Published on 11/01/2018 3:56:49 PM | Source: Motilal Oswal Securities Ltd

A study of the relevance of employment in India`s economic growth - Motilal Oswal

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Employment: Broken Link Or…?

A study of the relevance of employment in India’s economic growth

The conventional view serves to protect us from the painful job of thinking. - John Kenneth Galbraith

The theory of virtuous/vicious cycle of employment is very well established in economic literature and is rarely questioned. However, when we looked at the Indian economy from this perspective, we found a broken link – contrary to the widely-held view, employment and GDP growth share an inverse relationship. In this note, we assess this broken link in detail and cover many other aspects of India’s labor market.

It is believed that higher (or lower) employment growth leads to higher (or lower) incomes, consumption, production and further (lower) employment in an economy. Not surprisingly then, after the dismal employment growth reflected by the Labour Bureau’s quarterly employment survey (QES), the Indian policy makers have grown wary of the employment situation in the country. While the importance of sufficient job opportunities in a young economy such as India cannot be emphasized further, research into establishing this theory in the context of the Indian economy is inadequate. This is what has compelled us to study the relevance of employment in India’s economic growth and its political landscape with data over the past quarter of a century (since liberalization).

Our key findings:

Weak role of employment in India’s economic and political landscape

* In stark contrast to established economic literature, we found an inverse, nonpositive correlation between employment and consumption/GDP growth in the case of the Indian economy during the past quarter of a century post liberalization.

* Using limited data, we also found that, unlike in some developed economies, the employment situation in India has failed to influence the results of any of the four (full-cycle) general elections held since the 1990s.

* Though lack of reliable data prevents us from commenting on income inequality in the Indian economy, we find that notwithstanding the volatility in employment growth during various periods over the past three decades, the level of consumption inequality (estimated using measures such as Gini coefficient, Lorenz curve, ratio of top and bottom decile, etc) has remained remarkably unchanged in India.

India’s labor market has some remarkable characteristics

* Almost half of India’s working-age population is not even looking for work. India’s labor force1 (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.

* While the share of employment in the industrial sector (including construction) in India is comparable with the other major economies, total employment in the services sector is, by far, the lowest and the share of agricultural activities is exceptionally high.

* The share of unorganized/informal sector is also the highest, while only ~18% of total employment is regular employees.

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