Employment has always been a controversial issue due to the fact that there is not much data available for the unorganised sector. Also the concept is fuzzy because while organised labour is recorded officially, the same does not hold for the other segment. Proxies are hence used to represent the same or surveys carried out that are then extrapolated. Both have their limitations.

The KLEMS data recently released by the RBI add a fair amount of material for debate. The database shows that there has been a substantial increase in the workforce in the last five years from 492 million in FY19 (which is before the pandemic) to 643 million in FY24. This is an increase of 151 million. In the preceding five years, which were normal and free of pandemic disturbances, the increase was just 21 million — from 471 million to 492 million. The size of the workforce estimated here is very different from the one provided by CMIE which is 460 million. However, this may not be very relevant as there are different approaches taken in arriving at these numbers.

But the puzzling observation is that KLEMS data show that incremental value added in real terms for the quinquennium ending FY24 was ₹31.4-lakh crore which is in accordance with the GDP data. But for the previous quinquennium ending FY19, the increase was ₹36.7-lakh crore. This means as the nation was adding more jobs the output produced was much lower in incremental terms. Hence the implication is that the average product of a worker in terms of GVA had fallen from ₹2.58 lakh in FY19 to ₹2.46 lakh in FY24. This raises another question on the productivity aspect of labour.

The workforce growth rates during the pandemic was extremely robust at 5.1 per cent in FY21 when there was a lockdown for almost six months in different forms. This was the time when anecdotal evidence showed people migrating to villages and MSMEs closing down operations, and even large enterprises resorting to downsizing staff. Yet there was robust growth in employment. In FY22 growth was 3.3 per cent which was higher than that 3.2 per cent in FY23 when the lockdown was totally removed. The interpretation would be that the lockdown did not lead to job losses but increased the same. The average growth rate of workforce in the last five years was 4.6 per cent with value added growing at 4.4 per cent compared with just 2.1 per cent for the preceding five years when average growth rate in value added was 6.8 per cent. This aspect is definitely puzzling.

The KLEMS database also provides information on industry-wise distribution of the workforce which shows some transformation in the decade ending FY23. The share of agriculture came down from 47 per cent to 42.4 per cent while that of manufacturing from 11.7 per cent to 10.6 per cent. The first is understandable as there has been urban migration from rural areas. But the share of manufacturing declining is significant because often it is argued that we need to increase the share of manufacturing in GDP as it leads to creation of more jobs. Quite clearly this is not the case here. The share of services increased from 29.9 per cent to 33.8 per cent. The shares of both trade and construction have gone up during this period thus contributing to this accretion in head count. The other sectors with significant share in total workforce were transport and storage with 4.3 per cent, business services with 3.1 per cent and education 3.2 per cent.

If all this information has to be stitched together, then the clue is provided by trends in productivity. The first fact is that the workforce has increased at a rapid rate. The second is that there has been a transformation of the employment structure where the movement is to the services segment. The third element is that average productivity of labour has come down. To this it can be added that growth in overall capital stock of the country grew at a slower rate in the last five years by 6 per cent compared to 6.7 per cent in the previous quinquennium. How do all these pictures fit in the frame?

Productivity figures

The data on labour productivity for FY23 throws light on this linkage. Agriculture has an average labour product of ₹90,000 while it was ₹1,75,000 for construction and ₹2,48,000 for trade. In the case of transport it was ₹2,65,000. This can be contrasted with the higher productivity sectors which did not see much momentum in growth in labour. Refining has a product of ₹56 lakh, while it was ₹13.5 lakh for finance and ₹15.2 lakh for post and telecommunications. Mining, chemicals, and electricity had productivity in the range of ₹13-16 lakh per person.

A conclusion that can be drawn is that the jobs have been created in low productivity areas during this period, which also explains why there has been a slower growth in value addition at the national level. A large number of jobs have been visible in construction and delivery which is linked with retail trade. Here the jobs do not require skill sets and pay well enough to keep one above subsistence after repatriating money to their families. Hence while these jobs provide incomes, they do not add high value in terms of productivity.

This picture also explains to a large extent the anomaly that is witnessed today where growth in consumption has been trailing with spending being low. The KLEMS data shows that there has been an acceleration in job creation, but the fact that this has happened in low productivity areas means that the spending power has not been generated. Add to this the fact that inflation has been high in the last 3-4 years means that the real purchasing power has also been eroded. This explains why consumer oriented companies have been constantly talking of lower rural and urban demand with only premium products doing well.

If the KLEMS data is accepted and juxtaposed with the trends witnessed in GDP growth and consumption, the policy question that needs to be addressed is more on how to move jobs from areas of low productivity to higher value generating ones. The answer will be in the realm of going back to the classroom and making sure education is given top most priority which will lead to learning of higher skills to qualify for this movement.

The writer is Chief Economist, Bank of Baroda. Views are personal