A V-shaped unemployment rate

Weekly estimates of the unemployment rate had given a preview of the rising unemployment rates in August 2019. These had bounced between 8 and 9 per cent compared to 7-8 per cent range observed in July. August 2019 finally ended with an unemployment rate of 8.4 per cent. This is the highest since September 2016.

The unemployment rate has been rising more or less steadily for a long time now. What does this rising rate tell us?

Over the past three years, the unemployment rate time-series forms a skewed V-shape -- of a sharp initial fall from September 2016 till July 2017 and then a slow and steady rise. It fell from over 8 per cent in September 2016 to less than 4 per cent by July 2017. That was, in effect, a 500 basis points fall in 10 months. It took 36 months to claw back those 500 basis points slowly but quite steadily to over 8 per cent by August 2019.

The V-shape pattern of the unemployment rate holds true for both, urban and rural unemployment rates.

The urban unemployment rate was 9.6 per cent and the rural rate was 7.8 per cent in August. Both these are also the highest rates since September 2016. 

Has the unemployment rate "recovered" to its "norm" of 8-9 per cent in India, as it was between January and September 2016? Or, is the unemployment rate on a steady secular rise since July 2017?

If the former is true then the unemployment rate could stabilise at 8-9 per cent in the near future. This can be interpreted as a recovery from the combined shock of demonetisation and GST that led to a fall in the labour participation rate and therefore the unemployment rate and a reversion to a normal unemployment rate of 8-9 per cent in India.

But, this is unlikely. The unemployment rate is an outcome of the labour participation rate and the employment rate. The preferred outcome is that both should rise. What do we see in the data?

The labour participation rate, which fell sharply after demonetisation in November 2016, is recovering -- not in a smart V-shape recovery as it should, but a very small and almost weak recovery is seen in recent months after several months of steady fall.

The labour force participation rate seems to have reached its nadir of 42.46 per cent 11 months ago in October 2018. Since then, it has risen slowly and steadily to scale nearly 90 basis points to 43.35 per cent in August 2019.

In August 2019, the labour participation rate was higher than in August 2018. An increase in the LPR compared to a year-ago is a recent phenomenon. This happened in July 2019 also. 

We are therefore witnessing a healthy change in the trend in the form of a gradual increase in the labour participation rate in recent months. This is a phenomenon unseen since we began monitoring labour markets in 2016.

However, this increase in labour force participation rate is not matched with an increase in the employment rate. The difference between the two has been rising. More people are seeking employment but not as many people are finding employment.

The increase in labour participation rate is a healthy sign as it hopefully reflects a confidence in labour that they may find jobs compared to the long period post demonetisation when labour simply left the labour markets as they had no hopes of finding jobs. We say hopefully because we hope that they are not seeking jobs entirely out of desperation.

But, this hope hangs precariously on a thin thread.

Investment conditions have been weak. New investments into large and modern enterprises are important to absorb the rising working age population into the labour markets. However, data from the annual financial statements of companies and from announcements by entrepreneurs do not show any pick-up in investments. Growth in good quality jobs is therefore very poor.

The little growth that we have seen in recent months is entirely in rural India. Employment in August 2019 was nearly 2 per cent higher than it was in August 2018. But, this comes entirely from rural India. This is not the kind of employment that an aspirational India hopes for.

Y-o-y growth in employment in rural India was 2.9 per cent in August 2019. But, urban India saw a 0.2 per cent fall. And, urban India has recorded a y-o-y fall in each of the past 13 months.

If labour continues to face a rising unemployment rate, and poor employment opportunities, it may start getting discouraged from entering the labour markets. Or, it could depress wages sharply which would indicate desperation.