India’s jobs crisis, the macroeconomic reasons

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Last Updated26/12/2023

India faces a persistent jobs crisis, pointed by the official data and on-the-ground reports.

The distinction between wage employment and self-employment that prevail in India is crucial.
The first is wage employment which is a result of labour demanded by employers in their pursuit of profits.
The second is self-employment where labour supply and labour demand are identical, i.e. the worker employs herself.
The crisis primarily pertains to inadequate labour demand particularly for regular wage work.

The Indian economy is historically marked by open unemployment and high levels of informal employment.
The employment growth rate of salaried workers in the non-agricultural sector over four decades is stagnant.
Lack of opportunities reflected in disguised unemployment, indicate a deficit in formal sector employment.

Labour demand is influenced by two factors viz. output growth and labour productivity growth.
In India, the employment growth rate of the formal and non-agricultural sector remained unresponsive despite rising GDP growth rate.
The lack of responsiveness of employment growth rate to changes in output growth rate reflects a phenomenon of jobless growth.
It indicates a strong connection between labour productivity growth rate and output growth rate.

Economies generally become more productive as they grow due to economies of scale.
Economies experiencing jobless growth are classified based on the tightness of the connection between output growth and labour productivity growth.
In India, the responsiveness of labour productivity growth rate to output growth rate is high.
The extent to which labour productivity growth rate responds to output growth rate is reflected by what is termed as the Kaldor-Verdoorn coefficient.
India’s non-agricultural sector is characterised by a higher than average Kaldor-Verdoorn coefficient, as compared to other developing countries.

Traditional macroeconomic policy focused on increasing output growth rate as a means to boost employment growth.
Current evidence suggests the need for a separate policy focus on employment, distinct from GDP growth.
Employment policies should encompass both demand and supply side components, addressing skill gaps and ensuring demand-side measures like public job creation.

Financing employment policies requires reorienting the macroeconomic framework.
Suggestions include increasing direct tax to GDP ratio, reducing exemptions, improving compliance and using macro-policy for a constructive employment agenda.