Explained: IMF Outlook and Employment Situation
Last week, the IMF unveiled its 2nd World Economic Outlook (WEO). IMO publishes the report twice a year – April and October – and also provides regular “updates” on other occasions. WEO reports are important because they are based on a wide range of assumptions on a multitude of parameters – such as the international price of crude oil – and set the benchmark for all economies to compare against.
What were the main lessons from the October WEO?
The central message was that the momentum of the global economic recovery had weakened somewhat, in large part thanks to the supply disruptions induced by the pandemic. But more than the marginal figures of global growth, it was the growing inequality between nations that worried the IMF most.
“The dangerous divergence in economic prospects between countries remains a major concern. The overall production of the group of advanced economies should return to its pre-pandemic trend trajectory in 2022 and exceed it by 0.9% in 2024. On the other hand, the overall production of the group of emerging markets and developing economies (at l (excluding China) is expected to remain 5.5% below the pre-pandemic forecast in 2024, leading to a further decline in their improvement in living standards, ”he said.
There are two main reasons for the economic differences: large disparities in access to vaccines and differences in political support.
But perhaps the most important finding of WEOs this time concerns employment growth that may lag behind the recovery in output (Chart 1).
“Global employment remains below pre-pandemic levels, reflecting a mix of negative output gaps, workers’ fears of being infected on the job in contact-intensive occupations, childcare, the demand for labor is changing as automation accelerates in some industries, with replacement income through leave schemes or unemployment benefits helping to cushion child losses. income and friction in job search and matching, ”the IMF said.
In this general theme, what is particularly worrying is that this gap between the recovery of production and employment is likely to be larger in emerging markets and developing economies than in advanced economies. In addition, young people and low-skilled workers are likely to be worse off than prime-age workers and high-skilled workers, respectively.
What does this mean for India?
When it comes to GDP, India’s growth rate has not been changed for the worse. In fact, beyond the IMF, several high-frequency indicators suggest that India’s economic recovery is gaining ground.
But what the IMF has forecast on jobs – that the recovery in unemployment lags behind the recovery in production (or GDP) – is extremely important to India.
For starters, according to data available from the Center for Monitoring Indian Economy (CMIE), the total number of people employed in the Indian economy in May-August 2021 was 394 million, 11 million below the level set in May. -August. 2019. To put these numbers in a broader perspective, in May-August 2016 the number of people employed was 408 million. In other words, India was already facing a deep jobs crisis before the Covid crisis, and it got much worse after it.
Thus, projections of an employment recovery lagging behind the output recovery could mean that large swathes of the population would be excluded from GDP growth and its benefits. The absence of adequate employment levels would lead to a decline in aggregate demand and thus stifle India’s growth momentum.
Why could employment lag behind output growth in India?
There are several possible reasons. On the one hand, as mentioned above, India has already experienced a massive unemployment crisis. Labor economists such as Santosh Mehrotra, visiting professor at the Center for Development Studies at the University of Bath (UK), cite a number of additional issues.
“The first thing to understand is that India is witnessing a K-shaped recovery. This means that different sectors are recovering at very different rates. And this applies not only to the divergence between the organized and unorganized sector, but also within the organized sector, ”Mehrotra said. He pointed out that some sectors such as the IT service sectors have hardly been affected by Covid, while the e-commerce industry is doing “brilliantly”. But at the same time, many contact-based services, which can create many more jobs, are not experiencing a similar rebound. Likewise, listed companies have recovered much better than unlisted companies.
The second major reason for concern is that the bulk of employment in India is in the informal or unorganized sectors (Table 2). The informal worker is defined as “a worker without a written contract, without paid leave, without health benefits or without social security”. The organized sector refers to businesses that are registered. As a rule, companies in the organized sector are expected to provide formal jobs.
Thus, a weak recovery of the informal / unorganized sectors implies a brake on the capacity of the economy to create new jobs or to revive old ones.
Last week, IMF Chief Economist Gita Gopinath pointed out that the number of people using the provisions of Mahatma Gandhi’s National Rural Employment Guarantee Act was still 50-60% above the level before the pandemic. This suggests that the informal economy is struggling to recover at the same rate as some of the more visible sectors.
How informal is the Indian economy?
Table 3, taken from the 2019 article “Measuring Informal Economy in India” (SV Ramana Murthy, National Statistical Office), provides a detailed breakdown. This shows two things. First, the share of different sectors of the economy in aggregate gross value added (GVA or a measure of aggregate production on the supply side as well as GDP on the demand side). Second, the share of the unorganized sector there. The share of GVA of the informal / unorganized sector is over 50% at the level of India as a whole, and is even higher in some sectors, especially those that create a lot of low-skilled jobs such as construction and trade, repair, accommodation and food services. This is why India is more vulnerable.
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