Signs of fatigue in labour recovery

by Mahesh Vyas

India’s unemployment rate fell very sharply from 23.5 per cent in May 2020 to 11 per cent in June. This was accompanied by a recovery in the labour participation rate - from 38.2 per cent to 40.3 per cent. As a result, the employment rate improved handsomely from 29.2 per cent in May to 35.9 per cent in June.

The 11 per cent unemployment rate of June is still quite high compared to the less than 8 per cent rate witnessed before the lockdown began. The unemployment rate had been rising steadily since 2017-18 when it had averaged 4.6 per cent. In 2018-19 it rose to 6.3 per cent then in 2019-20 further to 7.6 per cent. Compared to these rates and also the trend seen in them, the unemployment rate in June 2020 at 11 per cent is still quite high.

Further, the declining trend in the unemployment rate seen in June seems to be flattening out. The fall began in the week ended May 31 when the rate fell to 20.2 per cent after hovering around 24 per cent in the three preceding weeks. Then, in the following three weeks it continued to fall steeply. The average fall per week during these four weeks was 4 percentage points. In the last week of June, the unemployment rate stopped falling any further.

The unemployment rate rose by 0.1 percentage points in the week ended June 28. It rose again in the following week ended July 5, by 0.3 percentage points.

The data so far therefore seems to suggest that the worst is over and we are likely to settle at an unemployment rate which would be only slightly higher than the rates witnessed before the lockdown. The unemployment rate during the weeks of June 28 and July 5 were 8.6 per cent and 8.9 per cent, respectively. While the worst of April and May is over, it may be equally likely that the period of rapid recovery seen in June is also over.

The labour participation rate recovered faster than the unemployment rate. Its recovery began in May itself. The LPR had fallen from an average of well over 42.5 per cent in the second half of 2019-20 to 35.6 per cent in April 2020, the first month of the lockdown. Suddenly, in just one month, the labour force had shrunk by 69 million, from an average of 438 million in the second half of 2019-20 to 369 million in April 2020.

In May, the labour force regained 40 per cent of the losses of April. The labour force increased to 396 million and the labour participation rate went up to 38.2 per cent. This was while the unemployment rate at 23.5 per cent in May was just as high as it was in April.

In June, the labour participation rate went up further to 40.3 per cent. It has still not retained its 42.5 per cent rate that prevailed before the lockdown but, there has been a fairly smart recovery.

Like in the case of the unemployment rate, the recovery in labour participation rate is also slowing down. The recovery in June, of 218 basis points was slower than the 258 basis points recovery seen in May. And further, in an uncanny similarity with the trend in unemployment, weekly data suggest that the improvements in the labour participation rates may have peaked out. After rising for three consecutive weeks, the LPR fell by 0.62 percentage points in the last week of June and then by 0.92 percentage points in the first week of July. This deterioration coincides with the deterioration in the unemployment rate in the last two weeks.

The recent fall in the weekly labour participation rate and the simultaneous rise in the unemployment rate implies a corresponding fall in the weekly employment rate. The employment rate has been rising smartly since its fall from 39 per cent before the lockdown to 26 per cent by the middle of April. By the week ended June 21, the employment rate had touched 38.4 per cent, having recovered most of its lost ground.

But, in the last two weeks, the employment rate fell cumulatively by 157 basis points from 38.4 per cent to 36.9 per cent.

In spite of this fall in the last two weeks, the employment rate as of the week ended July 5, at 36.9 per cent is an improvement over the 35.9 per cent employment rate recorded in the month of June 2020.

The improvement in the employment rate in June 2020 was after a smaller improvement in the ratio that was registered in May as well. While the improvement in the employment rate in May led to the addition of 21 million jobs, the improvement in June implied an addition of 70 million jobs.

Given that the employment ratio in the first week of July is higher than it was in June, there could be some more job additions happening even in July. But, to ensure that the month does end up with net addition to jobs, the employment rate should not continue slipping as it has been in the past two weeks.

The estimated employment in June 2020 was 374 million. This is 30 million short of the average 404 million employment in 2019-20. This gap may have shrunk a little more in the first week of July. But, the pace of recovery seems to be slowing down in July, a fatigue seems to be setting in after the rapid improvement registered in June.


Published first in Business Standard Link