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Posted by: Deepa Vasudevan on Thu, May 15th, 2014

Finding Jobs for the Demographic Dividend

The growth path of India is unique in the way that the economy has shifted from being predominantly agrarian to extensively service oriented in just about four decades. This is different from the trajectory followed by western developed countries, or the model adopted by the emerging economies of East Asia. In both cases, the transformation was driven by a massive wave of industrialization. As agriculture became more productive and required fewer workers, excess rural labour migrated to cities to produce goods for export markets (Korea, China) or for large domestic markets (USA, UK). Manufacturing would remain the chief driver of growth and income for several years, and help the industrializing countries achieve higher levels of per capita income[1].  India has bypassed the few decades of rapid industrialization and growth in manufacturing capabilities that typically characterise an emerging economy. The share of manufacturing in total GDP has remained in the range of 14%-16% since 1980, although there have been extended periods of strong manufacturing growth[2].  At the same time, value addition by agriculture has declined continuously: from contributing about 35% of GDP in 1990-91, the share of agriculture is down to about 14%. Services, which account for 60% of total output, have become the main engine of economic growth.  Their importance has increased after the post-2008 crisis, when the 6% plus real rates of growth in services ensured that India avoided a steep recession (Pic 1).

 

Pic 1 Growth rates of GDP by Sector (at 2004-05 prices)

 

Pic 1 Growth rates of GDP by Sector (at 2004-05 prices)

Source: CSO


The transformation into a services oriented economy comes when India is in the midst of a demographic dividend, a period when the working age population exceeds the dependent population[3]. Government estimates indicate that the labour force could rise from 473 million in 2010 to as much as 586 million by 2020[4]. In other words, roughly 100 million workers would enter the labour force in that decade[5]. Will there be enough jobs for all of them? In which sector are they most likely to be employed?

 

The answer depends on two factors: (i) the rate at which the economy as a whole and its sub-sectors are growing and (ii) the responsiveness of employment to GDP growth.

 

Consider the second factor first. The responsiveness of employment to growth - known as employment elasticity- is measured as the percentage increase in employment for a percentage rise in GDP. Higher the employment elasticity, more the employment generated for each increase in   GDP. Unfortunately, employment elasticity has shown a declining trend in the decade of 1999-2009. Between the two periods 1999-00 to 2004-05 and 2004-05 to 2009-10, employment elasticity for the economy as a whole declined from 0.44 to a low 0.01. This means that a 1% increase in GDP generates merely a 1 basis point increase in employment[6].  The sector-level picture is even more alarming. Employment elasticity for agriculture and manufacturing turned negative; reflecting the reduction in the number of persons being employed in both sectors[7]. Employment was generated only in construction and some service sectors (Pic 2). Research shows that the construction sector has an employment elasticity of 1.15; among services, the financial, real estate and business services sub-sector has a high employment elasticity of 0.77[8].

 

Pic 2 Increase in Employment across Sectors 


Pic 2 Increase in Employment across Sectors

Source: Planning Commission

 

So can the economy depend on construction and services to absorb most of the new entrants to the labour force? The picture below shows why even that will be a serious challenge (Pic 3). The width of each column in the picture represents employment in that sector, and the height represents its contribution to economic output. The widest and shortest column belongs to agriculture, which employed nearly 49% of the labour force, but generated only 14% of GDP. In contrast, financial, insurance, real estate and business services (tall but narrow!) generated 18% of output although it employed only 1.7% of workers. Manufacturing is somewhere in between, absorbing about 12% of workers. 

 

Pic 3 Employment by sectors against Contribution to GDP

 

Pic 3 Employment by sectors against Contribution to GDP

Source: Planning Commission, CSO


Sectors that are the most labour intensive also tend to be the slowest growing and therefore contribute the least to economic growth.  Fast growing services needs the least labour, so it can absorb only a very small fraction of the workers that enter the job market. Agriculture is declining, and agricultural labour is often underemployed and seasonal, so the sector cannot absorb too many of the new entrants. And manufacturing, where employment elasticity is falling and growth has been poor for the last two years, cannot pick up the slack either. If the sectors put together cannot fully absorb the hordes of workers that will enter the job market each year, then does that mean that unemployment will go up?

 

There is no reliable annual data on employment and unemployment. Estimates of the shortage of jobs between 2010 and 2020 vary from 3 million to 17 million, depending on assumptions made about the rate of economic growth, the extent of labour force participation and the sector-wise break-up of employment[9]. The numbers are not too large (for a workforce of 500 million, it accounts for not more than 3.4% ), but it must be remembered that even when all the sectors of the economy were growing at a high rate, only 2.7 million jobs were added in the five years between 2004-05 and 2009-10.  If the highest growth years ever experienced did not deliver enough jobs, employment opportunities can only worsen during years of lower growth.

 

There are no easy solutions to this problem, but Pic 3 provides some clues. First, given that construction has high employment elasticity; a rise in infrastructure investment will create opportunities for construction and greatly add to employment. That is one more good reason to invest in infrastructure! Second, putting incentives in place for labour intensive manufacturing sectors, such as textiles and garments, or gems and jewellery would spur growth and hiring in these sectors. An added bonus is that these are export oriented sectors that can earn valuable foreign exchange. Third, skill development and vocational training of workers is necessary to ensure that they are adequately equipped to handle jobs[10]. In the absence of formal training, many will end up in low paying and unproductive unskilled jobs in industry and services. Finally, since economic growth and employment elasticity work together to generate jobs; if elasticity is declining, we need to compensate by increasing growth.  The past few years have often been described as years of “jobless growth”, but the country would be worse off if there was widespread joblessness, and poor economic growth.

 

The summary of the ideas explained in the blog is also in this podcast.

 



[1] Rodrik, 2013, “The Perils of Pre-mature Industrialization”, explains the growth patterns of some countries. Available at http://www.project-syndicate.org/commentary/dani-rodrikdeveloping-economies--missing-manufacturing

[2] Between 1993-94 and 1996-97, real growth in mfg averaged 11.1%. Between 2004-05 and 2007-08, growth averaged 10.5%.

[3] The Census of India 2011 estimated the working age population (15- 64 years of age) at 63.4% of the total population

[4] Source: “ Table 2.1, Seizing the Demographic Dividend, Chapter 2, The Economic Survey of India, 2012-13”. Under three alternate scenarios, it is estimated that the labour force will vary from 561 million to 586 million by 2020.

[5] This number will vary depending on underlying assumptions. But roughly, about 10 million workers annually appears to be a reasonable estimate.

[6] A basis point is one-hundredth of a percent

[7] The Planning Commission explains the negative employment elasticity of agriculture as the outcome of outward migration from agriculture. In the case of manufacturing, the drop in elasticity is due to increasing use of technology and capital intensive production processes which reduced new hiring

[8] For the period 2004-05 to 2011-12. Source: Crisil Insight: Hire & Lower, Slowdown Compounds India’s job-creation challenge, January 2014

[9] These numbers are taken from the Economic Survey of India, 2012-13, Chapter 2

[10] The 2009-10 NSSO survey found that among the working age labour force (15-59 years ); nearly 30% were illiterate, and less than 20% had completed secondary school or higher education.

Ajit Purohit on Wed, May 21st, 2014 5:59:10 pm

It is a very detailed study done by Ms Deepa hence we could get good knowledge out of it.

Atul Kamdar on Tue, May 20th, 2014 10:51:56 pm

It is a very exhaustive study made by Ms.Deepa. She has clearly brought the actual picture in front of us.

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