India’s Job Market — Problems & Solution
Originally published on www.adityanidmarti.com
This is an economic analysis to pin point the root causes of India’s jobless economic growth. I heavily rely on the work of Claudia Goldin and Lawrence Katz — two great economists who have produced a groundbreaking paper on the relationship between capital/technology and skilled/unskilled labor.
Overview Of The Future
Today, India is one of the youngest countries in the world with a median age of 27, compared to China’s 37 and 47 in Japan. The graph above shows the increase in number of working age people in India, US and China. Clearly, India is set to be the country with the largest working age population (over a billion people) by 2050. But, this is a breeding ground for disaster if the job market does not grow at the same (or greater) pace.
What Is Happening Today?
The unemployment rate in India at around 6.1% is the in 45 years. Additionally, the labor force participation rate — % of the population working/seeking employment — has dropped by 2.5%. These two facts are worrying as India braces for an influx of working age individuals. Moreover, the unemployment rates show a strong positive correlation with levels of education. That is, unemployment increases with increasing level of education.
Economics
The basic Cobb-Douglas equation says that GDP (output) is a function of productivity, labor and capital. Interesting fact is that India’s GDP has been growing at an impressive 7% since 1991. So how is this growth happening with such high levels of unemployment? Obviously this growth cannot be coming from labor, as the labor force is shrinking. One might argue that each worker is getting more productive, but that is debatable (and I prove that is somewhat true later in this post). However, the equation and logic say that the growth is coming mainly from capital (and capital productivity). Capital in this context can be things like roads, buildings, equipment, etc.
Unskilled/Skilled Labor and Capital Complementarities
With a higher rate of unemployment of educated individuals and increase in output due to capital, it would be safe to assume that there is some kind of complementarity between unskilled labor and capital. This theory, however, goes against what Goldin and Katz posit in their paper The Origins of Technology Skill Complementarity. According to them — due to advances in the methods of production (batch production), complex machinery and electrification of manufacturing — there should be more skilled labor participating in manufacturing. In other words, there should be complementarity between skilled labor and capital.
However, in the case of India, current empirical data suggests that the capital being deployed is operated by unskilled labor. That may include manual work such as pushing and pulling. But this goes against conventional wisdom as electrification/automation should have replaced manual labor. What might explain this logic is the fact that the bulk of unskilled labor is actually involved in agriculture (as seen in the graph above) rather than manufacturing. In agriculture, there might be a natural complementarity between unskilled labor and capital (tractors, advances in seeds, etc.), due to limitations in electrification/automation.
But can agriculture alone contribute to the 7% growth of GDP? NO! So where is this growth coming from? It is coming from the services industry. This industry primarily employs skilled and highly skilled labor. But how is this possible with high levels of unemployment in the educated labor force? It may be because of the increase in productivity of labor due to advances in technology. And, advances in technology are only possible with increase in capital (again proves that the GDP increase is coming from capital). With increasing levels of output and a stagnant workforce, this industry might have reached its natural equilibrium level of employment.
Solution
If India wants to unlock the potential of its working age population, it needs to develop its manufacturing sector. As Goldin and Katz mention, this sector will heavily employ skilled labor, due to complementarity between skilled labor and capital. Because with increasing complexity of technology in manufacturing, only skilled labor will be able to successfully operate that technology. Education and training programs will enable the labor force to operate those new technologies. This will reduce the unemployment of the educated masses (as demand for skilled labor will increase). Additionally, due to the nuanced relationship between manufacturing, logistics and commerce in India, increase in employment will trickle down to the unskilled labor force as well. Manufacturing is key to ensure adequate employment for the skilled and unskilled labor force of tomorrow.
