Employment Paradox – Part 1

When we look at the successive rounds of India’s labour force data, it suggests that GDP growth and unemployment rate are positively correlated i.e., lower is the GDP growth rate, lower is the unemployment rate. Isn’t it counterintuitive?

How can a low GDP growth result in higher employment or higher labour force participation rate? How would you reconcile such developments?

One of the easy and trivial way to address this anomaly is by saying - the survey does not capture the reality of India or many variants of the same statement. A quick and incomplete answer to a more serious question.

No matter whatsoever is your inclination, India’s statistical system is one of the robust systems in the World. Professor P C Mahalanobis, one of the greatest theoretical and professional statisticians led the foundation of independent India’s statistical system in the year 1949.

Contribution of NSSO (National Sample Survey Office) towards policy formulation for India’s underprivileged is immense. In particular, quinquennial round of survey capturing employment-unemployment and consumer expenditure as well as unorganized enterprises survey formed the bedrock for many policy intervention.

It is important to understand that statistical system is an evolutionary process. The term GDP what it was three decades ago is very different today. The coverage and calculation had undergone changes with greater variety of goods and services, better data and better methodology.

Have you ever heard something called GIS three or four decades ago? The only ‘night-light’ that was available in many parts of the country is a kerosene lantern. I grew up using that.

Let’s get back to the original question on GDP and unemployment.

In the year 2017-18, India’s GDP grew at 6.8% followed by 6.5% in 2018-19 and at 4% in 2019-20. As per the periodic labour force survey, Unemployment rate was 6.1% in 2017-18, 5.8% in 2018-19 and 4.8% in 2019-20. What’s happening here? How the lower GDP growth is resulting in lower unemployment?

Output and Employment relationship in Economics

Student of economics have studied something called Phillips curve.

Until 1970s, it was a dominant empirical perspective on growth, inflation and employment. Phillips curve shows an inverse relationship between inflation rate and unemployment rate under normal circumstances. The idea is simple. Assume that there is an increase in demand either due to rise in firms’ investment demand or rise in household consumption expenditure due to increased government expenditure. Output would increase to meet the increased demand. More number of workers would be required to produce the increased output. Assuming a constant short-run aggregate supply curve, increase in demand would lead to a rise in price level. Therefore, demand-led output increase results in higher price level as well as lower unemployment in the short-run.

What is short-run? While economists have never given a precise temporal dimension of short-run, it broadly connotes the period during which the productive capacity is given.

Phillips curve could not sufficiently explain the subsequent stagflation – when inflation and unemployment rose together in 1970s due to oil shock and it lost its glory as an analytical tool. During the pre-pandemic period, Philipps curve seems to have flattened – while unemployment declined, inflation in large part of the World remained at a lower level.

Notwithstanding that, what you see currently in India is a situation which has less theoretical explanation. Therefore, it needs to be explained in terms of data.?

Output and Employment relationship in India: A few possibilities

There could be multiple possibilities of having a lower GDP growth and lower unemployment rate.

Possibility 1 - Labour is moving from a more productive sector to a less productive sector. For example – a factory worker is going and joining in MGNREGA type work or in agriculture sector where the per worker output is low. In that situation, you can see a rise in employment but the aggregate output growth would remain low.

Possibility 2 - It could be the case that the additional employment (fresh employment) is being generated in sectors which are facing diminishing returns. Essentially, here you are not talking about labour mobility, rather it is the new job creation in sectors with lower productivity.

There could be a simple statistical reason as well explaining the declining unemployment rate while the 'absolute' unemployed people may remain the same.

For example – unemployment rate is measured by the percentage of persons unemployed amongst the persons in the labour force. Assume that in each of the year the number of unemployed people remain the same – say at 30. The ratio – in this case unemployment rate would show a declining trend if the denominator increases.

Now you assume a situation like this as given in the table:

Though in terms of absolute unemployed people, it remains at the same level of 30, unemployment rate declined as the labour force size has increased.

You can view it in two ways – there is relatively higher growth in employed persons vis-à-vis unemployed therefore the unemployment rate has gone down. You can also say that – look, the absolute number of unemployed people has not gone down. A household which does not have an earning member is a cause of concern irrespective of overall percentage decline.

Economics at times is funny and produces/uses very wrong metrics to analyze and interpret the world. The greatest disservice of a single statistics to economics is ‘average’. Average masks many things and remains blind to distributional aspects. Media does not report quartiles, quantiles, percentiles or standard deviation. Those are for journal paper writing.?

Searching for some answers to the apparent unemployment paradox

Periodic Labour Force data does not allow for a longitudinal study. You would not be able to track the same households across the different rounds of PLFS annual survey. Therefore, tracking labour mobility over a period of time across the economic sectors is a challenge.

Nevertheless, we can explore possibility-2. Are we adding more workers to the sectors where productivity is low? ?If that is the case, then while you may see a rise in employment, it may not translate in higher output growth.

