Indian Labor Market and intro

to Macro economics
MBA ZC416, Managerial Economics
By Prof. K. Bindumadhavan
Agenda

 Indian Labour Market

 Intro to Macroeconomics

2
An Overview of the Indian Labour
Market

Self-
employed

Employed Regular
Labour force
487 million*
Unemployed Casual
Population
Not in Domestic duties,
pensioners, Students,
Labour force Beggars, and so on..

3
Employment status

Regular
wage/salaried
employee

Casual wage
Self-employed
labourer

Employment
status

4
Employment status: Self
employed

Self-employed:

Engaged in
Engaged in Engaged in
household enterprises
household enterprises household enterprises
as own-account
as an employer as helper
worker

Characteristics of self-employed: Autonomy and economic independence

5
Employment Status

• Engaged in farm • Engaged in others’

or non-farm farm or non-farm
activities, but activities, but wages
receive wage on a are paid according to
regular basis (e.g., daily or period work
weekly, monthly). contract
Regular
Casual wage
wage/salaried
labourer
employee:

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 Attended
educational
institutions
(91)

Children of Attended to
age 0-4 years domestic
(99) duties only
(92)

Attended to
domestic duties
Not in ‘labourforce and was also
engaged in free
Others
(including collection of
beggars, etc.) goods, sewing,
(97) tailoring, weaving
etc for household
use (93)

Rentiers,
Not able to pensioners,
work owing to remittance
disability (95) recipients, etc.
(94)
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Details of employment status

• Self-employed
– Engaged in household enterprises as own-account workers
• Persons who operate their enterprises on their own account, or with one or a few partners
• Operate their enterprises without hiring any labour
• They may have unpaid helpers who assist them in the activity
– Engaged in household enterprises as an employer
• Persons who operate their enterprises on their own account, or with one or a few partners
• Operate their enterprises by hiring any labour
– Engaged in household enterprises as helper
• Unpaid family members
• Working full-time or part-time
• Do not receive regular wage or wages in return for their work
• Regular wage/salaried workers
– Worked as regular wage/ salaried employee
• Casual labour
– Worked as casual wage labour in public works except MGNREGA
– Worked as casual wage labour in MGNREGA
– Worked as casual wage labour in other types of works

8
Reasons for the educated
unemployment?
• Why educated unemployment is rising in India?
– Lack of demand?
– Lacking skills in the relevant field
– Unemployment among engineering students is
soaring
– Quality of education- No industrial exposure,
particularly internship experience
– Mismatch between what is taught and what the
industry needs
– Many opt for the subject without any interest
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Intro to Macroeconomics
• What is Macroeconomics:
– A broad aggregation of markets (what happens in the
economy as a whole)
• Subject matter:
– Aggregate measures of income, output, inflation, savings,
unemployment, the balance of payments, and money supply
in the economy
• Determinants of the aggregate measures
• Expenditure on goods
– Consumption expenditure
– Investment expenditure
– Government expenditure
Economy’s Income and
Expenditure
Aggregate income: Total income of everyone

Aggregate expenditure: Total expenditure on goods and services

For an economy as a whole, income must equal expenditure

Why is this true?

Every transaction has two parties

Equality of income and expenditure through circular flow of

expenditure
Circular flow of Income
But, the actual economy
But in the real economy……
Households do not spend all of their income

