- May 5, 2019
- Posted by: Arun Kumar
- Category: Featured, INDIAN ECONOMY, Latest Work, UNEMPLOYMENT
Keynesian economists argue that full employment does not exist in the real world, and the government interventions implemented through fiscal and monetary policies are necessary to maintain stability in employment. The fiscal and monetary interventions accelerate economic growth by increasing total production, which thereby positively affects job creation process (Musgrave & Musgrave, 2017). However, tight monetary and fiscal policies result in lower employment generation. The reduction in total employment creates both short- and long-run imbalances in the economy by affecting the general equilibrium of aggregate demand and supply. The economies which fail to generate enough employment lag behind in economic growth. This is because the unemployment reduces the purchasing power of the individuals which reduces the aggregate demand of goods and services in the economy. The reduced aggregate demand negatively affects the aggregate supply in the economy which leads the firms to cut their total production and fire the workers. This creates a vicious circle of employment in the economy where unemployment further leads to unemployment. This study addresses the ongoing economic problem of unemployment from academic and policy perspective, and it will be of special interest for policymakers and academicians.
This theoretical underpinning is apt with the present condition of the Indian economy, which is facing a severe level of unemployment. The recently leaked data of ‘employment and unemployment’ round of NSSO shows that India’s level of unemployment is highest in the last 45 years. As per the report of NSSO, the rate of unemployment in India is now highest at 6.1% (Thewire, 2019). Aside to NSSO, the Center for Monitoring Indian Economy also shows that India’s unemployment rate is 8.2%. This shows an alarming situation for the Indian economy which has a high level of demographic dividend. The greater share of the youth population demands a more significant number of jobs. However, the economy is unable to provide additional employment to this increasing youth population. The recent OECD report shows that more than 30% of Indian youths are not in employment, education or training (Livemint, 2017).
The higher level of unemployment has many economic consequences in both short- and long-run. The increased unemployment can be denoted as a reduction in aggregate demand for labour in the economy. The reduction of aggregate demand for labour helps the producers to hire the workers at lower wages. This way, the workers who are not fired gets lesser remuneration at the workplace. This happens because producers or companies know that India already has surplus labour supply, and they will get another worker at lower remuneration if the existing worker demands higher wages. India is already suffering from the problem of excessive labour supply, and the present condition of increasing unemployment is stimulating the issues for the economy.
This mounting unemployment in India also has a negative impact on the total productivity of the economy. The increments in unemployment reduce the per capita income of the workers, which thereby reduces the aggregate demand for goods and services in the economy. The decreased aggregate demand not only forces the producers to reduce the production but also demotes them to increase total productivity. This hampers both economic growth and economic development in the economy. The reduced level of employment limits the benefits of economic growth to the employed people only, wherein a lesser number of employed people means lesser expansion of economic development. Unemployed people get excluded from the process of economic development if they are unable to earn their livelihood.
There is a loss of skills if skilled or educated people are kept unemployed in the long-run. This also reduces the ‘rate of return to education’. In the rate of return to education, education is considered as an investment which increases overall productivity and skills of the individuals to enhance the total earning. If a particular education sharply increases the earning capacity of an individual, then we say that the rate of return to that particular education is high. In the case of India, the rate of return to education is already low due to the increased level of educated unemployment and youth unemployment. However, the present increment in unemployment further reduced the rate of return to education. In simple words, why will someone invest money and time in education if he or she already knows that most of the other people with the same education are unemployed in the economy? This also discourages the parents (of middle and lower income class) to not invest in higher education of their children if they know that there are no jobs in the market. In India, this problem already persists for female children as the parents know that females are paid lesser than males for the same jobs. Thence, parents invest less on the education of girls than boys (Kingdon, 1998).
When the rate of return to education is lower due to increasing unemployment, the Indian economy is expected to face a higher deficit in its balance of payment for international trade. The labour intensive industries dominate in India’s export (when the software industry is excluded) for which India gets a lower return. At the same time, India imports the products of capital intensive industries, which have higher prices than the prices of labour intensive products. India has to boost both professional and technical skills to produce the products to capital intensive industries to reduce the overall imports. However, the present level of unemployment has reduced the aggregate demand for goods and services by reducing the per capita income of the people. Parallel to this, the rate of return to education has diminished, and the families are now reluctant to spend more on the education of children. Now, if there are not enough educated people to lead the capital intensive industries, then how India will expand its capital intensive industries, and how the balance of trade deficit will be controlled? Here, it shall be pointed out that higher education or higher human capital positively affects international trade by increasing the comparative advantages of trade (Investopedia, 2018).
Keynes said that government intervention is essential to bring equilibrium in the aggregate demand and supply of the labour market. However, the recent moves of government for privatizing of the public enterprises and tightening the monetary policy have spurred the imbalances in general equilibrium in the economy. For instance, the government is in the process to privatize the six Indian airports, 30 public sector undertakings and subsidiaries of AirIndia. Now, as the economy is moving from a mixed to a capitalist economy, the power of government to correct the mismatches of demand and supply is reducing. This is because the private sector cannot bring equilibrium in the economy (Musgrave & Musgrave, 2017). The government shall increase the public spending to boost the aggregate demand which then will reduce the unemployment in the economy.
The problem of unemployment has been further stimulated due to the implementation of GST and demonetization. The GST has complicated the business process of the organised sector, and the demonetization has crashed the unorganised sector of the economy. The government shall put additional measures to help the economy recover from these two monumental decisions. The timely taken steps of government will not only increase total employment but will also help the economy to increase wage rate, reduce poverty, expand economic development, increase the rate of return to education, reduce the balance of payment deficit and empower the youth for nation building.
