Good news: Unemployment is rising

The unemployment rate has been crawling up recently. I consider this to be a good sign because this seems to reflect a rise in the labour participation rate.

In the recent past, ie since April 2017, the unemployment rate has been below 4 per cent. In any mature economy such a low rate could be considered as close to full employment. But, we do not have full employment. Our low and falling unemployment rate is a reflection of low and falling labour participation rate.

Evidently, most Indians choose not to work.

Labour participation rate is a ratio of all adults willing to work, whether employed or unemployed, to the total population. This ratio was 48 per cent in January 2016. It fell suddenly below 45 per cent in November 2016. Since then, it has fallen almost steadily to reach a low of 43 per cent in July 2017. 

World Bank statistics show that there were only seven countries in the world that had a labour participation rate of 43 per cent or less. These are Iraq, Puerto Rico, Moldova, Syria, Timor-Leste, Samoa and Jordan. 

Our labour participation rate was 54 per cent according to the World Bank's modeled ILO estimate. Even at this much higher estimate, our LPR ranked 35 from the bottom among 200 countries. Labour participation rate in China is 71 per cent. The world average is 63 per cent.

International comparisons make India's low labour participation rate very worrying. High income countries had a labour participation rate of 60 per cent, upper middle income countries had a higher participation rate at 66 per cent and low income countries had an even higher rate of 76 per cent. 

A sub-component, the lower middle income group of countries (which includes India) had a labour participation rate of 58 per cent. Obviously, India's 54 per cent brings down the average for this group. Other major countries in the group include Indonesia with a labour participation rate of 67 per cent, Pakistan (54 per cent), Nigeria (56 per cent), Bangladesh (62 per cent) and Philippines (65 per cent).

The CMIE-BSE partnership that rides upon CMIE's Consumer Pyramids Household Survey to estimate unemployment has shown a much lower labour participation rate. Most importantly, this large and fast-frequency survey throws light on the current changes in India's labour markets.

Weekly estimates indicate that the labour participation rate may rise (or at least stop falling any further) in August. This is good news. It indicates that more people are willing to work. It is a different matter whether they find jobs or they remain unemployed. At least initially, they may not find work. This could raise the unemployment rate for some time.

The unemployment rate is a ratio of the unemployed to the labour force. The unemployment rate was 8-9 per cent during the first nine months of 2016. Then, it fell to less than 7 per cent and then the fall continued to reach 3.3 per cent in July 2017.

During August, the unemployment rate has been rising. It was 3.5 per cent in the first week and then 4.5 per cent in the second week. In the third week, the unemployment rate rose further to 4.6 per cent. Labour participation, which had fallen to 43 per cent by July 2017, averaged 44 per cent in the first three weeks of August.

The increase in unemployment could indicate a disappointment, but the concomitant rise in the labour participation rate reflects hope.

It is imperative that labour participation rises. A jobless growth is neither sustainable nor desirable. Beyond a point, low labour participation rates could render the high growth rates we take pride in, suspect. It is not possible to square sustained high growth with sustained low unemployment rates which is justified on the basis of low incomes. For long India has justified low unemployment rates with an explanation that Indians are too poor to remain unemployed for long. But, for how long can this be true when economic growth has been accelerating for the past 25 years?

If labour participation rate continues to fall from its abysmally low levels (as even the World Bank data shows) then accelerated economic growth is not possible.

Why do so many Indians choose not to work? And, why do Indians prefer government jobs over private ones by a huge margin? It would be too facile to say that Indians are lazy and rent-seekers by nature. The problem is in the lack of good jobs; in opportunities to work in a place where meritocracy rules and one can work hard with dignity and honesty for growth and prosperity. If such jobs are available in good numbers many more Indians will choose to work and the labour participation rates will rise to show this.


 

 

Every Tuesday, Business Standard brings you CMIE’s Consumer Sentiments Index and Unemployment Rate, the only weekly estimates of such data. The sample size is bigger than that surveyed by the National Sample Survey Organisation. To read earlier reports on the weekly numbers, click on the dates:

November 21, November 28, December 4, December 11, December 18, December 25, January 1, January 8, January 15 , January 22, January 29, February 4 , February 12, February 19, February 27, March 5, March 13, March 19, March 26, April 02, April 10, April 17, April 23, May 1, May 8, May 15, May 21, May 28, June 4, June 11, June 18, June 25, July 2, July 10, July 16, July 23, July 30, August 7, August 14

Methodology

Consumer sentiment indices and unemployment rate are generated from CMIE's Consumer Pyramids survey machinery. The weekly estimates are based on a sample size of about 6,500 households and about 17,000 individuals who are more than 14 years of age. The sample changes every week but repeats after 16 weeks with a scheduled replenishment and enhancement every year. The overall sample size run over a wave of 16 weeks is 158,624 households. The sample design is of multi-stratrification to select primary sampling units and simple random selection of the ultimate sampling units, which are the households.

The Consumer Sentiment index is based on responses to five questions on the lines of the Surveys of Consumers conducted by University of Michigan in the US. The five questions seek a household's views on its well-being compared to a year earlier, its expectation of its well-being a year later, its view regarding the economic conditions in the coming one year, its view regarding the general trend of the economy over the next five years, and finally its view whether this is a good time to buy consumer durables.

The unemployment rate is computed on a current daily basis. A person is considered unemployed if she states that she is unemployed, is willing to work and is actively looking for a job. Labour force is the sum of all unemployed and employed persons above the age of 14 years. The unemployment rate is the ratio of the unemployed to the total labour force.

All estimations are made using Thomas Lumley's R package, survey. For full details on methodology, please visit CMIE India Unemployment data and CMIE India Consumer Sentiment.

The creation of these indices and their public dissemination is supported by BSE. University of Michigan is a partner in the creation of the consumer sentiment indices.