risks (both within the membership end of the spectrum, contributions are covered group when group insurance is purchased, and for many of the members by the NGOs'/funders' beyond through the risk pool of the end-insurer) own resources. An additional innovation in and the cost-reducing benefits of an intermediary some schemes is the provision for deposit of a organization close to the client. At the same time, lump sum by the participant, from which the the Yeshasvini experience cautions against being interest generated covers the annual premium. very prescriptive on a preferred model. Although community/NGO involvement controls administrative costs, most schemes rely on external The experience to date is mixed, with serious subsidies. The subsidies may come from the questions remaining on the capacity to go to scale, government, the NGOs or donors, cooperatives, given the reliance on subsidies from funding or other sources. This is very typical of rural health institutions and donors. In addition, community- insurance initiatives in developing countries, based initiatives to date have focused primarily virtually none of which cover services from on health insurance and not yet addressed other contributions alone (O`Keefe 2006). types of social insurance, particularly those related to old age. There are also legal issues with respect There are a few basic models of community-based to CBMIs as the Insurance Regulatory and social insurance.11 The first is the insurer-agent Development Authority (IRDA) Act does not model, where the NGO/MFI or other founders provide for such schemes as part of the broader act as intermediaries between members and the insurance market. Recent IRDA guidelines aim insurers. This model has been relied on by large to address this issue though. organizations such as Self Employed Women's Association (SEWA) and Buldhana, and much The Way Forward smaller ones such as Navsarjan in Gujarat and While the case for public intervention in providing Bharatiya Agro Industries Foundation (BAIF) in social insurance for unorganized sector workers Maharashtra (Acharya and Ranson 2005). The in India is clear, it is by no means axiomatic that second model is where the founding organization more is better. Badly designed schemes can have itself acts as the direct insurer but is not the negative impacts on the poor (for example, they provider of the insured services. This applies contribute to health cost escalation which harms both to some NGO schemes (Yeshasvini in the uninsured and dilutes impact even for the insured). It is important for public policy to be what appear to be the easier wins in terms of framed with realistic expectations of the scope specific types of social insurance that are less and timeframe for coverage and expansion, and subject to moral hazards and administrative by taking into account India's income levels, problems. Two types of insurance that stand high degree of labour market informality, current out as somewhat more easy to expand are life informal support mechanisms, and their likely insurance (for which demand in the commercial impact on demand, administrative and institutional market already appears high among unorganized capacities, demographics, and other factors. sector workers) and disability insurance, which acts in one sense as the most extreme form of Evidence suggests that inadequate design of many ex post health insurance. These points suggest public and quasi-public initiatives, combined a cautious and gradual approach to expansion of with high ambitions, has failed to take these social insurance coverage. Such a strategy may not constraints into account in the past. Future be consistent with the political desire for broad- initiatives should be based on a serious analysis based schemes with high announcement value. of previous public, welfare fund, and CBMI However, it is a strategy which lessens the risks of initiatives, to understand the factors driving more doing harm and also extends coverage sustainably and less successful schemes. The experience to and as rapidly as feasible. date suggests serious scepticism about overly- defined top­down schemes. It would seem EMPLOYMENT EXCHANGES13 sensible to place more explicit emphasis on Employment exchanges were established under group-based insurance for schemes where a the Employment Exchanges (Compulsory public subsidy is involved. Notification of Vacancies) Act of 1959 which made it compulsory for public establishments What might be some elements of a strategy for and private sector establishments engaged in gradual expansion of social insurance coverage non-agricultural activities and employing 25 in the unorganized sector? The experience of workers or more, to send notices about specified middle-income countries in expansion suggests types of vacancies to the nearest employment Increasing the Effectiveness of Active Labour Market Policies that achieving wide-scale coverage at India's exchanges. The administration of employment current income levels and degree of labour market exchanges rests with state and Union Territory informality is very challenging. Some portions (UT) governments.14 As of end-2004, there were of the unorganized sector (for example, urban 947 regular employment exchanges in India, workers with a strong organizational structure, concentrated in urban areas. There are different members of cooperatives) can more feasibly types of employment exchanges. Most employment be included in social insurance in the short to exchanges cater to all types of jobseekers but some medium term than others. This points to the (totalling an additional 76 in 2001, with a further critical role that intermediary organizations need 82 bureaus for universities) specialize in particular to play between the government/insurers and the types of jobs. The special exchanges include those unorganized worker population if schemes are to for colliery workers, exchanges for professionals be both effective and affordable. Being aware of and executives only, and special employment the `low hanging fruit' is important in developing exchanges for the physically handicapped. a sequenced and more focused expansion strategy. Similarly, based on prior experience and insurance The main function of exchanges is to register principles, policies should focus on exploring and place jobseekers. The officer in charge 153 154 of an exchange meets individual jobseekers India's Employment Challenge Figure 6.2 Vacancies and Placements by at the time of registration where evidence of Employment Exchanges, 1991­2001 (in thousands) educational levels, and medical certificates in the 450 case of special exchanges for the handicapped, is 400 350 collected. Vocational guidance is provided at the 300 time of registration. Persons interested in self- 250 employment and those needing further training are 200 150 guided towards relevant public programmes. The 100 exchange receives vacancies and then shortlists the 50 names of jobseekers who meet the requirements 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 of the vacancies, based on seniority of registration on the live register. The shortlists are sent to Vacancies Placed potential employers. In practice, placements are Source: Ministry of Labour and Employment (MoLE), Government overwhelmingly in the public sector. of India (GoI), 2004. Apart from their placement function, exchanges was reinforced by a Supreme Court judgement are tasked with job counselling, training, labour in 1996 which allowed employers to meet their market information collection and dissemination, staff requirements from sources other than aptitude testing of jobseekers, and promotion employment exchanges, and the growing role of of self-employment through special cells. The private sector placement agencies. The link between limited availability of assessments and fieldwork employment exchanges and establishments in the indicate that in the large majority of exchanges, private sector is weak, though there are exceptions. these functions are performed poorly, often by Gujarat, Andhra Pradesh, Haryana, and Tamil staff who do not have the skills and knowledge of Nadu are notable in this respect. Even in more local labour markets to allow for effective service. effective systems, however, rural outreach remains While the challenges in public provision of such a major shortcoming, though states like Tamil services are not restricted to India,15 the problems Nadu are making greater outreach efforts. in India have been unusually acute. At the same time, commercial private placement Nationally, the performance of exchanges is organizations have been increasing their presence. poor and has been declining over recent years. Consolidated information on private placement The `placement to registration ratio' at the all- agencies is not available but the Director General India level, never more than 5 per cent, declined of Employment and Training (DGE&T) estimates to almost 3 per cent in the 1990s. Figure 6.2 that at least 800 existed as of the early 2000s confirms the substantial decline in both registered (for example, it is estimated that there are more vacancies and placements between 1991 and than 100 private placement agencies in Gurgaon 2001, with a fall of over a quarter in both cases [Haryana] alone).16 Like the government-run (though accompanied with rising expenditures on employment exchanges, these focus primarily the exchanges). This can be attributed to several on urban areas and the formal sector, often factors, the dominant one being the combination with specific sectoral focus. Fees are charged of flat public sector hiring demands and failure by either to the jobseekers who are placed or to the the majority of exchanges to develop new markets employer upon placement. Even less is known in the formal and unorganized private sectors. This about organizations in the unorganized sector that intermediate between employers and more employment exchanges are moving in the casual labourers, though there are concerns in direction of establishing partnerships with private industries like construction that business practices placement agencies. The exchanges serve as are often less than ethical. the contact points from where workers get linked and referred to networks of services. The There is a fundamental need to reorient the partnerships work best when the government National Employment Service if it is to regain sets the appropriate regulatory framework and relevance in the current labour market. The oversight mechanisms. In general, this requires problems are well-understood by the government, intensive use of information technology (IT). having first been reviewed by the 1978 Matthew Committee and subsequently by a Working Group Another important function for employment on Employment of the Planning Commission in exchanges can be providing timely and more 2001. The increasing role of the private sector in localized labour market information. This providing employment placement services points function has been generally neglected till now. to the need for focusing public intervention where Timely information on trends in local labour it is most needed to address market failures. It may markets is a product which can provide value also be useful to discontinue some functions of the addition for both employers and jobseekers. exchanges altogether. For example, some exchanges This will require innovation in information have been operating small credit schemes for gathering in local labour markets, ranging from jobseekers looking to pursue self-employment. regular (at least annual, and preferably more Results to date have been