India Lacks Formal, Salaried Jobs

In the United States a majority of workers work for very large firms and only 10% are self-employed. In India hardly any workers work for large firms and 80-85% are self-employed, as I pointed out in my post India is a much more Entrepreneurial Society than the United States (and that’s a problem).

Data from a draft report by the World Bank summarized by LiveMint show that India has few formal, salaried jobs not just compared to a developed country like the United States but also compared to many other less developed countries around the world.

Solving this problem is one of India’s biggest challenges as the number of workers is increasing rapidly. Land reform and deregulation of labor markets including stopping own goals that discourage firms from growing and formalizing such as requiring absurdly “generous” maternity leave benefits is a first step.

Hat tip: Urbanomics.


I would like to report that I am shocked, shocked.

RU also shocked to hear that "In the United States a majority of workers work for very large firms" ?

Shocked, shocked, I say.

You mean bridges and roads arent made by self employed workkers? And why arent cars and trucks made by self employed workers?

Steel, well, mostly wrought iron, was long made by self employed workers, so we should return steel making back to self employed production!

Radios were once produced by self employed workers. Anyone can get a cat whisker working given enough time to detect the radio signal.

The great thing about most of US housing is it's produced by self employed workers just the same way housing was made 250 years ago.

The problem with today's housing is too much stuff is bought from big employers, like electrical wiring and appliances, plumbing, locks. Housing was better when produced by the self employed because outhouses, dug wells, buckets, rope, were much better because they were made by the self employed. Who needs locks when you protect your home with a big stick, or a knife from the self employed blacksmith who turned ore and charcoal into knives.

The question is why doesn't Tyler live where self employment is highest, like rural Alabama, Louisiana, Afghanistan, Africa, but ditching all the stuff made by big employers, starting with cell phones and motor vehicles and refined oil using devices?

Clearly Tyler rejects the steel industry related sectors in India, as well as the computer services and call center sectors, tourist attractions, et al in India. Much more of Indias economy should be like the farms and slums where self employment is the highest. The cities in India are taking India in the wrong direction, except for the multistory building built floor by floor by the self employed. The guy building floor ten will easily fix the ground floor to handle all the load from floors 3-10 So his floor isn't the straw that breaks the camel's back.

It's an Alex post, not Tyler.

The hint to the problem is in the linked article:
"India would be a better country if it were richer and more unequal".
"It’s hard to escape the impression that the main purpose of the increased maternity leave benefits is public relations,"

Capitalism rewards hard work. What every country and every political system needs is more hard workers who can keep what they earn. But the result of this is that slackers and those who choose not to work hard do not benefit. Thus economic inequity. Which brings us to the second issue; which is passing laws that improve public relations or more honestly buy votes. Laws that require higher taxes on the hard working people to support an ever growing population of slackers. But of course those very laws suppress hard work and success, which in order to sustain the welfare society requires even more oppressive taxes which in turn forces more hard working people to simply stop working or move away. (California for example).

The problem is simply that if we allow hard workers to have the benefits of their hard work it will result in economic inequality. And if we allow politicians to follow their instinct to take money from the productive to use to buy voters then we will kill the goose that lays the golden eggs. We don't need more laws we need smarter politicians.

"Capitalism rewards hard work."

What does socialism reward ?

Socialism and its milder variants are really really popular in India (and U.S.) -- it must have something positive and attractive going for it.

"What does socialism reward ?" Slacking, arse-licking, delating, and - in its more vigorous forms - murder.

But, if you accept Great Stagnation, Post-Scarcity Economics, monopoly rents, and natural monopolies (all interrelated themes), inequality and/or socialism will increase in the future.

Put another way: Marx was not wrong, just early.

Since Reagan, and the rise of the GOP to dominate political economic policy, the US has become more socialist or more capitalist?

"Marx was not wrong, just early."

As a philosopher or leader Marx was wrong. As a prognosticator of the human nature Marx was right. It is inevitable that a democracy eventually leads to Marxism which eventually leads to a more brutal dictatorial oppressive form of government. Venezuela is the latest example of this.


.... U.S. turned to socialism-lite in the Progressive Era and no President since has changed course.

Socialist Security went officially bankrupt during Reagan's tenure --- Reagan "saved" it by cutting benefits and raising taxes.
Reagan "talked" small government but did the opposite. Bush-wackers & Trump are big-government enthusiasts, as are all Democrats.

Funny, how democracy is only a problem in Latin America. Yeah, I know, I know: Norway and Finland are terrible, too.

