The labor market in India since the 1990s Updated

Elevator pitch

The Indian economy entered an ongoing process of trade liberalization, domestic deregulation, and privatization of public sector units in 1991. Since then, per capita output has increased significantly, while the overall unemployment rate has remained moderate. However, labor force participation rates fell sharply, though recovering for women since 2020. Youth unemployment remains high, an overwhelming proportion of the labor force continues to work in the informal sector, labor movement out of agriculture is slow, and there is little evidence of a sustained rise in wages for either unskilled rural or factory workers.

Key findings

Author's main message

The Indian economy has performed well in terms of GDP growth and increase in output per worker over the last 35 years. There has been significant structural change: the importance of agriculture in total output has fallen sharply and about 20% of the country’s labor force has shifted from agriculture to other occupations. The aggregate unemployment rate has remained moderate. However, there has been a large fall in labor force participation among the young, and youth unemployment rates have remained high (especially among the educated). The quality of available work remains a matter of concern. Employment continues to be overwhelmingly informal in nature, without security, income stability or the benefit of protective legislation. The share of wages in net value-added by organized manufacturing has fallen dramatically. The very low and declining level of output per worker in agriculture and related activities relative to other sectors, in a context where over two-fifths of the labor force is still located in agriculture, is yet another cause for concern.

Motivation

Knowing the facts about a labor market is crucial for understanding labor-market policy. Equally important is knowing which areas a country’s labor market is doing well in and which ones poorly. This study provides and discusses these facts for India. India is the world’s most populous country, accounting for almost 18% of the world’s population. It is also the world’s third largest economy in purchasing power parity (PPP) terms – currently producing about 8.5% of the world’s output. After China, India has registered the most impressive growth performance among the world’s ten largest economies since 1991, and has been the fastest-growing among such economies in recent years. Yet, India continues to face major economic challenges. Understanding the key features of India’s labor market is therefore essential, not only because they directly affect almost a fifth of the world’s population, but also because, increasingly, they influence the global economy through trade, labor migration and capital flows.

Discussion of strengths and weaknesses

Aggregate issues: growth, unemployment and labor participation

In 1991, the Indian economy entered a period of extensive trade liberalization, substantial domestic deregulation, and limited privatization of the public sector. As shown in Figure 1, over the next 33 years, real GDP grew at a compound annual rate of about 6.3%, a significant improvement over the preceding three decades. Growth performance of the economy was particularly impressive during 2003-2010. Growth rates fell during 2011–2019, but nonetheless remained creditable. While the Indian economy contracted by almost 6% in 2020 due to the Covid-19 shock, its growth rate recovered to over 8% on average during the next four years.  In consequence, India improved its global GDP country rank in PPP terms from 8th in the early 1990s to its current rank of 3rd by 2009, and its share of global GDP (PPP) from about 3% in 1990 to about 8.5% in 2025.

Figure 2 below maps changes in per capita GDP and labor productivity, in the sense of output per person in the labor force. Per capita real GDP in purchasing power parity terms in 2021 international dollars was about US$9800 in 2024, about 4.5 times its 1991 value. The increase was about 50% during 1991–2001, almost 70% over the subsequent decade of 2001–2011, and almost 90% over 2011–2024. Labor productivity increased somewhat less slowly in the first and last periods. GDP PPP per person employed in 2024 was almost four times that in 1991. Practically the entire increase in per capita real GDP in the second period, almost 90% in the first period, and over 80% in the last period, were accounted for by increases in labor productivity rather than employment growth.

The fact that labor productivity increased only marginally less than the increase in per capita output immediately suggests quite limited impact of growth on employment. Figure 3 plots the behavior of unemployment rates over the chosen period. Aggregate unemployment rates (for those 15 years or older) remained remarkably stable in the 7.5-8% range till 2019, before declining sharply in the post-Covid years. However, youth (aged 15-24 years) unemployment rates were far higher and rising, from about 20% to about 25%, between 1991 and 2018. Both male and female youth unemployment rates declined somewhat in the post-Covid years, but both were well above 15%, even in 2024.

