The jobless growth narrative is a myth

Published: March 1, 2019 2:44 AM

Even if the economy is at a steady state equilibrium, a certain level of unemployment will always exist, which is usually frictional or structural in nature. (Representational photo)

By Ranveer Nagaich

The extent of job creation in India has always been subject to debate. At present, the narrative being touted by some is that India’s growth, over past 4-5 years, has been of ‘jobless growth’. The assertion here is that no new jobs have been created in India over the past five years. The piecemeal leak of the Periodic Labour Force Survey (PLFS) report has added fuel to this fire. The Centre for Monitoring Indian Economy (CMIE), through its surveys, has been painting a picture of rising unemployment as well.

The assertion and arguments for jobless growth defy common sense, with the economy growing at 7%-plus. We also know that the investment activity has been subdued, with the investment-to-GDP ratio (at current prices) staying flat at 28.7% in 2015-16 to 28.6% in 2017-18. Moreover, the growth of non-food bank credit offtake has also plummeted in the recent years. Therefore, an argument for jobless growth would imply that entirety of India’s growth is driven by a rise in total factor productivity, for which no empirical evidence has been provided by any of the claimants.

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One also needs to understand the different types of unemployment that exist. Structural unemployment occurs when traditional industries decline due to the advent of new technology. Cyclical unemployment occurs with downturn or disruption in markets. Frictional unemployment occurs when a job-seeker is between jobs. Furthermore, we also need to be aware of the concept of the natural rate of unemployment. Even if the economy is at a steady state equilibrium, a certain level of unemployment will always exist, which is usually frictional or structural in nature.

With that in mind, there is, however, a method through which we can empirically estimate the extent of job creation in India. This can be achieved through calculating employment elasticities.

Elasticities measure the response of one economic variable in response to changes in another. Formally, employment elasticity is the percentage change in employment divided by the percentage change in GDP growth.

The estimation of employment elasticities in India has been problematic due to the lack of a continuous time series on employment. Earlier studies have estimated employment elasticities with respect to total output. These studies show that the overall elasticity of employment with respect to output has been falling since the 1990s. Whilst this may be true, it masks important sectoral differences. With the labour force exiting agriculture, the shift of labour from low-paying jobs with low productivity to relatively better paid and more productive jobs will be masked. Hence, the number of non-agriculture jobs being created serves as an important barometer of employment generation in India. The need is to generate sector-wise estimates of labour elasticity to understand the true extent of job creation in India.

As part of the world KLEMS (Capital, Labour, Energy, Materials and Services) project, the Reserve Bank of India (RBI) has been maintaining the India KLEMS database, which provides us a time series on employment from 1980-81 to 2015-16. The gross value added (GVA) by industry is also available in this database.

This allows us to estimate sector-wise employment elasticities. Regressing the growth rate of employment over sector, GVA provides us with the estimates of employment elasticities. This, in turn, allows us to determine the extent of job creation, by sector, given the sectoral growth rate. Our sample runs from 1993-94 to 2015-16. Labour force data has been taken from the International Labour Organisation (ILO). A review of literature reveals that the estimated elasticities are similar to those estimated by other studies, using the same dataset. The estimates are also close to the elasticities provided in the 12th Five Year Plan, despite using a different dataset. Therefore, we can be reasonably assured of the robustness of these estimates.

With the KLEMS database providing data until 2015-16, it is possible to project employment generated using the estimated elasticities and the sectoral growth rates, as provided by the Central Statistics Office (CSO). Therefore, implied employment growth has been calculated for the years 2016-17, 2017-18 and 2018-19. To get a sense of labour exit from agriculture, it has been assumed that agricultural labour decreased by 2% per annum, the same rate of decline witnessed between the two thick National Sample Survey (NSS) rounds on employment in 2004-05 and 2011-12.

According to our analysis, approximately 24 million non-agriculture jobs have been created in the three years between 2016-17 and 2018-19. This is an average of 8 million per year. Clearly, the jobless growth narrative is, indeed, a myth. The construction sector, with the highest elasticity, has benefited from the current government’s push towards infrastructure creation. The services sector has added about 12 million jobs in these three years as well. This indicates that enough jobs are being created for new entrants to the labour market.

However, this is not to say that India’s job is done. In fact, 43% of our population is still employed in the agriculture sector. We need to further accelerate growth so that the labour force flowing out from agriculture finds formal, well-paying jobs. This is perhaps our biggest challenge. Blue-collar jobs, in and around agriculture—food processing, transport, aggregation, mechanisation—are potential areas that can absorb the labour force exiting agriculture. Apprenticeships need to be expanded as well. Reforms in labour laws are still needed. NITI Aayog’s Strategy for New India @ 75 contains several recommendations in this regard. Codification of labour laws needs to be completed at the earliest. The National Policy on Domestic Workers needs to be operationalised. Common facilities for MSMEs in labour-intensive sectors should be pursued as well. India also needs to prepare its labour force in new and emerging technologies, colloquially known as Industry 4.0. These reforms, amongst the others suggested in Strategy for New India @ 75, should ensure that India creates an adequate number of jobs, both for labour exiting agriculture and new entrants to the labour force.

-The author is Young Professional to Vice-Chairman, NITI Aayog. Views are personal

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