High labour supply will lead to drop in wages in urban India: CMIE

High labour supply will lead to drop in wages in urban India: CMIE

High labour supply will lead to drop in wages in urban India, thus narrowing the gap between rural and urban wages, think-tank the Centre for Monitoring Indian Economy said while maintaining the unemployment rate in the country at the pre-Covid levels of 8.6% for the week ended June 28, though a tad higher than the previous week.

The labour participation rate also fell from 42% in the previous week to 41.4% in the latest week and the employment rate fell from 38.4% to 37.8%, CMIE said in its weekly report on Tuesday.

“Demand-supply balances determine wages. In times such as these, when the supply of labour is far in excess of its demand, the only way in which markets can clear is for wages to drop,” CMIE said.

According to CMIE, urban labour has reasons to be desperate for jobs as it cannot afford to stay unemployed for so long. “The cost of living and poverty rates in urban India are higher than in rural India. This is what drove the migrants out,” it said, adding this is what compels the rest to drop wages to find odd jobs to survive. “Usually, urban wage rates are 50% higher than rural wage rates. But, this could be narrowing very rapidly now,” it added.

Commenting on the data for the week, CMIE said in spite of this small deterioration of labour conditions in the latest week compared to the preceding week, the data indicate a dramatic improvement over the labour conditions in April and May.

“The unemployment rate has declined and simultaneously, the participation rate has recovered to a close-to pre-lockdown period,” it said recounting the sudden and sharp increase in the unemployment rate immediately upon the imposition of a lockdown surprised us initially resulting in loss of 122 million jobs in April.

According to CMIE, the 30-day moving average of rural unemployment stood at 10.6% while the urban unemployment stood at 12.4%, resulting in the unemployment rate for India at 11.1% for June 29.

“The improvement in rural India is explained by the rise in MGNREGA spending by the government and by the increase in kharif sowing,” it said, adding there is no overlap between the two.

“The two together therefore have evidently powered the rural employment surge in June. This could have also absorbed a part of urban labour as well though it will be only a small proportion of the total urban labour,” it added.

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