Table-2 shows a baseline scenario. We have taken year 2017-18 as the baseline year matching with the release of PLFS series. In Table-2, there are 24 sectors as per National Accounts Statistics. Output index is the real GVA in a sector expressed in terms of crops and livestock. Likewise, it is done for employment index. If agriculture sector employs 1 worker, hotel and restaurant is employing 0.05 worker. Productivity index is the division of output index by employment index. It is GVA per capita expressed as an index where the base is crop & livestock. We have grouped these 24 sectors into low productive, moderately productive and high productive sectors as per their productivity index.

As you could see, agriculture (i.e., crops and livestock) which is the least productive sector has the maximum employment share. Cumulatively, 85% of the workforce has been engaged in low productive sectors. Moderately productive and high productive sectors respectively have 7% and 8% worker share.

This shows both hope as well as despair. Why sectors such as textiles, food and beverages, Hotel and Restaurant business have lower GVA per worker??I say it as both hope and despair because India has immense potential to grow at a faster rate. These sectors in many of the countries are their most productive sectors. Take for example textiles in Bangladesh. However, the challenge lies in massive disguised unemployment. How to make the workforce more productive? It is easier said than done. Mechanization and automation have its own challenges in a labour surplus economy.

Table-3 shows the employment and output share of sectors by its productivity level as well as the employment growth in 2018-19 over 2017-18, 2019-20 over 2018-19 and the CAGR growth of 2019-20 over 2017-18. The last column shows the contribution to employment growth by sector. ??

If we look at the three-year horizon since the time PLFS survey was launched, employment growth is maximum in low productivity sectors which provides 85% of the employment with close 50% share in Output. How would the GDP grow if the sector which has maximum share in GVA is the least productive? Employment can grow but it still would not reflect in a rapid rise in output growth as the productivity level remains low.

Table-4 shows employment growth by sector. The second column is a GVA index. It tells us that if output per worker in agriculture is 1, it is 3.6 in industry and 4.3 in service sector. Simply means service sector is the most productive sector followed by industry and agriculture. We have taken the three-year horizon that is 2017-18 to 2019-20. When you look at the last column, it is abundantly clear that the agriculture is absorbing maximum workforce with least return. Service sector is experiencing lowest employment growth despite having the highest potential productivity level.

We can keep adding bulk of our workforce to Agriculture sector but it would not make the GDP grow faster unless we do something to increase its productivity. Mechanization of the farming has to go hand in hand with gainful employment of the worker in Industry and service sector. Also, the productivity gap between service and industry sector is worrying.?

Table-5, the last in this section, looks at the employment growth by activity status. Self-employed people constitute the bulk of the workforce in 2017-18. It was 51.6% of the total employed people in the country. Regular salaried people and casual workers roughly share equal percentage.

In 2019-20, 30.4% employment growth is seen in case of unpaid family member while overall self-employed people grew at 12.2%!

Who are these Unpaid family members? As per PLFS –

“Self-employed persons who were engaged in their household enterprises, working full or part time and did not receive any regular salary or wages in return for the work performed were considered as helpers in household enterprise. They did not run the household enterprise on their own but assisted the concerned person living in the same household in running the household enterprise.”

Look at the growth of the same category i.e., of unpaid family member in 2018-19. It was mere 1%. What happened in 2019-20 that suddenly there is a rush in unpaid family labour? Are they employed in true sense? PLFS survey covers the period of July 2019 to June 2020. India went into the first phase of the lockdown on 25 March 2020 which lasted for 21 days. It continued in four phases up to 31 May, 2020.?

Such massive rise in self-employment is a reaction to Covid. These are not gainful employment. At the same time, casual employment has increased from near stagnation to 6.4% growth. 75% of India’s employed people are either self-employed or are casual workers.

It is no longer a surprise that if at all employment has to be created, it has to be created in the private sector by private companies. Push for domestic production and self-reliance may give boost to small and medium enterprises. Bulk of the own account worker may be disguised unemployed. If they withdraw from those activities and get gainful employment elsewhere, they would be able to contribute to the overall growth story of this country. Agriculture sector is overcrowded. A major push is required to make the sector more productive while at the same time development of a social security system would be necessary to take care of the transitional pain. Not only that. Where would those workers be employed? MGNREGA at best is a employment insurance scheme. That would not be the way forward to make the country grow at a higher rate.

Employment remains a challenge. The shortest possible route could be to kickstart the private sector and increase their capacity utilization. Private sector would invest only if they see a demand – be it domestic or external. A search for demand and a strategy to augment the demand is an immediate need.

These headline numbers on employment therefore tells a partial story. Nevertheless, our dream of reaching USD 5 trillion is a plausible proposition if we put these people in gainful employment. It is the private sector which has to drive the agenda. Let the animal spirit be back!

?[…to be continued]