India’s employment paradox of the 21st century: An explanation
We saw a post-covid reversal of both positive and negative labour-market trends and the causes should be debated carefully
is chairman, Centre for Development Studies.
The covid pandemic is the great divide of the early 21st century. We compare conditions before and after 2020. This also applies to employment trends. The International Labour Organization-Institute for Human Development (ILO-IHD) India Employment Report released last month highlighted some curious paradoxical trends of the pre-pandemic period that were sharply reversed following the pandemic. Drawing on Periodic Labour Force Survey (PLFS) data and the earlier NSS Employment-Unemployment surveys, the report points out that there were some very slow but positive employment trends during 2000-2019 which were reversed after 2020. Three developments in particular are worth noting.
First, there was a pre-pandemic shift in workforce distribution from agriculture to the non-agricultural sector, a key structural transformation of the development process. Unfortunately, most of the additional employment was primarily in lowskill, poorly paid jobs in construction and services. The workforce transformation also lagged far behind the corresponding transformation of the structure of production. Nevertheless, the shift was a positive development.
The second was a shift from informal to regular employment in the organized sector, the best category of employment in India’s complex labour market. Informal jobs remained predominant, but the share of regular employment in total employment rose from 15% in 2000 to 24% in 2019.
The third positive development was a rise in labour productivity across all sectors, albeit with large variations. During 2000-2019, productivity increased the most in manufacturing (annually 6%), followed by services (5%), agriculture (4%) and construction (1%). Of course, rising labour productivity also meant that the labour requirement per unit of output was declining. It is not surprising that construction, where productivity growth was the least, is also the sector whose share in employment rose the fastest during this period.
Paradoxically, alongside these positive trends, there were also some serious negative developments. Thus, the Labour Force Participation Rate (LFPR), the proportion of India’s working-age population that is either working or available for work, declined from 62% in 2000 to only 50% in 2019. Similarly, the worker population ratio (WPR), the proportion of employed persons in the population, also declined from 62% to 50% (these aggregate numbers mask large gender differences, where the LFPR or WPR for women are much lower than for men). The unemployment rate, the proportion of population in the labour force who were openly unemployed, rose from 2% in 2000 to 6% in 2019.
Once the pandemic struck, the shock reversed all these trends. The share of agriculture in the workforce, which had been going down during the previous two decades, went up again in 2021 and remains higher even today (2023 PLSF survey) than in 2019. There has been a similar reversal of the rise in the share of regular wage employment, which remains lower today than in 2019. But along with the reversal of these positive trends, negative trends have also been reversed. The LFPR, which was declining till 2019, has since gone up. So has the WPR, while the unemployment rate has declined. How can these paradoxical trend reversals be explained?
For an answer to that question, consider the arcane details of how employment is measured in the PLFS. The market is segmented by conditions of work and earnings. The best job is regular wage employment in the organized or formal sector, followed by regular informal employment, casual work and self-employment (covering own account workers, employers and unpaid family workers). All those engaged in these economic activities are counted as employed.
During good market conditions, workers are able to move to better jobs and the reverse happens during adverse conditions. But these dynamics are not captured in aggregate employment or unemployment numbers. It has been argued that when conditions were improving, those ‘employed’ in miserable jobs for little or no pay at the bottom of the pyramid could afford to move out of the labour force, since others in the family were able to earn better. Also, getting education has been a major factor driving withdrawal from the labour force, especially for the youth. When urban non-agricultural employment opportunities collapsed with the pandemic, workers had to migrate back to rural areas as underemployed workers in agriculture, which acted as a shock absorber.
The declining workforce share of agriculture was reversed, as also the rising share of regular employment in the formal sector and productivity gains. The number of self-employed workers, especially unpaid family workers, had an upswell, and with that the LFPR and WPR improved while the unemployment rate declined. After all, unpaid work for a family farm is also counted as employment in the PLFS, no matter how odd that may be. These trend reversals have persisted and showed up in the 2023 PLFS too. It is still too early to tell whether it is an aberration in the near-term or a long-term structural reversal.
Finally, a major focus of the ILO-IHD report is the relationship between youth unemployment, education and skills. I have not got into these issues on account of space limitations, but would strongly recommend the report to interested readers. It is important because these are the factors, along with related policies, that will determine whether India reaps a demographic dividend or faces a demographic disaster in the decade ahead.
These are the author’s personal views
Self-employed workers had an upswell, especially unpaid family workers, and that could explain why labour force participation improved and the country’s unemployment rate declined.