Economic development and unemployment

Much skepticism has been expressed about the realism and usefulness of measuring unemployment and underemployment in dominantly agricultural and dualistic Asian economies. And the controversy continues over the concepts to be used for measurement. Still, a large amount of data on unemployment and related magnitudes have been collected in nationwide labor force surveys in India over the last three decades. These data are not widely known because researchers have not so far built up comparable time series data of key magnitudes. They have been hampered by the slow and irregular release of data in changing forms and by the frequent "improvements" in survey concepts which affected the comparability of data yielded by different surveys. Many cross section analyses of the Indian labor market are already available (see, for example, Rosenzweig, 1981; Bardhan, 1982; and Evenson and Binswanger, 1981).

After an analysis of some significant macroeconomic tendencies, the paper provides a nonparametric decomposition of the growth of "weekly status" unemployment for which eight observations are available over the period 1959-78. These observations imply the growth of unemployment at a rate of about 1.7 percent a year. This growth is decomposed into four factors: population growth and changes in the participation rate on the supply side; and growth of the capital stock and capital intensity on the demand side. Alternatively, the growth in the demand for labor (employment) is broken down into the contributions of the growth of output and the growth of productivity.

The decomposition exercise makes it possible (in section 4) to compute alternative combinations of growth rates of population, output, and productivity (or capital intensity) required for a target reduction of unemployment by the end of the century.

The main outcome is that though India has a massive unemployment problem, it can be reduced by a sustained overall growth rate of the order of 6.5 percent a year. But whether India can attain and maintain this high rate, under the well-known structural constraints, remains problematic. In the absence of a high growth rate, implementation of direct employment-generation programs, specifically targeted at landless and small-farm rural workers, will continue to be necessary for a long time.