Once adjusted for inflation, real purchasing power could remain lower than pre-pandemic levels for both urban and rural areas
By Anubhuti Sahay
Recent news on India’s labour market has been positive. Various employment outlook surveys indicate companies are likely to step up hiring activity over the next few quarters. Salary surveys indicate an annual increase of 7-9% for India Inc over the next 18 months, compared to a 9-10.5% increase in the five years leading to the pandemic. More people are now actively looking for jobs compared to two months ago, leading to an increase in the labour forecast participation rate (as per CMIE data).
With a high probability of 70% of the population inoculated by March 2022, the labour-market outlook is likely to improve further, especially in sectors like hospitality. An improved labour-market outlook bodes well for household purchasing power, which has risen since last year but is still below pre-pandemic levels. However, this reversal will be gradual, uneven, and extend into FY23.
Our analysis of the link between the labour market and purchasing power of a population indicates that normalisation is likely to take time. Three channels explain this link: a) the number of people employed, or the worker-to-population ratio (WPR), b) the quality of jobs they hold (skilled/lower skilled or regular wages versus casual/self-employed), and (c) the wages/salaries earned.
Based on various data sources, while job losses since Covid outbreak are reversing, the WPR (based on CMIE) is still lower by c170bps (as of August 2021) from the pre-pandemic level. This translates into a decline of over 6-8mn in the number of workers from February 2020 to August 2021, with c60% of job losses concentrated in urban areas. As the CMIE employment time series shows that the usual annual increase in worker population averages c1.5mn (July 2017-2019), a loss in the total number of workers since the start of the pandemic underlines the magnitude of the challenge facing the labour market. Medium and small firms will likely face a greater challenge after having already suffered a lot more than the formal sector.
A survey by ILO (over May 2020-January 2021, for three states accounting for almost 35% of MSME employment) concluded that almost 50% of enterprises laid off workers either temporarily or permanently as a coping strategy amid the pandemic. Other countries’ experience also indicates that WPRs are yet to reach pre-pandemic levels, despite relatively better vaccination coverage and a faster pace of recovery. India is unlikely to be an exception to this trend, especially as fiscal policy has been relatively more measured (rightfully so) than developed countries.
Second, there has been a shift in the employment trend from regular/salaried jobs to self-employment/casual labour. This is evident in the quarterly labour force surveys for the period ended December 2020 (latest available). The share of regular wages/salaried employees was lower by c130bps in December 2020 relative to pre-pandemic; the lost share was taken up by self-employed/casual labour/helpers in household enterprises. This shift is concerning as the wages of self-employed are usually estimated to be almost half of regular wage earners. The broad conclusion also ties in with CMIE data inferences, which underline a sharper reversal in rural job losses (relatively lower paying) than urban jobs. Interestingly, EPFO data has seen an acceleration in net monthly additions. On comparing cumulative additions over March 2020-June 2021 to the previous 15 months from November 2018-February 2020, we found that net additions grew by 5% (albeit lower than the 100% increase earlier). As employees enrolled under provident fund schemes have better security cover, the data indicates that the formalisation process has continued despite the pandemic. However, as EPFO data includes both formalisation of existing workers as well as new workers, the net impact on the WPR is difficult to ascertain.
Lastly, even as nominal wages increase, higher inflation can keep real purchasing power subdued. This is likely to be true for both rural and urban real wages. As noted above, various HR surveys indicate a rise in nominal wages and salaries for urban areas. Rural wages, on the other hand, are normalising after recording a spike in 2020 on labour shortage and then an upward wage revision by the government in the employment guarantee scheme. Once adjusted for inflation, real purchasing power could remain lower than pre-pandemic levels for both urban and rural areas. This is noteworthy as our analysis shows that in the last decade, higher real rural and urban wages took turns to support household consumption expenditure; from FY10-15, positive real rural wages supported household consumption expenditure, despite subdued urban real wages in the same period.
The baton was then passed to real urban wages from FY16-19, as real rural wages remained low. A re-emergence of this support might take time amid high commodity prices and ongoing supply chain disruptions. Real wages could improve in FY23 if inflation comes off and/or the usual pace of wage-increase is reinstated in both urban and rural areas. However, this will depend on the business environment; manufacturers are already facing challenges due to higher commodity prices. It is therefore important that policy support to create more jobs and improve economic activity continues to ensure a sustainable increase in purchasing power.
The author is Head, South Asia, Economics Research, Standard Chartered Bank