Why it is wrong to blame low female labour force participation rate on demonetisation.
Two economists I admire, Surjit Bhalla, a part-time member of the Economic Advisory Council to the Prime Minister, and Mahesh Vyas, managing director and chief executive officer of the Centre for Monitoring Indian Economy (CMIE), have been involved in a sharp debate on whether the Indian economy is creating jobs or destroying them. Last week, they debated the fall in the female labour force participation rate (FLFPR) by disputing each other’s estimates based on different sources of data – the National Sample Survey Office’s estimate (2011-12), the Labour Bureau employment surveys (pertaining to 2014 and 2015) and the CMIE’s own Consumer Pyramids Household Survey (CPHS), which began in 2016 and are carried out every four months.
The female LFPR is a composite number arrived at by adding the number of women already employed with those actively seeking work, and expressing the resultant number as a percentage of the total female labour force in the working age (15+) population. A low or falling FLFPR indicates that women are withdrawing from the workforce for various reasons. It could be to pursue higher studies, opting for home-making, or abandoning formal work due to workplace discrimination – or a combination of all three. (You can read the core of Bhalla’s and Vyas’s arguments here and here in The Indian Express)
While Vyas is the pessimist on FLFPR, given that his own CPHS surveys put the rate below 12 per cent in May-August 2017, Bhalla is the optimist, and claims that if the FLFPR in 2017 was even the same as what was true in the NSSO survey seven years ago, there could be more than twice the number of women employed than what Vyas presumes. He writes: “if the CMIE estimate of 12 percent in 2017-18 is made just equal to (not more than) the NSSO estimate of 23.3 percent in 2011-12, then the estimate for female employment in 2017-18 is nearly double the CMIE reported estimate of 49 million employment. More accurately, a 23.3 percent FLFPR in 2017-18 will yield a female employment level of 95 million; CDS (current daily status) employment for females was 82 million in 2011-12.”
The problem with this formulation is that we cannot base FLFPR assumptions in 2017 with data from another source dating back to 2011-12. Much would have changed in the intervening years. So, while one need not rule out Bhalla’s claim altogether, it is unlikely to be correct in the context of the overall trend towards declining FLFPR for much of this decade and the period after 2004-05.
As Vyas points out, the FLFPR fell (according to the NSSO) from 31.1 per cent in 2004-05 to 23.3 per cent in 2011-12, a steady decline of 1.1 per cent every year. Then, when you compare this NSSO number to CMIE’s own May-August 2016 FLFPR of 16.37 per cent, the rate of descent accelerates to 1.39 per cent in these five years. In 2017, the rate crashes by another 4.93 per cent in CPHS to 11.44 per cent – probably reflecting the additional impact of demonetisation in the previous year. This rate was twice the rate at which the male LFPR fell during that year, which was 2.5 per cent down between May-August 2016 and a year later.
Vyas writes: “no country has given itself a shock of demonetisation like we gave ourselves and so it is not surprising that no country ever observed the kind of withdrawal of labour from labour markets like we observed after demonetisation. Given this huge shock of demonetisation, and its evident impact on the labour markets, it is not correct to assume that the labour participation rate has remained unchanged since 2011-12. But, without any explanation, Bhalla makes this assumption and once again magically (or, simply) doubles the number of women employed!”
Two points are worth making.
One, there is little doubt that demonetisation was a shock that impacted employment, both for men and women. So, the drop in the LFPR for both sexes is a reasonable expectation to have, even allowing for the fact that the data come from different surveys using different methodologies.
But Vyas overstates his case by blaming it all on demonetisation. The negative effects of demonetisation on jobs and growth probably lasted three quarters, but the decline in female LFPR both preceded and followed demonetisation. Which means, it is not demonetisation that needs to be excessively blamed for this trend. The declining trend in India’s gross domestic product (GDP) growth preceded demonetisation by at least two quarters (GDP growth peaked in the January-March 2016 quarter, and fell for the next two quarters before demonetisation kicked in from the middle of the third quarter of 2016-17). So, the real answers to the jobs crisis, whether with women and men, ought to be sought elsewhere.