SS has not gone bankrupt. Since the mid 50’s the federal government has syphoned off about $4 trillion (including accrued interest) out of the SS trust fund. So SS is far from bankrupt. But the real problem with SS is that it was used by politicians to “pay off” favored groups. Recent immigrants who failed to get the qualifying 40 quarters of work can collect SS. People who never put a cent into the SS system collect from it. And the payout rates are calculated as though it was a welfare system. But even with all that it is solvent. In fact there is no reason SS would ever have to become insolvent if it was managed properly. The first thing that should be done is separate it from the general fund and remove it from the grasp of all politicians. Secondly set the payout using standard accounting principles and based on what the recipient paid in. Treat it like what it is, an annuity.

Norway and Finland have small populations with large land areas Relative to the population AND a single culture. They benefit from a focused use of capitalism with an enormous world market for their products. Their economic plan would nt work if they were a larger population or choose to live and rule as socialists. So if your intent is to claim that they are an example of the success of socialism than perhaps you don’t understand what socialism is.


Democracy ??

Name the last U.S. President who took office with a majority, popular vote from the U.S. national electorate.

(ignore that Electoral College proces for this narrow, illustrative question)

Maybe we should make voting mandatory as in another countries? Would the vote be more enlightened hen?!

I think you have it backwards in some ways. Plenty of people work extremely hard in the US and are barely rewarded for their work. Many extremely wealthy got there through inherited wealth, investments, etc...of a passive nature. Some inequality is always going to be present, of course, but the American system is far from a meritocracy as you seem to feel it is.

"Selling pakodas" is a different mentality than entrepreneurship - the self-employed has no access to capital to think about expanding - he is just trying to make his ends meet. There is no support from law or police that a small enterprise can get - so even if there is market, people rarely take risk and expand. There is a big political discussion on whether "Selling Pakodas" can be called a job - going on now

Exactly right. I live in Thailand where a lot of these "entrepreneurs" are closer to risk-bearing contractors with no benefits.

Much of the vaunted street food is now someone who buys ingredients from a giant company, heats them, and sells them on their behalf.

There is no way to outcompete rivals or rise above the basic level

In some cultures people work together for a common purpose rather easily, but in other cultures they don't. Of course, working together requires both trust and a willingness to share in the benefits if the common purpose is achieved. I suspect that an inability to trust and to share can be misinterpreted as entrepreneurship, as going it alone can reflect ambition. In some cultures people accept the rule of law more easily than in other cultures. Of course, the rule of law implies a willingness to abide by the terms of a contract already made. In some cultures, negotiations never end, even if all of the i's have been dotted and all of the t's have been crossed. I suspect that a propensity for never-ending negotiations can be misinterpreted as an astute business practice. The successful entrepreneur in Silicon Valley has the ability to trust others, share in the rewards, and abide by the terms of a contract already made. Cowen's friend Peter Thiel comes to mind. These are just the musings of an old business lawyer and not a comment on any particular culture.

So is "Peter Thiel" now a context-free horror-movie bogeyman reference, like "Candyman"?

Thiel personifies the entrepreneur who has the ability to trust others (handing someone a check for hundreds of thousands if not millions of dollars is real trust), willingness to share the rewards, and abide by the terms of a contract already made. The linked interview (about Thiel's take-down of Gawker) is an unusual example of that ability. From the interview: "he (Thiel) recognized the potential in Mr. A’s plan (to take-down Gawker) the way a venture capitalist recognizes a great idea. Here, he (Thiel) thought, I have the right person behind the right idea, and I’m going to support it." I have come here to praise Thiel, not to bury him.

Since when did the Candy Man become a bogey man? -

'Who can take a sunrise (who can take a sunrise)

Sprinkle it with dew (sprinkle it with dew)

Cover it with choc'late and a miracle or two

The Candy Man (the Candy Man)

Oh, the Candy Man can (the Candy Man can)

The Candy Man can

'Cause he mixes it with love

And makes the world taste good (makes the world taste good)'

Ha, great song. Different Candyman:

One aspect of India that is not sufficiently understood is the "joint family" system and the large household size. The average household size in India is nearly 5 (4.9). And even today, it is not uncommon to find households as large as 10-12 in urban middle class India.

Two brothers staying together with their wives and kids, as well as their parents in the same building is extremely common to this day.

What this means is that per-capita incomes are very very misleading. Indian per-capita income may be around $5000 in PPP terms, but the household income is quite likely a multiple of that. And there haven't been efforts to estimate the household income reliably.

Now why am I bringing this up? It is relevant because the synergies of the "Joint family" set up make self-employment a more agreeable option. It is not as "risky" as it would seem if you are a single man, all alone in this world.

This is also the reason why I do think India is not as poor as PCI numbers suggest.

