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Thursday, October 31, 2019

Elements of the low Indian labour force participation rate: The elderly

by Subhamoy Chakraborty, Renuka Sane and Ajay Shah.

India has a remarkably low rate of labour force participation. The Periodic Labour Force Survey (PLFS) carried out under the Ministry of Statistics and Programme Implementation estimated the labour force participation rate (LFPR), for individuals of age 15 and above, at 49.8% in 2017-18. The CMIE CPHS survey, which has more recent information, has shown a decline in the LFPR by 2019. These numbers suggest that a large part of India is not in the labour market. These magnitudes of non-participation are much larger than the rates seen with unemployment. The grand question of Indian labour economics is that of understanding the low LFPR. The grand question of Indian economic policy lies in obtaining a 50 per cent gain in GDP through a 50 per cent increase in the labour force.

One big element of this LFP problem is women's LFP. The women's LFPR has been falling. In 2011-12, India was already one of the countries with the lowest female labour force participation. This has gotten worse with time. In 2017-18, the female LFPR fell to a historic low of 23.3%. A remarkable feature of the Indian women's LFPR is the comparison against countries like Pakistan (24%) or Bangladesh (36%). For those of us who believe that women's agency in India is ahead of that in Pakistan, this is a bracing fact. The examination of women's LFP is an important crossroads between labour economics and gender studies. It also emphasises the importance of gender studies in thinking about India.

The other two big elements of the LFPR problem are the young and old. In this article, we delve into labour supply of the elderly and establish some basic facts of this field. The positive and normative economics of elderly LFP is an important element of labour economics, given the large and growing share of the elderly in the population. It is also a major issue in ageing studies. High labour force participation by the elderly is well known to contribute to emotional and physical well being. It is generally better for a person to work for a wage of Rs.50 a month rather than obtain a pension of Rs.50 a month. The puzzle of the field lies in devising labour market arrangements that will harness labour supply of the elderly, and avoid the abrupt event of retirement.

The elderly are defined as those above the age of 55. The 55-64 age group is also part of the conventionally defined working age group (age 15 to 64). The 65+ age group constitutes the old elderly.

Data

We study the Consumer Pyramids Household Survey (CPHS), a pan-India panel household survey of about 170,000 households carried out by the Centre for Monitoring Indian Economy. The survey asks about the present employment status of each member above 15 years of age. The response to the employment question is recorded as a 4 point status:

  1. Employed
  2. Unemployed, not willing and not looking for a job
  3. Unemployed, willing and looking for a job
  4. Unemployed, willing but not looking for a job

Individuals whose employment status is either Employed (1) or Unemployed, willing and looking for a job (3) are considered to be a part of the labour force. In this article, we examine the data for January - April, 2019.

Overall

Table 1 provides estimates of the labour force participation by age group. There are approximately 375 million workers in the 15-54 age group, giving a LFPR of 45%. The LFPR drops slightly to 44% for the 55-64 age group with 51 million workers. The LFPR drops dramatically to 12% for the 65+ age group with only 8.4 million workers.

Table 1: Labour Force Participation: Age Group
Age Group Population
(in millions)
LFP
(in millions)
LFPR(%)
15-54 828.3 375.0 45.3
55-64 115.6 50.8 43.9
65 and
above
69.1 8.4 12.1

Figure 1 presents the labour force participation rate (LFPR) of those above the age of 55. The labour force participation was a little over 55% at age 55, and fell to about 10% by age 70.

Figure 1: Labour Force Participation (55 and above)

Withdrawal by the elderly from the labour force generally happens for one of the following reasons: (a) people are required to leave their main job at a specific retirement age, (b) are unwilling to work because they value leisure more and access to pensions at a sharply defined age which makes it feasible to stop working (c) are unable to work because of health constraints or (d) the labour market is unfriendly to older workers. In the US, for example, sharp drops in participation are seen at the age of 62 and 65, when access to social security benefits becomes available.

In India, formal pension arrangements are only in place for a small part of the population. Hence, factors "(a)" and "(b)" above should not matter much in India. And yet, we see a sharp drop at age 60. This suggests that reasons such an unfriendly labour market might explain the large drops in labour force participation at older ages.

Changes over time

Figure 2 presents the labour force participation rate in 2016 and 2019. We see that there has been a small increase in the participation rate for the 55-59 age group between 2016 and 2019. However, for all other age categories, there has been a remarkable fall. For example, about 42% of the 60-61 age group participated in the labour market in 2016. This had fallen by about 10 percentage points in 2019. Similarly, in the 65 plus age group, labour force participation was at 28%. By 2019, this had fallen to 12%. This suggests that that stress in the economy has hurt the elderly more than prime-age working males. This may be part of a larger phenomenon, where prime age working males are protected in economic downturns, while all other parts of the labour force (women, the young, the old) seem to lose employment at higher rates.

Figure 2: Labour Force Participation: Over time

International comparison

It is useful to ask how these compare to the numbers in the OECD countries, where formal pension systems shape the decision to retire. Table 1 presents the elderly labour force participation rate (LFPR) in India, US and Japan.

Table 2: LFPR: Comparison with US and Japan
Age Group India (%)
(Jan-Apr 2019)
US (%)
(2018)
Japan (%)
(2018)
55-59 52.7 72.3 83.4
60-64 29.4 57.1 70.6
65 and
above
12.1 19.6 24.7

In 2018 according to the Bureau of Labor Statistics in the US, 72.3% of those in the 55-59 age group were in the labour force. The participation rate fell to 57.1% for age group 60-64 and further declined to 19.6% for those above 65. Meanwhile the labour force participation rate in Japan, as reported by Statistics Bureau of Japan, was 83.4%, 70.6% and 24.7% for age groups 55-59, 60-64 and above 65 respectively. Japan has, in fact, seen a resurgence in elderly labour force participation in recent years owing to better health and education, as well as reduced generosity of social security programs.

Japan is considered one of the best countries in terms of integrating the elderly into the labour market. Suppose we treat Japan as a frontier: the outer limit of what is possible with labour market participation by the elderly. How much would we in India gain if we moved up to this frontier?

If the LFPR of the 55-64 age group in India (which is 43.9%) were to become the same as that of Japan's (77%), then the overall working-age LFPR would go up to 49.15%. This is a 4 percentage point increase in the LFPR owing to increases in the labour force participation of the "young old", and would mean that an additional 38 million individuals would be in the labour force.

An additional 9 million people, of age 65+, would also join the labour force, by matching the Japanese LFPR for the age group of 65+.

Totally, 47 million people would enter the Indian labour force if we moved up to Japanese levels of LFP from age 55 and above. This is an economically significant number. This magnitude of impact will go up in the future as India ages.

Conclusion

The Indian labour market has a remarkable feature: of low labour force participation. In this article, we examine one facet of this problem: the low LFP for the elderly. Despite the prevalence of a large informal sector, and the absence of a formal age of retirement, we find that the elderly labour force participation is low, and has actually fallen between 2016 and 2019.

Withdrawal from the labour market is bad for the elderly and bad for the economy. The examination of the LFP of the elderly is an important crossroads between labour economics and ageing studies. Further research is required in identifying the causes behind the low LFPR of the elderly.

 

The authors are researchers at the National Institute of Public Finance and Policy.

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