In today's Finshots we talk about India's labour force participation rate

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The Story

There are 1 billion employable people in India. But… 60% of them are not looking for jobs!!!

This was the headline that sparked a massive debate this past week. The insight came from an independent consulting firm CMIE after they reported that labour force participation rates (LFPR) have plummeted — from 46% in 2016 to about 40% today. Indicating that the total percentage of the working-age population that’s either “employed already or seeking work” stands at an abysmal 40%. It would also mean that the remaining 60% remain unemployed and that they aren’t actively seeking a job either.

At first sight, this might seem counterintuitive. How on earth do people just stop looking for jobs, especially when they’re unemployed?

Well, the answer isn’t always straightforward.

Take for instance somebody who decides to quit work to tend to the household. Or somebody who opted to retire early because they want to go explore India. These people will show up in the statistic, only this isn’t always a bad thing. Somebody has to tend to the household and going on a tour hardly indicates they’re struggling in life. However, it does get a bit sombre when you realise that some of them could also have stopped looking for jobs because the job market is horrible. They just can’t find anything meaningful and they’ve given up. This seems to be the popular narrative right now.

Also, there’s a stark difference between the unemployment figures and the labour participation rates. In fact, the unemployment rate has actually dropped — from 8.1% in February to 7.5% in April.

How do you explain this anomaly?

Well, the unemployment rate only includes the number of people who are actively looking for jobs (but don’t have one yet). So if you have 100 people in the working-age population and 10 people were looking for gainful employment the unemployment rate would be 10%. It doesn’t however include people who’ve dropped out of the job hunt. If anything, more people dropping out of the job hunt makes the unemployment figure looks better. For instance, in the earlier example, if 2 extra people were to drop out, then the unemployment figure would improve — from 10% to 8%. So it’s imperative that we understand the distinction here.

But that presents another interesting question — If so many people are dropping out of the workforce while being unemployed, why don’t we have pandemonium on the streets? What’s preventing a full-blown economic crisis?

Well usually, things don’t explode all of a sudden. Instead, we see progressive deterioration. For instance, we know for a fact that the total number of vulnerable households has been on the rise. Only 25% of households in India had more than one working member in 2021, as opposed to 35% in 2016. So it’s likely that they’ve been living on lower wages. Couple it with high inflation, and it’s likely you’ll start seeing more unrest as each day goes by.

There’s also the fact that the labour participation rates almost always tell you something about women in this country. When LFPR declines, it’s mostly women moving out of the workforce. And when they do so, they also forego a considerable degree of financial independence in the process.

Now, the government has come out very strongly denying these reports. They’ve contested CMIE’s conclusion. They’ve cast aspersions on their research methodology and have also highlighted a bunch of other issues in the study. However, it must be noted that the current growth figures don’t inspire a lot of confidence. It’s incredibly hard for us as a country to keep absorbing the large number of people coming of age each year, if growth in economic output continues to stay muted.

So yeah, even if CMIE’s study is off the mark, the employment conundrum is perhaps the single biggest issue plaguing the country.

Until then...

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