A welfare scheme is wrecking the national labor
New Delhi has made its share of economic mistakes in recent years, but its marquee employment program is in a league by itself. The scheme, which began in 2005 to offer social security to millions of rural poor, is instead shunting those people into expensive underemployment while real employers struggle to find workers. It's such a disaster that one branch of the government this month asked another temporarily to stop enforcing the law.
The Mahatma Gandhi National Rural Employment Guarantee Act, as the jobs scheme is now called, promises 100 days of work per year to the unemployed at a minimum daily wage currently around 120 rupees ($2.70). Since this is higher than the lowest pre-existing private-sector daily wages in many areas, the program has encouraged workers to shift from private employment to the public dole.
Critics of this welfare program always worried about the fiscal strain, and sure enough the program's annual outlay is now $9 billion. It is fast becoming the largest entitlement in India. But now other unintended consequences are coming into focus, a severe labor shortage worst of all.
The minimum wage the program sets is hurting employers who can't afford to match it, while forcing those who can to pay more for labor. This vise is especially squeezing farmers in fertile Punjab state in the north who can't find field hands. That's why the Agriculture Ministry has asked the Rural Development Ministry, which administers the program, to halt it during peak farming seasons like the current sowing one. Local media reported last week that Rural Development Minister Jairam Ramesh had said no to this request.
That means the scheme's distortions will become more widespread. Rural wages in some states are climbing faster than India's 9% inflation rate. An agricultural commission noted this year that these labor costs are contributing to the rise in food prices—a problem currently fixating the ruling Congress Party, though the government's solution, predictably, is to expand welfare. The construction industry, which absorbs unskilled laborers, is seeing its costs multiply too—costs that are being passed on to home buyers.
Other facets of the employment scheme are hindering the development of India's labor market. The program offers hardly any worker training that might boost participants' productivity and prepare them to one day command a higher wage from the private sector. As a result, workers are literally digging and refilling ditches instead of gaining marketable skills.
The scheme also is arresting labor mobility. Market forces would normally encourage workers to flee poor states such as Uttar Pradesh and Bihar in favor of prosperous farms in Punjab or, more importantly, the cities—places where workers could naturally move up the productivity and wage ladders. The employment program makes it easier for workers in backward areas to stay where they are and scrape by on the government dole.
Most policy makers never saw these effects coming. The scheme was billed as a form of unemployment insurance, the Congress Party's sop to those afflicted by cyclical joblessness. But by offering a legal entitlement anybody could claim, the government has slowed down job creation. If workers never manage to gain new skills, cyclical unemployment could become structural.
The irony is that unemployment and underemployment in India truly are problems the government needs to tackle. Unemployment is difficult to quantify, but a government survey released last year pegged 9.4% of the work force as jobless for more than six months.
But New Delhi completely misunderstood the solution. Many parts of India actually suffer a dearth of formal employment opportunities, because India's socialist-era labor regulations discourage employers from hiring and firing people easily. This has pushed more than 90% of workers into the illegal, informal sector, which formerly could pay below mandated minimum wages, only to now find itself hit by the government's jobs scheme. The solution is to deregulate the labor market, not offer another handout that further calcifies that market.
Delaying this deregulation delays India from reaping its demographic dividend. India may not be the only country to disrupt its labor market with bad policies, but it bears higher costs for its mistakes. The country's labor force numbers 500 million, and is set to add 110 million in the next decade—an advantage Asian economies like Japan and even China envy. The right reform could help Indians capitalize on this advantage.
Source: The Wall Street Journal, July 27, 2011
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