The issue of structural unemployment and the Union Budget 2024 (2024)

Unemployment, especially youth unemployment, has emerged as a major concern for the Indian economy. Before discussing India’s unemployment scenario, we need to understand some concepts.

Measuring employment and unemployment

Economists divide the population into labour force and not in labour force. The labour force segment includes people in working age, say 15 years to 60 years (working age differs across countries). The non-labor force includes children and the retired/old-age population. Within the labour force, the population is divided into employed and unemployed. The employed are those who have work opportunities whereas unemployed are those who are willing to work but are unable to find any work opportunities.

Economists use two major economic indicators to understand labour markets. First is the labour force participation rate which is the ratio of the labour force to the adult population. Second is the unemployment rate which is the percentage of the labour force that is unemployed. While measuring labour trends of the entire population is desirable, it is highly time-consuming and costly. Hence, economists with the help of statisticians conduct surveys to estimate the trends in labour markets.

In India, the National Sample Survey Organisation used to conduct quinquennially (once in five years) surveys on employment and unemployment since 1972. These surveys gave us data on the state of employment and unemployment in India. However, these surveys had a large time lag and there was a need for a higher frequency survey and timely response by the government to address unemployment.

Youth unemployment: A major concern

Hence from 2017-18 onwards, the Ministry of Statistics and Programme Implementation (MOSPI) started releasing quarterly and annual surveys on employment named Periodic Labour Force Survey (PLFS). The PLFS has become the major source of measuring and understanding trends in India’s labour markets since.

The PLFS 2017-18 noted that “the unemployment rate among the youth was much higher compared to that in the overall population.” The unemployment rate was 6 per cent whereas the youth unemployment rate (age 15-29 years) was 18 per cent. As per the PLFS 2022-23, unemployment rate has declined but the difference between unemployment in total labour force and youth unemployment remains as high. The overall unemployment rate in 2022-23 is 3.2 percent whereas youth unemployment rate is 10 percent.

In terms of rural-urban, the rural youth unemployment rate is 8 per cent whereas the urban unemployment rate is nearly double at 15.7 percent. The Centre for Monitoring Indian Economy (CMIE), an independent research organisation, publishes a separate unemployment data. As per CMIE, youth unemployment rate was 45.4 per cent in 2022-23.

The gender-wise unemployment rate shows male and female youth unemployment at 9.7 per cent and 10 per cent respectively. The labour force participation rate of females increased from 17 per cent in 2017-18 to 27.8 per cent in 2022-23. The labour force participation rate of males was 55.5 per cent in 2017-18 which increased marginally to 56.2 per cent in 2022-23. The lower representation of females in the labour force is also a major problem for the Indian economy.

Frictional and structural unemployment

Economic research distinguishes between two kinds of unemployment. First is frictional unemployment that results due to workers taking time to search for the jobs that best suit their tastes and skills. The second is structural unemployment where the supply of jobs is less than demand for jobs.

While frictional unemployment is inevitable as the economy is constantly changing creating new opportunities and destroying older ones. Hence economists are not too worried about frictional unemployment.

But structural unemployment is a major cause of concern for economists. Structural implies the economy is not generating enough jobs to absorb the growing workforce, which seems to be the case in India.

One way to see the presence of structural unemployment is to compare the share of different sectors in employment with the share of different sectors in economic activity or GDP (Table 1). We see that the share of agriculture in GDP is 15 per cent but the share of agriculture in employment is 46 per cent. In the other two sectors, viz. industry and services we see the opposite: the share of GDP is higher but the share of employment is lower.

On analysing trends in male-female classification, we see the usual problem of females getting employment mainly in lower growth agriculture sector. The majority of males are employed in the high growth services sector. It also partly explains why females get lower wages than males.

Addressing the issue of structural unemployment

The share of agriculture in economic activity has declined from 60 per cent in 1951 to 15 per cent today. But we do not see a similar decline in employment in agriculture. The sectors that are generating higher growth are not creating similar growth in employment, showing the structural unemployment problem in India.

Agriculture also suffers from disguised unemployment where more people are employed than required as opportunities are not available in other sectors. Lack of opportunities in the formal sector also pushes workers to seek employment in informal sectors. This further complicates and aggravates the employment problem as in the informal sector not only the wages are lower but also it does not offer any protection to workers.

Structural unemployment needs to be addressed on both demand and supply fronts. While there is a need to create a supply of more jobs in growth sectors, there is also a need to work on demand factors by improving education and skill-sets of labour enabling them to work in the higher growth sectors.

Structural unemployment and the budget

In the Union Budget 2024, the Finance Minister said the government will work on nine priorities for economic development. One of the nine priorities was ‘Employment & Skilling’. Under ‘employment and skilling’, the Finance Minister announced three schemes to address employment concerns:

The three schemes are aimed at incentivising both new employees and employers to create employment opportunities in the formal sector. There is an additional incentive to push employment in the manufacturing sector which is better suited to absorb surplus employment from the agriculture sector compared to the services sector which is much more skill-based.

Further, the Budget has proposed additional schemes to skill the workforce. A scheme launched to upgrade 1,000 Industrial Training Institutes that will skill 20 lakh youth over a 5-year period. The course content and design will be aligned as per the needs of the industry, preparing the youth to be industry-ready while studying. The government has also proposed that it will facilitate skill loans up to Rs 7.5 lakh enabling students to upgrade themselves.

The budget has also offered another interesting proposal which has attracted a lot of attention. Under this proposal, the government will tie-up with India’s top 500 companies to provide internships to youth. The internship will be for 12 months and will be gradually scaled to touch 1 crore youth in 5 years. The government will provide an internship allowance of Rs 5,000 per month along with a one-time assistance of Rs 6,000. The training cost will be borne by the companies from their Corporate Social Responsibility (CSR) funds.

The budget has also made measures to increase female LFPR. It will develop hostels for working women in collaboration with industry and also establish creches. The government will also seek to organise women-specific skilling programmes with the industry, and promote market access for women SHG (Self Help Groups) enterprises.

Wait for the implementation

India has been suffering from structural unemployment problems for a long time now. The governments have tried to come up with many schemes in the past to reduce unemployment but they have had limited success. The policymakers have also tried to promote and incentivise manufacturing but it has remained a distant dream.

The current government has introduced new policies but we have to wait and see how they are implemented. The proof of the pudding lies in its eating and the same is true for all government schemes including the recent ones on employment. One silver lining that has emerged after the Lok Sabha election is that unemployment has become a very important issue. The governments, both at the centre and in the states have no choice but to work towards addressing the ticking time-bomb.

Post Read Question

Analyse the unemployment scenario in India. How does the government seek to tackle it?

What is the unemployment rate? Why has the issue of structural unemployment been a major concern?

The overall unemployment rate in 2022-23 is 3.2 percent whereas youth unemployment rate is 10 percent. Evaluate the cause of high youth unemployment.

(Amol Agrawal is an Adjunct faculty in economics at Ahmedabad University and the author of History of Private Banking in South Canara District (1906-69).)

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