<b>Shankar Acharya:</b> Employment problems

States can improve their labour ecosystems through intelligent policy measures on demand and supply side of labour and labour reforms

Nearly seven years ago, in an article in this newspaper (November 25, 2003) I had cautioned against the burgeoning euphoria about the demographic dividend of India’s young population and its potential for rapid growth and development. I had pointed out that the demographic dividend was about the supply of labour; it said nothing about demand. Without adequate growth of employment opportunities, the labour supply bulge could spawn major problems of unemployment, underemployment and low incomes. Secondly, the demographic trajectory across India’s states varied enormously. In particular, nearly 60 per cent of the likely increment in India’s population (and labour force) between 2001 and 2051 was likely to be concentrated in the “four populous, poor, slow-growing northern states (undivided Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh), with weak infrastructure, education systems and governance”. So, the prospects for transforming the extended labour supply bulge into productive employment and growth was going to be very challenging, to put it mildly.

What light does the government’s just released “Annual Report to the People on Employment” shed on these seven-year-old concerns of mine? The short answer is very little. It focuses on estimates (for 2009-10) of aggregate labour force and employment, and projections up to 2014-15, extrapolating from the most recent available, large sample National Sample Survey (NSS) data (for 2004-05!) and using economy-wide estimates of employment elasticity (with respect to GDP) based on NSS employment data for 1993-94, 1999-2000 and 2004-05. On this macro basis, aggregate employment in 2009-10 is estimated at 506 million out of an estimated labour force of 520 million. The labour force is projected to grow to 574 million by 2014-15, out of which 559-572 million are expected to be employed, depending on whether employment growth averages at 2.5 or 2 per cent in the intervening years.

Distressingly, there is barely any appreciation, let alone analysis, of the regionally differentiated nature of the employment challenge confronting India in the coming decades (I could only find two short paragraphs in the 44-page document).

A sharp and refreshing contrast is provided by the recently completed “India Labour Report 2009” (henceforth referred to as ILR2009), prepared by TeamLease (India’s leading staffing company) and economic consultants Indicus, with Laveesh Bhandari and Bibek Debroy as principal authors. This is the fifth in a series of valuable annual reports on labour and employment. This one focuses on the geographical mismatch between labour supply and demand, and provides a very interesting analysis and ranking of Indian states by their respective “labour ecosystems”.

Its key message on the geographic mismatch is: “Much of India’s demographic dividend will occur in states with backward labour market ecosystems. Between 2010 and 2020, the states of UP, Bihar and MP will account for 40 per cent of the increase in 15- to 59-year-olds but only 10 per cent of the increase in (national) income. During the same period, Maharashtra, Gujarat, Tamil Nadu and Andhra Pradesh will account for 45 per cent of the increase in GDP but less than 20 per cent of the addition to the total workforce.” The likelihood of growing regional disparities in incomes and job opportunities, and the resulting increase in migration pressures and social and political stresses is obvious.

What can individual states do to help themselves? To explore this key question, ILR2009 constructs a “labour ecosystem index”, which is itself composed of three sub-indices: an “employment ecosystem index”, an “employability ecosystem index” and a “labour law ecosystem index”. Roughly speaking, the first captures elements of labour demand and includes variables such as investment ratios, fulfilment of investment intentions, per capita availability of roads and telephones, power availability and prevalence of crime. The second index focuses on the supply side and includes variables such as proportion of working age population, labour participation rate, literacy, teacher-pupil ratio, proportion of secondary school graduates in the population and the availability of engineering and MBA seats. The third index includes measures of lockouts, strikes, prosecutions under the Shops and Establishments Act, and state-level transaction cost reducing reforms of the Industrial Disputes Act. These three indices are then combined together to produce the overall labour ecosystem index.
 

RANKING STATES BY LABOUR ECOSYSTEM
States	Labour Ecosystem Index Rank			Rank by component indices, 2009
	2009	2005	1995	Employment (Demand)	Employability (Supply)	Labour Law
Andhra Pradesh	1	6	8	2	3	2
Karnataka	2	3	2	10	1	3
Maharashtra	3	5	4	13	7	1
Delhi	4	1	1	1	2	8
Gujarat	5	2	3	6	4	4
Kerala	6	11	9	5	6	10
Tamil Nadu	7	4	7	7	8	6
Haryana	8	12	11	12	12	7
Rajasthan	9	9	13	3	13	11
Goa	10	7	5	14	5	9
Punjab	11	8	12	9	11	12
Himachal Pradesh	12	10	14	4	16	13
Madhya Pradesh	13	13	6	16	17	5
Orissa	14	14	10	15	15	14
West Bengal	15	15	15	8	10	19
Uttar Pradesh	16	17	17	18	14	15
Bihar	17	18	19	17	9	17