A digital public platform for jobs could lend India’s labour market efficiency

His statement comes against the backdrop of a growing national debate about the lack of quality jobs for a young population. Surveys conducted before the recent national elections showed that inadequate employment opportunities were one of the major concerns as voters prepared to elect a new Parliament.

It is not uncommon to hear employers say that they are unable to find labour for their projects. Neither is it uncommon to hear stories of young people desperately seeking jobs. One answer to this paradox is well known—the skills gap.

Too many youngsters coming out of colleges and universities across the country do not have the skills that companies seek. A lot of attention has been focused on this problem, even though not much has changed on the ground as yet.

However, the curious coexistence of labour shortages in a labour surplus economy is not just a matter of skills. This is especially true in the case of an unorganized labour market such as ours. Economists have in recent decades studied situations in which buyers and sellers do not automatically find each other because of a variety of “search frictions.” Search is imperfect. It involves costs. There are risks involved as well.

The standard model that we learn in any basic economics course tells us that buyers and sellers seamlessly meet in a market. Transactions are finalized at an equilibrium price. This works very well in most situations, especially when undifferentiated products are involved. The situation is more tricky when the same product comes in many different variants. Labour markets are a classic case of a setting in which searching for the right supplier or buyer is costly. So are housing markets.

Three economists—Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides—were awarded the Nobel Prize in economics in 2010 “for their analysis of markets with search frictions.”

In its press release announcing the award, the Nobel Foundation said something that should resonate in contemporary India as well: “On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates friction in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labour market.”

There are several ways in which search costs are brought down. One interesting response in India, especially when informal jobs are being sought, is the use of social networks. For example, one person moves to the city in search of a job, gradually builds credibility with his employer, and then brings in others from his village or caste group to work with him. In effect, the cost of searching for a new employee to work in a restaurant or at a construction site is reduced.

However, the rapid spread of digital public infrastructure (DPI) in India offers a different opportunity. A whole range of such platforms has reduced transaction costs for citizens in several areas. The United Payments Interface, for example, has been a huge success. There have also been other examples such as the Open Network for Digital Commerce, which is trying to connect small businesses in the country with consumers.

The hope is that even a small neighbourhood business can sell to consumers in different parts of India. There is a strong case for building a similar digital platform that will connect employers with potential workers—a DPI provision for the Indian labour market. I had earlier written about a variant of this idea in May 2020, when the big question was how India should get its economy back on track after the first lockdown of the pandemic (bit.ly/4cGpo6L).

Contemporary labour economists such as David Autor at Harvard University have shown that low-wage workers often take the first job that comes their way, either because of a lack of information or an inability to take risks, which implicitly means a loss of bargaining power.

The question then is whether a public digital platform that helps match workers with employers—and perhaps to key welfare schemes as well—will boost wages and productivity. Autor recently wrote a paper with Arindrajit Dube and Annie McGrew on how the pandemic first led to job losses, followed by a churn as workers found better-paying jobs during the recovery.

They argue that relief cheques given to families by the US government also helped. The result is that the wage gap in the US has narrowed in the past three years.

India has a massive task of job creation in the coming years. It also has a more immediate problem of weakening consumer spending because of weak wage growth. A DPI set-up that makes the Indian labour market more efficient would help in these circumstances.