The employment test

By Pulapre Balakrishnan

Attuned as we have become to political grandstanding on the purpose of democracy we may not have imagined that something so prosaic as statistics can alter our perception of how it is actually working for us. The emergence over the past few months of data on employment, speaking precisely the lack of it, cannot but have an influence on our assessment. They paint a picture of an economy that is widely out of line with the government’s pronouncements on its performance. These have generally avoided any reference to employment, except to say that there is a lack of reliable data on it, for the rectification of which the government itself has done very little.

          Arun Jaitley, Finance Minister for the greater part of this government’s tenure, has claimed that it has coincided with a degree of macroeconomic stability that has not been surpassed. Perhaps he had in mind the combination of falling inflation and declining budget deficits since 2014. However, while this has indeed transpired, it is important to note that these trends had commenced even before. Moreover, after repeatedly expressing a commitment to fiscal consolidation, the government did not hesitate to swerve from the path of rectitude to finance an income support programme for farmers in a pre-election year. But of greater significance is the fact that neither he nor the prime minister have had anything to say about employment. In this the BJP is not unique. Employment does not usually figure in the public discourse orchestrated by political parties, either at the centre or the states. This must change, for steady employment is the citizen’s aspiration, to actualise which they elect representatives. Governments in India must therefore be routinely subjected to an employment test which gauges their success in generating and sustaining high employment. In his election campaign in 2014 Narendra Modi had announced that he would generate jobs.

          Employment data from government sources (Labour Bureau), for about half a decade upto 2015 and from the independent agency Centre for Monitoring the Indian Economy (CMIE) for the period since give us a reasonably good idea of the progress made with respect to employment. When supplemented with other information these sources also suggest to us the proximate factors responsible for that history. The evidence they provide tell two stories. First, the Narendra Modi government has had next to no success in generating employment notwithstanding its promises at election time. A development that may require some effort to understand fully but which nevertheless it is important for the citizen to do is that the labour force may actually have shrunk while it has been in office. The labour force is the sum of the employed and those unemployed who are seeking employment. A shrinking of the labour force is most unusual in an economy with a growing population, and thus a growing working age cohort. While this decline had already emerged in 2015 it became pronounced after the demonetisation in 2016. We owe to the CMIE, a private Indian body, both this finding and the articulation of the precise mechanism at work. A section of those hitherto willing to work may have simply dropped out of an already challenged labour market. This possibility is recognised in macroeconomics as the ‘discouraged-worker effect’ and has been observed in western economies. The loss of skill that can accompany being unemployed even temporarily, and the consequent loss of long-run output for the economy, is the basis of the argument that public policy must respond with alacrity to growing unemployment. No such sensibility has infused the government which appears not to have noticed the decline in the labour force itself, a development very early in its tenure. It has instead congratulated itself on having delivered macroeconomic stability. We are now able to see that whatever may have been the acclaimed beneficial impact of the demonetisation in terms of raising direct tax compliance it has caused demoralisation among a section of the already unemployed who may have given up all hope of finding employment.

                The second of the two histories referred to, seen in the reports of one of the government’s agencies is that of a rising unemployment rate from 2011 onwards. This point has political significance as we stay poised for the general elections. This is that while the Narendra Modi government may have run amok with the demonetisation, India’s unemployment challenge predates this episode and evidently runs deeper. Labour Bureau data show that the unemployment rate almost doubled between 2011 and 2015. It is surprising that the government’s own reports did not flag this. The economic, as opposed to the political, message is that the recent history of unemployment has been impervious to the political formation governing India.

          If we are to more than just wring our hands at the current unemployment an understanding of what underlies it is necessary. Actually, no more than standard macroeconomic analysis is needed in this regard. Both output growth and employment are under normal circumstances associated with capital formation. Capital formation as a share of output has been declining since 2011-12. Unlike consumption expenditure capital expenditure is unique in expanding both the supply and demand sides of the economy. Despite the declining capital formation neither UPA II nor NDA II considered it necessary to respond to it by stepping up public investment, the obvious thing to do. The clue to this inertia may be found in the political economy. For UPA II the success of its first term in office must have looked like the perfect opportunity to expand its political base by legislating rights and reciting the mantram “inclusive growth”. Then came Narendra Modi, who somewhat incongruously for an avowedly nationalist politician, embraced the dogma of the Washington Consensus. Popular in the 1990s after the collapse of the Soviet Union, it encouraged small government and exhorted the capacity of the market mechanism to deliver an optimal outcome. There was in this scheme of things no place for any involuntary unemployment. So, whatever may have been the calculation of the two political formations, employment generation just took a back seat in their respective programmes.

          We have adopted representative democracy as our form of government because we cannot in isolation achieve the outcomes we desire even when they are exclusive to us. Employment is one example of this. Though it manifests itself as jobs for individuals it is determined by macroeconomic factors which individuals cannot influence. The Great Depression in the 20th century and the Great Recession in the 21st , both which may have originated in the United States but quickly spread across the world, testify to this helplessness of individuals in the face of market forces. In a democracy it is left to elected representatives whether to pursue macroeconomic policies conducive to the generation of employment. India’s political parties have for close to a decade now failed to so, either wilfully or out of neglect. However, when elected to govern they are given a chance to create the conditions that enable Indians to lead flourishing lives, which includes being meaningfully employed during their working age. India’s political parties must pass ‘the employment test’. When  they fail they must vacate the stage.