Tax incentives for employment

Dr Bharat Jhunjhunwala
the International Labour Organisation (ILO) has said that the global unemployment situation is worsening. The number of unemployed has increased by 2 million between 2012 and 2013. It is further likely to increase to 215 million by 2018 (17.17t). The situation in India is similar. A study by V V Giri, National Labour Institute, Lucknow has found that 26.9 per cent youth between the age group of 15-29 years is neither working, nor studying and not even looking for a job. At the same time the share markets are booming across the world. The Dow Jones Index of New York Stock Exchange closed at an all time record of t 15,783 in November. Our own sensex has been hovering in the range of 20-21k for the last few months. This is near the all time peak. It is clear that the economic development model pushed by the World Bank and implemented by our Government is not delivering for the common man.

The ILO and many other well wishers of the poor have suggested that there is a need to implement special policies to promote employment by the government. These are called Active Labour Management Policies (ALMP). I rely on a Knowledge Brief issued by the World Bank for Europe and Central Asia to examine the success of these policies. The first policy suggested is that of providing information regarding availability of jobs. Often the worker has a skill and employer needs that skill but they cannot connect with each other.

Evidence from European countries shows the benefits of job search assistance for outsiders on their employment prospects, especially for long-term unemployed workers (39.4.1). But it cautions that effectiveness of this policy is concentrated in the short run and is not sustainable. This happens because there is no new job creation or skill generation in this programme.

The second policy suggested is that of training. The Knowledge Brief says that these training programmes are costly but effective only in the long run. On the other hand, most programmes funded by our Government are one shot modules. These are not long term programmes. Evaluations of these programmes show mixed results. Often, those who already have the appropriate skills are inducted into these programmes. These programmes could be made more effective if they were targeted to the chronically unemployed workers.

The third ALMP is that of providing subsidies for employment. Subsidies for elf-employment show a clearly positive impact. According to the Knowledge Brief, (39.3.1) evidence confirms the positive impacts of providing incentives for self-employment, even though its applicability is limited to a small fraction (up to 3 per cent) of the unemployed workforce. The limited result of this policy arises because the space for small businesses is rapidly shrinking with the entry of large companies in manufacturing as well as trade. The policy of seeking FDI in retail is a case in point. Subsidies to kirana shops will be of no avail if the buyers flock to Walmart.

Subsidies for employment are not found to be effective. This results in dead weight employment. Certain persons are rendered employable only as long as employers get subsidies to give them work. They are thrown out of work as soon as subsidies are removed.

Another problem is of substitution. One person who is currently unemployed is provided a job but in the same breath one who was employed till date is thrown out. The result is that subsidised employment is created in place of a stand-alone employment. In particular the Knowledge Brief says that public works programmes like MNREGA are a fiscal drain and can even have negative effects on participants’ later employment prospects.

The result is not very encouraging. Information exchange is only marginally effective because no job creation or skill upgradation is involved. Training, if at all, indicates effectiveness in the long run and it is difficult to target these programmes towards the less skilled who genuinely need training. Self-employment subsidies are effective but they are limited by the market which is dominated by big companies. Employment subsidies do not generate new jobs. Public programmes for employment generation are wholly negative because they hit at the long term employability of the person. At the end of the day we really have no solution for employment generation. No wonder the World Bank found no relationship between spending on ALMP and unemployment rates in Europe.

We would have expected that countries that have higher expenditures on ALMPs would have lower rates of unemployment. That is not the case. Bulgaria has high ALMP expenditure and low unemployment. Czech Republic and Romania have low expenditures on ALMP and also low unemployment. Of the six countries for which clear relationship is seen, only in Slovakia we see high expenditures on ALMPs and low unemployment. These statistic indicate that ALMPs are basically ineffective in creating employment.

We will not be able to create employment for the large number of our youth as long as we continue with the big-business led economic development model. The idea that taxes paid by big companies will be used to generate employment is fundamentally false because the big businesses will be able to pay taxes only if they use automatic machines and kill jobs in the first place. High growth rates will not create employment. On the contrary a reduction in growth rates brought about by heavy taxation of automated production alone will create employment.

(Author is former Professor of Economics at IIM Bengaluru)