Understanding India's Job Crisis

What is the issue?

India is certainly witnessing a massive jobs crisis.
But there is constant denial of this from the government side, with an argument that it is more a problem of wages than of jobs.

Is the argument on wages justified?

According to this argument, every Indian youth who wants a job can get one, but not the wages she wants.
But in reality, what determines the wages for an employee is the demand for such skills versus the supply of such skills.
In economic parlance, wage, or the price of labour, is an internal variable and not an external one.
So wages are not certainly determined by some external factor that is removed from labour market conditions.
It is, instead, entirely a function of the labour market.
Example: the PM's favourite example of frying pakodas
Wages for a person frying pakodas is determined by the demand for pakodas and the supply of pakoda fryers.
If the wages for pakoda frying are very low, it means that there are more people willing to fry pakodas for a job than there is demand for pakodas.
In other words, the economy is not creating enough opportunities for the large number of unemployed people other than to fry pakodas at minimum wages.
So in effect, if demand is higher than supply, wages automatically rise; if not, they remain stagnant.
So to understand the current unemployment issue in India as a wages problem is not valid.

What is a possible explanation?

The work of Arthur Lewis, the Nobel Prize-winning economist from the West Indies, clarifies to an extent the issue with India's job crisis.

He proposes that in economies such as India and China, which have an “infinite supply of labour”, there tends to be a two-sector economy.
These are the capitalist sector (urban manufacturing) and the subsistence sector (rural agricultural).
He found that the living standards of all citizens in such two-sector economies are determined by the wages of those in the subsistence sector.
Initially, the majority of labour is employed upon the land which is a fixed resource.
But over time, due to disguised unemployment, diminishing marginal returns eventually set-in in this sector.
Eventually, the higher urban wages attracts labour force from the subsistence sector, to engage in manufacturing activity.
But a point will be reached when wages will ultimately rise only when the demand for labour exceeds the supply; otherwise wages remain low.
This is the current jobs situation in India as it is not creating as many jobs as is needed i.e. demand is lower than the supply of labour.
As some argue the job crisis is also not the result of the largely informal nature of India’s economy that leads to low productivity and low wages.
Evidently, no large market economy in history has embarked on an explicit economic policy for forced formalisation, for better wages.
As, formalisation is an outcome of economic development, and not a cause for it.

What is the need now?

India is not unique in experiencing rising joblessness and, consequently, income inequality.
Many developed and developing nations are also witnessing this problem.
The government should thus stop denying and first acknowledge the job crisis existing in the country.
It should then move forward with finding ways and solutions to tackle the crisis, and finally, a coordinated implementation of ideas.

Source: The Hindu