Deconstructing self-employment

Having a large number of self-employed people does not necessarily indicate an improvement in job conditions

The jobs debate has consumed Indian society and the polity. The recent instance of the Indian Railways receiving 25 million applications to fill 90,000 vacancies is the tip of the iceberg. India’s jobs challenge is not just one of creating jobs for the entrants into the labour force, but also one of creating “better paying productive jobs” for the large swathes of workers trapped in poorly-paid and low-productivity jobs in the informal sector. So, what fits the bill of a “good productive job”? A salaried job or a self-employed one? The government has put its weight behind the latter, arguing that India's youth should aspire to become job creators and not job seekers. The World Bank, on the other hand, in a Systematic Country Diagnostic for India, has asserted that the need of the hour is to create more regular, salaried jobs.

The data from multiple surveys tells us that close to half of India’s workforce is self-employed. The Labour Bureau’s most recent Annual Household Employment Survey for the period 2015-16 reports that the share of the self-employed and wage/salary earners in employment is at 46.6 per cent and 17 per cent, respectively. An examination of the distribution of monthly earnings of the self-employed and wage-employed indicates that, on average, the latter are much better off than the former. What is particularly striking is that about 85 per cent of the self-employed earn Rs 10,000 or less a month while a minuscule 0.5 per cent earn more than Rs 50,000 each month. The concentration of the self-employed in such a low average earnings group makes it difficult to comprehend how India’s self-employed subsist, let alone become job creators.

Illustration: Binay Sinha

Understanding and deconstructing the notion of self-employment in countries such as India is imperative. In the literature, the self-employed are broadly categorised into two groups. The first are “own-account workers”, who operate their enterprises on their own account without hiring labour. They could, however, have unpaid helpers who do not receive regular salaries or wages. The second category of the self-employed comprises “employers”, who run their enterprises by hiring labour. In India, the enterprise landscape is dominated by own-account enterprises. According to the sixth Economic Census, 58.5 million establishments were found to be in operation in 2013-14. Of these, 41.97 million (71.74 per cent) were own-account enterprises. Establishments operating with at least one hired worker accounted for the remaining 28.26 per cent. Significantly, own-account enterprises grew at 56.02 per cent between the Economic Census of 2005-06 and 2012-13, while the growth of establishments with hired workers was significantly lower at 15.11 per cent.

The rapid proliferation of own-account enterprises is not testimony to the entrepreneurial spirit of India. On the contrary, it shows the inability of the economy to create enough highly-paid, secure and productive jobs. The paucity of such jobs has pushed the poor into self-employment. In the literature, there is a clear distinction between self-employment “by choice” and “by necessity”. In the developed world, self-employment is “chosen” and is a consequence of people willingly creating enterprises to generate wealth. In developing countries, on the other hand, this is typically not the case. The predominance of self-employed own-account workers in India is largely a consequence of a “lack of choice”. In the absence of unemployment insurance and other social protection programmes, the poor cannot afford to remain unemployed or exit the labour force when they are unable to find a job. Instead, they resort to self-employment as a survival mechanism. It is misleading and incorrect to equate own-account workers with dynamic, innovative and risk-taking entrepreneurs who set up businesses and foster job creation.

There is no denying the importance of entrepreneurial activity as a pillar of economic growth. There is a large body of evidence that highlights the significance of new, young firms and entrepreneurs in net job creation compared to incumbent firms. However, India has failed to generate such new entrepreneurs and businesses which can emerge as engines of job creation. The World Bank’s Entrepreneurship Database also reaffirms this. Of the 115 countries for which the World Bank reported the new business entry density rate, defined as the number of newly registered corporations per 1,000 people of working age, India ranked seventh from the bottom in 2016. In such a situation, creating an enabling ecosystem for entrepreneurship to flourish is crucial. However, we cannot ignore the imperative of creating regular, salaried jobs which will enable the “constrained” self-employed transition to new and better-paid wage employment. The significantly lower levels of labour productivity in own-account enterprises compared to enterprises which operate with hired workers, both in the unorganised and organised sectors, only reinforce the welfare gains to be made from such a transition.

The writer is senior fellow, Indian Council for Research on International Economic Relations