Formal sector employment was 90 million in 2015‑16 and rose to 105 million in 2020‑21. During the same period, real GDP increased from ₹150 trillion to ₹210 trillion. (a) Calculate the average employment elasticity of the formal sector over the five‑year period. (b) State whether the elasticity indicates that formal employment is responsive to economic growth, and briefly interpret the result.
Answer
Average employment elasticity ≈ 0.42; since it is below 1, formal employment is relatively inelastic to GDP growth.
The correct answer is Average employment elasticity ≈ 0.42; since it is below 1, formal employment is relatively inelastic to GDP growth. — Conclude that while output expanded strongly, formal job creation lagged behind, indicating limited responsiveness.
Step-by-step solution
- Compute percentage change in employment: ΔE = 105 million – 90 million = 15 million; %ΔE = 15/90 = 0.1667 = 16.67 %.
- Compute percentage change in real GDP: ΔY = ₹210 trillion – ₹150 trillion = ₹60 trillion; %ΔY = 60/150 = 0.40 = 40 %.
- Apply elasticity formula ε = %ΔE / %ΔY = 16.67 % / 40 % = 0.4167 ≈ 0.42.
- Interpretation: ε < 1 means employment grows less than proportionally to output; the formal sector is relatively inelastic to GDP growth.
- Conclude that while output expanded strongly, formal job creation lagged behind, indicating limited responsiveness.
Common mistake: Using final values instead of initial values to compute percentage changes, which inflates the elasticity.
Concept tested: Average employment elasticity over time
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