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12-18, ISSN: 2456-4516

Labour Market Inequalities in India through the lens of Human

Capital Obsolescence
Nidhi Srivastava
Research Scholar

Department of Development Studies

Rajiv Gandhi National Institute of Youth Development (RGNIYD), Sriperumbudur

Abstract

The objective of this paper is to present a more global perspective of looking at the labour market
inequalities in India. Currently the Indian labour market is segregated on the basis of gender, caste,
geographic gradient, religion, etc. These outlooks, although relevant, present a very narrow and
limited way of considering the issue of disparities in the labour market. Time and again researchers
and policy makers have tried to explain the rising rates ofunemployment and underemployment
though skill mismatch. Many studies have emphasized upon the fact that the Indian Education System
is not skilling the entrants to the labour market according to the current demands of the employers
and recruitment agencies.These studies, however, failed to reiterate the fact that a prominent shift is
needed in the assessment of the labour market in India. Instead of analysing the labour market on the
basis of traditional categorizations, a new perspective needs to be employed, which will help the
Indian Labour Market to move to a global platform. Through this paper the discrimination of the
India’s youth labour market based on human capital obsolescence has been discussed. Problems of
skill atrophy and wage scarring have been highlighted as an outcome of labour market inequalities
due to human capital obsolescence. The impact of these issues on economic growth has also been
addressed. This paper also attempts to underline the critical need to change the way the youth labour
market analysis in India is approached.
JEL Classification: J21, J24, J71
Keywords: Labour market, inequality, human capital, skill atrophy, wage scarring.
1. Introduction
Despite its demographic dividend and increased educational levels, India faces youth unemployment
and underemployment as a major challenge for the labour market. Add to this the labour market
inequalities arising due to various social dimensions and the situation becomes more intense.
Traditional segmentation of the labour market in India has been done through caste differentials,
gender inequalities, regional inequalities in wages and income, formal and informal sector, religion,
etc. Even in an era of globalization and high economic growth such differences have continued.
Although India is still struggling to iron out the segregation in the labour market due to various
traditional factors, new perspectives regarding labour market segmentation also need to be discussed
and debated.

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Through this paper the segmentation of the Indian youth labour market based on human capital
obsolescence has been discussed. The Oxford English Dictionary defines Human Capital as “the skills
the labour force possesses and is regarded as a resource or asset.” This definition makes one
understand that there are investments in people in terms of education, training, health, etc. and that
these investments increase an individual’s productivity. Knowledge and skills obtained by an
individual help them obtain gainful livelihood, a sense of individual and social identity and contribute
to economic growth. The United Nations, during the formation of both Millennium Development
Goals (MDGs) as well as Sustainable Development Goals (SDGs), highlighted the importance of
investment in human capital. As a key determinant for growth and poverty alleviation, Human Capital
has been given due importance is all forums discussing the future and human development. In light of
this global viewpoint, this paper studies the youth labour market inequalities in India from the
standpoint of human capital accumulation and depreciation.
The objective of this paper is to present a new perspective of looking at the labour market inequalities
in India - through the lens of human capital obsolescence. Problems of skill atrophy and wage scarring
have been highlighted as an outcome of labour market inequalities due to human capital obsolescence.
The impact of these issues on economic growth has also been addressed.
2. Review of Literature
High youth unemployment rates are a reality of today’s world. India is no different. From 1983 till
2013, the unemployment rates (UR) of India averaged 7.32 percent reaching an all-time high of 9.40
percent in 2009 and a record low of 4.90 percent in 2013. According to Trading Economics global
macro models and analysts expectations, the youth unemployment rate in India, which decreased from
18.1 percent in 2012 to 12.9 percent in 2013, is projected to trend around 15.5 percent in 2020.
(Retrieved 19 January 2016)
Addressing the reasons for unemployment, reports by international organizations and studies from
scholars alike have highlighted that high youth unemployment across the world is due to lack of skills,
work experience, job search abilities and the financial resources to find employment (United Nations,
2003; ILO, 2006; Matsumoto et al., 2012). In developing countries, this situation is exacerbated by
poverty and the competitive pressures that result from a rapidly growing labour force.
India celebrates the status of being the youngest country in the world today and has more than 333
million youth population1 (Census of India 2011). If the potential of this enormous youth population
is tapped to capacity India will be closer to achieving sustainable economic and social development.
For this young men and women of working age need to be productively employed and integrated into
society. But unemployment, underemployment and other labour market inequalities plague the youth
labour market in India at present. In face of such problems, it is very difficult to fully tap into the
youth potential. Bloom & Canning (2004) have succinctly put it saying “both empirically and
theoretically there is nothing automatic about the link from demographic change to economic growth.
Age distribution changes merely create the potential for economic growth. Whether or not this
potential is captured depends on the policy environment”. This was seconded by Chandrasekhar &
Ghosh (2006). For effective policy formulation it is important to understand the youth labour market
in its entirety.

