When will the jobs come back, Mr Modi?

The loss of job opportunities in recent times has been so severe that labour stopped even looking for jobs, says Mahesh Vyas.

In April 2017, the unemployment rate in India was just 3.76 per cent. This is ridiculously low. The unemployment rate has fallen steadily and sharply since its near-peak level of 9.6 per cent in August 2016.

Why is the unemployment rate so low when investments into new capacities have been weak for a very long time, capacity utilisation has been falling and industrial production is stagnant.

It is because the labour participation rate has been falling. In April labour participation rate was 43.6 per cent. This is significantly lower than the peak participation rate of 48.6 per cent in September 2016.

This implies that a massive 5 per cent of the working population just moved out of the labour force in a matter of just seven months. While this is true, it dramatises the shift as it picks the peaks in a timeseries.

Nevertheless, it is by now a clear fact that the labour participation rate has been falling quite significantly even if it is not as dramatic as 5 per cent of the workforce.

The only way in which we can interpret this fall is that the loss of job opportunities in recent times has been so severe that labour stopped even looking for jobs.

The labour participation rate has been falling sharply and steadily since its peak in September.

If we control to keep the sample of households surveyed to be constant, then the fall is very high during December, January and February. These are the months immediately following the demonetisation shock of November 2016.

The sample of about 40,000 households surveyed during December reported a labour participation rate of 45.3 per cent. And, the same households had reported a LPR of 47.1 per cent in August 2016.

This shows that the labour participation rate fell by 1.8 percentage points. Similarly, the same sample of about 40,000 households surveyed in January 2017 and September 2016 reported 3 percentage point fall in LPR from 48.6 per cent to 45.6 per cent.

This implies that there was a very sharp fall in the LPR in January. Interestingly, January is also the month when we saw the greatest fall in the consumer sentiment index -- a 5.8 per cent fall compared to September which again, controls for sample change. In January, jobs were lost and apparently, hopes were lost too.

Measured similarly, the fall in the LPR was 1.9 percentage points in February and then 1.7 percentage points each in March and April.

The LPR in rural India is always higher at about 47 per cent than in urban India, which has averaged at about 44 per cent. The higher LPR in rural India is a reflection of the unorganised nature of low-productivity employment which keeps rural folks more engaged to eke out a living.

Rural LPR also has a greater range. It bounced from about 46 to 50 per cent -- apparently reflecting seasonal changes in farm activities. In contrast, urban LPR was almost steady at about 45 per cent.

This stability of the urban LPR reflected the more organised nature of employment or the greater linkage of employment in urban regions to the organised sectors.

Post demonetisation, urban LPR fell sharply and broke its remarkable stability seen earlier. Between January and October 2016, urban LPR was 45.2 per cent with a narrow range of 44.9 to 45.5.

Then, between November 2016 and April 2017, the urban LPR fell to an average of 43 per cent. More importantly, the LPR fell almost month after month to reach a low of 41.7 per cent in April 2017.

Perhaps, it is this sharp fall in the urban LPR and its break from a steady state prior to demonetisation that explains the much lower consumer sentiment in urban areas compared to rural regions.

While the rural LPR has also fallen, its sentiment were shored by loan waivers. Urban India has had no respite. Its falling LPRs were reflected in low consumer sentiment.

As the academic year comes to an end during May-June, a fresh batch of young graduates are expected to hit the labour markets -- particularly in urban India. The LPR can rise again.

If there is a dearth of matching jobs, unemployment can rise too. We need new jobs for the new labour force and, we need to get the workforce that quit, back into the labour markets.

During the first week of May 2017, the LPR was up a bit and unemployment too had risen a tad to 4.5 per cent.

Methodology

Consumer sentiment indices and unemployment rate are generated from CMIE's Consumer Pyramids survey machinery. The weekly estimates are based on a sample size of about 6,500 households and about 17,000 individuals who are more than 14 years of age.

The sample changes every week but repeats after 16 weeks with a scheduled replenishment and enhancement every year. The overall sample size run over a wave of 16 weeks is 158,624 households.

The sample design is of multi-stratrification to select primary sampling units and simple random selection of the ultimate sampling units, which are the households.

The Consumer Sentiment index is based on responses to five questions on the lines of the Surveys of Consumers conducted by University of Michigan in the US.

The five questions seek a household's views on its well-being compared to a year earlier, its expectation of its well-being a year later, its view regarding the economic conditions in the coming one year, its view regarding the general trend of the economy over the next five years, and finally its view whether this is a good time to buy consumer durables.

The unemployment rate is computed on a current daily basis. A person is considered unemployed if she states that she is unemployed, is willing to work and is actively looking for a job.

Labour force is the sum of all unemployed and employed persons above the age of 14 years. The unemployment rate is the ratio of the unemployed to the total labour force.

All estimations are made using Thomas Lumley's R package, survey. For full details on methodology, please visit CMIE India Unemployment data and CMIE India Consumer Sentiment.

The creation of these indices and their public dissemination is supported by BSE. University of Michigan is a partner in the creation of the consumer sentiment indices.

Photograph: Reuters