Skill mismatch: Rising labour quality, stagnant employment in key sectors

RBI data reveals rising labour quality in industries like textiles and mining, but stagnant employment growth highlights a skill mismatch

The answer to why workers are not able to find work when industry complains of a shortage is apparent from the rich RBI data store released last week.

We measure it through the index of labour quality indices over the past three decades. This index captures how educated the worker is in each of the 27 industries the RBI data covers. As the KLEMS data set notes, the quality was calculated based on educational qualification and wage rates of the workers.

If the index for a particular industry, say textiles, rises steeply over the years, it indicates that the industry is using more educated workers. This index can be compared against the independently derived data on the number of workers in the industry. The data shows this is indeed true. The index of labour quality in the textile industry has risen sharply from 107.5 in FY91 (base year=1980-81) to 129.9 in FY23. The growth of workers employed in the industry in these 31 years is less than 1 per cent annually.

What does this show? It shows that as the demand for more educated workers has risen, the growth rate of the number of workers has not kept pace, indicating a skill mismatch. Nitin Gadkari, Union Minister for Roadways and Transport, has recently suggested industry should set up their own colleges and skill development centres. The suggestion is not new and is based on the assumption that to raise the labour input in the production process, workers need to be trained.

The complaint across the industry is that the pool of skilled workers is not enough. The RBI data set should show if this is indeed the case. The only assumption we make in this context is that a more educated labour force is equivalent to a more skilled worker. As the data for the textile industry shows, if skill training was easily available, workers would veer towards it since, with the higher quality demanded, they would earn higher wages.

While globally there is granular data to estimate the quality of labour using various standards beyond education, like age (experience), gender, and employment status, most of those are not easily available in Indian labour data. To make up for the shortcoming, the RBI data set has done rather well. It has calculated the labour quality index using five education categories: up to primary, primary, middle, secondary and higher secondary, and above higher secondary. There are thus five types of people employed for each of the 27 studied industries.

At a theoretical level too, a measurement of labour quality is important to understand how productive it has become. All labour analysts agree that training is essential to raise the productivity of the labour employed. Also, the data set is able to abstract from the other seasonal factors affecting employment, like demand conditions, capital requirements for the industry, and so on.

The data also makes sense intuitively. Take the case of mining. The quality of labour demanded by the sector has risen steeply from 113.9 to 164.6. The number of people employed in the sector has contracted by 0.87 per cent in the last three decades. India is short of adequately trained miners and capital investment in the sector, whereas the demand for all sorts of minerals, especially those for renewable energy, has led to a massive import bill.

The same has been the case for most manufacturing lines like machinery or chemicals. The rise in the quality of the labour demanded has not been accompanied by a commensurate rise in the number of those employed.

Instead, in the two sectors where labour demand has been high, construction and trade, the indices have hardly moved. From 106.1, construction has risen only to 116.5. The sector has not made much of a demand on the quality of the labour employed. So wage rates, the other marker for quality, have also remained flat. Despite the flat trend, it has seen an annual compound growth rate for labour employed at 5.74 per cent.

The picture for trade has been slightly better. The labour employed has risen 3.1 per cent annually. The index for labour quality has moved from the same as construction at 108.1 to 128.2, but here too most of the gain came during the decade of expansion of retail trade in 2000-01 to 2010-11 and has stagnated thereafter. One of the reasons workers speak about their disaffection is clearly visible in these two sectors: a combination of flat income and low skills.

Even in the MSME sector, the connection is obvious. The index of labour quality demanded has sharply risen for basic metals and metal fabrication units, a standard small industry product (see table). This has led to an expansion of the cumulative employment rate of 3 per cent annually.

T Koshy, Managing Director & CEO, Open Network for Digital Commerce (ONDC), is aware of the trend. “We need to help MSMEs to leverage the digital ecosystem. ONDC network is providing a level playing field to small retailers and access to credit, access to market, and access to skill,” he said at a CII-organised meet recently.

As a marker for the lack of skill training, the data on agriculture, fisheries, and related sectors show the labour quality in the sector has hardly moved in the same three decades since liberalisation. It was 103.3 in FY91 and is 113.5 in FY23. The number of workers in the sector has remained high. Low skills and thus the curse of low wages have kept a huge number of workers drawn to it.