Lecture 5

Unemployment

PGP 24 Section A&B, PGP- Fin_01

Objectives of the class
• What is unemployment and how do we calculate it?
• Types of unemployment
• What is labour force participation rate?
• What is the trend in employment and LFPR during business cycles?

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Inflation UP and growth slips?

Discussion on Friday class:

Indianomics
video possibly for a Discussion video for Fridays Class
• https://www.youtube.com/watch?v=wucUV2rYXSE

3
Questions to be pondered over?
What are the trends in CPI inflation? Food and core inflation trend ( 00.00 to 1.98)
How do they calculate a growth decline in the current quarter? What variables capture
them? ( 02.00 to 04.15)
What is the views on persistence of inflation ? Prasanas argument on increasing CPI
index . ( 04.20 to 8.00)
What does convergence of Rural CPI, Urban CPI and All india CPI suggests? How does
Rural CPI increased ( Soumya kant’s Argument on inflation on LPG and firewood) (8.20
to 11.30)
How expectation of inflation play its role.? In the current situation what nflation rate (
does it require revised) will ensure RBO to act on inflation and growth fall ( 11.40 to
12.20)
Why there are not acting now ( expectations are optimistic)? Is loose money policy a
trigger?
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Employment rate Post pandemic

5
Labour Markets in distress: Mahesh Vyas
(CMIE)
• Labour markets have been weakening in the last four weeks. The labour
participation rate and the employment rate have fallen in each of these. The
unemployment rate has bounced between 5.5 per cent and 7.8 per cent with
an average of 6.8 per cent.
• But, this is almost inconsequential. What is important is that the labour markets
were unable to absorb adequate proportions of the working age population
during the festive season of 2020.
• Labour participation touched a recent peak of 41.3 per cent in the week ended
October 25. Since then, it has slid in each of the following four weeks. Note that
this recent peak of 41.3 per cent itself is very low. Labour participation had
reached 42 per cent in June during its recovery from the fall in April and May.

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Mahesh Vyas article
• A falling LPR implies that an increasingly smaller proportion of the working age
population is seeking employment. In absolute terms, the LPR translates into the
labour force. If the LPR continues to fall sharply, the labour force shrinks. This is what
happened in September 2020 after the recovery process lost steam. This labour force
stagnated in October. It could be falling in November. This is worrisome. The
unemployment rate is the proportion of the labour force that fails to find employment.
• In the week ended November 22, 7.8 per cent of the labour force could not find
employment. This is much higher than the 5.5 per cent unemployment rate pencilled
in the preceding week. Or, compared to any of the preceding four weeks when the
unemployment rate hovered between 5.5 per cent and 7.2 per cent. The sharp rise of
the unemployment rate is against the trend seen since the recovery began. The trend
has been one of falling unemployment rates with an occasional spike. This happened
during the first fortnight of October 10.

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First lets define and measure Unemployment

• National Sample Surveys try to estimate the following

categories of the population:
• employed
working at a paid job
• unemployed
not employed but looking for a job
• labor force
all employed plus unemployed persons
• Not in the labor force
not employed, not looking for work
Four methods to capture who is employed?
• First we consider whether people are part of labour force
• Usual principal status basis: activity status of a person during the 365 days preceding the date
of survey .183 days or more : Chronic unemployment
• Usual Principal Status and Subsidiary Status (PS+SS): is an extension to the principal status
approach. If a person has engaged in any economic activity for a period of 30 days or more
during the preceding 365 days a person is considered as employed under this approach
• Current Weekly Activity Status (CWS) relates to the activity status of a person in the week
preceding the date of survey. A person who has engaged in any economic activity for at least
one hour and for at least one day in the last seven days preceding the date of survey is
regarded as employed.
• Current Daily Activity Status (CDS) measures the activity status of a person on each day of the
week preceding the date of survey. It divides each day of the reference period into two ‘half
days’ or a ‘full day’ and assigns an activity status accordingly.

