What’s the link between GDP growth and employment in India

What’s the link between GDP growth and employment in India

Subject : Economy

Section: Employment

Key Points:

• It is generally believed that fast GDP growth will automatically bring about employment. But this is not necessarily correct, as the growth can be with or without much employment generation.
• For a country like India, with surplus labour, growth is expected to be labour intensive, unlike labour scarce countries where growth is capital intensive. But this does not always hold true as can be seen in the case of India.

How to compare employment generation in relation to growth?

• • A good way to measure this relationship is to look at employment elasticity of growth — it is the extent to which employment grows when GDP grows by one unit.
  • It is calculated by dividing the employment growth rate by the output growth rate.

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.

Recent trend in employment elasticity:

• As can be seen, employment elasticity has consistently fallen between 1983 and 2017, showing that a 1% increase in GDP leads to a less than 1% increase in employment.
• It is noteworthy how employment elasticity went up so sharply in the last few years. Highlighted in circles, we can see that non-farm employment growth rate improved during this period.
• It is also true that the employment elasticity calculation was helped by the fact that the non-farm output growth (the denominator in this formula) also fell quite sharply.
• In addition the majority of employment generation in this phase has been self-employment.
• In 2020-21 (pandemic year) regular wage employment fell by 2.2 million. But this net change hides an increase in formal employment by 3 million and a loss of about 5.2 million of semi and informal regular wage employment.