Top 4 Strategies to Boost Employment

Read this article to learn about the four strategies to boost employment in developing countries.

The four strategies are: (1) Industrialisation-Led Strategy, (2) Wages-Goods Strategy, (3) Employment Strategy of Using Labour-Intensive Technology, and (4) Strategy of Direct Attack on Unemployment.

Strategy 1# Industrialisation-Led Strategy:

Influenced by the growth experience of the western developed countries, the several developing countries adopted industrialisation-led strategy of development for absorbing surplus labour in productive employment in the modern industrial sector. An essential feature of this approach is that it seeks to generate more employment opportunities by achieving a higher rate of industrial growth through accelerating investment or capital formation in it.

Besides, this approach regards labour and capital as complementary inputs. In the developing countries the stock of capital and modem industries have not been growing at a rate fast enough to keep pace with the growth of population. As a result, the whole of current labour force cannot be absorbed in productive employment because not enough capital is available to employ them.

Thus this approach attributes the existence of unemployment and underemployment in developing countries to the lack of capital relative to the magnitude of labour force. A variety of growth models and development strategies come under this approach, all of these, though differing in some other aspects, lay stress on the importance of capital accumulation for generation of employment opportunities.

Models:

We shall explain below some of the models of this growth-led approach towards employment that fall in this category:

(a) Industrialisation-Led Strategy:

Harrod-Domar Model. According to Harrod-Domar model the rate of growth of output depends upon the ratio of total investment to national income divided by the capital-output ratio, i.e.,

G = 1/v

Where, G = rate of growth of output

I = rate of investment (defined as ratio of national income)

v = capital-output ratio

Harrod-Domar model assumes capital-output and capital-labour ratios to remain constant which can happen if there is no technological progress. Thus, in the absence of technological progress, increase in capital would imply increase in both output and employment.

Therefore, Harrod- Domor model suggests that the rate of growth of both output and employment is determined by the growth of capital stock. Thus, according to this model, solution to the problem of unemployment lies in sufficient increase in the rate of investment or capital accumulation. However, this model does not distinguish between capital formation in industry and agriculture.

(b) Lewis and Fei-Ranis Models of Growth:

In their growth models for a dualistic economy with surplus labour, Lewis and Fei-Ranis also regard capital as the crucial factor for the expansion of employment in the modern industrial sector. While their models suggest that rate of growth of employment depends upon the rate of capital accumulation and economic growth.

It differs from Harrod-Domar model in the sense that they draw distinction between the two sectors of a less developed economy:

(1) The subsistence agricultural sector which is characterized by surplus labour, low productivity and self-employment; and

(2) The modern industrial sector which is characterized by wage employment and high productivity.

These dual economy growth models emphasize transfer of surplus labour from the subsistence agricultural sector to the modem industrial sector. And this transfer of labour and expansion of employment opportunities in the modern industrial sector is determined by the rate of capital accumulation. Therefore rate of capital accumulation and economic growth in the modern industrial sector increases over a number of years it would withdraw all the disguised unemployed labour from agriculture.

(c) Mahalanobis Heavy Industry Development Strategy and Employment:

This growth model which formed the basis of development strategy adopted in India’s Second and Third Plans also laid a great stress on the rate of capital accumulation for determining the rate of growth of employment, especially in the industrial sector. According to Mahalanobis, unemployment of labour is caused by the lack of capital stock.

To employ a person in productive work, he needs to be equipped with adequate capital. Therefore, in order to generate more opportunities of productive employment more capital has to be accumulated. Given a closed economy, the rate of capital formation, according to him, depends on the capacity of the economy to produce capital goods.

With this premise he showed that in order to achieve a high rate of economic growth, it is necessary to accord a high priority to basic heavy industries producing capital goods in the development strategy of a plan.

It is worthwhile to mention that in Mahalanobis’ opinion it is necessary to allocate relatively greater resources to basic heavy industries to achieve not only the objective of rapid economic growth but also of expanding opportunities for productive employment. With this, the stock of basic goods like steel, machinery, fertilizers, should be sufficiently increased to eliminate unemployment.

It may be noted that Mahalanobis later realised that basic heavy industries, though important for determining the long-term growth of employment, will themselves not create adequate employment opportunities in the short run.

In response to the need to create enough employment opportunities in the short run, he extended his model to four sectors wherein he kept the basic heavy industries sector intact but divided the consumption goods sector into three sub-sectors, namely:

(1) Factory enterprises sector,

(2) Household and small-scale sector, and

(3) Services sector.

