ICAI Notes 6.3 - Unemployment CA Foundation Notes | EduRev

Economics for CA CPT

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CA Foundation : ICAI Notes 6.3 - Unemployment CA Foundation Notes | EduRev

The document ICAI Notes 6.3 - Unemployment CA Foundation Notes | EduRev is a part of the CA Foundation Course Economics for CA CPT.
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Learning Objectives

  • get familiar with the meaning of unemployment.
  • understand various types of unemployment.
  • understand the nature of unemployment problem in India.
  • know the incidence of unemployment in India.

Every sixth person in the world is an Indian and every third poor person in the world is also an Indian. The statistics speak about the gravity of the problems of unemployment and poverty which demand an immediate solution. It has been observed that with the increase in the number of unemployed persons poverty expands. Keeping in view this fact, removal of unemployment has been mentioned as one of the objectives of economic planning in all five year plans, but it has been given serious consideration only after Fifth Plan. Till Fifth Plan, there was no serious concern for solving the unemployment problem.

It was assumed that the gains of economic growth would percolate downwards and thus inequalities would decline and problems of poverty and unemployment and would be automatically solved. The growth of employment and removal of poverty were taken for granted. The connection between economic growth and other objectives as stated above is not as simple as it is often believed in this country. It has been observed in a number of less developed countries that economic growth generally benefits the elite groups and, as a result, economic inequalities grow. India’s experience is precisely the same over the period. The growing unemployment over the years is generally attributed to this basic weakness in the approach of the Government.


Generally a person who is not gainfully employed in any productive activity is called unemployed. Unemployment is a complex phenomenon and takes many forms. The important forms are:

i) Voluntary unemployment : In every society, there are some people who are unwilling to work at the prevailing wage rate and there are some people who get a continuous flow of income from their property or other sources and need not work. All such people are voluntarily unemployed. Voluntary employment may be a national waste of human energy, but it is not a serious economic problem.

ii) Frictional Unemployment : Frictional unemployment is a temporary phenomenon. It may result when some workers are temporarily out of work while changing jobs. It may also result when the work is suspended due to strikes or lockouts. To some extent, frictional unemployment is also caused by imperfect mobility of labour. We may also say that frictional unemployment is due to difficulties in getting workers and vacancies together.

iii) Casual unemployment : In industries, such as construction, catering or agriculture, where workers are employed on a day to day basis, there are chances of casual unemployment occurring due to short- term contracts, which are terminable any time.

iv) Seasonal unemployment : There are some industries and occupations such as agriculture, the catering trade in holiday resorts, some agro-based activities like sugar mills and rice mills, in which production activities are seasonal in nature. So they offer employment for only a certain period of time in a year. People engaged in such type of work or activities may remain unemployed during the off-season. We call it seasonal unemployment.

v) Structural Unemployment : Due to structural changes in the economy, structural unemployment may result. It is caused by a decline in demand for production in a particular industry, and consequent disinvestment and reduction in its manpower requirement. In fact, structural unemployment is a natural concomitant of economic progress and innovation in a complex industrial economy of modern times. vi) Technological unemployment : Due to the introduction of new machinery, improvement in methods of production, labour-saving devices, etc., some workers tend to be replaced by machines. Their unemployment is termed as technological unemployment.

vii) Cyclical unemployment : Capitalist biased, advanced countries are subject to trade cycles. Trade cycles - especially recessionary and depressionary phases cause cyclical unemployment in these countries. During the contraction phase of a trade cycle in an economy, aggregate demand falls and this leads to disinvestment, decline in production and unemployment. The solution for cyclical unemployment lies in measures for increasing total expenditure in the economy, thereby pushing up the level of effective demand. Easy money policy and fiscal measures such as deficit financing may help. Since cyclical phase is temporary, cyclical unemployment remains only a short- term phenomenon.

viii) Chronic unemployment : When unemployment tends to be a long- term feature of a country it is called chronic unemployment. Underdeveloped countries suffer from chronic unemployment on account of the vicious circle of poverty, lack of developed resources and their under utilisation, high population growth, backward, even primitive state of technology, low capital formation, etc.

ix) Disguised unemployment : So far, the types of unemployment which we have discussed above are all related to open unemployment. Apart from open unemployment we have disguised unemployment. Disguised unemployment commonly refers to a situation of employment with surplus manpower in which some workers have zero marginal productivity so that their removal will not affect the volume of total output. Disguised unemployment in the strict sense, implies underemployment of labour. To illustrate, suppose a family farm is properly organized and four persons are working on it. If, however, two more workers are employed on it and there is no change in output, we may say that these two workers are disguisedly unemployed. This kind of unemployment is a common feature of under developed economies especially of their rural sector. In short, overcrowding in an occupation leads to disguised unemployment. It is a common phenomenon in an over populated country.


