Employment rate could get worse as govt won't spend, private sector can't

The unemployment rate dropped to 6.4 per cent in the week ended September 20. This is the lowest weekly unemployment rate seen in a long time. But, this is hardly a cause for celebration.

Other weekly labour market metrics for September so far indicate deterioration in conditions compared to the situation in August and also compared to the earlier months since the recovery. August itself had seen stagnation in the recovery process from the precipitous lockdown-induced fall of April. Deterioration from the August stagnation implies a possible slipping away of the recovery process seen till recently. This is what emerges from the trend in the labour participation rate and the employment rate. 

The average labour participation rate (LPR) in the first three weeks of September was 40.7 per cent. The 30-day moving average as of September 20 was 40.3 per cent. These compare poorly with the 40.96 per cent pencilled in August. The LPR seems to have peaked a month ago in the week ended August 16. Since then, it has dropped to a significantly lower level. The average LPR from June through mid-August was almost 40.9 per cent. This average has dropped to 40.45 per cent for the period mid-August through mid-September.

A falling labour participation rate indicates that a smaller proportion of the working-age population is employed or is unemployed and looking for employment. People who are employed or are unemployed but actively looking for employment together make the labour force. A shrinking labour force compared to the total working-age population is a sign of a deteriorating labour market. It indicates that people are so discouraged by the conditions that they prefer to sit out and not participate in the jobs market.

Besides the decline in the labour participation rate, we see a fall in the employment rate. This is the proportion of the working-age population that is employed. The employment rate had hovered between 39 and 40 per cent during 2019-20. It averaged at 39.4 per cent for the year. The rate fell to 27.2 per cent in June but recovered to 37.6 per cent in July. Then, in August it fell to 37.5 per cent.

The trend in September is somewhat mixed. The average employment rate during the first three weeks of the month, at 37.9 per cent, is substantially higher than the rates seen recently. But, the slope is negative since the recovery is distinctly negative. After the April fall, the employment rate climbed up to a maximum of 38.4 per cent in the week ended June 21. Since then, it has slid down a zig-zag gradient. The rate falls for a week or two before recovering a bit and then it falls again. But, each recovery has been lower than the earlier and the falls are steeper.

This negative trend in the employment rate since June 21 is a source of anxiety. At 37.5 per cent, the employment rate was nearly two percentage points lower than the average of 2019-20. And, the negative trend implies that it could fall further. India’s employment rate has been falling at a little over one percentage point a year since 2016-17. The two percentage point fall so far this year with a potential to fall further indicates that the recovery from the impact of the lockdown is incomplete and India could lose some of the gains from the hit that has been made so far.

The two principal reasons the employment rate could fall further are: First, the government’s predilections and second, the private sector’s disincentives. The government seems predisposed to fiscal prudence even during the extraordinary times of today. Given its reluctance to spend aggressively or even indicate its intentions to spend, the private sector lacks the business argument in favour of expanding or investing into capacity creation or creation of new jobs.

Given the sharp compression of demand as a consequence of the lockdown, private enterprise can be expected to shrink its spending budgets in all possible ways. The impact of this will not be limited to the people it employs directly but it will also be on the jobs in businesses that serve these enterprises. If a large company sharply reduces its spending on travel, for example, it not only leads to a direct loss of people within the company who handle the travel plans of its executives but also jobs in travel services companies. The impact of private enterprise shrinking its business is, therefore, much larger than the observed fall in their wage bill or head count. Exhorting companies to not retrench its staff in the face of the lockdown was, therefore, facile.

While the lockdown has been lifted in many ways in many areas, the economy is still functioning at a lower capacity than before the lockdown. Recent labour statistics suggest that India could slip from this incomplete recovery instead of continuing on a recovery path unless the government engineers a well-thought recovery plan.

The fall in the unemployment rate seen in recent weeks is meaningless and misleading in the face of a falling labour participation rate and a falling trend in the employment rate.

The writer is MD and CEO, CMIE P Ltd