The Unemployment Problem Nobody Wants To Talk About

Most of us can now feel that India is in a mess. Our jobs are going, our incomes are sinking and things feel a lot worse than they have been in the last decade. This feeling is called unemployment - or more specifically "stagflation", a deathly combination of stagnation (read no growth) and inflation where everything from footwear to beer to basic medicine is rapidly getting more and more expensive.

India’s economy is in shambles for reasons that long precede the pandemic. At the center of this crisis is India’s persistent lack of jobs. India’s finance minister recently acknowledged that India’s economy is shrinking, perhaps months and months after most economics enthusiasts and professionals had already foretold this.

How do we know that India has an unemployment problem?

The existence of an unemployment problem in India, prior to the pandemic, has been vehemently denied by the current government every time the issue has been discussed. Today, we're going to put this question to rest. If one has to solve problems, one must begin with acknowledging that there is, a problem. To decide if India does indeed have an unemployment problem one must turn to the evidence.

The latest Periodic Labour Force Survey (PLFS) states that the unemployment rate in both rural and urban India is at its highest since 1972, both in urban and rural areas and for men and women. In economics this is called a “secular” trend, there is nothing ambiguous or debatable here. Why does this matter? Surely, like all rates, the unemployment rate must also vary. Unfortunately, this is not the case. In India, the unemployment level has been relatively staid, hovering between 1.2 to 1.7 since the seventies. It is only since 2012 that we have seen an almost triple increase in the rate of unemployment, and it is the educated youth who have lost jobs the most.

Part of the reason that this is the case is that jobs in the informal sector have been tanking. This is the same sector which employs migrant labour (about seventy per cent of the labour force in total) in hoards, and recently lost so much due to migrants heading back to villages. Labour in the informal sector earn meagre wages and, of course, receive no social protection to speak of.

To understand this one must first understand how jobs, formal or informal, come about. For jobs to be had, work must be done. For work to be done, employment opportunities must exist – i.e. there must be enough productive work or demand for products that an industry must produce, such that it needs to employ people to produce these goods or services. If one had to put this simply, there has to be a demand for goods that needs servicing.

What is a good way to measure this? Historically, in the current paradigm of accounting for capital and labour, a reasonable assumption to make is to look at company’s borrowings or investments into new projects. It stands to reason to surmise that if companies are expanding either infrastructure or buying new machinery or capacity then they probably are growing. People and firms and industries invest when they have excess or disposable capital that they want to generate returns on. So, when one looks at the ratio of investment to GDP, we can see that this has been falling for a long while. When industries aren’t investing their money into anything it seems unlikely that any new jobs are about to arrive.

 The other way to understand if new jobs can come about is to assess the capacity of industry to absorb more labour. If you were selling shoes and can produce a hundred pairs of them a day and the demand is for seventy pairs, your capacity to produce as a firm is, in fact, underutilised. It is only when there is a demand for 110 pairs or more, then may you decide that you need more people to help you work create more shoes. Then, maybe, you would hire somebody. Your ability to hire also depends on your ability to raise credit or have the money to pay this person you want to hire. It also depends on your plan to utilise his/her capacity. Perhaps this person can produce 30 more pairs of shoes and you need only ten pairs more, for now, but expect demand to go up and it depends on your ability to train this person and much more. These are all the costs of hiring.

When all these considerations are measured and weighed and an expansion decision is taken, one can say that industries are creating jobs. So, another indication of the ability to create jobs is looking at the current productivity of industry also called a “utilisation rate” i.e. how well or efficiently labour is utilised. In India, no manufacturing industry has been at 100 per cent capacity utilisation for years. Like with the unemployment rate, we’ve generally hovered at seventy per cent capacity.

What could that mean? Of all the things it could mean, and there are several (for example, production is not efficient, regulatory barriers exist, maybe information asymmetry is an issue) the one thing that is most obvious is this; people just aren’t buying a hundred pairs of shoes i.e. demand isn’t there.

The next question is then to ask ourselves, when is demand for products not there? When people aren’t spending. There are two reasons, broadly, in economics for not spending a) people are saving and doing things like hoarding gold because they are not hopeful about income flow and are trying to smoothen risks in their lives or b) people aren’t earning enough to spend.

Now, while there may be two reasons for why people aren’t spending, there is usually just one reason to be negative about the future in any economy, people just don’t see themselves in better times. Any economist worth their salt will tell you this, aspirations and hope effect markets and the economy of a country or even countries, in very real ways. This is more than what can be dismissed as a business cycle.

It has to do with aspiration traps that afflict a developing nation’s “poor” people. Development economists define aspirations traps as the phenomenon of poor self-belief causing poor performance which in turn causes a person to continue to be stuck at the very bottom of their lives. Aspiration traps are cyclic and a consistent feature of persistent poverty. In imperfect markets, the poor often make, seemingly irrational choices such as choosing to practice a low-paid vocation as opposed to investing in long-term full education, because many of these choices are constrained by aspiration traps or a lack of imagination with regard to a “better future” for themselves.

 Another way to try and see if any jobs are forthcoming is to look at sources of formal lending such as banks, NBFCs, private lenders or the markets. Most industries need to borrow when they decide to expand – they either borrow from the market by listing on the stock market or they borrow from banks. Now since industries are clearly not investing in new infra or people, are firms just borrowing and sitting on that money? Turns out that like the unemployment rate and capacity, banks also have not been lending. It is well recognised that MSMEs are the engines for economic growth, at least as far as employment goes and MSME lending by banks is in negative territory.

These indicators are of course, just indicators. The underlying reason for India’s unemployment problem is structural. India’s economy has always been skewed. It has been primarily agrarian and then it leapfrogged to the services sector (at least in urban and peri-urban areas) which has been hit badly by India’s worst economic decisions of all times – demonetisation and GST. The infrastructure to support a services sector boom such as a robust education system at foundational level or basic healthcare, is non-existent. Is it surprising that a job crisis has now come out of the bottle like a genie? The pandemic has taken a toll on tourism and low-level IT jobs too. Construction is in the doldrums.

But let’s back-up a little. GST and demonetisation were terrible ideas and they destroyed a crippled economy. But the economy was already doing badly to begin with. Years of underinvestment in agriculture, social-security, healthcare and education set up the economy for failure which died a natural death when demonetisation, GST and then COVID hit.

When manufacturing (and this includes everything from pins and buckets) has the capacity to employ the bulk of the Indian workforce (this is at a whopping seventy per cent of the whole labour force in India) and is now creating the least number of jobs, something is wrong. India’s exports data suggests that we don’t export much and the reason we don’t export much is because we don’t create much worth exporting. The manufacturing sector’s share in India's GDP increased by a lowly 1 per cent from 2017 to 18.2 per cent of the whole GDP, in 2019.

The largest piece of the unemployment puzzle then is Indian manufacturing. The capacity of the manufacturing sector to absorb semi-skilled labour is enormous and so is its capacity to employ in the informal sector. This sets it apart from agriculture and services. So while we’ve failed to polish the shoe and wash the laces, the main issue with the economy is structural, the shoe is simply the wrong size.

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