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Two important labor force concepts

• Unemployment rate
percentage of the labor force that is unemployed
• Labor force participation rate
the fraction of the population that “participates” in the labor force, i.e. is working
or looking for work
NOW YOU TRY
Computing labor statistics

Population by group, 2001

Number employed = 337 million
Number unemployed = 27 million
Working age Population = 1025 million

Use the above data to calculate

 the labor force
 the number of people not in the labor force
 the unemployment rate
 the labor force participation rate
11
NOW YOU TRY
Answers

data: E = 337, U = 27, POP = 1025

• Potential labor force (16+)
L = E + U = 337 + 27 = 364
• not in labor force
NILF = POP – L = 1025 – 364 = 661
• unemployment rate
U/L x 100% = (27/364) x 100% = 7.4%
• labor force participation rate
L/POP x 100% = (364/1025) x 100% = 35.5%

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Computing Activity for Class
• Working population (16+) = 1000
• Employed ( remunerative job) = 570
• Unemployed ( No job but actively seeking for job) =30
• There are also people who are not in labour force
Students
Retired
Illness/ Home work
 Not looking for job ( concern for policy makers)

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Check your answers
What is the level of labor force ?
E+U =570+30 =600
Who is not in labor force ?
 NILF= Working age population- Labor force (E+U) = 1000- (570+30)
=400
What is the level of unemployment rate?
Unemployment rate = U/ E+U ( labor force) =30/600*100 =5%
What is the labor force participation rate?
LFPR = E+U/ Working population = 600/1000*100 = 60%
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Equilibrium in the labor market
• The labor demand and labor supply curves describe the national labor market.
• The intersection of the curves identifies the market equilibrium.

The labor market in equilibrium

Wage • At equilibrium, there is a
stable wage (price) and
Labor
supply amount of labor bought and
sold.
• The equilibrium does not
W* explain unemployment.

Labor
demand

L* Labor
The labor market with unemployment

Unemployment occurs when the wage rate is higher than the equilibrium wage.
The labor market with unemployment
Wage • Workers are willing to
Labor
provide more labor than
Unemployment
supply
firms are willing to hire.
W
1
• The labor market has a
surplus of workers.
W*

Labor
demand

L L* L Labor
D S
Unemployment rate: Some omissions
Underemployment
Time: Workers who would prefer to work more hours
Skill: Workers Skills are mismatched with jobs
Discouraged workers: Given up looking for job
Both unemployment rate and LFPR falls
Working population=1000
Employed + unemployed (20 now) = 590
NILF = 410 (10 more people have stopped looking for job)

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Categories of Unemployment
 Real wage unemployment
 Due to minimum wage being higher than the market-
clearing level
 Frictional unemployment
 Time required to bring together employers and job
seekers
 Doesn’t last long and policy makers are usually not
concerned
 Seasonal unemployment
 Examples: Demand for farm workers, construction
workers
 Policy makers usually not concerned
Sources of Unemployment

 Structural unemployment
 Mismatch of skills or geographic location
 Some skills become obsolete

 Cyclical unemployment
 Increases during recessions
 Temporary feature of developed countries but persistent in poor countries
 “Full employment” can be achieved by macroeconomic policy by
eliminating cyclical employment but other sources will remain – that
is called the natural rate of unemployment
How does LFPR fall reflect in Unemployment
rate: An interesting case
• What is the unemployment rate now?
U= 20/590 =3.3% ( earlier was 5%)
LFPR = 590/1000*100 =59% ( earlier was 60%)
This is however a concern for policy makers. It gives a wrong picture to
the employment situation of the economy.
Unemployment fell for a unhealthy reason people stopped looking for
work.
https://www.financialexpress.com/economy/indias-low-unemployment
-rate-gives-no-reason-to-cheer-workers-prefer-to-sit-out-of-job-market/
2090657/

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Why unemployment and labour force
participation rate and economic cycles
• Numbers of Unemployment rate and LFPR also reflect on the current
state of the economy
• GDP is increasing/decreasing indicates more demand, more
production to satisfy demand and more people will get remunerations
and more employment (lesser unemployment rate).
• An increase in the job prospect with good remunerations also makes
people interested to work who otherwise considers not taking up a
job.
• Participation rate can be influenced by the current state of economy.

