India’s employment dilemma

Economic growth story is marred by a troubling trend of increasing youth unemployment

The India Employment Report 2024 was published last week. It contains a comprehensive, in-depth analysis within a 300-page report jointly published by the Geneva-based International Labour Organisation (ILO) and the Delhi-based Institute for Human Development (IHD). This is the third major report by ILO-IHD on labour and employment issues in India, following publications in 2014 (workers and globalisation) and 2016 (employment in manufacturing-led growth). The data used in the current report mainly comes from government sources, covering a period of over two decades since 2000. Prior to 2018, the primary data source was the quinquennial survey of employment conditions, while thereafter it has been the quarterly reporting of the Periodic Labour Force Survey (PLFS). Granular data at the unit level is available to all researchers, and the present report goes into great detail to gain insights.

Before we examine the main findings of the report, it is important to remember the definitions. The Labour Force Participation Rate (LFPR) refers to those of working age in the population (15 years and older) who are either working or seeking work. It is important to note that while India’s population growth has slowed down to 0.8 per cent per year, its labour force is still expanding at over 2 per cent annually. Thus, the population within the working-age group is expanding relatively rapidly. From this demographic bulge, we first examine the trends of LFPR over the past two decades. The Worker Participation Ratio (WPR) is the proportion of working-age people who are working. The rest are unemployed, making the unemployment rate the share of those in the labour force who do not have work and are seeking work. 

Now, to the main findings: The dismal long-term trend is that until 2019, all three ratios—LFPR, WPR, and unemployment rate—were moving unfavourably. The participation rate was dropping, and the unemployment rate was rising. This is worrisome because it indicates that despite economic growth, the economy was not generating adequate employment opportunities for an expanding work force.

Between 2000 and 2012, the economy expanded at a rate of 6.2 per cent annually, but jobs grew only at 1.6 per cent. This disparity worsened between 2012 and 2019 (until the pre-Covid year), when average economic growth was 6.7 per cent but job growth was just 0.1 per cent. This is the classic case of jobless growth. What does this mean? It suggests that economic productivity, measured as the unit of GDP per worker, has been increasing, eliminating the need for extra workers. It also means that GDP growth is more capital-intensive, employing more machines per worker, particularly evident in the manufacturing sector. In manufacturing, employment growth averaged a mere 1.7 per cent annually from 2000 to 2019, while manufacturing output grew at 7.5 per cent. In contrast, the services sector experienced nearly 3 per cent employment growth per year, thus providing more jobs. Construction work particularly responded well to economic growth during the same period.

The growth process is intended to absorb surplus labour from agriculture into manufacturing and services, known as the structural transformation of the economy. It can be aided by rising exports too. The share of exports of goods and services in GDP increased from 6.3 per cent in 1984 to 22 per cent in 2022. This expansion in global market opportunities should have resulted in more employment in India, following the pattern witnessed in labour-intensive exports. Indeed, that was the story of export-led growth in most of East Asia, starting five decades ago with Japan and still continuing with countries like Vietnam. India somehow missed the bus, first with its initial export pessimism and then being wary of joining global value chains. This is likely to change in the coming years. But now there are new challenges, as trade barriers go up due to geopolitical reasons and automation threatens to eliminate jobs even in labour-intensive sectors. 

Manufacturing employment has remained stagnant at 12 to 14 per cent of the workforce for over two decades. There are numerous reasons for the non-absorption of new workers into manufacturing, including the sector’s inherent bias towards capital intensity. But a big and persisting problem is that of skill mismatch. The education sector is failing potential employers, as many students graduating from schools and colleges are not employable. Consequently, the bulk of unemployment is among the youth, with a staggering 83 per cent of the unemployed being under the age of 34. Beyond this age group, the likelihood of finding employment improves dramatically, albeit not necessarily in high-paying positions. The youth constitute 27% of the population, which is expected to decline to 23% by 2036 due to the ageing process. Since India’s gross enrolment rate in colleges will keep rising, those youth will not be part of the labour force, and hence LFPR might decline somewhat. 

But youth unemployment remains a stubbornly difficult challenge. It tripled from 5.7 per cent to 17.5per cent in 2019 before declining slightly to 12.1 per cent in 2022. The problem of youth unemployment is inversely correlated with education levels. In 2022, the youth unemployment rate for those who cannot read or write was 3.4per cent, while for those with secondary or higher-level education, it stood at 18.4 per cent, and for graduates, it was 29.1 per cent. This is the highest countrywide educated youth unemployment ever. The causative factors are many, but chief among them is a lack of skill-building and vocational training. It is the failure of our teaching and skill-imparting institutions. Given that much vocational learning occurs on the job and on the shop floor, there is an urgent need to aggressively pursue apprenticeship programmes that are transferable across the country without obligating the employer to make the apprentice a permanent employee. 

The ILO-IHD report offers many useful insights and recommendations for policymakers. The main policy thrust should be to incentivize investment that maximises job creation per dollar, not just focusing on exports or total production value. Simultaneously, the National Education Policy 2020 could be oriented towards enhancing employability, focusing on skill intensity, fostering collaboration with employers, and promoting experiential learning. The next decade should be a decade of investing in enhancing India’s human capital. 

(The writer is a noted Pune-based economist) (Syndicate: The Billion Press)