Unemployment in India: Private sector must also do its part

Adam Smith, in his seminal work, The Wealth of Nations, observed that “the real price of anything, what it really costs the man who wants to get it, is the toil and trouble involved in getting it.” This observation highlights the critical importance of generating employment, especially in a country like India where millions of people struggle to earn a living through hard work.

The latest data paints a mixed picture of progress. As per the Periodic Labour Force Survey (PLFS), if employment is defined as any engagement in profitable productive activities, the increase in employment since 2017-18 has been significant. The total number of workers in the Indian economy increased from 458 million in 2017-18 to 563 million in 2022-23, reflecting a significant growth. Moreover, the National Statistical Office (NSO) has released estimates from the Quarterly Urban Surveys for January-March 2024, confirming these trends. The labour market participation rate for urban men above the age of 15 years increased from 67.7% in January-March 2022 to 69.8% in January-March 2024. For urban women, the participation rate increased from 18.3% to 23.4% during the same period.

Based on PLFS data, the unemployment rate has declined from 4.2% in 2021 to 3.6% in 2022 and further to 3.1% in 2023. PLFS is considered one of the most reliable sources of employment data in India. However, improvements are needed in the robustness of this data collection.

The main intention behind the introduction of the PLFS in 2017 was to provide more frequent and timely data on the Indian labour market, addressing the shortcomings of the previous five-year surveys. Unlike the enterprise surveys, the PLFS focuses on collecting data from households, capturing the nuances of individual and informal sector employment. This approach offers a comprehensive and timely understanding of labour force participation, employment status and the nature of work, thereby enhancing the ability of policymakers to make informed decisions and respond to the dynamic changes in the Indian labour market.

However, there is a need to (1) shorten the time lag of the PLFS, (2) increase the survey frequency, and (3) improve the methodology. Several empirical studies have criticized the PLFS methodology. In a study published in Economic & Political Weekly, Jatav and Jajoria (2020) delve into the methodological changes introduced with the PLFS and their implications for the estimates of socioeconomic inequality in India. They highlight the fundamental flaws in the PLFS sampling methodology, in particular, the replacement of the detailed stratification based on economic status used in the five-year Employment and Unemployment Survey (EUS) with an overly simplistic criterion based on the education level of household members. It is argued that this methodological change is irrational and technically incorrect as it fails to take into account the multifaceted nature of socioeconomic status, leading to biased and unreliable data results. The use of education as a proxy for economic status by the PLFS omits important factors such as household income and asset ownership, which were integral to the EUS stratification process.

The authors provide a technical critique of the inconsistencies resulting from the sampling design of the PLFS, in particular the unrealistic changes observed across socioeconomic strata and the distortions of key labor market indicators. The study finds that the PLFS data indicate significant increases in unemployment and NEET (Not in Employment, Education, or Training) rates, especially among youth aged 18-29, which can be attributed to flawed sampling methods. Furthermore, the modified PLFS sampling method results in a nonlinear and inconsistent distribution of households by income class, which contrasts with the expected linear relationship observed in the EUS data. This inconsistency is exacerbated by the exclusion of detailed queries on household assets, land ownership, and economic activity in the PLFS, which limits its ability to accurately capture socioeconomic disparities. The paper concludes that the methodological flaws of the PLFS undermine its reliability, necessitating a thorough review and revision of the sampling techniques to provide more accurate and comprehensive socioeconomic data.

Manna and Mukhopadhyay (2023) extend this critique by examining alternative stratification variables for the PLFS to increase the accuracy and reliability of the data. They argue that the current stratification variable, the number of household members with secondary education or higher, does not adequately reflect socioeconomic status. Instead, they propose using variables such as the number of household members aged 15 and older or the number of members aged 15–59, which exhibit higher correlation coefficients with key PLFS variables such as the number of people in the labor force and the number of employed. The methodology adopted in their analysis involves deriving sample allocations based on proportional and optimal allocation methods and comparing them with the current PLFS allocations.

Their findings suggest that existing rural allocations, which disproportionately assign more households to the stratum with one educated member, should be adjusted. Specifically, they recommend reducing the allocation for this stratum from four to two households per village and increasing the allocation for the stratum without educated members from two to four households. In addition, their analysis reveals that stratification by the number of household members aged 15 and older or 15-59 years would provide a more accurate representation of socioeconomic status and improve the reliability of the survey data. Such an approach would more closely align the stratification process with the true distribution of socioeconomic characteristics in the population, resolving the biases introduced by the current educational criterion.

Apart from the larger methodological issues, when we talk about employment, it is prudent to examine state differences in the number of unemployed. The unemployment rate for those aged 15 and above is highest in Jammu and Kashmir (11%) and Kerala (10.7%) in Q4 2023-24. These states are closely followed by Rajasthan (9.6%), Himachal Pradesh (9.1%) and Telangana (8.8%).

But the bigger problem is the shockingly high unemployment rate among youth aged 15-29. Kerala tops the list with a youth unemployment rate of 31.8%, followed by Telangana (26.1%), Rajasthan (24%), Odisha (23.3%), Uttarakhand (22%) and Bihar (21.5%).

This persistent and high youth unemployment can be attributed to factors such as the fraction of youth enrolled in higher education, preparation for government exams, skill gaps, or mismatches in wage expectations. These factors, while significant, only scratch the surface of a deeper, systemic problem affecting the quality and type of jobs available.

In addition, higher levels of education in some of these states are driving up unemployment rates. The reluctance of educated youth to take up manual or commercial jobs, which are often filled by migrant workers, highlights a critical mismatch between job availability and the aspirations of the local workforce. Furthermore, the rise in women pursuing higher education, while positive in many ways, has contributed to the rise in unemployment as they seek quality employment that matches their qualifications.

There is also the problem of the private sector not creating enough jobs. Closely related to this is the problem of skills mismatch. Educational institutions often fail to equip graduates with the practical skills and industry knowledge required by employers, resulting in a significant gap between the skills of job seekers and the needs of the labor market. Rapid technological advances are exacerbating this problem as the labor force struggles to keep up with changes in industries such as IT and automation. As a result, even when jobs are created, a significant portion of the labor force remains unemployed due to a lack of relevant skills, hampering overall economic progress.

The recent remarks by Chief Economic Advisor V. Anantha Nageswaran on employment have been much discussed and in some cases misunderstood. Speaking at the launch of the India Employment Report 2024, Nageswaran emphasised that it is not feasible for the government to address all the social and economic challenges, including unemployment, on its own. He explained that the primary responsibility for job creation lies with the private sector, not the government. However, the government needs to create an enabling environment for job creation. The government has been working towards creating such an environment over the last 10 years. It is fair to say that more needs to be done. But at the same time, the private sector also needs to do its part.

(Bibek Debroy is an economist and Aditya Sinha is a public policy specialist.)

Disclaimer: These are the author’s personal opinions.