The India Labor Market Report

Preview: a 5-year summary account of the Indian labor market

inTouch analytics

10/7/2011

The India Labor Market Report

Labor markets: the coming of age

Indias journey on the path of economic reforms has indeed brought her a long way we are one of the worlds fastest growing economies today. Along this journey, the country has been favored with serendipity its large and growing population is a potential asset, and this *demographic dividend* can quadruple GDP and catapult India into the developed economies league over the next decade. All this if a billion people could be transformed into a productive workforce. For over half a decade now, India has been chanting the demographic mantra with little real progress seen on the ground. Because, with opportunities come challenges. The Services sector which is key to the demographic transformation needs many million knowledge workers but has to contend with only few. Lack of employability is endemic, and India has been willy-nilly about solving this mother of all (demographic) problems. Mediocrity in the education system feeds low quality talent into low quality, unorganized employment. On the other hand, Indias largely skill-based labor force an inheritance from the agrarian economy of the past has been stubborn in transition. Jobs in Agriculture and Manufacturing the employment bastions of yore have stagnated for long thanks to factors of cost, competition and commoditization. And over 90% of the labor force stays inadequately skilled and therefore chooses between unemployment and casual employment. The 15 year milestone is in striking distance. Jobs continue to be created, mostly needing an educated workforce and many in sunrise sub-sectors. There is a problem of plenty, of jobs and of people. We need to recognize new opportunities for what they are, prepare the supply side, and appropriately match both ends. For this, we need immediate fixes to the overall labor ecosystem that create adequate employable supply from a reformed education and vocational set up.

The Demand pie in the sky

The debate about jobless growth stagnating organized sector employment vis--vis rising casual employment in the unorganized sector scratches the surface of a reality India has been living with, and in denial, for some time now: that the organized sector, especially services, is a fertile breeding ground for jobs. The denial is thanks to an inadequacy in converting this opportunity into large scale knowledgebased employment. While policy makers were not looking, job demand patterns have morphed into a mature and diverse requirement of skills and knowledge. The demand pie includes new age clusters of services- and knowledge-intensive jobs within its expanded envelope quite the global growth trend. New subsectors have emerged and many existing industry sectors have graduated to a higher plane of operation that requires knowledge-based talent.

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The India Labor Market Report

Fig. 1 Share of sectors in India follow global trends of economic growth

[Source: Central Statistical Organization (CSO) for FY1951-FY 2009]

Dependent Var: Log (Value Added) of Sector Agriculture Manufacturing Wholesale Trade, Retail Trade, Transport, Public Administration & Defense Education, Health, Hotels, Other Services Finance, Communication, Business Services

Range: Log Employment (Hours) Low Skilled High Skilled -0.57 0.22 -0.25 0.43 -0.23 0.53 -0.52 -0.52 0.48 0.61

Table 1: Global Employment Elasticity Modern service sectors (gray shaded) score substantially higher
[Source: The Service Sector as India's Road to Economic Growth, Barry Eichengreen and Poonam Gupta, February 2011]

A mature stage of growth must also indicate that job creation could follow global trends as well. Another reality, India chooses to ignore, is that the services sector is immensely capable of creating far more jobs compared with other sectors; albeit, jobs that require high skilled people. India, even with its recent skill development initiatives, is busy filling low skilled and low paying jobs that extend right beyond the doors of the unorganized sector. There is a failure to both visualize and

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The India Labor Market Report

actualize an enormous employment prospect. This, actually, is at the root of the problem of transforming the large and growing demographic potential into dividend. Bridging the divide The first step to address this issue would require Indias planning and policy institutions to recognize a shift in the labor demand paradigm. The immediate burning issue is to put the nearly 50 million unemployed people to work. In the medium term, however, there is a dire need to stop looking in the rear view mirror and formulate policies based on current and forecasted labor demand. Given the 58%, and growing, share of services in GDP, solving for the large deficit of graduate and post-graduate level, employable talent is an imperative. Filling a substantial proportion of the additional 270 million working age population in the services sector would have a multiplier effect: increased marginal growth in GDP, thanks to significantly higher incomes and improved tax revenue, thanks to growth in the organized sector. Add to this, broader demographic and societal benefits of improved literacy and reduced poverty, and we would have holistic and qualitative transformation. Three key steps policy makers need to take to effectively capture and capitalize on tomorrows labor demand prospects Identify and include greenfield and newage subsectors with promising medium to long term prospects in the industrial framework Set up a mechanism to map current and future demand at industry subsector level, working closely and continually with subsector stakeholders Share demand intelligence with private training and vocational institutions and set up career counseling cells to prepare the supply side for new opportunities

