India's Jobs Crisis

Amidst all talk of the need for second generation of reforms in India, we should not overlook the fundamental reality that the sustainability of India's economic growth, indeed its democratic polity itself, would depend on how it is able to manage the transition from agriculture to manufacturing and services for the majority of the 60% of population currently working in the former. This boils down to job creation, especially in manufacturing. And it is here that the alarm bells are ringing the loudest.

The most alarming signal is this graphic taken from a CRISIL report which shows that job creation slowed down even as growth rate increased. In the five years from 1999-00 the economy grew at 6% and created a net 92.7 million wage and self-employment jobs, whereas in the next five years from 2004-05 the net job creation declined to just 2.2 million even as the economy grew at an average rate of 8.6%. The biggest problem was the decline in the numbers joining the self-employed category by 25.5 million in the later period. The report finds that the majority of this fall in self-employed jobs was in agriculture. The role of NREGA in this shift is undeniable.

Even within the regular jobs, job creation fell dramatically in that engine of formal economic growth, urban areas. The number of urban regular jobs created fell sharply from 13.7 million in the 1999-2005 period to just 5.5 million in the 2004-10 period.

The biggest concern was the performance of the creating sectors like manufacturing, which were supposed to create the jobs required to help the country make the transition from a predominantly primary to a secondary and tertiary sectors. In many of these sectors, even as sectoral growth rate rose, the employment growth rate actually declined.

The report also contains another graphic that highlights how employment intensity, or the number of people employed for every Rs 100000 of real output, has been falling. It has been falling steadily in all sectors except construction. In fact, for the economy as a whole, it has fallen from 1.71 in 1999-2000 to 1.05 in 2009-10. While on the one hand, it is a reflection of productivity improvements, it also underscores the magnitude of the job creation challenge, even when growth is robust.

In this context, Livemint draws attention to a Planning Commission report which points to an alarming decline in employment elasticity in recent years. The Mint report writes,

The Planning Commission says that employment elasticity has come down “from 0.44 in the first half of the decade 1999–2000 to 2004–05, to as low as 0.01 during the second half of the decade 2004–05 to 2009–10.” An employment elasticity of 0.01 implies that with every 1 percentage point growth in GDP, employment increases by just one basis point. (One basis point is one-hundredth of a percentage point.) It’s as good as saying that the extraordinary growth during those years didn’t lead to any employment growth at all. What is worse is that employment elasticity of growth was much higher during the pre-reform period. The 10th Plan document has a table that shows employment elasticity for the economy as a whole was 0.68 during the period 1983 to 1987-88; this fell to 0.52 if we consider the period 1983 to 1993-94, implying a slowing down during the later years; and it went down to a mere 0.16 during 1993-94 to 1999-2000, which led to much worrying about jobless growth at that time. But employment elasticity during 2004-05 to 2009-10 is even lower than during the late 1990s. The bang we used to get for the buck is now an almost inaudible whisper.

Historical growth trajectories of countries show that as the economy grows and diversifies, the non-formal sector would shrink. But in India's case, exactly the opposite appears to be happening,

The total net increase in employment between 2004-05 and 2009-10 was 2.72 million. But the increase in informal employment during the period was 4.62 million. That means not only were the new jobs all created in the informal sector, but there was some shrinkage in formal sector employment as well, with jobs shifting to the informal sector. Indeed, in the decade 1999-2000 to 2009-10, formal sector jobs shrunk by two million and the entire job growth was in the informal sector. Nearly 93% of the workforce in 2009–10 was in informal employment, compared with 91% in 1999–2000. Not only are jobs hard to get, their quality too has worsened. 

Construction sector, where employment is predominantly non-formal

Many of the new jobs in the informal sector were in the construction industry. Between 2004-05 and 2009-10, there was a reduction of 14 million jobs in agriculture and five million in manufacturing. Most of the persons displaced found jobs in construction, where employment went up by 18 million. And since most of the construction industry is in the informal sector, the trend explains the growing share of informal employment.

It is a no-brainer to realize that job creation is India's biggest challenge in the years ahead. It is at the same time a massive economic, social, and political problem. Failure here will have consequences for the social and political order in the country.

Update 1 (24/1/2013)

Mint reports of an alternative explanation for the fall in jobs created during the 2004-09 period. It points to research which shows that the main reason for this decline was an improvement in the rural economy, which led many women to quit agricultural work. It writes,

Of the 59.5 million jobs created during the first half of the previous decade, nearly a third was in agriculture, at a time when the sector was in distress and agricultural growth was near-zero. Most of the new farm jobs in that period went to “self-employed females”. The majority of such workers were “unpaid”, which means they worked mostly for their relatives or husbands, without compensation. The rise in such low-quality jobs was a reflection of rural stagnation. As the rural economy improved in the second half of the decade and wages shot up, especially for males, women quit distress jobs. The fact that these women could afford not to work even in the drought year of 2009 suggests a rapid reversal of rural fortunes in the last decade. Thus, despite an increase in 22.3 million jobs in the non-agricultural sector, the overall increase in employment in 2004-09 appears poor because of the withdrawal of 21.1 million agricultural workers. The spread of education is also partly responsible for the declining LPR (the sum of employment and unemployment rates): most young males and nearly a third of women missing from the workforce chose to study rather than work. 

Update 2 (1/12/2013)
Mint has an excellent series on structural changes in India's labor market, based on the latest NSSO survey findings. This graphic has the changes in sectoral composition of jobs in India.

This graphic shows the changes in urban wages over the 2004-05 to 2011-12 period...

... and this in the rural areas...

... and this the female labour force participation trends. In the period, female labor force participation rate has declined by seven percentage points to 22.5%, one of the lowest in the world.