Sentiment raises hopes amid low labour participation rate

During the week ended November 12, 2017, the labour participation rate (LPR) was 42.8 per cent and the unemployment rate was six per cent. In the corresponding week a year ago – during the week ended November 13, 2016 – the LPR had been higher at 45.6 per cent and the unemployment rate lower at 5.8 per cent. Note that November 13, 2016 was the week of demonetisation. Ergo, exactly one year after demonetisation, fewer people were participating in the workforce and a lower proportion of those seeking jobs were able to find them.


Is this a freak one-week phenomenon or can we generalise, at least prima facie? Let us look at the averages for four weeks preceding demonetisation and the corresponding weeks a year later.


During the four weeks preceding demonetisation, the average labour participation rate was 47.2 per cent and the unemployment rate was 6.2 per cent. A year later, using similar averages of four weeks, the labour participation rate was significantly lower at 43.7 per cent, though the unemployment rate remained at around the same level as before.


Soon after demonetisation, the LPR and unemployment rate fell. Now, one full year after demonetisation, the LPR continues to be lower, but the unemployment rate has risen above the level around demonetisation. These comparisons are still not adjusted for seasonal effects and it will take a while before we have sufficient data to make seasonal adjustments. But, the picture emerging from year-on-year comparisons doesn't look quite good.


Chief Statistician of India T C A Anant has shown that according to the NSSO's 2011-12 data, there are almost wild movements in and out of the labour force quarter over quarter. The number of people employed during April-June according to these data is 7.3 per cent lower than during October-December. However, GVA during April-June was higher by 4.6 per cent nominally and 0.03 per cent in real terms, when compared with the October-December period. This throws up more questions. How do 7.3 per cent fewer people produce more national income? Is it possible that when 7.3 per cent people stop working, they have no impact on national income? Either the government's employment numbers are off the mark or their national income numbers are.


The problem is that seasonal adjustments cannot be done by just one year's data and so, it is still not a settled issue over how much of the movements in the estimated number of employed people are because of seasonality and how much of these are due to changes in sample or other factors, including demonetisation. I, therefore, think that this is a problem best left to academics to resolve through thorough research and peer review after we have sufficient time-series data.


Causality apart, what is important is that after November 2016 (which just happened to be the month of demonetisation), labour participation fell, and it continues to remain significantly lower than what it was before November 2016. The unemployment rate is higher than it was a year ago. And, the unemployment rate has been rising.


Six per cent is not a worrisome unemployment rate. But, a low labour participation rate is. During the week ended November 12, 2017, the LPR at 42.8 was close to its lowest level of 42.6.


The LPR did fall sharply soon after demonetization, but it stopped falling any further after April 2017. In fact, the LPR was on a recovery trend during August, September and October 2017. But, we did see a little weakness in the LPR towards the end of October when the ratio fell to 42.9 per cent in the week of October 22 and then again to 42.8 per cent in the week ended November 12.


While the LPR languishes at sub-45 per cent levels, the unemployment rate has risen to around six per cent. 


There is slender glimmer of hope in the consumer sentiment index. Somewhat surprisingly, the index of consumer sentiment has seen a sharp increase of 5.8 per cent in the week ended November 12. This is driven almost entirely by rural India.


It is unclear yet as to what has driven the rural index of consumer sentiment. But, that does not deny that rural folks are signalling something very positive.


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.

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