Education and youth unemployment today

In the nationwide protests that followed the leakage of the NEET exam paper, students had demanded more than just a fair examination system. They had highlighted the poor quality of higher education in India and the challenge of youth unemployment. While the youth of India are right to perceive the education system as ripe for drastic reform, it would be appropriate to not attribute all of the current unemployment to poor education. Two strands of evidence suggest this. First, unemployment in countries with far superior educational systems is higher than in India today, Finland and Sweden being examples of this. Within India, there is the case of Kerala, which has a better educated work force but yet has the highest youth unemployment rate among states. Secondly, if educational qualifications and skills are scarce in India the real wage of skilled workers must rise. We see little of that happening currently, though. Even in India’s IT sector, apart from those with AI-related competency or are working in the Global Capability Centres of multinationals, wage increases for the remaining employees are not particularly high. This is not to say that education and skills do not matter. They matter for productivity, which is reflected in earnings. Historically, when the required skills were not available, firms invested in training their fresh hires. Economy-wide, as opposed to sectoral, unemployment is related to the aggregate demand for goods. That is, the demand for labour is a derived demand; it exists because of a prior demand for goods.

            Everything points to a slowing of aggregate demand growth in India in the last decade. 7 out of the 11 sectors at the initial level of disaggregation of national income slowed, 3 grew at the same rate as before and only 1 grew faster. The sector that grew faster was real estate, which is neither large nor one that employs many. With so comprehensive a slowing of the economy, a slackening of the demand for labour would surely have occurred. But why did the economy slow? Both short-term and long-term factors are responsible. There is by now sufficient evidence to show that the trigger for the slowdown was the demonetisation of 2016. Growth slowed annually for the next 3 years, before output actually contracted in 2020-21 due to Covid 19. As expected, the economy rebounded after the lockdown, but even that could not prevent a decline in the average rate of growth since 2016 being registered.

            We next come to the long-term factors driving the slowdown in growth of India’s economy. There are two. The first is the slowing of capital formation, or investment, from around 2009-10. The slowdown is of public investment. The pace of private investment has been constant, despite the Modi government being the most business-friendly one the country has ever seen. Among other overtures, it had cut the corporation tax rate significantly in 2019, particularly for new companies. Yet, private investment has not picked up. An explanation would take us to the second of the two long-term factors I have mentioned, namely, the rising price of food. Having remained steady during the phase of all-time high growth in India, in the early 2000s, the real price of food, i.e., its price relative to that of all goods, began to rise. It has risen by 53% since 2008-09. Globally, countries became richer as food got cheaper. We know why.  

            While the impact on welfare of food becoming more expensive is immediately understood, its consequence for growth, and therefore for employment, is not. As the price of food rises, unless wages rise, households are poorer, and demand less of other goods. Industrial firms are now left with excess capacity, leading them to postpone investment. This explains the fact of an unchanged pace of private investment, even as firms pay lower taxes and enjoy a business-friendly political party. There is evidence that the real wage in India has stagnated for most rural workers for about a decade, and that real earnings have declined for regular workers and the self-employed for the country as a whole. The majority of India’s labour force is self-employed. Therefore, consumption expenditure, which represents demand, could not but have been impacted.  

            Firms invest based on the anticipated demand for their goods. However, their expectation of future demand is very likely influenced by what they see happening in the economy today. As firms observe the slow growth of the market for their goods they are likely to turn pessimistic about the prospects for its growth in the future. It explains the unchanged growth rate of private investment despite the substantial tax cut in 2019. Public investment can to an extent make up for the unchanging pace of private investment. But for this to be effective the government must choose projects wisely. The Modi government shows a marked preference for big infra such as highways and airports. However, it is infrastructure more closely aligned to production - such as urban roads, electricity, sewerage, industrial waste management and transportation - that may be expected to yield greater returns in terms of employment generated. Only when the employment crisis India faces today is understood can the necessary corrective action be taken. While India owes it to its youth that they receive the best education, public policy must aim to keep high the aggregate demand for goods.