Indian Apprentice Act, 1961 ties us into knots by capping apprenticeships and posing innumerable procedural hurdles in the way of organisations wishing to take on apprentices
The Nobel (Memorial) Prize for 2010 speaks to the need of the hour. Even if double-dip recession does not seem an immediate prospect for the major economic zones of the world, the nagging problem of high unemployment remains. US banks report comfortable profits by confining themselves to prime lending, slowing credit to small and medium enterprises, and firing staff deployed previously for credit appraisals of large numbers of small borrowers. In late October, a policy move to raise the credit flow to small business was introduced. Meanwhile, bank staff shown the door join former small entrepreneurs among the ranks of people looking for jobs, and the problem of matching them to potential employers grows.
Search and match, the 1982 formulation of friction in the labour market by Peter Diamond in a paper in the Journal of Political Economy, is a pressing problem today.
Frictional unemployment has been known for years, as the unmatched need for jobs, even at a market clearing wage. There was a Beveridge curve, proposed a long time ago by William Beveridge, a British economist (with an India connection; born in what is now Bangladesh, son of an ICS officer sympathetic to the country where he served). What Peter Diamond did was to construct a formal model incorporating information asymmetries between the two sides of the labour market, where these asymmetries could be a function of policies in place. In collaboration with Olivier Blanchard in later work published in 1990, and independently by his co-winners Pissarides and Mortensen, at varying points, we have matching functions on the joint behaviour of unemployment, employment, and vacancies, which opened up a large empirical literature inferring the sources and the dynamic effects of labour market shocks, and the impact of policies bearing on the labour market. Peter Diamond is actually more widely known for his work on fiscal issues, most recently on the optimal design of the US Social Security system, which deducts savings at source for post-retirement benefits, akin to provident fund and pension schemes in India. Those ideas may well be implemented soon, since reform of Social Security is one of the critical areas targeted for bringing the path of public debt in the US onto a sustainable track.
But Diamond is best-known for a two-part paper published in 1971, jointly with James Mirrlees, who got the Nobel award in 1996, on optimal taxation of goods. The paper formally showed the inefficiency in taxing intermediate goods, like steel going into cars, and thus the efficiency properties of a tax like the VAT, which offsets the tax paid on steel against the tax payable on the final car. However, that paper did not give birth to the VAT, as economists are sometimes wont to claim. The VAT originated in 1954 in France, from tax practitioners, not from economists. The Diamond-Mirrlees paper merely offered a formal demonstration of the efficiency properties of allowing a tax credit on inputs.
The second, and greater, achievement of that paper was that it brought an end to an embarrassing phase starting with a paper by Frank Ramsey in 1927, when economists could only recommend differentiated tax rates on goods, with the highest taxes on items of mass consumption carrying a low price elasticity of demand, whose consumption would not be reduced greatly in response to the tax. That was a regressive message, and unacceptable to tax practitioners who found it impossible to calibrate tax rates to price elasticity, and in any case found taxes easiest to administer when the rate structure was uniform. Diamond-Mirrlees, by bringing in the possibility of higher weights for the welfare loss of taxation at lower income levels, paved the way by which, through some nimble-footed algebra, equity considerations could exactly counterbalance the regressivity of pure efficiency-based taxation, and point to a uniform rate structure on goods. Those tax issues are now solved problems for policy purposes, but unemployment and jobless growth remain major challenges of the day everywhere. We have low unemployment rates in India, in the sense of involuntary idleness, because people must engage in, or migrate in search of, some activity in order to survive. But unmatched aspirations are high.
There are 40 million registered job-seekers on the 1,200 employment exchanges in India, which find a match on average for around 200 vacancies annually, with a wide range from zero at one end for some of the more remote locations. Together, these exchanges successfully place a mere 250,000 in a typical year.
Labour policy in India targets job security and, therefore, the difficulty of termination is loaded onto procedural delays and wariness at the point of hiring in the organised sector. Recognising this, Team Lease, a private sector entrant in 2003, offers a new model for the matching of aspirants to vacancies in the high-friction Indian labour market. Their model reduces the burden of filling a vacancy through offer of a lease in the first instance, without the commitment implicit in even a contractual hire directly entered into by the ultimate employer. If the vacancy has been effectively matched, the lease gets converted to a permanent placement very soon.
Team Lease does more than just perform a matching function to supplement employment exchanges. The skill deficit among the 95 per cent of applicants who are rejected is addressed by offering training in accounting, sales, retail, and hardware. There are several remedial education agencies in the private sector today supplementing the formal school system, but this one matches the skill taught to vacancy requirements.
Germany and Japan have effective apprentice systems which combine remedial education, training on the job, and induction into the organisational culture, in hiring environments characterised by a lifetime employment preference similar to that of India. But the Indian Apprentice Act of 1961 ties us into knots by capping apprenticeships, and posing innumerable procedural hurdles in the way of organisations wishing to take on apprentices. Here is another stroke-of-the-pen reform waiting for its moment.
The author is honorary visiting professor, ISI Delhi
