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Unemployment is not about just education

Only when the employment crisis India faces today is understood can the necessary corrective action be taken. While India owes its youth the best education, public policy must aim to keep India’s aggregate demand for goods high.

5 min readAug 24, 2026 01:33 PM IST First published on: Aug 23, 2026 at 07:07 AM IST

In the nationwide protests that followed the leakage of the NEET paper, students had demanded more than just a fair examination system. They had highlighted the poor quality of higher education and the challenge of youth unemployment. While the youth are right to perceive the education system as ripe for drastic reforms, it would be appropriate not to attribute all of current unemployment to poor education. Two strands of evidence suggest this. First, unemployment in countries with far superior educational systems is higher than in India today — Finland and Sweden being two examples. Within India, there is Kerala, which has a better-educated workforce but still has a high youth unemployment rate. Second, if educational qualifications and skills are scarce in India, the real wage of skilled workers must rise, but we see little of that happening currently. Even in India’s IT sector, apart from those with AI-related competency or working in the Global Capability Centres of multinationals, wage increases for the remaining employees are not particularly high. This is not to say that education and skills do not matter. They matter for productivity. Employment, though, is related to aggregate demand for goods. The demand for labour is a derived demand; it exists due to a demand for goods.

Everything points to a slowing of aggregate demand growth in India over the last decade. Seven out of the 11 sectors at the initial level of disaggregation of national income slowed, three grew at the same rate as before, and only one grew faster. The sector that grew faster was real estate, which is neither large nor one employing many. With such a comprehensive slowdown in the economy, a slackening in the demand for labour would have occurred. But why did the economy slow? Both short-term and long-term factors are responsible. There is by now sufficient evidence to show that the trigger was the demonetisation of 2016. Growth slowed annually over the next three years before output actually contracted in 2020-21 due to Covid. As expected, the economy rebounded after the lockdown, but that could not prevent a decline in the average growth rate.

There are two long-term factors. The first is the slowdown in capital formation — or investment — from 2009-10. The slowdown is in public investment. The pace of private investment has been constant, despite the Modi government being the most business-friendly one the country has ever seen. Among other overtures, it had cut the corporation tax rate significantly in 2019, particularly for new companies. Yet, private investment has not picked up. An explanation would take us to the second long-term factor, namely, the rising price of food. Having remained steady during a phase of India’s all-time high growth in the early 2000s, the real price of food, that is, price of food relative to that of all goods, began to rise. It has risen by 53 per cent since 2008-09. Globally, countries became richer, as food got cheaper. We know why.

While the impact on welfare — of food becoming more expensive — is immediately understood, its consequence for growth, and therefore for employment, is not. As the price of food rises, unless wages rise, households are poorer, and demand less of other goods. Industrial firms are now left with excess capacity, leading them to postpone investment. This explains the unchanged pace of private investment, even as firms pay lower taxes.

There is evidence that the real wage in India has stagnated for most rural workers for nearly a decade, and that real earnings have declined for regular workers and the self-employed. So, consumption expenditure, which represents demand, would have been impacted. As firms observe the slow growth of the market for their goods, they have likely become pessimistic about their prospects for future growth. It explains the unchanged growth rate of private investment. Public investment can to an extent make up for the unchanging pace of private investment. But for this to work, the government must choose projects wisely. The Modi government shows a marked preference for big infra, highways and airports, but it is infrastructure more closely aligned to production, roads, electricity, sewerage and transportation, that may be expected to yield greater returns in terms of employment generated.

Only when the employment crisis India faces today is understood can the necessary corrective action be taken. While India owes its youth the best education, public policy must aim to keep India’s aggregate demand for goods high.

Balakrishnan is the author of India’s economy from Nehru to Modi: A brief history Coomi Kapoor’s Inside Track column will be back in a fortnight