When global firms disengage, employment suffers

Synopsis: Permanency of large foreign firms operating for decades is slowly on the decline. That is why, domestic capital formation and private investments should step in.

Introduction

The most recent labour statistics, for August 2021, released by the Centre for Monitoring Indian Economy (CMIE) shows that the unemployment rate has increased from around 7% in July to 8.3% for August 2021.

What does the analysis of CMIE data says?

Sectoral analysis shows that most of the jobs lost were farm jobs, while non-farm jobs did increase to absorb some of these. However, the quality of new jobs generated is a matter of concern.

Non-farm jobs increased by 6.8 million, mainly in business and small trade, but the manufacturing sector shed 0.94 million jobs. Thus, much of the labour shed by agriculture has been absorbed in low-end service activities.

Employment sustainability: The non-availability of sufficient jobs in manufacturing and higher end services could be the dampener for economic recovery in the subsequent quarters of the current fiscal year.

Driver of the manufacturing sector’s output and employment growth is the auto sector. The automobile sector employs 19.1 million workers, directly and indirectly.

Why there is difficulty in expansion of auto sector?

Aggregate demand in the economy is low due to pandemic.

The shortage of semiconductors continues to impact production even when customer sentiments are slowly turning positive.

What are some important issues/concerns associated with foreign investment?

Global corporate restructuring: the uncertainties of global corporate restructuring and changes in the economic environment in the lead firm’s home economy are factors to consider. For example, experience of Nokia was one of the world’s largest mobile phone plant, with 8,000 permanent employees working three shifts and exporting products to over 80 countries. But in 2014, Nokia halted its production operations from this location, disrupting the livelihoods of thousands of workers.

More frequent global production re-arrangements: these are becoming a part of the strategy of big firms in this phase of globalisation, as markets tend to be more volatile due to repeated demand fluctuations.

Recently, Citibank announced that it would shut India retail banking business as part of a global decision to exit 13 markets.

Creating a massive disruption in the local economy: Ford’s exit from India will affect about 4,000 direct employees. Estimates show that another 35,000 indirect employees would also be lost at various levels.

Emergence of modern transnational corporations (TNC): When TNCs emerge as key players in an industry, a proliferation of mergers and consolidations across national and international borders might be frequent.

How exit of high-profile firms’ impact job generation?

Creates apprehensions among potential investors: it generally lead to a ‘wait and watch’ approach, affecting private investments even if an economy claims to have the tag of investor friendliness. A downturn in private investments leads to slower employment growth.

Mismatch in labour supply: The process of the ‘destruction’ of jobs through exits creates mismatches in the labour market. There is a sudden release of high skilled workers which could block possible new entrants who have already invested in their skills. This leads to a levelling down of wages which occurs when high-end services firms exit.

Rise in unemployment:  When large assembly firms exit there would be a big influx of low-skilled workers to other sectors as the same sector might not be able to absorb the workforce released. This churn in the labour market aggravates an existing unemployment problem.

What is the way forward?

First, raising the level of public investments which is the key to output and employment growth.

Second, attract domestic private investment. the economy has been waiting for private investments to flow in for quite some time, but their levels have been very low.

Source: This post is based on the article “When global firms disengage, employment suffers” published in the Hindu on 25th September 2021.