Revealing the Real Picture Behind India’s Unemployment Problem

BA Kiya, MBA Kiya, 
Lagta Hai Sab Kuch Aiwen Kiya 
— With due apologies to Sampooran Singh Kalra.

The rate of unemployment as of February 2021 stood at 6.9%. This doesn’t sound very high. But the calculation of this figure misses out on a very important nuance. 

Those who follow me on Twitter know that I go by the moniker of Shikshit Berozgar (or educated unemployed). This is basically a joke I crack on myself on not being gainfully employed with a corporate, in the traditional sense of the term.

Nevertheless, on a more serious note, unemployment is a very serious problem in India. In fact, in the recent past, #modi_rojgar_do has been a top Twitter trend. This gives me a reason to look into this economic and social illness which impacts the society at large and the youth in particular, very badly. Of course, nothing is what it seems, which is why it is important to go into details.

I will use unemployment data published by the Centre for Monitoring Indian Economy, which has now been available for a period of five years, hence, will give us a decent long-term trend.

Let’s first look at the unemployment rate over the last five years, starting from January 2016 onward.

Source: Centre for Monitoring Indian Economy.

What does the chart tell us? The unemployment rate has varied quite a bit between January 2016 and February 2021. As of February 2021, the rate of unemployment stood at 6.9%.  Hence, things have improved from April 2020, when the unemployment rate hit a high of 23.52% and nearly one-fourth of the labour force was unemployed. This was when the lockdown enforced by the government was at its peak.

Nonetheless, the unemployment rate is still very high in comparison to the low of 3.37%, which was achieved in July 2017. It needs to be mentioned here that the Goods and Services Tax (GST) came into effect from July 1, 2017 and has been responsible for increased formalisation of the Indian economy. Hence, many informal businesses have been shut down. Formal businesses tend to be more mechanised and hence, employ fewer people, can be one possible explanation for the higher unemployment.

Moving forward if we were to read only the above chart, we are likely to come to the conclusion that the negative economic impact of the covid pandemic and the general slowdown in the Indian economy, over the years, are gone. But there is some nuance we are missing out on here.

While I have shared the unemployment rate in the above chart, I haven’t told you how the term unemployment is defined. A person is categorised as unemployed “because of a lack of job and where such a person is actively looking for a job”. The word to mark here is actively. At the risk of repetition, a person can be categorised as unemployed only if he doesn’t have a job and is searching for one.

As the Centre for Monitoring Indian Economy (CMIE) puts it, a person categorised as unemployed, “should be unemployed on the date of the survey, should be actively looking for a job in the 100 hundred days (approximately three months) preceding the date of the survey and should be willing to take up the job if a job is found.”

They further point out: “A person is considered to be actively looking for a job if such a person has contacted potential employers for jobs, contacted employment agencies, placement agencies, appeared for job interviews, responded to job advertisements, online employment sites, made applications, submitted resumes to potential employers or reached out to family members, friends, teachers to look for jobs from them.”

To put it in short, waiting for a job offer to come, is not considered as actively looking for a job.

It will soon become clear why have I gone into such detail trying to explain what being unemployed exactly means. First let’s take a look at the following chart, which plots the labour participation rate.

Source: Centre for Monitoring Indian Economy.

In fact, this chart is at the heart of the issue of Indian unemployment. As can be seen from it, the labour participation rate has been falling over the years. It was at a peak of 48.47% in May 2016 and fell to a low of 35.57% in April 2020. In February 2021, it stood at 40.5%.

Now what does this mean? Labour participation rate is the ratio of the labour force to the population greater than 15 years of age. And what is the labour force? As per CMIE, labour force consists of persons who are of 15 years of age or more, and are employed, or are unemployed and are actively looking for a job.

What has happened in the last five years? Let’s take the case of May 2016. In May 2016, the population greater than 15 years or what is referred to as working-age population, stood at 94.58 crore. Of this, 45.84 crore individuals formed the labour force, which means they were either employed or were unemployed and actively looking for a job. Hence, labour participation rate, which is the ratio of the labour force to the population greater than 15 years of age, was at 48.47%.

Now what’s the scene in February 2021? The population greater than 15 years stood at 105.80 crore. The labour force stood at 42.85 crore. This implies a labour participation rate of 40.5%.

In simple English, in February 2021, a smaller proportion the working age population is working or is unemployed and looking for a job, than was the case in May 2016.

The working age population, between May 2016 and February 2021, has gone up from 94.58 crore to 105.8 crore, this implies an increase of 11.22 crore.

Nevertheless, the number of people employed or unemployed and looking for a job, that is the total labour force, has fallen from 45.84 crore to 42.85 crore, or by 2.99 crore.

