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Organised and unorganised sectors — Increasing convergence and symbiosis

Tirthankar Roy

LIBERALISATION of the economy has had contradictory effects on employment and labour. Gains in industries that expanded due to low tariffs or removal of licensing were partly offset by losses made in formerly protected industries facing competition from new entry.

Gains in the three boom years — 1993-04 to 1995-06 — were partially wiped out in the recession that followed. What was the net overall effect on manufacturing employment?

Until recently, the data to measure net employment effects of the reforms were not available. Whereas employment in registered factories — the organised sector — is available annually, no up-to-date estimate of unorganised (unregistered) sector employment was available.

Yet, the unorganised sector played a large role in the story of India's structural adjustment. Recent National Sample Survey (NSS) studies redress that gap greatly.

The organised sector: Employment in the organised sector industry grew from 8.3 million in 1991 to 10.2 million in 1996, or at over 4 per cent annually. There is no previous episode of such high growth rates sustained for five years. It is also clear that the rate of growth of average real wages slowed down greatly in the 1990s, and the rate of growth of real productivity (value-added per worker) increased.

These trends represent a big contrast to the 1980s, which saw quite opposite trends: Rapid increase in real wages, moderate increase in productivity, almost no change in employment. These features were named the syndrome of `jobless growth' and have been, along with the contrast to the early-1990s, matters of debate.

Why did jobless growth turn into job-friendly growth in the early-1990s? One answer is that industrial composition changed in favour of labour-intensive sectors, and many exportable sectors are intensive in labour, skilled or semi-skilled. This answer lays more stress on the demand effects of the reform.

A second answer focusses on the dynamics of the labour market, and suggests that the employment growth resulted from a coincidence of reforms with changes in industrial relations. Incidence of labour militancy came down in the 1990s, and may have encouraged more recruitment while slowing down wage growth. There has indeed been a great deal of adjustments in employment and terms of contract. The corporate sector has pushed a lot of jobs, formerly integrated, to the service sector. On an average, the private sector employee seems to work harder for less at 2002 than at 1992.

New firms in the 1990s started without any overhead of surplus workforce and the option to introduce more flexible work regime. By contrast, employment was sluggish in the 1980s because of labour militancy, often state-backed, and a great lack of flexibility. One point missed out in the `jobless growth' debate is that employment growth is a sum of new jobs created and old ones lost. The debate, by contrast, has been preoccupied only with the rate of job creation. It is possible to estimate gain and loss separately for the organised sector.

In 1980-90, jobs were lost on an unusually large scale, almost a quarter of the employment level in 1980. Jobless growth, in other words, was influenced by mass closures, the most famous examples of which occurred in textiles and engineering. In 1991-96, such mass closures were rare, closures occurred more at the firm level, and total job loss was small, about 2 per cent of 1991 employment.

The main difference between the 1980s and the early-1990s was not one of `more' or `less' militancy, but of change in bargaining institutions. Industry-wide unions were in decline all through the 1980s, making way for firm-specific bargaining. Closures, to the extent they can be attributed to labour factors such as militancy or wage-rigidity, also ceased to be industry-wide in the 1990s.

In contrast with the early-1990s, the late-1990s were devastating. In only two years of recession, 1997 and 1998, job loss was quite significant. Between 1994 and 1999, the organised sector employment fell from 9.4 to 8.4 million. The real magnitude is somewhat smaller, for these two figures correspond to two industrial classification systems. Adjusted for that, the extent of the fall may have been about half a million.

The unorganised sector: There are interesting similarities and contrasts between the patterns of growth in the organised and unorganised sectors over the 1990s. The major point of similarity is that both experienced growth in productivity and stagnation in real wages in much of this decade, perhaps suggesting a kind of convergence in labour market institutions.

On the other hand, there is a significant contrast in employment growth. In 1989-95, while employment in the organised sector grew from 8.3 million to 9.4 million, in the unorganised sector, it declined from 35 million to 33.4 million.

This decline was an average over rapid growth in sectors such as garments and leather products, and fall in traditional consumer goods such as handlooms and earthenware.

What about the second half of the 1990s when organised sector employment fell? In the unorganised sector, which is not normally statistically well-served, for 1999, there are three estimates of employment. According to an NSS employment survey, employment in the unorganised sector rose from 33 to 35 million.

An NSS informal sector survey indicates that employment fell from 33 million to 29 million. And the most recent NSS unorganised manufacturing survey shows that employment rose from 33 million to nearly 38 million. It is better to settle for the scenario of an increase.

Not only because that is the majority view, but also because the enterprise or industry surveys are likely to use a definition of employment less restrictive than the employment surveys and more consistent with the figures for previous years used.

What may have happened is that, in the first half of the 1990s, there was no net loss of employment in the organised sector. Job loss was minimal, and possibly compensated within the sector. The organised sector may even have drawn some workers from the unorganised. In the latter part of the decade, the impact of the recession seems to have pushed large number of new entrants and incumbents into the unorganised sector. This is not pure overcrowding of under-employed labour, for productivity growth did not suffer in the late-1990s.

Changes in labour market institutions, post-reform and post-recession, show up in general statistical trends in two ways. First, estimates of job loss show that the dynamics of closure has changed, from industry- to firm-level. Second, the unorganised sector absorbs an increasing extent of new entry as well as jobs shed in the organised sector.

What can be concluded from the fact that trends in the two sectors apparently move in opposite directions? The obvious answer is, there is possibly far greater symbiosis between them now than before. The previous situation was probably one where the two sectors were largely independent, engaged in traditional consumables and the other in capital-intensive consumer goods and capital goods.

That may be changing for increasing co-dependence and convergence in type of activity, labour market character, and labour mobility.

(The author is Professor, Gokhale Institute of Politics and Economics, Pune. He can be reached at tirthankar-roy@yahoo.co.in)

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