Jobs growth much slower than economy

The India Employment Report 2024 was published last week. It has a comprehensive, in-depth analysis contained in a 300-page report published jointly by the Geneva based International Labour Organization (ILO) and Delhi based Institute for Human Development (IHD). This is actually the third major report by ILO-IHD on labour and employment issues in India, the first two being published in 2014 (workers and globalisation) and 2016 (employment in manufacturing led growth). The data used in the present report is mostly from government sources, covering a period of more than two decades since 2000. Prior to 2018 the main source of the data was the quinquennial survey of employment conditions, and thereafter it is the quarterly reporting of the periodic labour force survey (PLFS). Granular data at the unit level is available to all researchers and the present report goes into great detail to gain insights.

Before we examine the main findings of the report, it is important to remember definitions. The labour force participation rate (LFPR) is those of working age in the population (15 years and older) who are working or seeking work. It is important to note that while India’s population growth has slowed down to 0.8 percent per year, its labour force is still expanding at more than 2 percent annually. Thus, the people in the working age group are a relatively fast expanding bulge. From this bulge we first look at what is happening to LFPR over past two decades. The worker participation ratio (WPR) is the proportion of working age people who are working. The rest are unemployed, and hence the unemployment rate is the share of those in the labour force who do not have work and are seeking work.

Now to the main findings. The dismal long-term trend is that until 2019 all three ratios LFPR, WPR and unemployment rate were moving in an adverse direction. Participation rate was dropping, and unemployment rate was rising. This is dismal because it means that the growing economy was not generating work or jobs for the ever-expanding work force. During 2000 to 2012, the economy expanded at the rate of 6.2 percent per year, but jobs grew only at 1.6 percent. This became worse between 2012 and 2019 (i.e. until the pre-covid year) when average economic growth was 6.7 percent, but job growth was just 0.1 percent. This is the classic case of jobless growth. What does this mean? It means economic productivity measured as unit of GDP per worker has been increasing, eliminating the need for extra workers. It also means that GDP growth is more capital intensive, employing more machines per worker. This is particularly stark in the manufacturing sector of the GDP. In manufacturing for the entire period of 2000 till 2019, employment growth was merely 1.7 percent per annum whereas manufacturing output grew at 7.5 percent. By comparison the services sector employment growth was nearly 3 percent per year, thus providing jobs. Particularly construction work responded very well to economic growth during 2000 to 2019.

The growth process is supposed to absorb the surplus labour in agriculture into manufacturing and services. This is called structural transformation of the economy. It can be aided by rising exports too. The share of export of goods and services in GDP was just 6.3 percent back in 1984 and is now at 22 percent in 2022. This expansion in global market opportunities should have meant more employment in India, a pattern we would have witnessed if we had focused on labour intensive exports. Indeed, that was the story of export led growth in most of East Asia starting five decades ago with Japan, and still continuing with countries like Vietnam. India somehow missed the bus, firstly with its initial export pessimism, and then being wary of joining global value chains. This is likely to change in the coming years. But now there are new challenges, as trade barriers go up due to geopolitical reasons, and automation threatens to eliminate jobs even in labour intensive sectors.

Manufacturing employment remains stuck at 12 to 14 percent of the workforce for over two decades. The reason for non-absorption of new workers into manufacturing are many, not least because manufacturing still has a bias of more capital intensity. But a big and persisting problem is that of skills mismatch. The education sector is failing potential employers, because the students who come out of schools and colleges are not employable. No wonder the bulk of unemployment is among the youth. A whopping 83 percent of the unemployed are youth i.e. under the age of 34. Above that age the chance of getting a job improve dramatically, even though the job may not be high paying. The youth constitute 27 percent of the population and due to the ageing process, this number will decline to 23 percent by 2036. Since India’s gross enrollment rate in colleges will keep rising, those youth will not be part of the labour force, and hence LFPR might decline somewhat.

But youth unemployment remains a stubbornly difficult challenge. It tripled from 5.7 percent to 17.5 percent in 2019 and decline a bit to 12.1 percent in 2022. The problem of youth unemployment is inversely correlated with education. In 2022, the youth unemployment rate for those who cannot read or write was 3.4 percent, for those who have secondary or higher-level education was 18.4 percent and those who are graduates it was 29.1 percent. This is the highest countrywide educated youth unemployment we have ever had. The causative factors are many, but chief among them is lack of skill building and vocational training. It is the failure of our teaching and skill imparting institutions. Since a lot of vocational skills and learning happens on the job and the shop floor, it is time to aggressively pursue the apprenticeship program, which is portable across the country. It should not force the apprentice employer to make the job holder permanent.

There are many useful nuggets of insights and information in the ILO-IHD report as also recommendations for policy makers. The main thrust of policy is to incentivise investment which maximises jobs per dollar, not just exports or total production value. Simultaneously the National Education Policy 2020 can be oriented to focus much more on employability, skill intensity, collaboration with employers and experiential learning. The next decade should be a decade of investing in enhancing India’s human capital.

(Dr. Ajit Ranade is a noted Pune-based economist) (Syndicate: The Billion Press)