poor. Given the range of regular) and quick assessments of labour market public and private credit channels available in India, developments in both urban and rural areas to the more logical function for exchanges in this analysing emerging/declining labour demands regard would be to provide information--pointing and skills gaps. This will, in turn, require linking entrepreneurial jobseekers in the direction of with a broader range of partners, including public existing credit facilities rather than the exchange and private sector training providers, other itself being the provider. Similarly, best practices departments of government that are engaged with Increasing the Effectiveness of Active Labour Market Policies suggest that training should not be provided by productive sectors of the economy, local employer the employment exchanges themselves. Instead, organizations in the formal and unorganized exchanges should focus on referring workers to the sectors, and labour researchers. Given the current appropriate public or private training providers. skill base of employment exchanges, it may be necessary in many states to explore the contracting Exchanges could play a more important role if out of surveys and other investigations. At the they develop a greater service orientation and national and state levels, another important role fill gaps unlikely to be met by the private sector. could be developing much more effective rural Both official and ILO analyses point towards outreach strategies. some key areas where reinvigorated employment exchanges might focus. They include: developing The future role of employment exchanges could a service orientation by more active engagement draw from emerging good practices in two with trade associations, workers associations, and Indian states: Gujarat and Tamil Nadu. Both have employers, including those in the unorganized expanded the role of IT in increasing outreach to sector; and assessing needs which cannot be met jobseekers and employers. In particular, they are by private sector providers. In many countries, able to offer detailed information on jobseekers, 155 156 which employers can sort through according VOCATIONAL EDUCATION AND TRAINING India's Employment Challenge to their needs. This addresses a fundamental Another element of the government's active labour weakness in the typical exchange system where the market policies has been providing support to the exchange itself proposes jobseekers to prospective vocational education and training (VET) system employers, largely on the basis of the seniority in the country. Not only does providing skills on the jobseeker roll and not on the suitability training to workers enhance the efficiency and for the specific vacancy. Both have also been flexibility of the labour market and reduce skills active in arranging job fairs where jobseekers and bottlenecks, skilled workers are also more easily employers engage directly. These practices have absorbed into the economy and their job mobility proven more effective than regular procedures. For is improved. This is important in a country like example, Gujarat placed over 50,000 jobseekers India where a large part of the workforce remains with employers in 2003­4 alone (that is, around stuck in agriculture and does not possess the skills one-sixth of total national placements in 2001) to transit to more productive employment in other through 32 industrial recruitment rallies. Both sectors. Further, close to 5 million school children states have also attempted to strengthen vocational drop out of school between Classes VI and X guidance functions which, in most exchanges, (Figure 6.3); another 3 million drop out between remain desultory. This has included jobseeker Classes X and XII. For these student groups, access groups, initiatives like `career corners', and greater to secondary education and VET can potentially availability of resource material on specific sectors facilitate an effective school-to-work transition and job openings. A particularly interesting and improve their employment prospects and initiative in Gujarat has been the Rojgar Sahay lifetime earnings. Kendra that linked a group of NGOs, which had knowledge of local job opportunities, with the The vocational education stream is quite small, jobseeker database and intermediated between enrolling less than 3 per cent of students at the employers and appropriate jobseekers. upper secondary level. Currently, vocational skills Figure 6.3 Secondary School Dropout Rates in India India: Transition from Primary to Upper Primary and India: Transition from Upper Primary to Secondary and Secondary Education Sr. Secondary, and Undergraduate Studies 18 16.49765 16 14 15.040344 13.786304 11.664613 14 12 12.571497 9.902607 12 10.679008 10 10.07684 8.583825 In Millions In Millions 9.523997 10 8.824832 8 7.09115 8.132881 7.568889 6.122759 5.38748 8 6.453402 6 5.354901 6.973653 6.215512 5.937286 5.212572 5.653423 4.573463 6 4 3.779848 3.373757 3.029218167 5.002608 4.225606 3.305984 4 4.139559 3.371253 2 1.841301833 2.013723 2.048917 2 1.187916333 0 0 1997­8 1998­9 1999­00 2000­1 2001­2 2002­3 1997­8 1998­9 1999­00 2000­1 2001­2 2002­3 Class VIII Class IX Class X Class XI Class XII UG Class V Class VI Class VII Class VIII Class IX Class X Boys Girls Total Boys Girls Total Source: Wu (2005). are provided either within the schooling system vocational education appear to be more intent on in Classes XI or XII (vocational education) or entering higher education than in entering the through separate institutions for students who labour market. International experience suggests leave school after completing Class X (vocational that employers, too, look for young workers with training). Aimed at students who want to enter the basic skills taught in primary and general the labour market, 6,800 schools, almost all in secondary education, and not for workers trained the public sector, currently provide vocational in narrow vocational skills (see Box 6.5). In India, education. These schools offer a total of over 100 there have been very few evaluations of the courses in various areas--agriculture, business performance of vocational education. However, and commerce, humanities, engineering and a study by the Operational Research Group in technology, home science and health, paramedical 1998 reported that only 28 per cent of graduates skills, etc. of vocational education were, in fact, gainfully employed. The vocational education programme has, however, not met with much success to date. It is more appropriate for the government to This stream has not been very popular; just about focus its efforts on strengthening secondary 40 per cent of the available student capacity in education. India's enrolment ratio for secondary the schools is filled. Even students who opt for education is lower than what its country income Box 6.5 International Experience of Vocational Education Programmes The international experience of vocational education points to a few key things. · Vocational subjects are desirable on general education grounds, as part of a well-rounded education intended for everyone, but they should not detract from efforts to improve the quality of core subjects. No study has shown that vocational courses offered as a minor part of a student's total curriculum give an advantage in finding work (let alone self-employment) within the first few years after leaving school. This is particularly so when the labour market conditions for youth are severely depressed. Vocational subjects Increasing the Effectiveness of Active Labour Market Policies may foster an interest in the types of work for which the subjects are broadly intended, and the skills learnt may have private uses. However, tracer studies have found that they have no positive impact on access to work after students leave school and no strong effect on access to further relevant technical training. · Providing vocational education is costly. Most variants are more costly per student class period than general education subjects, primarily because of smaller classes and the greater cost of facilities, equipment, and consumables. Unless a course can be taught to a full class of students (few can), operating costs will be more than twice that of non-laboratory academic subjects. · Enrolment in some types of vocational courses is often strongly gender-biased. Many skills taught are culturally identified with one gender only--for example, domestic science and secretarial skills with girls, industrial arts skills with boys. · Vocational education is hard to implement well. It requires specially trained instructors, preferably with work experience in the types of skills taught. Teachers with these qualifications are hard to recruit and retain. Time spent on vocational skills training can detract from the teaching of basic academic skills which are badly in need of improvement and also essential for labour market purposes. Source: Johanson and van Adams (2004). 157 158 level would predict. Access by gender and social the goal of expanding secondary education, the India's Employment Challenge groups, by rural and urban locations, and by government faces two challenges. One, creating expenditure quintiles also remains more unequal opportunities for all to attend secondary education for the secondary school age group relative to the and securing that everyone takes advantage elementary school age group. This is worrisome of the opportunities created. Two, the even because the positive effects of secondary education greater challenge of improving student learning. on health, gender equality, and poverty alleviation This entails strengthening existing institutions; are even stronger than those of primary education implementing reforms in curriculum, textbooks, (Wu 2005). Through its impact on delayed examinations, and teacher training; and improving marriage, reduced fertility, and safer birth practices, accountability and monitoring, and evaluation of secondary education of girls can also lead to outcomes (see Box 6.6). significantly reduced maternal and child mortality, and slower population growth, both of which are Another government intervention is the running important goals of the government. In achieving of certificate-level crafts institutes. Programmes Box 6.6 Secondary Education in India In India, the average number of years of schooling among people over the age of 25 is just over four. Forty- four per cent have never even been to school. In this respect, India lags behind most East Asian countries. Over the past decade, thanks to the government's drive to universalize elementary education, access to schooling for children aged 6­14 rose rapidly. The enrolment rate in elementary schools for this age group has reached 94 per cent. No such rapid increase has, however, taken place at the secondary level where the enrolment rate still stands at only 38 per cent. This is low, relative to what international experience suggests it should be at India's income level. At the same time, improving the skills of future workers requires expanding secondary education and improving the quality of both elementary and secondary education. Worldwide, in response to globalization and the emergence of the knowledge economy, the role of secondary education is now changing to prepare young people for lifelong learning, and the boundaries between general and vocational education are rapidly blurring. Both demand-side and supply-side factors have contributed to India's poor educational outcomes. Demand- side constraints include the inability of poor households to bear the direct and opportunity costs of schooling, a