Everybody in the business sector that I spoke to here in Bhubaneswar (Orissa) complained about the labour problem. Everyone. From the traditional Indian shopkeeper, the corner store owner, the electrical parts & repair guy, the boutique owner, and the retail owner, to the small street food vendors and street food kiosk owners.
Everybody said the same thing. It is difficult to retain skilled labour, or just labour at all. Employees just leave, and very often leave with meticulously honed trade secrets that they then use to start up a separate business in the same trade.
I haven't quite figured out the larger scale dynamics leading to this effect (out-migration, the economies of growing a small business in a less developed local market), but the observation is consistent: after financing constraints, the biggest problem here for businesses in the MSME sector here is that of labour retention. I won't extrapolate to small towns in India in general, but I would logically expect the situation to be similar in the urban parts of those states which have underdeveloped market institutions and infrastructure, and high rates of out-migration among the economically poorer population.
Further, since retaining employees is such a challenge here, few entrepreneurs / business owners with whom I've spoken, care to worry about "skill" levels. Employers tend to rate "loyalty" and "willingness to stick around" higher on their preference list and technical finesse lower; their modus operandi appears to be to find somebody who is willing to accept a certain wage, and then skill them through on-job training or a [residential / stipend-paying] apprenticeship. As mentioned above, this is true of a wide variety of businesses and trades.
The "training on the job" makes sense in a less competitive market context : it is difficult to find too many skilled individuals, and hiring skill comes at too high a price. Yet the problem is that this raises sunken costs for the employer to the extent that it can be quite devastating when the employee quits (read this earlier post on a related case study from the urban poor community with which I'm currently working).
For their part, employers here do not always provide reasons for their employees to stick around. For every entrepreneur that has complained to me about "labour", multiple employees have complained about business owners. Complaints typically include reneging on a contract or a commitment, delaying payments, underpaying or overworking employees, unreasonably extending work hours at will, and so on.
As I read the scenario, the employers' behaviour makes sense because they are constantly distrustful of their employees and hence trying to minimise losses in the event [which event is certain in their minds] that their employee quits. In response, the employees shirk because they feel taken advantage of. This in turn validates the employers' suspicions, and so it goes.
Neither party has the guarantee that the other will uphold their commitment, and there is complete lack of [accessible / affordable] legal enforcement of employment contracts. Thus employees flit from one employer to another trying to find a good paymaster; employers are loath to grow their business since it would necessitate hiring.
The lack of effective contract enforcement in India is one of my pet peeves. I understand that we have a system of relational market institutions in India, where business occurs on the basis of relationships, and on the trust built from repeated interactions. Unfortunately, larger scale dynamics can adversely affect these micro scale interactions; trust-based norms that have served small local businesses reasonably well in the past may not work so well.
This tendency to trust and want to work with family members rather than complete strangers - even when the strangers have more skill and expertise - has led to an over-abundance of family owned and operated enterprises at every scale of business.
Thus trust based, small-scale, family/kin owned and operated small businesses that are nested within an increasingly interconnected and competitive market, can rapidly lose the ability to stay viable. Additionally, those who are faced with the same trust deficit but lack a family-based support structure, can find it difficult to start, maintain, or grow their business.
Legal enforcement of contracts would go a long way in bringing about cooperation between the employer and employee, and allow them to focus on building a strong working partnership.
MSME Sector Development
Opportunities and exposure are growing in urban India, and people (employees) are getting increasingly dissatisfied with the limited opportunities for professional development and wage growth in small towns and cities. Small businesses cannot do much about this until the government pumps some lifeblood into the MSME sector.
Low budget small businesses are especially held hostage to local/regional supply chains. In towns that are less well connected to large markets (i.e. to manufacturing centres, or trading and commerce hubs) and have poor local market infrastructure, business owners can genuinely end up paying so much in overheads and raw material procurement, that they cannot afford to pay much to their employees. The government needs to pitch in here too, understanding these regional factors and helping develop industrial clusters that address existing lacunae.
Inexplicable Behavioral Observations
These businesses often become a learning ground for the employees, who move on to bigger opportunities once they pick up at least bare minimum skills. Not a bad halfway house for rural-urban migrants in particular.
In terms of economic behaviour, I am not entirely certain about this following question, although I haven't been able to quit mulling over it since it first came to my mind last year. I understand why someone would leave a job that doesn't pay well but offers an excellent business training opportunity. I also partially understand why these jobs do not pay well.
What I don't understand is the behaviour of those individuals who quit these small businesses that aren't paying well (thus making the parent business struggle to stay viable), then go start yet another small business in that same trade, then themselves struggle to pay and retain labour and grow their business. It's an inexplicable mushrooming of undifferentiated (or barely differentiated) small (or micro) businesses that are all struggling in the same way.
What's going on? What can be done?