Would Gurugram Be Gurugram If New Local Hiring Laws Were In Effect Since The Beginning?

Recently there has been a debate regarding raising the minimum wages in the United States which triggered a discussion around the impact of them. The discussion became a polarising one and even academic economists were quick to point out different and often contrary views on the subject.

The debate about minimum wages in the US and the decision to reserve private sector jobs for locals in an Indian state has interesting parallels.

The reason why wages in the US have been flat is because of increase in the supply of skilled labour. The end objective behind increasing the minimum wages is to ensure people get a higher wage.

Local hiring legislations are also an instrument that are believed to result in more job opportunities for people from a particular region.

Its proponents are often those who believe that companies tend to hire people from outside and thus such restrictions would create more employment for locals.

The question is whether this policy instrument is sufficient to meet that objective or not.

The first point that needs to be evaluated pertains to hiring of non-locals in the first place. Why would a company deliberately hire people from outside the state if they can get equally qualified people within the state at the same wage rate?

A private firm would hire from outside the state only when it does not find the required skilled workforce within the state – or if it finds the required skilled workforce at a cheaper rate outside the state who are willing to migrate.

That a lot of migration happens only to improve the standards of living by obtaining a higher wage is well recognised by now and this point was illustrated in the recent work by Dr Prakash Loungani and Sriram Balasubramanian of the International Monetary Fund.

For states that have such legislations, doing so is counterproductive as companies would find it easier to shift towards places where they can find cheaper workforce.

Globalisation combined with technological enhancements, in fact, has enabled people to shift value addition to offshore locations to save on wage costs. Thus, the real value addition can now happen elsewhere and states with such restrictions will find it increasingly difficult to provide employment opportunity for their local population.

It is further important to recognise the importance of migration. There is significant evidence that supports the hypothesis that migration has a net positive impact in terms of innovation and productivity gains, which adds to the overall growth process.

At a time when the government is committed to developing critical infrastructure, bringing parity in terms of taxation policies and removing restrictions to allow for large markets to develop, such decisions are regressive and can result in significant damage to the growth prospects of the region.

Isolation of a labour market and restricting applicant pool to a local region can have two implications.

First is that it would be difficult to find the right people for the job which could either push up the wages or alternatively force companies to hire elsewhere. The latter's a more likely scenario.

The second implication, which is equally important pertains to the lack of competition within the applicant pool which would affect the quality of people that eventually get absorbed in the event that a company does decide to operate within the region.

Both of these outcomes are adverse outcomes for companies and would hamper their growth process.

The question that needs to be asked is whether we are trying to kill the goose that has been giving us a golden egg on a daily basis. That is, would Gurugram develop the way it did if these laws were in operation? The answer is perhaps not.

Creation of employment is not directly the job of the government as the government can at best commit itself to faster economic growth which in turn would create jobs. After all, if laws could create jobs and achieve full-employment levels then the world would have been a much simpler place.