Govts can't create jobs

The less they focus on employment creation, the better it may be for the economy

One of the problems created by giving the Union Budget such high media billing is that it enhances public expectations about what governments can or should do. It is a pity that even economists have fallen prey to this belief that governments can do a lot, as we saw two years ago when demands were made to spend up to 10 per cent of gross domestic product (GDP) to support a Covid-ravaged economy. We must be eternally grateful for the fact that the Narendra Modi government largely ignored their advice and stuck to moderate relief and economic support. One hopes that the new Chief Economic Advisor, V Anantha Nageswaran, focuses more on what government should not do rather than what it should. The former list is a long one, and the latter rather short.

The two things the finance minister will be asked to do in her Budget is to raise capital spending on infrastructure and focus on job-creation. No doubt, budgetary provisions to make progress on these two goals are important, but here’s the reality. Governments can pour money to achieve these objectives, but outcomes are not guaranteed. One can go further and say two more things: One, what governments know about job creation can be written on the back of a postage stamp; what they don’t can fill an encyclopaedia. Governments cannot create jobs, only businesses can.

The less the government does about jobs (beyond distress relief programmes like MGNREGA), the better it may be for the economy. I am not here making a libertarian argument that the state must shrink, but that governments should first start with the assumption that they know little about how the economy works and how jobs are created, what skills are really in demand, et al, and once this is done, better policy responses will follow. Here’s why.

First, there is increasing complexity. There is no sector that lives up to its definition. There is nothing that is purely agricultural, or manufacturing or services. There is nothing that is wholly formal or informal business. Both exist in some proportion in each category of producer. As agriculture shrinks and consolidates, it will become partly manufacturing and partly services too, as that is the only way to convert a basic commodity into a product of higher value. 

The same goes for manufacturing, which has to integrate forward into services, even while services have to integrate manufacturing into their strategy, whether through direct ownership or through contracts. Decades after Xerox realised that people want copies and not copiers, most manufacturing companies have realised the need to redefine themselves as service providers in order to deliver customer value.

Asian Paints is not just a paint maker; it is becoming a décor advisory and retail services company too. The goods and services tax may have formalised many companies, and fintech companies may be formalising credit cultures, but this does not mean all borrowers are formal, for there will be informal parts to their businesses too. Work itself has become hybrid after Covid, as work from home becomes part of corporate strategy. If we can’t even separate office from home, residential from office spaces, work from leisure and home-making from home work, how are we going to devise enabling policies for job creation in specific sectors?

Illustration: Binay Sinha

Next, there is the sheer speed of change. Did anyone know two years ago that Indians would take to digital payments like ducks to water? The Unified Payments Interface saw more than 4.5 billion transactions in December 2021, which is more than three transactions for each citizen of India. Did we know at the start of 2021 that the year would create 40 unicorns?

Third, there is the bigger question of whether job creation initiatives work. In the 2018-19 budget, Arun Jaitley introduced the idea of fixed-term labour contracts for apparel and leather manufacturing, but we have not heard of any explosive growth in employment in these sectors over the last four years. Incentives have been given for formalising jobs through subsidies on social security contributions, but we don’t know if the rise in payroll employment is an addition to total jobs or a mere transfer from informal to formal jobs. Equally, how do we know whether an incentive to manufacturing will go towards machines and automation or employing more labour? Will production-linked incentives deliver more jobs or merely more output with a marginal rise in employment?

In a complex, rapidly-adjusting economy, it is not easy for governments, to know which sectors will create jobs, which ones will enable them in some other allied sectors, and which ones will only swallow the incentives and deliver nothing more than GDP growth without a major uptick in jobs.

The takeout is two-fold: Governments should stop thinking they can artificially stimulate job creation. What they should do is enable investments in information flows about jobs and skilling. The decision to release monthly payroll information is good to know as it tells us something about formal jobs, but our general job surveys suck. They offer too little insight and too late.

It is not necessary that jobs data surveys should only be done by the government’s statistics office. Why can’t it be done in partnership with private parties? Why can’t a Reliance, Google, Amazon or the many head-hunting and temp services providers be partners in generating information on current jobs? Why not fund the Centre for Monitoring Indian Economy and many other organisations to generate more granular and high-frequency jobs data instead of asking fuddy-duddy sarkari economists in the National Statistics Commission to come out with periodic jobs data that helps no one? Isn’t real-time, roughly credible, jobs data better than well-tabulated tomes that only academicians will salivate over?

We can also ask: Do we need more economists in the prime minister’s economic advisory council or corporate and business data analysts with access to real-time data from not only government sources (goods and services tax and income tax data), but also private players, who hold lots of customer and user data, after suitable anonymisation?

In the era of big data and artificial intelligence, using economists to generate jobs data is the worst possible way to spend money on policy advice. That job should shift from macroeconomists to data analysts.  

The author is Editorial Director, Swarajya magazine