March 28, 2018

NEW REPORT: The labor market in India: A large informal sector and falling productivity in the agricultural sector pose challenges

new IZA World of Labor report looking at the Indian labor market since the 1990s finds real GDP per capita today at 3.5 times their respective 1991 levels but an overwhelming proportion of the labor force continues to work in the informal sector and productivity in the dominant agricultural sector has fallen sharply.

According to the Indian economists Indraneel Dasgupta of the Indian Statistical Institute and Saibal Kar of the Centre for Studies in Social Sciences in 1991 the Indian economy entered an ongoing process of trade liberalization, domestic deregulation, and privatization of public sector units. Furthermore, the years from the 90s saw the continuation of a shift from the agricultural sector to the service and industrial sectors. By 2012, agriculture employed less than half (in 1994: 60%) of the labor force, while industry absorbed a quarter, and services almost 30%. The corresponding GDP shares were 14%, 27%, and 59% respectively.

This development led to a substantial increase in per capita output: Per capita real GDP in 2011 international dollars was about $6,000 in 2016, about 3.5 times its 1991 value of roughly $1,700. Labor productivity increased practically in tandem. GDP PPP per person employed in 2016 was about 3.4 times that in 1991. But this productivity growth did not affect the agricultural sector. In fact, productivity has declined in the agricultural sector over the years. Output per person employed in the agricultural sector amounted to about 70% of the total economy’s average output per person in 1951. This proportion had fallen to 47% by 1994 and 30% by 2012.

About 90% of India’s labor force remain employed in the informal sector without security, income stability or the benefit of protective legislation. More than 80%, and perhaps as high as 90%, of all wage workers are estimated to have had no written labor contract in 2011–2012. Fewer than 4% of all Indians report their incomes for income tax assessment.

The overall unemployment rate has remained essentially below 5% since 1991. However, for young workers (aged 15–24), unemployment has remained at around 10% with youth unemployment rates being significantly higher in urban areas: in 2011–2012, the urban youth unemployment rate reached a maximum of 18.8% for women aged 20–24 and 12.8% for men aged 15–19.

The labor force participation rate has fallen sharply for both women and younger men; the participation rate of young women collapsed, finally stabilizing at about 17% after 2012. Looking deeper into the data, women’s labor force participation declined the most among the poorest households, whereas it actually increased among better-off households.

According to the authors: “Increasing the impact of output growth on employment outside agriculture, bringing a larger proportion of the population within the ambit of income tax, and formalizing the informal sector remain India’s greatest policy challenges.” They suggest a number of policy measures such as plugging major loopholes in tax laws, stepping up the growth rate of the manufacturing sector and proactive government intervention in the land market to facilitate the scale expansion of enterprises.

Please credit IZA World of Labor should you refer to or cite from the report.

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