Most of the unemployment in India is definitely structural, that is, the structure of the economy is such that it does not absorb an increasing number of people coming to labour market in search of jobs. Apart from structural unemployment there is some cyclical unemployment which has resulted from industrial recession in urban areas. If we classify unemployment as rural and urban unemployment we find total urban unemployment is mainly of industrial unemployment and educated unemployment type and rural unemployment is seasonal and disguised in nature. Industrial unemployment is the one which has resulted from failure of the industrial sector to absorb the increasing labour force and educated unemployment results when a large number of educated people remain unabsorbed. Seasonal unemployment, generally, results in agricultural sector when a large number of small and marginal farmers and labourers do not get occupied during the off-season and disguised unemployment results when people appear to be occupied but actually they are not adding to production. This happens because of over-population which forces people to work on a small piece of land although their services on the land may not be required. It is estimated that over one-third of India’s work force is disguisedly unemployed.


The various causes responsible for widespread unemployment in India are as follows :

1. Growth without adequate employment opportunities : As economy grows usually employment also grows. But in India, most of the time, the economic growth has been inadequate and adequate number of jobs could not be created. In fact, for almost three decade 1950-80, GDP growth rate was as low as 3.6 per cent per annum. Such a low rate of growth did not push many jobs in the market. Since 1980s however, growth has accelerated to around 5-6 per cent but job creating capacity of the economy has not improved much.

2. Growing Population : Population has increased at a very fast pace since Independence but jobs have failed to keep pace with the population.

3. Inappropriate technology : India is a labour surplus and capital scarce economy. Under such circumstances, labour-intensive industries should have been given preference. But not only in industry but also in agriculture producers are increasingly substituting capital for labour. This has hindered the growth of job opportunities.

4. Inappropriate education system : The education provided in India has not much practical utility. The students receiving such education, even very high one, fail to get appropriate jobs.


The backlog of unemployment at the beginning of the FYP-1 was 3.3 million to which were added 9.0 million new entrants during this period. The Plan provided additional employment to 7.0 million, thus leaving a back log of 5.3 million at the beginning of the FYP-2. In the subsequent plans, the back log has been continuously increasing, since the new jobs created during each plan period invariably fell short of new entrants to the labour force. As per the estimates the backlog of unemployment at the beginning of the FYP-9 was estimated to be of the order 34-35 million. The labour force was projected to increase by about 36 million during 1997-2002. Thus, the total number of persons requiring employment would be 70 million over the period 1997-2002. The Tenth Plan aimed at creating 50 million jobs during the plan. The result of the 61st round of the NSSO shows that above 47 million persons were provided employment during 2000-2005.

Before understanding the incidence of unemployment, it is better to understand the meaning of labour force, work force and unemployment rate.

Labour force : Labour force or in other words, the economically active population refers to the population which supplies or seeks to supply labour for production and, therefore, includes both ‘employed’ and ‘unemployed’ persons and the labour-force participation rate (LFPR) is defined as the number of persons in the labour force per 1000 persons.

Work-force : Work force is a part of labour force and refers to the population which is employed. Thus work force participation rate (WPR) is defined as the number of persons/ person-days employed per 1000 person/person days.

Unemployed rate : Unemployment rate is defined as the number of persons unemployed per thousand persons in the labour-force.

Measurement of Unemployment: There are three main measures of employment and unemployment.

1. Usual Status : This measure estimates the number of persons who may be said to be chronically unemployed. This measure generally gives the lowest estimate of unemployment especially for a poor economy because only a few can afford to remain without work over a long period.

2. Current Weekly Status (CWS) : This estimate reduces the reference period i.e. the period for which data is collected to one week. According to this estimate a person is said to be employed for the week even if he is employed only for a day during that week.

3. Current Daily Status (CDS) : The reference period here is a day. It counts every half day’s activity status of the respondent over the week. For working out the rate of unemployed person-days the aggregated count of unemployed days during the reference weeks constitutes the numerator and the aggregated estimate of the total number of labour force days constitutes the denominator.

Having understood the meaning of various terms, we can now find the rate of unemployment in India. The following table shows that the labour force participate rate, work force participation rate and person unemployed in 2004 in India.

Table 9 : All India Labour force Participation Rate (2004) (NSSO - 60th round)
(Number of persons per thousand population)


WPR = Work Force Participation Rate
PU = Persons Unemployed
LFPR = Labour Force Participation Rate

The above table shows that in the year 2004, out of 1000 persons in the population, 420 persons were in the labour force according to UPS. Out of 420, 411 were working and 9 were unemployed. In other words, unemployed persons as percentage of labour force were 2.14 considering UP status. Similarly according to CWS and CDS, the unemployment rates were 5.12 per cent and 9.09 per cent respectively. The extent of unemployment actually varies considerably depending on the measure chosen. For example, the unemployment rate for the year 2004 in India is a low 2.14% based on UPS definition but it rises to 9.09% based on the CDS definition.(Table 9).

In order to assess the degree of unemployment in India it is relevant to compare the incidence of unemployment with unemployment in other countries. The table below shows the unemployment rates in selected countries :

Table 10 : Unemployment in Selected Countries (per cent)

Sri Lanka5.2

If we look into the data on unemployment in India we find that the unemployment rates have first decreased and then risen. This is clear from the following table.

