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Employment and growth — a comment

Dr. C. Rangarajan in his opinion piece (“Employment and growth — the emerging scenario,” October 23) claims that the “employment growth rate increased from an annual rate of 0.98 per cent in the period 1993-94 to 1999-00 to 2.89 per cent in the period 1999-2000 to 2004-05. Interestingly, there was also an unprecedented acceleration in the labour force growth rate from 1.03 per cent to 2.93 per cent . . .” Making alternative projections of sect oral employment, using alternative values of elasticities of employment growth with respect to growth of sectoral value added, he claims that “with a 9 per cent GDP growth, under the very conservative assumption [about elasticities], the economy will reach a level where the workforce will match the labour force within a short period (thus eliminating unemployment)]”.

Both claims are debatable. First, the absolute numbers of workforce, labour force and unemployment in his Table 1 have been derived by using a methodology recommended by the National Sample Survey (NSS). NSS recommended that “to estimate an absolute number in any category, it is advisable to apply the survey estimates of ratios to the census population or projection thereof, for that category.” This recommendation is based on the fact that because of differences in methods and coverage in the NSS surveys, as compared to the population census, population estimates from the NSS are in general below the corresponding census estimates. Not only are the NSS estimates lower, but the extent of the difference is growing over time. The NSS organisation is currently exploring the possible reason for this growing difference.

The NSS recommendation, though plausible, is valid only under the strong assumption that the NSS ratios are unaffected by the growing underestimation of total population. There is no logical reason for this assumption to hold.

An alternative to the hybrid methodology of the use of NSS ratios was census population estimates to derive absolute numbers is to use the absolute numbers for usual status (principal and secondary) as estimated by NSS itself. In Table 1, I give the NSS estimates along with the corresponding numbers from Dr. Rangarajan’s Table 1. It is evident the growth rates derived from using NSS estimates of absolute numbers and their growth rates are much more plausible than the corresponding numbers of Dr. Rangarajan. Also, the acceleration in their growth rates are also modest and do not show any unprecedented growth.

Dr. Rangarajan’s second claim is based on the use of employment elasticities. Such use has no analytical foundation whatsoever. Elementary economics would suggest that the observed employment in any period represents equilibrium between supply of and demand for labour. In principle, both supply and demand functions could shift over time. For example, GDP growth, ceteris paribus, would shift the labour demand function outward. Similarly, growth of the number of individuals in the prime working ages due to population growth, ceteris paribus, shift the supply curve outward. Depending on the relative strengths of these shifts, almost any trend (up, down or no change) in equilibrium employment is possible.

In other words, the so-called “employment elasticity” computed from shifting equilibrium levels of employment is not a deep behavioural parameter, such as labour demand or supply elasticities. It can take on any value. Unfortunately this simple economic logic has apparently escaped the Planning Commission and the Ministry of Finance — this is evident from their mindless use of elasticities in discussing employment, for example, in the Approach to the Eleventh Plan and the Economic Survey.

(The writer is Samuel C. Park Junior Professor of Economics, Yale University.)

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