Losses in livelihood, slump condition: What can contribute to employment generation?

By Arup Mitra*, Aya Okada**

After the COVID-19 pandemic and the subsequent lock-down hit the economic activities drastically the concern for job creation gets even bigger as the phenomenon of sluggish employment growth was already at the centre-stage even during the pre-COVID times. The long run employment elasticity has been low: mechanisation and the poor human capital are some of the reasons. Technological advancement which contributes to total factor productivity growth is definitely welcome. However, a mere increase in labour productivity prompted by capital accumulation is not the right indicator of progress because it does not ensure rise in the total factor productivity growth. Improvements in total factor productivity growth can lead to enhanced investments which may contribute to employment creation. Even if the application of advanced technology is expected to reduce labour required per unit of output, the expansion in economic activities from the rise in total factor productivity may compensate the employment loss and instead, add to new opportunities.

The importance of domestic innovation cannot be undermined. The firms often manipulate the figures on research and development in order to get the tax benefits. Such activities will have to be discouraged and a more conducive and incentivised system for genuine research to take place will have to grow. Even the imported technology requires a great deal of innovation expenditure to be incurred as the adaptation cost can be significant. The cost of innovating inhouse the appropriate technology can be much less and subsequently the price of the new technology will remain affordable even by the small firms.  Large entry of the new firms can also be envisaged as a route to expansion in the overall scale of economic activities and employment opportunities at the economy wide level. Further, domestic innovation is seen important for processing of the by-products and enlarged scale of activities of a given firm. Hence, labour adjustment and employment creation can be facilitated.

During the post lockdown phase the government is trying to stimulate the effective demand so that the normalcy returns soon and the economy is able to experience a reasonable rate of growth. However, given the major losses in livelihood and the slump conditions that the economy has encountered it is difficult to revive the effective demand instantaneously. An alternate way would be to provide encouragement to the producers to augment supplies so that with a rise in production, factor income will increase and the demand will be stepped up subsequently. After all the purchasing power of the consumers has a major impact on GDP. Any reduction in employment can have adverse effect on output so much so that there can be a steady deceleration in the effective demand. When most of the countries are struggling to revive, it is far-fetching to rely on export demand to pick up and sustain the growth of the economy. Export demand has a number of constrains; unless the competitiveness is extremely high it is unlikely that the exports can sustain the long run growth. Hence, the classical conceptualization of a close association between growth and employment is instrumental to the long run steady state of the economy.          

The second wave of COVID has hit the economy; following the lockdown of 2021 massive employment loss is noticeable. In low income countries even under normal circumstances a large number of households are vulnerable to precarity of livelihood loss. Their capacity to withstand such employment loss is highly limited as they do not have an asset base or the flexibility to switch occupations. The strategy of livelihood diversification requires enormous amount of guidance coming from both government and non-government agencies, which may have had the requisite experience. While distribution of food and provision of health support are indeed the short run rescue measures at the time of crisis, massive planning will be required to create employment both in the rural and the urban areas. The urban employment guarantee programmes will be relevant for the urban poor/low income households who have been residing in the urban areas for a very long time with little access to the rural areas.    

*Professor, Institute of Economic Growth, Delhi. **Dean & Professor, the Graduate School of International Development, Nagoya University, Japan.

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