The enigma of low unemployment rates

During the week ended February 26, the BSE-CMIE-UMich consumer sentiment index fell by 3.4 per cent to 94.01 and the unemployment rate inched up to 4.4 per cent.

The unemployment rate is perplexing. In January 2017, it was just under 6 per cent compared to almost 9 per cent a year ago, in January 2016. The unemployment rate has remained around 6 per cent during all the post demonetisation months of November, December and January. It continues to remain under six per cent in February as well. It was persistently higher at 8-9 per cent till September 2016.

This persistently low unemployment rate does not square with the sharp fall in consumer sentiments and the regular media stories of loss of jobs in recent months. Then why does the measure of unemployment turn out to be low?

Since this is a young effort (we began measuring unemployment only in January 2016) one suspect is that the survey is "not stable" yet. But, it is the same sample, same execution machinery and same computational methodology that measured unemployed when it was high till September and now when it is low. The same households were surveyed in October 2016 through February 2017 when the unemployment rate was low that were surveyed again during June 2016 through September 2016 when unemployment was higher. The sample size is a constant 40,000 households per month enlisting the employment/unemployment status of over 100,000 individuals of 15 years or more.

There is one non-sampling problem in the survey that could be partly responsible for this low unemployment rate post demonetisation. This was explained in my article in this column on 3rd January. Since it was mostly migrant labour that had lost jobs as an immediate effect of demonetisation, this migrant labour force had left the towns and cities in which they worked and moved back to their home-towns or villages. In the survey, their houses reported "locked" and in the villages they reported that they were not looking for jobs (because there were none available there for them). As a result, what should have been reported as "unemployed" if the migrant labour had stayed back to respond to the survey, was reported as a non-response because the household was locked.

The survey team honestly reports a locked house and does not conjecture that a household is locked because the occupants have lost their jobs and gone away. We only conjecture post-hoc, by talking to survey team supervisors that migration is showing up as locked households.

Preliminary data crunching revealed that labour participation rate had fallen. This was explained in this column on 24th January. Job losses during the early months following demonetisation were so severe that labour that lost jobs also lost hopes of finding alternate jobs because there were none around. As a result, people who dropped out of the employed labour force, dropped out of the labour force altogether. The labour force is the denominator in the ratio of unemployment rate. It is much larger than the numerator (the unemployed). As a result, when an equal amount is reduced from both the numerator and the denominator, the ratio (which is the unemployment rate) falls.

It is likely that a lot more is happening in the labour markets than migration of the labour force or a drop in its stock. It is likely that labour at the bottom of the pyramid has returned to work and is willing to work at low wages. The options for these at the bottom of the pyramid are possibly low wages or no wages. 

The migrant labour that lost jobs and went back home belong to the vulnerable parts of society. They cannot afford to remain unemployed for too long. This is what explained India's low (almost unbelievably low) official unemployment rate till recently. The BSE-CMIE effort to measure unemployment as a fast-frequency measure demonstrated that the unemployment rate is higher -- implying that the poverty in India was not so low that it was impossible for people to remain unemployed. People could "afford" to remain unemployed in search for an appropriate job.

Probably, demonetisation has taken us back to those desperate conditions where low-wage jobs are better than no jobs. But, this begs the question -- are low-wage jobs are available in greater numbers than they were earlier? Or, are we seeing the return of labour that was paid several months of wages in advance in the old currency notes?


Sentiment gauge


Unemployment gauge

Business Standard brings you CMIE’s Consumer Sentiments Index and Unemployment Rate, the only weekly estimates of such data. The sample size is bigger than that surveyed by the National Sample Survey Organisation. To read earlier reports on the weekly numbers, click on the dates:

November 21November 28December 4,

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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