Recent reports suggest that some of India’s major information technology companies, like Wipro, TCS, and Infosys, have collectively laid off over 21,000 employees between June and September this year. Campus hiring, too, has hit all-time lows. This is likely precipitated by a – global – normalisation of the Covid-19 pandemic-driven surge in demand for all things digital.
Mass layoffs are often justified on grounds of operational efficiency. However, they come at significant social costs. These include accentuating business (down) cycles, souring market sentiments, and deterioration in the welfare of laid-off workers that the Indian economy can ill afford.
Accentuating impact on business cycles
Cyclical movements in the economy naturally involve shifts between employment generation and destruction. There are two parts to the latter: first, the shift from employment to unemployment, and second, the period of time a worker is without a job. While it is axiomatic that large layoffs correspond to mass unemployment, economists Robert Gibbons and Lawrence F. Katz demonstrate that retrenchments elongate unemployment duration as well. The capability of those who get retrenched for operational efficiency rather than more existential problems like company closures is often perceived negatively. This “lemon’s problem,” as described by Nobel laureate George Akerlof, results in longer post-layoff unemployment durations for such workers.
Moreover, mass layoffs during economic downturns can create a crowded job market, making it harder for individuals to find work, especially in specialised fields like IT. Another challenge is that companies tend to rebalance capital and labour after mass layoffs. Contemporary economic trends suggest that the share of capital is secularly increasing in production processes. And economist Lisa Kahn suggests that several recent recoveries were jobless. That is, employment levels were still low despite recovery in aggregate output. And displaced workers were left with mismatched skills.
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Souring market sentiments
A company’s reputation is naturally a critical strategic asset. However, reputations are vulnerable to negative information. While companies treat layoffs as a cost-cutting instrument to boost performance and, therefore, expect to be rewarded by stock markets, evidence contradicts this notion. That is, stock markets react negatively to job cuts in the short term, which is followed by a decline in a company’s financial performance in the medium to long term. Reasons include worsened work climate, reduced trust in management, and lower motivation among remaining employees. This is a vicious cycle that can also hamper economic recovery.
Welfare of laid-off workers
Economists Daniel Sullivan and Till von Wachter estimate a loss in life expectancy of about one-and-a-half years for a worker laid off at the age of 40. Strikingly, they find that employment termination leads to a 15-20 per cent increase in death rates during the following 20 years. Additionally, individuals entering the job market in midlife earn less, work more, receive less welfare support, and have higher rates of work-related disabilities. They are also more likely to be unmarried, divorced, childless, or have spouses with lower incomes. These outcomes not only affect the laid-off workers but also adversely affect their social and familial networks – which are doubly important in a developing economy.
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Policy lever
India’s IT industry’s relative share to India’s GDP is 7.5 per cent, and it employs about 5.4 million professionals. The high societal costs associated with recent layoffs in this industry require government attention, particularly since private actors may not see the big picture immediately. Policymakers should consider two ideas.
First, a longitudinal employment survey – following the same group of individuals over an extended period of time to collect data on livelihoods – is necessary for Indian scholars and policymakers to understand the socio-economic consequences of mass layoffs. This will also help in piecing together critical information about service sector job cuts that the government currently lacks, as confirmed by Labour and Employment Minister Bhupendra Yadav in the Rajya Sabha.
Second, unemployment insurance (UI) has proven an important tool to mitigate the negative consequences of job cuts in several countries, like the United States and Canada. UI cushions the impact of job loss on individual consumption, reducing the consumption decrease in the economy to around one-third of what it would be without its presence. There are two government unemployment assistance programmes in India: Rajeev Gandhi Shramik Kalyan Yojna (RGSKY) and Atal Beemit Vyakti Kalyan Yojna (ABVKY). However, these focus exclusively on organised manufacturing. They also stipulate that the contributions for an eligible insured person are made by the employer, and that such a person should have been employed for at least two years. These conditions make the scope of UI in India extremely limited.
India must build a safety net that not only supports those in need but also strengthens economic resilience. This is particularly critical at a time when the world is reeling in uncertainty, and India’s insulation from global trends is gradually wearing thin.
The authors work at Koan Advisory Group, a technology policy consulting firm. Views are personal.
This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector. Read all the articles here.
(Edited by Zoya Bhatti)