The jobs challenge

The OECD Employment Outlook 2007, an annual report published by the Organisation for Economic Co-operation and Development, provides a detailed picture of employment growth in the BRICs (Brazil, Russia, India and China). The focus of an organisation often referred to as the "Rich Men's Club" on countries that are quite some distance away from membership is new, but not surprising. These four countries are going to be the drivers of world economic growth in the coming decades and their ability to sustain their own momentum is going to depend, among other things, on how effectively they can put their hundreds of millions of people to work. The remarkable shift in global employment patterns is demonstrated by the report's estimate that these four countries together generated about 22 million jobs per year over the past five years, several multiples of the 3.7 million jobs generated in the entire 31-member OECD area. Amongst BRICs, India emerges the winner, with an estimated 11 million jobs being created every year. From a growth-equity perspective, this should be a source of satisfaction; ultimately, the larger the number of jobs created, the more widespread will be the distribution of benefits from accelerating growth.

But, before we begin patting ourselves on the back, we must pay attention to the other findings of the report. It estimates that fully 85 per cent of the jobs in India are in the informal sector. Even discounting agricultural jobs, which are close to 60 per cent of the total, the clear implication of this is that most of the new jobs being created are also in this category. The next highest on this parameter is Brazil, with 50 per cent. From the perspective of growth sustainability, a high dependence on informal sector jobs does not bode very well. One immediate manifestation of this is the trend in wage inequality, which, the report suggests, is increasing in India and China. In fact, the report argues that trend is contrary to trade theory, which suggests that labour-surplus economies should see wages increase as globalisation leads to a fruition of their comparative advantage. The problem is that, if the majority of jobs are being generated in the informal sector, the benefits of more efficient resource allocation are offset by the market conditions prevailing in the informal sector. If, as the evidence suggests, most of the jobs being generated are in a situation of low and relatively stagnant wages, the domestic consumption driver of growth will inevitably be weakened.

Two other issues highlighted in the report are worth mentioning. One, despite generating the largest number of jobs over this period, India has the lowest employment-population ratio in the group. This is, of course, partly due to a large proportion of children, but it still highlights the very large demand-supply mismatch that we will have to deal with. Two, again India is in a relatively advantageous position as far as the rate of aging is concerned, but it will also have to deal with the pressing challenge of having to provide for old age care for a majority of its population long before it reaches the levels of affluence of the current OECD members. In other words, today's demographic dividend will inevitably turn into a demographic tax. We must make the most of the opportunity while it lasts.