Book excerpt: The real story behind India’s low unemployment

From late September to early October 2016, there was a spate of reports in the media which said that unemployment in India was at a 5-year high.

Indian economic agencies do not measure the rate of unemployment on a regular basis. In the United States, a regular unemployment figure is released every month. In India, this happens now and then when some big surveys are carried out. In mid-September 2016, the Labour Bureau, based out of Chandigarh, released the Report on the Fifth Annual Employment-Unemployment Survey (hereafter referred to as the report).

Using this report, large sections of the media reported that unemployment in India during 2015-2016 was at a five-year high of 5 percent. The Press Trust of India in a news report said: “The figures could be an alarm bell for the Bhartiya Janata Party (BJP)-ruled government at the Centre.” The Times of India said: “It shows a continuation of a distressing job situation.”

What these statements clearly tell us is that the media was right and wrong at the same time. Furthermore, should a country be bothered about a 5 percent rate of unemployment, even if it is at a five-year high?

Let’s consider the rate of unemployment reported when the previous survey was carried out by the Labour Bureau. The last survey was carried out in 2013-2014, and the rate of unemployment then was 4.9 percent. Given this, there has hardly been any jump in the rate of unemployment between then and now.

Vivek_380So, should that get us worried, even if the unemployment is at a five-year high? In 2012-2013, the rate of unemployment was 4.7 percent. In 2011-2012, it was at 3.8 percent, and in 2009-2010, it was at 9.3 percent. The Labour Bureau did not publish any report in 2014-2015 and 2010-2011.

So things in 2015-2016 on the unemployment front were a little worse in comparison to 2011-2012, but a lot better than in comparison to 2009-2010. Also, it is important to understand that at any point of time there will be some unemployment in any economy. People will be in between jobs. Some people might have got fired. Some companies might have shut down, rendering people unemployed. Some businesses could be seasonal. Some skill sets which were in demand might get out- dated, and so on.

For a labour market to have flexibility, some unemployment is necessary. A labour market which has 100 percent employment will make it difficult for employers to hire people. Once these factors are kept in mind, a rate of unemployment of 5 percent is not that high at all.

With that distinction out of the way, how worried should we be about India’s so-called high rate of unemployment? Answer: We should be very worried. But isn’t that a contradiction to what I have said until now? Yes, it is. Allow me to explain.

What the media did not tell us in the news reports is how unemployment is defined. For how long does one need to be unemployed to be counted as unemployed? And this is where things get interesting.

The Labour Bureau essentially measures unemployment using two methods. The first method is called the Usual Principal Status (UPS) Approach. In this approach, “the major time spent by a person (183 days or more) is used to determine whether the person is in the labour force or out of the labour force”.

Hence, under this method, anyone who has a job for 183 days or more during the course of the year is considered employed. What does this mean? It means that an individual might have been unemployed for close to half the year but still would be considered to be employed.

As per this method, the rate of unemployment was 5 percent. The rate was 4 percent for males and 8.7 percent for females. These were the figures that were highlighted in the media.

The second method is called the Usual Principal and Subsidiary Status (UPSS) Approach. Here, “a person who has worked even for 30 days or more in any economic activity during the reference period of [the] past twelve months is considered as employed under this approach”.

Hence, an individual might not have had a job for 11 months during the course of a year and still would be considered employed. As per this approach, only 3.7 percent of the workforce was unemployed. The rate was 3 percent for men and 5.8 percent for women.

What this clearly tells us is that the definition of unemployment is fairly broad and, given that, just looking at the rate of unemployment will not give us a clear picture. Take a look at Table 4.2, which gives us a much clearer picture.

What does the table tell us? Only 60.6 percent of the individuals who were available for work all through the year were able to get work for the entire year. In rural areas, this figure was at 52.7 percent. This basically means that close to half of rural India cannot find work for all 12 months of the year.

Table 4.2: All-India percentage distribution of persons available for work for 12 months (UPSS approach).

Group Rural Urban All-India
Worked for 12 months 52.7 82.1 60.6
Worked for 6-11 months 42.1 13.2 34.4
Worked for 1-5 months 1.4 0.4 1.1
Did not get any work 3.8 4.3 3.9

Source: Report on the Fifth Annual Employment-Unemployment Survey, 2016.

