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Why Migrant Workers Can’t Find Work

By Rupa Subramanya Dehejia, published on February 28, 2011 on The Wall Street Journal (http://blogs.wsj.com/).

"This is the reality in India’s major cities: a poor migrant worker pounding the pavement is unable to find gainful employment, while a construction foreman next door is looking for a skilled welder or bricklayer–but the job goes unfilled. And all of this in what is supposedly a labor-abundant economy.

Recently, Joe Leahy and James Fontanella-Khan in the Financial Times documented the plight of Bihari migrant workers unable to find unskilled jobs in Mumbai, and at the same time the inability of would-be employers to find semi-skilled and skilled workers to fill vacant positions.

What’s going on?

Though the facts are well-known, what is less commonly understood is the relationship between these two things: that one exacerbates the other.

This may well be a uniquely Indian curse. While it’s common to have a scarcity of skilled workers in developing economies, it’s almost unheard of to be short of work for unskilled workers, too, which is the ostensible comparative advantage of poor countries that have abundant labor. In India, these labor market pathologies show up as chronic unemployment and under-employment.

Under-employment can take different guises. Consider the uber-specialization of domestic tasks in the average Indian household, for example. The cook doesn’t clean, the maid doesn’t cook, and the sweeper only sweeps. A job that one person could do is instead carried out by three people. Or fully automated high tech toll plazas in India’s major cities will be typically manned by three workers: one pressing the button to dispense the ticket, a second handing you the ticket and giving you change, and a third hovering nearby making sure the operation goes smoothly. Examples abound: automatic elevators with human operators in many apartments buildings are another usual scenario.

Far from reflecting what Adam Smith called the “division of labor,” which represents an efficient market, these labor market phenomena in India are coping mechanisms to spread the small amount of work available as widely as possible. Privately optimal, but socially inefficient, they are the market’s response to the unemployment problem.

As is now widely accepted, the absence of a large number of unskilled jobs in India reflects the lack of a large-scale labor-intensive manufacturing sector, which in turn is generally attributed to India’s rigid labor laws. Rigid labor laws make it difficult to fire workers, and, therefore, employers are reluctant to hire them in the first place. The upcoming budget statement is unlikely to address this issue.

The dearth of semi-skilled and skilled workers is a phenomenon that has also been much remarked on, especially in the context of construction and other infrastructure sectors.  It is tempting to resort to cultural, and specifically, caste-based explanations for this phenomenon,  but a far more likely culprit is the difficulty in getting the necessary skills. The National Skill Development Mission (NSDM), a government program in the form of a public-private partnership, aims to address the shortage in vocational skills. But by itself it cannot fix the structural impediments that prevent the creation of new unskilled and semi-skilled jobs to absorb the growing workforce expected to rise in the next decade.

Some of the problem comes down to matching, much like in dating. Looking for gainful employment is a lot like finding your ideal partner.

In the market for regularly traded commodities, such as bananas, a discrepancy between the supply and demand for bananas will cause the price to adjust, bringing the market back to equilibrium. Looking for a job is different, and much like dating involves playing what economists call a “matching game,” in which the two parties to a transaction are trying to consummate a trade under conditions of uncertainty and heterogeneity and repeated interactions.

Thus, in the labor market, imperfections and inefficiencies can persist, leading to what economists call “frictions,” which imply that unemployment can persist even when there are workers willing to work and employers looking to hire. Unlike the market for bananas, a mere adjustment in the “price” of labor, i.e., the wage rate, cannot solve this problem. This is much like the dating market: after all, what is the market “price” of a successful first date? It is about matching, not so much about the price.

By 2025, India will have the world’s largest labor force, with roughly 12.8 million entering the workforce every year.

According to Goldman Sachs estimates, India’s labor force in the next decade alone will increase by 110 million.  In a single generation, this would be the largest increase to the global labor force in history, with people in their 30s and 40s comprising about half of this increase. India’s services sector is expected to absorb 40 million of these workers. What will happen to the rest? That’s an open question.

Could India’s failure to reform its labor laws, which in turn impede the growth of labor-intensive manufacturing, prove an Achilles heel of the country’s growth miracle? When so much is at stake and millions of workers stand to gain from a more flexible labor market, why is the government apparently hesitant to act? And will continued chronic unemployment fuel social unrest down the road?

What do you think?

Link to the blog:

http://blogs.wsj.com/indiarealtime/2011/02/28/economics-journal-why-migrant-workers-cant-find-work-even-as-construction-companies-search-for-welders/?mod=google_news_blog




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