Sharp divergence in rural and urban unemployment

As of January 27, the unemployment rate based on a 30-day moving average (30-dma) was 7.3 per cent. This rate has been falling since it peaked at 7.81 per cent on January 8. It was 7.4 per cent in December. Trends in the 30-dma suggest that the unemployment rate in January is likely to turn out to be a shade lower than it was in December. 

Before discussing the trends in the 30-dma unemployment rate, let me explain the dynamics of the 30-dma vis-a-vis the weekly series of unemployment rates. One of the objectives of CMIE's efforts at estimating employment / unemployment is to generate these at fast frequencies. The target was to generate daily estimates of unemployment. However, this turned out to be too volatile to be a reliable indicator of the health of the economy. 

Weekly estimates are relatively stable and reasonably reliable but turn out to be systematically higher than the 30-day moving average measure. This is because weekly estimates use a restrictive survey design that considers just two strata -- urban and rural India. Sample distribution and logistics of execution of the survey currently do not permit a better stratification for weekly estimation purposes. Weekly estimates are therefore useful in terms of the direction of unemployment but are found to be half a percentage point of overestimates.

The 30-day moving average (30-dma) measure is based on a much richer stratification which considers rural and urban strata at the state level and so is far more accurate.  The disadvantage though is that a single observation has the effects of all the past 30 days and so it does not give us, adequately sharply, the full impact of events that happen on a day.

The 30-dma unemployment rate, which is a better indicator to study trends due to the richer sample and survey design, fell to 7.3 per cent by 27 January. The fall is entirely because of the fall in the rate in rural India. The rural unemployment rate peaked at 7.6 per cent on January 5. Since then, it has dropped to 6.5 per cent by January 27. This alone has brought the all-India unemployment rate down from 7.8 per cent to 7.3 per cent. Rural India has a much larger weight in the overall estimates and therefore any change in this sector has a large impact on the all-India estimates.

Unemployment in rural India has fallen in spite of a steady increase in its labour participation rate. Rural LPR has increased from 43.4 per cent as of January 5 to 44.1 per cent as of January 27. Thus, rural India has absorbed the larger labour force available to it during January. This possibly reflects increased rabi crop sowing and associated activities during the month. Rabi sowing picked up substantially during late December and early January. Total acreage under rabi crops shot up from 47.6 million hectares as of December 14 to 59.2 million hectares by January 25.

While rural India has seen a pick up in economic activities to engage labour, urban India has not been similarly successful. The urban labour participation rate had remained under 41 per cent during November and December 2018. This has been rising steadily since mid-December. By early January, urban LPR crossed 41 per cent and has continued to rise. As of January 27, it was 41.5 per cent. 

This increased flow of labour into the urban labour markets has not met with a corresponding increase in employment. As a result, the unemployment rate has risen steadily in January 2019.

Urban unemployment rate was steady at around 7.6 per cent between September and December 2018. Early in January 2019, its 30-dma crossed 8 per cent and it has continued to rise steadily during the month. By late January, the 30-dma urban unemployment rate had reached 8.9 per cent.

The weekly series suggests a substantial increase in urban unemployment in the last week of January. After averaging 10 per cent in the first three weeks, urban unemployment shot up to 11.2 per cent in the week ended January 27. In the case of rural India, the last week saw a sharp fall in the unemployment rate to 5.9 per cent after averaging close to 7 per cent in the preceding 3 weeks.