So, the working age population has increased by 11.22 crore between May 2016 and February 2021, but the total labour force as such has fallen by 2.99 crore. This is India’s real unemployment problem, which isn’t reflected in the unemployment rate, and needs a lot more digging.

What is happening here? A very small proportion of the population is studying more and some may also be retiring early. But that hardly explains the scale of this problem. The explanation lies in the fact that more people are simply dropping out of the labour force, because they are not able to find jobs over a period of time and hence, are not actively looking for jobs anymore.

Let’s look at how the situation has changed post-covid. In January 2020, before covid had struck, the working age population had  stood at 103.13 crore. By February 2021, this had jumped to 105.8 crore, a jump of 2.67 crore. Meanwhile, the labour force as of January 2020 stood at 44.24 crore. It has since shrunk to 42.85 crore, by 1.39 crore. So, post-covid, the working age population has gone up by 2.67 crore, but the workforce has shrunk by 1.39 crore.

Clearly, covid has only accentuated the larger unemployment trend India was already going through. In a sense, many jobs have simply been destroyed, leading to people dropping out of the workforce and in the process, making the overall unemployment number look much better than it actually is.

In the conventional definition of unemployment, individuals who are not actively looking for a job and drop out of the workforce, do not get counted, but ultimately, they are also not gainfully employed. And that’s where the problem lies and explains hashtags like #modi_rojgar_do.

If you still haven’t got it, let me share a very simple example. Let’s say the labour force has 100 individuals. The working age population of people above 15 years of age comprises 200 individuals. Hence, the labour participation rate is 50%. Let’s further assume that the unemployment rate is 10%. This means that 10 individuals are unemployed (10% of 100) and are actively looking for a job.

These individuals do not get a job for a while and let’s further assume that four of them stop actively looking for a job. Given this, the labour force size will fall to 96 (100 minus 4). Those categorised as unemployed will fall to six (10 minus 4). The rate of unemployment will fall to 6.25% (6 expressed as a percentage of 96).

So, the rate of unemployment will come down from 10% to 6.25%, nevertheless, the number of people without jobs will continue to remain at 10. The labour participation rate will come down to 48% (96 expressed as a percentage of 200), from the earlier 50%.  This is how the maths will work out.  This is precisely what is happening in India, of course, at a much larger level.

Now let’s take a look at the unemployment rate and labour participation rate among the youth, that is those aged between 20 and 29. This is where things get very interesting.

Source: Author calculations using data from Centre for Monitoring Indian Economy.

As can be seen from the above chart, the unemployment among youth, which was always on the higher side, has gone even higher, in the last five years. It peaked at 40.41% in April 2020, and in February 2021, was still at a very high rate of 25.68%.

What this means is that one in every four Indian youths is unemployed and is actively looking for a job. And that is clearly bad news. The situation has deteriorated over the last five years.

Now let’s take a look at the labour participation rate among youth.

Source: Author calculations using data from Centre for Monitoring Indian Economy.

As is the overall trend, the labour force participation rate among youth has come down dramatically over the years. It peaked at 53.18% in May 2016 and in February 2021, it stood at 45.42%. Of course, one explanation for this is lies in youth spending more years in college. Nevertheless, the broader explanation for this lies in youth dropping out of the labour force given their inability to find a job. Also, even those who are in college are actively looking for a job. Or sometimes college is just an excuse to postpone actively looking for a job. These are points that need to be remembered.

What explains this situation? One reason for this lies in the fact that the investment to gross domestic product (GDP) has fallen over the years from a high of 34.31% of the GDP in 2011-12 and is expected to be at 30.91% in 2020-21. Hence, with a lower investment in the economy, fewer jobs are being created.

Over the last few years, the government has made attempts at formalizing the economy through a harebrained measure like demonetization and a half-baked measure like goods and services tax.

As an August 2018 Mint Street Memo published by the Reserve Bank of India points out:

“The MSME ( micro, small and medium enterprises) sector has witnessed two major recent shocks, viz., demonetisation and introduction of goods and services tax (GST). For instance, contractual labour in both the wearing apparel and gems and jewellery sectors reportedly suffered as payments from employers became constrained after demonetisation (RBI, 2017). Similarly, the introduction of GST led to increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net.”

This has hit jobs badly as well.

It needs to be understood here that many employees of MSMEs that shut down did not come under the income tax slab. Nevertheless, whenever they make a purchase as a consumer, they do pay some form of indirect tax. This is a point those celebrating the increasing formalisation of the economy, seem to miss out on.

Let’s take a look at a few more trends, starting with female labour participation rate.

Source: Centre for Monitoring Indian Economy.

This is a very disturbing chart. The female labour participation rate has crashed to just 10.89%. In urban India, it was at 6.56% in February. This means more and more women are getting educated but are not working in salaried jobs. In fact, this is a trend that started before 2014 and it has only accentuated since then. As per surveys carried out by the Labour Bureau, the female labour participation rate in 2012-13 and 2013-14 stood at 25% and 28.7%.

