Wednesday, September 18, 2013

Why the organised sector corporate labour is most affected during economic slowdown

To state the obvious, India's labour market is segmented and heterogeneous. The labour force is 650 million. But not everyone in the labour force is in the work force. We have a work force that's around 470 million. Depending on how you compute, 90% of them are in the unorganised sector.

Whether it is in agriculture or outside agriculture, there's a substantial chunk of self-employment in that 90% category. For unorganised sector workers, when it is wage employment, either the employer is unregistered/informal, or even when the employer is registered, labour contract is informal. That means we have around 47 million who are in theorganised sector.

A slowdown hurts everyone, but it hurts different segments differentially. Had growth occurred at 9%, we would have created 12 million new jobs a year. Growth at 4.4% means those jobs are not being created and this shows up in National Sample Survey data for 2011-12. This cuts across organised/unorganised and would have been worse had it not been for some states growing faster than that 4.4%.


Job availability is a function of price. If a person has invested in education, and there is greater demand for education across all socio-economic categories, expectations are of higher wages and salaries. It isn't just a question of fewer jobs.

It is also a question of salaries below expectations. Once upon a time, for a certain socio-economic segment, unless you opted for medical or engineering, an undergraduate degree was regarded as the minimum requirement prior to entering the job market.

Some years after the whiffs of liberalisation were felt, this changed into an MBA diploma/degree. Management institutions sprouted like mad. During high growth years between 2003 and 2007, when salaries in high-end institutions went astronomical, graduates exiting low-end institutes earned around Rs 35,000 per month. Today, Rs 20,000 would be par. In a perverse sense, new entrants are better off.

Five years ago, had you obtained a job at Rs 35,000, you assumed glorious growth would continue, not recognising high rewards come with high risk. Therefore, in heyday of lowinterest rates, you opted for purchasing cars and houses at ages that would have been unthinkable 20 years ago and now, with high retail inflation and no savings that bring positive real returns, it has become impossible to service EMIs.


That 47 million can be sliced in different ways. Around 20 million work for the government, including PSUs. Another 10 million work for quasi-government, teachers being an instance.

In such cases, there is job security. No one is going to throw you out. Such people are intrinsically risk-averse. Normally, you stay away from capital markets, unless it is mutual funds. You stay away from speculative real estate transactions.

The money is parked in bank FDs. During those high growth years, you probably strayed into capital markets and real estate and burnt your fingers. Back to gold and FDs, the problem being that given retail inflation, real rates of return are zero or negative.

Finally, we are left with another 17 million. This is not quite corporate India, strictly speaking. Labour costs were always high in India. Between 1997 and 2004, there were competitive pressures to become lean and thin and price of capital declined. This shifted relative price ratios of capital and labour. Corporate India consciously outsourced labour functions.

There is a myth propagated to the effect that unorganised sector has no protective labour legislation and organised sector is riddled with protective labour legislation. While this is partially true, it also simplifies. There is some protective legislation for unorganised sector.

And unless you are a "workman", as defined under industrial relations legislation, there is no job security in organised sector, protection being defined as stipulated notice period and/or benefits.

An additional dimension has now been added to that outsourcing template, one with an age dimension. Slowdown and competitive pressures mean more expensive older employees are retrenched, because of perceptions that younger and cheaper employees can perform the function equally well.


This is an increasing phenomenon in metros, if not urban India. If you lose your job at 45, it is impossible to acquire new skills, or, in the midst of slowdown, find a new job with existing skill sets. Independent of post-2007 slowdown, societies like the US have always been used to people embarking on new careers post the mid-life crisis.

Since 2004, because of an assortment of policies, there has been a shift in income from urban to rural India. The 47 million is primarily urban, almost exclusively so. As long as the cake was growing, redistribution mattered less. But now, with slowdown, this urban anger is manifesting itself, not just from the 47 million, but also from those who would have entered the labour force, but have been prevented.