Data fuzzy on job creation

Member of the Prime Minister’s Advisory Council Professor Surjit Bhalla has said that 1.5 crore jobs were created in the economy in the year ending in March 2017. He has said this, among others, on the basis of a report by the Center for the Monitoring of Indian Economy (CMIE) saying that 1.18 crore jobs were created in the age group 25-64 years in that year.

In a parallel development, Professor Pulak Ghosh of Indian Institute of Management, Bengaluru has said that about 66 lakh jobs have been created in the current year 2017-18. He has said this on the basis of the number of members of the Employees’ Provident Fund Organisation (EPFO).

The difference in the two figures arises because Prof Bhalla is looking at all the jobs created in the entire economy including those in the informal sector such as plying of e-rickshaws; while Prof Ghosh is looking at the jobs created in those businesses that employ more than 20 persons and are required to register themselves with the EPFO. We ignore here the fact that the first data relates to 2016-17, while the latter relates to 2017-18.

This data indicates that the economy is in good shape. However, officials of the CMIE have clarified that while 1.18 crore jobs have indeed been created in the age group 25-64 years; at the same time 70 lakh jobs have been lost in the age group 15-24 years and 30 lakh jobs have been lost in the age group above 65 years.

Thus the net creation of jobs was only 18 lakhs. Prof Bhalla appears to have based his figures on the jobs created in the age group 25-64 years and ignored the loss of jobs in other age groups. The importance of this clarification by CMIE is that the increase in the jobs in 25-64 years age group could be due to ‘formalisation of the economy.

These workers were most likely already employed previously as indicated by their 25+ age, but their employment was not reported previously. Their employment is now being reported due to demonetisation and GST. Businesses that were previously running in cash purchases and sales have had to enter the banking stream. In consequence they cannot hide the employment given by them and this is now being reported.

There is a shift from informal to formal sector. If we consider the increase of 1.18 crore jobs to be due toformalisation and not due to the generation of new jobs; then the total number of jobs may actually have reduced as indicated in the reduction of 70 lakh jobs for the young and the reduction of 30 lakh jobs for the old.

The second reason for the doubt of the creation of large numbers of jobs is that the International LabourOrganisation, which is a reputed agency of the United Nations, has said the level of unemployment in the age group 15-24 years in India is three times the level of unemployment in the whole economy. This again indicates that new jobs are not been created since these are likely to go to the young.

Another reason for the doubt of this rosy picture is that the wage rates are declining. There is a connection between the number of jobs and the wage rate. If the economy is generating jobs, then there is a demand for workers, and in order to attract workers to take up employment, the companies increase the wage rates.

Therefore, an increase in the wage rates is an indicator of creation of jobs whereas a reduction the wage rates is an indicator of a reduction in the number of jobs. A report by the CMIE says that long term average rate of growth in the real wages in the formal sector has been about 6 percent. However, from 2014 to 2017, this rate of growth reduced to 3.9 percent. This means that even in the formal sector, the rate of increase has slowed down. This is like a car running at 60 kmph previously; and now slowing to 50 kmph.

The formal sector consists of two parts. Some companies in the formal sector are listed on the share markets. These are generally large companies like Tata Motors. Other companies in the formal sector are not listed on the share markets.

These are generally smaller companies. The CMIE report says that the real wages of the workers in the companies listed on the share markets increased by about 4.5 percent in the first half of 2017. This is higher than the 3.3 percent increase in the year before. This indicates that within the formal sector, large listed companies are doing well.

Two factors appear to be working simultaneously. On the one hand, the total number of jobs in the economy is reducing as indicated in the reduction of jobs in the 15-24 years age and above 65 years age as reported by CMIE, the high level of unemployment in the young as reported by the ILO, and the reduction in wage rates.

On the other hand the business of large listed companies seems to be growing as indicated in the higher increase in wage rates paid by these companies, and the buoyancy in the share markets. The overall economy appears to be shrinking while, within that overall shrinkage, the size of the listed companies may be increasing. This is like the elder brother in the family taking away the roti of the younger brother.

The overall health of the family declines because the younger brother is now malnourished. Yet, the elder brother becomes strong. The decline in health of the family and improvement in the health of the elder brother go together. Similarly, the listed companies in the economy are taking away the business of the small companies.

The overall economy is in decline because the small companies are closing down. Yet, the listed companies are becoming strong. Thus decline in the economy and improvement in profits of the large companies is going together.

The conclusion is that the increase in employment reported by Professors Bhalla and Ghosh should be taken with a pinch of salt. This increase likely happened due to the formalisation of the economy. This may not indicate an increase in the number of jobs.

The government should not get carried away by the favourable talk on employment by Profs Bhalla and Ghosh, and instead make efforts to revive the generation of employment (Writer is formerly Professor of Economics at IIM Bengaluru)