Economists have struggled to come up with an explanation for this. One possible explanation lies in the fact that the number of jobs available haven’t grown at the pace that could accommodate the new individuals, both men and women, entering the workforce. Hence, in a patriarchal society, men in deciding positions, have offered jobs to other men. This needs more research, and I will write about it in detail in the days to come.

Another interesting trend is the unemployment rate depending on the education level. The following chart plots the unemployment rate by level of education for February 2021.

Source: Centre for Monitoring Indian Economy.

While I have only shared data for February 2021, this is a trend that has played out over the years.

World over there is a wage premium for education, which means, the more educated you are, the higher your income is likely to be. That might be the case in India as well, but along with that we have another very interesting phenomenon.

The rate of unemployment increases with the number of years of education, with one in every five graduates being unemployed. The fact many graduates are unemployed again explains the popularity of trends like #modi_rojgar_do. The graduates have the time, the energy and the internet bandwidth, to get such an important issue to trend.

The larger explanation for this lies in the fact that graduates tend to wait for that good job, which never really comes. That is a choice that the less educated don’t make.

Let’s now look at a chart which plots the rate of unemployment across different age brackets, for the month of February 2021.

Source: Centre for Monitoring Indian Economy.

The rate of unemployment is highest at the younger ages and as one ages, it comes down dramatically.

The high rate of unemployment for the ages between 15-19 can be explained by the fact that more individuals now spend time in school and go to college. But what about rates beyond that bracket?

The interesting thing is that rate of unemployment in the age category 25-29 stood at 11.53% in February 2021. For the age group, 30-34, it was at only 1.32%. While I have only shared data for February 2021, this is a trend that has played out over the years.

What’s happening here? It seems this is a problem that isn’t just peculiar to India and is prevalent in other parts of the world, including South Africa, Egypt and countries in the Middle East.

A part of the problem, like most disappointments in life, is a mismatch of expectations that the unemployed youth have, and the situation as it prevails.

As Abhijit Banerjee and Esther Duflo write in Good Economics for Hard Times:

“They [i.e. the youth] were told that if they studied hard they would get a good job, meaning mostly a desk job or a teaching job. This was closer to the truth in their parents’ generation than it is today… The growth in government jobs slowed and eventually stopped in the face of budgetary pressures.”

In fact, in the Indian case, the pace of creation of government jobs has slowed down over the years. As far as central public sector enterprises (CPSEs) are concerned, the total number of employees has gone down over the years.

Take a look at the following table.

Employment at CPSEs

Source: Public Sector Enterprises Survey 2018-19.

The number of employees in 2009-10 had stood at 14.90 lakh. It has fallen to 10.33 lakh in 2018-19. This is largely true of the government as a whole. But the fascination for a government job still remains strong and there is an economic incentive for it as well.

As can be seen from the above table, while the number of jobs in CPSEs has come down, the emoluments have gone up. In 2009-10, it stood at Rs 5.89 lakh. In 2018-19, it had jumped to Rs 14.78 lakh. And this is just the emoluments. There are other things that come with a government job, employment guarantee for life, access to good medical facilities, pension in many cases, and so on.

This explains why every few months we get stories in the media about graduates, engineers, post graduates and even PhDs, applying for low-level government jobs like that of peons, sweepers etc.

As Banerjee and Duflo write:

“There are small fraction of jobs that are much more attractive than the rest, for the reasons having nothing to do with productivity. The best example are government jobs… In the poorest countries, public-sector workers earn more than double the average wage in the private sector. And this is not counting generous health and pension benefits.”

What this ensures is that many individuals spend the best part of their youth preparing and writing exams to get into a government job. As Banerjee and Duflo write: “These young people are mostly waiting for jobs they will not get… If the government jobs stopped being quite so desirable, the economy would gain many years of productive labour.”

But given that there are very few government jobs going around at the end of the day, the futility of it all, ultimately hits individuals who cannot see a world beyond a government job. What this basically means is that as people age, they eventually do start working, once their overall expectations fall in line with what is on offer.

So, other than the fact that there aren’t enough jobs going around for anyone, the love of a government job also seems to hold people back.

To conclude, you won’t get to read this anywhere in the mainstream media. Hence, it is very important that you continue supporting my work.

PS: This is not to say that all was well before 2014. It clearly wasn’t. As the Report on Employment-Unemployment Survey of 2013-14 points out: “Full employment was available to only 63.4 per cent of self-employed persons, the figure being as low as 42.1 among ‘casual’ workers.” The government has done away with the publishing of this report, since then. Such big structural problems don’t manifest overnight. If not tackled on a war footing, they only get worse with time and which is what seems to have happened.