Securing the demographic dividend

Two recent reports—by TeamLease and Goldman Sachs—have called on Indian policy-makers to concentrate on reforming labour laws and education policy lest India fail to capitalise on its demographic changes. By 2025, about a quarter of the entire global workforce would be Indian—predominantly young, but potentially unskilled or unemployed.

TeamLease, a staffing company and Indian Institute of Job-oriented Training, released their annual report about India’s labour market in June. Andhra Pradesh tops the 2009 “labour ecosystem” ranking based on labour supply and demand conditions as well as the labour law situation in the state. Other consistently well-performing large states are Karnataka, Maharashtra and Gujarat. Poorly performing states have been Uttar Pradesh, West Bengal and Bihar, although the latter has shown some improvements of late.

The change in India's productive population

The Labour Ecosystem Index is found to be strongly correlated with future growth in the state’s economy. While the report does not explicitly say this, such a correlation does not bode well for any rapid convergence of the economies of poorer northern and eastern states having relatively fast increasing populations with that of richer southern and western states. This is especially so because geographic and sectoral mismatches of labour demand and supply might become worse before improving. The third inefficiency identified by the report is a skills mismatch for which more vocation and private education would be required to keep up with the market demands.

While government employment exchanges are supposed to ameliorate these mismatches, they have failed miserably. In 1992, 5.3 million people registered with them and 4.5 percent got placements. In 2005, slightly more than 5.4 million people registered but only 3.2 percent were successful. Disaggregating by states, only Gujarat’s exchanges did their job by placing a respectable 48.1 percent of the applicants in 2005, with the second highest rate being Rajasthan’s 4.5 percent, according to the labour ministry. In fact, the Delhi government budget shows that it costs the government `228,381 for a single placement! Although the trend towards privatised exchanges has finally started—TeamLease itself being awarded a public-private partnership contract to run one Karnataka employment exchange—clearly a lot more needs to be done.

The only way then to not miss the economic dividends of our demographic transition towards a younger workforce is to invest more (and more smartly) in education, along with rationalising labour laws. Realising the political difficulty of labour reform, the TeamLease report recommends federalism—making labour completely a state subject—to allow competition and innovation in this policy area. Indeed, Manish Sabharwal, Bibek Debroy and Laveesh Bhandari—the minds behind this report—have long been calling for labour and education policy reform through public-private exchanges, outright privatisation where appropriate, and decentralisation.

Although allowing states to completely set their own labour regulations is a good first step, reform will still be difficult because of the classic insider vs outsider struggle. Unionised employees, especially government employees, do not want to cede an inch towards making firing easier. But that naturally discourages the organised sector from hiring “outsiders”—that is why jobs with basic benefits continue to be so few despite the economy’s explosive growth. Moreover, minimum wages which have been repeatedly hiked in many states constitute another obstacle to hire a person “on the books” and provide healthcare and other benefits. In the United States, for instance, David Neumark and William Wascher have found that that it is “fairly unambiguous” that “minimum wages reduce employment of low-skilled workers” and that there is “no compelling evidence that minimum wages on net help poor or low-income families”.

Goldman Sachs, in a broader economic report, says that falling dependancy ratios and the rise of the “thorties” (30-49 year olds) could start off a virtuous cycle of saving, investing and further growth. Moreover “prospective lowering of effective tax rates” along with liberalising labour laws could further increase India’s attractiveness a major destination for manufacturing investment as well, especially as China’s labour costs rise as it transitions into higher value-add activities.

In the next decade, China’s labour force will increase by 15 million, Japan’s will decline by 3 million while India’s will increase by a staggering 110 million! In fact just demographics might account for 4 percentage points of economic growth every year, or around half the total growth possible. However, these high rates assume that India’s policies will no longer remain biased against the urban, organised sector and that education—especially of the female population—will not be short-changed.

While both the Goldman Sachs and TeamLease reports largely make the same prescriptions, the former focuses more on generous childcare policies and other incentives for women to work, whereas the latter recommends a general path of liberalisation, with the specifics left to evolve in the policy laboratories of states.

The idea of population being an asset is now entrenched. Domestic trends like an explosion of aspirations and a move towards further gender equality would further increase our effective workforce. The Union government must help with regard to education and labour laws—mostly by interfering less and facilitating more.

As a final remark, creating a national market—not just in goods and services, but in labour also—requires more than just smart policy. It requires Indians of all regions and states to be less chauvinistic and more accepting of diversity. Without this attitudinal change, the internal migration to more prosperous states over the next decade will either be impaired or create social problems. We in India might start greying before we start getting rich.