THE UNEMPLOYMET

PROBLEM IN INDIA
THE JOB CRISIS

SMURUTI RANJAN SWAIN | MACROECONOMICS | 29-01-2020

 TABLE OF CONTENTS

1. Unemployment
2. Structural or Cyclical?
3. What can the government do to address this problem?

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UNEMPLOYMENT
Why does unemployment exist? Is it accidental or necessary?

Some unemployment in capitalist societies is inevitable. There are always going to be

some people who are between jobs (transitional unemployment) looking for new work.
But more importantly, the economy goes through a business cycle with periods of
declining aggregate demand for goods and services which leads to increasing
unemployment. When the economy picks up, demand for labour increases and
employment increases and unemployment decreases. Marx and Kalecki had argued that
in a capitalist system unemployment helps to control wages and prices and keeps the
workers’ “pretensions in check”.

Is unemployment voluntary or involuntary?

The unemployed are simply “searching” for a suitable job and if unemployment
benefits are available and generous they will continue to search for a higher paid job.
Economists have long argued that unemployment is involuntary and due to a lack of
aggregate demand.

Does immigration cause unemployment?

There is overwhelming evidence that immigration does not cause unemployment in the
recipient country. Immigration leads to an increase in the supply of workers but at the
same time it leads to an increase in aggregate demand.

Why is the unemployment rate among youths and migrants higher? Why do
unskilled workers have higher rates of unemployment? Why do less educated
people have higher rates of unemployment?

Youths enter the labour market with little knowledge of the availability of jobs. Young
people have less experience in the workforce, may not be recognised by employers.
Young people who have less educational qualifications and hence are assumed to be
lower productivity workers and hence less likely to be employed. The literature on
human capital suggests that increasing education and skills increases the workers’
productivity and hence they are more profitable for the employers. During a recession,
when there are a large number of workers seeking employment, employers can be more
choosy and hire those workers who have better qualifications and skills, hence leaving
the less educated and less skilled unemployed.

What are the costs and benefits of unemployment?

Some economists argue that an economy must be run with a certain amount of
unemployment to control inflation. However, unemployment imposes significant costs
on society, on individuals and on families. The existence of large pools of unemployed
people signifies the loss of production that they could have produced if they were
employed, in other words, there is a significant loss of GDP. In addition, unemployment

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leads to increases in poor physical and mental health, family disputes, social problems
and crime.

STRUCTURAL OR CYCLICAL? THE TYPE OF UNEMPLOYMENT MATTERS

 If it's cyclical, that means it's simply a byproduct of the business cycle, the
economy went into recession, it's growing very slowly but growing. And when it
reaches normal, whatever that is, we get unemployment way down.

 If it's structural, though, that means the economy has fundamentally changed;
that there is a complete mismatch between the kinds of jobs people are trained
to do and the kinds of jobs employers want to hire them for. So if this is a
structural crisis that means millions of Indians are likely to be unemployed or
underemployed for many, many, many years to come.

Dissecting India’s slowdown

A slowdown in consumption demand, decline in manufacturing, inability of the

Insolvency and Bankruptcy Code (IBC) to resolve cases in a time-bound manner, and
rising global trade tension and its adverse impact on exports are some of the factors
affecting India’s growth, analysts say.

Consumption:

“Private consumption, which contributes nearly 55-60 per cent, to India’s GDP has been
slowing down. While the reduced income growth of households has reduced urban
consumption, drought/near-drought conditions in three of the past five years coupled
with collapse of food prices has taken a heavy toll on rural consumption,” said analysts
at India Ratings and Research, Indian arm for Fitch Group. The private final
consumption expenditure (PFCE) has slumped to 3.1 per cent in Q1FY20, the weakest
level since Q3FY15. A slowdown in the GDP growth for the fourth consecutive year, from
8.2 per cent in FY17 to around 6.5 per cent in FY20 (E), makes it a case of structural
slowdown.

Savings:

Savings by household sector – which are used to extend loans for investment -- have
gone down from 35 per cent (FY12) to 17.2 per cent (FY18). Households, including
MSMEs, make 23.6 per cent of the total savings in the GDP.

