Contradictory policies will not revive the labour market and consumption

Economics, when it is taught properly, starts by telling first year students that the world consists of three markets, namely, for labour, goods and finance — and not much else. When these are in balance, all is well with the world which can then indulge itself on less important matters. 

The problem of course is that these are never fully in balance. But as long as one or two of them are not way out of balance, an adjustment process is always possible.

The big problem arises when these markets go completely out of balance, as indeed they have done globally since the virus that originated in China stopped economic activity in the entire world except China.

Governments have responded in three ways to this collapse of all three markets. These responses have been in different combinations.

Governments in the Western Hemisphere have pumped in money to revive, or at least keep going, the market for finance. The key instrument here has been low interest rates.

In the product market, non-western governments have been buying directly via heavy investments in all types of infrastructure. This is what Keynes had prescribed back in 1936.

Governments have thus become the main customers for cheap finance, thus developing a vested interest in keeping the money tap open. The cheap finance is used to buy things in the product market.

The markets for finance and products have thus been the easier bits.

The intractable problem

That leaves the labour market which is altogether more intractable. This is because a new sub-market has developed in the product market — the one for labour displacing technology.

This is what is delaying the full revival of the product market. Artificial intelligence doesn’t need consumer products.

What this shows is that governments can’t displace finance and products. But labour is an easy mark. It can, and is, displaced.

Thus, what before the 2020 took five people to produce now takes just two or two-and-a-half, where that half has a foot in both the market for labour and for technology.

This is what the term ‘skills’ embodies. It ensures high skills at low but unstable costs.

But people need jobs and work. So the challenge before governments all over the world is how to revive the labour market, where revival means ensuring stable and fair wages or rates for at least 70-80 percent of the

workforce.

Most of the rest of the world has been opting for stability at the cost of fairness in wages. That means a worker gets paid very little but at least something for his labours. This doesn’t help revive the product market.

India, however, wants both. And this is where the biggest problem lies.

We want the private sector to lead the revival, forgetting that it generally looks for efficiency, which means neither stability nor fairness. The worker has to take what he can get.

Unmindful, the government is looking for huge increases in private investment along with labour market stability, accompanied by fair wages. That is simply impossible.

We can’t have all three. One definitely. Two, maybe. But all three? No way.

This is the problem that the government has to solve.

Choose one

Of the three variables that it is targeting — higher private investment, stability and fair wages — the government has to discard at least one. That means it has to decide between the time horizon of the labour market — life time or part time.

The choice is between life time employment but with very low wages or part time employment with somewhat higher remunerations.

With 17 elections looming between March 2022 and 2014, domestic politics will not allow any of this to happen. This means the revival of the formal labour market — and therefore the formal product market — is going to take a long time.