1
Age group 15-29 years as per the National Youth Policy of India 2014
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According to the World Employment and Social Outlook – Trends 2015 report, nearly 73 percent of
the global jobs gap2 in 2014 was due to a deficit in employment among women. A considerable ratio
of this incidence is due to the ‘sharp decline in female labour force participation and employment that
occurred in recent years in India, which had a substantial impact on the overall jobs gap in the Asia
and the Pacific region as a whole’. Kapsos et al. (2014) and Verick& Chaudhary (2015) find that the
major reason for the decline in the female labour force participation rate is due to a relative decline in
employment opportunities for Indian women, owing to factors such as occupational segregation and
discrimination in the labour market. Verick& Chaudhary impressed upon the importance of education
for increasing female access to better jobs. However, they also cautioned that higher educational
attainment will be a waste if there are not adequate opportunities to absorb such skilled labour.
While studying high rates of unemployment among the female labour force in India, Abraham (2008),
explaining the term ‘distress employment’, said ‘when income level falls below sustenance then that
part of the normally non-working population is forced to enter the labour market to supplement the
household income’. He further said that when the period of distress passes, this female workforce
again quits the labour force and goes back to their domestic duties and female LFPR declines. This
means that female population experiences short spells of employment due to ‘distress’ conditions
followed by long durations of unemployment. Edin&Gustavsson (2008) found statistically strong
evidence of a negative relationship between work interruptions and skills. Laureys (2014) also stated
that one undesirable aspect of unemployment is that skills – human capital –deteriorate with increase
in the period of unemployment.
Parasuraman et al (2009) stated that the youth population ‘is expected to bring in freshly learned and
updated skills that will help renew and improve the country’s stock of human capital’. But
Mitra&Verick (2013) refuted this expectation saying poverty, rapidly rising labour force, lack of skills
and work experience means young men women in developing economies like India have little to no
support outside family and friends and are ‘more likely to be unemployed or employed on more
precarious contracts or in the informal sector. This leaves them with no resources to accumulate
human capital. Their social capital is also restricted.
Mahendra Dev and Venkatanarayan (2009) calculated that joblessness3 among Indian youth to be
about 26 percent in 2004-05. They found joblessness among the youth to be much higher than the
unemployment rate. In terms of the level of education, joblessness declined up to secondary education
level but was found to be highest for youth with post-secondary education, at 32.2 percent in 2004-05.
These computations were done using the NSS Employment and Unemployment Survey unit record
data. These numbers re-emphasize that lack of adequate labour market opportunities to absorb
educated youth will force them to be jobless.
Chadha (2015) stated that the unemployed educated rural youth of Punjab constitute about 54 percent
of the total rural unemployed of the state. These youth, who are normally reluctant to take up
employment opportunities that involve physical labour, have neither been able to acquire proper
technical or communication skills nor acquainted with the arduous industrial work, desire white collar
jobs. However, they possess inadequate skills to secure such jobs and this causes discontent and
frustration amongst them. This scenario puts the quality of Indian education in a palisade.
Chandrasekhar and Ghosh (2006) had said that it is not only important to have adequate job supply for

