‘Falling labour participation rate is common in the ageing populations of the developed world.’
‘But India is a country with a young population.’
‘It is imperative that the labour participation increases.’
‘We need a larger labour force to increase our per capita income level,’ points out Mahesh Vyas.
Demonetisation did not hit the unemployment rate. It hit something much deeper. It hit labour participation itself.
Labour participation rate is the proportion of the population that is employed or is seriously willing to work.
The labour force, therefore, consists of people who are employed and also those who are not employed, but are actively looking for jobs.
People who are not employed and are not actively looking for jobs are not considered part of the labour force.
A retired person who has opted to not seek any further employment, a young student who is not seeking employment, or most home makers in India who do not seek employment are not considered part of the labour force.
People generally join the labour force in their early twenties and exit it as they approach their sixties.
Some join early, some leave late, but broadly the labour participation rate is the highest among people in the age group of 25 to 60 years.
Usually, a person who joins the labour force does not leave it until he achieves seniority in age.
Usually, a person who loses a job continues to look for another job and is, therefore, classified as an unemployed person.
In such a case, the labour force remains the same and the unemployment rate goes up.
In the unorganised sector, however, people could move in and out of the labour force depending on the availability of jobs.
Labour in the unorganised sector is relatively fluid, as it depends on the seasonality of jobs in farms, construction and other similar sectors.
In exceptional times, such as a deep economic shock, people who lose jobs may drop out of the labour force because of an understanding that there are no jobs to look for.
Further, during such tough times, a large proportion of the unemployed also leaves the labour markets because these people see no hope of getting jobs in such conditions.
In fact, the unemployed leave the labour market faster because their probability of getting jobs is much lower than those who had some job until recently.
This is what happened during November and December 2016.
The total number of people looking for jobs shrank, not necessarily because they found jobs, but because they lost hopes of finding any.
As a result, the labour participation rate fell to 45.8 per cent in November and 45.3 per cent in December 2016.
These are the lowest labour participation rates seen since we started these measurements in January 2016.
Usually, the ratio has hovered between 46 per cent and 48 per cent.
These are preliminary estimations, but they do reflect the broad trend, which, it seems, is one of a falling labour participation rate.
What happens to the unemployment rate when the labour participation rate falls?
The unemployment rate is the ratio of the unemployed people who are looking for a job to the total labour force.
As explained earlier, the number of unemployed has fallen.
This reduces the numerator and the denominator in the computation of the unemployment rate.
But since the denominator is much larger (almost 10 times) than the numerator, the proportionate fall in the numerator is much bigger.
As a result, the ratio falls and shows up as a fall in unemployment.
The unemployment rate has been falling since October 2016.
The rate has come down from 8 to 9 per cent during January to September 2016 to 5 to 6 per cent in the past three months.
In the week ended January 22, 2017, the unemployment rate was even lower, at 4.9 per cent.
Such a fall in unemployment is misleading. A fall in unemployment during a period of a serious shock is counter-intuitive.
As explained earlier, this fall in the unemployment rate is the result of a decline in labour participation.
A falling labour participation rate is common in the ageing populations of the developed world. But India is a country with a young population.
It is imperative that the labour participation increases.
We need a larger labour force to increase our per capita income level.
This, of course, is best achieved through greater investments in an environment that actively encourages innovation and entrepreneurship.