Updated: March 9, 2021 10:46:47 am
Over the past couple of weeks, high unemployment — and governmental policies to remedy it — have been in the news. Last week was dominated by the Haryana government’s decision to force private sector firms to pack at least 75% of their workforce with “locals” — that is, those domiciled in Haryana. This rule applied to jobs that paid up to Rs 50,000 a month. With the private sector accounting for roughly 97% of all employment in the country and with the Rs 50,000 pm salary level accounting for roughly 97% of all private-sector jobs, the Haryana job reservation law will likely impact the functioning of the whole state quite comprehensively.
As several stories found out, businesses and economists alike panned the move.
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They say this law will raise the costs of compliance for firms — imagine making sure whether workers in your firm have been honest about the number of years they have stayed in Haryana before claiming to be a local.
Moreover, the move would restrict the freedom firms have in choosing who to employ — for instance, firms may not be able to employ cheaper migrant labourers who are often far more willing to do certain jobs than the so-called locals. Or if they do then a lot of the employment will become informal in a bid to avoid legal penalties.
Add to this spectre of government officials enjoying high degrees of discretion and power to make it difficult for firms to function — thus opening up the very likely possibility of corruption.
In essence, if this law stands — and that is a big if since there is no constitutional basis for such a reservation, especially in the private sector — all these factors would likely result in Haryana losing out on not just future investments but also any expansion in existing productive capacity. Businesses could well decide to relocate because it is no longer as efficient and profitable to do business in Haryana.
Beyond what happens inside Haryana, this law presents an even bigger problem for the country as a whole.
What the Haryana government has done strikes at the root of India being a single unified market. Over the past several months, the ruling BJP government has been trying to convince the protesting farmers about the merits of India being a single market. Prime Minister Narendra Modi has been arguing in favour of bringing down state-level barriers — be in the way indirect taxes were imposed (that’s why the Goods and Services Tax was brought in) or the way farm produce is traded (that’s why farm laws were passed).
Now Imagine if every state were to impose similar restrictions. It would lead to, as Prof Ravi Srivastava of Centre for Employment Studies said, “Balkanisation of the Indian labour market”. If labour — not just the poor and unskilled ones but even the rich and skilled ones — is not allowed to freely roam around the country, it would hold back India’s ability to grow rapidly and reduce poverty. India already has comparatively low levels of internal migration. Policies are needed to boost inter-state migration so that the resource mismatch can be addressed. All of this matters most now when India is trying to regain its growth momentum.
In short, in trying to reduce the unemployment rate, Haryana’s law will hurt all concerned stakeholders. Businesses will lose out on current profitability and future growth; many existing employees will likely lose jobs without the unemployed necessarily getting any employment, and quite likely losing out on a job that may have come around in the future; even the government will lose out because the economic activity will fall and result in lower than usual tax revenues. If the law stands — and worse still, if it is copied by other states — it would epitomise the old proverb: “The road to hell is paved with good intentions”.
This begs the question: What prompted the government to go for such a desperate policy choice?
The government passed this law in November 2020 even though it got the Governor’s nod only last week. As a result, it makes sense to look at the state of unemployment in the state in the lead up to the decision and at the time of the decision.
The first chart uses the unemployment rate data from the Centre for Monitoring Indian Economy (CMIE). It clearly shows that since August 2017, the unemployment rate in the state has been twice and even three-times the national average.
But the granular details of such high levels of unemployment are even more worrisome. The following charts are from the unemployment profile of the state for the September to December period in 2020.
The first thing to note is the level of unemployment among those between the age group of 20 to 24 years — it was over 83%. That means eight out of every 10 individuals in this age group failed to get a job.
The third chart captures the same reality in another manner. It maps the unemployment rate (the red line) and the labour force participation rate (LFPR or the blue line) across age brackets. The LFPR maps the proportion of people in any age bracket that seek work. The LFPR becomes the base for calculating the unemployment rate, which is nothing but the proportion of people within the labour force who failed to get a job.
The next chart captures how being educated made matters worse. The unemployment rate rises with the level of education.
The last chart shows how urban unemployment was more than the rural one even though both were fairly high.
The next question is: How did Haryana come to have such high levels of unemployment if it has been such a magnet for business investments?
Mahesh Vyas, the head of CMIE, provided three factors why Haryana has high unemployment rates.
The first factor, quite ironically, is the fact that Haryana is such a magnet for businesses. Places such as Gurgaon and Manesar have grown rapidly over just the past couple of decades because they are very close to New Delhi without being as costly. In being such magnets of economic activity, these places have attracted migrants workers from all the nearby states. In other words, the number of people seeking jobs in these places has gone up just because more and more people have landed up here in the hope of getting some work. This bumps up the unemployment rate because there is a higher proportion of people in such belts who are there for no other reason but to seek work.
The second factor is the nature of jobs in these places. Most of the new jobs belong to the modern economy and a key feature of these jobs is that, while they pay better than the staid old jobs of the 1970s and 80s, they are less stable in nature. In other words, jobs in the modern economy can be lost far more easily. This leads to significant fluctuations and often keeps the unemployment rate high.
The third and very interesting factor is that Haryana has one of the worst gender ratios in the country. It implies that the workforce is predominantly male. This gender skew also raises the unemployment rate.
Data suggests that when women lose their jobs they tend to leave the labour force. Technically speaking, this leads to a lower labour force participation rate (LFPR) by women. In doing so, women exit the pool of people seeking work and, as a result, do not get counted in the calculation of the unemployment rate. However, when men lose their job they tend to stay in the labour force — leading to a much higher LFPR for men — and continue to look for employment.
With Haryana having a much more male-dominated labour force, the same number of job losses would lead to a higher spike in the unemployment rate than any other state because most of the job losses would be affecting men and they tend to continue to seek work. The data from the unemployment profile bears it out. The male LFPR is 67% and the female LFPR is less than 8%.
Now here’s the kicker: It is quite possible that this job reservation scheme may result in bringing down the unemployment rate in the state in the coming months and years but it would be nothing but a Pyrrhic victory.
Because the fall in the unemployment rate would have been achieved, not by increasing the supply of jobs, but by reducing the demand for them.
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