How To Fix The Jobs Crunch

The only real solution to the jobs crisis, whether in India or abroad, is to direct tech innovation towards job enhancing sectors, and disincentivising job-replacing ones, observes R Jagannathan.

One of the stated goals of India's G20 presidency is to foreground 'its belief in a human-centric approach to technology, and facilitate greater knowledge-sharing in priority areas like digital public infrastructure, financial inclusion, and tech-enabled development in sectors ranging from agriculture to education.'

This is laudable, but the big elephant in the room that remains unacknowledged is the negative impact technological progress has on jobs.

India has been facing a jobs crunch since at least the end of the Vajpayee era, but the reason why we did not see it coming was the high growth period of 2003-2008, which got extended on fiscal steroids till 2012.

But even after 2012, when it was clear that we were into a full-blown jobs crisis, there was a reluctance to acknowledge it because it was seen as being the result of the economic slowdown.

When things don't go the way the economic forecasters say, there is a tendency to blame proximate causes rather than the deeper structural ones.

Thus, we blamed demonetisation or a flawed GST structure for precipitating a jobs problem, when the reality preceded these disruptive economic events.

There is also a deep reluctance among economists to say it like it is: That the jobs crisis, which is global in nature, is directly related to technology's ability to replace human labour with automation and robots.

This is because subliminally no one wants to be called a Luddite, and experience has shown that technological innovation and disruptions have sooner or later created as many, if not more, jobs than they destroyed.

This assumption is no longer true. Since the 1990s in the US and Europe, and in the post-Vajpayee years in India, labour has been continuously replaced by capital, thanks to huge advances in technology, including internet and digital technology.

The 2008 financial crisis, in fact, accentuated the problem, because capital could be borrowed at practically zero cost, and the process of replacement of labour accelerated almost everywhere.

The key difference between technological changes in the past and now is that the pace has accelerated, and the vast mass of workers cannot adjust to the new realities at that speed.

In India, the employment elasticity of growth is probably between 0.1 and 0.2 now, which means even if we grow gross domestic product at 10 per cent, jobs will grow just by 1-2 per cent.

The Centre for Monitoring Indian Economy produces a four-monthly estimate of employment and unemployment, and between January-April 2016 and May-August 2022, the employment figure has stayed stuck in the 395-405 million range.

The substitution of labour with cheap capital may be partially reversed or slowed down in the short run because central banks are trying to defeat inflation, but there is no stopping the trend over the medium to long term.

What we need to reckon with is this unvarnished truth: Labour-replacing technology is getting better and better every year, and every country will face a jobs crisis, if it is not already in the throes of one.

The reason why India's own employment crisis looks worse is because we are facing the problem at a lower level of per capita income than the rich world.

Also, demographically, we are at a more vulnerable stage, since our labour market will continue to expand for another 20 years, whereas the rest of the world (outside Africa and West Asia) is facing a crisis after becoming rich.

When you are rich, it is easier to finance welfare with higher taxation.

Also, when you reform a bit too late, your gains are much lower.

If we had reformed our factor markets (labour and land) in 1991, we would have benefited from the global pivot over the next two decades, where entire supply chains moved towards Asia.

We missed the bus while China didn't.

One idea being mentioned in order to reverse the jobs crisis is that you have to reskill and upskill your citizens faster.

However, while this process will indeed make a significant minority better off, it is impossible to do so for a working age population of 900 million, especially since the long process itself will be overtaken by obsolescence of skills and may come too late for the most under-educated sections of the workforce.

Also, the advice ignores the fact that technological improvements reduce the need for skills at the bottom end of the market, where deadbeat jobs will indeed expand as we have seen in spaces like logistics, food and grocery delivery, retail and warehousing, and cab-hailing services.

The only real solution to the jobs crisis, whether in India or abroad, is to direct tech innovation towards job enhancing sectors, and disincentivising job-replacing ones.

But this can't happen without a global consensus.

This is because countries are at different stages of demographic transition and technological capabilities, with those at the older end of demography and endowed with easy access to capital being keener to push automation, and those endowed with larger stocks of cheap labour keen to slow the process down.

In an interconnected world, it is not possible for any one country to decide automation policy on its own, for if any major economy decides that it will restrict the development or the use of one kind of technology, another may decide the opposite, and the knowledge will anyway flow covertly to the one banning it.

If China, for example, decides that due to its own ageing population, it will advocate job displacing technology, it will gain a competitive advantage that other countries cannot decline to use.

So, decisions on which technology to promote or restrict can only be made when there is a global consensus.

It's a problem that is akin to climate change; we can all move forward together, or regress together.

It's like the prisoner's dilemma in game theory.

The optimum results depend on cooperation and not selfish decision-making that causes more losses to more people.

The jobs crisis is global in nature, and the only difference is in the varying impact it has on countries that are at different levels of income and development.

The problem can only be dealt with globally, or through a consensus among the big economies that have an oversized impact on global growth and employment.

It's a fit case for the G20 to at least launch a study on how technology impacts jobs.

Without a deeper understanding of job-displacing technology, we can never get our arms around the problem.