Figure 4 illustrates the behavior of labor participation rates. Strikingly, after rising steadily from about 30% in 1991 over 1991–2005, the female labor participation rate started declining in a sharp, secular fashion. This decline continued till 2020. It however recovered sharply thereafter, reaching about 33% by 2024. The male labor participation rate fell as well, from about 84% in 1991 to about 76% by 2020, recovering only marginally thereafter.

India has the world’s largest youth population, with close to 30% of the population comprising of those aged between 15 and 29 (according to ILO, “youths” are described as young people between the ages of 15 and 29 years; according to United Nations, between 15 and 24 years). Based on availability and context of the data, this is used appropriately. For example, it is interesting to note that the post-2005 fall in labor participation rates appears even more marked for young (15-24 years) people. The labor participation rate of young females, after fluctuating around 27% over 1991–2005, collapsed subsequently, falling to 12.5% in 2020 before recovering somewhat by 2024. The labor participation rate of young males rose marginally from 66% in 1991 to 68% in 2000, but fell steadily and sharply thereafter to reach about 43% by 2020. It does not appear to have recovered appreciably since then. The share of youth not in education, employment or training increased from about 26% in 2004 to 31% in 2018 overall, before declining to 23.5% by 2023.  However, the corresponding increase for young females was from 46% to 48%, before a decline to 38% (Figure 5). This suggests that a large part of the decline in labor force participation by young people was matched by a commensurate increase in their presence in education and training. Women’s labor force participation declined the most among the poorest households, whereas it actually increased in the case of better-off households. Similarly, by levels of education, women’s labor force participation declined among those not literate or the least educated, but increased among those with higher levels of education. One possible interpretation is that women who were earlier forced to take on the worst-paid, lowest-quality jobs because of their poverty have withdrawn from those jobs as their household incomes have risen, due to the fact that the male household income earner has a higher pay [1].

While youth education levels are rising in India, major issues remain with regard to quality and skill match. The youth unemployment rate increases with the level of education, with the highest among graduates and higher among women than men. The educated (secondary level or higher) unemployment rate has increased since 2000, though with a decline between 2019 and 2022. In 2022, the unemployment rate among youths was six times greater for those who had completed secondary education or higher and nine times higher for graduates, than for persons who could not read or write. It was higher among educated young women than men, especially among female graduates compared to their male counterparts.Thus, the problem of unemployment in India has become increasingly concentrated among the youth, especially educated youths and women in urban areas [2].

Changes in sectoral composition of employment

As a largely rural society, the primary sector (agriculture and related activities) constitutes the main source of employment for India’s workforce.  In 1951, soon after Independence, this sector absorbed about 72% of India’s labor force, while the secondary sector (mining, manufacturing, construction, gas, electricity, and water supply) employed about 11%. The service sector absorbed the rest. The GDP shares were 51%, 19%, and 30% respectively. Thus, the primary sector was the biggest employer as well as the largest contributor to GDP. This employment structure changed quite slowly over the next four decades, so that, by 1991, services had come to absorb about 22%, and the secondary sector only about 15%. The corresponding GDP shares were about 30% each for agriculture and industry and about 40% for services. Therefore, while the primary sector remained the pre-dominant employer (accounting for almost two thirds of the workforce), the service sector had supplanted it as the biggest contributor to GDP, while industry’s contribution to GDP was about the same as that of the primary sector. However, by 2023, agriculture had come to employ less than 45% of the labor force, while industry absorbed a quarter and services the rest. The corresponding GDP shares were 16%, 25%, and 59%, respectively. The primary increase in labor absorption in the secondary sector after 1991 however occurred in construction, rather than manufacturing. The Covid-19 shock led to a retrogressive net migration of labor from non-agriculture to agriculture by about four percentage points, which had not been fully reversed even by 2023. While about 60% of male workers were employed in agriculture in 1991, only 37% were employed in that sector by 2023. In contrast, agriculture continued to employ over 60% of females even in 2023 – down only marginally from 78% in 1991. Thus, employment diversification out of agriculture has not only been slow overall, and partly reversed by Covid-19, it has been primarily a male phenomenon, which suggests diminishing relative representation of women in non-agricultural occupations.

