62 Unemployment and Underemployment
This chapter takes up unemployment and underemployment — the two faces of labour-market slack. Open unemployment dominates Western policy debate; underemployment dominates the Indian story.
62.1 What is Unemployment?
A person is unemployed when she is currently without work, available for work, and actively seeking work. The ILO definition has three elements:
TipILO Definition of Unemployment — Three Conditions
| Condition | What it requires |
|---|---|
| Without work | Not in paid employment or self-employment |
| Currently available for work | Could begin within a reference period |
| Seeking work | Has taken specific steps to find work |
The Unemployment Rate is computed as:
UR = (Number of Unemployed / Labour Force) × 100
62.2 Types of Unemployment
TipMajor Types of Unemployment
| Type | What it covers |
|---|---|
| Frictional | Temporary unemployment between jobs; healthy in a dynamic economy |
| Seasonal | Unemployment in seasons of low activity (agriculture in dry months) |
| Cyclical | Demand-deficient unemployment during recessions |
| Structural | Mismatch between skills demanded and skills available |
| Technological | Automation eliminates specific jobs |
| Frictional / search | Time taken to find right match |
| Disguised | Persons appear employed but contribute little to output (common in family farms) |
| Open | Visibly out of work |
| Voluntary | Person chooses not to work at prevailing wage |
| Involuntary | Person willing to work at prevailing wage but unable |
62.2.1 Distinctively Indian Categories
Indian labour-market analysis adds:
- Disguised unemployment — too many workers in family farms; marginal product near zero. The Lewis model of dual economies built on this concept.
- Underemployment — workers employed for fewer hours than they wish or below their skill level.
- Educated unemployment — graduates without jobs matching their qualifications.
62.3 Underemployment
Underemployment has three forms:
TipThree Forms of Underemployment
| Form | Definition |
|---|---|
| Time-related underemployment | Working fewer hours than desired and available for more |
| Skill / qualification mismatch | Working below one’s skill or education |
| Income underemployment | Earnings below subsistence despite working |
In India, time-related underemployment (especially in rural agriculture) and skill mismatch (in graduate labour markets) are the dominant forms.
62.4 Measuring Unemployment in India — Three PLFS Statuses
PLFS uses three reference statuses to measure unemployment.
TipThree PLFS Statuses for Unemployment
| Status | Reference period | Captures |
|---|---|---|
| Usual Status | 365 days | Long-term, chronic unemployment |
| Current Weekly Status (CWS) | 7 days | Short-term, weekly unemployment |
| Current Daily Status (CDS) | Each day of past 7 days | Day-by-day; captures intensity, including underemployment |
CDS unemployment is typically higher than CWS, which is higher than US — reflecting underemployment captured by the day-level measure.
62.5 Indian Unemployment — Recent Numbers
TipIndian Unemployment Indicators (PLFS 2023-24, Usual Status)
| Indicator | All | Male | Female |
|---|---|---|---|
| Overall UR (15+) | ~3.2% | ~3.2% | ~3.2% |
| Youth UR (15-29) | ~10.2% | ~9.4% | ~12.0% |
| Educated UR (graduate+) | ~13% | ~11% | ~17% |
| Urban UR (15+) | ~5.5% | ~4.4% | ~8.5% |
| Rural UR (15+) | ~2.5% | ~2.7% | ~2.1% |
The CMIE high-frequency series typically reports unemployment in the 7-9% range — a substantial difference attributed to methodology, especially treatment of casual and self-employed workers.
62.6 Causes of Unemployment in India
TipSix Causes of Indian Unemployment
| Cause | Mechanism |
|---|---|
| Slow labour-intensive industrialisation | Manufacturing absorbs less labour than expected |
| Skills mismatch | Education and training not aligned with demand |
| Labour-market rigidities | Some statutory provisions discourage hiring |
| Demographic pressure | 12 million new entrants per year |
| Capital-intensive growth | High productivity growth reducing jobs per unit of output |
| Regional imbalance | Concentration of jobs in a few states |
| Low female LFPR | Untapped potential workforce |
| Informalisation | Quality of jobs deteriorating |
62.7 Consequences of Unemployment
TipConsequences of Unemployment
| Layer | Consequences |
|---|---|
| Individual | Loss of income, dignity, skills (atrophy); mental-health impact |
| Family | Poverty, indebtedness, withdrawal of children from school |
| Society | Inequality, crime, social unrest, migration pressures |
| Economy | Lost output, reduced demand, lower tax revenue, fiscal pressure for support |
| Political | Discontent, instability, anti-incumbency |
62.8 Government Programmes to Address Unemployment
TipMajor Indian Programmes to Address Unemployment
| Programme | Approach |
|---|---|
| MGNREGA, 2005 | Right to 100 days’ rural wage employment |
| National Skill Development Mission | Skill-training for employability |
| Pradhan Mantri Kaushal Vikas Yojana (PMKVY) | Skill training |
| Atma Nirbhar Bharat Rozgar Yojana | Employer subsidy for new hires |
| Production Linked Incentive (PLI) schemes | Encourages labour-intensive manufacturing |
| Self-employment schemes (PMEGP, MUDRA, Stand-up India) | Credit for micro-enterprises |
| National Career Service portal | Job-matching |
| Apprenticeship programmes | NAPS — wage subsidy for apprentice training |
62.9 Lewis Dual-Economy Model
W. Arthur Lewis’s 1954 model — Economic Development with Unlimited Supplies of Labour — argued that developing economies have a traditional sector with surplus labour (disguised unemployment) and a modern sector with productive employment. Growth depends on transferring labour from traditional to modern sector. The model anchors much of Indian planning literature.