parental bias against girls' secondary education, and poor quality of education and high dropout rates in elementary schools, which limit the number of students ready for secondary education. Policies to improve the efficiency and quality of elementary education, information campaigns to change parental attitudes towards schooling and delayed marriages, and financial assistance targeted at disadvantaged students have the potential to raise the demand for secondary education. The limiting factors on the supply side include distances from homes to schools and the reluctance of teachers (particularly of mathematics, science, and English) to serve in rural areas and urban slums. Correcting the imbalances in supply requires: improving policies regarding teacher recruitment, deployment, transfer, and evaluation; more effective utilization of private school capacities for expansion; the use of vouchers to encourage private schools to serve disadvantaged students; and building government schools in under- served and remote communities. However, beyond enrolment, quality is also an issue. A 2005 World Bank survey (see World Bank 2009a) of secondary schools in Rajasthan and Orissa administered separate mathematics tests, drawn from a sample of published test items in mathematics from the Third International Mathematics and Science Study (TIMSS), to a sample of IX and XI graders in order to benchmark Indian student performance with some international measures. The Rajasthan and Orissa mean scores for many items were below the international mean of the same items. What is the reason behind this? A comparison of the curricula in mathematics and science prescribed by India's Central Board of Secondary Education and the respective state education boards, with the Geneva-based International Baccalaureate and Britain's International General Certificate of Secondary Education (IGCSE), found that the coverage was similar but the emphasis of both systems was very different. India's school system remains oriented towards examination and rote memorization at the expense of conceptual understanding and application. This weakness in foundation in elementary education also contributed to low achievements at the secondary level. Improving quality requires strengthening the basic skills and promoting deeper understanding in order to enable students to tackle new materials and devise solutions. India developed a progressive national curriculum framework in 2005 which aims to prepare children and youth with higher order thinking and flexible skills. However, syllabi, examinations, textbooks, teacher education, and in-service training have yet to be revised to align with the new framework. Since every state has its own system and standards, setting national standards regarding the basic skills students need to master in each subject and in each grade would be helpful in raising standards for all and facilitating labour mobility. Source: Wu (2005). are operated by the Industrial Training Institutes The study found that employment of ITI/ITC (ITIs) and Industrial Training Centres (ITCs). graduates in the organized sector was very low. These are open to 5 million or so students a In none of the states did more than 50 per cent of year who leave school after completing Class X. the graduates find wage employment, or become About 80 per cent of the students take admission self-employed, or even work in a family business. Increasing the Effectiveness of Active Labour Market Policies in engineering courses, and the remaining in There were significant inter-state differences: in non-engineering courses. In addition, there are Andhra Pradesh, unemployment ranged from 33 about 150,000 apprentices employed in various per cent for ITI graduates to more than 70 per industries. Students who complete crafts training cent for ITC graduates; while in Maharashtra it are certified when they pass an All-India Trades was around 23 and 27 per cent respectively. At the Test, conducted under the aegis of the National same time, employers in the same states reported Council for Vocational Training (NCVT) but experiencing problems finding employees with administered by the states. Individual states also the right skills, implying that graduates did administer tests for state-approved trades that are not meet employers' needs. A survey by the not affiliated with the NCVT. Federation of Indian Chambers of Commerce and Industry (FICCI) in late 2001 also reported The crafts certificate courses have, however, that close to 60 per cent of industry respondents met with only limited success. A comprehensive felt that these institutions were not geared to meet study of vocational training programmes was the challenges of the global economy, and over 43 conducted by the ILO in 2002­3 (ILO 2003). per cent felt that academic institutions were not 159 160 aligned to the needs of industry (FICCI 2002). of rural workers would not seem to be the solution. India's Employment Challenge Eighty-seven per cent felt that institutions should Public institutions would find it difficult to have greater exposure to industrial practices. make the changes to serve both the formal and informal sectors with the same skills and The poor outcomes may reflect the many experience. Innovative solutions are thus needed constraints the public vocational training system (see Box 6.8). faces. Management of the system is shared between Central and state authorities. While on In-service training in India is also much lower on paper the functions of each are clearly specified, average than international levels, though there there is little coordination between them, leading are wide variations among states. Provision of to poor accountability and duplication of efforts. in-service training is another area which has not Furthermore, a preoccupation with providing and received much attention by policymakers. No more financing training has resulted in the government than 17 per cent of manufacturing establishments neglecting a key role--providing information in India provide in-service formal training. This about the availability and effectiveness of training is less than half the average for Europe, East Asia, programmes. There are few incentives to institutes and Latin America. On average, Indian firms are to improve their performance and little industry less likely to train than even firms in Bangladesh inputs in defining training policies and developing (27 per cent) and Sri Lanka (38 per cent). Within courses. This is now changing, and industry India, too, there is a wide variation in the incidence associations and individual employers are showing of formal in-service training among the states. considerable interest in involving themselves in Only 11 per cent of firms provide training in West developing and managing ITIs. Bengal, Punjab, and Uttar Pradesh, compared to 27 per cent in Andhra Pradesh and Karnataka. A bigger failing of the system is that the current From the point of view of coverage, only about 7 programmes are quite inadequate to meet the per cent of employees receive training in a given training needs of the large workforce in rural areas, year. The proportion of workers in India receiving arguably the group which should have been its in-service training is especially low among micro main target. The formal training system, because of and small firms, where fewer than 4 per cent its entry requirements and geographical mapping, of employees receive training. In medium and is not designed to offer skills to low-educated large firms, the figures are around 17 per cent people, and particularly not to those in the rural for managers and professionals, and about 11 per non-farm sectors.17 But there are also no other cent for less-skilled groups. These estimates again providers to fill this gap. Most workers continue appear low compared to countries in South Asia to learn trades on the job and through informal or East Asia. For example, the level of employees apprenticeships at their places of work from other receiving in-service training in Sri Lanka is twice low-skilled crafts people. These apprenticeships as high. Generally, the incidence of in-service are based on traditional technologies and ideas training in states with good `investment climates' from previous generations. The quality of training and those receiving more foreign direct investment is thus only as good as the skills of the master (FDI) was strikingly higher (21 and 25 per cent and his/her willingness and ability to pass them respectively) than in the other states (10 per cent on. The theoretical aspect of learning is weak or and 8 per cent respectively).18 absent; only the simplest skills are learnt, resulting in low-quality products. However, re-orienting There are distinct differences between industry public training institutions to meet the needs sectors and firms of different kinds in their propensity to offer formal in-service training. on demand, the kinds of tailored training A survey of 1,827 industries in India showed programmes that firms want and private providers that industries where training levels were below can deliver. Given the limited capacity of public average included textiles, garments, leather institutions, private providers--firms themselves, products, food processing, automobile parts, and industry associations, buyers and equipment metal products (World Bank 2004a). Industries suppliers, and private training institutes--are where training levels were above average included important for expanding the resources available chemicals, pharmaceuticals, machine tools, for workforce skills development. International electrical white goods, electronic products, and experience suggests that there are three market software. The second list can be considered to be failures that constrain training, particularly among more technologically sophisticated than the first small firms: (i) the high cost of training; (ii) lack one of low-training industries. Firms that have no of adequate information; and (iii) high turnover of research and development (R&D) capacity and are skilled workers. The first failure can be addressed not involved in export have a poor track record of by financial sector reforms that improve access to providing in-service training. The incidence of funding for all kinds of investments, including formal in-service training also rises with firm size, training. The appropriate policy response to the from 6 per cent for micro enterprises to 56 per cent second failure would be to disseminate widely for large enterprises. This is a common finding in all the evidence of the productivity benefits of countries for which data are available, and probably training, best practices in training know-how, reflects size-related differences with respect to and information about the availability, offerings, access to finance, scale economies in the provision and costs of services from different public and of training, education levels of workers, managerial private sector training providers. The problem of capabilities, and use of new technologies. high turnover (or `poaching' of skilled workers by other employers) requires collective action. In this Indian employers do not appear to rate the skills respect, the Human Resource Development Fund of their workforce as an especially important of Malaysia is an example that has successfully constraint. This may explain why, for all types increased training among firms. Increasing the Effectiveness of Active Labour Market Policies of Indian firms, the employers' pay policies reward formal pre-employment education and training Consideration could be given to employer- but