Structural Deformity

Employment and Unemployment


Some eulogists of the existing pattern of development acknowledge the growth of inequality. However, they say it is an inevitable part of development. After all, the Nobel-winning economist Simon Kuznets suggested in 1954 that as agrarian societies undergo industrialization, inequality would grow. Firstly, industry being far more productive than agriculture, there would be a growing gap between the incomes generated by the two sectors. Secondly, the inequality of incomes within industry too would be higher at first, as workers would be plentiful and cheap and there would be few social checks on capitalists' wealth. So industrial development and overall rise in productivity would lead—at first—to a rise in inequality. But later, as industry became predominant and led to various changes in society, inequality would diminish. Inequality would follow an 'inverted U' path, first rising and then falling: So ran Kuznets’ tentative hypothesis. Those who wished to justify growing inequality embraced the hypothesis enthusiastically, discarding Kuznets’ qualifying remarks and caveats. Inequality, they said, had to grow before it shrank, but it inevitably would shrink, and at a much higher level of income for all: such was the necessary and happy course of capitalism.

However, development in the underdeveloped countries has not taken the course Kuznets envisioned. One should recall that economic develop-ment in what became the developed countries took the form of a structural shift away from agriculture, first to industry. Industry, which was not bound by natural constraint in the same way as agriculture, enjoyed increasing returns, and hence was able to keep expanding its output and investment. The subsequent shift to services in those countries took place after industry had attained a share of 50 percent in output. Changes in output structure were accompanied by a corresponding shift of workforce first to industry and then to services. As a result, today, "developed countries have a product structure similar to their employment structure—in each of them agriculture accounts for less than 5 percent, both in GDP and employment, and services contribute 70 to 75 percent and industry 25 to 30 percent, both in GDP and employment. Inter-sectoral productivity differences are thus rather insignificant.

The case of developing countries—even those now classified, like the BRICS, as "middle-income countries'—is markedly different. Dani Rodrik has recently coined the phrase "premature deindustrialization" for their actual pattern of growth. As he reminds people, no country has developed without manufacturing leading the way. The early industrializers (i.e., today's developed countries) grew and developed first by industrializing, and then by moving into services: For example, manufacturing employment in Britain, as a percentage of total employment, peaked at 45 percent prior before it began to decline (Sweden: 33 percent; Germany: 40 percent; etc,). By contrast:
*    Manufacturing employment in the late industrializers has peaked at much lower levels. The most striking case is India, in which manufacturing peaked at a meagre 13 percent of total employment, and trended downward thereafter.
*    Moreover, manufacturing employment in the late industrializers (e.g., Brazil, China, and India) peaked at comparatively very low levels of per capita income. Here, too, India is the most extreme of Rodrik's cases.
*    Thirdly, Rodrik argues, in the early industrializers, the modern, high-productivity segment of the economy absorbed the traditional, low-productivity segment and unified the economy; but in the late industrializers, dualism—the coexistence of high and low-productivity sectors is actually getting strengthened, with ever more workers crowding in the low-productivity sectors. (For example, it appears that while the 'unregistered manufacturing' sector in India accounts for 78 percent of the employment in the manufacturing sector, its Gross Value Added per worker is less than 7 percent of the figure for the 'registered manufacturing' sector.)

Rodrik's observations are not entirely novel: development economics, particularly its Marxist stream, has long been concerned precisely with the distortions and divergence in the development path of the Third World. The roots of these distortions lie in the legacy of colonialism and the continuing phenomenon of neocolonialism. Nevertheless, Rodrik's observations usefully highlight the persistence of this distorted pattern in the period of rapid growth in the BRICS countries, which are touted as the new industrial powers. In his words "structural change has become increasingly perverse: from manufacturing to services (prematurely), organized sectors to informality, modern to traditional firms, and medium size and large firms to small firms".

This perversity is reflected in the actual pattern of India's employment, admirably summed up in the recently published India Labour and Employment Report 2014 (ILER), prepared by the Institute for Human Development. What follows is largely extracted from that publication.

By conventional wisdom and by historical experience, most of the 'pre-modern' features characterising the labour markets of a developing economy are expected to give way to more rational, clearer and less inequitable attributes of a 'modem' labour market in the process of economic development. This is also expected to be accompanied by a gradual replacement of 'traditional' institutions and practices by modern ones. As a result, identification, description and analysis of concepts and categories are also expected to get crystallized and become easier and less ambiguous.

Thus the transformation of an economy from predominantly subsistence-oriented economic activities, agriculture and informal modes of work and production organizations to one with its major part in the capitalist, industrial and formal sectors is likely to lead to a change in labour categories and employment structure. In this process, there are changes not only in the shares of different sectors in employment, but also in the modes of work and employment status of workers.

Workers would increasingly become either fully employed or fully unemployed, and the extent of under-employment would decline as the economy develops. More and more workers would work as wage and salary earners, the proportion of the self-employed would decline. Most workers would be employed on a formal basis; informal enterprises would increasingly become formal and formal enterprises would employ most workers as regular employees. Thus most workers would have formal time-based contracts, clear rules and procedures to govern conditions of work and employment tenure. Employer and employee identification would be unambiguous and employer-employee relationships well-defined. One would also expect an increase in the decree of unionization and greater role of unions and collective bargaining in industrial relations. The labour market would be unified, and wage differentials would be determined mainly by economic factors.

In other words, labour markets are expected to become more rule-based and labour institutions more visible and effective, as the economy makes a transition from the subsistence, agriculture-dominated and informal character to the capitalist, industrial and formal status.

