India’s rapid economic growth in recent decades has been accompanied by a shift from agriculture to services. While this structural transformation has driven significant improvements in GDP, it has not translated into more jobs – particularly for women. Despite advancements in education, poverty reduction, and healthcare, the female labour force participation rate in India has stagnated or declined in recent years. This column argues that the primary reason behind this trend is a mismatch between labour demand and supply, particularly in the aftermath of ‘premature deindustrialisation’
India’s economic growth since 1991 has been marked by several positive developments, including sustained high GDP growth, a decline in absolute poverty, rapid increases in educational attainment, falling fertility and maternal mortality rates, and an improved sex ratio at birth. Despite these advancements, the female labour force participation rate (LFPR) in India has remained low and witnessed a significant decline between 2004-05 and 2017-18. Specifically, the female LFPR in rural areas dropped from roughly 50% in 2004-05 to 25% in 2017-18, while it remained stagnant at just above 20% in urban areas.
The mainstream view attributes this decline to cultural norms (Jayachandran 2021), various supply-side explanations, such as rising household incomes, increased education enrolment (summarised in Verick 2014, Klasen et al. 2019), or the stigma or fear of sexual violence (Chakraborty et al. 2018).
However, a smaller body of literature has highlighted the importance of demand-side in explaining the decline in the female LFPR. This literature focuses on changes in labour demand and structural transformation. In a recent paper (Deshpande and Singh 2024), my co-author and I aim to show that structural shifts in employment and local labour demand are responsible for the decline in the female LFPR.
Supply-side factors explain a tiny part of the decline
We begin by examining the contribution of supply-side factors to the decline in the female LFPR. Using a Blinder-Oaxaca decomposition, we quantify the impact of various wage-earning characteristics, such as education level, household income, and other demographic factors, on the decline in rural female LFPR between 2004-05 and 2017-18.
Our analysis reveals that the contribution of supply-side factors has been reducing over time. Specifically, changes in wage-earning characteristics explained 17.8% of the decline in the female LFPR between 2004-05 and 2011-12, and only 4.5% of the decline between 2011-12 and 2017-18. This suggests that supply-side factors account for a smaller share of the decline in recent years, validating the need to investigate demand-side factors.
Structural transformation and labour demand
India has undergone extensive structural transformation over the last three decades, with a decline in the share of the primary sector (agriculture, forestry, and fishing) in GDP and employment, and a rise in the share of the tertiary sector (services). The value added by the primary sector as a percentage of GDP declined from 24.18% in 1998 to 16.61% in 2022, while the value added by the services sector increased from 40.13% to 48.58%. This shift has been accompanied by a sectoral shift in employment, with the share of agriculture in total employment declining from 64% in 1991 to 41% in 2019, and rising through the Covid-19 pandemic to 44%. Service sector employment increased from 22% to 33% between 1991 and 2019, before declining to 31% in 2021. Industrial employment increased from 15% to 25% over the same period.
Despite this structural transformation, the increase in total employment has fallen short of the growth in the working-age population, leading to a period of ‘jobless growth’. We argue that this mismatch between labour demand and supply has disproportionately affected women, as female employment is highly responsive to changes in local labour demand driven by sectoral shifts.
Methodology
To estimate the effect of labour demand on the female LFPR, we use the Bartik shift-share instrument, which measures exogenous changes in local labour demand by combining national trends in employment growth with the initial share of different industries in local areas. The instrument relies on the fact that national trends of employment growth in different industries are unrelated to district-level changes in labour supply and should impact district-level employment rates differently depending on their pre-existing industrial structure.
Main findings
We find that the female LFPR is highly responsive to changes in local labour demand driven by sectoral shifts. A one percentage point drop in local employment leads to a 1.45 percentage point fall in the female LFPR. This result is specific to female rates; the male LFPR does not change in response to changes in local labour demand.
Our back-of-the-envelope calculations estimate that falling local demand for labour explains most of the fall in the female LFPR over the study period. In fact, had there been sufficient labour demand, the female LFPR would have been higher compared to the initial period (2004-05), given that supply-side factors, such as wage-earning characteristics for women, have been improving.
Heterogeneity in impact
We also examine the heterogeneity in the impact of local labour demand on the female LFPR. We find that the impact is relatively larger for low to middle-educated women and for women in rural areas. The impact is also larger for women from marginalised communities, such as Scheduled Castes and Scheduled Tribes. This suggests that the decline in the female LFPR is not uniform across different demographic groups and is influenced by various socioeconomic factors.
Discussion
We also address the question of how labour demand factors affect women’s labour supply. We argue that if there is unmet need for employment or labour market slack, it would be reflected in lower labour supply. According to the International Labor Organisation (ILO), labour market slack refers to recorded unemployment, as well as three supplementary indicators: underemployed part-time workers, people seeking a job but not immediately available to work, and people available to work but not seeking. The latter two categories are jointly referred to as “potential additions to the labour force”. These individuals are recorded as out of the labour force but reflect an unmet supply of employment.
Conclusion
Our paper concludes that the decline in the female LFPR in India is primarily due to demand-side factors, specifically the declining share of agriculture in total employment and the rise of capital-intensive service sectors that have not created sufficient employment opportunities. We argue that policies to boost employment creation, especially non-farm employment in rural areas, are the need of the hour.
Source : VOXeu
