When global firms disengage, employment suffers

Context:

The most recent labour statistics, for August 2021, released by the Centre for Monitoring Indian Economy (CMIE) shows that the unemployment rate has increased from around 7% in July to 8.3% for August 2021. In absolute terms, around 2 million jobs were lost in one month.

Relevance:

GS-I: Indian Society (Population and its associated issues, Salient features of Indian Society, Diversity of India), GS-II: Governance (Government Initiatives and Policies)

Dimensions of the Article:

1. CMIE report on unemployment for August 2021
2. The need for Raising the level of investments
3. Issues – Employment sustainability:
4. Way Forward

CMIE report on unemployment for August 2021

• Final estimates for August 2021 show that the unemployment rate increased to 8.3% from 7% in July 2021.
• Considering the employment in absolute terms – on a net basis, almost 2 million jobs were lost during the month of August 2021.
• The loss was essentially in farm jobs, Non-farm jobs increased to absorb a very large proportion of the jobs shed in the farm sector to leave a net deficit of approx. 2 Million jobs. However, the non-farm jobs that expanded were mostly not the kind that could be considered good quality jobs (Much of the labour shed by agriculture has been absorbed in low-end service activities, Industry could not absorb any.).
• During normal times, seasonal labour released from agriculture gets accommodated in the construction sector. But, currently, the construction sector itself is shedding jobs, forcing workers to find employment in the household sector and low-end services.
• Employment in the industrial sector in August 2021 was 2.5 million less than in July 2021. Factories, it seems, are not a reliable source of employment. They seem to have permanently lost about 10 million jobs in the pandemic-induced lockdowns.
• Excess or seasonal labour released from agriculture usually finds its way to construction sites. In better times, this is part of the transition from farms to factories.
• This non-availability of sufficient jobs in manufacturing and higher-end services could be the dampener for economic recovery in the subsequent quarters of the current fiscal year.

The need for Raising the level of investments

• The economy has been waiting for private investments, but their levels have been very low, accentuating the unemployment situation.
• According to the elementary economic theory, raising the level of investments is the key to output and employment growth.
• While public investments are important, there is a dire need to complement them with even more private investments.
• Turning to Foreign Direct Investment (FDI) to supplement domestic capital formation is an approach that India has been pursuing by making ‘ease of doing business’ more attractive.

Issues – Employment sustainability:

• When FDI increases, the sustainability of increased employment is often threatened as it depends on the business avenues that other competing economies open up leading to corporate restructuring at the global level and firm exits from earlier locations.
• When such firms exit, they create massive disruption in the local economy.
• The exits of high-profile global firms affect employment generation creates apprehensions among potential investors about choosing that location for greenfield investments or for scaling up existing facilities.
• Exit of global firms also affects private investments even if an economy claims to have the tag of investor friendliness. A downturn in private investments leads to slower employment growth.
• The process of the destruction of jobs through exits creates mismatches in the labour market.
• Global firms’ Exits leads to a levelling down of wages which occurs when high-end services firms exit.
• When large assembly firms exit there would be a big influx of low-skilled workers to other sectors as the same sector might not be able to absorb the workforce released.

Way Forward

• While inward FDI does generate jobs both directly and indirectly through an increase in production activities, the magnitude of employment generated especially in the manufacturing sector needs closer scrutiny.
• The euphoria on the inflow of FDI and associated benefits must be evaluated in comparison with the reality of the emergence of modern transnational corporations (TNC). When TNCs emerge as key players in an industry, a proliferation of mergers and consolidations across national and international borders might be frequent.
• The emergence of modern TNCs and such processes of internationalisation of production is driven by the big firms by investing in and out of developing economies. Hence, there is a need for efforts to open up new opportunities in new markets. Such waves of expansions and contractions are aimed at acquiring new markets and new trade opportunities.
• Growing scepticism towards more open trade policies and the rise of protectionism have increased the risk and unpredictability of policy environments, leading to deeper reflection on both existing and new investments by global firms.
• The permanency of large foreign firms operating for decades is slowly waning, hence, there is a need for domestic capital formation and private investments must be encouraged as well.

-Source: The Hindu