A cruel cut

Job destruction and skills shortage are the reason why government cannot dither on labour reform

Indian job markets used to react tepidly to phases of deceleration in the economy, but this appears to have changed rapidly with the economic downturn of 2011. The Labour Bureau's latest quarterly employment data for April-June 2012, released on Monday, underlines the shift. Employment generation in eight key sectors has slumped to its lowest levels compared to the past three quarters. Just as the boom in the economy since 2003 fuelled a larger move towards wage employment, the drop too has become more pronounced in the economic slump. Yet, an emerging trend in the dismal numbers may hold out hope: within the aggregate drop, the decline is larger among the contract workers, as compared to those in regular employment. Indian entrepreneurs have long been squeamish about expanding employment in good times based on a genuine concern that retrenchment will be difficult in times of slowdown. That picture could be changing, the data shows, as the biggest decline in terms of average monthly percentage change in employment has occurred in the automobile sector followed by metals, both of which are the largest draw for contract employees. The higher cutback in the number of contract employees here and elsewhere points to the emergence of a nascent flexibility in the labour market for the organised sector in India. So far, employment numbers have held rigid here, through the ups and downs of the economy, effectively shutting out new entrants into the labour market, or forcing them to grapple with the dreadful choice between self-employment and making do with the options in the unorganised sector.

The heartening longer-term trend notwithstanding, the widespread nature of job destruction framed by the employment data provokes immediate concern. In the services sectors, IT/BPO as well as gems and jewellery, employment has just kept pace with replacements. Between them, the two draw in a wide variety of skilled labour from all income classes, so a stagnation here would be worrying. But as both depend on the external sector, the slack was on the cards and masks an endemic problem ó of skill shortage. A recent OECD report noted that close to 70 per cent of employers in India cite recruitment difficulties, a reflection of both the general skills deficit and job market frictions, which prevent the efficient matching of demand and supply.

Beyond fiscal issues, job destruction and skills shortage sum up the two biggest challenges for governments at the Centre and in the states. To procrastinate on labour reforms is, then, a risky tendency at this stage.

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