Creating jobs

Some years back, while doing a research project on the ready made garment industry in Bengal, we talked to a local trade union leader. When he heard that we were coming from IIM, Calcutta, he welcomed us but also warned us that we should not suggest any modernisation of the industry as this would mean job loss for workers.

We tried to argue that a major reason why jobs were vanishing in Bengal in industries like jute, textiles, garments and engineering was that these industries were not modernised. Countries and regions which had taken measures to modernise and become globally competitive in terms of cost and quality were having a surge in investment, output and employment. He was not convinced and insisted that the government should provide more subsidies (including assured purchase by government departments) or take over these sick units. 

This brings us to the more basic question: Does modernisation and the consequent rise in labour productivity destroy jobs?  One should first understand that in a market economy the real wages of workers are broadly determined by their labour productivity or the output per worker. The workers in the same industry in a developed country earn higher wages primarily because their productivity is correspondingly higher. Unless the higher wages are offset by higher productivity, the cost of production per unit of output would be higher and the country would not able to compete with other countries leading to the closure of the industry. This is the reason why the steel industry or the low-end IT industry is no longer competitive in USA and American workers are losing jobs in these sectors. So, the key to competitiveness, higher wages and better standard of living lies in higher labour productivity. 

Even granting that, one may still raise a question. Modernisation and rise in productivity would raise the real wages of workers who are fortunate to find jobs but it may well be at the cost of more people losing jobs. So, there could be a trade-off between  productivity growth (and higher wages) and employment growth. What is the answer to this question? 

Basically, we need to distinguish between alternative scenarios. The first scenario assumes that the total output is fixed. Here if the productivity or output per worker rises, the number of workers employed has to fall as total output is assumed fixed. But the assumption of fixed total output may not be valid. Higher wages (due to higher productivity) would lead to more spending and higher demand for goods and services which would imply that more output would be produced to meet this demand. In that case, higher productivity, higher wages and higher output and employment can all go together. In fact, that has been the broad trend in all high growth economies for most of the periods. 

Higher unemployment

By the same token, it follows that if higher wages brought about by using more machines per worker (automation) in USA are spent on imported goods, say, cheaper Chinese goods, more jobs would be created in China instead of in the USA. Wages of American workers would go up but this would go along with higher unemployment in USA (and more employment in China). 

Now think of what happens in a country like China. Suppose, all existing workers in a garments factory are provided with better machines. The first round effect would be that total output in the factory increases while keeping the number of workers the same. But as each worker earns more and spends most of it on other goods, the output and employment in other industries would go up. Clearly, overall employment would rise along with rising productivity. But what is the guarantee that the additional garments output would be sold?  If these better quality and/or cheaper garments can be  exported, the output in the garment industry would be higher than what can be sustained by domestic demand alone.

This is the kind of growth in GDP and employment that China (and more recently Bangladesh) has achieved by following an export-led growth model built on technological upgradation and labour productivity improvement in garments and other simple consumer goods industries. As a result, a rapid rise in manufacturing employment has taken place. This is precisely where India has lagged behind. India’s focus (for various reasons like bad physical infrastructure, rigid labour laws) has been on the higher-skill sectors like IT, pharma and  automobiles which has created jobs for the relatively higher skilled workers but has failed to absorb the vast army of  unskilled workers engaged in low-productivity (and hence low wage) agriculture and related activities in the country side. Consequently, the scale of organised sector job creation has been much lower in India relative to China.
 It also follows that if overall demand slows down due to a global recession (as at present), it would be harder for a country to increase employment by improving productivity. Clearly if higher output can not be sold at home or abroad, labour-saving technological improvement may bring down overall employment. Therefore, the best time to boost productivity by introducing more mechanised and automated technology (as opposed to initiatives like cutting down wastage of materials) is when the economy is on the upswing, rather than in a downturn. In other words, a generally good policy may get permanently discredited in popular mind if the timing is wrong.   

(The writer is a former professor of economics at IIM, Calcutta)