Data from the Centre for Monitoring Indian Economy (CMIE) shows that India’s labour force participation rate (LFPR) has fallen to just 40% from an already low 47% in 2016. This suggests not only that more than half of India’s population in the working-age group (15 years and older) is deciding to sit out of the job market, but also that this proportion of people is increasing.
GS III- Indian Economy (Growth and Development)
Dimensions of the Article:
- What is LFPR?
- Significance of LFPR in India
- How is it under-reported?
- What is the correct way to assess India’s unemployment stress?
- Why is India’s LFPR so low?
What is LFPR?
- According to the CMIE, the labour force consists of persons who are of age 15 years or older, and belong to either of the following two categories:
- are employed
- are unemployed and are willing to work and are actively looking for a job
- There is a crucial commonality between the two categories — they both have people “demanding” jobs.
- This demand is what LFPR refers to. While those in category 1 succeed in getting a job, those in category 2 fail to do so.
- Thus, the LFPR essentially is the percentage of the working-age (15 years or older) population that is asking for a job; it represents the “demand” for jobs in an economy.
- It includes those who are employed and those who are unemployed.
- The Unemployment Rate (UER), which is routinely quoted in the news, is nothing but the number of unemployed (category 2) as a proportion of the labour force.
Significance of LFPR in India
- Typically, it is expected that the LFPR will remain largely stable. As such, any analysis of unemployment in an economy can be done just by looking at the UER.
- But, in India, the LFPR is not only lower than in the rest of the world but also falling. This, in turn, affects the UER because LFPR is the base (the denominator) on which UER is calculated.
- The world over, LFPR is around 60%.
- In India, it has been sliding over the last 10 years and has shrunk from 47% in 2016 to just 40% as of December 2021.
- This shrinkage implies that merely looking at UER will under-report the stress of unemployment in India.
How is it under-reported?
- Imagine that there are just 100 people in the working-age group but only 60 ask for jobs — that is, the LFPR is 60% — and of these 60 people, 6 did not get a job. This would imply a UER of 10%.
- Now imagine a scenario when the LFPR has fallen to 40% and, as such, only 40 people are demanding work.
- And of these 40, only 2 people fail to get a job. The UER would have fallen to 5% and it might appear that the economy is doing better on the jobs front but the truth is starkly different.
- In fact, every time the LFPR falls, the UER also falls — because fewer people are now demanding jobs — giving the incorrect impression to policymakers that the situation has improved.
What is the correct way to assess India’s unemployment stress?
- When LFPR is falling as steadily and as sharply as it has done in India’s case, it is better to track another variable: the Employment Rate (ER).
- The ER refers to the total number of employed people as a percentage of the working-age population.
- By using the working-age population as the base and looking at the number of people with jobs (instead of those without them), the ER captures the fall in LFPR to better represent the stress in the labour market.
- If one looks at the ER data (Chart 1), it becomes clear that while India’s working-age population has been increasing each year, the percentage of people with jobs has been coming down sharply.
- Looking at the absolute numbers makes the stress even more clear.
- In December 2021, India had 107.9 crore people in the working age group and of these, only 40.4 crore had a job (an ER of 37.4%).
- Compare this with December 2016 when India had 95.9 crore in the working-age group and 41.2 crore with jobs (ER 43%).
- In five years, while the total working-age population has gone up by 12 crore, the number of people with jobs has gone down by 80 lakh.
Why is India’s LFPR so low?
- The main reason for India’s LFPR being low is the abysmally low level of female LFPR.
- According to CMIE data, as of December 2021, while the male LFPR was 67.4%, the female LFPR was as low as 9.4%.
- In other words, less than one in 10 working-age women in India are even demanding work.
- Even if one sources data from the World Bank, India’s female labour force participation rate is around 25% when the global average is 47%.