Output per person employed in agriculture was about 70% of that for the economy as a whole in 1951. This proportion had fallen to about 50% by 1991 and 40% by 2023. It follows that, while there was indeed a significant (about 20 percentage point) transfer of labor away from the primary sector, this transfer was insufficient to compensate for the relative stagnation of agriculture in the post-1991 period, leading to a sharp relative immiserization of those trapped in that sector. Any short-term rise in employment during 2021–22 is due to return of the workers into agriculture from other activities due to Covid-19. Beyond 2023, agricultural employment shows declining trend once again. However, as noted earlier, women found it much more difficult to escape this ‘agriculture trap’ than men.

The status of work in India

About three quarters of the labor force in India is at present either self-employed or employed as casual labor. Only about a quarter currently receive regular wage or salary payments, up by a meagre ten percentage points since 1991.

Almost 90% of India’s labor force is still employed in the informal sector. Figure 8 shows the small share of formal jobs within the unorganized sector and the high share of informal jobs even within the organized sector. Note that, the informal sector essentially refers to workers who are not covered by labor regulations. Such workers are mostly self-employed, contributory family workers or employed in the unorganized sector, i.e. in enterprises not regulated by labor legislation. A detailed discussion on the causes and patterns of informal organization in India and developing countries in general, is available in [3]. Employment in agriculture and related activities in particular is practically entirely informal, and the sector itself is almost entirely unorganized. The same is true for the lower end of the service sector, especially petty trade, transportation, domestic services, small-scale construction, and manufacturing. However, an increasing proportion of workers working in organized sector enterprises are also informal workers, in that they are not covered by either social security programs or protective labor legislation. Such informal workers in formal sector enterprises are essentially contract and casual workers typically hired indirectly via labor contractors, instead of being direct employees of the enterprise [see [4] and [5] for discussions]. (These estimates are based on the sample surveys by the NSSO and available from the Ministry of Labour, Government of India.)

Movements in wage rates

The average real daily wage for regular wage employees aged 15-59 increased only by about 23% for rural employees between 2004–2005 and 2011–2012 and about 29% for urban employees between 2004-2005 and 2009-2010 [6]. As already noted, however, regular wage and salaried employees constitute only a small segment of the labor force. Given the continuing preponderance of self-employment in India, especially in agriculture, movements in wage rates provide a rather partial picture of returns to work in the country. Furthermore, the overwhelmingly informal nature of employment makes any estimate of wage movements suspect. Nonetheless, some broad patterns can by identified for rural wage employment and in the manufacturing sector. Estimates suggest that in real terms average agricultural crop worker wages had been quite volatile and overall declined slightly from the mid-1980s into the early 2000s ([7], Annexes). After stagnating during the first half of the 2000s, rural unskilled wage rates started increasing on average from 2007. By 2013-2014, male real wages had increased by about 35%, while female wage rates increased by about 40%. From a peak of about 70% in 2000–2001, the female-to-male wage ratio consequently increased somewhat, to close to 80%, by 2013–2014. This increase was probably caused at least partially by the introduction of a national rural employment guarantee program in 2006, expanded to cover all districts in the country in 2008. This program, which has been in operation ever since, aims in principle to provide at least 100 days of wage employment in a financial year to every household whose adult members volunteer to do unskilled manual work. While the actual average provision of wage employment has been far less than the targeted 100 days a year, the timing of the upturn in rural wages does appear, prima facie, to suggest a significant positive impact of the program. Interestingly, as discussed below, the up-turn in rural wages during 2007-2013 was accompanied by a rise in real wages in the organized manufacturing sector. However, the latter appears to have been less than half the cumulative size of the former. Figure 9 depicts the average monthly wage rate of non-agricultural labor between 2013 and 2023. For both male and female workers the average daily wage rate rose, but since 2023 both seems to have fallen to the level reported in 2013. Further, in the year 2024 (provisional data, not shown here) the wage rates have fallen in absolute terms. This could be due to falling employment in both services and manufacturing (see Figure 6) in the recent years. For those who retained employment, the hourly wage rate seems to rise at a slow pace (Figure 9A).

