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09 May 2017 Mahesh Vyas

When will the jobs come back?

In April 2017, the unemployment rate in India was just 3.76 per cent. This is ridiculously low. The unemployment rate has fallen steadily and sharply since its near-peak level of 9.6 per cent in August 2016.

Why is the unemployment rate so low when investments into new capacities have been weak for a very long time, capacity utilization has been falling and industrial production is stagnant.

It is because the labour participation rate has been falling. In April labour participation rate was 43.6 per cent. This is significantly lower than the peak participation rate of 48.6 per cent in September 2016.

This implies that a massive five per cent of the working population just moved out of the labour force in a matter of just seven months. While this is true, it dramatises the shift as it picks the peaks in a time series. Nevertheless, it is by now a clear fact that the labour participation rate has been falling quite significantly even if it is not as dramatic as five per cent of the workforce.

The only way in which we can interpret this fall is that the loss of job opportunities in recent times has been so severe that labour stopped even looking for jobs.

The labour participation rate (LPR) has been falling sharply and steadily since its peak in September.

If we control to keep the sample of households surveyed to be constant, then the fall is very high during December, January and February. These are the months immediately following the demonetisation shock of November 2016.

The sample of about 40,000 households surveyed during December reported a labour particiaption rate of 45.3 per cent. And, the same households had reported a LPR of 47.1 per cent in August 2016. This shows that the labour participation rate fell by 1.8 percentage points. Similarly, the same sample of about 40,000 households surveyed in January 2017 and September 2016 reported three percentage point fall in LPR from 48.6 per cent to 45.6 per cent. This implies that there was a very sharp fall in the LPR in January. Interestingly, January is also the month when we saw the greatest fall in the consumer sentiments index - a 5.8 per cent fall compared to September which, again, controls for sample change. In Janauary, jobs were lost and apparently, hopes were lost too.

Measured similarly, the fall in the LPR was 1.9 percentage points in February and then 1.7 percentage points each in March and April.

The LPR in rural India is always higher at about 47 per cent than in urban India, which has averaged at about 44 per cent. The higher LPR in rural India is a reflection of the unorganised nature of low-productivity employment which keeps rural folks more engaged to eke out a living.

Rural LPR also has a greater range. It bounced from about 46 to 50 per cent - apparently reflecting seasonal changes in farm activities. In contrast, urban LPR was almost setady at about 45 per cent. This stability of the urban LPR reflected the more organised natur eof employment or greater linkage of employment in urban regions to the organised sectors.

Post-demonetisation, urban LPR fell sharply and broke its remarkable stability seen earlier. Between January and October 2016, urban LPR was 45.2 per cent with a narrow range of 44.9 to 45.5. Then, between November 2016 and April 2017, the urban LPR fell to an average of 43 per cent. More importantly, the LPR fell almost month after month to reach a low of 41.7 per cent in April 2017.

Perhaps, it is this sharp fall in the urban LPR and its break from a steady state prior to demonetisation that explain the mucg lower consumer sentiments in urban areas compared to rural regions. While the rural LPR has also fallen, its sentiments were shored up by loan waivers. Urban India has had no respite. Its falling LPRs were reflected in low consumer sentiments.

As the academic year comes to an end during May-June, a fresh batch of young graduates are expected to hit the labour markets - particularly in urban India. The LPR can rise again. If there is a dearth of matching jobs, unemployment can rise too. We need new jobs for the new labour force and, we need to get the workforce that quit back into the labour markets.

During the first week of May 2017, the LPR was up a bit and unemployment too has risen a tad to 4.5 per cent.

First Published in Business Standard Link