Employment elasticity

Also called: Elasticity of employment · Topic: Employment, Unemployment and Informalisation · NCERT: Beyond NCERT

Meaning

Employment elasticity is the percentage change in employment that comes with a 1% change in output (GDP). It shows how many jobs economic growth creates.

Formula: Employment elasticity = % change in employment ÷ % change in GDP

It matters because India has a very large and growing workforce. Fast GDP growth helps people only if it also creates enough jobs. A low elasticity means the economy is growing but hiring few new workers. This is the core idea behind the jobless growth debate.

Explanation

How it works

• It links two growth rates: job growth (the top of the formula) and output growth (the bottom).
• Worked example:
• GDP grows 7% and employment grows 1.4%.
• Elasticity = 1.4 ÷ 7 = 0.2.

• Meaning: each 1% of GDP growth adds only 0.2% more jobs.

• The same numbers also show productivity growth. Labour productivity is the output of each worker.

• Output rose 7%, but workers rose only 1.4%.
• So each worker is producing roughly 5.6% more (7 − 1.4).
• When elasticity is low, most growth comes from higher output per worker, not from more workers.

Reading the value

• Elasticity = 1: jobs grow exactly as fast as GDP. Output per worker does not change.
• Between 0 and 1 (India's usual case): jobs grow, but more slowly than GDP.
• Elasticity = 0: GDP grows but jobs do not grow at all. This is fully jobless growth (output rises while jobs do not).
• Above 1: jobs grow faster than output, so output per worker falls. This can happen when extra people crowd into low-paid work, such as family farms.
• Negative: output rises while jobs fall, for example when firms replace workers with machines.

What makes it rise or fall

• Capital-intensive growth pulls it down.
• Capital-intensive means firms use more machines and fewer workers.

• So output rises, but hiring does not rise as much.

• Which sectors are growing matters.

• Labour-intensive sectors need many workers for each ₹ of output, because wages are a large part of their costs. Examples are textiles, leather, food processing, construction and tourism. When these sectors grow, elasticity rises.

• IT and finance grow fast but hire few people, and mostly skilled ones. When they lead growth, elasticity falls.

• Premature deindustrialisation pulls it down.

• This means manufacturing's share of jobs peaks and starts to fall while the country is still poor.

• Factories that could have hired many low-skilled workers never grow large enough to do so.

• A low value is not always bad.

• It can mean workers are becoming more productive, which raises wages over time.
• The risk is that new workers, and workers leaving farms, find no jobs outside agriculture.

In India

• The figure is low and has been falling. Estimates put it at roughly 0.1–0.2 in the 2000s and 2010s (RBI KLEMS-type estimates).
• Who measures the inputs:
• PLFS (Periodic Labour Force Survey) is the main official jobs survey. The NSSO under MoSPI started it in April 2017 [1].

• The RBI KLEMS database measures output and inputs for each industry. KLEMS stands for Capital, Labour, Energy, Materials and Services. It puts total employment at 64.33 crore in 2023-24, up from 47.5 crore in 2017-18 [5].

• Growth vs jobs (NCERT Chart 6.3):

• Across 1951-2023, GDP grew faster than employment.

• Employment grew at 2% a year or less in every period except 1999-2005 and 2022-23.

• Jobless growth from the late 1990s:

• Employment growth fell back to its level in the early planning years.

• The gap between GDP growth and job growth grew wider.

• Signs that growth is not creating enough non-farm jobs:

• Agriculture's share of workers went up, from 44.1% (2017-18) to 46.1% (2023-24) [4].
• Manufacturing's share fell from 12.1% to 11.4% over the same years [4].

• Self-employed workers rose from 52.2% to 58.4%, and regular wage/salaried workers fell from 22.8% to 21.7% (2017-18 → 2023-24) [4].

• Policy aim:

• The Economic Survey 2023-24 says India must create about 78.5 lakh non-farm jobs every year until 2030 [2][3].
• To make growth more job-rich, the government backs labour-intensive sectors. The PLI scheme is expected to create about 60 lakh jobs over 5 years, and PM MITRA textile parks about 20 lakh jobs [2].

Don't confuse with

• Jobless growth: this is the situation (GDP grows but jobs do not). Employment elasticity is the number that measures it. An elasticity near 0 means jobless growth.
• Employment growth rate: this is the yearly % rise in jobs by itself. Elasticity divides that rise by GDP growth. Jobs can grow 2% a year while elasticity is still low if GDP grows much faster.
• Labour productivity: this is output per worker. It moves the opposite way. For the same GDP growth, a lower elasticity means higher productivity growth.
• Price elasticity of demand: this is the % change in quantity demanded ÷ % change in price. It has the same "elasticity" form but is about prices and demand, not output and jobs.

Prelims Hooks

• Employment elasticity = % change in employment ÷ % change in GDP. A value of 1 means jobs grow as fast as GDP. A value of 0 means fully jobless growth.
• India's employment elasticity was roughly 0.1–0.2 in the 2000s and 2010s. It is low and has been falling.
• Trap: a low elasticity does not always mean the economy is doing badly. It can also mean output per worker is rising.
• RBI KLEMS: 64.33 crore employed in 2023-24, against 47.5 crore in 2017-18 [5]. KLEMS = Capital, Labour, Energy, Materials, Services.
• PLFS was started in April 2017 by the NSSO under MoSPI. Its annual round runs July–June [1].
• Per NCERT, employment grew above 2% a year only in 1999-2005 and 2022-23 (1951-2023).

Mains Points

• The jobless growth debate:
• One side: growth is capital-intensive, manufacturing peaked early, and the elasticity is low (about 0.1–0.2).
• Other side: KLEMS shows about 16.83 crore more jobs between 2017-18 and 2023-24 [5].

• Balanced view: the number of jobs went up, but job quality did not. More workers are self-employed or unpaid family helpers, and fewer have regular salaries [4].

• Raising elasticity is key to the demographic dividend:

• The demographic dividend is the growth boost a country gets when most of its people are of working age.
• India needs about 78.5 lakh non-farm jobs a year [2]. If growth stays job-poor, the dividend turns into a burden.

• Policy levers: labour-intensive manufacturing through PLI and PM MITRA [2], MSMEs, skilling and labour codes (GS-III).

• Why services-led growth keeps elasticity low:

• IT and finance grow fast but take few low-skilled workers.
• So workers leaving farms end up in construction and informal services, or stay on farms. Agriculture's share of workers rose to 46.1% (2023-24) [4].
• A job-rich path needs growth in sectors that can take in these workers.

Related concepts

• Surplus labour
• Labour-intensive sectors
• Employment growth
• Jobless growth

Read more

• Where people work and how fast jobs grow: sectoral shift and jobless growth