The indispensability of labour in reviving India’s economic engine

Migrant workers are like nowhere people. Yet, they are everywhere. From high-rises to highways, who builds them? It is a silent army of migrant workers, working day and night with no job security, no social safety net, and poor living conditions — yet, theirs are not the names we see on the billboards or the foundation stones of these shining symbols of India’s economic progress. From domestic helps to drivers, from the vegetable seller to the roadside food stall or kirana store owners — their names are not on any payroll or pension plans or tax registers and yet, remove them and life in urban and semi-urban areas would be paralysed. Like now.

Invisible, taken for granted, they are treated with indifference in the best of times and callousness and cruelty in the worst, as the spectacle of migrant workers walking hundreds of miles on hot and dusty roads to go back home showed. It evoked the words from the Woody Guthrie song, “I ain’t got no home in this world anymore”. For some of them, this proved to be literally and tragically true, whether due to death or the hostile reception they faced back home. They left their homes in search of a better life, to support their families back home. Yet, their adopted homes did not own them up when the chips were down.

Perhaps the human tragedy involved here will not move everyone equally. Even if the human plight does move us, some may take a more pragmatic point of view — what matters most is dealing with the public health crisis first, and then restarting the engine of growth.

Now, what is this engine of growth? You might think that it is capital accumulation — new machines and factories — and productivity growth — better technology and organisational methods. But capital cannot generate output on its own — it needs labour. In a country like India, it comes mainly through migrant labourers from rural areas. The engine of growth runs on the fuel of migrant labour, which moves from less productive sectors like agriculture to more productive sectors like manufacturing and services. Without this fuel, the engine will sputter and stop because of upward pressure on wages in the limited pool of local labour markets.

What drives the flow of migration is the prospect of better opportunities in urban areas. Interestingly, research on migration shows that there is, in fact, significant under-migration compared to the potential labour supply from rural areas. The main factor cited is risk-aversion. While average incomes are lower in rural areas, villagers can eke out a living easily and rely on strong informal safety nets based on social networks. Very poor households may be unwilling to incur the financial and psychological costs of migration and brave the subsistence risk of things not panning out. The horrifying experience of migrant workers during this crisis will only magnify such fears and reinforce the tendency towards under-migration.

What does this imply for the post-lockdown period? Could we simply press a button and restart the engine of growth, as Ben Bernanke, the former Federal Reserve chairman, seems to suggest for the United States (US) economy? Bernanke said that the current economic crisis is closer to a major snowstorm or a natural disaster than to a 1930s-style Depression, which came from problems of human institutions and monetary and financial shocks. So, he has predicted a sharp recession and a quick recovery for the US.

Whether Bernanke’s prediction about the US is right remains to be seen, but his logic does not apply to a developing country like India where informal institutions and social networks play a much larger role in the economy than in a developed country. While trust and reputation are important in every economic sphere, these are the only currency in the informal sector where there are no contracts and regulations, and hiring is based on word-of-mouth referrals (think, for example, how domestic workers are hired).

Therefore, social networks play a big role as reputation in the community acts as a bond against potential malfeasance or low productivity. But trust takes time to build, as do social networks once they are disrupted. Therefore, the assumption that after the crisis subsides, things will return to normal and an unlimited supply of labour will flow in from the countryside is unrealistic. Wages will have to rise significantly, and networks that underpin informal labour markets will have to reform for the process to resume.

Employers are clearly seeing the writing on the wall. Therefore, we see attempts like the construction industry lobbying a state government to cancel trains to stop migrant workers from heading back home.

The same logic of the market that is often invoked to say there are no free lunches when talking about relief packages for the poor, also says the only way to induce labour to work is through improvement in wages and living and work conditions, not coercion. And given that 90% of the Indian workforce is in the informal sector with no job security or benefits, the safety net provided by the government must be strengthened to attract migrant workers back after this ordeal.

At the minimum, this would involve making ration cards portable so that migrant workers are covered by the public distribution system (PDS) and committing significantly more resources (than in the relief package announced earlier) to direct cash transfers and to the PDS. There are no free lunches. The economy will not move forward unless the migrant workers come back.

Maitreesh Ghatak is a professor of economics at the London School of Economics and director, Development Economics Programme, STICERD