Here's an interesting anecdotal piece of information I would like to bring up. There was this Kannada language movie star by the name Kashinath who passed away recently. An actor-director and a veteran of the industry of nearly 4 decades. Now in his obituaries it was mentioned that he was living in a bungalow in a Bangalore suburb with his four brothers, and their families, along with his own! Now this isn't rural India mind you. Here's a movie celebrity in Bangalore, still adhering to the joint family set up and living in a household with over a dozen people! In this kind of a set up, self employment and small scale entrepreneurship becomes a LOT more attractive.

Interesting points and they push back against the assumption that high rates of self and informal employment is bad for the country, and that this must be addressed using Alex's favorite tool: deregulation.

I'm sure the pointless retail regulations strangling India's economy for decades should be preserved for your psychological welfare

Boxers and NBA players often live that way in the U.S., too. It's the Entourage factor; the one who hits it big is expected to shell out as needed to take care of all of his extended relatives and their hangers-on.

Migration numbers suggest these synergies are limited.

Migration numbers are miniscule compared to the Indian population.

The synergies are significant, which you will appreciate only if you have seen the set up in close quarters.

My second cousin stays with his mom and dad, grandparents as well as his uncle and family in a large mansion in a Bangalore suburb. There are three floors in the bungalow and it houses some 10 people. He is an engineer by profession, a mediocre one. But has chosen not to work for a corporation. Instead he has started a venture to teach JAVA programming to youngsters. I am very dubious about this venture of his, but he feels good taking that chance as he has a back-up. A loving mom and dad to pamper him, a loving uncle and aunt and his first cousin just one floor below him, and a doting wife who brings home a steady income from a government job.

Of the 5 bread earners in the joint family, 2 are salaried, while the other three are "entrepreneurs". This is how India operates.

Other countries on the above list operate this way, too, but still have a higher share of workers in the formal sector and less domestic and international migration. Malaysia, for instance, has a median household size comparable to India's but is a much wealthier country with substantially more formal sector employment.

Yes, but in Muslim countries, the large household size is a consequence of a high birth rate.

In India, the birth rates are not that high. What makes the household big is the "joint family" set up

Are you self employed if you work for your family businesses with no salary?

If this is the case, then why not liberalize the labour laws?
My guess is your example is an elite one. People who have property that has been in the family for a long time are really different from the median skilled indian. Low FAR hurts the potential to recreate the joint family in modern high rises.

@Srikanth - I agree that joint households can be a safety net. However, what you're describing is the top 1% of India. Most of "middle class" lives in joint households where the house really only fits one household as each nuclear family cannot afford the rent their house nor has the cold, hard cash to buy a house. Let's be clear: middle class india lives in rural india.

Migration is a tough subject as there is lots of temporary migration in India, not permanent migration. Even in slums, the turnover is high. Temporary migration in India between villages and small towns is high. I agree permanent migration is still for upper middle class and above. Reason this is important is that we have the opportunity to grow businesses and industries in small towns, which will directly benefit the middle class. Cities should not be our focus of investment.

On topic of formal vs informal employment - arcane labour laws are the big difference between some of the other countries with similar per capita income - other factors such as population density institutional strength (or lack thereof), corruption and educational system ("rote" nature) are similar in countries like Thailand, Philippines, Bangladesh.

However, my question is that should we really get rid of the positive laws (currently only for show and buying upper class votes)? Can we counteract those with more work on other laws? Reason is that USA inequality among genders is strongly driven by its own arcane labour laws - shitty maternity & paternity benefits & lack of vacation except in small pockets (eg: tech sector, largest MNCs etc).

The steady march of bureaucratic complexity makes gray-market self-employment almost mandatory, not just an option. Furthermore, an extra-legal service business can satisfy customer wants for a fraction of the price that top-heavy organized businesses can. Those customers don't have to pay for management salaries, insurance, regulatory compliance, etc. Of course, gray market entrepreneurs are unlikely to manufacture cars and trucks or operate airlines but they do have a place in all economies.

"The steady march..." That suggests gray market should be steadily increasing in India. I don't think that's true, but please share any data that indicates otherwise.

I'll have to look into the Bank's methodology here, but I can't think there's any way over 80% of people in China are salaried. Large numbers of people in the countryside are still farmers and/or doing petty cash business.

Precisely what I was going to comment.

"Solving this problem ...": what problem?

The problem that India does not follow the West "Nuclear Family" option, but is more like what shrikanthk says upstream. This must be defeated, if you've read F. Fukuyama's "Origins of Political Order" you know what I'm am talking about.

Why do you think it must be defeated?

