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ExplainSpeaking: Why recovery in employment may lag the recovery in GDP

It is clear that the bulk of India’s employment is both in the unorganised sector and is of an informal nature.

A worker at a restaurant in Jammu (AP)

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Dear Readers,

Over the past week, the International Monetary Fund (IMF) has been in the news for both desirable and undesirable reasons.

A big part of the focus on the IMF has been due to the controversy surrounding its Managing Director Kristalina Georgieva’s role in the alleged rigging of the World Bank’s Ease of Doing Business Rankings while she was the chief executive at the Bank.

But, away from the controversies, the IMF has also been in the news for unveiling its second World Economic Outlook (WEO). To be sure, twice every year — April and October — the IMF comes out with its WEO. It does provide regular “updates” to the WEO on other occasions. The WEO reports are significant because they are based on a wide set of assumptions about a whole host of parameters — such as the international price of crude oil — and set the benchmark for all economies to compare and contrast.

On the whole, the IMF’s central message was that the global economic recovery momentum had weakened a tad, thanks largely to the pandemic-induced supply disruptions across the planet.

“Compared to our July forecast, the global growth projection for 2021 has been revised down marginally to 5.9 per cent and is unchanged for 2022 at 4.9 per cent. This modest headline revision, however, masks large downgrades for some countries. The outlook for the low-income developing country group has darkened considerably due to worsening pandemic dynamics,” states the latest WEO.

But more than just the marginal headline numbers for global growth, it is increasing inequality among nations that the IMF was most concerned about.

“The dangerous divergence in economic prospects across countries remains a major concern. Aggregate output for the advanced economy group is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9 per cent in 2024. By contrast, aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5 per cent below the pre-pandemic forecast in 2024, resulting in a larger setback to improvements in their living standards,” it stated.

There are two key reasons for the economic divergences: One, large disparities in vaccine access and, two, the difference in policy support (or the help provided by the respective governments).

“While almost 60 per cent of the population in advanced economies are fully vaccinated and some are now receiving booster shots, about 96 per cent of the population in low-income countries remain vaccinated. Emerging and developing economies, faced with tighter financing conditions and a greater risk of de-anchoring inflation expectations, are withdrawing policy support more quickly despite larger shortfalls in output,” it states.

On vaccination, which is possibly the most important intervention to get the world economy back on track, the chart captures the nature and extent of the challenge facing policymakers.

Global distribution of vaccines remains a key policy challenge

But possibly the most important takeaway from the WEO this time is about the employment growth likely to lag the output recovery

Share of economies projected to regain pre-pandemic employment and output levels by 2022

“Employment around the world remains below its pre-pandemic levels, reflecting a mix of negative output gaps, worker fears of on-the-job infection in contact-intensive occupations, childcare constraints, labor demand changes as automation picks up in some sectors, replacement income through furlough schemes or unemployment benefits helping to cushion income losses, and frictions in job searches and matching,” states the IMF in WEO.

Within this overall theme, what is particularly worrisome is that this gap between recovery in output and employment is likely to be larger in emerging markets and developing economies than in advanced economies.

Labour markets, by economy and worker groups

Further, young and low-skilled workers are likely to be worse off than prime-age and high-skilled workers, respectively.

On the whole, India’s growth rate hasn’t been tweaked for the worse. In fact, beyond the IMF, there are several high-frequency indicators that have suggested that India’s economic recovery is gaining ground.

But in the context of what the IMF said about recovery in unemployment lagging output recovery, it matters to understand why we may not know about the unemployment distress in a large part of India. That’s because, as it is often said, 90% of India’s jobs are in the so-called informal sector. More often than not, data on this part of the economy is quite patchy and inadequate.

Last week, my colleague Ishan Bakshi wrote an opinion piece pointing to the continuing divergence in the fortunes of the formal and informal parts of the Indian economy.

So how big is India’s informal economy? How many people does it employ? What is the level of output it contributes to the national economy?

In a 2019 paper, titled “Measuring Informal Economy in India”, S V Ramana Murthy of the National Statistical Office estimated the extent of India’ informal economy. “The terms unorganised/ informal sector are used interchangeably in the Indian context. The informal sector/unorganised sector consists of enterprises which are own account enterprises and operated by own account workers or unorganised enterprises employing hired workers. They are essentially proprietary and partnership enterprises,” he states.

Table 1 shows two things. One, the share of broad economic activity in GVA (in %). Two, the share of the informal sector across different types of companies. As can be seen, the share of informal/unorganised sector GVA to the total is more than 50%. (Source: Computed from National Accounts Statistics, 2019)

Sector of the economy Share in Gross Value Added

(in %)

Share of unorganised/ informal sector

(in %)

Agriculture, forestry and fishing 17.2 97.1
Mining and quarrying 2.3 22.5
Manufacturing 16.4 22.7
Electricity, gas, water supply & other utility services 2.7 5.3
Construction 7.8 74.5
Trade, repair, Accommodation and food services 11.8 86.6
Transport, storage, communication & services related to broadcasting 6.4 47.7
Financial services 5.4 11.9
Real estate, ownership of dwellings & professional services 15.6 52.8
Public administration and defence 6.2 0
Other services 8.1 47.9
Total  100 52.4

Of course, there are sectors such as Agriculture and allied industries where almost all the sector’s GVA is produced by those working in the informal sector. Then there are sectors such as Manufacturing where less than 23 per cent of the total GVA comes from the informal sector.

That was the contribution of the informal sector in total output. But what about employment?

The informal worker is defined as “a worker with no written contract, paid leave, health benefits or social security”. The organised sector refers to firms that are registered. Typically, it is expected that organised sector firms will provide formal employment.

Table 2 shows the break-up as of 2017-18. (Source: Computed from NSS 68th unit level data on employment unemployment, 2011-12 and Periodic Labour Force Survey, 2017-18)

Worker Unorganised Organised Total
Informal 84.5 5.2 90.1
Formal 1.3 7.9 9.3
Total 86.8 13.2 100

It is clear that the bulk of India’s employment is both in the unorganised sector and is of an informal nature.

What this data shows is that if the informal/unorganised sector recovers at a slower pace than the formal sector, then the recovery in employment (relative to the recovery in output) will be even slower in India.

Take care and stay safe.

Udit

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