The bad news hidden in the good news on job numbers

As can be seen from the above chart, the unemployment rate seems to be coming back to where it has been in the last five and half years. This must be good news, right? If you look at the rate of unemployment in isolation, it is.

But there is more to unemployment than just the unemployment rate. We also need to take the labour participation rate into account. It had stood at 40% in May and fell to 39.6% in June.

What does this mean? Labour participation rate is the ratio of the labour force to the population greater than 15 years of age. The labour force, as CMIE defines it, consists of people who are of 15 years of age or more and are employed or are unemployed and are willing to work and are actively looking for a job.

Those who stop looking for a job because they can’t find one or do not get around to looking for one in the first place are not counted as a part of the labour force. To that extent, the labour force shrinks. So, while the unemployment rate has fallen between May and June, the overall labour participation rate has also shrunk. Hence, the number of people employed or unemployed and looking for a job, as a proportion of those aged over 15, has come down. This is a key factor that needs to be taken into account.

This is not a recent but a long term trend. For example, take a look at the following chart. It plots the labour participation rate from January 2016 onwards.

What does the above chart tell us? It tells us that the size of the labour force as a proportion of those aged over 15 has been falling for a while. While CMIE data is available from January 2016 onwards, this has been happening way earlier. The downward trend seems to be continuing after the brief recovery post last year’s lockdown.

This has been happening mainly because people stop looking for jobs as they cannot find one and thus drop out of the labour force. But, of course, a small proportion of this can also be attributed to individuals spending more time in school and college.

The labour participation rate peaked in May 2016 at 48.5%. In absolute terms, the size of the labour force then stood at 458.4 million. This was when the total number of individuals aged 15 or above was at 945.8 million. In June, the size of the labour force stood at 422 million. The number of people aged 15 or over was 1.07 billion, leading to a labour participation rate of 39.6%.

Clearly, as the number of people looking for a job or India’s so-called demographic dividend has expanded, the size of the labour force has shrunk as well. The main reason for this is the lack of jobs forcing people to stop looking for one and thus drop out of the workforce.

There is another way of looking at this—the total number of people who are employed during a month. In June, 383.3 million individuals were employed, against 375.5 million during May. Hence, the number of jobs month on month went up.

Nevertheless, the number of people employed in January 2020, before covid became a problem, had stood at 410.4 million. Clearly, we are a long way away from that level. Also, it is worth mentioning here that the number of employed people had peaked at 418.5 million in September 2016, nearly five years back, when the number of people aged 15 or over had stood at 953.3 million. In June, the number of employed people stood at 383.3 million. Those aged 15 or above stood at 1.07 billion.

Clearly, the number of people working as a proportion of the people who are in a position to work has come down dramatically over the years. This is one of India’s major problems, and it only seems to worsen by the day.

We simply don’t have enough jobs for our youth.

Vivek Kaul is the author of Bad Money.