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Vibrant Cities and Flexible Labor Laws Critical for India’s Employment Growth, says World Development Report 2013

November 5, 2012

Part time work is on the rise in India, medium-size businesses are not growing and the share of informal workers in organized firms is up from 32% in 2000 to 68% in 2010

NEW DELHI, November 5, 2012 – With the working age population increasing by 7 million people each year in India, accelerating urban development and increasing labor flexibility are key to creating jobs in more productive activities, thus sustaining growth and reducing poverty, says the new World Development Report (WDR), a flagship publication from the World Bank.

The World Development Report 2013: Jobs stresses the role of a strong urbanization policy for India in creating better jobs. In 1990, the share of India’s population living in cities was the same as China: 27 percent. Two decades later, China’s coastal cities are engines of growth, while insufficient infrastructure, shortcomings in basic services and inadequate mechanisms to convert land clog Indian cities. The report also emphasizes the need for India to stay within the efficiency “plateau” of labor laws where labor policies are not too stringent and allow the creation of more wage employment, especially in cities and in activities connected to global markets. 

 “When workers move from low-to-high-productivity jobs, output increases and the economy becomes more efficient. Stringent regulations that obstruct such labor reallocation do not sit on the efficiency “plateau” and affect economic efficiency. There are dimensions over which the country is not close to the cliff and the regulation does not have a detrimental effect on development, but on some other dimensions India is close to the edge, if not beyond it,” says Kaushik Basu, World Bank Chief Economist and Sr. Vice President.

India, as other developing countries, has seen a rise in part time and temporary wage employment. Indeed, the number of temporary workers grew more than 10 percent in 2009 and 18 percent in 2010. More unusual is the increase in its number of informal workers in the organized sector, from 32 percent in 2000 to 68 percent in 2010.

Firm dynamics (or lack thereof) partly account for these trends. The World Bank’s survey of 54,000 firms in 102 developing countries finds that large firms (those with over 100 workers) have higher productivity and higher wages, are more likely to export and are more innovative than small firms (those with fewer than 20 employees). Big firms are more likely to add a new product, incorporate new technology or upgrade a product line.

A majority of firms are born small but in India they also tend to stay small. In the United States, if a company lasts 35 years, it becomes on average ten times as productive and employs ten times as many people. In India the productivity of a 35 year-old firm merely doubles and its headcount actually falls by a fourth. As a result, there is a “missing middle” of medium-sized firms.

Vibrant cities and economic clusters can invigorate firm dynamics, help fill the missing middle and result in more productive jobs. According to the report, this has been so even in countries with inadequate labor policies. Sri Lanka became a manufacturing exporter despite having labor regulations very similar to those of India.  China had the hukou system, preventing rural workers from reallocating to urban areas.  But it put its cities to compete with each other, and the resulting dynamism made the hukou system largely irrelevant.   

The report also highlights how the world of work is rapidly evolving. Demographic shifts, technological progress and lasting effects of the international financial crisis are reshaping the employment landscape in countries around the world.

“India’s working age population, like in other South Asian countries, is on the rise and will continue to do so for another two decades. India can take advantage of this demographic dividend by creating an environment more conducive to job creation. Jobs can serve as a cornerstone for development, contributing to growth, prosperity and social cohesion,” says Onno Ruhl, World Bank Country Director for India.

The WDR authors, who processed over 800 household surveys and censuses to arrive at their findings, estimate that worldwide, more than 3 billion people are working, but nearly half work in farming, small household enterprises, or in casual or seasonal day labor, where safety nets are modest or sometimes non-existent and earnings are often meager.

“The youth challenge alone is staggering. More than 620 million young people are neither working nor studying. Just to keep employment rates constant, the worldwide number of jobs will have to increase by around 600 million over a 15-year period,” says Martin Rama, WDR Director.

With rapid urbanization more than half the population in developing countries is expected to be living in cities and towns before 2020. While countries like India and China have added very large numbers to its labor force in the last two decades, rapid urbanization in countries like India could also change the composition of employment. “Such structural changes which in industrial countries took decades, now transforms lives in developing countries in a generation,” Rama adds. 

The authors also highlight the need for reliable country-level data that is disaggregated and covers more than urban or formal sectors.

The World Bank Group fosters job growth through its two main channels of support to the developing world -- the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) -- as well as through the IFC and the Multilateral Investment Guarantee Agency. Assistance comes in the form of policy advice, support for private sector development plus loans and programs to advance rural development, urbanization, infrastructure and human development (including social protection).

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