Since 2017-18, the working-age population of India has increased by about 9 crore, while formal sector jobs rose by 6 crore — a deficit of 50 lakh jobs annually. Most of the recent increase in employment has come either from self-employment in rural areas or from informal services. Hence, both the quality and the quantity of work opportunities are under strain with a rising working-age population.
The challenge of expanding work opportunities in the formal sector becomes even more daunting in the face of rapid technological progress. Data shows a persistent and steady decline in the labour intensity of production technology across sectors. This deepening of the capital intensity of the production process, including in labour-intensive manufacturing and services industries, is likely to hasten with the advent of AI.
But why is the capital intensity of production rising in a labour-abundant economy? There can be two factors at play — one, demand-side factors, which make the adoption of capital-intensive techniques imperative for increasing productivity and value added at low cost, and two, supply-side factors, which impinge on the availability of complementary quality or skilled labour.
If the relative cost of capital or machinery falls, it incentivises producers to invest in more capital-intensive technology, even without any gains in productivity. Value added has increased the most in the services sector, which is reflected in the rising contribution of the services sector to GVA (Gross Value Added) and to GDP. However, the manufacturing sector’s contribution has been stagnant while agriculture’s contribution to GDP has declined. Although real wages have not risen significantly, the price of capital or new machine-based technology is falling rapidly with technological progress worldwide. At the same time, less than 10 per cent of our labour force has any formal technical or vocational training and evidence suggests that the majority of our educated youth do not possess skills that make them employment ready.
With the advent of new technologies that favour particular skills, there is likely to be devaluation or destruction of tasks that become redundant. This “skill-biased technological change” lowers the demand for labour by firms as they shift towards more productive and relatively cheaper machine-based technologies. It is, therefore, imperative to continuously equip and re-equip our labour force with skills that complement new technology and machinery. Given this scenario, what are the policies that need to be adopted to incentivise hiring more labour in the formal sector?
