Unemployment rate falls, but still too high

The unemployment rate in India fell to 7.1 per cent in January 2023 from 8.3 per cent in December 2022. This is a sharp fall, not just from the December level but also the levels of the preceding two months that averaged at around 8 per cent. In spite of this substantial fall in January, the unemployment rate continues to remain elevated. An unemployment rate of over 7 per cent seems to be the new norm in India. This is rather high for a country that boasts of being among the fastest growing economies in the world.
 

According to The Economist (February 4, 2023) which lists 43 countries (including an entry for “Euro area”), only nine had an unemployment rate that was higher than India’s. These are Greece, Italy, Spain, Turkey, Brazil, Chile, Colombia, Egypt and Saudi Arabia. Over 30 countries did better than India on the unemployment rate front although many of them faced potential recession prospects.
 

The tabulation in The Economist compares India’s January 2023 estimate of 7.1 per cent with those of the latest data from other countries. The latest data from most other countries is for December 2022. If the comparison were to be made with India’s December 2022 unemployment rate of 8.3 per cent, then only five countries would have been worse than India – Greece, Spain, Turkey, Colombia and South Africa.
 

India, incidentally, was the fastest country to report the unemployment rate for the month of January 2023.
 

Monthly estimates of the unemployment rate in India are somewhat volatile because of the large share of informal employment engagements in largely unorganised sectors. A slightly longer time frame helps overcome this volatility and get a better sense of the real prevailing unemployment rate in India. The four-month Wave of CMIE’s Consumer Pyramids Household Survey (CPHS) is a good time frame in this respect.
 

In the four full Waves of CPHS after the Covid-induced lockdowns, from September-December 2021 through September-December 2022, the unemployment rate was consistently over 7 per cent. The average unemployment rate of the four Waves was 7.4 per cent with a range of 7.3 through 7.5 per cent. This new norm of over 7 per cent open unemployment rate in India is worrisome.
 

In this context, it is also useful to understand the limitation of the unemployment rate and the real meaning of its fall in January 2023.
 

The fall in the unemployment rate in January 2023 compared to its level in December 2022 is likely to reflect largely a seasonal phenomenon. In five of the past six years, the unemployment rate in January was lower than it was in the preceding December. The average change between December and January was a 77 basis fall. This year, the unemployment fell by a sharper, 116 basis points between the two months. The fall in the unemployment rate in January 2023 could therefore be more than just a seasonal fall.
 

The unemployment rate usually falls in January because employment goes up and the number of people unemployed goes down. Past averages suggest that compared to December, the number of unemployed drops by about 3.3 million and employment rises by about 3.7 million in January. This is a healthy movement and it causes the unemployment rate to fall in January compared to December.
 

In January 2023, however, employment declined by 0.95 million. This is not what the past pattern suggests. Past patterns suggested an increase in employment in January.
 

It is possible that the fall in January is a correction of the larger-than-normal increase in employment seen in December. Employment had increased by 8.1 million in December 2022. This was an extraordinary increase and possibly some of this was corrected in January.
 

Employment in January 2023, at 409.3 million, is comparable to the pre-pandemic level of 410.5 million in January 2020. It is also among the highest level of employment in the post-demonetisation period. The three highest monthly employment levels since demonetisation of November 2016 are – 410.5 million in January 2020, 410.2 million in December 2022 and 409.3 million in January 2023.
 

In spite of the fall in employment in January 2023, employment in the past two months has been higher than any time in the post-pandemic period and higher than most of the post-demonetisation period.
 

Interestingly, the number of unemployed persons declined sharply by 5.7 million in January. This is not because they found jobs. If this were to be the case then, employment would have risen. But, we have already noted above that employment itself declined by 0.95 million. So, what this means is that the labour force shrunk in January by 6.6 million – partly because employment fell (by 0.95 million) and largely because the unemployed declined (by 5.7 million).
 

As large numbers of the unemployed left the labour markets in January 2023, the labour participation rate fell from 40.5 per cent in December 2022 to 39.8 per cent. This is India’s greater challenge, its equally volatile and falling labour force participation rate. Labour leaves the labour markets when the availability of jobs decline. As they leave, they do not get counted as unemployed and this causes the unemployment rate to fall giving a false sense of comfort that the situation in the labour markets has improved.
 

The fall in the unemployment rate in January is not a source of comfort. It reflects a falling labour participation rate.

The writer is MD & CEO, CMIE P Ltd