While this is likely a side-effect of demonetisation, more research is needed to unpack how India’s unemployment rate fell in January-April 2017.India has a structural labour participation rate crisis. Credit: ReutersNew Delhi: The Modi government’s demonetisation decision may have resulted in the loss of roughly 1.5 million jobs, according to new survey data put out by the Centre for Monitoring Indian Economy (CMIE). CMIE’s data is based on the result of consecutive waves of household surveys performed from January 2016 to April 2017 (sample size: 161,617 households across India).The cliff notes? While India’s employed force grew from 401 million in April 2016 to 406.5 million in December 2016, it fell to 405 million in the four-month survey period of January through April 2017. “The workforce (persons greater than 14 years of age) swelled by 9.7 million to 960 million during January-April 2017. But, the number of employed did not grow, it shrank. This implies that the stock of persons to be provided with employment has increased,” Mahesh Vyas, head of CMIE, said in a recent post.Unemployment rate, Kharif puzzleVyas’ research notes however there are a number of confounding factors when trying to assess the impact of demonetisation on job creation and unemployment.Firstly, India’s unemployment rates (the ratio of unemployed to the total labour force) dropped in January-April 2017. As CMIE points out:The unemployment rate during September-December 2016 was 6.8% (29.6 million unemployed out of a labour force of 436 million). in January-April the rate fell to 4.7% (20 million unemployed out of a labour force of 425 million).Note that the 9.6 million fall in the unemployed count is close to the addition to the workforce. This is like saying that almost the entire new workforce of January-April 2017 did not offer themselves for employment. This is odd. Is this a seasonal phenomenon?The second issue is that the India’s employed labour force went up during the September-December 2016 period – demonetisation occurred on November 8, 2016.Vyas acknowledges that longer time-series research could help solve these issues, but posits a few reasons as to why the unemployment rate went down dropped in the quarter after demonetisation and why employment went up in the September-December period.“September-December is a busy season as the kharif crop is harvested during this period and most festivals fall during these months. 2016 was a good kharif crop and this could have kept employment levels high. January-April is a relatively lean season. Further, demonetisation could have had its full impact during these months while its impact during September-December was partial,” he notes.From November 8, 2016 onwards, however, the impact of demonetisation is more clearly shown in the labour participation rate: while the average rate was 46.9% from January to October 2016 (holding a narrow range at best), it fell to 44.8% in the weeks after demonetisation. After this, it recovered and then fell to 43.5% in April 2017.“After the demonetisation of November 8, it was evident to the new labour force that there was a serious dearth of jobs. This is evident in the drop in the labour participation rate,” CMIE’s research notes. Vyas’ conclusions merit serious consideration: “The drop in labour participation is in line with CMIE’s observation that new investments have been falling. For a developing economy like India, a drop in labour participation rate is a sign of an economic slowdown.”
