Twin Shocks and Jobs


by Mahesh Vyas

Recent data seem to suggest that the sharp fall in labour participation, seen till recently, has stopped. Labour participation rate averaged 47 per cent during the first eight months of 2016. During the last four months of the year, which saw the launch of demonetisation, it averaged 46 per cent.

Prima facie, demonetisation seems to have led to an immediate and significant fall in labour participation rate. The average participation rate during the ten months preceding demonetisation was 47 per cent. During the ten months following demonetisation, the average labour participation rate was 44 per cent. In both cases, the range was about a percent on either side of the average. Evidently, the two periods are significantly different with the latter seeing a substantial fall over the former.

The second shock to the Indian economy, the GST, happened in July 2017. Possibly, its immediate impact was less severe. Labour participation was at its lowest at 43 per cent in July 2017. But, during each of the following months – August, September and October 2017, it has increased.

The increase post GST is surprising since this is contrary to the pain reported by medium and small enterprises following GST. Such enterprises (that hire five workers or less) account for 70 per cent of the workforce. And, those that employ less than ten persons account for 79 per cent of the workforce. It is this section that is severely hit by GST (and was earlier hit by demonetisation).

It is somewhat counter-intuitive to expect the LPR to rise in the face of this structure of the labour force and the anecdotal evidences of the pain arising out of GST. Businesses are stressed in understanding the new tax structure and in having to comply with it, per force. More importantly, many medium and small units have found it difficult to survive in an environment of compliance and / or the cost of the new compliance requirements.

But, it may be possible to explain the lower pain seen post GST.

Demonetisation was perhaps, a lot more devastating to businesses because they could not survive the disappearance of cash. The impact was more widespread but, it had a strong element of wealth distribution. This wealth-distribution impact possibly cushioned the impact of demonetisation on job losses. In contrast, the impact of GST is not as widespread. It affects only the unviable units.

Like demonetisation created “jobs” of people standing in queues to convert old currency notes into new ones or to launder the ill-gotten wealth of others, GST is creating employment of armies of accountants figuring out changes in new laws and uploading information into a monstrous, sluggish system. These fake jobs camouflage the real slowdown in employment in the country.

There is pain post GST but, there is a rush to comply. Indirect tax collection during August-September 2017 was 38 per cent higher than in the corresponding months of 2016. This is partly because of an increase in rates but, it is also because of an increase in the number of people required to fulfill the compliances. It is logical to expect employment to increase to meet compliance.

During the post GST period, people are not leaving the labour force like they did post demonetisation. There seems to be an expectation that even if jobs are lost this time, they may find one (among the viable units) if they remain in the labour force. As a result, the unemployment rate has been rising.

The unemployment rate was 5.7 per cent in October. It has been rising steadily from 3 per cent in July. The recent increase in the unemployment rate notwithstanding these rates are low. Both, the labour participation rate and the unemployment rate need to rise to indicate that the economy is recovering from its long slump as seen in these ratios. At its current low level, the unemployment rate misleads.

The problem is that even if GST is creating a few new jobs for accountants, these are not the jobs that result from economic growth. It would be safe to conjecture that investment and growth-based new jobs are still too low. Investments have been poor because of a downturn in the business cycle since 2011-12. Now, the twin shocks of demonetisation and GST have made entrepreneurs wait further till disruptions caused by these shocks settle before demand picks up and conditions become conducive to invest again. Till the business cycles turn around and ripple-effects of the twin shocks ebb, the problem of jobs will continue to bedevil us.

Perhaps, a strong counter-cyclical strategy by policy makers is imperative.




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