Disguised unemployment

Also called: Hidden unemployment, Concealed unemployment · Topic: Employment, Unemployment and Informalisation · NCERT: Class 10, Ch 2 "Sectors of the Indian Economy"; Class 11, Ch 6 "Employment: Growth, Informalisation and Other Issues"

Meaning

Disguised unemployment means more people work on a task than the task needs. The extra workers add nothing to output. Their marginal product (the extra output from adding one more worker) is zero, so taking them away does not reduce total output.

It matters because these people look employed but are not really needed. India's official unemployment rate can therefore look low while many workers produce almost nothing extra.

Formula: Marginal product (MP) = Change in total output ÷ Change in number of workers. Disguised unemployment exists wherever MP = 0 for the extra workers.

Explanation

How it works

• Work is shared out thinly. Everyone on the farm or in the shop looks busy. But the same work could be done by fewer people.
• Why it is called "hidden":
• these workers are not sitting idle or looking for jobs;

• so surveys count them as employed, not unemployed.

• The test: remove some workers. If output stays the same, those workers were disguisedly unemployed.

• Class 11 example:
• A farmer has 4 acres. The work needs 2 workers plus himself.
• He actually uses 5 workers plus his wife and children.
• Everyone beyond the first three is disguisedly unemployed.

Worked example with numbers

Workers on 4 acres	Total output (quintals)	Marginal product
3	60	—
4	60	0
5	60	0
6	60	0

• Adding the 4th, 5th and 6th worker adds 0 quintals. So MP = 0 ÷ 1 = 0.
• Remove workers 4, 5 and 6, and output stays at 60 quintals. Those three are disguisedly unemployed.
• Output per worker falls: 60 ÷ 3 = 20 quintals, but 60 ÷ 6 = 10 quintals. The same income is split among more people.

The Laxmi case (Class 10)

• Laxmi's family has five members. They farm 2 ha of unirrigated land (land that depends only on rain) and grow jowar and arhar.
• All five work all year because they have nowhere else to go. Their effort is divided, so no one is fully employed.
• Suppose two members take jobs on landlord Sukhram's land or in a factory:
• family income rises, because they now earn wages;

• farm output does not fall, because the other three can do all the farm work.

• Lesson: moving surplus workers to other jobs is a pure gain for the family.

What makes it rise or fall

• It rises when:
• the population grows but land does not;
• there are too few non-farm jobs in or near the village;

• city jobs vanish, so migrants return home and join the family farm.

• It falls when:

• factories, construction and services create jobs that pull surplus workers off the farm;

• rural non-farm work (for example, small industry and repair work) grows.

• Urban version: painters, plumbers and repair workers who do not find work every day. Cart-pushers and street sellers who "spend the whole day but earn very little".

In India

• Most common on family farms. A study in the late 1950s found about one-third of farm workers were disguisedly unemployed. Sugarcane cutters are the Class 11 example (Fig. 6.6).
• Not captured by the unemployment rate. PLFS (Periodic Labour Force Survey, run by NSSO under MoSPI since April 2017) counts these workers as employed [2].
• In 2023-24, rural UR (ps+ss) was 2.5% and urban UR was 5.1% [2].

• Urban UR is roughly double rural UR. One reason: in villages, people fall back on family farms, so their unemployment stays hidden.

• Recent rise in surplus farm labour:

• Farm employment grew faster than agricultural gross value added (GVA) after 2019 [3]. More workers were producing only slightly more output.
• The long shift of workers out of low-productivity agriculture (2000-2019) slowed and then reversed in 2019-2022 [3].

• The ILO-IHD India Employment Report 2024 says people returned to subsistence farming because there was no non-farm work during the pandemic slowdown [3].

• The COVID chain of events:

• 2020 lockdown: urban informal jobs were lost, so migrants returned to their villages.
• Back home: they joined family farms, so disguised unemployment rose.

• In the data: UR looks low, but job quality falls [3].

• MGNREGA (a legal guarantee of 100 days of wage work a year to rural households) acted as a cushion during this reverse migration.

• Wider picture: UR was only 3.2% (2023-24) [2], yet nearly 90% of workers are informally employed (no written contract and no social security) [3]. Disguised unemployment is one reason a low UR can sit alongside poor jobs.

Don't confuse with

• Open unemployment: the person has no work at all and is clearly looking for it, for example at labour chowks or employment exchanges. It is visible and counted in UR. Disguised unemployment is hidden, because the person appears to be working.
• Visible underemployment: the person works fewer hours than they want. Victor works 2 hours a day, so CWS counts him as employed, but he is underemployed. In disguised unemployment the person may work full hours, but their marginal product is zero.
• Invisible underemployment: a wider idea. It covers anyone working full time with low productivity or underused skills (for example, a graduate working as a peon). Disguised unemployment is the special case where the extra worker's marginal product is exactly zero.
• Seasonal unemployment: there is no work at all for part of the year, mostly between harvest and the next sowing. Disguised unemployment can exist all year round, even at the peak of the season.

Prelims Hooks

• Core test: the marginal product of the extra workers is zero, so withdrawing them does not reduce total output.
• Other names: hidden or concealed unemployment. It is most common in agriculture, especially on family farms.
• Trap: disguised unemployment does not show up in the PLFS unemployment rate, because the workers are counted as employed. Rural UR (ps+ss) was only 2.5% in 2023-24 [2].
• Class 10 (Laxmi case): if two family members take outside jobs, family income rises and farm output stays the same.
• Class 11: a late-1950s study found about one-third of farm workers were disguisedly unemployed.
• Trap: a person who works only 2 hours a day (Victor) is underemployed, not disguisedly unemployed. Under CWS they are counted as employed.

Mains Points

• Low UR hides weak jobs.
• UR was 3.2% (2023-24) [2], but surplus workers sit on family farms, and about 90% of employment is informal [3].

• So policy should track productivity, wages and job quality, not UR alone.

• Stalled structural transformation. (Structural transformation means the long shift of workers from farms to industry and services.)

• Farm employment grew faster than farm GVA, and the move out of agriculture reversed in 2019-22 [3].

• The Lewis model idea: surplus farm workers can move to industry without cutting farm output. So labour-intensive manufacturing and construction are the natural way to absorb them.

• Rural policy response.

• MGNREGA gives surplus rural workers paid work in the lean period and acted as a buffer during the 2020 reverse migration.
• Long-term remedies:
  • irrigation (so land like Laxmi's unirrigated plot can support more work);
  • rural non-farm jobs (small industry, food processing);
  • skilling, so that surplus family labour can find productive work (links to GS-III employment and GS-II welfare).

Related concepts

• Unemployment
• Open unemployment
• Underemployment
• Seasonal unemployment
• Educated unemployment
• Youth unemployment
• Rural-urban migration
• Circular migration
• Distress migration
• Reverse migration

Read more

• Unemployment in India: definitions, forms and migration