Since households are the only net savers in the economy, their savings are major
contributors towards investment. These savings have now reached to a level which isn’t
adequate to fund the government borrowings… This will keep interest rates elevated,”
says Sunil Kumar Sinha, principal economist, India-Ra.

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Investment:

Gross Fixed Capital Formation (GFCF), a metric to gauge investment in the economy,
too has declined from 34.3 per cent in 2011 to 28.8 per cent in 2018, government data
show. Similarly, in the private sector, it has declined from 26.9 per cent in 2011 to 21.4 per
cent in 2018.

Causes and Consequences of Unemployment in India

The major cause of unemployment in India is the slow pace of development. As GDP
growth rate is still slow even after sixty-five years of independence. The major causes
which have been responsible for the wide spread unemployment can be spelt out as
under:

Rapid Population Growth: It is the leading cause of unemployment in Rural India. In

India, particularly in rural areas, the population is increasing rapidly. It has adversely
affected the unemployment situation largely in two ways. In the first place, the growth
of population directly encouraged the unemployment by making large addition to
labour force. It is because the rate of job expansion could never have been as high as
population growth would have required. Secondly, the rapid population growth
indirectly affected the unemployment situation by reducing the resources for capital
formation.

Inadequate Employment Planning: The employment planning of the government is

not adequate in comparison to population growth. In India near about two lakh people
are added yearly to our existing population. But the employment opportunities did not
increase according to the proportionate rate of population growth. As a consequence, a
great difference is visible between the job opportunities and population growth. On the
other hand, it is a very difficult task on the part of the Government to provide adequate
job facilities to all the people.

Rural and Urban Unemployment in India: The unemployment rate at all India level
stood at 3.8 per cent while in rural and urban areas it was 3.4 per cent and 5 per cent
respectively. Unemployment rate is more in urban areas than in rural areas as in urban
areas educated unemployed are more in numbers and also in urban areas it requires
some vocational training or technical skill to do a job as compared to rural areas. Urban
unemployment is that unemployment which exit in urban areas. It is not only painful at
personal level but also at social level.

Despite this problem the government has not given attention to it. Urban
unemployment can be classified into two forms.

 Industrial unemployment: The exact size of the industrial unemployment is not

known because the necessary data for its estimation are not available.

 Educated unemployment: It constitutes large part of urban unemployment in India.

Rural unemployment is the main problem of Indian government and it requires huge

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capitalization of capital. Disguised unemployment, seasonal unemployment etc. are
some of the example of rural unemployment. The educated are not the only ones who
face the problem of unemployment in the urban areas. There are large numbers of
people in the rural areas who do not have a high level of education and who are
unemployed.

WHAT CAN THE GOVERNMENT DO TO ADDRESS THIS PROBLEM?

A common perception is that it takes a college or university degree to get a good job.
This misperception is the result of lack of an adequate and affordable vocational and
education training program in the country.

The budget can incentivise companies and industrial units to provide internship and on
site vocational training to unemployed youth. This experience can be combined with
distance education to teach the trainees relevant theories and concepts.

In the interim, the government should fill the large number of vacant posts. Estimates
suggest that there are more than 22 lakh vacancies in government departments. The
country can ill-afford this neglect at a time when the unemployment rates remain very
high.

S.NO labor 2004- 2011-12 2017-18

05
1 Unemployment Rate 2.3 2.2 6.1
2 Youth Unemployment Rate 5.4 6.1 17.8
3 Labor Force Participation Rate 63.7 55.9 49.8

LABOR FORCE PARTICIPATION RATE

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YOUTH UNEMPLOYMENT RATE

UNEMPLOYMENT RATE

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 UNEMPLOYMENT RATE

Policies for Reducing Unemployment – Key Themes

 Boosting human capital - education and training - a long run strategy to make
the workforce more employable and to raise the level of labour productivity

 Lower employment taxes to increase labour demand - for example, a reduction

in national insurance contributions

 Stimulus to demand from both the public and private sector - keeping aggregate
demand high to drive the creation of new jobs

 Improved export competitiveness to provide an injection of demand into the

circular flow of income

 Improving work incentives - making work pay to reduce benefit dependency and
expand the size of the labour supply

Raising the total level of employment is an important aim of labour market policies.

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