Subir Gokarn: A vicious jobs-skills circle

Regulatory reform will not stimulate improvements in the informal sector as long as the workers remain at current skill levels.

The Organisation for Economic Co-operation and Development (OECD), a collective of 31 affluent countries, recently published its Employment Outlook for 2007. The first chapter of the report compares and contrasts the recent history of employment patterns in the four large economies that have come to be collectively known as the BRICs""Brazil, Russia, India and China. One might wonder why the OECD would be interested in the state of affairs in countries that are quite some years away from claiming membership of the organisation. This is explained in the introductory editorial.

The significance of these four economies in the global scenario has been increasing dramatically over the past few years. Apart from their growing presence in the trade and investment arenas, they are currently home to 45 per cent of the world's labour force, a proportion that can only grow as the populations of the affluent economies age further. The useful deployment of this labour force is clearly critical to the global spread of prosperity and the preservation of an open trading environment.

In this article, I explore some implications of the Indian employment scenario presented by the report, specifically with reference to the inter-linkages between jobs and skills. The report lays out the following facts about employment. One, during the period 2000-05, India generated about 11 million jobs per year, about 50 per cent of the total jobs generated in the BRICs. In contrast to the 22 million jobs generated in these four economies every year, the 31 members of the OECD together generated about 3.7 million jobs per year.

Two, the overwhelming majority of jobs in India are in the informal or unorganised sector. About 85 per cent of jobs in the economy are informal in nature and over 94 per cent of the jobs are in unorganised enterprises, i.e. those which are outside regulatory and fiscal scrutiny.

Three, the participation of women in the workforce is relatively low. Among urban women, it was about 24 per cent of the potential in 2005; by contrast, the other three BRICs economies registered above 60 per cent on this parameter. Over 70 per cent of urban Chinese women participated in the workforce.

Four, the proportion of Indians acquiring even secondary education is relatively small. Less than 12 per cent of the Indian population have attained this distinction, although there are some indications that younger people have had better access to schools. Even then, only about 21 per cent of people now in their early 20s have cleared secondary school. About 8 per cent of this age group have gone on to acquire higher qualifications. In comparison, about 19 per cent of China's total population have cleared secondary school and there also, younger people are more likely to have a school qualification than older people.

While the first fact""11 million jobs per year""is heartening, the other four are clearly cause for concern. On the premise that any job is better than no job at all, 11 million jobs more or less accommodate the estimated entry into the workforce, which is corroborated by the fact that the unemployment rate does not seem to be increasing (putting aside measurement issues for the moment).

But, the fact that the overwhelming majority of these jobs are in the informal sector, combined with the fact that a very large number of women in the urban areas are not even entering the workforce, does not hold out much hope for upward income mobility for the masses. A single-income household with that income coming from informal activity may manage to hold its head above the poverty line, but is very unlikely to be able to do much else. In fact, there is probably a strong causal relationship between this and the fact that such a small proportion of today's youth manages to finish school.

That the overwhelming majority of jobs are in the informal sector can be attributed to the great difficulty that enterprises face in formalising and being recognised by the state. Given all the procedures involved and the reputation for harassment from the authorities, the benefits may prove to be less than the costs. There is clearly a case for restructuring the value proposition for formalisation such that even small enterprises can appreciate it. But, the facts presented in this report suggest that this is not the only cause of the problem. Other factors may also be at work.

The unorganised sector is typified by small scale, low and relatively stagnant technological levels and extreme insecurity, both to entrepreneurs and workers. Presumably, only people who had no other choice would work under such conditions. If the minimum requirement for all or most organised sector jobs is a high school qualification, the data presented in the report suggest that almost 80 per cent of our first job seekers will not qualify. In other words, apart from regulatory compulsions, the informal sector is fuelled by the availability of millions of workers, whose skill levels are simply not consistent with more formal and sophisticated work environments.

Regulatory reform may help lower barriers to formalisation, but they will clearly not stimulate improvements in the operating environment of these enterprises as long as the people who work in them remain at current skill levels. The realisation of the potential benefits of formalisation will depend critically on how quickly the skill levels of people who work in these enterprises can be raised.

A rather powerful vicious circle appears to be in operation here. Low female participation combines with high informalisation to suppress household income increases, which, in turn, lowers the ability and incentives of young people to finish school, which puts them in a situation where informal sector employment is the only option.

Breaking a vicious circle can be easy when one of the links is clearly and quickly amenable to interventions. But, when this is not the case, a multi-pronged intervention strategy is advisable. In this situation, apart from making formalisation more attractive, finding ways to improve workforce participation among women and changing the certification procedures and the incentives to attend school are also going to be key components of a viable employment strategy.

We must transit from a "any job is better than no job" paradigm to one which matches skills and opportunities in a way which generates sustained increases in productivity and, consequently, household incomes. That is obviously in our own interest, but now, as the OECD tells us, it is in the world's interest as well.

The author is chief economist, Crisil. The views here are personal