Friday, November 14, 2014

Economic Notes: The imbalance between employment and growth

Close to half of employed Indians work in agriculture. The ‘value add’ in agriculture – the amount by which the value of output exceeds the value of intermediate inputs – is an indication of the health of the agricultural economy. In 2012, this was Rs 63,000 per agricultural worker, less than a fourth of the average figure for non-agricultural workers [1]. At about Rs 170 per day, this was barely higher than the minimum daily wage of unskilled agricultural labour in some states. It must be kept in mind that ‘value add’ is only an average figure and that different categories of agricultural workers - large farmers employing labour, small farmers tilling their own land and wage labourers - will have differing claims on the value added.

For the millions trapped in agriculture the possibilities of escaping poverty depend on the rapid growth of agriculture and the availability of jobs in more productive sectors outside. There are major impediments to the former, chief among them being the fragmentation of land into very small holdings, making the mobilization of capital for development extremely difficult. The choice of the latter is contingent upon better more paying jobs being available outside agriculture for the ‘unskilled’ farm worker.

The existential crisis faced by the Indian peasant is not unique. All across the world, the presently industrialized nations, had at some period in their history, a greater part of their workforce engaged in agriculture under conditions of low productivity in comparison with industry. Industrialization progressed with the help of labour migrating from agriculture. This migration in turn opened up the path for growth in agriculture through productivity increases, eventually narrowing the gap in productivity between agriculture and industry. The rapid change in these economies from agriculture accounting for the lions’ share of employment and gross domestic product (GDP) to industry taking its place has been termed a ‘structural transformation or shift’.[2]

Structural shifts from agriculture to industry happened not only in the industrialized countries of the west, but also in Asia – in Japan, South Korea and Taiwan. In most countries after the shift, the share of manufacturing in employment increased to over 30%. In the industrial powerhouses Britain and Germany, this share reached 45% and 40% respectively, at its height.  Since then, there has been a decline in the share of industrial employment in these countries. But it must be noted that second structural shift in employment, this time from industry to services happened only after industry had attained a share of about 50% in the GDP.[3][4]

Data Sources: GDP data [5] ; Employment data [6]

Closer home, China too, it appears, is also on its way to a structural transformation with manufacturing accounting for about 33% of the GDP (industry for 46%).[7] India remains way behind in terms of the development of industry. Manufacturing had a share in GDP of 14.4% in 2011-12 and industry as a whole had a share of 26.7%. The above chart draws attention to the basic structural imbalances in the Indian economy – the great discrepancy between share of contribution to GDP and share of employment in different sectors of the economy. (The share of other non-manufacturing industries except for construction - such as electricity, gas and water distribution - has been clubbed with mining in the above chart)

Has a structural shift begun in India?


Claims have been made recently that a structural shift in employment out of agriculture, though greatly delayed, may finally be in progress in India too. The claim is based on the sharp 10% drop in the share of agriculture in total employment between 2004-05 and 2011-12, and the fact that the absolute numbers employed in agriculture have declined for the first time since 2004. [8]  The chart below shows the relative share of employment of different sectors of the economy over the years. Employment in non manufacturing industries (other than construction) has been omitted as it is insignificant.

Data Sources: Authors calculation using employment numbers from Mehrotra et al (2014)

The chart taken at face value seems to show that Indian peasants are moving out of agriculture at an accelerated pace since 2004. The increase in the share of employment has been mainly in construction sector and to a lesser extent in services. Employment share of manufacturing has increased only marginally. A closer examination of disaggregated NSSO data for agriculture throws more light on the shift out of agriculture.


Women are leaving the workforce


The chart below shows the decrease in recent years in the labour force participation rates (LFPR) - the number of people in a category who look for employment out of every 1000 - for rural and urban Indians aged 15 and above. (The same trends have continued into 2012-13 as per labour ministry surveys.)

Data Sources: NSSO Surveys

One reason for the decreasing LFPR is the increasing enrolment of youth between 15 and 24 in educational institutions. This affects both men and women and more or less accounts completely for the LPFR decrease among men. That still leaves the issue of women leaving the labour force.
Over 80% of women leaving the labour force belong to rural India. The most plausible explanation for rural women leaving agriculture and retreating to household duties runs along these lines. Most of these women are from the poorest rural households. These are the households of marginal farmers and casual labourers from which the men have migrated out of the village for casual jobs in construction. Rural women traditionally work together with their men folk either as unpaid family workers or as casual labour and have stopped working as they can no longer accompany their men folk.[9]

The falling LFPR, predominantly affecting rural India and thereby agriculture means that the fall in the employment share of agriculture is not entirely due to workers shifting to other sectors. A significant part is due to rural girls and women withdrawing from agriculture. Agricultural labour is not being ‘pulled’ to jobs in expanding manufacturing in industrial centres; rather it appears that it is being forced to take up seasonal casual work to avoid further deterioration in standard of living. The households of these migrant workers are still in the villages. For all these reasons, it is difficult to conclude that a structural transformation similar to that seen in industrialized countries is under way.