not the later acquisition of skills. Information targeted training policies to remedy the under- from an Investment Climate Study done by the investment in in-service training. Programmes World Bank (2004a) indicated that in-service used elsewhere include: (i) training levy rebate training actually had very little, if any, impact on schemes where firms are partially reimbursed for wages. At the same time, external training appeared approved training out of payroll levies; (ii) levy to have a positive and statistically significant effect exemption schemes where employers are exempt on productivity, especially for firms that either from levy payments, provided they spend a given exported or conducted R&D, indicating the percentage of their payrolls on training; and (iii) importance of such training. tax incentives for approved training, paid out of general revenues. Strengthening the in-house training capabilities of Indian firms should thus be a priority for Going forward, rather than only expanding policymakers. Public institutions have typically vocational education, policymakers should focus focused on pre-employment training in basic on strengthening general secondary education skills and may have little capacity to provide, and reforming the vocational education system, 161 162 including promoting private sector participation in on training programmes, hiring and firing of India's Employment Challenge VET. Such reforms would include improving the teachers, and generating revenues by selling goods management of the system. This would require and services. creating a clear demarcation between the functions of various levels of government and developing Finding the right role for the public sector in an effective coordination mechanism between training is critical. State-provided training can them. Significant involvement of employers be used to address market failures (for example, in the decision-making process of these bodies externalities from training, in general) and equity would also be critical to ensure that the system issues (for example, provision of training for the is responsive to market demands. Another informal sector) but may be less needed in an way to incentivize the system would be to give environment where private capacity exists (Box institutions greater autonomy in terms of deciding 6.7 presents some general principles for the role of Box 6.7 The Appropriate Role for the Public Sector in Training There has always been an extensive debate regarding the appropriate role of the government in providing and financing training. While the debate is by no means resolved, international experience points towards some guiding principles: · No government today can afford to provide and finance all the skills needed by a modern economy. Finding the appropriate balance between government and non-government provision and financing of skills is essential. The highest priority for a government in this context is to formulate the right policies which facilitate skills development and encourage both the public and private sectors to pursue their comparative advantages in a market context. The balance in the partnership may vary from country to country given the economic context, and will need to be informed by analysis of this context. · Some rather clear roles for government emerge where ensuring equity of access to training is concerned, and where markets fail to provide the right signals to guide training decisions. Encouraging the cost recovery of training can improve the efficiency with which training resources are used, but reduce access to training for those without a capacity to pay. The state has a clear role in promoting equity in access and can use its financing in a targeted fashion to achieve this goal in state-sponsored and non-government sources of skills training. Where markets fail to send the right signals to guide training decisions, governments can also justify financing interventions. The presence of social benefits to training that are not captured in increased earnings for the trainees or higher profits for the enterprises, will lead to lower levels of private investment in skills development than those needed from a social perspective. Targeting public financing at those who will invest in these skills can improve the performance of the market. · State-sponsored provision of training can also be used to address equity and market failures, but it is not a necessary condition in an environment where non-government capacity for skills development exists. Determining the role of the public sector in the provision of training therefore requires carefully assessing what the non-government sector is willing to do and whether, with appropriate incentives, it can be encouraged to fill training gaps. · There are many things the non-government sector does not or cannot do. These include overall policy development and guidance, standards setting, the provision of information about the benefits and locations of training, preparing teaching materials, training instructors, and running standardized examinations of graduates. Here, the state's role is clear and positive. Source: Johanson and van Adams (2004). the public sector in training). As a rule, unplanned upgrade 500 public sector ITIs, out of a total of public provisions should not crowd out private 1,863 institutions (there are 3,500 additional ITIs supply. It is also not necessary that the government that are fully private), between 2005 and 2010. intervene solely through providing training. It has already used its own funds to upgrade 100 Indeed, it may have a more important role to play ITIs and is in the process of selecting another 100 in things that the non-government sector cannot for upgrading. do, such as developing policies and standards, preparing teaching materials, training instructors, In the informal sector, instead of delivering training, and even contracting training to the private sector. the government can act as facilitator by creating an A key function could be providing information on environment that is supportive of non-public the nature and quality of training and facilitating providers of training. In India, as in many other regular and independent evaluations of the impact countries, non-government providers are much of these training programmes. The GoI is keen to more active in providing training in the informal undertake reforms to move towards a system where sector. Non-public providers pick up innovative it plays a key role in policy development, standards training approaches much more quickly and need setting, financing, and monitoring and evaluation, less support. Instead of delivering training itself, the while engendering greater competitiveness and government can focus on creating an environment accountability among institutions. A key ingredient to support non-public providers through: (i) of the reform agenda is to move the private sector supporting curriculum development, training of into a lead role at all levels of decision making-- trainers, and development of competency-based from policy-making at the Central and state levels skills testing; (ii) stimulating investment through to managing institutions through Institutional tax incentives or financial support so as to increase Management Committees (IMCs) which are the capacity and quality of training; and (iii) led by employers. The Ministry of Labour and revising apprenticeship Acts that are outdated and Employment (MoLE) is working closely with the contain regulations which hamper enterprise- private sector to transform this vision into reality. based training. One successful approach in this In terms of public investment, the GoI aims to regard is Kenya's Jua Kali project (see Box 6.8). Increasing the Effectiveness of Active Labour Market Policies Box 6.8 Training for the Informal Sector--The Jua Kali Experience The Jua Kali (informal sector) project in Kenya, funded by the International Development Association, is aimed at providing skills and technology upgradation to about 25,000 informal sector manufacturing workers; increasing the access of informal sector entrepreneurs to services; and improving the policy and institutional environment by removing restrictive laws and policies. A key feature of the project is a voucher programme intended to introduce consumer choice, enabling informal sector operators to purchase the training they want, wherever they want. Intermediaries--allocation agencies--are selected by competitive tender to market, allocate, and redeem vouchers in a decentralized way throughout Kenya. Allocation agencies receive a fee equal to 3 per cent of the value of vouchers issued. Vouchers can be used for any kind of training from any registered training provider. Over the course of the project, about 700 training providers have become pre-qualified to provide training. By early 2001, some 18,000 training vouchers had been issued. The impact of the project, evaluated through two tracer studies, has been highly positive for the beneficiaries. Employment among the graduates has 163 164 Box 6.8 (continued) India's Employment Challenge increased by 50 per cent compared with employment before training, and the income of enterprises has also increased by 50 per cent. According to anecdotal evidence, some participants who received vouchers for basic training have paid the full costs of more advanced training. One unexpected outcome of the voucher training programme is the emergence of a new kind of training provider--the skilled master craftsperson. The strong preference of Jua Kali workers for appropriate, accessible training by master craftspersons was revealed in the first phase of the project: 85 per cent of all vouchers went to pay for the services of master craftspersons, and only 15 per cent went to private and public training institutions. Some important lessons include: (i) the use of a voucher mechanism enabled the project to stimulate demand for training, technology, and management and marketing consultation among micro and small enterprises. A supply response was generated and a training market established to address the needs of micro enterprises; (ii) an unexpected impact of the voucher training programme was the emergence of skilled craftsmen as the leading providers of training. Entrepreneurs preferred the training services of master craftspersons in the informal sector to training in formal institutions. The training by master craftspersons was usually well adapted to entrepreneurs' needs for short, practical training. These training providers were previously invisible to agencies that wished to pay for training directly; and (iii) the implementation experience underscored the importance of appropriate management arrangements--a project for the private sector is best managed by the private sector, with the government at best playing a facilitating role. Source: Johanson and van Adams (2004). CONCLUSION designs need to be improved and reinforced The GoI already has in place a range of active through the development of better monitoring market policies to help improve labour market and evaluation mechanisms. Similarly, previous outcomes. It has also committed to a major experience on social insurance provision suggests expansion of two important components of this a cautious and gradual approach to expansion programme: public works and social insurance. which may not be consistent with the political This significant expansion is in line with the desire for broad-based schemes with high government's objective of protecting vulnerable `announcement value'. The vocational training sections of the workforce and also with the system in India suffers from a lack of proper country's rising income levels. Improvements in targeting and an overly bureaucratic approach the social protection system are also a prerequisite which stresses delivery over quality. If this is to be if the GoI is to undertake any reform of labour made more relevant, the system needs to become regulations. more flexible and responsive to market needs. There is also a need to reassess where public Prior experience, however, suggests that significant interventions are most needed, and the form these changes and improvements are required to make interventions should take. such programmes more effective. In public works programmes, poor implementation remains an These policies involve substantial fiscal issue. For these to be more effective, programme expenditure and may come at the cost of other possible welfare-enhancing interventions. 