Unemployment in India

A recent news headline said, As many as 7,000 persons, mostly graduates, had applied for 13 vacant posts of canteen waiters in Mantralaya, the Maharashtra secretariat. Another said, As Narendra Modi government and opposition fight over ‘jobs crisis’ in India, another surprising news has come from Uttar Pradesh where over 93,000 candidates including Phd holders, post graduates have applied for peon jobs that have an eligibility of Class V. Then there was this news, More than 25 million people, a number greater than Australia’s population, have applied for about 90,000 positions on India’s state-run railways, underlining the challenge Prime Minister Narendra Modi faces in providing millions of jobs ahead of an election in 2019.

All these data present a very grim picture of Indian job market. India is a country of 1.36 billion people with one of the world’s youngest labor forces. Mainstream economists, politicians and media pundits don’t get tired talking about the demographic dividend that this young labor force will give to India.  But as recent Mohandas Pai report said, India’s young labor force is more of a liability than asset, and so the demographic dividend has been lost. It is a supreme irony that in India on one side we have millions of young people ready to work and on the other side they find it hard to get that work. Why it is hard for these young people to find work? To understand the answer of this question we need a short lesson of economics first. We need to first understand how the labor market works.

Labor Market 101

There are two types of goods that humans need for survival: 1) consumer goods and 2) producer goods. It is one of the first laws of economic science that before we consume anything, we have to produce it. And production requires factors of production i.e., producer goods. Labor is one of the chief factors of production. Now, just like consumer goods, produce goods also have prices because they are scarce. The price of labor is called wage. The way market forces of demand and supply determine prices of various consumer goods, they also determine the prices of various producer goods. The supply of labor is determined by factors like population growth and migration. The demand for labor is determined by the discounted marginal value product of the labor unit i.e., how much valuable consumer goods the laborer is producing or what additional revenue the individual labor unit fetches for the producer.

As long as wage is allowed to be flexible, it will balance out both supply of and demand for labor. But in our nation state economy wages are not flexible. As we will see below, one or the other policy of the government doesn’t allow the labor market to function freely, and this in turn creates the mismatch between the demand for and supply of labor creating  unemployment.

How Government Intervention Hinders the Labor Market?

The Indian government intervenes in the working of the labor market in myriad of ways. I will list down some of the broad categories of economic and labor policies and show how they create unemployment.

Economic Policies

Government’s fiscal and monetary policies create unemployment on a vast scale, but because the job losses occurring from these policies largely remain in the unseen sphere (see Bastiat) it is hard to fathom them for most people who are not trained like real economists to see the unseen and long run impact of any policy or action. This happens necessarily because the way in which the government functions. By nature government works on the basis of taxation so when they spend money on various fiscal programs like building roads or dams or on myriad of government schemes like MGNREGA, the money is taken from productive tax payers. Tax payers are thus deprived of that tax money which they could’ve spent on either consumption, giving rise to demand for valued goods, or on investment creating more productive capacity and employment in the economy. These productive capacity and jobs do not come into existence because of government spending, and so they go unnoticed by the majority of people. Although these effects are unnoticed, they are real nonetheless.

Government policies also disrupt the working of the market and that create unemployment e.g., the policies of demonetization and GST has created astronomical levels of unemployment in India. The recent report from the CMIE (Center for Monitoring Indian Economy) revealed that due to these policies the Indian economy lost 11 million jobs in 2018. The recently leaked report from the NSSO (National Sample Survey Organization), leaked because the Modi government is not releasing this report in the election year and protesting that two members of the Statistical Commission recently resigned, has also revealed that because of demonetization and GST the level of unemployment in India has gone to its 45 year high level of 6.1%. Not only these two policies, but recently enacted eCommerce policy is also disrupting businesses of eCommerce giants like the Amazon India and Flipkart. This eCommerce policy will result into unemployment because of losses and business disruption of these companies.

Apart from the fiscal and other policies of the government mentioned above, the monetary policy of RBI generates business cycles in the economy, which creates mass level of unemployment.

Various Labor Market Legislation

Apart from above mentioned economic policies of the government, other labor market legislation like the minimum wage act, employment protection act, workplace condition and safety act, equal pay act, unemployment insurance, Universal Basic Income (UBI), maternity benefit act, anti-child labor laws, trade unions etc., also create unemployment. Most of these acts add into cost of production of businesses without adding anything into their revenue. This entails losses. To reduce their losses and maintain profit margins, businesses are forced to fire workers and stop hiring new ones.

Education Policy of the Government

Education in India is centrally planned and regulated by the government. This means, schools/colleges/universities run courses which are mandated by the education ministry and not as mandated and demanded by the market economy. The centrally planned education system produces millions of young graduates every year who are without any kind of useful skills and so unemployable. This is the reason why thousands of educated people (sic) in India apply for petty government jobs! This government man power planning is also a major cause of huge mismatch between demand for and supply of labor and resulting unemployment in India.

Conclusion

Once one understands the laws of economic science, it is not surprising to find that there are millions of unemployed people in India. The employment situation of India is grim because of its massive government size.  Such a big size government means heavy intervention in all spheres of the economy including the labor market, and that only means unemployment for the masses. If the big size of government and its interventionism is responsible for unemployment then rolling back the size of the big government and eliminating interventionism is the only solution of grim unemployment problem. Anything less than that will not work. The people of India must pressure its government to stop intervening everywhere. As long as this is not happening, unemployment will remain a grim reality of this country.