India low on employment elasticity: ASSOCHAM

Employment elasticity provides the extent to which employment can increase due to an increase in GDP.

An ASSOCHAM –Thought Arbitrage joint study on ‘Employment Generation and Rebooting India’ has pointed out that India’s labour force will expand by 160-170 million in 2020, depending on various factors, including population growth rate, labour force participation, education enrolment at higher levels, and so on. However, employment elasticity with respect to GDP is declining in India.

Overall, the labour force increased from around 337 million in 1991 to around 488 million in 2013 — an expansion of 151 million in the labour force in roughly 22 years. Employment level, more or less, followed the same trend as the labour force but fell short of the labour force throughout the period, creating a consistent gap between the two. Employment in India witnessed an increase to 470 million in 2013, as compared to 323 million in 1991.

The study revealed that between 2000 and 2010, approximately 64 million jobs were generated in India. On the other hand, labour force participation witnessed an increase of 72 million in absolute terms. There is a growing disconnect between economic growth, skilling, education and jobs. This is an alarming situation since India’s work force is expected to increase exponentially in the future. The reason for the decline in India’s employment, especially in the organised sector, is due to the relatively low and almost constant share of manufacturing in the country’s GDP, says the study.

According to the report, employment elasticity with respect to GDP has been declining in India. On the basis of those CAGR, employment elasticities are calculated for respective time periods by dividing employment growth rate with GDP growth rate. Employment elasticity figures show the percentage change in employment due to percentage change in output or GDP. In other words, employment elasticity provides the extent to which employment can increase due to an increase in GDP.

Growth rate of employment achieved its peak of 2.80 per cent during 1999–2000 to 2004–05, and thereafter declined sharply. However, if one compares the GDP growth rate and the employment growth rate, then a distinct divergence can be witnessed between these two series of data. When the Indian economy was enjoying a high economic growth during the latter part of the depicted time series, the employment was experiencing a downfall.

GDP growth rate increased from 4.98 per cent during 1983 to 1993–94 to around 8.7 per cent during 2004–05 to 2009–10. But, employment growth rate reached its lowest level, falling from 2.04 per cent during 1983 to 1993–94 to 0.37 per cent during 2004–05 to 2009–10. Usually, high economic growth is associated with high employment growth in common wisdom, but in India’s case, it is the other way round. This is indicative of low level of employment elasticity. In other words, a smaller proportion of the entire GDP or output increase was getting reflected in the increase in employment opportunities, pointed out the study.

Lower elasticities, as a result, are indicative of what some economists call ‘jobless growth phases’. Reaching a high of 0.50 in the period between 1999–2000 and 2004–05, it came down precariously close to zero at 0.04 during the period between 2004–05 and 2009–10.

In simple words, employment elasticity means that for every Rs. 100 increase in GDP, only four new employment opportunities were created in this period. On the other hand, in the period between 1999-2000 and 2004–05, for every Rs. 100 increase in GDP, 50 new employment opportunities were created. After that, it showed slight improvement during 2009–10 to 2011–12 by increasing marginally to 0.08 per cent, and was projected to be 0.17 for the year 2014–15. For the year 2015–16, employment elasticity was projected to be around 0.08 indicating a bigger problem in the near future.

Given the decreasing trend in employment elasticities over the years, it becomes imperative to study the trend of employment elasticity in the three principal sectors of the economy. The primary sector (agriculture) absorbs the bulk of the workforce, but due to stagnant productivity and other factors the ability to create new jobs waned in this sector over the years. This gets reflected in the elasticity figures as well. During the period between 1983 and 1993–94, employment elasticity was around 0.5, implying that 1 per cent growth in GDP used to culminate into 0.5 per cent growth in primary sector employment.

Over the years, the ability of the primary sector to create new jobs diminished and it is reflected in the elasticity figures, particularly after 2004–05. Employment elasticity dropped sharply during 1993–94 to 2004–05 to 0.26, which is almost half of what was achieved during 1983 to 1993–94. The situation worsened when the employment elasticity became negative (-0.05) during 2004–05 to 2009–10, and further deteriorated to (-0.29) during 2009–10 to 2011–12.

This gross deterioration of employment elasticity in the primary sector means that any effort to improve the productivity or output in the primary sector may result in net job loss. This clearly means that the primary sector, mainly agriculture, is burdened with disguised unemployment and underemployment.

As a result, the primary sector cannot support any new job creation. Even in rural areas, the onus of creating new jobs will fall on rural industry and services. On the other side, the secondary sector witnessed a continuous increase in employment elasticity, though the increase has been marginal. During the period between 2009–10 and 2011–12, elasticity in the secondary sector (industry) was 0.68, which means that almost 70 per cent employment generation is possible for 100 per cent increase in output/production in the secondary sector. Precisely for this reason, policy and other economic boosts for the secondary sector (industry) are needed to revive employment generation.

Employment elasticity in the tertiary sector was high during the early 1990s, but since then it has been showing a downward trend. It decreased from 0.57 during 1983 to 1993–94 to 0.10 during 2009–10 to 2011–12. This result is also significant because it highlights the fact that any rise in tertiary (services) output will not be able to create adequate proportional increase in employment.

Decreasing trends in elasticities of secondary and tertiary sectors, point to the conundrum, which is probably faced by most of the policy makers of the world today. Due to explosive and rapid improvement in technology, production of goods and services has become highly mechanised. While high mechanisation spurts economic growth, it does not result in commensurate employment generation. However, most of the businesses cannot survive without mechanisation as they will then not remain competitive.