The fundamental problem that must be solved immediately for the Indian economy to recover from the lockdown is how to employ more people in more secure jobs. Policymakers were struggling with this even before the Covid pandemic struck. In their academic debates, some economists had valiantly defended the government by doubting, and even hiding, the statistics of unemployment. However, with pictures of employers abandoning thousands of workers, who lost the means to support themselves and their families and left struggling for food and shelter, the need for debating statistics has passed.

In India, unemployment is not merely a pandemic problem; it is a chronic, structural problem. While the government is busy with providing immediate relief, which it must, it is imperative that policymakers step back to find a new approach to growth and employment to replace the one that has failed.

Labour practice

The Economist points out that while the pandemic has devastated economies around the globe, shutting down businesses and slowing spending, the fallout has been much more severe in some countries than others. Nowhere is this more apparent than in unemployment figures in the US and Japan. The US jobless rate increased four-fold from February to April to 15 per cent, whereas in Japan it barely budged to 2.6 per cent.

The reason, The Economist says, is “A fundamental divergence in attitudes and policies towards labour. In the United States, when the economy gets bad, people get laid off one after the other, and the unemployment rate shoots up. But for Japanese employers, laying people off is difficult both psychologically and practically.”

Companies in Japan are more likely than their American counterparts to prioritise employees’ interests over those of shareholders, focussing on the sustainability of their business rather than maximising growth. Naohiko Baba, chief economist at Goldman Sachs, Japan, says: “In good times, companies accumulate profits on their balance sheets by restricting rises in workers’ salaries. In bad times, companies refrain from firing redundant workers by using retained earnings accumulated during the good times so that people can have secure jobs.” Violating that social contract can have severe reputational costs. Moreover, pro-labour attitudes have been reinforced by strong legal precedents built up since the end of World War-II, which prevent companies from laying off employees unless they can demonstrate that they have no other choice.

The Indian government has pleaded with employers to pay their employees wages during the lockdown, even when their businesses are closed. This was a complete turnaround from its earlier stance of weakening labour laws to make it easier for employers to trim their workforce and improve their companies’ profits even when the economy is growing. The Indian economy is at a crossroads now. Employers must change their attitude towards their workers. They must not treat them as undesirable costs, but as necessary assets of their enterprises.

Appreciating assets

The philosophy Japanese employers have followed since World War-II is that humans are the only ‘appreciating assets’ of any enterprise. The value of machines and buildings depreciates with time, whereas the value of human assets can increase. This philosophy created the Japanese industrial miracle. Japan, which did not have any raw material assets, had to import petroleum for its energy and chemical industries, and iron ore and coal for its steel industry. Nevertheless, Japan became the world leader in many industries within two decades — steel, chemicals, ship-building, machinery, automobiles, consumer durables, and electronics.

The common resource in all industries was Japanese workers. And the catalytic ingredient which unlocked the potential of Japanese workers was the orientation of Japanese employers and managers to their workers. They guaranteed their workers life-long employment and invested in continuous upgradation of their skills. Managers and employees worked together to improve production processes and quality, and reduce costs in a quest for continuous improvement of the company’s international competitiveness. This was a win-win social contract between workers and employers. Workers had stable sources of incomes and Japanese firms grew.

Innovation and stability

In the early 1990s, when Sony, Matsushita, and other Japanese electronics companies were transforming the consumer electronic industry with a slew of innovative products, like the Sony Walkman, the University of Southern California at San Diego did a benchmark study for North American electronic companies for conditions of innovation. The hypothesis was that, while the Japanese system may be good for the continuous improvement of costs and quality in a stable production process, it would hamper product innovation, which is a dynamic process requiring greater freedom for managers.

The insight from the study was counter-intuitive. It revealed why American companies, with excellent R&D labs (and Nobel laureates), could not get new products to the market as fast as the Japanese companies could. Workers in American companies feared the introduction of new products because, with new equipment and new skills required, they themselves could be made redundant. Whereas in Japanese companies, workers welcomed new products. Their jobs were secure; and they would learn new skills and their companies would prosper too.

American employers do not like labour unions because they hamper their freedom to set the terms of employment. However, laws in Japan and Germany, both countries whose manufacturing industries seem to grow stronger through economic recessions, support strong unions. Workers are not a burden and unions that represent them need not be an obstruction.

India has a surplus of human power, which can be the source of its competitive advantage, provided employers in India change their attitudes towards workers and labour unions. Employers must stop pressing the government for changes in laws to give them more freedom at the cost of workers’ security. Employers who complain about the poor skills of Indian workers and their poor work culture should look inwards, too. For India to progress, employers’ attitudes towards workers must change, and their management skills must improve. India’s workers and unions must be engaged as equal partners in India’s quest for sustained prosperity for all Indian workers and citizens.

Through The Billion Press. The writer, a former member of the Planning Commission and former chairman of BCG India, is Chair of HelpAge International

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