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Copy Denmark, and good jobs will follow

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There is a view that export-led growth will enable India to increase the supply of quality jobs and the country’s problem is not high unemployment, but low wages. This argument points to the experience of the Asian Tigers which have all been able to experience long periods of high growth, along with rapid growth in trade.

First, globally in recent years, the link between growth and jobs has become weak so that the current development experience is in part one of jobless growth. If the pace of creation of fresh jobs lags a respectable economic growth rate, then creation of enough jobs becomes the key concern. The quality of jobs created then takes second place.

The US economy has been experiencing an extended period of good growth and gradually falling unemployment levels to now historic lows. For long, both growth and falling unemployment had no impact on wage rates. It is only recently when all the slack in the job market has been reined in that wage rates have started to go up.

In the post-war period, first Japan, and then South Korea and Taiwan, began with poor levels of domestic demand as they slowly crept out of war-induced poverty. To grow fast, these economies had to perforce look beyond borders for demand and markets to address. Conversely, the large US economy grew nicely on the basis of ample domestic demand with foreign trade accounting for a rather small part of its GDP.

India, with a similar large domestic market, did not have to look outward for demand and growth momentum. Additionally, economic priorities were different during the years of planning and low growth. It is only after the policies of economic liberalisation came that India lowered trade barriers and adopted a supportive exchange rate policy. This caused exports to boom and the economy to grow fast.

Modi Sarkar 1.0 was marked by rising trade barriers, stagnant exports, high unemployment and, as it now turns out post-Arvind Subramanian’s calculations, very average rates of growth. Where do we go from here?

Additional jobs in India are created not by high tech large and medium industries, but right at the bottom of the economic structure by micro and small enterprises. At the grassroots, units employ maybe a handful of people, are unincorporated, and the proprietor’s family budget and that of the business are indistinguishable.

As ease of doing business at this level prevails and there are no shocks like demonetisation and GST, successful businesses will grow, slowly get incorporated and then started bringing their employees under provident fund, thus taking the first step in creating quality jobs. The recent rise in provident fund memberships, which was first wrongly interpreted as a sign of more jobs being created, has been in fact a sign of pick-up in the creation of formal jobs with stability returning at the bottom of the business pyramid after the twin shocks mentioned earlier had spent themselves out.

But there is still a long way to go. The current reality on the jobs front, as pointed out by Mahesh Vyas, is depressing. Over three-fourths (77 per cent) of employees have vulnerable jobs and the unemployment rate among the young (15-25 age group) is three times the overall unemployment rate. A recent rise in employment is seen as largely unregulated sectors adding jobs by accommodating footloose or low skilled workers.

What Modi Sarkar 2.0 must do is contained in the exhortation of Praveen Khandelwal, Secretary General of the Confederation of All India Traders, who said “there should be one licence instead of more than 28 licences for conducting businesses and their yearly renewal should be abolished as it causes great harassment and corruption”.

While such a step will create informal jobs, a World Bank-ILO study finds that policies to expand exports and improve workers’ skills can be very effective. It finds that increased exports will boost average wages, in particular for skilled, urban, experienced and male workers. To widely share the benefit of exports, it is necessary to particularly help women and the youth in raising their skills levels.

But simply raising the ease of doing business and lowering trade barriers will not be enough. Policy making will have to be far more proactive. In this, there is a global model to follow – Denmark. It has a unique combination of high mobility between jobs, low job security, and high rates of unemployment benefit which make up its unique “flexicurity” model. Plus, critically, there is a well-developed system of adult vocational training.

Thus, what India must work towards is the following combination -- labour market flexibility, limited period of unemployment dole and workers knowing they have a life ahead of periodic retraining to acquire new skills which can find them jobs in firms that have adopted new technology. Once this model slowly gets into place, exports will do well as will the availability of quality jobs.

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