The problem India is facing is that even this falling labour participation rate encounters an increasing incidence of unemployment.
The unemployment rate in February 2019 was 7.2 per cent. This was higher than the 7.1 per cent unemployment rate in January 2019 and much higher than the 5.9 per cent unemployment rate in February 2018 or the 5 per cent in February 2017.
Inter-play of the labour participation rate and the unemployment rate has undergone significant changes since 2016, when we started measuring labour market indicators. Till October 2016, both, the labour participation rate and the unemployment rate were high. Post demonetisation, both fell. Then, from July 2017, unemployment started to rise but the labour participation rate did not. Initially, the labour participation rate recovered a bit and then stabilised. But after February 2018, labour participation rate also started declining.
Therefore, for the last one year, India has been witness to, once again, the dreadful phenomenon of falling labour participation rates and rising unemployment rates.
This combination leads to a falling employment rate. The employment rate is a powerful summary statistic of labour markets. It measures the proportion of working-age population that is employed. Growth requires more hands to the oar. The employment rate is a measure of the hands that power the oar to steer the economy onto a high growth trajectory.
India's problem is not the unemployment rate as much as it is the employment rate. We have a low unemployment rate because we have a low labour participation rate. At the core of the problem is very low job opportunities.
The low job opportunities compared to the size of the working age population have reduced wages in the private and unorganised sectors to a point, where, only the desperate are willing to take up such jobs. These low job opportunities have also kept labour participation rates low. If there are not many jobs to run after, then it does not make sense to crowd the already crowded labour markets.
The employment rate in India skid onto a sharply declining trend from November 2017 when it was 41.8 per cent. By December 2018, it fell to 39.5 per cent. In February 2019, the ratio was 39.7 per cent.
The total number of employed persons in February 2019 is estimated at 400 million. This is lower than the 406 million employed in February 2018 and 407.5 million in February 2017. Less hands to the oar.
India needs to employ its growing working-age population. The working age population grows by an estimated 23 million a year. If we assume that 42-43 per cent of these will join the labour force, we are looking at an increment of 9.6 to 9.9 million to the labour force in a year. This means that we need to find new jobs on a net basis (i.e. net of those who exit the labour force because of retirement or any other reason) of the order of 0.8 million every month.
If we do not find these jobs, initially, the unemployment will rise. But, it is unlikely that it will continue to rise too much. It is more likely that political pressures will rise. Labour "understands" that there are no jobs and labour markets can only offer them increasingly depressing wages.
Beyond a point these will lead to political pressures which, we must recognise, is also a form of social unrest.