It was the household and small-scale sector in his four-sector model which being labour-intensive was expected to create a good amount of employment opportunities. However, his four-sector model did not represent any essential change over his two-sector model inasmuch as it maintained the emphasis on basic heavy industries.

Moreover, since adequate resources were not provided for the household and small-scale industries, nor was any effort made to improve their productivity so that they could successfully compete with the large-scale industries, they recorded a low growth rate in output and employment.

A Critical Appraisal of Industrialisation-Led Strategy of Employment:

Industrialisation-led strategy of employment rightly lays stress on the importance of capital goods for generating employment. Without some capital goods such as tools, implements, machinery and equipment, it is hard to generate productive employment in both the large-scale and small-scale industries.

Likewise, capital inputs such as irrigation facilities, fertilizers, etc., play a crucial role for the productive absorption of labour in agriculture. Above all, shortage of infrastructure such as steel, power, cement and transport facilities serves as an important bottleneck for the expansion of output and employment in both industry and agriculture. Therefore, expansion in their supply would promote the growth of output and employment in the economy.

However, industrialisation-led strategy did not sufficiently recognize the importance of wage- goods constraint for generation of employment opportunities. Thus, at a time when fixed capital goods alone were thought to be necessary, Vakil and Brahmananda made a valuable contribution by highlighting the importance of wage-goods for expansion of employment opportunities.

But the assertion that the increase in the supply of wage goods alone is both a necessary and sufficient condition for creation of employment sounds quite unrealistic. It is not a right approach to think of capital goods versus wage-goods. Indeed, increase in the supply of both is needed to solve the problem of unemployment.

The availability of wage-goods serves as a constraint for generating wage-employment for without them the demand of the newly employed persons for wage-goods would not be met. But if opportunities for productive employment are to be generated in the very first instance either in industry or in agriculture, labour needs to be provided with some capital goods.

It is worthwhile to note that growth of the modem industrial sector was expected to absorb not only the openly unemployed but also the disguised unemployed persons from agriculture. However, the actual experience belies the hopes of generating sufficient employment opportunities through industrial growth.

For instance, an annual average rate of growth of around 7 per cent achieved by the industrial sector in India during the last four decades and a very high increase in the rate of net capital formation (from 5.5 per cent in 1950-51 to 25 per cent of national income in 1995-96) has not been able to solve the problem of unemployment and underemployment in India. It is thus clear that not much employment opportunities can be generated directly through growth of modem industrial sector even with high rate of increase in its output.

A serious drawback of strategies of employment generation through industrial growth is that they have ignored the possibilities of absorbing labour productively in agriculture. These strategies regarded agriculture merely as the source of labour supply to the expanding industries.

Even in growth models of Lewis and Fei-Ranis of a labour-surplus dual economy, both surplus labour and dualism have been sought to be eliminated by way of shifting labour from agriculture to the modern industrial sector. But there is ample scope for absorbing labour in the Indian agriculture provided proper agricultural policies are adopted. India employs much less labour per hectare than other countries like Japan.

A good amount of labour can be productively absorbed in the Indian agriculture through rapid growth of its output by increasing cropping intensity and irrigation facilities and through the adoption of new high yielding technology. Reckless mechanization, that is, use of labour-displacing agricultural machines such as tractors, combine harvesters, is to be avoided if more employment opportunities are to be created in agriculture.

Finally, most of the growth strategies described above focused on industrial growth for employment generation and ignored the importance of institutional reforms, especially in agriculture, for promoting the expansion of employment opportunities. Land reforms in agriculture such as redistribution of land and changes in the tenancy system can play an important role in increasing employment opportunities for landless labourers, small and marginal farmers and share-croppers.

There exist large inequalities in land ownership in India with the result that whereas a large number of rural households have either insufficient or no land to provide them adequate employment and income, a few families, on the other hand, own such a large amount of land that they cannot manage it efficiently. Consequently, there, is under utilisation of land and irrigation potential.

Further, it is generally believed that employment per hectare and cropping intensity are higher on small farms as compared to those on large farms. This may be taken to imply that redistribution of land through imposition and effective implementation of ceiling on land holdings will bring about increase in employment opportunities in agriculture.

To sum up, agriculture contains immense employment potential provided proper strategy for its development involving technological and institutional changes is adopted. This has, however, been ignored by the mainstream of the growth-oriented strategies of employment.

Strategy 2# Wages-Goods Strategy:

Industrialisation-led strategy of development explained above neglects the constraint of wage- goods availability on employment generation. In their criticism of the development strategy of Second and Third Five Year Plans, Vakil and Brahmananda advanced what is known as wage-goods strategy of development.

