Unemployment, a festering wound

Recently, the data published by Centre for Monitoring India Economy (CMIE) showed that the rate of unemployment in the country shot up to 27.11% for the week ending on May 3 from 6.74% at the end of March 15, 2020. The spike in the unemployment rate was due to the shut down of all economic activities by the government to combat the spread of the coronavirus.

The unemployment rate was highest in the urban areas, constituting most of the red zones due to the highest number of COVID-19 cases. Incidentally, Puducherry in South India recorded the highest number of the unemployment rate at 75.8%. In the United States, the unemployment rate jumped to 14.7% in April, the highest level since the Great Depression, as many businesses shut down or curtailed operations to limit the spread of the deadly virus.

It is a known fact that unemployment creates misery to all sections of society and even more hardships to the underprivileged class who have to depend on government handouts, which only creates further poverty as these sections struggle to make ends meet.

Unemployment refers to a situation where people who are able and are willing to work are unable to get a job commensurate with their qualification and skills. All of us know the economic impact that unemployment on the growth of any economy.

Arthur Okun, an American economist and a Yale professor, studied the relationship between unemployment and GDP. He first published his research on the topic in the 1960s, and his findings were referred to as Okun’s law. The law states that when unemployment levels go up, the GDP of the country would fall.

The percentage increase by which GDP changes when unemployment falls by 1% is the Okun coefficient. The Okun coefficient estimated that in the US when unemployment increases by 1%, then GDP would fall by 2%. Though his findings were applicable more to the United States, economists world over have acknowledged that there is an inverse relationship between unemployment and GDP.

Other than the economic impact that unemployment can have on the economy, there are social issues as well which cannot be measured through a number like GDP. The French philosopher and sociologist Emily Durkheim’s theory of functionalism highlighted the sociological perspective of unemployment.

For Durkheim, society was greater than the sum of its parts and the basis for social order was moral rather than economic. In a functionalist capitalist society, everyone had a role and a purpose, and division of labour meant everyone was aware of what he was expected to do. This also ensured that there was balance in the society when individuals believed that whatever they were doing was in their self-interest.

Another theory on unemployment was the conflict theory by Karl Marx which looked at society as a whole and focused on the different conflicts that occur between classes in the society. As Marx explained, conflicts occurred between the proletariat or the lower class, and the bourgeoisie—the upper class.

The theory supported the idea that those with more power and money have the ability to gain a higher level of services like education and healthcare, therefore creating a greater level of stratification in society. Stratification was the division in a society based on class and wealth.

Creating conflict

Stratification, particularly in the workforce, creates a tremendous amount of conflict because those who do not have the means to get the services they need, turn to unconventional ways to get what they need. Conflict theory viewed unemployment as evidence of those in a powerful or privileged position exploiting others. Both theories believed that social structure controlled the individual through the socialisation of values. While Durkheim thought positive, Marx felt negative about the social order.

Unemployment is a burning social problem and every successive government tries to grapple with it. Chronic employment will lead to an increase in cases of domestic violence, vandalism, crime, drug abuse depression and suicide. The low self-esteem and alienation of the youth makes it difficult for any government to integrate them into society.

Whether we look at unemployment from a functional or conflict perspective, there are no right or wrong answers. The perspectives of both theories are helpful in getting a better idea of unemployment. For a government, higher unemployment means loss of tax revenue as fewer people are paying income taxes.

The decrease in aggregate demand and less spending will also result in loss of GST revenue. The other burden will be that the government has to spend more on unemployment and related benefits. One study in the UK showed that the cost to the exchequer for one person being unemployed is £6,243 a year in benefits and lost tax revenue.

The Union Finance Ministry recently announced the fifth and the final tranche of the Rs 20 lakh crore Atmanirbhar Bharat stimulus package, announced measures to provide liquidity to MSMEs, allocation of an additional Rs 40,000 crore to the Mahatma Gandhi National Rural Employment (MGNREGA). These should help in reducing the unemployment rate in the days to come.

While no government can guarantee full employment, the issue confronting the Centre is what rate of unemployment is tolerable. And unemployment will be a festering wound for any government worth its salt.