Employment

Employment Elasticity of Growth in India

by

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.

YearsEmployment Elasticity
1999-2000 to 2004-050.50
2004-05 to 2009-100.01
2009-10 to 2011-120.18

Similar trends have been witnessed at the sectoral level. In agriculture and manufacturing, employment elasticity between 2004-05 and 2009-10 has been negative.

Sector1999-2000 to 2004-052004-05 to 2009-102009-10 to 2011-122004-05 to 2011-121999-2000 to 2011-12
Agriculture1.09-0.39-0.44-0.41-0.08
Manufacturing0.80-0.271.740.100.33
Mining & quarrying0.870.20-1.76-0.140.34
Utilities0.67-0.277.601.421.17
Construction0.881.63-0.251.121.01
Trade, transport, hotels0.45-0.020.540.130.25
Finance, real estate1.400.34-2.32-0.450.06
Other services0.46-0.112.960.480.47
All sectors0.500.010.170.060.20

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.

Consumer Confidence in the Economy has Diminished

by

The Reserve Bank of India recently released the consumer confidence survey, which had some interesting insights. The survey was conducted in May with a sample drawn from the 6 major cities of New Delhi, Mumbai, Bengaluru, Chennai, Kolkata and Hyderabad. So, we must be aware of the extreme urban bias of the survey. Nonetheless, consumer perception about their current state and their expectations about the future can sometimes capture what the statistical data cannot.

In short, 48% of the population believe that the overall economic condition has worsened from a year ago, while 32% believe that their situation has improved. The rest believe that there is no significant change.

These tables from an article in Mint captures the summary of the consumer confidence survey.

Similarly, nearly 44% believe that their job situation has worsened and a majority of people believe that their incomes have remained constant in the last one year. This should ring alarm bells for the ruling government. In a fast growing economy, it should be worrying if a majority of people believe that there is a worsening or even a status quo of their income, job prospects and overall economic conditions.

The perception of those surveyed are contrary to the data. While GDP growth in the latest quarter has been the highest in the past two years, people believe that the economy is siding. Inflation perception does not correlate with the data as well. People largely believe that the inflation situation has improved in the past year, though CPI has been rising continuously.

The question, then, is whether we can take the results of this survey seriously. The answer is yes. People make decisions based on their perception and expectations of the future. They do not necessarily follow data released by the Central Statistical Office. Those decisions can result in a self-fulfilling prophecy. If enough people believe that the economic situation will worsen, they will postpone investment and big consumption decisions, and will choose to save instead. This will result in reduced demand and slack in the economy.

On that note, it is slightly reassuring to note that people are quite optimistic about the future. A majority of the people believe that all 4 of the parameters spoken above will improve in the coming year. However, the article also points out that the numbers were higher in 2014.