According to them, unemployment and disguised unemployment in less developed countries are due to the deficiency of the supply of wage-goods. They argued that the magnitude of employment in less developed countries was determined by the available amount of wage-goods.

This is because whenever employment for new men is created, say, in rural public works, it cannot be sustained unless adequate amount of wage-goods, especially food grains, is available. Of course, when people are openly or disguisedly unemployed, they would be consuming some food grains. But in that situation their consumption would be very low because their budget would not allow them to consume more.

Therefore, when they are given wage employment, their effective demand for wage-goods will tend to increase. Hence, given the reasonable real wage rate (in terms of wage- goods) we can calculate the total amount of wage-goods required to obtain full employment.

They call the difference between the required magnitude of wage-goods and the actually available supply of wage-goods as the ‘wage-goods gap’. Open and disguised unemployment in less developed countries like India, according to them, is due to the existence of this wage-goods gap. The level of full employment can be attained only when this wage-goods gap is bridged by expanding the capacity to produce wage-goods.

We thus see that whereas in Mahalanobis’ approach to growth and employment “the entire emphasis was on the role of fixed capital, Vakil and Brahmanand’s entire emphasis was on the role of wage-goods as capital.” It may be noted that in his later works Brahmananda has modified his strategy in that he now assigns a high priority to what he calls ‘Integrated Wage-Goods Complex’ which includes not only wage-goods but also capital goods which are used for the production of wage-goods.

Since they consider the supply of wage-goods as the most important determinant of employment in less developed economies, Vakil and Brahmananda proposed a development strategy which assigned the top priority to wage-goods industries, especially agriculture, in the pattern of investment.

That is why they severely criticized the development strategy adopted in India’s Second and Third Plans which gave high priority to basic heavy industries producing fixed capital goods.

It may be noted that like Nurkse, Vakil and Brahmananda believe that disguised unemployment in developing countries contains saving potential (in the form of wage-goods) for capital accumulation. By withdrawing the disguised unemployed from agriculture, some amount of wage- goods would be released for providing wage employment in the investment sector.

But, unlike Nurkse, they think that the surplus of wage-goods so released will not be sufficient to provide employment to all the potentially available labour force. Therefore, they emphasised the expansion of the capacity to produce wage goods and for that purpose advanced a development strategy which envisaged greater allocation of investible resources to agriculture and other wage goods industries.

It is also worth-mentioning that Prof. Amartya Sen winner of Noble Prize in Economics in 1998 who has been a follower of capital-formation approach to employment in his earlier works has explained in his recent study made for ILO “Employment, Technology and Development” that a crucial bottleneck in the way of expanding opportunities for wage employment in the less developed countries arises from the deficiency of wage-goods supply.

He points out that it is not the lack of demand as visualized in various studies based in input-output models of employment but the availability of sufficient wage-goods which prevents the generation of adequate amount of wage employment. Therefore, Prof. Amartya Sen has argued that to solve the problem of unemployment and underemployment, in the investment strategy wage goods industries, especially agriculture, must be accorded a high priority.

A Critical Evaluation of Wage-Goods Strategy:

The assertion by Vakil and Brahmanada that the growth in employment solely and exclusively depends upon the supply of wage-goods and that the capital goods (that is, heavy industry products) play no important role in the creation of employment opportunities is open to question.

Under adequate organisation and entrepreneurial ability as well as optimum institutional reforms, two important bottlenecks, namely, capital goods bottleneck and wage-goods bottleneck, are faced in creating opportunities for productive employment. For expansion in productive employment both these bottlenecks have to be overcome and to emphasize the breaking of one bottleneck, while making no attempt to tackle the other, is an unrealistic approach to the employment problem.

Wage-goods are required to meet the demands of the newly employed people, but if some people are to be employed in productive activities in the very first instance, they are required to be equipped with some capital goods. Further, for the production of wage-goods themselves, capital goods are required.

That is, labour is to be equipped with capital goods to produce wage-goods. Professor Dantwala rightly points our that, “It is a mistake to consider capital goods and wage-goods as exclusive and unrelated categories. Anyone who studies the composition of inputs needed for transformation of traditional agriculture should be able to appreciate the inter-connection between the two.”

Thus, development strategy for rapid expansion of employment has to be such as will envisage the increase in production of both wage-goods and capital goods. Thus, to talk of wage-goods versus capital goods is a false issue and an unrealistic approach to the problem of employment since both are needed to generate employment; capital goods are required to make the employment productive and wage-goods are needed to feed the workers provided with new employment, that is, to sustain their employment.

