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Beginning an era of hiring subsidies

Hiring subsidies may go a long way in generating employment

By Vijaya Krishnappa (@vijayakrsn)

The government in the union budget of 2016-17 has announced several measures to spur employment growth. One of the policy measures is a Hiring subsidy under which the government would contribute towards EPS (Employee Pension Scheme) for all the new employees enrolling in EPFO for the first three years of their employment with an initial allocation of Rs. 1000 crore. Hiring subsidies are demand side labour market interventions that include providing wage subsidies or reduced social security contributions for the employers of the targeted segment.

Currently for employees in the organised sector whose salary is up to Rs. 15000, it is mandatory to contribute 12% of the basic salary to EPF (Employee Provident Fund). A similar amount is being contributed by employer, which is often reflected as a portion of employee’s total salary. The Employer contribution is divided under two heads- 3.67% under EPF and 8.33% under EPS. So for hiring the new employees now the government will contribute to EPS instead of the employers. This would reduce the overall cost of hiring new employees and promoting employment generation.

With an over-ambitious target of creating 100 million new jobs by 2022, it’s an imperative that subsidy regime fuels growth in new jobs creation. While the businesses are increasingly becoming capital intensive the labour intensity is reducing due to improvement in technology and automation. Several economists including Raghuram Rajan, RBI Governor have recently criticized increased reliance on capital subsidies and have suggested instead focusing policy interventions on employment generation.

According to ILO, the number of people seeking jobs in India is expected to increase to 17.6 million in 2017 from 17.5 million people during 2015 and 2016. While the government has been focusing on skilling millions of people, lack of new jobs has reduced the effectiveness of the efforts. A survey done by labour bureau in 2014 indicates that among the people who got formal training from skill centres the unemployment rate was as high as 14.5%. It’s a priority to bridge this gap as any persistent gaps between demand and supply creates economic distortions and incentivises practices which adversely impact on healthy social norms and on social cohesion. While some of the manufacturing jobs are likely to come to India as the cost manufacturing increases, more needs to be done to grow employment and hiring subsidies go a long way in providing required impetus.

Hiring subsidies are distinct as they focus exclusively on creating jobs. They are extensively and successfully employed across several European countries where the policies are designed both to create new jobs as well as sustaining the employment during economic slowdowns. While providing social security contribution is one of the options, the studies indicate that direct wage subsidies are more attractive to employers than any other mechanisms.

In an ordinary course especially in high growth economies such as India, it is likely that firms hire employees in line with the growth of organisations even without subsidies. Subsidising such an employment would only result in a deadweight loss. So this leaves us with the question of how to target such subsidies. The some of the segments to target can comprise of

  • Sectors, which are growing sub-optimally,
  • Regions which require development and
  • Employees who would otherwise are difficult to be hired, such as disabled, women, unskilled, long term unemployed, etc.

While designing the scheme a transparent and balanced system needs to be put in place to address the accountability and administration issues without red-tapism, as any perceived burden by employers may negatively impact the intended outcomes. While hiring subsidies may be introduced it is essential to dovetail them with skilling initiatives, and address the post job issues such as transportation, child care, etc. Design of subsidy and duration has to be optimally set to avoid any negative effect such as displacing ordinary jobs and it needs to be evaluated objectively so as to correct any deadweight effects.

As labour laws become increasingly flexible the role of Hiring subsidies will be vital in sustaining employment generation. With an increasing literacy, reduction in jobs related to agriculture and the government’s target of skilling 400 million people by 2022, a quantum growth in new jobs is an imperative .Future elections are likely to be fought over job growth and hiring subsidies are likely going to be flagship policy interventions of the governments.

Vijaya Krishnappa is a Management Consultant. He is a GCPP alumnus from the 11th cohort. He tweets @vijayakrsn

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