Households pay some of their income to the government

in taxes

Household do not buy all goods and services produced in

the economy

Some goods and services are brought by government and

firms
Omission in income
measurement
• Underreported income
– Business people overstate their expenses and understate
reported income
– Teachers- Do they report earnings from tuition classes
– Individuals often understate their income so as not to pay
taxes
• People engage in underground activities (drug dealing and
gambling)
– Selling fake stamp papers
• Non-market activities
• Activities that are not performed through formal markets
– In India, farmers produce their own food, which can be
considered as income, but not reported in official statistics
Measuring Output
• How are we earning income?
– When we earn income, we must produce something
• Output (Production): Goods and services that are
produced
• Gross domestic product (GDP) is the market value
of all final goods and services produced within a
country in a given period of time.
– The given period of time may be a quarter or a year
– Assume that there are only two goods: pen and pencil in an
economy. In a year, 20 pencils were produced and sold for Rs
12 each and 8 pens were produced and were sold for 30 each.
Aggregate production would be Rs 480
GDP and GNP
• GDP is the most commonly used measure of economic
performance
– Captures value of all domestically produced final (including end consumer)
goods and services
– Includes those produced by citizens as well as foreigners
– Sales of used goods excluded (but commissions included)
– Excludes financial transactions and transfer payments (since they do not
represent production of goods)
• GDP = Consumer + Business purchases/ Investments + Govt. spend
+ Net exports
• GDI = Wages/ Salary + Interest + Rent + Business CF (Profit +
Depreciation)
– GDI = Consumed + Saved + Taxes
• Economy in equilibrium => GDP = GDI
GDP and GNP
• GNP is an alternative way of measuring national wealth
– Captures value of all end consumer goods and services produced by the
citizens of a country irrespective of whether or not they reside inside the
country
– GNP = GDP + income from citizens abroad – income from resident foreigners
• Real GDP is the adjusted nominal GDP (to remove the impact of
inflation)
• GDP deflator is like the CPI but includes all final goods and services
– Used to convert nominal GDP to real GDP
– Real GDP (current) = nominal GDP(current) * GDP deflator(base year)/GDP
deflator(current)
• GDP is not a perfect measure of economic activity since it does not
capture certain components of productivity such as homemaker
services, leisure activities, quality improvements, cost of pollution,
etc.
Other Indicators
GDP-Depreciation = NDP

NDP – Indirect taxes = Aggregate domestic income

GDP = Aggregate domestic income + Indirect taxes +Depreciation

GNP = GDP + Net Factor Income from Abroad

Net factor income from abroad are the income paid to the domestic
factors of the production by the rest of the world less income paid
to foreign factors of production by the domestic economy
Business cycle and unemployment
• The four stages of the business cycle are:
– Contraction
– Recessionary trough
– Expansion
– Peak

• Recession is defined as a period when real GDP declines for two or more consecutive quarters
• Depression is prolonged and severe recession
• 3 types of unemployment
– Frictional unemployment – voluntary movement between jobs
• Imperfect information and job search of both employers and employees (looking for best option)
– Structural unemployment – skill issue due to innovation/ other structural changes
– Cyclical unemployment – driven by economic cycle
• Unemployment is measured as sum of laid off, re-entrants to job force, new entrants and
those who left voluntarily and those who were terminated
• Problems with accuracy of unemployment rate
– People who have given up looking for a job (due to the state of the economy) are not counted
– Part-time and over qualified looking for “right” employment are counted as fully employed
– Counts underground economy and criminals as unemployed
– Workers waiting to rejoin (after a temporary lay-off) are included as unemployed
• Employment/ population ratio may be a better measure (16 year +)
Inflation
• Inflation is a long period of rising prices
• Purchasing power of the dollar diminishes over time
• Inflation rate is the rate of change in prices over time
• CPI is the most common measure of inflation (applies for consumers)
• GDP deflator is used for the economy as a whole
– Uses current period weights for basket of goods compared to CPI (which uses base
weights)
• Rate of inflation = *(current year’s price index) – (last year’s index)+/last years
index
• Unanticipated inflation is inflation that was not anticipated by rational decision
makers
– Increases risk of investments
– Wealth moves from Fixed income to variable income
– Creditors to Debtors (and hence senior citizens to the youth)
Inflation (cont)
• Harmful effects of inflation
– Increased risk
– Price distortion and consequent sub-optimal allocation of resources
– Lower output (speculate rather than work)
– Hyperinflation can destroy the currency (barter system)
– Hoarding
• If inflation is held to moderate levels there may be some benefits:
– Catalyst for profits and thereby encourages re-investment and new
investments
– Induces current consumption and thereby accelerates growth
– Encourages debtors to pay off debt (since value re-paid today is less in real
dollar terms)
THANK YOU