Note

Subsidize Employment, not Unemployment
Bharat Jhunjhunwala

Youth of the country are restive. They are unable to get jobs. The Government is trying to pacify them by providing some unemployment compensation. Question is whether the limited financial resources of the Government should be devoted to providing doles to the unemployed or to creation of new jobs?

There is no dispute that the idea of paying unemployment compensation is a well-intentioned step. However, these policies have been long implemented in the Western countries and their economies are under stress. European Governments are being crushed by the weight of these expenditures. The present ongoing crisis in Europe and the United States is in large measure due to the huge expenditures made on the government employees in the welfare sector. An article published recently in a New York newspaper lamented how the money being provided by the City of New York to the school system was being used to provide fat salaries to the teachers. Why should one expect their result to be any different in India? If at all, Indian problem is more difficult given high growth rate in population and a huge backlog of unemployment.

The Nobel Prize for Economics was awarded to Prof Edmund Phelps of Columbia University three years ago. On unemployment compensation schemes Prof Phelps says: "Although such programs have been substantial in Europe and the US, the working poor remain as marginalized as ever. Indeed, social spending has worsened the problem, because it reduces work incentives and thus creates a culture of dependency and alienation from the commercial economy, undermining labor force participation, employability, and employee loyalty. What is needed is higher employment and pay through higher demand for the least productive workers."

The unemployment compensation scheme explicitly pays for no work; while MNREGA mostly pays for facade of doing work. The main point is that these schemes create an incentive for the beneficiary to remain unemployed. A person loses this money if he gets a job. These schemes create a sense of helplessness and dependence among the unemployed workers. They reduce the ability of the unemployed in seeking employment or self-employment. Thus these schemes push the unemployed deeper into the pit of helplessness and defeat. It may appear that unemployment compensation provides relief to the unemployed but actually it debilitates them from seeking productive employment and locking them into long-term poverty.

The alternative according to Prof Phelps is like this: "The best remedy is a subsidy for low-wage employment, paid to employers for every full-time low-wage worker they hire and calibrated to the employee's wage cost to the firm. The higher the wage cost, the lower the subsidy, until it has tapered off to zero. With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid out as direct or indirect labor compensation. People could benefit from the subsidy only by engaging in productive work." That is precisely what Gandhi had said in Young India of October 13, 1921: "I must refuse to insult the naked by giving them clothes they do not need, instead of giving them work which they sorely need."

Frontier
Vol. 45, No. 27, 13-19, 2013

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