The Puzzles Of The Indian Labour Market

Indian firms are facing a contradiction on the labour market. In many respects, recruitment is hard, there are few good candidates and good employees seem to rapidly leave.

At the same time, there is macroeconomic data suggesting a vast scale of non-employment. A sound intuition into what is going on in the labour market is valuable for formulating business strategy.

A closer examination of evidence from the Centre for Monitoring Indian Economy's Consumer Pyramids Household Survey is useful. A lot of the employment debate is focused on the ranks of the unemployed. The unemployment rate is the fraction of those aged 15 and above, who are unemployed, are willing to work and searching for work. We break up the numbers of persons who are working into two groups: those who are contracted for employment versus those who are self-employed. This gives us a picture of the workforce broken into three groups: contracted, self-employed and unemployed.

Our term 'contracted' does not, of course, imply that the person is a part of the formal sector or works for a large firm. It only means that the person has a contract with some employer and the bulk of these are likely to be small employers.

From the numbers in the tables added above, we see that the unemployment rate has remained roughly the same from 2016 to 2022, with a small drop of around a percentage point. But the share of contracted versus self-employed has changed quite a bit. There is a drop in the proportion of individuals who are contracted for employment over the past few years and an increase in the fraction who are self-employed. For rural India, the fraction that is contracted has shrunk by about 10 percentage points. For urban India, the fraction that is contracted has shrunk by about 6 percentage points. These are both large changes in what ought to ordinarily be structural ratios.

When we consider these numbers, it is easy to slip into a notion of people being pushed around by vast economic forces. But it is important to notice that there are choices made by individuals in assigning themselves into these buckets.

Each person who is unemployed is revealing their preference between choosing to work, perhaps at a low wage, and instead choosing leisure and holding out for a higher price. As an example, anyone in a city has the choice of doing work in the form of deliveries for e-commerce companies. These are jobs that can be taken up in about a day’s effort. What the table suggests is that 10% to 12% of India is holding out for a higher wage while, in the meantime, living on savings or family support.

Similarly, there is the revealed preference in the choices of the 'contracted' and 'self-employed' groups. Everyone who is contracted has the choice of stepping out and becoming self-employed. Roughly speaking, the same applies in the reverse direction at a certain wage. Being self-employed gives control of one's time which comes with a high variability of income. Being contracted involves submission to a boss, losing control of how they can use their time but, in turn, delivers stability of income. At equilibrium, the differences in income earned between these two choices is a market outcome that compensates for these differences in work-and-life characteristics.

This reasoning has implications for firms that seek to hire more people without driving up the wage too much. When unemployed people and self-employed people consider going into a job, they face the transition from having full control of their time to having low control of their time. They demand a wage premium in return for this loss of freedom. To the extent that firms are able to organise themselves to support greater work from home and more flexible working arrangements, this required wage premium would be lower.

It is well-known that this issue—control of time and flexibility of time—is particularly important when recruiting women. The tables given above, of course, offer a highly limited picture as they only cover 445 million people of working age who are in the labour force and ignore the 588 million people of working age who are not in the labour force. Of the latter group, a full 425 million are women. These vast magnitudes can be brought to work at attractive prices from the viewpoint of firms, when the firms are able to address the requirement of women for control of their time and work from home.

There is, then, an important opportunity owing to the pandemic transition into work from home. The firms who sustain those mechanisms will be able to obtain their required staff at a lower wage, particularly by tapping into the vast base of women who are otherwise disengaged from the labour market.

Mithila Sarah and Susan Thomas are researchers at XKDR Forum.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.