The recovery of the global economy seems to be facing headwinds with demand in major economies slowing down, which has been marked by a sharp fall in crude oil prices in recent days. Brent crude, the international benchmark for the commodity, ended the previous week down by almost 7%, settling at $64.53 per barrel. The West Texas Intermediate, which is the US benchmark in oil pricing, fell by a similar margin to $61.42 a barrel. This is the sharpest weekly fall for oil prices since October.
It should be noted that the prices of this key commodity are reacting to the sluggish demand conditions even as the Biden administration has just made its most significant move by pumping in $1.9 trillion through the American Rescue Plan, one of the largest stimulus packages in US history. The critical components of this latest stimulus, which is marginally lower than the Trump administration’s CARES Act a year ago, are measures to stimulate demand by putting $1,400 in the hands of most Americans and to extend unemployment insurance. But it seems that the markets are not convinced enough about the incremental demand that the Biden stimulus package will bring, particularly because the labour market conditions have not recovered enough.
Uncertainties in the labour market are among the most daunting challenges that governments must overcome in order to ensure a sustained recovery of their economies. The Biden administration seems to appreciate this fact more than any other. Although the unemployment rate in the country is on a downswing, and is currently around 6.3%, the Chairman of the Federal Reserve, Jerome Powell, and the Secretary of the Treasury, Janet Yellen, think otherwise. Powell and Yellen have opined that the real unemployment rate would be closer to 10% if the millions of people who have dropped out of the country’s labour force are accounted for. It is because of this substantial slack in the labour market and the consequent depressed demand that the Biden administration expects that the $1.9 trillion being pumped into the economy by the American Rescue Plan will not create inflationary pressures.
Labour market woes are quite evident in India, and quite expectedly so, due to the high share of the workforce that is in the informal sector, among the worst hit following the lockdown. Unlike other major economies, official data on the labour market condition in India is available with a lag; the details are available only until the first quarter of the current financial year. In the absence of official numbers, data produced by the Centre for Monitoring Indian Economy (CMIE) on the state of India’s labour market are most often quoted.
CMIE has reported that India’s unemployment rate was 6.9% in February 2021. As is well known, unemployment numbers are an imperfect indicator of labour market conditions in India given the presence of significant levels of underemployment in the country. This implies that though workers may find jobs, their working hours may be inadequate for them to earn minimum levels of wages. A more meaningful indicator is the labour force participation rate, the percentage of persons in the labour force (working, seeking or available for work) in the population, which, according to CMIE, recorded 40.5%. Over the past few months, this figure has been hovering between 39-41%, which shows the extent of shrinkage the country’s labour market has suffered.
The bimonthly Consumer Confidence Survey of the Reserve Bank of India endorses CMIE’s gloomy labour market scenario. The Survey for January reported that 75.4% of the respondents felt that the situation on the employment front had worsened. In order to understand this figure better, it may be pointed out that when the Indian economy was reeling under the pandemic, around 82% of the respondents felt that the employment situation had worsened. This, in effect, means that the employment scenario has still not shown the desired level of turnaround. The same survey shows that about 61% of the respondents reported decline in incomes, as compared to 63% in July 2020. And perhaps not unsurprisingly, 60% of the respondents reported a decrease in non-essential spending, a figure that has remained almost unchanged since September 2020. What stands out from these numbers is that labour market conditions are still uncertain, leading to a continued demand crunch in the market.
The real conundrum for the governments can be summed up thus: While output seems to be slowly recovering in most economies, the depressed nature of the job market and therefore the inadequate levels of incomes being generated as a consequence imply that production is not being backed up by adequate market demand. In other words, unless consumers are back in the market in adequate numbers, economic recovery would continue to be on a knife edge.
Biswajit Dhar
Professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU
(bisjit@gmail.com)