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India's growth needs skill upgrade
Published in The Saudi Gazette on 14 - 10 - 2010

IN a rational economic universe, jobseekers wouldn't sit idle despite available opportunities. Wage levels would ensure that positions on offer got filled. With the award of 2010's Nobel Prize for economics, we're reminded again that traditional theory can't always account for demand-supply skews even in ideal situations, said The Times of India in an editorial published Wednesday. Excerpts:
The three winners MIT's Peter A Diamond, Northwestern University's Dale T Mortensen and Christopher A Pissarides of the London School of Economics have all specifically probed the labor market's problems in squaring demand and supply.
With varying impacts around the world, unemployment has been the common fallout of the global crisis. Particularly hard hit, the US is still struggling to beat a stubbornly high 9.6 per cent jobless rate. The economics Nobel is fitting in this context. It brings the focus on “search markets”, where buyers and sellers seek each other and job applicants scout for openings. The labor market's search ‘costs' can rise because diverse jobs have different requirements and jobseekers have varying skills and strengths, increasing the time to match them.
What do the economists have to say about today's scenario? Diamond suggests the longer job growth remains sluggish, the more the jobless could shed skills and the incentive to search for work. In fact, the issue today, Mortensen feels, is less the labor market than the state of the financial market. He rightly recommends that credit must flow to businesses. Growth must indeed remain on policymakers' radars. Another significant point is that jobless benefits can lead to higher unemployment by reducing the drive to look for work. Pissarides suggests it's essential workers don't lose attachment to labor and are given “direct work experience”. In this context, India can be said to have done well with a scheme like NREG that employs rather than maintains the rural jobless.
Finally, studies show labor market rigidities impede workers' mobility. We can extrapolate that India's inflexible labor laws increase search costs. Growing casualisation, labor insecurity and neglect of workers' training result when employers are forced to turn to informal hiring systems. India's growth needs will demand skills upgrade or re-skilling of 500 million people by 2020. Yet our current training capacity is insufficient to plug the existing skills/education mismatch. __


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