The Formalisation of Employment: Challenges and Government Initiatives

What is Formalisation of Employment?

Formalisation of employment refers to the process of integrating more workers into the formal sector. This transition allows workers access to contracts, social security benefits, and legal protections, in stark contrast to the informal sector where such benefits are often absent.

Are Enough Formal Jobs Being Created?

Despite ongoing efforts to enhance workforce formalisation, statistics reveal a concerning trend. The percentage of individuals engaged in regular salaried employment has declined from 22.8% in 2017-18 to 20.9% in 2022-23. A significant number of salaried workers still find themselves without contracts or social security benefits, highlighting an urgent need for more formal job creation.

What Are the Schemes Announced in the Budget to Generate Employment?

• First-Time Employee Subsidy: This initiative offers a wage subsidy of up to ₹15,000 for first-time employees, targeting one crore individuals.
• Manufacturing Sector Incentives: Wage subsidies for hiring first-time employees in manufacturing are provided, covering up to 24% of a ₹25,000 monthly wage for a duration of four years.
• New Worker Subsidy: Employers hiring new workers can receive reimbursement of up to ₹3,000 for their monthly EPFO contributions.
• Industrial Training Institutes Upgrade: This scheme aims to enhance the capabilities of ITIs, benefiting around 20 lakh students and bolstering skilling efforts.
• On-the-Job Skilling: Internships are provided for one crore youth in leading companies, accompanied by a monthly allowance of ₹5,000 for one year.

How Have Economists and Experts Responded to the Proposals?

In light of these proposals, economists and small industrialists have voiced several concerns regarding potential implementation obstacles:

• Conditions and Procedures: Requirements such as mandatory online financial literacy courses for employees and stringent refund clauses for employers may impede effective implementation.
• Structural Issues: Experts suggest that low wages and inadequate demand are the primary constraints hampering job creation, rather than merely high wage costs.

Why Has the Proportion of Salaried Workers Dropped?

The decrease in salaried workers can be attributed to multiple factors:

• Economic Slowdown: Sluggish economic growth has resulted in fewer job opportunities.
• Shift to Informal Sector: An increasing number of workers are transitioning to the informal sector due to a scarcity of formal job options.
• Underemployment: A considerable portion of the workforce is underemployed, taking on casual or part-time roles lacking formal contracts.

Why Are Wages Stagnating?

Wage stagnation is primarily driven by:

• Low Demand: A lack of demand for goods and services results in reduced consumption and limited hiring.
• High Competition: Intense competition for a limited number of jobs keeps wages suppressed.
• Economic Constraints: Issues like inflation and slow growth hinder businesses' ability to raise wages.

Should There Have Been More Focus on the MSME Sector?

Absolutely, placing greater emphasis on the MSME (Micro, Small, and Medium Enterprises) sector could significantly enhance job creation:

• Labour Intensive: MSMEs are generally more labour-intensive, capable of generating more jobs compared to larger, capital-intensive corporations.
• Economic Multiplier Effect: Investing in MSMEs can stimulate economic activity and boost demand, leading to further job creation.
• Local Development: Supporting MSMEs promotes growth in smaller towns and rural areas, distributing economic benefits more evenly.

What Else is Needed to Create Jobs?

• Stimulating Demand: Elevating consumption by increasing wages, particularly in rural regions, through initiatives like MGNREGA.
• Supporting MSMEs: Offering financial assistance and incentives to MSMEs can enhance their growth and hiring potential.
• Improving Skills: Focusing on vocational training and education can make the workforce more employable.
• Policy Reforms: Implementing reforms to simplify the business environment and attract private investment is crucial.