..and the reality
However, in India one finds :
*    The share of self-employment has declined extremely slowly, from 61 percent in 1972-73 to 52 percent four decades later, in 2011-12; even in urban areas it is 42 percent in 2011-12.
*    The proportion of regular wage/salary earners in total employment has hardly grown from 15.4 percent in 1972-73, it has grown to 17.9 percent in 2011-12.
*    What has grown is the proportion of casual workers in total employment, from 23.3 percent in 1972-73 to 29.9 percent in 2011-12. Thus there is a partial shift from self-employment to casual work, but not to regular work.
*    The share of the organized sector in total employment reached 17 petcent by the mid-1970s; it declined thereafter to about 12 percent by 2004-05 before returning by 2011-1 2 to 17.9 percent.
*    More importantly, within the organized sector, the share of informal workers (those without employment stability and social security, such as 'casual', 'contract', 'apprentice', etc.) rose from 41 percent in 1999-2000 to 58 percent in 2011-12. That is, the majority of the organized sector workforce consists of informal workers.
*    Indeed, practically all new employment in the post-reform period, particularly from the late 1990s till 2004-05, has been either in the unorganized sector or in the form of informal jobs in the organized sector. Thus there has been a continuous deterioration in the overall quality of employment.
*    While the share of agriculture in GDP has declined by 45 percentage points between 1950 and 2011-12, its share in employment has declined by only 24 percentage points over that period.
*    The subsistence mode and the unorganized nature of production of goods and services prevail. Out of the 472 million workers in 2011-12, about 392 million or 83 percent were estimated to be working in the unorganized sector (defined to comprise all privately-owned unincorpo-rated enterprises employing less than 10 workers). Even the organized sector, which comprises 80 million workers, had 46 million workers (58 percent) in the informal category of employment. In this way informal workers account for about 92 percent of the total workers. Employment, therefore, is of low quality, devoid of the characteristics of decent employment.

Structural changes in employment have thus not been in line with either what is postulated by the conventional theory of development or was experienced historically by today's developed countries. India stands apart, to some extent, from the experiences of even the developing countries of East and Southeast Asia. It seems to have jumped from the first stage (agricultural) to the third stage of a service-dominated economy, without an inter-mediate industrial phase. This has been accompanied by large asymmetries between GDP and employment shares in agricultural and services sectors.

The table covers the period of post-1991 'liberalization'. There has been significant decline in this employment share of agriculture. However, it remains the single largest sector. There has been a small increase in the employment share of manufacturing, which remains exceedingly low. Some service industries—trade, hotels and restaurants, transport, storage, telecommunications, finance, real estate, business services—have increased their employment share by a combined 7.3 percentage points. These are sectors, which would include a good number of 'middle class' jobs, but also include large numbers of insecure, low-wage jobs. At the same time, another source of middle class jobs, namely, 'community, social and personal services' (largely public sector and therefore relatively secure employment) saw its share fall by 1.2 percentage points. Only one sector has seen a dramatic increase, namely, construction. This is a particularly sweated sector, in which nearly the entire workforce is informal and insecure, and there is a near-complete absence of trade union organization.

The ILER points out that low earnings from employment, rather than open unemployment, are the main source of poverty. This disconnect between work and income is primarily caused by the predominance of informal employment. Furthermore, the distinction between the employed and the unemployed is also often unclear; a large number of Indian workers cannot really be classified exclusively in either of the two categories. Many of them are employed for part of the year and unemployed for another.

That under-employment is a much larger problem than unemployment in developing countries like India has been widely recognized by economists in India and abroad. It was however, postulated to decline with economic development. Development was expected to have been accompanied by change in the technology and organization of production that would bring about the employment of most people on a full-time basis. It would lead to a situation where those working would be fully employed and those not working would be fully unemployed.

Such change does not seem to have taken place. As is typical in poor, agrarian, developing economies, open unemployment rates in India are low, irrespective of the methodology used to measure it. The poor cannot afford open unemployment, and do eke out an existence through a multiplicity of subsistence activities.

Finally, not only do shortages and surpluses of labour co-exist, wage differentials which cannot be explained by economic factors persist and even increase despite increasing occupational and geographical mobility. The lack of information and increasing occupational segmentation prevent movement towards 'market clearing' of any sort. Labour is segmented not only geographically, but by caste, community and gender. Among those officially defined as 'poor', there is a higher proportion of Scheduled Tribes (STs), Scheduled Castes (SCs), Other Backward Classes (OBCs), and Muslims. That is, historically disadvantaged castes and communities continue to suffer from gross inequalities.

The largest proportion of regular formal jobs [which are considered the 'best quality' jobs] both in the public and private sector are appropriated by upper caste Hindus. Such slight improvement as has taken place is in the share of regular formal jobs held by OBCs. The proportion of SCs and STs in regular formal work in the public sector is much higher than in the private sector; but, with neoliberal policies, the share of public sector employment in total employment is declining. Thus one finds "an increased importance of social aspects in the economic dimensions of inequality during the period of market liberalization and economic reforms in the country.... class and caste inequalities have been on the rise...." The available data indicate that, even when the socially oppressed castes manage to get college degrees, this does not necessarily translate into better jobs and higher incomes.

As the ILER sums it up, there is in effect one labour market for the poor and another tor the better-off, and there is little traffic between the two.
[Source : Aspects of India's Economy, No. 58]

Table : Share of Employment by Industries 1993-94/2011-12

1993-94 2004-05
Agriculture & allied activities
Mining & quarrying
Electricity gas & water supply
Trade, hotels & restaurants
Transport, storage & communications
Finance, real estate, business services
Community, social & personal services

[Employment by Usual Principal & Subsidiary Status, based on National Sample Surveys for the relevant years, India Labour & Employment Report, 2014, p. 208]

Vol. 47, No. 45, May 17 - 23, 2015