Composition of the labour force of the country in terms of type of employment has been an important indicator of the development status of the country. Several lines of arguments about the trajectory of economic development of the country are constructed around the nature of employment for the labour force. One way to look at the composition of the labour force is through self-employment.
In simplest terms, any person who is earning livelihood through market exchange is either working for herself or for someone else. The dichotomy can be made more nuanced if we consider that those who work for themselves can be further divided into those who do not employ anyone else and those who do. The devil of details does not stop here. There are several individuals, predominantly seen in developing countries, who are enlisted in enterprises owned by someone in the family. Though classification makes them employees, their relationship with the employer is not as strictly economic as that of some other employee who is not from family. Among non-household employees, we can classify further as those who are regularly earning salary or wages and those who are employed in contractual manner. For this article, we will maintain a tripartite classification: own account workers (those who do not employ others), employers, and employees (from the same household as that of employer, regular salaried as well as contractual).
But why think about the labour force composition in the first place? Isn’t it the case that the market will take care of itself in terms of individuals considering consequences and their own preferences and deciding on what is the optimal role for them in the labour supply?
In the ideal world with no externalities and no inefficiencies arising from market power or information asymmetry, individual choice will perfectly align with what is optimal for the society. Such a world will not have much room for policymakers and writers of articles like this one and certainly for labour force composition debate. But the reality that we live with is not the ideal one.
Labour markets and credit markets are riddled with inefficiencies which means economic consequences of labour force choices of individuals will not be in the best interest of the society. For example, many individuals with entrepreneurial attributes but lacking in social networks and capital will choose to be either employees or own account workers when they are becoming decision makers for an enterprise of considerable size would have been a better outcome for society. Similarly, many individuals will choose to be own account workers, like a tailoring shop around the corner, for want of a more remunerative employment opportunity.
The path of economic development is assumed to be correlated with decreased market frictions, which means societies with higher levels of economic development will be closer to labour force composition which is socially optimal. There will be variations based on culture or other idiosyncratic factors so that two societies with the same level of economic development might have different labour force compositions. For example, Italy is known for prevalence of small businesses and hence has a much higher proportion of employment generators than countries at similar levels of economic development. But it has been generally found that own account workers will form a smaller fraction of the labour force as the country moves along the path of economic development and correspondingly employees will start constituting greater proportion.
The ideal evidence would be to see the labour force composition of several countries over time. Unfortunately, such high standard evidence is still in the making. Hence, we move to a cross-sectional examination. A word of caution about cross-sectional comparison is in order. We use cross-sectional evidence as a proxy to our quest for progress over time. We assume that units in their different attributes represent stages of a single unit over time. For example, if we take a cross-section of individuals and plot their age and earnings, for a given educational attainment, I assume that I am essentially seeing progression of the individual of that educational attainment over the years. The underlying proxy assumption is perhaps least erroneous when it comes to individuals within the same socioeconomic and cultural context but becomes increasingly unsuitable for comparison of countries where processes are often dependent on culture and other factors specific to that country. Hence, we must use cross-sectional examination of countries with caution.
Figure 1: Cross country comparison of proportion of employers in the labour force
Figure 2: Cross country comparison of own account workers in the labour force
Figure 1 and Figure 2 show the status of labour force composition across the OECD countries and India. The year 2017-18 was chosen to maximise the number of countries. Data is available for very few countries in recent years. Covid years are avoided since those were likely to be very different from the typical course of the economy.
The stand-out observation from this comparison is that there is a very high proportion of own account workers in India, for both men and women. The other countries are typically those with higher per capita income than India. So, one could expect that the Indian situation might change as the country moves further on the path of economic development. For employers, the Indian scene is not markedly different from comparison.
Very high proportion of own account workers, contributing to a very high proportion of self-employment, has been seen as a hallmark of developing economies. Considerable fraction of this self-employment arises from agriculture. But often self-employment, driven by own account workers, is high in non-agricultural sectors as well. As per PLFS 2017-18, own account workers were 59% of the labour force of men in non-primary sectors, that is excluding agriculture, forestry, fishery, and mining. This percentage is greater than the proportion of male employees in the labour force who are own account workers, which means own account workers are more likely to be found in non-agricultural employment than agricultural. Own account workers earn less than employers as well as salaries or regular wage-earning employees.
Own account working is a manifestation of stunted growth, same as malnutrition. Large fraction of own account workers is likely to be those who cannot be employees with decent wages or self-employed employers who cannot expand their enterprise despite having potential to do so. The solution will be improving the nutrition which a worker needs, of skills, credit, and opportunities. Such change will require addressing market distortions in fundamental markets like land, labour, education, and credit. Changing labour force composition away from large incidence of own account working will be the direction in which India’s economic development should move. Unless it occurs, the dreams of development will be of that bird which could not expand its wings completely despite possessing a very large wingspan.
