The employment test

The labour force may have actually shrunk while the Modi government has been in office

Updated - February 21, 2019 09:01 am IST

Published - February 21, 2019 12:02 am IST

Attuned as we have become to political grandstanding on the purpose of democracy, we may not have imagined that something so prosaic as statistics can alter our perception of how it is actually working for us. The emergence over the past few months of data on employment, speaking precisely the lack of it , cannot but have an influence on our assessment. They paint a picture of an economy that is widely out of line with the government’s pronouncements on its performance. These have generally avoided any reference to employment, except to say that there is a lack of reliable data on it, for the rectification of which the government itself has done very little.

Arun Jaitley, Finance Minister for the greater part of this government’s tenure, has claimed that it has coincided with a degree of macroeconomic stability that has not been surpassed. Perhaps he had in mind the combination of falling inflation and declining Budget deficits since 2014. However, while this has indeed transpired, it is important to note that these trends had commenced even before. Moreover, after repeatedly expressing a commitment to fiscal consolidation, the government did not hesitate to swerve from the path of rectitude to finance an income support programme for farmers in an election year.

Silence on jobs

But of greater significance is the fact that neither he nor the Prime Minister has had anything to say about employment. In this the BJP is not unique. Employment does not usually figure in the public discourse orchestrated by political parties, either at the Centre or in the States. This must change, for steady employment is the citizen’s aspiration, to realise which she elects representatives. Governments in India must therefore be routinely subjected to an employment test which gauges their success in generating and sustaining high employment. In his election campaign in 2014 Narendra Modi had announced that he would generate jobs.

Employment data from government sources (Labour Bureau) for about half a decade up to 2015 and from the independent agency Centre for Monitoring Indian Economy (CMIE) for the period since give us a reasonably good idea of the progress made with respect to employment. When supplemented with other information, these sources also suggest to us the proximate factors responsible for that history. The evidence they provide tell two stories. First, the Modi government has had next to no success in generating employment, notwithstanding its promises at election time. A development that may require some effort to understand fully, but which nevertheless it is important for the citizen to do, is that the labour force may actually have shrunk while it has been in office. The labour force is the sum of the employed and those unemployed who are seeking employment. A shrinking of the labour force is most unusual in an economy with a growing population, and thus a growing working age cohort.

The demonetisation effect

While this decline had already emerged in 2015, it became pronounced after demonetisation in 2016. We owe to CMIE, a private Indian body, both this finding and the articulation of the precise mechanism at work. A section of those hitherto willing to work may have simply dropped out of an already challenged labour market. This possibility is recognised in macroeconomics as the ‘discouraged-worker effect’ and has been observed in Western economies. The loss of skill that can accompany being unemployed even temporarily, and the consequent loss of long-run output for the economy, is the basis of the argument that public policy must respond with alacrity to growing unemployment. No such sensibility has infused the government, which appears not to have noticed the decline in the labour force itself, a development that occurred very early in its tenure. It has instead congratulated itself on having delivered macroeconomic stability. We are now able to see that whatever may have been the acclaimed beneficial impact of demonetisation in terms of raising direct tax compliance, it has caused demoralisation among a section of the already unemployed who may have given up all hope of finding employment.

The second of the two histories referred to, seen in the reports of one of the government’s agencies, is that of a rising unemployment rate from 2011 onwards. This point has political significance as we stay poised for the general election. This is that while the Modi government may have run amok with the demonetisation, India’s unemployment challenge predates this episode and evidently runs deeper. Labour Bureau data show that the unemployment rate almost doubled between 2011 and 2015. It is surprising that the government’s own reports did not flag this. The economic, as opposed to the political, message is that the recent history of unemployment has been impervious to the political formation governing India.

If we are to more than just wring our hands at the existant unemployment, an understanding of what underlies it is necessary. Actually, no more than standard macroeconomic analysis is needed in this regard. Both output growth and employment are under normal circumstances associated with capital formation. Capital formation as a share of output has been declining since 2011-12. Unlike consumption expenditure, capital expenditure is unique in expanding both the supply and demand sides of the economy. Despite the declining capital formation, neither United Progressive Alliance (UPA) II nor National Democratic Alliance II considered it necessary to respond to it by stepping up public investment, the obvious thing to do in the prevailing circumstances.

The clue to this inertia may be found in the political economy. For UPA II the success of its first term in office must have looked like the perfect opportunity to expand its political base by legislating rights and reciting the mantra “inclusive growth”. Then came Narendra Modi, who somewhat incongruously for an avowedly nationalist politician, embraced the dogma of the Washington Consensus. Popular in the 1990s after the collapse of the Soviet Union, it extolled small government and asserted the capacity of the market mechanism to deliver an optimal outcome. There was in this scheme of things no place for any involuntary unemployment. So, whatever may have been the calculation of the two political formations, employment generation just took a back seat in their respective programmes.

Cost of failure?

We have adopted representative democracy as our form of government because we cannot in isolation achieve the outcomes we desire even when they are exclusive to us. Employment is one example of this. Though it manifests itself as jobs for individuals, it is determined by macroeconomic factors which individuals cannot influence on their own. The Great Depression in the 20th century and the Great Recession in the 21st, both which have originated in the U.S. but quickly spread across the world, testify to this helplessness of individuals in the face of market forces. In a democracy, it is left to elected representatives whether to pursue macroeconomic policies conducive to the generation of employment. India’s political parties have for close to a decade now failed to so, either wilfully or out of neglect. However, when elected to govern, they are given a chance to create the conditions that enable Indians to lead flourishing lives, which includes being meaningfully employed during their working age. India’s political parties must pass ‘the employment test’. When they fail they must vacate the stage.

Pulapre Balakrishnan is Professor, Ashoka University, Sonipat and Senior Fellow, IIM Kozhikode

0 / 0
Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in


Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.