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Low Labour Demand UPSC NOTE

 The symptoms of low labour demand

  • It is useful to distinguish the two types of employment that prevail in an economy such as India. 

  • The first is wage employment which is a result of labour demanded by employers in their pursuit of profits. 

  • The second is self-employment where labour supply and labour demand are identical.

  • A further useful distinction can also be made between wage labour and jobs

  • The first includes all forms of labour done for an employer including daily wage work at one extreme and highly paid corporate jobs at the other. 

  • All jobs are wage labour, but all wage labour cannot be called jobs

  • When we speak of a jobs problem, we are speaking of inadequate labour demand particularly for regular wage work.

  • The Indian economy has historically been characterised by the presence of both open unemployment (out of work job-seekers) as well as high levels of informal employment. 

  • The last is also called “disguised unemployment” because, being similar to open unemployment, it also indicates a lack of adequate employment opportunities in the formal sector.

  • This lack of opportunities is reflected by a more or less stagnant employment growth rate of salaried workers in the non-agricultural sector in the last four decades. 

  • The labour demand in the formal non-agricultural sector is determined by two distinct factors

  • First, since firms in the formal sector hire workers to produce output for profit.

labour demand depends on the amount of output that firms are able to sell. 

  • Second, labour demand depends on the state of technology that dictates the number of workers that firms need to hire to produce one unit of output. 

  • Introduction of labour-saving technologies enables firms to produce the same amount of output by hiring a lower number of workers.

  • In India, the employment growth rate of the formal and non-agricultural sector remained unresponsive despite a significant rise in the GDP growth rate and the value added growth

rate during the 2000s as compared to the decade of the 1980s and 1990s

  • The lack of responsiveness of employment growth rate to changes in output growth rate reflects a phenomenon of jobless growth. 

Jobless growth with Indian characteristics

  • As an economy grows, it is generally seen that it also becomes more productive

  • In the process of producing a greater amount of total output, firms become capable of producing more output per worker

  • This happens because of what economists call “economies of scale”. 

  • As firms produce more output, they find it easier to adopt labour-saving technologies

  • But the extent to which labour-saving technologies are introduced depends on the bargaining power of labour.

  • We can make a distinction between two types of jobless growth regimes based on the tightness of the connection between output growth and labour productivity growth.

  • In the first case, the responsiveness of labour productivity growth rate to output growth rate is weak. 

  • The possibility of jobless growth in this case emerges exclusively on account of automation and the introduction of labour-saving technology

  • But employment growth rate in such regimes would necessarily increase if output growth rate happens to increase. 

  • Under weak responsiveness of labour productivity, the positive effect of GDP growth rate on employment would dominate over the adverse effect of labour-saving technologies. 

  • In the second case, which happens to be the Indian one, the responsiveness of labour productivity growth rate to output growth rate is high. 

  • The positive effect of output growth rate on employment fails to counteract the adverse effect of labour-saving technologies.

  • Employment growth rate in such regimes cannot be increased simply by increasing GDP growth rate. 

Macroeconomic policy framework 

  • The central contribution of the Keynesian revolution in macroeconomics was to highlight

  • the role of aggregate demand as the binding constraint on employment. 

  • Fiscal policy was perceived to increase labour demand by stimulating output

  • The developing countries that inherited a dual economy structure during their independence, confronted additional constraints on output. 

  • The Mahalanobis strategy identified the availability of capital goods as the binding constraint on output and employment, putting forward the policy for heavy industrialisation.

  • The structuralist theories based on the experiences of developing countries highlighted the possibility of agrarian constraint and the balance of payment constraints

  • Both these constraints led to key policy debates in India, particularly during the decade of the 1970s and early 1990s.

  • But the evidence suggests that the employment challenge can no longer be met only through more rapid GDP growth

  • Rather, a separate policy focus is needed on employment in addition to the focus on GDP growth.

  • Such employment policies will need both demand side and supply side components

  • Financing such expenditures while maintaining debt-stability requires the reorienting of the current macroeconomic framework in a significant way, including increasing the direct tax to GDP ratio by reducing exemptions and improving compliance, and a more imaginative use of macro-policy to pursue a constructive employment agenda.


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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Low Labour Demand UPSC NOTE
Low Labour Demand UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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