62.10 Unemployment Theories
TipTheories of Unemployment
| Theory | Lead author | Core claim |
|---|---|---|
| Classical | A. Marshall | Wages above market-clearing cause unemployment |
| Keynesian | J.M. Keynes | Demand deficiency causes involuntary unemployment |
| Monetarist | M. Friedman | Natural rate of unemployment; deviations from it are temporary |
| Real business cycle | Kydland & Prescott | Unemployment reflects real shocks |
| Search and matching | Diamond, Mortensen, Pissarides | Frictional unemployment from time taken to match worker and job |
| Insider-outsider | Lindbeck, Snower | Insiders raise wages; outsiders bear unemployment cost |
62.11 Practice Questions
Eight questions to test the chapter. Each card hides the answer — click Show answer to reveal it.
Q1
ILO definition of unemployment requires
ILO definition of unemployment requires:
AWithout work + available + seeking
BWithout work only
CAvailable + seeking only
DLong-term without work
Show answer
Correct answer
A. Without work + available + seeking
Q2
Disguised unemployment refers to
Disguised unemployment refers to:
AHidden labour
BPersons appear employed but marginal product is near zero
CUnderground workers
DMigrant labour
Show answer
Correct answer
B. Persons appear employed but marginal product is near zero
Q3
Match unemployment type with cause: |
Match unemployment type with cause:
A. (i)-(b), (ii)-(c), (iii)-(a), (iv)-(d)
| Type | Cause | ||
|---|---|---|---|
| (i) | Frictional | (a) | Demand deficiency |
| (ii) | Structural | (b) | Time between jobs |
| (iii) | Cyclical | (c) | Skills mismatch |
| (iv) | Seasonal | (d) | Off-season activity |
Show answer
Correct answer
A. (i)-(b), (ii)-(c), (iii)-(a), (iv)-(d)
Q4
Which PLFS status captures the highest
Which PLFS status captures the highest unemployment (typically)?
AUsual Status
BCurrent Weekly Status
CCurrent Daily Status
DAnnual
Show answer
Correct answer
C. Current Daily Status
Q5
Indian Youth UR (15-29, PLFS 2023-24)
Indian Youth UR (15-29, PLFS 2023-24) is approximately:
A3%
B5%
C10%
D25%
Show answer
Correct answer
C. 10%
Q6
Indian educated unemployment (graduates) is app...
Indian educated unemployment (graduates) is approximately:
A2%
B5%
C13%
D30%
Show answer
Correct answer
C. 13%
Q7
Lewis model of dual economy was
Lewis model of dual economy was published in:
A1936
B1954
C1976
D1991
Show answer
Correct answer
B. 1954
Q8
Search and matching unemployment theory is
Search and matching unemployment theory is associated with:
AMarshall, Pigou
BKeynes
CDiamond, Mortensen, Pissarides
DFriedman
Show answer
Correct answer
C. Won the Nobel Prize 2010.
ImportantQuick recall
- Unemployment = without work + available + seeking (ILO).
- Types: frictional, seasonal, cyclical, structural, technological, disguised, open, voluntary / involuntary.
- Underemployment forms: time-related, skill mismatch, income.
- PLFS statuses: Usual Status (365 days), Current Weekly Status (7 days), Current Daily Status.
- India UR (PLFS 2023-24): ~3.2% overall; youth ~10%; educated ~13%; urban-female ~8.5%.
- CMIE shows higher UR (~7-9%); methodology differs.
- Causes: slow industrialisation, skills mismatch, demographic pressure, capital-intensive growth, regional imbalance, low female LFPR.
- Programmes: MGNREGA, PMKVY, ABRY, PLI, MUDRA, NAPS.
- Lewis dual-economy model (1954) — surplus labour transfer from traditional to modern.
- Theories: classical, Keynesian, monetarist, RBC, search-matching, insider-outsider.