9. It is important to note though that administrative Experimentation is also not without cost. Thus, it costs in the beedi (a type of low-cost Indian is essential to fully learn the lessons from previous cigarette) workers' fund have been historically experiences and incorporate them going forward. much more reasonable, with data for 1993­2000 While such policies have considerable potential, indicating an average administrative share of 6­7 per cent. moving from the big picture of policy initiatives 10. See Ramaswami, Ravi and Chopra (2003) to the `nuts and bolts' of effective implementation regarding the Comprehensive Crop Insurance will remain the biggest challenge in realizing the Scheme and the National Agricultural Insurance full labour market potential of the policies and Scheme. See also Kalavakonda and Mahul (2005) the benefits they may hold for the poor. regarding Karnataka. 11. Devadasan et al. (2004) gives a useful typology and NOTES overview, noting around 20 community-based 1. See World Bank (2009b) regarding health shocks health insurance schemes. See also Ahuja and regarding old age security. Narang (2005). 2. See World Bank (2006), and Munshi and 12. See Kuruvilla et al. (2005) for a detailed discussion Rosenzweig (2005) for empirical evidence of of Yeshasvini, and also ILO (2005). credit and insurance market failures leading to 13. This note draws extensively on Chandra et al. limited mobility in rural areas. (2006). 3. For summaries of international experience, see 14. In practice, enforcement of the Employment Ravallion (1991), and Subbarao (2003). Exchanges Act has been limited, with only few 4. Estimates of employment generation are based private establishments reporting their vacancies on `arithmetic calculation', assuming a 60:40 to the exchanges. split in expenditure between wages and materials, 15. See Betcherman et al. (2004) for a review of a condition which is not met for most major developing and transition country experience categories of public works. The average share of with various active labour market policies. wages in total expenditure, across all states and all They find generally that informational and activities, was found to be about 47.5 per cent. job brokerage services have been far more cost 5. See, for example, Comptroller and Auditor effective typically than training, credit, and other Increasing the Effectiveness of Active Labour Market Policies General (CAG) Reports (1997 and 2000). interventions in public employment services. 6. See Papola (2005) for a positive view on the 16. India is not a signatory to the ILO Convention feasibility of rolling out the NREG in its full of 1996 on private employment agencies. dimension. 17. While one of the mandates of ITIs is to train 7. CBGA (Chhattisgarh, Madhya Pradesh, Andhra workers in the informal sector, evidence shows Pradesh, and Jharkhand); IHD (Bihar); Hirway this is rarely the case (Dar 2006). (Gujarat), all dated 2006. 18. A World Bank study (2004b) categorized 12 Indian 8. See Peters et al. (2002), Dulfo (2005), and World states according to their investment climates. Bank report (2009b). 165 APPENDICES Appendix 1.1 Panel A: Number of Persons in Labour Force (in thousands) and Rates of Growth of Labour Force (per cent per annum) Population 1983 1993­4 1999­2000 2004­5 1983/ 1993­4/ 1993­4/ Segment 1993­4 1999­2000 2004­5 USPS SS UPSS UPS SS UPSS UPS SS UPSS UPS SS UPSS UPS UPSS UPS UPSS UPS UPSS Rural Males 154,676 4,244 158,920 185,113 3,991 189,104 200,800 2,582 203,382 214,112 3,535 217,647 1.73 1.67 1.36 1.22 1.47 1.42 Rural Females 66,986 23,956 90,942 73,089 28,853 101,942 82,010 23,925 105,435 90,077 30,303 120,380 0.83 1.09 1.94 0.56 2.11 1.68 Rural Persons 221,662 28,200 249,862 258,202 32,844 291,046 282,810 26,007 308,817 304,189 33,839 338,027 1.46 1.46 1.52 0.99 1.65 1.51 Urban Males 49,632 768 50,400 66,582 628 67,210 80,051 493 80,544 90,602 759 91,361 2.84 2.78 3.12 3.06 3.13 3.12 Urban Females 10,330 2,340 12,670 14,199 3,546 17,745 16,658 2,819 19,477 21,191 4,314 25,505 3.08 3.26 2.7 1.56 4.09 3.69 Urban persons 59,962 3,108 63,070 80,781 4,174 84,955 96,709 3,312 100,021 111,793 5,073 116,866 2.88 2.88 3.04 2.76 3.30 3.24 Males 204,308 5,012 209,320 251,695 4,619 256,314 280,851 3,075 283,926 304,714 4,294 309,008 2.01 1.95 1.84 1.72 1.93 1.89 Females 77,316 26,296 103,612 87,288 32,399 119,687 98,668 26,244 124,912 111,267 34,617 145,885 1.16 1.38 2.06 0.71 2.46 2.00 Persons 281,624 31,308 312,932 338,983 37,018 376,001 379,519 29,319 408,838 415,982 38,911 454,893 1.78 1.76 1.9 1.41 2.07 1.92 Panel B: Average Annual Increments to Labour Force (in thousands) Population 1983/1993­4 1993­4/1999­2000 1993­4/2004­5 Segments UPS SS UPSS UPS SS UPSS UPS SS UPSS Rural Males 2,899 ­24 2,875 2,615 ­235 2,380 2,636 ­41 2,595 Rural Females 581 466 1,047 1,487 ­905 582 1,544 132 1,676 Rural Persons 3,480 442 3,922 4,101 ­1,140 2,562 4,181 90 4,271 Urban Males 1,614 ­13 1,601 2,245 ­23 2,222 2,184 12 2,196 Urban Females 369 114 483 410 ­121 289 636 70 705 Urban Persons 1,983 101 2,084 2,655 ­144 2,511 2,819 82 2,901 Total Males 4,513 ­37 4,476 4,859 ­257 4,602 4,820 ­30 4,790 Total Females 950 581 1,531 1,897 ­1,026 871 2,180 202 2,382 Total Persons 5,463 544 6,007 6,756 ­1,283 5,473 7,000 172 7,172 Source: Sundaram and Tendulkar (2006a) Note: UPS-Usual Principal Status; SS-Subsidiary Status; UPSS-Usual Principal-cum-Subsidiary Status Appendices 169 Appendices 170 Appendix 1.2 Estimates of Children (0­14 years of age) in Labour Force on Usual Principal and Usual Principal plus Subsidiary Status: All India, 1983 to 1999­2000 (in thousands) Persons in Labour Force Labour Force Rate Percent Per Annum Population 1983 1993­4 1999­2000 2004­5 1983/ 1993­4/ 1993­4/ Segment 1993­4 1999­2000 2004­5 UPS SS UPSS UPS SS UPSS UPS SS UPSS UPS SS UPSS UPS UPSS UPS UPSS UPS UPSS Rural Males 9,091 1,733 10,824 5,120 1,177 6,297 4,277 507 4,784 2,995 745 3,740 ­5.32 ­5.03 ­2.95 ­4.48 ­5.22 ­5.08 Rural Femals 6,477 2,609 9,086 4,378 1,496 5,874 3,480 988 4,468 2,406 1,170 3,576 ­3.66 ­4.07 ­3.75 ­4.46 ­5.81 ­4.84 Rural Persons 15,568 4,342 19,910 9,498 2,673 12,171 7,757 1,495 9,295 5,401 1,915 7,316 ­4.6 ­4.58 ­3.32 ­4.47 ­5.49 ­4.96 Urban Males 1,226 233 1,459 938 121 1,059 865 48 913 961 79 1,040 ­2.52 ­3.01 ­1.34 ­2.44 0.24 ­0.18 Urban Females 612 170 782 501 161 662 455 125 580 456 180 636 ­1.89 ­1.57 ­1.59 ­2.18 ­0.94 ­0.40 Urban Persons 1,838 403 2,241 1,439 282 1,721 1,320 173 1,493 1,417 260 1,676 ­2.3 ­2.48 ­1.43 ­2.34 ­0.16 ­0.26 Males 10,317 1,966 12,283 6,058 1,298 7,356 5,142 555 5,697 3,956 824 4,780 ­4.94 ­4.77 ­2.7 ­4.17 ­4.17 ­4.22 Females 7,089 2,779 9,868 4,879 1,657 6,536 3,935 1,113 5,048 2,862 1,350 4,212 ­3.5 ­3.85 ­3.52 ­4.21 ­5.20 ­4.30 Persons 17,406 4,745 22,151 10,937 2,955 13,892 9,077 1,668 10,745 6,817 2,175 8,922 ­4.33 ­4.35 ­3.06 ­4.19 ­4.62 ­4.26 Source: Sundaram and Tendulkar (2006a). Appendix 1.3 Age Group-Specific Student-Population Ratios by Gender and Rural/Urban Location: All India, 1993 to 1999­2000 Panel A: Rural India Males Females Age-Group 1983 1993­4 1999­ 2004­5 1983 1993­4 1999­ 2004­5 2000 2000 5­9 479 670 707 808 341 561 631 776 10­14 572 743 777 870 320 546 635 771 15­19 276 368 414 476 94 190 258 340 20­24 52 80 86 121 11 20 30 54 25­29 6 8 9 25 1 2 2 30 Panel B : Urban India Males Females Age-group 1983 1993­4 1999­ 2004­5 1983 1993­4 1999­ 2004­5 2000 2000 5­9 705 841 838 886 652 801 810 880 10­14 771 866 873 899 663 812 821 883 15­19 481 559 585 595 347 490 517 573 20­24 151 205 218 235 65 121 158 168 25­29 24 28 30 46 6 8 11 33 Sources: Sundaram and Tendulkar (2006a); Staff Estimates using NSS. Note: Computed from NSS Unit Record Data. Appendices 171 Appendices 172 Appendix 1.4 Usual Status Worker­Population Ratios (WPRs), per 1,000, by Age, Gender, and Rural/Urban Location: All India, 1983­2000 Panel A: Rural India Rural Males Rural Females S.no. Age-group 1983 1993­4 1999­2000 2004­5 1983 1993­4 1999­2000 2004­5 ps ps+ss ps ps+ss ps pp+ss ps pp+ss ps ps+ss ps ps+ss ps ps+ss ps ps+ss 1 0­9 10 13 5 6 3 4 1 1 9 13 6 7 3 4 1 1 2 14­Oct. 213 253 112 138 82 91 54 68 170 240 104 141 74 96 49 74 3 15­19 604 666 524 578 475 503 453 497 333 452 264 364 234 304 223 319 4 20­24 864 897 824 859 823 844 820 849 353 488 318 456 310 410 284 410 5 25­29 956 968 947 958 942 950 956 966 404 557 354 525 373 491 367 513 6 30­44 981 985 984 986 979 982 981 985 457 614 425 598 444 571 458 614 7 45­59 950 955 963 968 953 958 958 962 407 552 401 543 407 518 445 569 8 60­64 812 830 848 860 786 800 807 822 239 342 256 357 260 324 296 381 9 65 & above 518 551 564 583 510 528 527 541 103 155 117 165 117 148 135 173 10 60 & above 643 670 679 695 608 625 630 644 160 233 172 242 169 211 197 253 11 All Ages (1) 528 547 538 553 522 531 535 546 248 340 234 328 231 299 242 327 12 All Ages (2) 538 557 534 549 525 534 248 339 226 317 228 295 Panel B: Urban India Urban Males Urban Females S.no. Age-group 1983 1993­4 1999­2000 2004­5 1983 1993­4 1999­2000 2004­5 ps ps+ss ps ps+ss ps ps+ss ps ps+ss ps ps+ss ps ps+ss ps ps+ss ps ps+ss 1 0­9 3 4 2 3 1 2 1 1 3 3 2 3 1 1 1 2 2 10­14 94 113 59 66 46 49 44 48 54 70 34 45 28 36 24 33 3 15­19 375 414 337 356 303 314 314 335 121 155 94 123 87 105 92 128 4 20­24 698 727 654 675 644 658 662 684 138 182 137 180 130 155 155 201 5 25­29 915 921 892 904 879 883 900 909 183 229 175 224 161 194 186 229 6 30­44 972 975 974 975 968 969 972 975 234 291 230 295 233 266 253 309 7 45­59 921 926 931 935 918 921 917 923 226 276 230 283 218 251 217 252 8 60­64 620 635 557 570 510 528 465 476 172 202 133 172 117 137 125 146 9 65 & above 389 407 346 359 308 322 288 299 80 97 66 78 63 70 64 74 10 60 & above 488 505 431 444 382 397 355 366 118 140 92 114 82 94 86 100 11 All Ages(1) 500 512 514 521 513 518 541 549 120 151 121 155 117 139 135 166 12 All Ages(2) 512 525 512 520 522 527 119 150 117 149 118 140 Source: Sundaram and Tendulkar (2006a). Notes: 1. Estimates of worker­population ratios in all columns labelled `ps' relate to Usual Principal Status and those labelled `ps+ss' relate to Usual Principal Status workers plus workers on the Subsidiary Status among those classified as `non working' on the Usual Principal Status. 2. The overall WPRs for all ages in this row represent, for each population segment, the weighted average of survey-based WPRs with the survey-based share of each age group in the total population in that segment as weights. 