What the continued distress in informal labour market says

Synopsis: Status of informal sector in India, distress faced by them mainly during the Covid-19 pandemic and various impacts of the sustained divergence between the formal and the informal labour force. 


Recently released economic data suggests that the Indian economy has emerged from the second wave of the pandemic better than expected. Two broad points emerge.  

First, the second wave was far more severe. Still, the impact of the localized restrictions imposed during this period on economic activity was less damaging than observed last year.  

Second, in the weeks and months thereafter, large parts of the economy are almost back to pre-Covid levels. But distress is lasting in large parts of the informal economy. 

What is the status of the informal sector in India? 

The informal/unorganised sector in India accounts for roughly half of the total value added in the economy (52.4 per cent in 2017-18). It employs around 90 per cent of the labour force. 

The distress faced by this sector can be estimated from the state of the informal labour force.   

What does the various data represent? 

First, In the first quarter of the ongoing financial year, the number of households demanding work under MGNREGA was lower than last year. But it was higher than pre-covid levels. There could be two possible explanations for this.  

The extent of distress in the labour market last year was of a much higher magnitude.  

The spread of the pandemic in rural areas this year curtailed the registration of households demanding work under MGNREGA. 

Second, In the second quarter, however, the number of households demanding work this year was not only around the same level as last year, but was also significantly higher than the pre-Covid level (2019-20). This signals two possibilities. 

sections of the informal labour force in rural areas and the migrant households who have not returned to urban areas, were unable to find non-farm employment. They had to rely on MGNREGA. This implies that large parts of the informal economy (manufacturing, construction, trade and transport) were operating well below their pre-Covid levels in the second quarter as well. 

A section of the informal labour force simply opted for whatever work was available at depressed wage rates wherever employment opportunity was available. They supplemented its income by seeking work under MGNREGA.   

 What does the level of sustained distress in the informal labour market represent? 

This level of sustained distress in the informal labour market points towards a continuing gap in the fortunes of the formal and informal parts of the economy. 

Data also revealed that the bigger companies flourished, the smaller ones continued to be in distress. 

What are the outcomes of the sustained divergence between the formal and the informal labour force? 

First, worsening of the income distribution.  

Second, loss in purchasing power of the lower half of the distribution chain would translate to the aggregate household consumption basket shifting towards that of the relatively wealthy households. This would raise demand for the less labour-intensive services and high-end/imported manufactured products and reinforce the current labour market trends. 

Third, this distressed labour market has broader implications for aggregate consumption and investment, and indicates subdued medium-term growth prospects. 

Source: This post is based on the article “ What the continued distress in informal labour market says ” published in The Indian Express on 4th Oct 2021. 

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