In urban India, 82.1 percent of the individuals who were available for work all through the year were able to find work for the entire year. This explains why people migrate from rural areas to urban areas. Other than the wages being higher, the chances of getting regular work are also better in urban areas.
In fact, this is the real thing that the media reports should have talked about. But then unemployment at a five-year high was a simplistic (not to mention sexier) headline.

Furthermore, the situation on this front is more or less the same since the last survey was carried out, in 2013-2014. As per the last survey, 60.5 percent of individuals who were available for work all through the year had been able to find work for that entire year. In rural areas, this figure was at 53.2 percent. The figures are more or less similar to those of the latest survey.

Indeed, this is where the big worry for India lies. That a huge proportion of the population is not able to find work all through the year.

Another factor that was not highlighted in the media is that India is a land of reluctant entrepreneurs. Why do I say that? Look at Table 4.3.

Table 4.3: Category-wise employment figures (in percentage)

Approach Self-employed Wage/Salary Earners Contract Workers Casual Labourers
UPS 46.6 17.0 3.7 32.8
UPSS 47.2 16.2 3.5 33.1

Source: Report on the Fifth Annual Employment-Unemployment Survey, 2016.

Close to half of the workforce is self-employed. Some commentators have romanticised this in the past and said that India is a land of entrepreneurs. That is basically rubbish! These people would switch to other jobs if jobs were available in the first place. Why do I say that? Take a look at Table 4.4.

Table 4.4: Category-wise percentage break-up of earning levels

Self-Employed Salaried/ Regular Wages Contract Workers Casual Labourers
Percentage of Labour Force 46.6 17 3.7 32.8
Monthly Earnings
Up to Rs. 5,000 41.3 18.7 38.5 59.3
Rs. 5,001-7,500 26.2 19.5 27.9 25
Rs. 7,501-10,000 17.4 19 20.3 12
Rs. 10,001-20,000 11.1 23.6 11 3.5
Rs. 20,001-50,000 3.5 17.7 2.1 0.3
Rs. 50,001-1,00,000 0.4 1.4 0.1 0
Above Rs. 1,00,000 0.1 0.2 0 0

Source: Report on the Fifth Annual Employment-Unemployment Survey, 2016.

What does this table tell us? It tells us that the regular wage/salaried class of workers make the maximum money. Take the case of the self-employed. More than two-fifths of the self-employed make only up to Rs. 5,000 per month. In the case of the salaried, this is much lower, at 18.7 percent.

Hence, it doesn’t take rocket science to figure out that, if jobs were available, many of India’s reluctant entrepreneurs would gladly take them on. There is another reason for this. Take a look at Table 4.5.

This table tells us very clearly that around 63 percent of the self-employed are able to find regular work. In comparison, close to 93 percent of the salaried and those on wages are able to find work all through the year. In the case of casual workers, the situation is even worse, with only around 42 percent being able to find work all through the year.

And these are India’s main problems when it comes to unemployment—the lack of regular work and formal jobs. Hence, looking at the unemployment statistics in isolation doesn’t make much sense. Over and above this, there are around one million individuals entering the workforce every month.

Table 4.5: Category-wise percentage distribution of persons available for work for 12 months

Group Self-Employed Wage/ Salaried Contract Casual
Worked for 12 months 63.4 92.9 71.5 42.1
Worked for 6-11 months 35.3 6.9 27.3 56.2
Worked for 1-5 months 1.3 0.1 1.2 1.6

Source: Report on the Fourth Annual Employment-Unemployment Survey, 2014.

This trend is expected to continue over the next 15 to 20 years. The chances of individuals who are currently entering the workforce finding proper formal jobs remain low. Of course, they will manage to do something and earn something. This would mean that the overall unemployment number will remain low, as is the case currently. But most of the individuals entering the workforce won’t be able to find regular work.

Excerpted with permission from Equitymaster Agora Research from the book India’s Big Government: The Intrusive State and How It’s Hurting Us.

Author : Vivek Kaul, Publisher: Equitymaster Agora Research, Pages: 793

(Vivek Kaul is an author and a columnist based in Mumbai. This is his fourth book.)

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Updated Date: Apr 19, 2017 17:23:20 IST

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