WTO versus jobs

Dr Bharat Jhunjhunwala
There is a palpable sense of hope with Narendra Modi on the way to become Prime Minister. Youth of the country have supported him with the expectation that he will put in place employment-generating policies. This will not be easy though. Actually workers are becoming increasingly irrelevant in the modern economy. Machines are producing goods in large quantities with few workers. Say, there is demand for 10,000 yards of cloth per day in a town. Previously 1000 weavers were involved in producing this. Now the same cloth is being produced by 10 workers on automatic looms. Businessmen find it profitable to employ more machines and less labour because the cost of capital is declining. It is cheaper to borrow money from banks and buy machines. On the other hand, the cost of labour is increasing by the day. Economic development has become its own enemy. Development means prosperity which, in turn, mean low interest rates. Development also means high standards of living which, in turn, means high wages. The final result is that economic development is leading to displacement of workers by machines.
Indeed a number of high-skill jobs are being created in the modern factories such as in designing, computerization, etc. But number of these jobs are small in relation to the population. Moreover, these jobs are concentrated in big cities. Weavers are losing jobs in Varanasi while engineers are being employed in Gurgaon. Nearly one-half of our youth are unemployed at the national level. Such would not have happened if large number of jobs were being created in IT and other sunrise sectors.
The only way to create jobs in large numbers is to make it profitable for businesses to employ labour instead of machines to undertake production. This requires that the cost of labour be brought down. Governments across the world are moving in this direction. Labour reforms in our country are aimed to achieve this objective. Allowing businesses to lay off workers when not required, to employ them through contractors and to give them right to hire and fire as per their choice-all such measures lead to a reduction in the cost of labour. That is the natural direction to go. But let it be clear that this will lead to a reduction in wage rates. Only then labour reforms will lead to an increase in number of jobs.
Many scholars are of the view that imparting of better skills and better matching of applicants with available jobs can help solve the problem of unemployment. Some positive impact will indeed take place but this may be like a drop in the ocean. Problem is that skill development means less employment. Better skills will enable the workers to produce more goods. 10 workers in a modern textile mill will now produce 15,000 meters a day instead of 10,000 meters previously. So the total numbers of workers required will be less. Few highly skilled workers will get jobs while large numbers of less-skilled workers will remain unemployed.
The experience of both developed- and developing countries across the world indicates that skill development has not led to increase in employment. Unemployment is rising across the world despite a huge improvement in skills. The businessman will employ one highly skilled worker and remove two less killed workers. So we should not be under an illusion that improvement in skills will create jobs.  Actually, it will lead to the replacement of the less-skilled worker by a more-skilled worker. There is likely to be no increase in total employment. There may even occur a reduction.
Improvement in infrastructure will have a similarly small impact on job creation. Better roads, banking and communications will lead to a reduction in the cost of transaction. These will lead to a reduction in the cost and some increase in demand. But these improvements will simultaneously lead to a reduction in employment. Previously we would employ large number of workers in making paper, making envelopes and sorting the letters and making from the post office. Now the same communication takes place with a click of the mouse. The paper- and envelope makers and sorters in the post office have lost their jobs. The fact that infrastructure and good governance does not lead to creation of jobs is easily verified by comparing developing countries like India and developed countries like Japan. Unemployment remains at high levels in both these countries. Better infrastructure has not yielded results. This is not to decry the benefits of modern technologies but only to point out that solution to the problem of unemployment will not come from this route.
The culprit is technology. The modern production process simply does not require large number of workers. Existence of the humankind is becoming increasingly irrelevant to the workings of the economy. The solution will come from making employment generation the direct objective of the economy. We cannot assume that economic growth will automatically lead to an increase in number of jobs. It may be necessary to move towards lower rates of growth in order to generate employment. For example, an ‘unemployment tax’ can be imposed on modern textile mills. This will lead to an increase in cost of cloth. It will lead to lower rate of economic growth. High cost of cloth will lead to lesser demand and overall economy will slow down. But it will also lead to restart of handloom industry. Large number of jobs will be created in weaving. Hence there can exist an opposite relation between economic growth and employment. High economic growth secured by the use of automatic machines will lead to less employment, not more as conventionally held.
The new Government should take this reality on board. Following the beaten track of infrastructure, good governance and skill development will lead to short term gains. There will be a sense of euphoria in the first two or three years. But this will not sustain. India is today an unemployed developing country. Tomorrow it may become an unemployed developed country. Therefore, the new government should impose heavy taxes on select modern industries where there is a large employment potential. The imposition of heavy taxes on domestic industries will have to be combined with imposition of heavy import taxes on cheap goods produced in foreign countries. That s not possible within the WTO. Therefore, I believe, the new government should have a social audit of WTO  undertaken and then apply its mind whether it will be beneficial to stay in the WTO or not.
(The author wa sformerly Professor of Economics at IIM Bengaluru)

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