India’s job problem is easier to solve than its battle for wages

Dumbledore tells Harry Potter in Chamber of Secrets, “It is our choices more than our abilities that reveal what we really are”. This advice is important for policy makers because their choices around questions decide answers. And every doctor knows that treating the symptom rather than the disease can be fatal. So, if you think India has a jobs problem, you will throw money from helicopters (NREGS), mandate a three-day work week (lump of work fallacy), and replace the shovels of digging workers with spoons (productivity be damned). But if you think India’s problem is wages, then you will pursue formalisation, urbanisation, financialisation, industrialisation, and human capital. I’d like to make the case that India’s official unemployment rate of around 5% is not a fudge because everybody who wants a job has a job; they just don’t have the wages they want or need. Just like generals fighting the last war, too many politicians are stuck in yesterdays rhetoric of jobs rather than listening carefully to today’s demands of wages. This debate needs thinking about five things; our firms, our productivity, our wages, our data, and a possible macro framework. Let’s look at each in more detail.

Thinking about firms in any country is complicated but entrepreneurs essentially create two kinds of companies; a baby or a dwarf. Both are small but the baby will grow while the dwarf will stay small. India is a nation of enterprise dwarfs; we have 63 million enterprises of which 12 million don’t have an address, 12 million work from home, only 6.4 million paid indirect taxes till GST, only 1.2 million pay social security, and only 18,500 companies have a paid-up capital of more than Rs 10 crore.

Formality and size matter greatly for productivity; when you can rank manufacturing enterprises by size there is a 22 times difference in productivity between somebody at the 90th and 10th percentile. With a 22 times difference in productivity, you will never pay the wage premium. But if you don’t pay the wage premium, you will never be productive.

Our low national productivity — it took 71 years for the GDP of 1.2 billion Indians to cross the GDP of 66 million Britishers — is a child of the Avadi resolution of 1955 that unleashed the license raj and ensured that firms didn’t have clients but hostages.

GST implementation in 2017 is an important disruption; we added 4.7 million new enterprises in the last one year. Not every enterprise will become a large employer, but this huge addition of enterprises substantially increases the odds of formal employment and India producing more babies.

Thinking about productivity needs a deeper dive into farms and self-employment; 50% of our labour produces only 13% of our GDP (relative to high productivity of IT where 0.7% of our labour force produces 8% of GDP). We have too many farmers and reducing farmer poverty needs what economist Ashok Gulati called the 4 I’s; incentives, investments, institutions and innovation, but the only sustainable solution is to have less farmers. Another assassinator of our productivity is 50% self-employment; the poor cannot afford to be unemployed, not everybody can be an entrepreneur, and many of India’s 63 million enterprises are only viable with what Russian economist Chayanov called self-employment (you don’t have to pay yourself or your family market wages). But as Nobel Laureate Paul Krugman says, productivity is not everything but in the long run it is almost everything.

Sustainable higher wages cannot come from regulatory fatwa’s like unrealistic minimum wages — NREGS was rigged like LIBOR and led to galloping inflation — but come from the higher productivity of formalized non-farm jobs in urban areas done by workers with higher human capital.

Thinking about labour market data needs a deep dive into all four sources of employment data, household surveys, enterprise surveys, administrative data, and data from government schemes. But the notion that survey data is superior to all other kinds is unfair (29% of Indians in our household survey say they work for an enterprise with more than 9 employees but only 1.5% of enterprises say they have more than 9 employees in our enterprise survey). Administrative data often has shaky plumbing but the millions of new provident payers in the last few years represent data from a defined contribution salary deduction plan linked to Aadhar that is impossible to fudge. This data is important because it gives researchers, policy makers and employers new data across time, ages and regions and the source irrelevant (GST, Demonetization, Better Enforcement, Amnesty, Rediscovered morality, etc.) because it doesn’t matter if a cat is black or white if it catches mice. The original sin in labour market data and strategy comes from the Arjun Sengupta report that not only created confusion between informal enterprises and informal employment data but surrendered by treating informality as undefeatable. As a wise politician said, “You can have your own opinions but not your own facts”.

Thinking about wages needs acknowledging three fault lines; gross vs net, nominal vs real, and government vs market. The gross vs net transmission losses of 40% is highlighted by job seekers responding to salary numbers with the question “Haath waali salary ya chitthi waali salary?” i.e. the salary in the letter or in my hand. Nobody argues that gross should equal net but the current levels of confiscation for poor value for money schemes breed informality. The nominal vs real divergence is summarised by a kid in Gwalior who told me “Give me Rs 4000 per month in Gwalior, 6000 in Gurgaon, 9000 in Delhi, and 18,000 in Mumbai; my bags are packed and tell me where you want me to go”.

Since employers care about nominal wages and employees care about real wages, this divergence is a child of our patchy urbanisation — we only have 52 cities with more than a million people relative to China’s 375 — and is killing migration. The Government vs Private faultline comes from the government paying too much at the bottom and too little at the top. Don’t take the huge number of overqualified people applying for entry level government jobs as a proxy for unemployment; most have jobs but are opting for the unbeatable combination of wage premium, job security and low accountability.

Any macro framework will be incomplete and tentative but the export manufacturing story for China arose because Deng Xiaoping skilled and was lucky; he caught a thirty-year supercycle of global growth, global openness to trade, and global deconstruction of manufacturing supply chains.

Harvard Economist Ricardo Hausmann suggests that the only predictor of sustained economic success is economic complexity and India is very complex. We make everything and do everything; we don’t always do it well or at scale. Make-in-India might just become Make-for-India; our $64 billion in FDI last year was concentrated in areas where domestic markets are getting to critical mass which means manufacturing could rise from 11% to 20% of our labour force. But the fastest growing jobs in the economy will continue to be sales, customer service and logistics.

Our battles are just starting; we need more and better cities. We need more formal enterprises. We need more non-farm jobs. And we need better human capital. We need urgent ease-of-doing business interventions; adopt the India stack (paperless, presenceless, cashless) for labour laws, create competition for goofy organization like EPFO and ESI, replace our 25+ numbers with a unique enterprise number, and move forward on a single labour code.

The Bhagwad Gita says, “We are not kept from our greatest goals by obstacles but clearer paths to lesser goals”. Jobs are easier to solve than wages. And they are a lesser goal.