National Council of Applied Economic Research
Opinion: Bornali Bhandari Samarth Gupta Ajaya Kumar Sahu and K Subbaraje Urs
The Covid-19 pandemic and associated lockdowns have had a significant adverse impact on jobs and livelihoods. Using 2006-2021 data from a quarterly survey on business sentiments this article examines fluctuations in firms’ hiring of temporary/casual and permanent workers across three major economic events – the Global Financial Crisis demonetisation and the Covid-19 crisis. It shows that firms use temporary workers to adjust to changes in the demand of their products in response to macroeconomic uncertainty – increasing vulnerability among workers
The Indian economy has been characterised by jobless growth between 1977 and 2011. Basu and Das (2015) and Abraham (2017) reported stagnant employment growth during 2012-2016. Despite a slowing economy since 2018-191 quarterly Periodic Labour Force Survey (PLFS) data show that urban unemployment rate of people aged 15 and above had fallen from 9.2% in 2018-19:Q4 to 7.8% in 2019-20:Q3 before going up to 9.1% in 2019-20:Q4 at which point Covid-19 hit India.
The National Council of Applied Economic Research (NCAER) Business Expectations Survey (N-BES) has been collecting data about business sentiments since 1991 on a quarterly basis across industry region firm size (based on annual turnovers) and ownership. The NCAER Business Confidence Index (N-BCI) – a measure of business sentiments – fell for two consecutive quarters in 2019-20:Q4 and 2020-21:Q1 by 30% and 40% respectively on a quarter-on-quarter basis. It fell to its historical lowest in 2020-21:Q1 recovering by 41.1% and 29.6% respectively in Q2 and Q3 of 2020-21 on a quarter-on-quarter basis. What did this V-shape path of fall and recovery of business sentiments imply for temporary and permanent labour markets? How does the ongoing Covid-19 pandemic compare with previous episodes of economic shock specifically the Lehman Brothers bankruptcy that is the beginning of the Global Financial Crisis (GFC)?
Comparing three major economic events
The Centre for Monitoring Indian Economy (CMIE) reported that urban unemployment rate rose from 8.7% in February 2020 to 25% in April 2020 gradually – though not continuously – falling to 9.1% in December 2020. The N-BES offers a comparable indicator to assess the impact of the pandemic on labour markets from the perspective of firms. As part of the N-BES survey we have been asking firms about the ‘change in employment of workers over the last three months’ since 1991. There are three possible responses – increase decrease and no change. We use these responses to gauge the comparative impact of the Lehman Brothers bankruptcy (15 September 2008) and the Covid-19 pandemic (25 March 2020) on two different types of workers’ markets – permanent and casual/temporary. Exploring labour market decisions of firms can be useful since demand for factor inputs are linked to the expected demand for final goods and services indicating the macro expectations of firms.
At the outset there are many limitations to this exercise – we list three of them here. First one happened more than a decade ago and another is still unfolding with its full impact likely visible only a few years from now. Second the GFC impacted the economy negatively mainly through demand-side channels2. In contrast the nationwide lockdown imposed in March 2020 due to the pandemic affected the economy adversely both through demand- and supply-sides channels. The counteracting policies for the Lehman crisis leveraged the demand-side channels whereas during the pandemic it was concentrated on the supply side3.
We use N-BES data from December 2006 to December 2020 to analyse labour market trends and the impact of various shocks in the 14-year period. Our key findings are discussed below.
Key findings
The share of firms with the response that there has been no change in ‘labour employed over the last three months’ has been quite stagnant. The mode – the value that appears most frequently in the dataset – for this response for temporary workers has been 67% over the last 14 years and 87.5% for permanent workers. It confirms the empirical evidence about ‘jobless growth’ evidenced between 2004-05 and 2011-12 and thereafter (Basu and Das 2016).
The difference in the magnitude of the modes between temporary and permanent workers indicates that there is a tendency of firms to hire the former. This is consistent with the evidence of increasing contractualisation of workers in India (NCAER 2018). We look at the impact of three major shocks on the labour markets – Lehman Brothers bankruptcy demonetisation and the Covid-19 pandemic.
First we consider the Lehman Brothers bankruptcy (Figures 1 and 2). The share of firms that reported an increase in hiring of temporary workers went down from 20.6% in September 2008 to 10.1% in March 2009. For permanent workers the share of firms that reported an increase went down from 14.9% in September 2008 to 5.4% in December 2008 before going back up again from March 2009. The share of firms which responded that they had decreased hiring of temporary workers went up from 5.1% in September 2008 to 14.8% in March 2009 declining thereafter. For permanent workers it increased from 1.6% in September 2008 to 4.5% in December 2008 falling thereafter.
Next we look at the case of demonetisation. Its impact on labour markets was relatively small and short-lived. Overall we find that that the post-demonetisation period is characterised by high volatility for hiring temporary workers.
Finally we consider the Covid-19 pandemic. The share of firms which responded that they had increased hiring of temporary workers went down from 26.5% in March 2020 to 10.1% in June 2020 before going back up again from September 2020. The corresponding numbers for permanent workers were 14.9% and 5.1% respectively. The share of firms which responded that they had decreased hiring of temporary workers went up from 7.5% in March 2020 to 44.7% in June 2020 declining thereafter. For permanent workers the corresponding numbers were 2.6% and 30.2% respectively. By December 2020 we find that 16% of firms responded that they had decreased employment of temporary workers over the last three months 47.3% responded that it was unchanged and 36.8% responded that they had increased. The corresponding numbers for permanent workers were 3.6% 72.5% and 23.9% respectively.
Concluding thoughts
From the figures above three observations are noteworthy. First the Covid-19 pandemic had a much steeper impact on hiring decisions of firms compared to the GFC. Second while the immediate impact was stronger in the recent crisis the recovery in hiring decisions is also steeper. These observations indicate that businesses have so far perceived the current crisis as being short term with the impact bound to vary with the spread of the Virus. As the lockdown was eased and cases decreased in the later part of 2020 firms’ demand for key factor inputs went up.
Third firms are using temporary workers to adjust the increase/decrease of demand of their goods and services in response to the macroeconomic uncertainty. The increased share of temporary workers in the workforce would increase their vulnerability. The latest available numbers from the March 2021 survey indicate that the labour market has faltered further for both temporary and permanent workers. The medium-term goal of an equitable and sustainable growth path looks increasingly unattainable given the likelihood it may take India a few years to catch up on its pre-pandemic growth path (NCAER 2020) with the combined impact of macroeconomic uncertainty and rapid technological changes (Fourth Industrial Revolution) on the quality and quantity of job creation. Without a coherent social security policy (trinity of pensions unemployment insurance and health policy) India may get caught up in a vicious cycle of inequitable and inefficient growth patterns.
Notes:
Bornali Bhandari Senior Fellow; Samarth Gupta Associate Fellow; Ajay Kr Sahu Senior Research Analyst and K S Urs Associate Fellow at the National Council of Applied Economic Research. These are the author’s personal views.