3. The overall WPRs for all ages in this row have also been derived as weighted averages of survey-based age-specific WPRs but with the population census-based share of each age group in the total population in a given population segment as weights. Appendix 1.5 Industrial Distribution of Total Prime-age Workforce Industry No (in 000) Share (%) Average Annual Share of Average Annual Increment (in 000) Increment (%) 1983 1993­4 1999­ 2004­5 1983 1993­4 1999­ 2004­5 83/ 93­4/ 93­4/ 83/ 93­4/ 93­4/ 4 2000 2000 93­4 99­00 04­05 93­4 99­00 04­05 Agriculture & Allied 178,201 208,767 219,323 238,556 67.0 63.3 60.4 57.0 2,911 1,759 2,708 47.9 31.7 33.6 Mining & Quarrying 1,862 2,638 2,179 2,511 0.7 0.8 0.6 0.6 74 ­77 ­12 1.2 ­1.4 ­0.1 Manufacturing 29,257 35,289 39,217 50,222 11.0 10.7 10.8 12.0 574 655 1,358 9.4 11.8 16.8 Utilities 798 1,319 1,089 1,256 0.3 0.4 0.3 0.3 50 ­38 ­6 0.8 ­0.7 ­0.1 Construction 6,383 11,213 16,340 24,693 2.4 3.4 4.5 5.9 460 854 1,225 7.6 15.4 15.2 Trade, Hotel & Restaurants 17,022 24,735 36,312 43,526 6.4 7.5 10.0 10.4 735 1,929 1,708 12.1 34.8 21.2 Transport, Storage & Communication 7,447 9,894 13,798 17,159 2.8 3.0 3.8 4.1 233 651 660 3.8 11.7 8.2 Fin. Intermediaries, Real Estate, Business, etc. 1,862 3,298 4,357 6,696 0.7 1.0 1.2 1.6 137 177 309 2.3 3.2 3.8 Pub Admn., Edu., Health, other Community & Personal Services 23,140 32,651 30,502 33,900 8.7 9.9 8.4 8.1 906 ­358 114 14.9 ­6.5 1.4 ALL 265,972 329,805 363,118 418,520 100.0 100.0 100.0 100.0 6,079 5,552 8,065 100.0 100.0 100.0 Source: Authors' estimates based on Sundaram (2007). Appendices 173 174 Appendices Appendix 1.6 Distribution of Workers, by Employment Status Increments Growth Rate (in thousands) (in thousands) (% p.a.) Status 1983 1993­4 1999­2000 2004­5 I II III I II III RWS 38,964 48,647 57,377 59,111 922 1,455 10,464 2.14 2.79 1.79 (14.7) (14.81) (15.9) (15.53) (15.27) (33.08) (20.1) CL 79,279 106,786 120,599 115,444 2,620 2,302 8,658 2.88 2.05 0.71 (29.91) (32.51) (33.42) (30.34) (43.38) (52.34) (16.63) SE 146,817 173,038 182,884 205,987 2,497 1,641 32,949 1.58 0.93 1.60 (55.39) (52.68) (50.68) (54.13) (41.35) (37.31) (63.28) ALL 265,060 328,471 360,860 380,542 6,039 5,398 52,071 2.06 1.58 1.35 (100) (100) (100) (100) (100) (100) (100) Source: Sundaram and Tendulkar (2006b) and authors' estimates. Notes: RWS: Regular wage/salary CL: Casual Labour SE: Self-employed Periods: I, II, III- I: 1983 to 1993­4 (10.5 years) II: 1993­4 to 1999­2000 (6 years) III: 1993­4 to 2004­5 (11 years) Percentage shares in bracket Appendix 1.7 Educational Composition of the Indian Workforce (in thousands) S. Education All workers Avg. Annual Additions Share of Male Workers in No. Category Each Education Category 1983 1993­4 1999­ 2004­5 I II III 1983 1993­4 1999­ 2004­5 2000 2000 1 2 3 4 5 6 7 8 9 10 11 12 13 1 Illiterate 149,043 156,812 154,448 146,745 740 ­394 ­915 51.7 50.3 50.49 46.08 (56.23) (47.73) (42.8) (40.56) (12.22) (­7.30) (­30.24) 2 Literate upto Primary 63,137 78,800 82,060 95,346 1,492 543 1,504 83.16 79.77 78.27 73.53 (23.82) (23.99) (22.74) (26.36) (24.71) (10.06) (49.7) 3 Primary upto Middle 25,923 39,646 52,144 61,522 1,307 2,083 1,989 90.l25 87.03 85.23 79.59 (9.78) (12.07) (14.45) (17) (21.64) (38.59) (65.71) 4 Middle upto Graduate 19,588 37,906 50,773 58,149 1,744 2,145 1,840 91.18 89.31 88.47 83.40 (7.39) (11.54) (14.07) (16.07) (28.88) (39.74) (60.81) 5 Graduate & above 7,369 15,307 21,435 23,410 756 1,021 737 89.06 87.3 86.46 82.91 (2.78) (4.66) (5.94) (6.47) (12.52) (18.91) (24.34) 6 Total 265,060 328,471 360,860 361,762 6,039 5,398 3,026 66.92 68.03 69.31 65.01 (100) (100) (100) (100) (100) (100) (100) Source: Sundaram and Tendulkar (2006b) and Authors' estimates. Notes: Figures in parentheses are percentages of totals. I: Period from 1983 to 1993­4 II: Period from 1993­4 to 1999­2000 III: Period from 1993­4 to 2004­5 Appendix 1.8 Average Annual Increment to Adult (15­59 years of age) Workforce by Gender, Rural/Urban Location, and Poverty Status: All India, 1983/93­4 and 1993­4/1999­2000 Panel A: Rural India 1983/1993­4 1993­4/1999­2000 Category Rural Males Rural Females Rural Persons Rural Males Rural Females Rural Persons Self-employed All Households 1,220 497 1,717 521 96 617 APL Households 1,655 864 2,519 1,017 420 1,437 RWS Workers All Households 69 27 96 325 103 428 APL Households 271 52 323 344 102 446 Casual Labourers All Households 1,558 695 2,253 1,563 469 2,032 APL Households 1,224 375 1,799 1,688 750 2,438 All Workers All Households 2,847 1,219 4,066 2,409 668 3,077 APL Households 3,150 1,491 4,641 3,049 1,272 4,321 Panel B: Urban India 1983­94 1993­4/1999­2000 Category Urban Urban Urban Urban Urban Urban Males Females Persons Males Females Persons Self-employed All Households 664 179 843 792 123 915 APL Households 465 90 555 739 53 792 RWS Workers All Households 586 163 749 773 220 993 APL Households 497 135 632 789 234 1,023 Casual Labourers All Households 294 89 383 437 (­) 38 399 APL Households 100 19 119 343 17 360 All Workers All Households 1,544 431 1,975 2,002 305 2,307 APL Households 1,062 244 1,306 1,871 368 2,239 Panel C: All Areas (Rural + Urban) 1983­94 1993­4/1999­2000 Category Males Females Persons Males Females Persons Self-employed All Households 1,884 676 2,560 1,313 219 1,532 APL Households 2,120 954 3,074 1,756 537 2,293 RWS Workers All Households 655 190 845 1,098 323 1,421 APL Households 768 187 955 1,133 336 1,469 Casual Labourers All Households 1,852 784 2,636 2,004 431 2,431 APL Households 1,324 594 1,918 2,031 767 2,798 All Workers Appendices All Households 4,391 1,650 6,041 4,411 973 5,084 APL Households 4,212 1,735 5,947 4,920 1,640 6,560 Source: Sundaram and Tendulkar (2006b). Notes: APL Households are Above Poverty Line Households. RWS workers are `regular wage salaried' workers. 175 Appendices 176 Appendix 1.9 Rural Average Daily Earnings of Adult (15­59 years of age) Male and Female Casual Wage Labourers: All India (in Rs at 1993­4 prices) Males Females S. No. Operation Codes 1983 1993­4 1999­2000 I II 1983 1993­4 1999­2000 I II 1 1­6 16.08 21.06 25.10 2.60 2.97 11.09 15.08 18.23 2.97 3.21 2 7­11 18.75 24.88 30.02 2.73 3.18 11.05 16.48 20.03 3.88 3.30 3 1­11 16.42 21.87 25.85 2.77 2.83 11.09 15.31 18.44 3.12 3.15 4 13­14 22.84 30.42 35.43 2.77 2.57 11.54 17.32 23.84 3.94 5.47 5 1­11,13­14 16.64 22.37 26.82 2.86 3.07 11.12 15.37 18.64 3.13 3.27 6 12 23.27 30.07 38.71 2.47 4.30 11.63 17.93 24.05 4.21 5.02 7 14 24.48 30.98 35.64 2.27 2.36 12.13 17.62 24.07 3.62 5.34 8 12­14 23.22 30.14 37.69 2.52 3.80 11.63 17.80 23.98 4.14 5.09 9 All Ag. 16.39 21.96 26.03 2.83 2.87 11.05 15.26 18.25 3.12 3.03 10 All Non-ag. 23.78 30.46 38.32 2.39 3.90 11.66 17.91 23.88 4.17 4.91 11 All Activities 18.01 23.91 29.26 2.74 3.42 11.14 15.57 18.78 3.24 3.17 12 Public Works 19.51 24.65 31.47 2.25 4.15 11.92 18.54 25.91 4.30 5.74 Source: Sundaram and Tendulkar (2006b). Notes: 1. Operation Codes: 1­6: Manual work in cultivation 7­11: Manual work in other agricultural activities 1­11: Manual work in agriculture 13­14: Non-manual work in cultivation 1­11 and 13­14: Casual work in agriculture, manual and non-manual 12: Manual work in non-agriculture 14: Activities other than cultivation 12­14: Casual work in non-agriculture 2. Columns (6), (7), (11), and (12) Growth Rate (per cent per annum), for Period I: 1983 to 1993­4 (10.5 years) and Period II: 1993­4 to 1999­2000 (6 years). Appendix 1.10 Number of Persons Unemployed, 1983 to 2004­5 Panel A: Persons (All Ages) Unemployed on UPS and UPSS Persons Unemployed on UPS & UPSS (000) Population Segments 1983 1993­4 1999­2000 2004­5 UPS UPSS UPS UPSS UPS UPSS UPS UPSS Rural Males 3,260 2,225 3,647 2,709 4,275 3,556 4,430 3,345 (21) (14) (20) (14) (21) (17) (20) (15) Rural Females 940 593 1,040 816 1,228 1,096 2,923 2,218 (14) (7) (14) (8) (15) (10) (30) (17) Rural Persons 4,200 2,818 4,687 3,525 5,503 4,652 7,353 5,562 (19) (11) (18) (12) (19) (15) (23) (15) Urban Males 2,888 2,541 3,061 2,752 3,878 3,650 3,290 2,879 (58) (50) (46) (41) (48) (45) (35) (30) Urban Females 733 632 1,224 1,165 1,192 1,128 1,669 1,512 (71) (50) (86) (66) (72) (58) (75) (57) Urban Persons 3,621 3,173 4,285 3,917 5,070 4,778 4,958 4,391 (60) (50) (53) (46) (52) (48) (43) (36) Total Males 6,148 4,756 6,708 5,461 8,153 7,206 7,719 6,224 (30) (23) (27) (21) (29) (25) (24) (19) Total Females 1,673 1,225 2,264 1,981 2,420 2,224 4,592 3,729 (22) (12) (26) (17) (25) (18) (39) (24) Total Persons 7,821 5,991 8,972 7,442 10,573 9,430 12,312 9,953 (28) (19) (26) (20) (28) (23) (28) (21) Panel B: Youth (15­29) Persons Unemployed on UPS & UPSS Population Segments 1983 1993­4 1999­2000 2004­5 UPS UPSS UPS UPSS UPS UPSS UPS UPSS Rural Males 2,776 1,851 3,291 2,463 3,724 3,157 3,852 3,002 (49) (31) (48) (35) (51) (43) (49) (37) Rural Females 690 498 869 724 1,057 978 2,251 1,852 (28) (15) (32) (19) (37) (26) (75) (44) Rural Persons 3,363 2,349 4,160 3,187 4,781 4,135 6,103 4,855 (41) (25) (44) (29) (47) (37) (56) (40) Urban Males 2,442 2,161 2,678 2,415 3,311 3,118 2,794 2,484 (122) (106) (108) (96) (115) (107) (85) (74) Urban Females 637 557 1,065 1,015 969 925 1,313 1,191 (156) (112) (193) (149) (168) (138) (170) (126) Urban Persons 3,079 2,718 3,743 3,430 4,280 4,043 4,107 3,675 (128) (107) (123) (107) (124) (113) (101) (86) Total Males 5,115 4,012 5,969 4,878 7,035 6,275 6,646 5,486 (66) (151) (64) (51) (69) (61) (60) (48) Total Females 1,327 1,055 1,934 1,739 2,026 1,903 3,564 3,043 (46) (27) (60) (39) (59) (440) (94) (59) Total Persons 6,442 5,067 7,903 6,617 9,061 8,178 10,210 8,529 (61) (43) (63) (47) (67) (56) (69) (52) Appendices Source: Authors' estimates. Note: Figures parentheses relate to unemployment ratios defined as number of persons unemployed expressed per 1,000 persons in the labour force. 177 178 Appendices Appendix 2.1 Correspondence between Regular and Wage Employment Data from NSS and Organized Sector Employment from the Director General of Employment and Training Attempts have been made recently to explore the connection between the NSS-based RWS (regular wage salaried) workers and employment in the organized high productivity units. The most commonly used data source for organized employment is the number of employees on regular payrolls, as on 31 March each year, reported by the Directorate General of Employment and Training (DGE&T) and published in the annual Economic Surveys of the Ministry of Finance. The DGE&T collects this information under the Employment Exchanges (Notification of Vacancies) Act. Under this legislation, the reporting is mandatory for all public sector units, irrespective of size, as also for large private sector establishments with 25 or more employees. It is voluntary for private sector units with 10­24 employees. The data are known to suffer from under-reporting because of the voluntary nature of reporting from small units and lax enforcement of mandatory requirements from large units. The NSS 55th Round collected, for the first time, worker- reported information on the types of enterprises where workers were employed. This was confined only to workers engaged in non-agricultural activities. Three types of enterprises provide a reasonable approximation to organized sector employment: (i) public sector, (ii) semi-public, and (iii) other (including cooperative society, private limited company, and other units under the Annual Survey of Industries). A special tabulation of the self-reported affiliation of workers by type of enterprise, carried out by the Central Statistical Organisation (GOI-CSO 2004), brought out two results of interest in the present context. One, the aggregate employment in (i) to (iii) was 31.85 million, compared to 26.54 million as reported on 31 March 2000 by DGE&T, thus providing some support to the apprehension of under-reporting in DGE&T data. Two, the shortfall was almost entirely in organized services where the NSS-based estimate was 16.8 million compared with 11.5 million in DGE&T. Sundaram (2004) reported an alternative tabulation of the 55th Round data, in which he focused on