A couple a days ago the chief economic advisor of Modi government Mr. Arvind Subramanian said that
India’s current employment challenge is particularly difficult as sectors that did well in generating jobs in the country’s previous economic boom years — information technology (IT), construction and agriculture – are in trouble now.
The IT sector that “we thought would always be a dynamic sector for India” is ‘now the new problem.’
The problem is this – it’s relatively easy to diagnose that there is an employment problem. It’s actually really hard to say something that will satisfy the question,” Mr. Subramanian said. The only honest answer, the CEA said, is that many things need to be done to increase employment.
So is it actually hard to solve the job issue in India as the chief economic advisor is saying? Not really. The solution of the job (unemployment) issue lies in first understanding and then following the laws of economics.
The laws of economics tell us that whenever the government tries to control the price of any economic good, whether that be consumer good like apple or producer good like labor, they will either create shortage (scarcity) or surplus (glut) of that good. When government imposes a price ceiling – A price ceiling is a legal maximum the government sets on prices in the marketplace for a particular good or service; the idea is that a rising price hits the “ceiling” and is not legally allowed to go any higher (Lessons for Young Economists, P. 266) – they create shortage, and when they impose price floor – A price floor is a legal minimum, in which the government does not
allow the price of a good or service to fall below the “floor.” (Lessons for Young Economists, p. 272) – they create surplus.
These laws of economics tell us clearly that the only reason why there is unemployment (job issue) in the Indian labor market is because the government is controlling the price of labor i.e., wages via their myriad of labor policies. For example, the Indian government controls the wages of laborers via policies like the minimum wages, Employment safety laws, and equal pay laws etc. These laws make it difficult for the employers to hire laborers at their marginal productivity wage levels, which in turn creates mass unemployment.
Not only this, the Indian government also intervenes heavily in the labor market via its policies like the social security laws, employment guarantees in public work programs like MGNREGA, various labor welfare laws, and like these many other policies and schemes. This government intervention in the labor market cripples the working of the price as well as profit & loss system of the market which is essential for making sure the optimal utilization of given producers goods including laborers.
And, the Indian government also siphons away all important pool of saved resources via taxation, borrowing and its inflationary policies via its central bank RBI, and this siphoning away of resources has a huge opportunity cost of lost employment opportunities in the private sector of the economy. Also, government’s central bank RBI is responsible for generating the cycles of booms and busts in the Indian economy, which creates mass unemployment. The chief economic advisor alluded to this fact in his recent public lecture where he said,
India’s boom period in the 2000s led to job creation in three sectors that did extremely well, Mr. Subramanian said after a public lecture at the Nehru Memorial Museum and Library.
This included agriculture, construction and the IT sector.
Today, all these three sectors are challenged. We have to work on construction, we have to work on agriculture and of course, IT is now the new problem.
The problem with Mr. Subramanian’s analysis is that he failed to understand the fact that that the very same boom of 2000s was a root cause of the present unemployment problem (job issue) because it was artificial in its nature as it was generated by RBI via its easy money and cheap artificial credit policies! Such artificial booms will surely end up in bust eventually. All those sectors mentioned by the chief economic advisor above are in trouble today because their growth in the 2000s was unnatural only supported by RBI’s loose money policies. Their artificial nature of growth made them unsustainable in the long run from the very beginning. The Indian government is only reaping today the negative effects of their own policies which they sowed in past!
The above discussion of the root cause of unemployment gives us the answer of the original question that whether the job issue hard to solve. As we have seen above, it is, after all, not hard to solve at all. Jobs issue will be solved if only the Indian government stops meddling in the functioning of the labor market by repealing all its laws, schemes and policies etc., and let the market work on its own. If only the Indian government dismantles the RBI, so that it can’t generate the boom & bust cycles, and let the market base monetary system rule then the job issue will be solved. All in all, if India can have a pure Capitalist economy then all its myriad problems will have an efficient and moral answer. As long as this is not happening, all the problems are going to stay with us.