Unlike the case in South East Asia, GDP growth in India has not been associated with any sharp increase in wage rates of workers in large-scale (i.e. organized) manufacturing units.  Productivity growth started outpacing wage growth around 1990. Productivity appears to have almost tripled on average over the 1990–2013 period in the large-scale manufacturing. Strikingly, however, workers’ average (daily) real wage seems to have fallen over time. Real wages increased moderately till 1995–1996 and fell sharply over the three subsequent years. After a two-year long partial recovery, stagnation set in between 2000–2001 and 2007–2008. Figure 10 illustrates the movement in real wages thereafter. Beyond 2007, it started falling; rose briefly during 2009–2010 and then started falling again till 2014. Between 2014 and 2017 the real daily wage rose marginally and declined thereafter [8]. The data for real daily wage is unavailable after 2020.The earlier stagnation followed by the decline in daily real wages can reasonably be ascribed to a combination of weakening of trade unions, a structural shift towards capital-intensive industries, increasing automation within labor-intensive industries, outsourcing and greater use of ill-paid casual and contract labor and high price inflation for industrial workers during these years.

As depicted in Figure 11 below, factory employment did not rise sharply enough to counteract the negative effect of declining wages on the share of wages in net value-added by firms. Consequently, the latter declined from steadily from 1990–1991 to 2007–2008, before recovering slowly thereafter till 2019–2020. It declined sharply over the next two years before recovering marginally. Overall, the share of wages in net value-added by firms declined by ten percentage points between 1999 and 2022 [9]. Conversely, the share of profits increased over 1990–1991 to 1999–2000. After a two-year fall thereafter, it entered a period of explosive growth which lasted till 2007–2008. It declined gradually thereafter till 2019–2020, before shooting up again. In 18 out of the 20 years after 2002–2003, the share of profits exceeded 45%.

Limitations and gaps

The biggest hurdle in carrying out rigorous empirical analysis of India’s workforce and its labor market is the absence of reliable earnings data. As already noted, almost 90% of India’s workforce is employed in the informal sector, and only about a quarter is engaged in regular wage or salaried occupations. About half of India’s GDP is generated in the informal sector. Informal sector enterprises do not report earnings or wage data and, at a conservative estimate, over 80% of all workers do not even have written contracts. Only about 7% of India's population filed income tax returns in 2023–2024, and under-reporting is universally acknowledged to be extensive. Furthermore, until recently, income tax data was not made publicly available by the government for analysis. Consequently, estimates of income distribution as well as employment have to be derived almost entirely from large-scale sample surveys. These sample surveys are however episodic and have traditionally focused on self-reported consumption expenditure rather than income. Those which do incorporate income estimates are bedevilled by the usual problems of self-reporting compounded by the informal and fluctuating nature of occupations as well as large-scale use of family labor in agriculture and household industries in rural areas. The authors of one study have tried to construct income distributions for India by combining survey data with tax data under somewhat heroic assumptions in order to address this issue [10]. Employment estimates also suffer from analogous difficulties. Furthermore, the issue of under-employment and disguised unemployment is likely to be important, but impossible to capture satisfactorily in surveys when work is preponderantly either of the self-employed or casual labor type. These data limitations make detailed analyses of employment and earnings trends outside the formal sector in India difficult at any, except a broad impressionistic, level.

