Recently, there have been a spate of articles on employment elasticity of income in Indian newspapers and how important that is to job creation in India. The Hindustan Times has a series on India’s job challenge, Mint’s editorial discussed quality of jobs created, and the Economic Times cautions against India mimicking China’s strategy in creating jobs.
But what exactly is employment elasticity? And why is it important?
According to an RBI working paper by Sangita Misra and Anoop K. Suresh, employment elasticity is a measure of the percentage change in employment associated with a 1 percentage point change in economic growth. It indicates the ability of an economy to generate employment opportunities for its population as a per cent of its growth or developmentprocess.
An employment elasticity of 1 denotes that employment grows at the same rate as economic growth. Elasticity of 0 denotes that employment does not grow at all, regardless of economic growth. Negative employment elasticity denotes that employment shrinks as the economy grows.
This is crucial as it is commonly believed that economic growth alone will increase employment. However, as we examine the data, we see that despite India’s impressive economic growth, employment has not grown alongside. Ideally we would like to see an employment elasticity >=1, but, from the Misra and Suresh paper, we see that employment elasticity in India declined from 0.44 in the first half of the decade 1999–2000 to 2004–05, to as low as 0.01 during second half of the decade 2004–05 to 2009–10.
| Years | Employment Elasticity |
| 1999-2000 to 2004-05 | 0.50 |
| 2004-05 to 2009-10 | 0.01 |
| 2009-10 to 2011-12 | 0.18 |
Similar trends have been witnessed at the sectoral level. In agriculture and manufacturing, employment elasticity between 2004-05 and 2009-10 has been negative.
| Sector | 1999-2000 to 2004-05 | 2004-05 to 2009-10 | 2009-10 to 2011-12 | 2004-05 to 2011-12 | 1999-2000 to 2011-12 |
| Agriculture | 1.09 | -0.39 | -0.44 | -0.41 | -0.08 |
| Manufacturing | 0.80 | -0.27 | 1.74 | 0.10 | 0.33 |
| Mining & quarrying | 0.87 | 0.20 | -1.76 | -0.14 | 0.34 |
| Utilities | 0.67 | -0.27 | 7.60 | 1.42 | 1.17 |
| Construction | 0.88 | 1.63 | -0.25 | 1.12 | 1.01 |
| Trade, transport, hotels | 0.45 | -0.02 | 0.54 | 0.13 | 0.25 |
| Finance, real estate | 1.40 | 0.34 | -2.32 | -0.45 | 0.06 |
| Other services | 0.46 | -0.11 | 2.96 | 0.48 | 0.47 |
| All sectors | 0.50 | 0.01 | 0.17 | 0.06 | 0.20 |
The negative employment elasticity in agriculture indicates movement of people out of agriculture to other sectors where wage rates are higher. This migration of surplus workers to other sectors for productive and gainful employment is necessary for inclusive growth. However, the negative employment elasticity in manufacturing sector was a cause of concern particularly when the sector has achieved 6.8 per cent growth in output during Eleventh Plan. It did bounce back during 2009-10 to 2011-12, but the average employment elasticity in manufacturing between 2004-05 and 2011-12 was still only 0.10.
References:
Misra, S., & Suresh, A. K. (2014). Estimating Employment Elasticity of Growth for the Indian Economy. Reserve Bank of India.
Planning Commission, India. (2013). Twelfth Five Year Plan, 2012-2017. Sage Publications, India.