When Will India Reach The Lewis Turning Point?

India needs to create 16 million jobs over the next 15 years to come to a point where there is neither surplus labour nor unemployment

Students watch a presentation in a computer numerical control (CNC) operator class during vocational training. About 5 percent of Indian workers have had formal skills training, compared with 96 percent in South Korea and 80 percent in Japan. (Photograph: Udit Kulshrestha/Bloomberg)
Students watch a presentation in a computer numerical control (CNC) operator class during vocational training. About 5 percent of Indian workers have had formal skills training, compared with 96 percent in South Korea and 80 percent in Japan. (Photograph: Udit Kulshrestha/Bloomberg)

One of the key advantages that a number of developing economies have is the low cost of labour. As an economy industrializes, surplus rural labour moves towards urban areas. Industry can employ these migrants at relatively lower wages and keep their costs low.

Then comes a turning point. The Lewis Turning Point - named after economist Arthur Lewis. This is the point at which surplus rural labour dwindles and wages start to rise.

Many argue that China has reached this turning point. India, however, is a far distance away.

According to the India Employment Report 2016 by the Institute for Human Development (IHD), India will need to create at least 16 million jobs over the next 15 years to come close to a point where there is neither surplus labour nor unemployment.

IHD is a non-profit institution conducting studies in the areas of labour and employment, poverty, health and nutrition, education, and other aspects of human development.

To understand the enormity of the employment challenge, we may consider the conditions that will have to be met to reach the rather modest goal of the Lewis Turning Point, the point at which there is neither surplus labour nor unemployment, in the next 15 years. This will require absorption of the entire incremental labour force of 8 million, a segment of the surplus workers (7 million) and a segment of the unemployed (0.9 million) every year. The challenge therefore is of absorbing around 16 million persons in new jobs at rising levels of productivity every year over the next 15 years.
India Employment Report 2016

The Unemployment Picture Today

Understanding India’s current employment scenario based on available data is not easy.

The annual employment-unemployment survey’s conducted by the Labour Bureau tell us that the unemployment rate in India stood at 5 percent in 2015-16, up from 3.8 percent in 2011-12. The rate of labour force participation has fallen from 52.9 percent in 2011-12 to 50.3 percent in 2015-16.

When Will India  Reach The Lewis Turning Point?

If you zoom into that data, the reason for the increased unemployment rate is the rural segment. Rural unemployment has risen from 3.4 percent in 2011-12 to 5.1 percent last fiscal.

Alakh Sharma, professor and director at the Institute for Human Development attributes the increase in rural unemployment to a decline in economic activity. While gross domestic product growth has strengthened over the past two years, two successive bad monsoons have dented agricultural activity.

In fiscal 2016, the agriculture sector grew at 1.25 percent. The year before that agriculture grew at a mere 0.2 percent.

When Will India  Reach The Lewis Turning Point?
There is an increase of 1.2 percent that happened not just because of decline in economic activity but also due to cyclical reasons like drought and similar calamities . In urban areas, there is a decline but the bigger question is how true are these numbers?
Alakh Sharma, Professor and Director, Institute for Human Development 
When Will India  Reach The Lewis Turning Point?

Does Official Data Reflect The True Picture?

As Sharma says, the question to ask is whether India’s official employment and unemployment statistics reflect a true picture of the jobs scenario in the country.

That question requires an assessment of the method used to determine the unemployment rate.

The survey conducted by the Ministry of Labour uses the Usual Principal Status approach or UPS to measure unemployment. UPS uses a reference period of 365 days, i.e. one year, preceding the date of the survey for measuring unemployment by taking into account principal activity and subsidiary activity status of the worker, explained Professor GM Bhat, head of the department of economics at Central University of Kashmir.

The status of activity on which a person has spent a relatively longer part of the preceding 365 days prior to the date of survey is considered to be the usual principal activity status of the person. This approach of measurement takes into consideration the majority time criterion and refers to the activity status on which he or she spent the longer part of the year.
GM Bhat, Head - Department of Economics, Central University of Kashmir

Professor Sharma concurred and said that the more appropriate approach is Usual Principal Subsidiary Status or UPSS, especially to measure urban unemployment.

UPSS is a more inclusive measure and this approach seeks to identify ‘workers’ out of those who were classified as ‘unemployed’ or as ‘outside labour force’ on the basis the majority time criterion of the UPS approach.

Under UPSS, even if in a year, the person has worked for some part of it, he or she is UPSS employed. Hence, UPSS captures intermittent employment. For casual workers, UPSS is a better approach but for the educated workforce, UPS is a better measure.

Using the UPSS approach, the unemployment rate stands at 3.7 percent.

Challenges Of Underemployment

What the official data continues to hide is the widely-prevalent problem of underemployment. Official surveys and documents like the Economic Survey acknowledge that underemployment skews the headline statistics and under-estimates the extent of the employment challenge facing India.

It is pretty well-known that many of the people who are reported as ‘employed’ or ‘workers’ in official publications do not get work for the entire duration of their stay in the labour force. Even those who get some work or the other for the entire duration may be getting work for only a small fraction of the time they are available for work. This apart, some may be working on jobs which do not allow them to fully utilise their abilities or from which they earn very low incomes. All this constitutes underemployment which remains a worrying aspect of the employment-unemployment scenario in the country. 
Employment-Unemployment Survey, 2015-16 

Workers in several types of employment, particularly in casual wage employment and self-employment, do not have full-time work and are underemployed, points out the Institute of Human Development’s report quoted above.

Professor Sharma explained that a decline in underemployment in any given employment category indicates quality improvement in that type of employment as it means increased earnings per worker.

As such, along with adding new jobs to the economy, bringing down underemployment is key.

Creating ‘Good’ Jobs

The challenge doesn’t end there. Creating jobs is not enough. Creating ‘good’ jobs is the need of the hour.

The government’s economic survey of 2016 spoke of this challenge and said that India must create millions of good, safe, productive and well-paying jobs which tend to be in the formal sector.

The survey pointed out that between 1989 and 2010, most of the new jobs created were in the informal sector. It, however, adds that after 2000, there has been a pick-up in creation of jobs in the formal sector. The formal sector jobs though appear to have come through contract employment.

Thus the challenge of creating ‘good jobs’ in India could be seen as the challenge of creating more formal sector jobs, which also guarantees worker protection.  
Economic Survey 2015-16