Summary and policy advice

While over 40% of India’s labor force remain in the primary sector, agriculture and related activities now account for only about 16% of India’s GDP. This reflects major and persistent demand-side constraints to labor transfer from agriculture to other sectors, especially in recent years. While agriculture has grown quite slowly, relative to other sectors, post-1991, the employment elasticity of output growth in non-agriculture has remained low in India, compared to China. Agriculture continues to serve as the employer of last resort, within the context of an already extremely unfavorable land-man ratio. India has about as much arable land as the US, but about four times as many people; less than 2% of the US labor force is employed in agriculture and related activities, compared to over 40% in India. This exacerbates India’s problems of mass poverty and inequality. This in turn leads to political pressures to subsidize inefficient agriculture and protect it from import competition, even as it makes it more difficult to introduce labor-displacing technological improvements, scale up farm operations through consolidation of holdings, or convert agricultural land to non-agricultural uses. 

Increasing the employment elasticity of output growth outside agriculture (that is, by how much the employment changes if the economy grows), bringing a larger proportion of the population within the ambit of income tax and formalizing the informal sector remain India’s greatest policy challenges. Without the first, substantial labor transfer from the overcrowded agricultural sector cannot be effective. Without the second, the income tax mechanism cannot be used to reduce inequalities generated by the labor market in any substantive sense. Without the third, even a modest system of worker protection and a universal social safety net would both remain almost impossible propositions. 

Expanding the coverage of the current National Rural Employment Guarantee Scheme and maintaining it over the next 15 to 20 years could play an important role in attaining the first objective. Stepping up the growth rate of the manufacturing sector is also essential, since manufacturing in India exhibits the highest employment elasticity of output growth among sectors, in particular for unskilled workers [1]. The second requires the plugging of major loopholes in tax laws, especially the elimination of the tax-free status of agricultural income, and a major improvement in tax compliance. A substantial improvement in the ability of the legal system to deliver cheap, quick, and binding arbitration is also essential in this context. The third requires the elimination of the many policy-induced distortions that favor smaller operations and negate both technological and financial economies of scale [4]. Also relevant in this context is the highly fragmented nature of India’s land market (exacerbated, as discussed earlier, by inadequate labor movement out of agriculture), the often fuzzy nature of property rights in land and the interminable nature of land litigation, all of which militate against easy acquisition of land necessary for large-scale operations. These factors also make it inordinately difficult to build the public infrastructure to support large-scale operations and concentration of workers in relatively few sites.  Without sustained and proactive government intervention in the land market (a political hot-potato in India), enterprises will therefore continue to face major obstacles to scale expansion. The fragmented and highly dispersed nature of work sites will in turn continue to deter unionization of the casual and contract labor force and the expansion of at least some labor protection legislation to cover these segments. 
  
As noted earlier, about 90% of India’s labor force remain in the informal sector. Protective regulation, whether in terms of minimum wages, unemployment insurance, pension programs, union penetration or workplace conditions, is practically absent in the informal sector. Labor laws and regulations apply only to economic entities in the formal sector. Even in this sector, successive governments have whittled away both the scope and the enforcement of protective legislation since 1991 – firms, even in the public sector, have resorted to increasing contractual employment to reduce the proportion of the workforce protected by labor laws. The overarching policy objective has been labor market flexibility, rather than worker protection. Redistribution, to the extent it happens, happens in India through welfare programs such as food and fuel subsidies, cash transfers to women, free/subsidized public education and health facilities, caste-based affirmative action programs, and subsidies to sectoral pressure groups such as farmers. Labor market protection plays a minimal, and steadily diminishing, role in India’s post-1991 political economy, as does organized labor. One does not expect this political emphasis, however unfortunate, to change in the foreseeable future.

Acknowledgments

The authors thank Upamanyu Bhattacharya for excellent research assistance and IZA World of Labor editors for the opportunity to extend the previous results. We are also grateful to an anonymous reviewer for excellent suggestions. The usual disclaimer applies. Version 2 of this article updates all figures and adds new Key references [2], [3], [4], [9], and [10].

Competing interests

The IZA World of Labor project is committed to the IZA Guiding Principles of Research Integrity. The authors declare to have observed these principles.

© Indraneel Dasgupta and Saibal Kar