Table 11 : Unemployment Rate: Alternative measures


(Source : 61st Round of NSSO - July 2004-June 2005 and Planning Commission)

The latest round of NSSO on unemployment was conducted during July 2004 - June 2005. The 61st round of the NSSO survey reveals a faster increase in employment during 1999-2000 to 2004-05 as compared to 1993-94 to 1999-2000 (Table - 12). However, since labour force increased at a much higher rate than the increase in work force (employment), unemployment (on UPS basis) was higher at 3.06 per cent of the labour force in 2004-05 compared to 2.70 per cent in 1999-2000. Incidence of unemployment had come down from 2.88 per cent in 1983 (38th round) to 2.62 per cent in 1993-94 (50th round)

Table 12 : Employment and Unemployment (by UPS)

 19831993-941999-20002004-051983 to 1993-941993-94 to 1999-20001999-2000 to 2004-05
Labour Force277.34343.56377.88428.372.061.602.54
Number of

As per the 61the round of National Sample Survey Organisation (NSSO) (2004-05) on the situation of employment and unemployment conducted, the following are the salient features of the trend of unemployment rates in the country :

  • The unemployment rate went up between 1999-2000 to 2004-05. On the basis of current daily status, unemployment rate for males increased from 72 per thousand persons or 7.2 per cent to 80 per thousand persons or 8 per cent in rural areas and from 73 per thousand persons or 7.3 per cent to 75 per thousand persons or 7.5 per cent in urban areas (Table 13). 
  • Similarly unemployment rate for females increased from 70 per thousand persons or 7 per cent in 1999-2000 to 87 per thousand persons or 8.7 per cent in 2004-05 in rural areas and from 94 per thousand persons or 9.4 per cent to 116 per thousand persons or 11.6 per cent in urban areas. (Table 13). 
  • Furthermore, unemployment rates on the basis of current daily status were much higher than those on the basis of usual status and current weekly status. 
  • Urban unemployment rates (CDS) were higher than rural unemployment rates for both males and females in 1990-2000. However, in 2004-05, rural unemployment rates for males were higher than urban employment rates. 
  • According to the usual status, about 56 per cent of rural males and 33 per cent of the females belonged to the labour force. The corresponding proportions in the urban areas were 57 per cent and 18 per cent respectively. 
  • About 42 per cent of the population in the country was usually employed. The proportion was 44 per cent in the rural and 37 per cent in the urban areas. 
  • The daily status (employment) rates were slightly lower than the current weekly status rates, which in turn, were slightly lower than usual status rates.
  • The unemployment rate according to the usual status in the rural areas was 17 and in the urban area 45. The unemployment rates for females are found to be higher than for males and highest among urban females. 
  • In both the rural and urban areas, unemployment rate among the educated was higher than among the uneducated.

Table 13: Unemployment rates for 55th round (1999-2000) and 61st round (2004-05) of the NSSO

  Males  Females 
  Males  Females 

The Approach Paper to the Mid-Term Appraisal (MTA) of the Tenth Plan, has repeated that employment growth should exceed growth of labour force to reduce the backlog of unemployment. Employment strategies advocated in the MTA include : 

  • Special emphasis to promote public investment in rural areas for absorbing unemployed labour force for asset creation. 
  • Identification of reforms in the financial sector to achieve investment targets in the small and medium enterprises (SME) sector. 
  • Large-Scale employment creation in the construction sector, especially for the unskilled and semi-skilled. 
  • Necessary support to services sectors to fulfil their true growth and employment potentials and greater focus on agro-processing and rural services.

The Approach paper to the Eleventh Plan targets generation of additional employment opportunities in services and manufacturing, in particular, labour intensive manufacturing sectors such as food processing, leather products, footwear and textiles and in services, sectors such as tourism and construction and village and small scale enterprises.

Demographic Dividend

In India, 63 per cent population is in the working age group (15-64 years) and it is projected that in 2026 this will increase to 68.4 per cent. Such a big labour force, if properly utilised can yield high production and growth for the economy. This has come to be known as “demographic dividend”. For actually tapping this dividend, the Eleventh plan relies upon not only ensuring proper health care but also a major emphasis on skill development and encouragement of labour intensive industries. The projected decline in the dependency ratio (ratio of dependents to working age population) from 0.8 in 1991 to 0.73 in 2001 is expected to further decline sharply to 0.59 in 2011. This is in contrast with the demographic trend in the industrialised countries and also in China, where dependency ratio is rising. Low dependency ratio gives India a comparative cost advantage and a progressively lower dependency ratio will result in improving our cost competitiveness.


A person who is not gainfully employed is called unemployed. In India, the problem of unemployment has become very serious as around 9 per cent of the labour force is unemployed. Not only there is open unemployment, disguised unemployment is also wide spread. If we consider the nature of unemployment in India, we find that here most of the unemployment is structural in nature. In urban areas, unemployment is mainly industrial and educational in nature. In rural areas, it is seasonal and disguised in nature. The various causes responsible for high incidence of unemployment in India are growing population, inappropriate technology, faulty education system and failure of growth process in generating appropriate and adequate jobs.                                            

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