In 2004, with the formal widespread adaptation of Facebook, photographs became a cult of currency, more important than any bank account amount, than any phone number. The truth is, people and organizations dedicated to chess-type warfare were able to inject new and sophisticated representations of lynchings and gas chambers and even child pornography,

I'm simplifying this, but in Fukuyama's saying, strong states and strong families are incompatible. And a strong state is one of the three pillars (the other two being rule of law and popular accountability) that maintains political order. Without a state strong enough, not just to provide services but also to enforce the law, society (and the economy) will stagnate.

Why are strong families and strong states incompatible? Again, simplifying, if one's duty and loyalty to family always overrides (and overwhelmingly) one's loyalty to the larger society (represented by the state), then such a state can never be effective. Corruption (aka people using the levers of power to advantage themselves, their relations and friends) will be endemic and impossible to root out.
(We had a short exchange about this on a different thread a few weeks ago.)

Why is a "strong state" desirable?

Sure, a "weak state" brings with it its own set of problems no doubt, which I acknowledge. But so do strong states. USSR was a strong state. So is Communist China, Putin's Russia, Hitler's Germany, and Castro's Cuba.

So a strong state isn't quite a panacea for every problem. India is a moderately weak state, which is highly anti-fragile. And highly resistant to big downside shocks. If you look at the past 70 years of Indian history, we have never had a really bad recession / economic collapse. There are so many checks and balances in Indian government and in Indian society that massive goof-ups, blunders, revolutionary upheaval etc are extremely low probability events in India. Which is why India chugs along like a tortoise.

Why is a “strong state” desirable?

This is a complex issue. I'm not sure I can answer this very effectively here (perhaps you can check out Fukuyama's books when you get time?)

I think the relevant issue is exactly where the strength of the state lies. Clearly, a state strong enough to crush any opposition or dissent is undesirable. But a state strong enough to enforce the rules of contract (necessary for a smooth economy and minimization of arbitrage costs), collect taxes, use collected revenue honestly and effectively to build common infrastructure, and (anecdotally) "making the trains run on time" or "prevent people from littering", is desirable (at least to me.)

I think such a combination of strength and weakness arises in highly contingent circumstances, and there is no set formula. Fukuyama points out 17th century England as one of those places where such a state did arise, but then it had to be consciously reformed in the 19th century again as it had fallen prey to private interests.

There's also trust. I don't know precisely what the causal relationship between societal trust and the strength (or effectiveness) of a state is. Checks and balances are good and necessary, but they slow down societal and economic progress only if they are exercised to an inordinate amount. In a country like India, they are, because the transgressions are regular and ubiquitous. No one trusts each other to do the right thing, so we overload all our systems with minutely spelled out rules, which are almost impossible to enforce effectively, resulting in the greasing of palms to roll the wheel forward. Many vicious circles ensue.

Megan McArdle has a column describing her recent visit to Denmark, which is germane to our exchange:

The comparisons she makes between the US and Denmark are very similar to those I have observed between India and the US.

I get your points.

But India is not Denmark. It is an incredibly diverse country. And trust is bound to be low in such a country. Indian systems (be it the caste system, joint families, arranged marriages, peer regulation of behavior, among other things) have evolved keeping this reality of low trust as a given.

Sure, weak states have a hell of a lot of problems to face. But the 20th century has been a century of many unspeakable tragedies wrought by strong states. So I am always a bit sceptical of investing states with a great deal of power and reach.

@Kris: Now it looks like you have ended up strengthening Shrikanthk's argument: You started out talking of one's "loyalty to the larger society" as "represented by the state", while Megan's column is precisely about the distinguishing the role of the state from that of societal norms; how the latter can obviate the need for the former, in a very positive way.

Of course, I'm not complaining :)

Very standard Third World problem. High controls on wages, benefits plus heavy regulation in the formal sector deter employment lead to large barriers to entry in both investment and employment. Unions and other so-called populist groups maintain these rules in a kind of devil's bargain with the elite to "protect" urban laborers. Land reform rules "protect" agricultural workers. The result is that those who are in the formal sector earn a higher wage while creating a moat that is surrounded by the huge number of informal workers and rural workers. The possibility of agitation in the biggest cities plus the largest firms' ability to limit entry through having the lawyers, political clout, and knowledge to navigate the bizarre landscape of contradictory formal rules and arbitrary enforcement, stop competitors (think medium entrepreneurship and the lower rich) from challenging them.

Every round of environmental regulations or imitation of social benefit rules from the West further widens this divide between formal and informal. And of course, graduates of university are especially benefited by these rules.

These statistics are dubious given that SA has official unemployment of about 38% and unofficial unemployment of over 50% of the workforce -- so the supposed statistic that 80% of some group has salaried employment seems meaningless.

