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Economic growth
and
Unemployment
Session 6

1
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Outline

Economic Growth & Unemployment in India: Role of Manufacturing

Employment: Jobless Growth Sector
Long-term and Short-
term Perspective

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Economic Growth
Subtitle

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Economic Growth
Master title style

• Economic growth – percentage change of GDP in the current

year over the previous year
• Involves dynamics of how GDP evolves over time
• Growth theories explain movement of GDP over a long-term
perspective
• Interaction of utility maximizing households and profit maximizing
firms determines the long-term pattern of economic activities and
evolution of per capita income

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India – GDP
edit&Master
PC Income
title style
16000000 100000

90000
14000000
80000
12000000
70000
10000000
60000

8000000 50000

40000
6000000
30000
4000000
20000
2000000
10000

0 0

GDP PCI 5 5
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Interaction Households
title style
& Firms

6 6
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Framework

• Household behaviour – Maximising utility out of consumption over

infinite number of years of its existence
• Resources: wage income and returns out of assets
• Use of Resources: Consumption & Saving
• Change of assets: Resources over its use
• Firms – Maximise profit by using a production technology which
combines factor inputs to produce output
• Pays wages to workers and return on assets

7 7
Clickdeterminants
Key to edit Masteroftitle
Economic
style Growth

• Growth of factor inputs like workers and capital provided to the

worker
• Saving rate determines the pace of capital accumulation – but given
the limits to raise saving rate and diminishing marginal productivity of
capital, there is a limit to which they can propel perpetual growth
• Technological progress, which drives productivity growth of physical
capital and human capital key to long-term economy prosperity –
which is sustained in OECD countries
• Employment causes Economic Growth

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Click to Accounting
Growth edit Master (Solow)
title style
• PF: Y = A F(K, L)
• CD PF: Y = A Kα L1-α
• Ln Y = ln A + α ln K + (1- α) ln L
• Taking differentiation, both sides, we get
• dY/Y = dA/A + α (dK/K) + (1- α) (dL/L)

• Thus, economic growth is sum of (i) growth of technology of

production, (ii) α times growth of capital, and (iii) (1- α) times
growth of labour

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Accounting Master
economic
title style
growth in the US (Mankiw, 2010)
Years dY/Y dA/A α (dK/K) (1-α)(dL/L)

1948-2007 3.6 1.2 1.2 1.2

1948-1972 4.0 1.2 0.9 1.9

1972-1995 3.4 1.3 1.5 0.6

1995-2007 3.5 1.3 1.0 1.3

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Growth edit
East
Master
Asiantitle
Tigers
style
(Young, 1995 – Quarterly Journal
of Economics)
• Hong Kong, Singapore, South Korea and Taiwan
• 1966-1990: witnessed 7% annual growth (US 2%)
• Exceptional growth traced to
• Large increases in the capital stock
• Increases in labour-force participation
• Increases in educational attainment
• No unusual rapid growth in total factor productivity
• In South Korea
• Investment rate increased from 5% in 1950s to 30% in 1980s
• Working population with high-school education 26%(1966) to 75%(1991) 1111
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India (Rodrick
edit Master
and Subramanian,
title style 2004 – EPW)
• Projected growth for 2005-2025: 6.7%
• Growth in total factor productivity (dA/A): 2.5%
• α times growth in capital: 2.9%
• α =0.35, and dK/K=8.28
• (1- α) times growth in labour: 1.3%
• 1- α =0.65, and dL/L=1.9
• Actual average growth during 2004-05 to 2019-20: 6.8%

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Okun’s edit Master title style
• Business cycle phenomenon – periodic recurrences of economic
boom and recessions – also associated with similar swings in
unemployment rate
• Employed workers help to produce goods and services –
unemployment is associated with fall in GDP
• Authur Okun – negative relationship between unemployment and
GDP
• Okun’s Law:
• Economic Growth = 3% - 2*Change in the Unemployment Rate

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Long-term MasterShort-term
title styleRelation

• In the long-run, change in unemployment rate due to economic

fluctuation can be treated as nil
• Then, from Okun’s law – economic growth = 3%.
• This is determined by growth in labour force, capital accumulation and
technological progress
• In the short-run, movements in GDP are highly correlated with the
utilisation of the economy’s labour force (employment rate)
• Decline in production of goods and services during recessions are
always associated with rise in joblessness
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Unemployment in India &

Jobless growth
Subtitle

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CMIE

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PROF. AMARESH SAMANTARAYA
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Sectoral ShareMaster
in Employment
title style
70.0

63.2
60.1 60.4
60.0 58.6
56.7

Dr. Amaresh Samantaraya

50.0

40.0

30.0
25.7
23.8 22.9
21.2 22.3
17.6 18.5
20.0 15.6 15.6 15.8

10.0

0.0
1983-84 1987-88 1993-94 1999-00 2004-05

Agriculture Industry Services

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Sectoral ShareMaster
(2011-12)
title style

Output Employment

Dr. Amaresh Samantaraya

18.7%
26.8%
49.6% Agl & Allied 48.9% Agl & Allied

Industry Industry
31.7%
Services
24.3%
Services

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Click to edit
Sectoral ShareMaster title style (2018)
in Employment
Sales

Services
33%
Agriculture & Allied
42%

Industry
25%
Agriculture & Allied Industry Services 2020
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Comments

1. While structural transformation of Indian economy

entailed rising share of services and industry over
time, it didn’t result in commensurate shift in
employment share.