activity-status categorization. He reported two findings that are relevant. One, close to 88 per cent of the workers in organized non-agricultural enterprises reported RWS status. Second, in every population segment (rural/urban x male/female), at least 50 per cent of the workers with RWS status were located in the organized segment, with this proportion being as high as 57 per cent for rural RWS female workers. These results suggest that RWS status would provide a good approximation of organized high-productivity employment and possibly be a good alternative source of information on employment in the sector so that it would not be necessary to rely solely on DGE&T data. Why can data on worker-reported affiliation by type of enterprise in non-agricultural activities not be used directly as a measure of employment in the organized sector? One reason is that this information is available so far only for the 55th Round and not for earlier periods. It was not collected in the earlier quinquennial Rounds. Second, self-reported affiliation by type of enterprise is yet to stabilize itself in the NSS reporting system. Consequently, data from the aforementioned two exercises may only be used to provide support to the suggestion of approximating organized sector employment by the number of RWS workers. Source: Sundaram and Tendulkar (2006b). Appendix 2.2 Percentage of Employment in Formal and Informal Sectors, by Industrial Categories, 1999­2000 Column Percentages Industry Formal Informal Total Primary 5.79 67.31 60.53 Secondary 28.31 14.14 15.71 Tertiary 65.90 18.54 23.77 Total 100 100 100 Row Percentages Industry Formal Informal Total Primary 1.05 98.95 100 Secondary 19.88 80.12 100 Tertiary 30.67 69.43 100 Total 11.03 88.91 100 Source: Sundaram and Tendulkar (2006b). Appendix 2.3 Relative Wages of Regular Salaried and Casual Labourers, All India, 1983­2000 Urban Male Urban Female Industry 1983 1987­8 1993­4 1999­2000 1983 1987­8 1993­4 1999­2000 Agriculture (0) 1.47 2.11 2.02 3.10 1.95 2.50 2.83 2.00 Mining & Quarrying (1) 1.88 2.65 3.20 3.37 2.80 2.71 2.84 2.69 Manufacture (Organic) (2) 1.79 1.65 1.67 1.62 1.63 1.58 1.87 1.49 Manufacture(Inorganic) (3) 1.89 2.54 2.41 2.43 5.57 3.73 3.62 2.43 Electricity, Gas, Water (4) 2.65 2.97 2.56 3.35 ­ 4.16 3.86 ­ Construction (5) 1.83 2.01 1.88 1.92 2.35 2.32 1.54 2.78 Trade and Hotels (6) 1.49 1.46 1.51 1.74 2.37 2.14 2.02 2.75 Transport (7) 2.11 2.34 2.14 2.50 2.71 3.12 3.86 3.80 Business, Financial Services (8) 3.41 3.55 4.37 3.96 5.50 2.89 3.35 5.54 Social, Personal Services (9) 2.73 2.71 3.11 3.92 3.29 3.87 3.27 5.80 Non-agriculture 2.11 2.35 2.34 2.71 3.27 3.61 3.22 3.94 All (0­9) 2.18 2.46 2.41 2.68 3.28 3.88 3.37 3.67 Rural Male Rural Female Agriculture 1.04 1.30 1.27 1.73 1.95 1.43 1.51 1.73 Non-agriculture 1.89 2.22 2.21 2.42 2.29 2.85 2.32 3.89 All 2.04 2.41 2.52 2.80 2.20 2.80 2.28 3.88 Source: Computed from Unni (2006: Table 8). Note: Figures refer to regular wage earnings per worker/casual wage earnings per worker. Appendices 179 180 Appendices Appendix 2.4 Skilled­Unskilled Workers, by Level of Education and Skill Premium (W), All, Regular, and Casual (1993­4 and 1999­2000) All Workers Industry Skilled/Unskilled WH/WL 1993­4 1999­2000 1993­4 1999­2000 Agriculture, Forestry, & Fishing 0.03 0.04 1.56 1.72 Mining & Quarrying 0.19 0.20 2.27 2.33 Manufacturing 0.36 0.48 2.38 2.42 Electricity, Gas, & Water 1.00 1.42 1.67 1.55 Construction 0.08 0.11 2.20 1.69 Trade 0.46 0.59 1.79 1.79 Hotels & Restaurants 0.17 0.28 1.62 1.94 Transport, Storage, & Communications 0.43 0.57 1.85 1.94 Finance & Real Estate ­ ­ 2.87 2.41 Services 1.45 1.58 2.41 2.61 Total 0.22 0.25 3.50 3.37 Regular Workers Agriculture, Forestry, & Fishing 0.08 0.16 2.92 2.37 Mining & Quarrying 0.53 0.61 1.30 1.33 Manufacturing 0.64 0.78 1.94 2.20 Electricity, Gas, & Water 1.14 1.52 1.56 1.48 Construction 0.59 0.58 2.26 1.94 Trade 0.63 0.84 1.74 1.73 Hotels & Restaurants 0.22 0.40 1.57 1.94 Transport, Storage, & Communications 0.67 0.91 1.57 1.66 Finance & Real Estate ­ ­ 2.54 2.24 Services 1.93 2.25 2.07 2.13 Total 0.99 1.17 2.10 2.16 Casual Workers Agriculture, Forestry, & Fishing 0.02 0.04 1.22 1.28 Mining & Quarrying 0.02 0.05 0.96 1.19 Manufacturing 0.09 0.13 1.20 1.25 Electricity, Gas, & Water 0.21 0.58 0.99 1.22 Construction 0.05 0.09 1.12 1.19 Trade 0.15 0.21 1.10 1.16 Hotels & Restaurants ­ ­ 0.93 1.29 Transport, Storage, & Communications 0.09 0.13 1.06 1.09 Finance & Real Estate ­ ­ 1.22 0.94 Services 0.07 0.08 1.27 3.09 Total 0.03 0.06 1.25 1.37 Source: Unni (2006: Table 13). Note: Skilled workers are those who completed education of secondary school and above. WH wages of skilled workers; WL - wages of unskilled workers. Appendix 2.5 Estimating the Determinants of Labour Use in Cultivation by 2SLS Instrumental Variable Regression with Time Dummies Model 1: Dependent: Labour Days in Cultivation per Hectare of Net Sown Area Coefficient t-value p-value Area under labour intensive crops (%) 7.03 7.93 0.00 Tractors per hectare ­1.69 ­1.96 0.56 Total non-farm workers (%) ­5.97 ­3.45 0.00 D for Year 1987­8 26.12 0.66 0.51 D for Year 1993­4 74.29 1.83 0.07 D for Year 1999­2000 116.06 2.64 0.01 Constant 311.76 4.85 0.00 (p >F =0.000) R2=0.63 R2=0.59 Df=49 Endogenous Variable: Area under Labour Intensive Crops (%) Model 2: Dependent: Growth of Labour Days in Cultivation per Hectare of Net Sown Area Coefficient t-value p-value Growth in gross irrigated area 0.40 1.92 0.069 Growth of rural non-farm workers ­0.59 ­2.60 0.016 Annual % change in area of labour-intensive crops 2.57 3.80 0.001 Growth of NSDP in agriculture per 1,000 hectares 0.18 1.80 0.085 D for Period 1994­2000 ­1.01 ­1.65 0.113 Constant 1.10 1.12 0.276 (p >F =0.000) R2=0.49 R2=0.38 Df=22 Source: Srivastava (2006). Appendices 181 182 Appendices Appendix 3.1 Distribution of Employment in the Tertiary Sector: Formal and Informal (percentage as indicated) Rural Category Formal Informal Males Females Total Males Females Total Public 69.7 86.3 71.9 ­ ­ ­ Private Regular Wage 7.8 8.1 7.9 12.6 12.2 12.6 Casual Wage ­ ­ ­ 34.1 29.5 33.5 Self-Employed 22.5 5.6 20.2 53.3 58.4 53.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 % of All Tertiary 21.3 3.4 24.6 65.5 9.9 75.4 Urban Category Formal Informal Males Females Total Males Females Total Public 57.1 67.4 58.7 ­ ­ ­ Private Regular Wage 12.5 19.7 13.6 24.6 31.0 25.6 Casual Wage ­ ­ ­ 24.5 27.9 25.0 Self-Employed 30.4 12.9 27.7 50.9 41.1 49.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 % of All Tertiary 31.7 5.8 37.5 53.1 9.5 62.5 Source: Mazumdar and Sarkar (2009b). Appendix 3.2A Labour Productivity, by Broad Sectors 1983­2000 (Based on UPS estimates of employment) Labour Productivity (UPS) Labour Productivity Index (UPS) NIC 55th 50th 43rd 38th 55th 50th 43rd 38th 0 13,349 11,752 10,116 10,223 100 100 100 100 1 129,579 73,754 64,802 62,920 971 628 641 615 2&3 46,999 34,444 27,547 24,801 352 293 272 243 4 239,870 139,433 111,410 93,247 1,797 1,186 1,101 912 5 34,406 34,492 25,551 37,543 258 294 253 367 6 42,838 36,593 32,298 31,866 321 311 319 312 7 60,537 48,310 42,871 38,468 453 411 424 376 8 303,895 259,820 184,626 171,029 2,276 2,211 1,825 1,673 9 47,729 27,137 26,387 22,588 358 231 261 221 6+7+8+9 61,216 44,144 37,985 33,950 459 376 375 332 Source: Mazumdar and Sarkar (2008). Note: NIC=National Industrial Classification. Appendix 3.2B Decile and Quartile Ratios for the Distribution of Expenditure per capita in the Tertiary Sector, Different Rounds Rural Areas Round P90/P10 P90/P50 P10/P50 P75/P25 P75/P50 P25/P50 43rd 3.660 2.068 0.565 1.938 1.432 0.739 50th 3.442 1.989 0.578 1.883 1.401 0.744 55th 3.265 1.919 0.588 1.869 1.408 0.754 Urban Areas Round P90/P10 P90/P50 P10/P50 P75/P25 P75/P50 P25/P50 43rd 4.054 2.174 0.536 2.090 1.482 0.709 50th 4.107 2.191 0.533 2.118 1.496 0.706 55th 4.067 2.116 0.520 2.118 1.476 0.797 Source: Mazumdar and Sarkar (2009b). Note: NIC=National Industrial Classifiation. Appendices 183 Appendices 184 Appendix 4.1 Instrumental Variable Estimates of the Effect of GSDP on Employment Levels for Male and Female Workers Without State Dummies With State Dummies Without State Dummies With State Dummies 1 2 3 4 5 6 7 8 9 10 11 12 Male Male Male Male Female Female Female Female Rural Urban Male All Rural Urban Male All Rural Urban Female All Rural Urban Female All GSDP 0.21 0.817 0.423 ­0.155 0.452 ­0.453 0.515 0.77 0.677 1.089 0.188 2.115 [1.73]+ [4.73]** [4.99]** [0.22] [1.05] [0.26] [4.41]** [3.63]** [4.02]** [1.20] [0.14] [1.28] Rural Casual Wage Male 0.146 0.242 ­0.223 0.968 [0.31] [0.52] [0.26] [0.67] Urban Salaried Wage Male ­8.368 ­3.835 ­0.493 0.145 [2.90]** [2.15]* [0.54] [0.08] Rural Casual Wage Female 0.287 1.249 0.014 ­0.723 [0.83] [2.11]* [0.03] [0.89] Urban Salaried Wage Female 5 ­2.201 0.48 1.544 [1.22] [0.90] [0.39] [0.91] 1987­8 Dummy 0.054 1.095 0.422 0.142 ­0.105 ­0.179 ­0.052 ­0.775 0.176 ­0.123 ­0.19 ­0.554 [0.30] [2.17]* [1.25] [1.51] [0.60] [0.55] [0.39] [1.15] [0.43] [0.86] [0.62] [1.23] 1993­4 Duumy ­0.03 2.913 1.213 0.295 0.112 0.1 ­0.225 ­1.933 0.456 ­0.386 ­0.013 ­1.287 [0.14] [2.74]** [1.67]+ [1.76]+ [0.24] [0.09] [1.20] [1.25] [0.45] [0.95] [0.01] [1.02] 1999­2000 Dummy ­0.229 4.954 2.023 0.326 0.038 ­0.052 ­0.648 ­4.137 0.368 ­0.929 ­0.407 ­2.502 [0.72] [2.65]** [1.59] [1.13] [0.05] [0.03] [2.31]* [1.40] [0.22] [1.35] [0.24] [1.17] Urban Dummy ­1.262 ­1.262 ­2.063 ­2.063 [24.02]** [24.02]** [39.42]** [26.90]** Constant 11.311 38.175 24.39 16.653 10.058 15.326 7.554 ­15.334 11.713 1.822 7.397 ­12.847 [5.53]** [3.21]** [2.91]** [3.26]** [1.44] [0.77] [5.20] [1.05] [1.48] [0.20] [0.46] [0.62] Observations 247 277** 492 270 253 492 235 253 462 233 251 462 Test for Validity of Instruments Overidentification Test of all instruments (p­val­) 0.29779 0.20501 0.22334 0.73552 0.1719 0.40246 0.50153 0.49159 0.18463 0.47135 0.40425 0.8337 1st stage lgsdp 0.341 0.2407 0.3395 0.9971 0.9968 0.9965 0.2838 0.4053 0.3121 0.9959 0.9968 0.9959 Centred R2 for Urban Salaried Wage, Male 0.761 0.7736 0.8426 0.8553 Instrumented Rural Casual Wage, Female 0.3231 0.3201 0.5754 0.5792 Variables Urban Salaried Wage Female 0.4177 0.4916 0.5315 0.6218 Rural Casual Wage, Female 0.1864 0.1931 0.3726 0.3723 Excluded Share of Industry in GSDP x x x x x x x x x x Instruments Road density x x x x x x x x x x x x Percentage of villages electrified x x x x x x x x x x x Industrial Credit Rs. Per Capita x x x x x x x x x x Agricultural Credit Rs. Per Capita x x x x x x x x x x x x Source: Ahsan and Pagés (2006). Notes: 1. Absolute value of z statistics in brackets. Robust z is reported where heteroskedasticity exists. 2. + significant at 10%; *significant at 5%;** significant at 1% 3. x-excluded instruments used in the specification. Appendix 4.2 Effect of GSDP on Male Earnings GSDP (Instrumented) With State Dummies Rural Urban Casual Non- Casual Casual Salaried Agriculture Agriculture GSDP 1.934 1.381 ­0.368 ­1.181 [2.23]* [2.44]* [0.55] [2.17]* Scheduled Tribe (share in 25 plus) ­0.048 ­0.068 0.026 0.063 [1.13] [1.70]+ [0.57] [1.63] Scheduled Caste ­0.153 ­0.141 0.023 0.057 [2.40]* [2.22]* [0.51] [1.50] Primary Educated 0.172 0.221 0.068 0.07 [0.93] [1.30] [1.10] 1.37] Post-Primary Educated ­0.148 ­0.177 0.08 0.027 [0.80] [1.08] [0.53] [0.21] 1987­8 Round 0.301 0.343 0.436 0.619 [2.15]* [3.73]** [4.19]** [7.46]** 1993­4 Round 0.256 0.533 1.273 1.903 [0.62] [1.89]+ [4.03]** [7.24]** 1999­00 Round 0.297 0.73 1.95 2.951 [0.41] [1.51] [3.60]** [6.46]** Constant ­16.377 ­10.934 8.58 18.07 [1.80]+ [1.84]+ [1.22] [3.16]** Observations 245 243 246 248 Adj R-2 0.57 0.6 0.57 0.69 Test for Validity of Instruments Overidentification Test of all instruments 0.13694 0.26443 0.19339 0.15474 (P-val=) 1st state centred R2 for instrumented Variables GSDP 0.9963 0.9964 0.996 0.9963 Excluded Road density x x x x Instruments Share of industry in the x x x x state economy Percentage of villages electrified x x x x credit to industry per capita x x credit to agriculture per capita x x x x Source: Ahsan and Pagés (2006). Notes: 1. State fixed effects is not reported in this table. 