There should be a limit to the unemployment rate rising or the labour force participation rate falling. Since employment in India is largely informal in nature and wages are quite low, people cannot afford to remain unemployed or choose not be employed by not being a part of the labour market for long. Informal jobs imply no compulsory savings and low wages imply no practical savings. If people cannot save then not working would imply that they will not be able to meet the minimum daily expenses required to keep body and soul together.
Only around 20 per cent of the employed have salaried jobs. These are the only ones who can be expected to have regular savings. Over 50 per cent are self-employed and the rest are daily wage labourer. The median monthly household income in India was around Rs.15,000 and consumption expenditure was around Rs.11,000 in June 2021 according to CMIE’s Consumer Pyramids Household Survey. The headroom for savings, in absolute terms, for half the population is thus too small to permit them the luxury of remaining away from the labour markets over an extended period of time.
People in India just cannot afford to remain unemployed. It could leave a large section of the population vulnerable to hunger and therefore compulsions should drive them to work.
This understanding explained the unemployment rate of around 4 per cent till recently when income and savings rates were much lower. But, unemployment is now much higher at around 7 to 8 per cent and the labour participation rate has fallen dramatically in the past few years from well over 46 per cent in 2016 to just over 40 per cent in 2021. India’s labour force participation rate is now among the worst in the world. How could this have happened without widespread hunger and misery?
We try and explain this mystery and in the process also present a new measure of vulnerability. Our approach is fairly simple. We move the unit of compulsion and vulnerability from the individual to the household.
It is the household as a whole that faces compulsion and needs to overcome its vulnerabilities. For survival, a household requires that at least one of its members should be working. But, it is not similarly necessary for more than one member to be employed.
We find that the fall in the labour participation rate since 2016 has been accompanied with a fall in the proportion of households where more than one person is employed. Evidently, the fall in labour participation rate has largely been the result of the additional person employed in a typical household losing a job.
The proportion of households where more than one person is employed has fallen from 34.7 per cent in 2016 to 32.3 per cent in 2017 to 30.1 per cent in 2018. In 2019, it dropped further to 28.4 per cent. In 2020, the average proportion of households with more than one employed person fell to 24.2 per cent. But, in April 2020 when the country was under lockdown, the proportion was down to 17.6 per cent. In the first 11 months of 2021, the ratio was 24 per cent.
The proportion of households where more than one person is employed has therefore fallen relentlessly from nearly 35 per cent in 2016 to about 24 per cent in 2021. At the same time, households where only one person is employed has risen from 59 per cent in 2016 to 68 per cent in the first 11 months of 2021. The phenomenon provides an explanation of why India has been able to sustain a falling labour force participation rate over the past five years. But, it raises many related questions. What is the dynamics at play that leads to such an outcome? Do households withdraw working members from the labour markets or do they not send an additional member into the labour markets. This assumes some kind of household-level strategy. Or, wages are so low that it perhaps, makes better sense for just one person to enter the labour market to keep the hearth warm and the others are better deployed at home. These are questions that could be the work of academics who could subject the database to rigorous analysis to explain the dynamics behind this phenomenon.
A disturbing phenomenon that has also emerged in recent times is a rise in the proportion of households where no person is employed. In the past, before the pandemic, around six per cent of the households did not have any person employed. These were obviously the most vulnerable households. This proportion rose to 11.5 per cent in 2020. During the severe country-wide lockdown in April 2020, 33 per cent of the households did not have any employed person. This proportion remained high at 25 per cent in May 2020 and 12 per cent in June 2020.
The ratio never fell back to its pre-pandemic levels. After the second Covid wave, from July through November 2021, on an average, 7.8 per cent of the households did not report any member as employed.
Households with only one employed person can be considered to be somewhat vulnerable. Their proportion is rising. Also, the proportion of highly vulnerable households with no person employed is rising.