Home / Opinion / Online Views /  India’s employment elasticity almost zero

The years between 2004-05 and 2009-10 saw some of the highest rates of gross domestic product (GDP) growth for India. The problem, however, is that this high growth hasn’t led to more jobs. Employment elasticity—which is a measure of how employment varies with economic output—has come down dramatically.

The Planning Commission says that employment elasticity has come down “from 0.44 in the first half of the decade 1999–2000 to 2004–05, to as low as 0.01 during the second half of the decade 2004–05 to 2009–10." An employment elasticity of 0.01 implies that with every 1 percentage point growth in GDP, employment increases by just one basis point. (One basis point is one-hundredth of a percentage point.) It’s as good as saying that the extraordinary growth during those years didn’t lead to any employment growth at all.

What is worse is that employment elasticity of growth was much higher during the pre-reform period. The 10th Plan document has a table that shows employment elasticity for the economy as a whole was 0.68 during the period 1983 to 1987-88; this fell to 0.52 if we consider the period 1983 to 1993-94, implying a slowing down during the later years; and it went down to a mere 0.16 during 1993-94 to 1999-2000, which led to much worrying about jobless growth at that time. But employment elasticity during 2004-05 to 2009-10 is even lower than during the late 1990s. The bang we used to get for the buck is now an almost inaudible whisper.

During the period, there has been a reduction in the number of workers employed in agriculture, which is a good thing. But the employment elasticity in the manufacturing sector too was negative, at -0.31 compared with 0.76 in the first half of the decade. There was a reduction in the number of people employed in manufacturing during the second half, particularly in the industrialized states of Maharashtra and Tamil Nadu. Before liberalization, between 1983 and 1987-88, the employment elasticity of manufacturing was 0.59. The Planning Commission explains this by saying there has been a substitution of labour by capital-intensive technology.

If employment in the manufacturing sector contracted, where did people find jobs? The total net increase in employment between 2004-05 and 2009-10 was 2.72 million. But the increase in informal employment during the period was 4.62 million. That means not only were the new jobs all created in the informal sector, but there was some shrinkage in formal sector employment as well, with jobs shifting to the informal sector. Indeed, in the decade 1999-2000 to 2009-10, formal sector jobs shrunk by two million and the entire job growth was in the informal sector. Nearly 93% of the workforce in 2009–10 was in informal employment, compared with 91% in 1999–2000. Not only are jobs hard to get, their quality too has worsened.

Many of the new jobs in the informal sector were in the construction industry. Between 2004-05 and 2009-10, there was a reduction of 14 million jobs in agriculture and five million in manufacturing. Most of the persons displaced found jobs in construction, where employment went up by 18 million. And since most of the construction industry is in the informal sector, the trend explains the growing share of informal employment.

These trends raise several questions. First, because growth in jobs has been so meagre, the United Progressive Alliance (UPA) government has had to resort to doles instead to keep the masses happy. Needless to say, this is not a sustainable policy and has resulted in bloated subsidies, a high fiscal deficit, inflation, higher interest rates and lower growth. Bigger subsidies mean less money left over for investment. In agriculture, for instance, subsidies as a percentage of GDP from agriculture and allied activities increased from 8% in 2005-06 to 16.6% in 2008-09 before falling to 11.8% in 2010-11. Public gross capital formation in agriculture as a percentage of GDP from the sector, on the other hand, went down from 3.3% in 2005-06 to 2.7% in 2010-11.

Next, will changes in labour laws lead to more employment in manufacturing? The Planning Commission certainly hopes so and it wants the manufacturing sector to become an engine of growth during the 12th Plan, by “suitable amendments to the labour regulatory framework". But who has the political will to do that?

With employment stagnant in spite of high GDP growth and especially given its capital-intensive nature, it’s likely that high growth has favoured the owners of capital, rather than labour. The share of labour in GDP will have come down. The result is an increase in inequality.

The immediate concern is that if employment growth has been so low during a period of high output growth, it has probably become even worse now, when GDP growth has weakened so much. The worry is the construction sector may not be able to drive employment and able to absorb new entrants into the workforce as well as under-employed labour from agriculture. The need is to build more infrastructure, factories and commercial complexes, which will increase the demand for labour, adding to the existing demand from the housing sector. The key, therefore, is to increase investment, which will spur growth in the construction sector and improve employment.

Manas Chakravarty looks at trends and issues in the financial markets. Comment at

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