You are here: Home » Opinion » Columns
Business Standard

Ajit K Ghose: Employment in a time of high growth

Clearing up a few basic misconceptions about the nature of unemployment and underemployment in India

Ajit K Ghose 

Ajit K Ghose

is a much-discussed subject today, as indeed it should be. Unfortunately, there are plenty of about the nature of in India, which often render the discussions pointless or misleading. For example, a period of slow growth of is often seen as a period of jobless growth when in reality it merely is a period of slow growth of labour force. Or, an observed decline (increase) in the rate of growth of between two periods is often interpreted to mean a slowdown (acceleration) in the pace of job creation when in reality it only reflects a deceleration (acceleration) in labour force growth. Or the rate of unemployment is taken to be an important indicator of labour market conditions when in reality unemployment is a luxury good that only the "rich and educated" can afford. Or a rise (fall) in wages is taken as an indicator of tightness (slackness) of labour markets when in reality wages are not determined through demand-supply equilibrium.

India's is a dual economy with surplus labour. Only a tiny proportion of the workers is in formal (i.e., in regular wage-paid jobs endowed with security and provisions for non-wage benefits and social protection) in government or in modern enterprises - public and private - which together constitute the organised sector. Another small proportion is in regular-informal employment, i.e., in regular wage-paid jobs with no provisions for security, non-wage benefits or social protection. Though mainly in households and small enterprises, which constitute the unorganised sector, such employees are also found in the organised sector. The bulk of India's workers are either self-employed or in casual in the unorganised sector. In these types of employment, there is a lot of scope for work-sharing; the same amount of work can be performed by a variable number of workers. Work-sharing is the mechanism through which surplus labour is accommodated; it manifests itself in underemployment of the employed. Unemployment is not an option for most workers who must work to survive even if the work they can find is not particularly remunerative. Growth of labour force, in the absence of matching growth of demand for labour, results in increased underemployment and not in increased unemployment.

Thus growth in India basically reflects labour force growth. Any observed slowdown or acceleration in growth, therefore, says nothing about changes in the pace of job creation. Also, unemployment reflects queuing for "good" jobs and as such tends to be low and confined to young educated persons from relatively well-off households. Finally, there is an excess supply of labour in both organised and unorganised sectors, in the organised sector because most workers outside it would prefer to be in it and in the unorganised sector because there is substantial underemployment of the employed. So wages cannot be determined through demand-supply equilibrium, which simply is not a possibility, and must be given exogenously. A change in wages, therefore, says nothing about tightness or slackness of labour markets.

Some of these points are well illustrated by the data presented in Table 1. These data refer to persons of working age (15-59 years) who are either in or are looking/available for for the major part of a year. These are the core workers whose conditions matter most; better conditions for the core workers mean lower labour force participation of non-core or secondary workers - children, older persons and those who seek for only a few days in a year. What do these data tell us? That growth tends to equal labour force growth; that unemployment rate is low and stable; and that unemployment is confined to the educated.

How, then, do we judge if conditions in 2012 were better or worse than what they had been in 2000? The short answer is: by examining changes in structure. A rise (decline) in the share of formal as also of organised sector in total means an improvement (deterioration) in conditions because such employees enjoy higher labour-incomes and better working conditions than those employed in the unorganised sector. A fall (rise) in the share of casual wage in total wage means improvement (deterioration) in conditions because wage earnings of regular employees are higher than those of casual employees. Independently of structural changes of this kind, moreover, a positive trend in output per worker in the unorganised sector also indicates improvement in conditions, as this means either a fall in underemployment or a rise in unit labour-income or both.

The data in Table 2 tell us that conditions actually improved very substantially between 2000 and 2012. The share of formal in total increased as did the share of organised sector And the share of casual wage in total wage declined. The data in Table 3 strengthen the conclusion: output per worker in the unorganised sector showed impressive increase and, consequently, incomes of the self-employed rose and casual employees experienced both decline in underemployment and rise in real wage. Not all was well, of course; the share of formal in organised-sector declined from 63 per cent in 2000 to 49 per cent in 2012, indicating deterioration in average job quality in the sector. Nevertheless, the gaps in labour-incomes and working conditions between the sectors remain wide.

Rapid economic growth (7.2 per cent per annum) combined with slow growth of population (1.6 per cent per annum) to produce substantial improvement in conditions during 2000-12. But there is a long way to go; conditions were still very poor in 2012. The slowdown in growth since then is a matter of grave concern.

The writer is, currently, a honorary professor at the Institute for Human Development, New Delhi, and, formerly, Senior Economist at the International Labour Office, Geneva