"In the United States a majority of workers work for very large firms and only 10% are self-employed."

This statement seems rather imprecise for an economist. In the U.S. do 51% ("a majority") of workers work for very large firms and 49%, including the owners, work for not-very large firms?

(I just read Jack's comment. Yeah, what he said.)

I'd be curious to know what kind of land reform would be beneficial. What usually happens is a mostly random taking of private property under a pretense of 'justice', which I would be surprised to find the authors of the blog supporting.

Alex is of course, spot on here.

But a smarter commentator like Megan McArdle would have analyzed the problem at a more fundamental level: the politicians themselves face asymmetric incentives.

Namely, doing away with the own goals in the name of labor protection comes with the asymmetry that it will invite certain backlash from a very well-defined segment of the populace, while the benefits of deregulation are located in an uncertain future (e.g., a completely disjoint development such as rise or fall in oil prices can distort the correlation): the beneficiaries of the said de-regulation - in the form of those who get jobs later - will not even be able to palpably correlate their benefit with the deregulation.

An even smarter commentator might have solutions, but I don't know what they are, if any: certainly I am not smart enough to come up with such.

But understanding the limitations of politics in a democracy, instead of giving arm-chair "no skin in the game" advice to politicians as the otherwise well-meaning and nice Alex is wont to, is perhaps a first step.

My view is that Alex has blotted his copy book, irrevocably when it comes to offering "policy advice", as the recent example of Bulgaria and its declining population shows. When you are part of a national policy team you don't get mileage by challenging inetellectual boundaries in the stark way that he did, which came naturally to him but which is not how national policy teams operate. This is beyond him, and he would be better off were he to recognise this limitation. This post on employment is excellent however, and it arises naturally from his uncompromising focus on intellectual rigour. The value of the post is that it provides cross country data, which practical policy makers can understand and internalise in their different national contexts. For disclosure purposes, I have always relied on the work of academic economists to write the strong background analytical papers on which I relied, in my MDB career, but I limited their face time with political policy makers.

On the all important issues of substance, let me add that Alex has highlighted precisely the key issues that in my experience Asian policy makers have tended to ignore. First, there is in Asia an overwhelming negative reaction to the mortality of SMEs, and a corresponding tendency not to recognise that a really successful entrepreneur is someone who has has had multiple SMEs die under him/her and who is thereby a far stronger leader to take entrepreneurship forward. About ten or fifteen years ago I had one of my most able direct reports (Kelly Bird at the ADB) write analytical and empirical papers on the issues that Alex has highlighted. Kelly showed that it's important to look at the age profile of firms, as does Alex, and that a significant proportion of large firms were initially SMEs.

A comment directly to Alex and Tyler. I had provided additional comments pointing to research by my staff about 15 years ago on the issues Alex raises. Your AI rejected the comments as repetitious. My response is not something you would want to publish.

A comment directly to Alex and Tyler. I had provided additional comments pointing to research by my staff about 15 years ago on the issues Alex raises. Your AI rejected the comments as repetitious. My response is not something you would want to publish. This is not a duplicate comment!

Most intelligent Indians prefer to have a government job with assured salary and a stable job. Government jobs, especially central government jobs, carry more prestige and more scope for making additional money "under the table". The officials lord over the business people who contribute most to the state revenue. Where then is the incentive for real entrepreneurship?

India has from day 1 been strongly socialist in orientation. They have rejected foreign investment, objected to companies that are "bad for people" like a coca-cola plant, and favor feel-good policies like long maternity leave that only rich countries can afford.

shrikanthk says, rightly, that India is " highly resistant to big downside shocks. If you look at the past 70 years of Indian history, we have never had a really bad recession / economic collapse ... Which is why India chugs along like a tortoise." he also refers to the strong family bonds and the system which I agree is far better as a source of economic security than a state funded welfare scheme.

Having granted that one has to explain why people want to migrate from India, with its economic stability and strong family bonds, to America, with its economic instability and weak families. Even after being brutalised by the brutally materialist and individualist American culture and unstable economy, these people want to stay in America for good and pontificate about how great Indian culture is, like the chauvinist Hindus do, or attack the exploitative capitalist system, like the leftist immigrants do. Hypocrisy?

In my comment these should have been in quotes: "brutalised", " brutally materialist and individualist" American culture and "exploitative capitalist system": these are sentiments of the hypocritical Indians who run down American society but want to stay there for good

There are hypocrisies everywhere. I never deny them.

Having said that, the urge to migrate is a lot weaker in India than in say China, or Africa or many parts of Europe. Indians don't migrate as much as you'd expect them to.

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