Using national-level employment data, this paper explores both the supply and demand-side factors responsible for stalling India’s structural transformation on the employment side. We have found that although the overall LF participation has consistently been declining, the size of open unemployment and discouraged LF are rising at an unprecedented pace. This employment crisis arose because of the stalled structural transformation owing to the lack of effective demand for skilled workers in the non-farm sectors. This crisis is not only reflected in stagnant real wages, but it also adversely affected GDP growth and the incidence of poverty. Hence, unless measures are taken quickly, India’s demographic dividend, which ends in 2040, is under severe threat.
The Indian economy passed through a phase of structural transformation and became a lower middle-income country with substantial reduction in income poverty (see Chauhan et al. 2016) during 2004–2005 to 2011–2012. Over this period, a significant decline in the overall labour force participation rate (LFPR) in India also occurs, slower for males but much faster for women. This was caused by an upsurge in enrolment of boys and girls in the secondary and higher levels of education (Rangarajan et al. 2011; Hirway 2012; Thomas 2012; Kannan and Raveendran 2012; Mehrotra et al. 2014; Sudarshan and Bhattacharya 2009) along with a decline of the agricultural workforce due to mechanization (Himanshu 2011; Mehrotra et al. 2014) and rising cost of cultivation (Narayanamoorthy 2013).
A review of past studies conducted in various countries of the world suggests that the overall LFPR of countries tends to fall over the initial period of economic development to reach a minimum and then starts rising as the country develops further (see Durand 2015; Bardhan 1979; Mincer 1985; Psacharopoulos and Tzannatos 1989; Schultz 1990). In other words, the LFPR shows a U-shape as countries progress from low to higher levels of economic development. It happens because, over the initial phase of structural transformation as women move outFootnote1 of agriculture and allied sectors because of a relatively stronger negative income effect than the positive substitution effect of the rising real wage, the overall female LFPR starts falling; however, it moves upward again as women acquire appropriate skills and return to the LF at an advanced stage of development to participate in non-agricultural jobs (Fatima and Sultana 2009; Klasen and Pieters 2015; Luci, 2009; Mehrotra and Parida 2017).