A jobless growth


Going by the historical experience of other countries, manufacturing jobs are the key to facilitating an employment shift out of agriculture. Is manufacturing job growth stagnant because of poor growth?

The following table shows the average annual growth of jobs and value added (same as the contribution to GDP) in the different sectors of the economy in the most recent period for which both sets of data are available. Data for mining also includes all other non-manufacturing industries except for construction.

From 2004-05 to 2011-12, India’s real non-agricultural GDP grew by an average 9.4% per annum, but employment grew only at 3.5%. Services and Manufacturing were the fastest growing sectors at 10.1% and 8.9% respectively. However they added jobs only at 2.5% and 1.5% respectively. Clearly, GDP growth encompassing both manufacturing and services did not translate into employment growth. The answer to why growth in manufacturing is practically jobless growth must be sought in the structure of Indian manufacturing and its markets and is beyond the scope of the present article.
What is amply clear is that growth of the GDP variety is no guarantee of employment growth. A large part of the poverty ridden agricultural workforce waits the creation of factory jobs to transition out of agriculture. Any government that claims to represent the peoples’ best interests must aggressively focus on creating productive jobs in industry.

References:

Binswanger-Mkhize (2013): “The Stunted Structural Transformation of the Indian Economy”, Hans P Binswanger-Mkhize, EPW, June 29, 2013
Kannan et al (2012): “Counting and Profiling the Missing Labour Force”, Kannan K P and G Raveendran, EPW, February 11, 2012
Mehrotra et al (2014): “Explaining Employment Trends in the Indian Economy: 1993-94 to 2011-12”, Mehrotra S, J Parida, S Sinha and A Gandhi, EPW, August 9, 2014
Rodrik (2013): “The perils of premature deindustrialization”, Rodrik D, Project Syndicate, http://www.project-syndicate.org/commentary/dani-rodrikdeveloping-economies--missing-manufacturing
RUPE (2014): “A middle class India?, Aspects of India’s Economy, No 58, Sept 2014, http://www.rupe-india.org/58/introduction.html

Notes:

[1] Agricultural ‘value add’ is obtained by dividing the contribution to GDP (factor cost at current prices) of agriculture by the number of people employed in it. The ‘value add’ of non-agricultural workers as a whole was 284,000 in 2011-12.
[2] See Binswanger-Mkhize (2013) for a description of the general characteristics of structural transformations in the industrialized countries
[3] A discussion on the growth in employment in manufacturing during the structural shift in the industrialized countries can be found in Rodrik (2013) and in Rodrik’s weblog http://rodrik.typepad.com/dani_rodriks_weblog/2013/10/on-premature-deindustrialization.html
[4] See also chapter 4 of RUPE (2014) for a discussion on the structural transformation thesis and its applicability to India
[5] GDP data is from the Central Statistics Office press release, MOSPI website www.mospi.nic.in
[6] Employment data is based on estimates using unit level NSSO data by Mehrotra et al (2014)
[7] See note 2 for numbers on China
[8] Mehrotra et al (2014) write: “Post 2004-05, for the first time in India’s post-Independence economic history, in the five-year period, 2004-05 to 2009-10, as many as 23.7 million of India’s agricultural workforce abandoned agriculture..... In fact, non-agricultural employment grew by 25 million.... Between 2009-10 and 2011-12, non-agricultural employment increased sharply – a 27 million increase in absolute terms, while at the same time the numbers in agriculture fell by 13 million in a matter of two years. This is a historically unprecedented development in India’s economic history.
This structural shift .....  is precisely the kind of progressive structural change in employment that should accompany a structural change in output between the primary, secondary and tertiary sectors in any developing economy.
[9] This is the conclusion drawn in Kannan et al (2012) based on a detailed analysis of data between 2004-05 and 2009-10. The same trends appear to have have continued through 2011-12 and very likely through 2012-13 as well.


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