Link between GDP growth and employment in India

A recent report says the relationship between India's GDP growth and the generation of employment for its people has become weaker over time.

Let us see the relationship between GDP growth and Employment.

What is GDP growth?

• The annual average rate of change of the gross domestic product (GDP) at market prices based on constant local currency, for a given national economy, during a specified period of time.
• Measurement: GDP average annual growth rates are those estimated by the World Bank from the corresponding data in the United Nations's Systems of National Accounts expressed in 1995 US dollars constant prices, using the least-squares method.
  • The least-squares growth rate is estimated by fitting a linear regression trend line to the logarithmic annual values of the variable in the relevant period.
  • The calculated growth rate is an average rate that is representative of the available observations over the entire period.
  • It does not necessarily match the actual growth rate between any two periods.

How employment is related to Growth?

• Generally, there is an inverse relationship between GDP growth and unemployment. When the economy is growing at a healthy rate, businesses expand, invest, and hire more workers, leading to a decrease in unemployment. Conversely, during economic downturns or recessions, GDP contracts, businesses cut back, and unemployment tends to rise.
• Lag Effect: The impact of GDP growth on unemployment may not be immediate. It often takes time for businesses to adjust their hiring decisions in response to changes in economic growth. Therefore, changes in GDP growth may precede changes in the unemployment rate.

Factors affecting employment and growth:

• The type of economic growth (extensive or intensive), is an important factor that determines the rate of job creation in relation to economic growth.
• Thus, the economic growth (GDP growth -aggregate production) as reaction to the aggregate demand growth, can be achieved in different ways:
  • Either the quantity of inputs (labour force, capital, etc.) increases and then the extensive growth, or,
  • The productivity of production factors increases (intensive growth), or a combination of the two possibilities.
• The existence of a positive or negative, higher or lower employment elasticity of economic growth can be explained by the type of economic growth (extensive or intensive).
• As a result of the influence of some factors such as the institutions specific to the labour market, relative cost of labour, the micro and macroeconomic context, technological progress, working time including part-time work, the sectorial composition of employment, etc. are important to be considered.

Conclusion

GDP growth and unemployment are closely related in the sense that a growing economy typically leads to lower unemployment rates, and a shrinking economy often results in higher unemployment. However, the relationship is not always straightforward, and various factors, including government policies and global influences, can modify this link. Understanding this relationship is essential for policymakers, businesses, and individuals seeking to make informed economic decisions.