A skewed supply landscape

That one in four engineers, one if five IT graduates, or an even smaller proportion in case of MBAs, graduating from Indian colleges and universities is all that is employable is a statistic we are living with for close to a decade now. While there is gross addition to the talent pool, poor employability and skill gaps are constraints the knowledge economy in India is delivering against. These statistics are still the tip of a lopsided supply iceberg India has built for itself. The Indian labor landscape is a complex terrain. Unemployable or inadequately skilled labor is an 83 million overhang we have been able to do little about over the past 5 years. Force-fitting this under-employable labor landmass to demand feeds the unorganized sector disproportionately and stretches the employment envelope on the casual side. Evidently, perpetuating this practice is not what we want to be doing to our demography. Architecting a supply landscape that

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better suits the demand dynamic requires us to overhaul an archaic HRD regime and therefore restructure a vexed education-vocation set up. Immediate and medium term action The immediate term focus needs to be on policies that positively reinforce the countrys impaired skill development infrastructure. We need to dramatically improve the throughput of trained manpower train 10 times the just-over-a-million people being trained currently. This demands quadrupling vocational training capacities from the present 3.1million to 12.8 million. The imperative is a shift of focus from the formal public training system to increased private participation. The Government has, indeed, taken several laudable steps towards skill development over the past 5 years but its stranglehold over policy implementation, given the numerous limitations of the present state of governance, leaves many a question unanswered. The medium-to-longer term focus must be a two-pronged strategy to restructure education greater access and greater quality. While capacities are being created in education, they are only aggravating the problems of access especially to the underprivileged and quality. Opening up the sector to substantial participation by industry and foreign institutions should imbue it with superior academic standards that help leapfrog employability. This model must accommodate subsidized education to the poor and deserving to ensure equity. This step to restructure education gestates over a longer period of time but holds the promise to deliver us to dividend. A few critical interventions are required at the state level to make the above transformation a reality Augment public-private partnerships in vocational education with industry linkages right at the policy level, and down to the curricula and outcome stages, to include inputs of the demand dynamic throughout the vocational education lifecycle. Implement a performance ranking system for vocational institutions to arm candidates with information to make the right choices. Vesting candidates with the funding option through appropriate vouchering and other mechanisms also links funding to outcomes. Link accreditation of higher educational institutions to their capability to contribute to incremental employability. This, in turn, puts lower limits on quality of pedagogy and infrastructure, and forces an eventual consolidation in the sector.

A mismatched jigsaw puzzle

Historically, the issue concerning unemployment has been that a 10% unemployment rate in 2006 would inflate to about 29.5% in 2020. Over the past 5 years though, sustained, recession-proof economic growth and state intervention led hope that structural problems of the labor market are being addressed by interventions in the HRD regime, seem to have allayed these concerns a bit. That economic growth is not entirely, and on its own, effective in creating the magnitude of jobs needed is an early realization that stirred the government machinery into skill development related action.
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The India Labor Market Report

Persistent growth in casual employment, and a constantly, relatively smaller share organized employment, reminds us that we continue to live under the threat of a systemic failure to capture demographic potential. For an inherent lack of demand-supply equilibrium to be addressed, the complex labyrinth made of the three structural mismatches needs to be straightened out. The Sectoral mismatch, a demand-side issue discussed above, is yet to be effectively addressed. The Education-and-Skills mismatch is a huge supply-side issue discussed above. The recent skill development initiatives, stressing on vocational education, would partly address this issue. The Geographic mismatch, also inadequately addressed so far, is discussed in a later section of heterogeneity and needs strong rural-to-urban transitional interventions

Towards effective transformation

While individualized interventions such as skill development are much needed to tackle each of the mismatch areas, they risk the possibility of being isolated, part-solutions to a bigger problem. The root cause of labor market heartburn is regulatory cholesterol. Arriving at an effective solution to labor market woes needs not just medicinal dosages, but a set of new eyes as well. In other words, a holistic, interconnected, vision of 3Es Education, Employment and Employability is to be cultivated from which all regime reform is conceived. This is not difficult. Like most attitudinal changes, this one requires a tangible, measurable goal and reducing transactional costs of labor markets is it. Archaic, arbitrary and dysfunctional laws, as well as over-legislation, are the drivers of this cost. Key steps to be taken in this regard are The very roles of government and its departments in formulating, and executing on, the regime needs to be rethought to reduce multiplicity and encourage individual state government implementation. Labor laws need to be freed from their present convoluted form; the complex nomenclature needs to be simplified and where required de-duplicated and unified. In order that unorganized employment is not incentivized laws that constitute distractive and wasteful expenditure for employers (EFPO and ESI are examples) need to be repealed.

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