1. The shift in share in employment is quite slow

2. Agriculture continues to suffer from disguised

unemployment in India

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Labour market changes

during 2005-18

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Structural Shifts
Master
in Indian
title style
Labour Market

1. Expansion in the size of working-age population

2. Marked rise in enrolment of young adults in educational institutions

3. Gradual movement of rural workers away from agriculture – due to

both ‘push’ and ‘pull’ factors
• Young in rural areas anxious to escape from ‘disguised unemployment’ in
agriculture

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Question

• Whether the rate of growth of labour demand in non-agricultural

sectors has been rapid enough to absorb the rising supply of young
adults who are potential job seekers?

• After 2012, the gap between labour supply and labour demand
deepened
• Marked increase in unemployment rate among the young

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Labour edit Master title style
• India enjoys demographic ‘window of opportunity’
• By 2000s, India had overtaken China w.r.t growth of
working-age population
• After 1990, India accelerated addition to working-age
population, while the same declined in China
• The size of working-age population will continue getting
bigger until 2050

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Enrolment Educational
title style
Institutions

• Considerable improvement in enrolment in educational institutions

between 2004-05 and 2011-12
• Increased by around 3.2% for males and 3.0% for females
• Led to decline in LFPR
• However, the proportion of students to population declined between
2011-12 and 2017-18
• By 1.1% for males and 0.6% for females
• Could be due to slowing down in growth of the young population
• Decline in LFPR during 2011-18 is not due to increase in the
proportion of students in total population
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Educated Workforce
Master title
andstyle
Economic Growth
• Expansion of educated workforce has been crucial to success
achieved by South Korea and in other East Asian countries
• Caution:
• Enrolment in educational institutions does not necessarily translate into the
skills and knowledge that constitute human capital
• Poor learning achievements of students in many developing countries
undermine the progress achieved in school enrolment
• Annual Status of Education Report’s surveys from 2008 onwards show –
learning outcomes in Indian schools have worsened over time
• Leaders of Indian industry have been expressing concern about a serious
shortage of workers with necessary skills in various fields

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Changes in Labour
MasterDemand
title style
• Initial years after economic reforms since 1991 witnessed faster
economic growth
• It was followed by a phase of slowdown during 1997-98 to 2002-03
• ‘Dream run’ during 2003-08
• Signs of deceleration since 2011-12
• GCF-GDP ratio declined from 39.5% in 2012-13 to 33.5% by 2016-17
• Exports growth decelerated with dampening world demand
• Vulnerabilities with high incidence of NPAs and lack of growth in the informal
sector

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swingstitle
in economic
style activity & unemployment
situation
• Surveys held in 1999-2000 and 2004-05 indicated – India’s rural
economy was going through a severe crisis
• Dip in public investment and stagnation in agricultural income and wages
• Surveys confirmed that employment growth decelerated sharply during
1990s as compared to 1980s
• Industrial sector and services revival of growth since 2003-04
• Between 1999-2000 and 2004-05, non-agricultural employment increased
impressively (by 41.9 mio)
•

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Structural transformation
Master title style
in Indian labour market
• Employment elasticity of agriculture has declined and that of
services has increased
• During 2009-11, India’s rural sector had been on a path of recovery,
but it was associated with fall in employment in agriculture
• Faster growth in agricultural income and increase in government spending
on MGNREGA
• Agricultural workforce declined from 258.8 mio in 2005 to 224.5 mio in 2012,
which further declined to 197.2 mio in 2018
• There was modest increase in non-agricultural employment by 49.1
mio, overall employment by 14.8 mio
• The structural transformation is in consistent with predictions by
Arthur Lewis (1954) and modern theories on structural
transformation
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Employment elasticity
title style
Sectors 1993-94 to 1999-00 to 2009-10 to
1999-00 2004-05 2011-12

Agriculture 0.3 0.7 -0.5

Industry 0.4 0.9 0.9

Services 0.3 0.5 0.5

Total 0.2 0.4 0.1

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Employment generation
title in
style
the construction sector

• Marked acceleration in growth of income and employment in the

construction sector since 2004-05
• Generated 23.9 mio jobs between 2005 and 2012
• Severe deceleration in the construction sector since 2012
• Employment generation fell to 4.7 mio between 20012 and 2018
• Fresh employment opportunities that created in rural India on
account of construction fell from 18.9 mio during 2005-12 to 1.6 mio
during 2012-18

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Role of Manufacturing
Sector

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Manufacturing jobs picked
title style
up since mid-2000s
• Indian manufacturing sector employed a total of 61.3 mio in 2012 as
compared to 55.9 mio in 2005
• This increase of 5.4 million jobs was only 11.0% of the incremental non-
agricultural employment created during 2005-12
• Most of these jobs were in the factory sector
• ASI – employment in the organized sector increased by 4.7 million as
compared to jobless growth during early 1980s and the mid-2000s
• Thus, lack of adequate job creation in unorganised sector – micro
and small firms since mid-2000s
• Power shortages, inadequate availability of and high cost credit, phasing out
of preferential treatment

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Job-losses inMaster
Manufacturing
title style
after 2012

• Manufacturing employment declined since 2012

• 61.3 million in 2012 to 60.3 million in 2018
• On the contrary, employment in the organised sector improved
• ASI – 12.9 million in 2011-12 to 14.3 million in 2016-17
• Micro and small industries in the unorganised sector continued with
severe job losses
• Saving grace – jobs created in the services sector

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Comment

• If the trend of increasing jobs in the industry and services

continue, and workforce shifts from agriculture to industry
and services, it will help address the long-standing concerns
of income inequality and poverty in India

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Discussion

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