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Why India needs 1 crore new jobs every-year ?
• Will demographic dividend become demographic burden what should be done to
prevent it?
Working age population increases day by day (fertility increase, demographic
advantage).
So accordingly labour force is also increasing ( 1.2 crore workers enter work force
every year)
We need to give 94% of the labor force employment ( 1.12 crore jobs)
• How much are we creating?
Use CMIE database

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GDP, LFPR and Unemployment rate
GDP unemployment and LFPR In India (CMIE data)
60

50

40

30

20

10

0
Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20
-10

-20

-30

Gross domestic product at current market prices 11.5 Gross domestic product at current market prices Labour participation rate (LPR)

Gross domestic product at current market prices Unemployment rate (UER)

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Labor force participation in India
• CMIE data LFPR in India (CMIE)
80

70
All India Total
60

All India Male

50

40
All India
Female
30

Urban Total
20

10 Rural Total

0
16 16 16 16 16 16 17 17 17 17 17 17 18 18 18 18 18 18 19 19 19 19 19 19 20 20 20 20 20
n- r- y- l- p- v- n- r- y- l- p- v- n- r- y- l- p- v- n- r- y- l- p- v- n- r- y- l- p-
Ja Ma Ma Ju Se No Ja Ma Ma Ju Se No Ja Ma Ma Ju Se No Ja Ma Ma Ju Se No Ja Ma Ma Ju Se

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 Greater unemployment rate
Unemployed not actively looking
Unemployed actively looking 100,000,000

100,000,000 90,000,000

90,000,000 80,000,000
80,000,000
70,000,000
70,000,000
60,000,000
60,000,000
50,000,000 50,000,000

40,000,000 40,000,000
30,000,000
30,000,000
20,000,000
10,000,000 20,000,000

0 10,000,000
16 16 16 16 17 17 17 17 18 18 18 18 19 19 19 19 20 20 20
a n- pr- Jul- ct- an- pr- Jul- ct- an- pr- Jul- ct- an- pr- Jul- ct- an- pr- Jul-
J A O J A O J A O J A O J A 0
Jul-15 Jan-16 Aug-16 Mar-17 Sep-17 Apr-18 Oct-18 May-19 Dec-19 Jun-20 Jan-21

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Unemployment situation in India

Discussion Bloomberg Quint

https://www.youtube.com/watch?v=oIS-PynsP6c

07/06/2021 Board Capital and CSR 26

How to solve the unemployment problem?
• India’s Unemployment challenge
• https://www.youtube.com/watch?v=1nBpWRr_uVE

07/06/2021 Board Capital and CSR 27

India's urban unemployment rate drops to 9.3% in Jan-Mar 2019: Govt data
https://thewire.in/rights/india-urban-unemployment-rate-nso-data
November 24, 2019

• The urban unemployment rate in the country fell to 9.3 per cent during January-
March 2019 from 9.8 per cent in April-June 2018, government data showed on
Saturday.
• The data showed that unemployment rate in urban areas among males was
estimated at 8.7 per cent during January-March 2019 as compared to 9 per cent
during April-June 2018. For women, the UR was at 11.6 per cent during the
reported period as against 12.8 per cent during April-June 2018.
• The statement on Saturday pointed out that the overall labour force
participation rate (LFPR) was estimated as 36 per cent in the urban areas during
January-March 2019, as compared to 35.6 per cent during April- June 2018. The
LFPR for men was estimated to be 56.2 per cent, while for women it was at 15
per cent in the urban areas during the January-March 2019 period.