Labour force rises but not employment

Fiscal 2018-19 is turning out to be a difficult year on the employment front. The first quarter had seen the labour participation rate fall to 42.7 per cent and the employment rate fall to 40.4 per cent.

The first measures the proportion of persons who are willing to work and are either employed or are unemployed, but are looking for a job as a per cent of the total working-age population. The second measures only the employed to the same population. The two indicators measure the economy's absorption of available labour.

Both measures reached their lowest levels during the first quarter of 2018-19 compared to any quarter since we began estimating these in the first quarter of 2016.

In July 2018, the labour participation rate fell further to 42.3 per cent and the employment rate fell to 40 per cent. This continued shrinking of these two rates does not bode well for the economy.

Private sector investments must pick up aggressively to fix this problem. It is good that the Prime Minister took pains last week to explain that industrialists are not thieves and dacoits. I am sure he did not intend to give a good-conduct certificate to all of them, but the message was to effectively acknowledge their contribution to growth and therefore to employment.

Nitin Gadkari is reported to have highlighted the limitations of job reservations (in the light of widespread agitations for reservations in Maharashtra) because there weren't too many jobs in government.

If we juxtapose the statements of the Prime Minister and his senior cabinet colleague in the central government, it is evident that the government understands that employment growth will only be possible if private investments grow. CMIE's CapEx database and the CSO's national accounts statistics show that investments are still far below their levels in the recent past. But, the RBI continues to worry about inflation and implicitly not about the lack of momentum in investments.

CMIE's Consumer Pyramids Household Survey shows that there is some weak pick-up on the economy's ability to absorb working-age population into the labour force, but it is unable to provide this additional labour with jobs.

The labour force in the quarter ended June 2018 was 2.2 million higher than it was during the corresponding year-ago quarter. In a similar comparison, the labour force in the March 2018 quarter was higher by 0.4 million. Thus, in a year-on-year comparison, the labour force has been expanding during 2018.

This is a turnaround because such was not the case in 2017. During each of the four quarters of 2017, the labour force was lower than its corresponding quarter in 2016. This, perhaps, was the impact of demonetisation which happened towards the end of 2016, in November.

The y-o-y expansion seen in labour force during the first half of 2018 continued into July when compared to a year ago, the labour force was 3.7 million higher.

This expansion of the labour force in 2018, however, was not sufficient to absorb the additional flow of labour into the working age population. As a result, the labour participation rate continues to fall. For example, the working age population is estimated to have grown by about 24.9 million between the quarter ended June 2017 and the quarter ended June 2018. But, the labour force expanded by only 2.2 million in a similar comparison. The incremental labour force participation rate works out to less than 10 per cent.

The encouraging story of 2018 is that there is an increase in labour participation in absolute terms in the first six months as compared to a shrinking of the labour force in 2017.

This is a fragile improvement. The labour force expanded by 2.6 million in the first half of 2018 after having shed 13 million in 2017.

More importantly, the rise we see in the labour force is not seen in employment. Employment during the quarter ended June 2018 at 401.9 million was 4.3 million lower than it was in the quarter ended June 2017 which was 406.2 million. June 2018 was the second consecutive quarter of a year-on-year fall in employment.

The monthly series of the labour force and employment suggest a seasonality where both seem to fall from January through July and then rise from August through the following January. While the labour force has fallen from January through July 2018, most months of 2018 have seen higher labour force compared to the corresponding months of 2017. This is a healthy sign.

The monthly employment series of 2018 also falls from January through July, but in each month the employment level is lower than it was in 2017. Further, the gap between the employment level in a month of 2018 and the corresponding month of 2017 has been increasing. This is a worrying sign.

The monthly series of 2017 suggest that sequentially, both labour force and employment should rise in August. If they don't, we must worry.