Unemployment, inflation and education

P. V. Indiresan

Undoubtedly by promoting unemployable education policy-makers have raised unemployment. Also, by not putting to more productive use much of the public money, they have added to inflation. If colleges are made to give economic relevance to education, that should address both unemployment and inflation, says P. V. Indiresan.

Queuing up for jobs... Are they unemployed because they are unemployable?

RECENTLY, TWO books have appeared that debunk any attempt to manipulate macroeconomy. In Freakanomics, Levitt and Dubner take an irreverent look at economics to show that nothing can be done predictably. They take the example of chess, where the situation is fully transparent all the time, and the rules are well known and fixed. Yet, it is quite impossible to predict the future progress of a game. They argue that sif even such a transparent and well-established game as chess is unpredictable, nothing is predictable in the more complex, uncertain, unsettled game of economics.

In the other book, Nobel Laureate Joseph Stiglitz confesses that his own successes, as Economic Adviser to Mr Bill Clinton when he was President of the US, were more a matter of accident than of intent. He debunks the much-touted successes of Mr Alan Greenspan of the Federal Reserve Board who is credited with guiding the American economy with great skill. Both books are sceptical about the possibility of directing the future.

Prediction Theory is a well established, if abstruse, branch of Control Engineering. According to it, the best that can be done is to control past errors rather than attempt to improve the future. Minimising past errors is the sure way of making the future better; modifying the future (according to whatever calculations one may make) is a far from reliable exercise.

Pro-market economists favour low inflation, zero fiscal deficit, and stable currency. In that manner, they expect to maximise growth. They are less concerned about either unemployment or rich-poor disparity. Leftists hold the opposite view: They want zero unemployment, zero disparity but are unconcerned about fiscal balance. They think that the government can control the future.

There is evidence to show that, to a certain extent, unemployment and inflation are interchangeable. Every economy is supposed to possess its own "Non-Accelerating Inflation Rate of Unemployment", NAIRU for short. This hypothesis assumes that there is a level of unemployment at which inflation remains constant, and any attempt to lower unemployment below that figure will cause undesirable increase in inflation.

Currently, in India, we have fairly low inflation but unemployment is high. In particular, educated unemployment is very high — some claim that it could be as much as 20 per cent among graduates. One suspects that political instability

in the country — increasing Naxalite violence, for instance — is the result of excessive unemployment. Will greater tolerance of inflation create more jobs and check such violence? If so, should we not accept higher inflation to create more jobs and reduce unrest? Or, is there any other alternative?

If NAIRU can be reduced, for the same rate of unemployment, inflation will be lower. Alternatively, at the prevailing rate of inflation, unemployment will be lower. Hence, reducing NAIRU is highly desirable. There must be some technique by which we can lower both inflation and unemployment simultaneously. Unfortunately, neither the reasons why NAIRU drifts up and down, nor the techniques by which NAIRU can be lowered, are known.

Inflation is like acceleration in a car but with a difference: In a car, acceleration stops sometime or other and the car attains a steady speed. The economy is different: Inflation never stops. That is like a car that never reaches steady speed and speeds faster and faster forever and forever. It appears as though, world over, economies have unlimited accelerating power.

From another point of view, unchecked inflation is an illusion. In rupee terms, inflation has been continuous; gold is several hundred times costlier. In terms of dollars too, the rupee has inflated but only ten times. However, in terms of purchasing power, prices have actually fallen significantly over the past 50 years. We are three-four times richer than we used to be fifty years ago.

However, this is not a matter for self-congratulation. If all our unemployed graduates had been gainfully employed, we would have been richer still. Their unemployment — all unemployment for that matter — is a permanent loss to the economy.

From this point of view, zero unemployment is ideal. However, zero unemployment is neither practical nor even desirable: If every one is employed, there will be no one to take on new jobs. There will be no growth, no change, no development. Hence, we do need some unemployment to allow changes to take place in the job market. However, the level of educated unemployment is fast getting beyond tolerable limits.

Some people argue — with some considerable truth — that many of our graduates are unemployed only because they are unemployable. Our graduates have paper qualifications but no employable skills. For reasons of social prestige, the educated unemployed refuse to take up less attractive jobs. Thus, we have a peculiar aberration: there are many without jobs and there are many jobs without applicants.

For this state of affairs, educators are mainly to blame. Nobody asked them to teach useless skills, but they do. They even insist that it is their moral right to provide "liberal" education, and students have a right to study what is patently of no use. The educators who control national policy belong to this group.

They want more years of education; they shed tears that less than ten per cent of youth go to colleges. They are unconcerned about the psychological pain and political risk of the higher unemployment that will result when even more unemployable graduates are produced.

These educators have a self-interest in this matter. More students mean more colleges, more teaching positions, more principals and Vice-chancellors and also more seminars and more committees for them to lord over.

Some months ago, the Finance Minister demanded of all departments to produce an "outcome budget".

The Human Resource Development Ministry will probably put out impressive figures of the increase in the number of students at all levels. It is pertinent to ask if that is the correct way of measuring the outcome of education. Is education to be measured by quantity or should quality be also measured? Are unemployable graduates a truly desirable outcome?

Let us revert where we started — inflation, unemployment and NAIRU. Our education policy-makers have undoubtedly raised unemployment by promoting unemployable education. They have also wasted a lot of public money that could have been put to more productive use.

Thereby, they have added to inflation too. Thus, they have found one sort of answer to the NAIRU conundrum: They have discovered a way of raising NAIRU, raising both unemployment and inflation simultaneously. Unfortunately, like their education, their discovery is less than useless. We want to know how to reduce, not increase, NAIRU.

As a matter of simple arithmetic, removing a negative factor has the same effect as adding a positive factor. Hence, if we stop useless education we will be improving NAIRU and doing much good to the economy. Unfortunately, the political debate these days is all about increasing admissions and lowering standards.

Asking educators what use is their education and what contribution it makes to economic (or even) social welfare tantamount to sacrilege. Nevertheless, for having committed this sin, let me make a two-part suggestion.

One, as bad education is hurting the economy, let the Finance Ministry step in. I do not think the Finance Minister has enough political clout to discipline bad colleges, but he may be able to reward good ones, the kind that produce graduates that contribute to the economy. (Even that is doubtful. The ideology of many of our educational planners does not tolerate any one to do better than others.)

Two, as college graduates are at the top of the education pyramid, they should be paid well.

Just as labourers have a minimum wage, so should college graduates. It is not unreasonable to say that college graduates (who constitute the top five per cent of the educated) should earn enough to pay income-tax. Then, let the Finance Ministry ask all income-tax payers whether they are graduates and if so, from which college they graduated. It is a simple matter to calculate the average number of such graduates per year for each college.

The Finance Ministry may offer a special grant to each college in proportion to the average number of its graduates who pay income-tax. That need not be the whole grant but large enough to make a difference. Further, extending the principle of Right-to-Information, let the grants secured by each college be made public.

It may be noted that only the number of income taxpayers is taken into account and not how much tax they pay. Hence, a liberal arts college will not be at an unfair advantage compared to a management institute. We are not being sordid about money; we merely ask that graduates should be valued enough to be paid enough to pay income-tax.

Among the 15,000 colleges in the country, there will be many who have not produced ever even one income-tax payer. If the names of those colleges are made public, it is possible they will be forced to rethink, make education at least a little bit relevant economically.

As education has large multiplier effects, that rethinking is bound to lower NAIRU, to improve simultaneously both unemployment and inflation.