To say this, however, does not imply that all capital goods industries should be necessarily developed at home and given higher priority in the allocation of resources. Which specific capital goods should be produced at home and which imported from abroad should be decided on the basis of resource endowments and comparative advantage conceived in the dynamic context.

Strategy 3# Employment Strategy of Using Labour-Intensive Technology:

An important school of thought led by Schumacher, Singer and Myrdal attribute the mounting problem of unemployment and underemployment in the developing countries to the use of capital- intensive technology. It has been observed that while industrial output in developing countries has increased at a reasonably good rate, growth of employment has lagged far behind.

And this is said to be due to the use of capital-intensive technology. Thus, according to this school of thought, the creation of meagre amount of employment opportunities due to the use of capital-intensive technology on the one hand and the growth of population at an alarming rate on the other has resulted in the huge magnitude of surplus labour.

It is worthwhile to note here that the modern industries using capital-intensive technology not only create few new opportunities of employment but also destroy employment in the traditional household industries. This un-favourable impact of modern sector on the traditional employment is what Myrdal calls backwash effect.

According to this school of thought, modern manufacturing enterprises using capital-intensive technology produce goods on a mass scale which drive out the products of traditional household industries from the market. As a result, a good number of people engaged in these household industries are displaced. They add to either open or disguised unemployment in agriculture.

In this context, labour migration model of Todaro has often been invoked, especially by Singer, to explain the mounting problem of urban unemployment in developing countries. According to Todaro, decision of rural workers to migrate to urban areas rests on the level of wage rate and the expectations of getting employment in the modem urban sector.

A few employment opportunities at relatively higher wage levels created by capital-intensive technology in the modem urban sector attract many more rural workers than it is possible for this to absorb. This results in enormous increase in urban unemployment and underemployment.

Of course, Galenson-Leibenstein, M. Dobb, Amartya Sen have pointed out that the use of capital-intensive techniques would generate more surplus resources which would be ploughed back into further investment and it would result in greater growth of employment than is possible through labour-intensive techniques.

But this has not been borne out by empirical evidence. For instance, estimates of saving and investment in India reveal that contributions of the public and the private corporate sectors to the domestic savings have not only been too small but have also recorded slow growth in the last four decades in spite of the fact that capital-intensive technology has been used in them.

On the contrary, it is the savings of the household sector (consisting of households and unincorporated enterprises) which often use labour-intensive technology that have greatly increased. This raises doubts about the argument that capital-intensive techniques necessarily generate more surplus and therefore greater growth of employment.

There is another important aspect of the use of capital-intensive technology which is worth mentioning. The use of capital-intensive techniques creates high profit-wage ratio and thereby accentuates inequalities of income. These income inequalities create demand pattern oriented towards luxuries which are again produced by the use of capital-intensive techniques.

This limits the size of market for labour-intensive goods consumed by the working classes. Thus, the use of capital-intensive techniques gives rise to a vicious circle with causes slow growth not only of direct employment but also of indirect employment through its effects on the pattern of demand.

Why in Developing Countries Capital-Intensive Technology is Used?

Now, a pertinent question is why have the developing countries been using capital-intensive technology despite the fact that surplus labour prevails in them? There are two views about this. First, the alternative technology which though efficient but labour-intensive is generally not available.

The available technology is the capital-intensive technology that was developed in the Western countries to suit their factor endowments. The Western technology is quite inappropriate for the developing countries which suffer from surplus of labour and shortage of capital. Now, given the technology imported from the Western countries, there is not much possibility of substitution of capital for labour.

In view of this, Schumacher and Singer advocate for the development of what has been called intermediate or appropriate technology. Appropriate technology for the developing countries is that which though efficient should be labour-intensive so that it conforms to their factor endowments.

According to Schumacher, the development of appropriate technologies does not imply the discovery of altogether new principles of science and technology. What is required is the application of basic principles of modern science and technology to evolve the appropriate production techniques.

These appropriate production techniques may be obtained by scaling down the advanced techniques by adapting them so as to make them more labour-intensive, or by scaling up handicrafts technique with the introduction of new tools and simple machines and thus improving economic efficiencies of these techniques while maintaining their labour intensity.

On the other hand, several other scholars such as Ranis, Blaug, Layard and Woodhall, Little, Scott and Scitovsky are of the view that the slow growth of employment opportunities in the industrial sector is not due so much to the lack of flexibility in the production function but to the distortions in factor prices.

Due to the various concessions and subsidies provided in taxation structure by the Government such as liberal investment or development rebate, policy of low interest rate and over­valued foreign Exchange rate have caused the price of capital to be very low relative to its scarcity.