The second point is that the crimp on growth and jobs began after 2011, when the United Progressive Alliance (UPA) had to stamp on spending as inflation and fiscal deficits got out of control.
After the National Democratic Alliance (NDA) came to power, we had two years of back-to-back drought, and this coincided with two other deflationary pressures: the double balance-sheet problem of overleveraged corporates and banks sagging under the weight of rising bad loans. So, no fresh lending could take place.
To fix the fisc, the Finance Minister did not allow the oil price drop to re-stimulate the economy; he absorbed most of the fall in taxes, and states did the same, thus improving the government’s balance-sheet that facilitated state spending on public works (roads, railways) and welfare, while private investments did not recover.
Then we have demonetisation, but it was the goods and services tax (GST) that was the bigger disrupter, for it impacted the informal economy, forcing it to either downsize or formalise itself. This trend is visible in the growth in Employees Provident Fund Organisation (EPFO) subscriptions, but one cannot assume a linear growth in jobs. Jobs may have merely migrated from the informal to the formal sector.
Then we had another big disruption: the insolvency and bankruptcy code (IBC). Given the huge haircuts banks will ultimately have to take on insolvency cases, it is more than likely that this has impacted jobs growth further.
On the other hand, there is little doubt that over the last three years, starting with the liberalisation of the Apprentices Act in 2015, the focus of the NDA government has shifted to employment. And formalisation, even if it has impacted jobs negatively in the short run, will benefit female participation rates since women will generally prefer formal workplaces to informal ones that often operate outside the ambit of the law.
In the last budget, Finance Minister Arun Jaitley re-emphasised his commitment to creating jobs, and announced further concessions to boost women’s employment in particular. It is worth quoting him in full on these points.
“Creating job opportunities and facilitating generation of employment has been at the core of our policy-making. During the last three years, we have taken a number of steps to boost employment generation in the country. These measures include:-
· Contribution of 8.33 percent of Employee Provident Fund (EPF) for new employees by the government for three years.
· Contribution of 12 percent to EPF for new employees for three years by the government in sectors employing a large number of people like textiles, leather and footwear.
· Additional deduction to the employees of 30 percent of the wages paid for new employees under the Income Tax Act.
· Launch of National Apprenticeship Scheme with stipend support and sharing of the cost of basic training by the government to give training to 50 lakh youth by 2020.
· Introducing a system of fixed term employment for apparel and footwear sector.
· Increasing paid maternity leave from 12 weeks to 26 weeks, along with provision of creches.
“To carry forward this momentum, I am happy to announce that the government will contribute 12 percent of the wages of the new employees in the EPF for all the sectors for next three years. Also, the facility of fixed term employment will be extended to all sectors.
“To incentivise employment of more women in the formal sector and to enable higher take-home wages, I propose to make amendments in the Employees Provident Fund and Miscellaneous Provisions Act, 1952, to reduce women employees' contribution to 8 percent for the first three years of their employment against existing rate of 12 percent or 10 percent with no change in employers' contribution.”
So, for Vyas to be cocksure that “a much bigger problem of unemployment will be inherited by the new government” is premature, unless he believes that all the disruptions (GST, IBC, etc) were worthless and the incentives for employment generation irrelevant.
One can always presume that some of the stated benefits may remain on paper for some time, but there is no point in denying that after all the disruptions to the job market in the post-demonetisation period this government has largely been focused on jobs.
One cannot rule out the possibility that both male and female LFPRs may spike after a lag, once these policies take effect on the ground.
However, one cannot rule out the possibility that one of these measures – higher maternity benefits – may well worsen the chances of formal jobs for women since small employers may think of this as a needless addition to costs.
Overall, Vyas is being too pessimistic when he puts too much of the blame for low FLFPRs on demonetisation, when the other disruptions may well deliver value after a lag, including healthier balance-sheets and more formalisation in the economy. The job-creating policy changes may also start delivering only after the balance-sheet problems are sorted out.
The truth, as always, may lie somewhere in between Bhalla’s over-optimism and Vyas’ excess pessimism. We will know better once the next round of NSSO surveys pertaining to 2017-18 comes out in a few months’ time.