When global firms shut down, employment takes a hit

The latest labor figures for August 2021 released by the Center for Monitoring Indian Economy (CMIE) show that unemployment rate has increased From about 7% in July to 8.3% for August 2021. Overall, employment declined to 397.8 million from 399.7 million in July, i.e. 1.9 million jobs lost in a month.

Sectoral analysis shows that most of the jobs lost were agricultural jobs; While non-farm jobs have increased to absorb some of these, the quality of new jobs remains a concern. While employment in agriculture declined by 8.7 million, non-farm jobs increased by 6.8 million, mainly in trade and small business, but the manufacturing sector lost 0.94 million jobs. Thus, much of the labor shed by agriculture has been absorbed into low-level service activities.

employment stability

During normal times, seasonal labor freed from agriculture is accommodated in the manufacturing sector, even if the ideal situation is their movement in the factory sector. But, at present, the construction sector itself is giving up jobs, forcing workers to find employment in the domestic sector and lower-level services. This non-availability of adequate jobs in manufacturing and high-end services may hinder economic recovery in the later quarters of the current fiscal.

Primary economic theory states that increasing the level of investment is the key to production and employment growth. While public investments are important, especially in the current context of sluggish aggregate demand, there is a dire need to supplement public investment with even more private investment. The economy has been waiting for private investment to come in for a long time, but their level has been very low, leading to unemployment. Recourse to Foreign Direct Investment (FDI) to enhance domestic capital formation is one approach that India is adopting by making ‘ease of doing business’ more attractive. While inward FDI creates employment both directly and indirectly through an increase in production activities (which increase the demand for labor), the magnitude of employment generated, especially in the manufacturing sector, needs closer scrutiny. In addition, the sustainability of increased employment is often threatened because it depends on the business avenues that other competing economies open up to corporate restructuring on a global scale and the firm’s exit from preexisting locations.

an exit and interruption

The slow growth of employment in the manufacturing sector is not a recent phenomenon in India. However, some sub-sectors within the manufacturing sector have created jobs, both direct and indirect, by attracting foreign direct investment and entering global networks of production. A key segment, often projected as a driver of manufacturing output and employment growth, is the auto sector.

Estimates suggest that there are 19.1 million employees directly and indirectly employed in the automobile sector. At present, more than 70% of auto component companies are small and medium enterprises. It was expected that by 2022, employment in this sector will reach 38 million with indirect employment with a high generation.

However, three factors have created hurdles in the expansion of this sector. First, due to the novel coronavirus pandemic and the subsequent lockdown, overall demand in the economy is low, which is reflected in vehicle sales. Second, semiconductor shortages are affecting production, even as customer sentiment is gradually turning positive. Third, Ford’s recent exit from the Indian market will release a large number of employees who will be looking for jobs that are hard to find.

Ford’s exit raises some important issues regarding the unbridled attraction of FDI. While FDI can help create a manufacturing ecosystem in some places, the uncertainty of global corporate restructuring and changes in the economic environment in the domestic economy of the major firm are factors that should be considered. In this phase of globalization, more frequent global production rearrangements are becoming part of the strategy of larger firms, as markets become more volatile due to frequent demand fluctuations.

other examples

We have the experience of Nokia which, at its peak, had one of the largest mobile phone plants in the world at its Sriperumbudur factory (Tamil Nadu) with 8,000 permanent employees working in three shifts, producing over 15 million phones a month. produced and exported the products. For more than 80 countries. But in 2014, Nokia halted its production operations from this location, disrupting the livelihood of thousands of workers.

Read also | Why India’s Most Ambitious Generation – Its Millennium – Is Quickly Getting Its Most Worried

Recently, Citibank announced that it will close India’s retail banking business as part of its global decision to exit 13 markets. The US-based bank wants to focus on ‘some wealthier areas’ around the world. Citibank’s exit from the retail segment after more than three decades; The bank has 35 branches which employ about 4,000 people in the consumer banking business. Auto maker Ford is deciding to exit India after nearly 25 years of its operations. It will affect about 4,000 direct employees as it stops making cars at its factories in Sanand, Gujarat and Chennai, Tamil Nadu. Estimates suggest that another 35,000 indirect workers will also be lost at various levels, causing huge disruption to the local economy.

impact on job creation

The exit of high-profile global firms affects job creation in two ways. First, it creates apprehension among potential investors about choosing that location for greenfield investment or for augmenting existing facilities. Such situations generally lead to a ‘wait and see’ approach, affecting private investment even if an economy claims to have the tag of investor friendliness. A decline in private investment slows employment growth. Second, the process of ‘destruction’ of jobs through exit creates a mismatch in the labor market. That is, there is a sudden release of highly skilled workers that can block out potential new entrants who have already invested in their skills; This reduces the level of wages that occurs when high-end service firms exit. When large assembly firms move out there will be a large influx of low-skilled workers to other sectors as the same sector may not be able to absorb the released workforce. This churn in the labor market adds to the existing unemployment problem.

loss of stability

The enthusiasm over FDI inflows and associated benefits needs to be tempered with the reality of the emergence of Modern International Corporations (TNCs) with ‘agility, speed and dynamism’. When these TNCs emerge as major players in an industry, mergers and consolidations can often spread across national and international borders. These are efforts to open new opportunities in new markets. Such waves of expansion and contraction are aimed at gaining new markets and new business opportunities. This process of internationalization of production is driven by large firms investing in and out of developing economies.

Growing skepticism towards more open trade policies and the rise of protectionism have increased the risk and unpredictability of the policy environment, leading to intense reflection on both existing and new investments by global firms. Thus, the ‘near near’ stability of large foreign firms operating for decades is gradually decreasing. This is where domestic capital formation and private investment should come into play. We are still waiting for that to happen.

M. Suresh Babu is Professor of Economics at IIT Madras. Views expressed are personal