2
The number of jobs that need to be created in order to return to pre-recession employment rates, while
alsoabsorbing the people who enter the labour force each month.
3
‘Joblessness’ is different from ‘Unemployment Rate’ in that while the former is for the population the latter is
for the labour force.
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the labour force entrants but also ‘to ensure that the quality of those entering the workforce is of the
desired level’. Continuously rising rates of youth unemployment in the face of increasing education
enrolment in India have pinpointed the fact that higher educational attainment by the youth may be
preventing them from taking up employment below their skill levels (Rangarajan et al, 2011).
A decline in the LFPR in the five year period from 2004-05 to 2009-10 made the search for ‘missing
labour’ the main topic of debate.4 The studies of ‘missing labour’ are especially important in the
concept of human capital obsolescence because one reason for the ‘missing’ labour force may be that
the skills acquired by this labour force are not helping them in getting jobs and in order to earn a
living they take up employment in sectors not easily measured by NSSO. Another reason may be that
such individuals have completely quit the labour force and due to lack of capital are also unable to re-
skill themselves so as to enter the labour force at a later date.
According to a research report from The Economist, graduate unemployment remains high despite the
labour market crying out for skilled workers. Sanghi&Srija (2014) stated that this is because our
education is ‘supply-driven’ and not ‘demand-driven’. They said that ‘training institutes need to
educate as per industry's requirements so that demographic dividend can be tapped fruitfully’.
Mismatch in demand and supply of education and skills were also addressed by ILO (2013), Chadha
(2000) and Mamgain (2010). Listing the reasons for higher unemployment among the youth, Visaria
(1998) said that lack of trainingfor work, acceleration of population growth and mortality decline an
expansion of education are the main reasons for youth unemployment in India.
De Grip et al (1997) outlined the distinction between technical and economic depreciation of human
capital. They said technical obsolescence can either be due to wear of skills resulting from natural
ageing or illness or injury or it can be due to skill atrophy because of unemployment or
underemployment. The reasons given by them for economic obsolescence were three-fold – job-
specific, sector-specific or firm specific skill obsolescence. They remarked that it is very important to
evaluate and take appropriate measures to reduce human capital obsolescence as depreciation in
human capital has a direct impact on the overall well-being of not only the individual but also the
society.
Some recorded consequences of long term unemployment among the youth were found to be wage
scarring (Gregg &Tominey, 2005), increased participation in crime (Coles et al, 2010), reduced
employability due to skill erosion and reduced social capital (Bell &Blanchflower, 2010), poor well-
being and reduced self-confidence (Coles et al, 2010).
Klaus Schwab, Chairman of the World Economic Forum, said “Talent not capital will be the key
factor linking innovation, competitiveness and growth in the 21st century”. In purview of this, the
situation in India is very abysmal. In the Human Capital Report 2017, India has slipped from 100 to
103 since 2015. The report ranks 130 countries according to five distinct age groups and categories of
education, skill and employment conditions. Among the BRICS nations, India is ranked lower than its
peers - Russia (16th), China (34th), Brazil (77th) and South Africa (87th). In the South Asian group of
nations, India was ranked lower than Sri Lanka (70th) and Nepal (98th), but it ranked higher than

4
Increase in education enrolment as the identified primary factor in the decline in LFPR in the aforesaid five-
year period has been duly noted by official documents and by several scholars (Planning Commission, 2011;
Chandrasekhar & Ghosh, 2011; Choudhury, 2011; Rangarajan et al, 2011; Kannan &Raveendran, 2012).
Abraham (2013) debated that incidence of ‘missing labour’ was actually due to ‘consistent de-feminisation’ of
the labour force. Hirway (2013) made use of the time use statistics to show that there is actually no ‘missing
labour’ but in-fact these persons have moved to sectors which are difficult to measure by the NSSO surveys and
hence do not show up in the results.
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Bangladesh (111th) and Pakistan (125th). The sub-indexes of the Report highlight the facts that in term
of skill development for the future, India ranks 65th. However, there are a number of factors because
of which India has a low rating in the Human Capital Index (HCI). It ranks last in the world when it
comes to employment gender gap. It also ranks low (110th) in educational attainment (primary
education attainment among 25-54 year olds) and low deployment of its human capital, meaning that
the skills available are not getting put to good use. India’s rank is 118thfor labour force participation
among the key 35-54 year old demographic. This means that too many Indians are engaged in
informal or subsistent employment.
3. Conclusion and Policy Issues
Along with caste, regional inequality, gender, religion, etc. a new variable for inequality in today’s
youth labour market is ‘skill’ - human capital. The skills being taught in schools and colleges are
supply driven rather than demand driven. Till the supply matches the demand in terms of skills and
demand matches supply in terms of employment opportunities, unemployment rates will always be a
matter of concern for the Government and society.
As better and higher education became the norm for better paying jobs, more and more youth
registered for higher education and vocational training. This resulted in an increase in the number of
school years of an individual. A decline in unemployment rate and LFPR was reported because this
population had moved out of the labour force for education. However, employers still continued to
fail in finding suitable labour in the market. This was because the demand was not meeting the supply.
Today ‘skill mismatch’ has become an accepted reason for rising rates of youth unemployment in
India.
Skill atrophy and wage scarring have significant effect on economic growth and there is a significant
decline in the return to education. Skill mismatch and skill atrophy result in failure to secure decent
employment. This forces the young men and women of working age to get caught is the vicious circle
of unemployment or underemployment. Long spells of unemployment, underemployment or career
interruptions result in wage scarring. Young people’s disadvantages, disengagement, and
underutilisation in the labour market incur lasting costs to the economy, to society, to the individual,
and to their families.
All the studies on employment, unemployment and underemployment have a common thread –
human capital and its lack thereof. The presence and absence of human capital has considerable
impact on the quality of employment, income generation and the overall wellbeing of persons.
Investmentin human capital is important at all levels – individual, societal and national. In light of
such facts the policy formulations should focus more on addressing labour market inequalities due to
human capital depreciation rather than on economic growth. Investments in human capital formation
will automatically result in faster economic growth and better income distribution.
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