2. Robust z statistics in brackets. 3. + significant at 10%; * significant at 5%;** significant at 1%. 4. x - excluded instruments used in the specification. Appendices 185 186 Appendices Appendix 4.3 Impact of GSDP Levels on Unemployment Rates OLS GSDP and Wages Instrumented with State Dummies with State Dummies 1 2 3 4 5 6 Growth of GSDP ­1.014 ­0.317 ­0.653 ­4.179 ­2.698 ­2.116 (1.95)+ (1.02) (1.78)+ (1.56) (1.39) (1.94)+ Round 2 Dummy 0.083 0 0 ­0.738 ­0.379 0 (0.61) (.) (.) (1.25) (0.89) (.) Round 3 Dummy 0 ­0.115 ­0.105 0 0 0.384 (.) (1.45) (1.18) (.) (.) (1.34) Round 4 Dummy 0.233 ­0.022 0.06 0.17 0.026 0.521 (3.09)** (0.27) (0.68) (1.32) (0.26) (2.01)* Urban Dummy 0.271 0.235 (4.19)** (3.21)** Urban Salaried Wages ­0.984 0.505 (0.85) (0.48) Rural Casual Wages 0.564 0.8 (1.32) (1.0) Constant 1.523 1.718 1.526 0.87 6.638 ­3.136 (6.10)** (20.26)** (12.08)** (0.49) (1.26) (1.04) Observations 213 212 425 188 193 375 R-squared 0.7 0.56 0.58 0.59 0.28 0.31 Source: Ahsan and Pagés (2006). Notes: Robust t statistics in parentheses. + significant at 10%; * significant at 5%; ** significant at 1%. Appendix 4.4A Estimates of Determinants of Female Participation Rates: Female and Male Wages, Household Earnings and Unemployment Rates Dependent Variable: Female OLS Female Wages and Household Per Capita Participation Rates Unemployment Rate Expenditures, Unemploy- Instrumented ment Instrumented 1 2 3 4 5 6 7 8 9 Rural Urban All Rural Urban All Rural Urban All Rate of Unemployment ­0.098 0.001 ­0.05 ­0.778 0.092 ­0.338 ­0.475 ­0.235 ­0.325 [3.68]** [0.05] [2.74]** [2.70]** [0.22] [3.91]** [2.72]** [0.40] [1.45] Real Household per Capita ­1.812 3.381 1.685 Expenditure [0.93] [0.47] [0.52] Rural (non-agr) Casual Wages, Female 0.133 0.119 0.734 1.491 1.547 1.359 [2.20] [3.35]** [1.06] [2.59]** [1.69]+ [1.50] Urban Casual Wages, Female ­0.019 ­2.069 0.155 2.855 ­1.596 [0.29] [0.94] [0.19] [0.53] [0.68] Urban Salaried Wages, Female ­0.114 ­0.126 5.651 [1.10] [1.44] [0.97] Urban Casual Wages, Male 0.211 [1.92]+ Rural Casual Wages, Male ­0.187 ­0.051 0.046 ­0.617 [2.01]* [0.79] [0.10] [1.57] Urban Salaried Wages, Male ­0.169 ­0.071 ­4.35 ­1.412 [0.77] [0.40] [0.98] [1.91]+ Urban Dummy ­0.573 ­0.182 ­0.71 [10.85]** [1.18] [0.57] 1987­8 Round 0.217 0.016 0.097 0.624 0.199 0.405 0.889 ­2.226 ­0.229 [2.16]* [0.20] [1.40] [2.16]* [0.49} [2.42}* [1.29] [0.49} [0.24] 1993­4 Round ­0.012 0.162 0.105 ­0.486 ­0.026 0.144 1.072 ­4.339 ­1.636 [0.11] [1.70]+ [1.28] [1.44] [0.05] [0.77] [0.67] [0.48] [0.63] 1999­2000 Round ­0.032 0.122 0.066 ­0.724 ­0.112 0.152 1.217 ­6.719 ­2.494 [0.26] [0.89] [0.56] [1.48] [0.13] [0.56] [0.57] [0.50] [0.70] Constant ­0.946 ­0.87 ­0.316 ­6.757 0.668 1.034 2.006 ­27.422 ­9.869 [2.48]* [1.14] [0.48] [2.55]* [0.12] [0.53] [0.26] [0.53] [1.03] heteroskedasticity test (P-val=) 0.0981 0.8393 0.0459 0.9498 1 0.9828 0.999 1 0.9995 R-squared 0.14 0.04 0.45 Observations 177 210 371 159 170 322 161 177 324 Test for Validity of Instruments Overidentification Test of all instruments (P-val=) 0.81588 0.88074 0.15068 0.543 0.84699 0.3997 1st state centred Partial R2 for Rate of Unemployment 0.1884 0.1247 0.4474 0.3931 0.236 0.4387 Instrumented Variables Rural (non-agr) Casual Wages, 0.2983 0.3332 0.292 0.2699 Female Urban Salaried Wages, Female 0.6647 Urban Casual Wages, Female 0.4212 0.3408 0.2027 0.267 Real Household Per Capita Expenditure 0.4962 0.5121 0.5342 Excluded Share of industry in GSDP x x x x x x Instruments share of sch tribe 25­59; Female x x x x x x Share of sch caste 25­59; Female x x x x x Share of primary educated x x x x female 25­59 Share of secondary educated x x x female 25­59 Industrial Credit Rs. Per Capita x Agriculture Credit Rs Per Capita x x x x x Gini-real daily wage x Appendices count no-salaried-15­59 x Source: Ahsan and Pagés (2006). Notes: 1. t statistics in brackets. Robust is reported where heteroskedasticity exists. 2. + significant at 10%; * significant at 5%; ** significant at 1%. 3. x - excluded instruments used in the specification. 187 188 Appendices Appendix 4.4B Determinants of Female Participation Rates: Expected Earnings of Males and Females Female Participation Rate OLS OLS Expected Earnings without State Dummies with State Dummies Instrumented with State Dummies 1 2 3 4 5 6 7 8 9 Rural Urban All Rural Urban All Rural Urban All Expected Earnings for Females in 0.083 0.045 0.1 0.074 0.926 0.352 Rural Casual Work [1.68]+ [1.31] [3.96]** [3.47]* [3.26]** [2.19]* Expected Earnings for Females in ­0.06 ­0.045 ­0.069 ­0.055 ­0.021 ­0.649 Urban Casual Work [1.03] [0.94] [1.50] [1.62] [0.10] [3.43]** Expected Earnings for Males in ­0.318 ­0.228 ­0.183 ­0.149 0.685 Rural Casual Work [3.40] [3.19]** [2.13]* [2.28]* [3.24]** Expected Earnings for Males in 0.222 0.233 0 ­0.075 ­0.086 ­0.128 Urban Casual lWork [2.43]* [2.55]* [0.00] [0.75] [0.78] [0.71] Expected Earnings for Males in 0.19 Urban Salaried Work [0.85] Urban Dummy ­0.708 ­0.716 ­.749 [20.59]** [29.08]** [23.21]** 1987­8 Round 0.05 0.003 ­0.003 0.051 0.026 0.046 0.106 0.033 0.11 [0.66] [0.04] [0.07] [1.14] [0.55] [1.26] [1.24] [0.51] [1.67]+ 1993­4 Round 0.042 0.053 0.009 0.041 0.094 0.083 ­0.093 0.083 0.076 [0.54] [0.80] [0.17] [0.88] [1.57] [1.87] [0.96] [1.14] [0.80] 1999­2000 Round 0.042 ­0.06 ­0.047 ­0.01 0.006 0.028 ­0.248 ­0.01 0.022 [0.51] [0.85] [0.82] [0.17] [0.10] [0.54] [1.98]* [0.10] [0.15] Constant 0.214 ­1.911 ­0.624 ­0.809 ­1.314 ­0.298 ­1.235 ­1.167 ­0.546 [0.78] [6.69]** [2.56]* [3.10]** [3.32]** [0.99] [2.86]** [3.11]** [0.63] heteroskedasticity test (P-val=) 0.7878 0.4838 0.1421 0 0 1 0 0.006 Observations 263 277 498 263 277 498 258 232 432 R-squared 0.05 0.03 0.48 0.71 0.55 0.74 Adj R-2 0.03 0.01 0.47 0.67 0.48 0.71 Test for Validity of Instruments Overidentification Test of all instruments (P-val=) 0.21917 0.3455 0.60499 1st stage centered R2 for Expected Earnings for Females in Rural Casual Work 0.4564 0.4703 0.429 Instrumented Variables Expected Earnings for Females in Urban Casual Work 0.5021 Excluded Instruments Female Share of sch tribe 25­59; Female x x x Share of primary educated female 25­59; x x x Share of secondary educated female 25­59 x Gini-real daily wage x Industrial Credit Rs. Per Capita x Agricultural Credit. Rs. Per Capita x x Share of industry in GSDP x x count no salaried 15­59 x Source: Ahsan and Pagés (2006). Notes: 1. State fixed effects is not reported in this table. 2. Absolute value of statistics in brackets. Robust is reported where heteroskedasticity exists; 3. +signification at 10%; * signification at 5%;** significant at 1%. 4. x-excluded instruments used in the specification. Appendix 4.5 Effect of GSDP on Unemployment Rates for Males and Females OLS Instrumental Variables Rural Urban All Rural Urban All 1 2 3 4 5 6 GSDP ­1.036 ­0.966 ­1.01 ­2.028 ­1.225 ­1.26 (2.58)* (3.00)** (3.61)** (­1.45) (1.85)+ (­1.42) Rural Casual Wage 0.051 0.116 0.896 1.002 (0.48) (1.49) (1.99)+ (1.42) Urban Salaried Wages ­0.042 ­0.129 ­0.663 0.08 (­0.46) (­1.28) (­0.87) (0.08) Round 2 Dummy 0.169 0.172 0.164 ­0.582 0 0 (1.42) (2.16)* (2.17)* (­1.05) (.) (.) Round 3 Dummy 0.224 0.334 0.301 0 0.217 0.379 (0.99) (1.95)+ (2.07)* (.) (0.9) (0.99) Round 4 Dummy 0.863 0.784 0.829 0.917 0.718 0.955 (2.46)* (2.72)** (3.43)** (1.79)+ (1.56) (1.47) Urban Dummy 0.263 0.236 (4.51)** (3.26)** Constant 12.094 11.871 12.1 20.37 17.435 10.968 (2.85)** (3.53)** (4.14)** (1.39) (1.87)+ (1.05) Number of Observations 280 285 556 188 193 375 R Square 0.68 0.56 0.58 0.57 0.46 0.37 Source: Ahsan and Pagés (2006). Note: + significant at 10%. * significant at 5%. ** significant at 1%. Appendices 189 190 Appendices Appendix 6.1 Selected Welfare/Provident Funds: Membership, Contribution Structure, and Benefits Fund and Year Member Estimate Contribution (Annual, Main Services of Establishment (2002) unless stated) Beedi workers 4 million Cess Health/education (Central ­ 1976) TN Construction Workers 380,000 Rs 25 registration + Rs 10 Accident/death/education/maternity (1994 in 3 cities; 1997 every two years for workers. state-wide) 0.3% of estimated cost of construction for employer West Bengal US Provident 650,000 Rs 240 for worker DC pension/lump sum death payout Fund Rs 240 ­ GoWB AP Labour Welfare fund 1 million Rs 2 ­ employee Education/emergency relief/health and (1988) Rs 5 ­ employer funeral Govt subsidy Karnataka Labour Welfare 675,000 Rs 3 ­ employee Medical/accident/self-employment Fund (1965) Rs 6 ­ employer Rs 3 ­ GoK Kerala Agricultural 1,050,000 Rs 24 ­ worker Superannuation/medical/education/ Workers' Fund (1974) Rs 10­15 per hectare for insurance/maternity landowners Kerala Labour Welfare 453,000 Rs 8 ­ employee Education and training/medical Fund (1975) Rs 16 ­ employer assistance/compassionate relief Kerala Cashew Workers' 135,000 Rs 0.5 per day for worker Medical/maternity/death and Welfare Fund (1988) Re 1 per day ­ employer accident/unemployment/education Re 1 per day ­ GoK Maharashtra Mathadi 150,000 26­46% of employee wage Provident fund/medical/paid leave and Boards (1969) holidays/education/injury and death Source: O'Keefe (2006). 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Opportunity, Human Development Unit, South Washington D.C.: The World Bank. Asia Region, The World Bank. India's Employment Challenge CREATING JOBS, HELPING WORKERS As the Indian economy looks to grow further in the coming decades, it faces the key challenge of increasing the earnings of millions of workers who live in poverty, and also meeting the demand for jobs by new entrants to the labour force. Analysing trends and developments in the Indian labour market over the past two decades, this report finds that though labour market outcomes have been improving since the 1990s and job growth has been on the rise since 2000, unemployment and underemployment continue to be areas of concern. Examining detailed National Sample Survey and Census data, it identifies three trends: · increase in employment growth has been accompanied by a deceleration in the growth of wages and earnings; · around 90 per cent of prime-aged persons remain employed in low productivity, informal sector jobs; and · the share of formal sector and manufacturing in total employment has remained low and strikingly unchanged. Thus the need of the hour is to raise productivity and job quality in the informal sector; stimulate formal sector employment growth; and address persistent regional, gender, and social disparities in labour market outcomes. The report also recommends regulatory reforms in order to remove barriers to the growth of both formal sector jobs and labour intensive manufacturing. These reforms must be complemented with effective and active labour market policies that can help workers, especially those in the informal sector, become more productive, obtain more protection against unemployment, and enhance skills. India's Employment Challenge will be useful for policymakers and administrators, practitioners in the area of economic reforms and public policy, and institutions and research organizations working on labour and development issues. Students, scholars, and researchers in economics and development studies, and those studying the Indian economy in particular will also find it informative. THE WORLD BANK ISBN 0-19-806351-2 1 9 780198 063513 www.oup.com Rs 895