Article (July-2018)


Alarming need for balance between employment and GDP

Sudhir Dhar

Designation : -   Director & Head HR

Organization : -  Motilal Oswal Financial Services Ltd., Mumbai


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The association between employment and economic growth is one of the most contested issues in national strategies. The general understanding is that employment rate should be proportional to growth in GDP. Economic growth should ideally emerge from a suitable combination of productivity growth and employment growth. Creating jobs and incomes is crucial for development and thereby the GDP. Most developing countries tussle with high underemployment or unemployment. Many people can barely live from what they earn. This is why creating new jobs, improving incomes and working conditions for existing jobs, together, is immensely important.
Employment is quite unstructured in India given the fact that a large part of the workforce is in the unorganized sector where it gets blurred. The importance of employment is very well established in the western world. Real GDP and employment move in line with each other in most mature economies. However, data for the past quarter of the century, it is found that employment and GDP ratio share a robust inverse relationship in the Indian economy.

The virtuous/vicious cycle of employment is thus broken in Indian economy. Employment grows faster during a slowdown and it grows slowly during the boom period. One of the explanations for such unconventional relationship could be opportunistic behaviour of employers, as employees lose their bargaining power during slowdowns, employers hire more at lower cost. On the contrary, as the economy recovers, the employers try to retain their employees instead of hiring new resource, since income rather than employment decides consumption. GDP growth shares an inverse correlation with the employment.

Following questions arise in mind when such a situation perpetuates -
1. The increasing pace of recruitments across sectors, is it really required?
2. What really matters? Hiring OR Retention?
The above representation confirms that thumb rule of higher GDP growth required to boost employment doesn't hold in case of Indian economy. It also confirms that higher employment is not necessary to higher GDP growth. One of the key reasons why employment may have become irrelevant during the past decade or so is the sharp fall in the labour force participation ratio (LFPR). As a result, even lower employment growth failed to increase the unemployment rate, which is the key. The future, however, could be different. Most of the factors responsible for the lower LFPR (almost entirely due to rural females) such as education enrolment, higher household income, buoyant nonfarm economy, etc., are at least partly reversing. Hence, the rural female population may soon begin entering the labour force, creating a U-shaped recovery in the LFPR.
Almost half of India's working-age population is not even looking for jobs. India's labour force (as % of population) has fallen from its peak of 60% in 2005 to 53% on 2015, among the lowest in the G-20 economies. Although the headline unemployment rate is sub-4%, the unemployment rate among the youth (aged 18-29 years) was as high as 13.2% and stood at 35% among the educated (graduate & above) youth.

On other hand, employment situation has not influenced the results of general elections in India since liberalisation. The change in unemployment rate also appears insignificant in terms of the results of the general elections. However, during the past three elections, employment growth and unemployment rate have unconventionally moved in similar directions. During all the past three elections, India's unemployment rate appears to have been more important for the general elections than the country's employment growth.

The estimate of jobs requirement will thus depend upon the rise in LFPR. Recruitment will no longer be in the hands of the employer. Looking at the base case scenario, our economy would require 10.2 million jobs per annum until 2030 however only 9.1 million jobs could be provided which gives a deficit of about million jobs per annum. If so, the unemployment rate will surge from 3.5% currently to 5.9 by 2030. This will make the labour market more relevant for India's economic and political landscape for the future.
It is imperative to conclude that established economic theory has failed in the context of Indian economy. The thumb rule of 'higher GDP leads to higher employment' doesn't follow in India. Alternatively, high GDP growth is sustained without high employment growth. Soon, employment may get its due share in the future.