India's Demographic Dividend - Where Are The Jobs?

The demographic dividend is defined as a rising share of the working age population in total population. The working age population is usually in the range of 15 to 64 years. The rising share of the working population, if it is increasingly absorbed in non agricultural activities (which are known to be more productive than agriculture) should lead to higher income. Higher income would contribute to higher savings, in turn leading to higher share of investment in GDP, hence growth. For these reasons the demographic dividend is seen as a once-in-a-lifetime opportunity in a nation's life. India is at the mid-point of its dividend, which will end by 2040.

If on the other hand jobs are not growing and yet young people are entering the labour force looking for work the end result could be the opposite, with rising social discontent. So the question is: is India generating sufficient jobs to absorb those entering the labour force?

If one were to believe the media the numbers that are joining the labour force each year is 12 million. This fact was however only true for a very limited period of time since the economic reforms began, for the period 1999-2000 to 2004-5. Never before 1999 and never since 2004 have 12 million been joining the labour force. Before 1999 it was just over 3 million per annum and between 2004-05 and 2011-2012 that number fell to 2 million per annum.

At the risk of some over simplification the number of entrants to the labour force changed so sharply first, because of the fall in the population growth rate and second, the number of young joining education. India's population growth rate declined from 2.3 percent per annum in the early 1980s to 1.4 % per annum within the last few years. Not surprising therefore that the population bulge that India experienced in the labour force led to a sharp rise in the size of the labour forcebetween1999 and 2004.In addition the smaller youthful population are almost all entering education, something which was not true until 15 years ago.Almost all children between the ages of 6 and 14 have been going to school after 2005.So the fall in entrants to the labour force after 2005 until 2011/12 is majorly explained by the increase in school participation.During that period only 2 million per annum joined the labour force.

However, precisely because of the participation in education of these youth they will now join the labour force and look for non agricultural work, not agricultural and not construction work which is where many of them from an earlier generation were absorbed.How is the situation going to change from this point onwards?It is highly likely that the number of entrants to the labour force who are better educated is now since 2012 somewhere between 5 and 7 million per annum, who must be given either wage or self employment, but the job growth rate has fallen since 2012.

In fact looking beyond 2020 until 2030 one could argue that the young entrants into the labour force would go up first to ten million and then even further to 12 millionper annum.There after from 2030 onwards our expectation is that there would be a decline in the number of entrants into the labour force. By 2040 the demographic dividend will be over.In fact after 2040 the total labour force would decline in absolute terms, just as it has already begun to happen in China and had happened in the now industrialized countries even earlier.

Is it possible for India to provide non agricultural jobs at the needed rate?The past experience may provide some answers.Between 2000 and 2012 the number of non agricultural jobs that were being added per annum was 7.5 million, which is the roughly comparable to those who were then entering the labour force.In other words if the numbers of jobs we were creating in the decade of the 2000-2012 were sustained, there would be no problem in absorbing them, if the GDP growth rate had remained the same since 2012. However, that has unfortunately not been true.

There been one fortunate development in the decade from 2000 to 2012, which is that the labour force participation rate of young girls has been falling, because they have been entering schools and remaining there for longer periods of time, which in itself is a good development.But precisely for that reason now and in future the non agricultural jobs needed to be created is greater, since so far only young men were mostly looking for them.The situation since 2012 is quite different because young girls are also looking for non agricultural jobs on account of their higher level of education.At secondary level there is gender parity between girls and boys in enrolment.So while in the current decade the previous decade'sgrowth rate in jobs was sufficient, with the growing number of girls looking for work, it is more difficult for girls to find work, despite their better education.

Looking further beyond 2020 the situation becomes even more serious.The employment elasticity of output would have to increase significantly in non-agriculture so as to absorb the larger numbers of relatively educated boys and girls who will be looking for work.

If India is to realise the demographic dividend, as China did by providing non-agricultural jobs, then India would need to match China's GDP growth rate and achieve comparable labour absorption. Otherwise, we risk the dividend turning into a disaster.