Employment elasticity

Employment elasticity

Subject : Economy

Section: Employment

Context

One percentage of GDP growth today yields less than one ­fourth the number of good quality jobs that it did in the 1980s.

Concept:

Employment Elasticity:

• Employment elasticity is a measure of the percentage change in employment associated with a 1 percentage point change in economic growth. 
• The employment elasticity indicates the ability of an economy to generate employment opportunities for its population as per cent of its growth (development) process.
  • An employment elasticity of 1 implies that with every 1 percentage point growth in GDP, employment increases by 1%.
    • An employment elasticity of 1 denotes that employment grows at the same rate as economic growth.
  • Elasticity of 0 denotes that employment does not grow at all, regardless of economic growth.
  • Negative employment elasticity denotes that employment shrinks as the economy grows. This is crucial as it is commonly believed that economic growth alone will increase employment.
    • The negative employment elasticity in agriculture indicates movement of people out of agriculture to other sectors where wage rates are higher.
    • However, the negative employment elasticity in the manufacturing sector was a cause of concern particularly when the sector has shown positive growth in output.
• Jobless growth means that the high growth in GDP did not accompany a similar growth in employment, resulting in a low Employment Elasticity.
  • For example, between 2004–05 to 2009–10, employment elasticity of India was as low as 0.01, which implies that with every 1 percentage point growth in GDP, employment increased by just one basis point.
  • Falling or low employment elasticity is partly the result of large-scale substitution of labour with capital and automation.
• In India- the highest employment elasticity has been shown by the Construction and utilities sector (which includes energy, water and waste management). While the farm sector in India has shown negative employment elasticity. This simply indicates that growth in the farm sector is accompanied by reduction in farm employment as more and more people leave this sector and go out for jobs in the non-farm sector.

Using data of ‘employment in public and organised private sectors’ published by the Reserve Bank of India (RBI), we can calculate that in the decade between 1980 and 1990, every one percentage point of GDP growth (nominal)generated roughly two lakh new jobs in the formal sector. That is, if India’s GDP grew by 14% every year in the 1980s, it can be said that it created roughly 28 lakh new formal jobs. In the subsequent decade from 1990 to 2000, every one percentage point of GDP growth yielded roughly one lakh new formal sector jobs, half of the previous decade. In the next decade between 2000 and 2010, one percentage point of GDP growth generated only 52,000 new jobs. The RBI stopped publishing this data from 2011-12, but one can safely infer using proxy data that in the 2010-2020 decade, the number of new jobs generated for every percentage of GDP growth fell even further