On the other hand, the prevailing wage rates are too high for a labour-surplus economy due to the strong bargaining power of the trade unions in the organised sector. According to them, these distortions in factor prices induce the adoption of capital-intensive techniques in industries with the consequence that less labour is employed. In order to promote the use of more labour-intensive techniques, it is therefore imperative that all distortions in factor prices be corrected.

By emphasizing the use of labour-intensive technology in developing countries, this strategy has brought into sharp focus the question of appropriate technological choices. In a labour-surplus economy the importance of the use of appropriate technology which is labour absorptive and at the same time quite efficient can hardly be denied.

However, appropriate technologies for various manufacturing industries just do not exist and a good deal of more research and development (R & D) would have to be undertaken before appropriate techniques are evolved for several industries. Of course, to encourage the development and use of appropriate techniques the various factor price distortions ought to be removed.

Whereas, in view of the prevailing price situation, wage rates of industrial workers do not seem to be high, the effective price of capital is low. Therefore, the various concessions and rebates in taxes on various types of capital investment be drastically reduced and the lending rates of interest charged by banks and other financial institutions be raised so as to curb the tendency to substitute capital for labour.

As for technological choices in agriculture, it may be noted that new high-yielding technology represented by a package of high-yielding varieties, fertilizers and pesticides is quite appropriate for a labour-surplus economy such as ours, for it not only raises yield per hectare substantially but is also labour-absorptive.

Strategy 4# Strategy of Direct Attack on Unemployment:

This approach seeks solution to the unemployment problem not through emphasizing any particular pattern of resource allocation or technological choice but through special employment schemes, especially rural public works. This approach regards the regular growth process as being incapable of alleviating the problem of unemployment and underemployment in the foreseeable future.

This approach of employment generation through rural public works has been combined with food for work programme. Those workers who are employed on rural public works are paid in the form of food grains as their remuneration. However, a part of remuneration may be paid in money form.

In the UPA Government’s Common Minimum Programme (CMP), food for work programme is an important element of strategy for employment generation. The launching of rural works programme on a large scale has been especially advanced by Dandekar and Rath to solve the problem of mass poverty, which they maintain is mainly caused by unemployment and underemployment.

Rural public works also constituted the main thrust of the recommendations of the Bhagwati Committee on Unemployment in India to tackle the problem of mass rural poverty and unemployment.

Further, the scheme of rural public works as a major source of employment generation in rural areas has also been strongly recommended by J.P. Lewis, K.N. Raj, M.L. Dantwala, and Raj Krishna. Besides, B.S. Minhas also suggests massive rural works programme in his “integrated programme of compulsory consolidation and land development.”

Employment generation through Rural Public Works was undertaken in 1977-78 on a regular basis under the ‘Food for Work Programme’ during the regime of Janata Government and was later adopted as a part of the Sixth Five Year Plan (1978-83). Under this scheme a major part of wages is paid in terms of food grains.

The constraint of wage-goods (i.e., food grains) which stood in the way of implementation of earlier schemes of rural public works did not then exist. At present rural public works programme has been continued under the scheme called ‘National Rural Employment Guarantee Scheme’. This programme intended to provide supplementary employment opportunities to the rural poor seeking work.

Projects relating to soil and water conservation, irrigation, flood protection and drainage, field channels in irrigation command areas, construction and improvement of village tanks and ponds, school and dispensary buildings, improvements of village environment, hygiene and sanitation have been undertaken under this programme.

There can be hardly any two opinions that rural public works can be helpful in providing employment to the rural poor, especially the landless labourers and marginal farmers who remain without gainful work for a large number of days in a year. At the same time the programme can be used to build durable community assets which would promote rural development.

Further, by providing alternative avenues of wage employment the rural works programme can ensure reasonable wages to the agricultural workers. But the view that these rural public works should serve as a substitute for employment generation through a proper development strategy as was conceived by Dandekar and Rath and some others is open to question.

For, being construction activities, rural public works are, at best, an interim or short-run solution of the problem of unemployment and leave the question unanswered as to how the growing number of workforce will be productively employed in the long run. The lasting and long-term solution to the problem of unemployment and underemployment lies in framing a development strategy that involves technological and institutional changes which are appropriate for labour-surplus conditions of the Indian economy.

However, the rural public works have an important role to play in an employment-oriented strategy. As stated above, with the scheme of rural public works we can build up durable assets or infrastructural facilities. Now, these assets or facilities will help in creating more employment opportunities in agriculture and rural industries in future. To fulfill this purpose, rural public works need to be integrated with the overall strategy of rural development rather than being formulated and implemented in isolation of it.