GDP, Unemployment and Okun's law

Is there a relation between GDP and unemployment?. I hope most of you are working with an established corporate unlike me who always chooses the path less taken. Jokes apart, the job market across the World is not so good. Hope you heard about Boeing's plans to layoff 800 Commercial Jet workers and few companies in India related to the Automobile Industry have reduced the working days to cut the production. And for the first time since its launch in 2004, Maruti Swift which used to have a waiting period of 3 months - 6 months is available off the shelf and with a hefty discount too. And most of the companies are talking about lay-offs and production cuts. Employees are asked to take a cut in the salary or asked to have paid holidays (only half the salary will be paid in this period).

The picture is not rosy. But is this only for the manufacturing or for the Auto sector? No. If you remember a week back, candidates who got campus offers from HCL Technologies were protesting outside the company's offices across India as they have not received any announcement on the formal joining dates. These guys have passed out in 2012 and the next batch will be out in a month or so. A cousin brother of mine says, "Bro, I should have opted for Mechanical Engineering like you. I made a mistake by choosing Computers. I cannot fit into any industry wherein Mechanical engineers are being inducted in IT too." But when the economy is not doing well, it is not about IT or manufacturing, every sector will not do well. It is always the other way round, when most of the sectors are not doing well, the economy in turn will not do well. The Indian IT industry grew so well in a short span of time as it was fueled by cheap availability of skilled labour. But, this is not an advantage anymore as the labour is not cheaply available. In any Indian IT company about 30% of employees would be on bench at any given point of time. TCS has more employee utilization (72%) compared to the other companies. They plan to increase the employee utilization by few percentage. INFOSYS on the other hand hired 80% less employees in the December quarter compared to the previous quarter. The percentage of campus recruitment is very low for all the companies in the Indian IT sector. Before writing this article, I thought of talking to a friend who is working with the IT industry. He is a Senior Manager with a foreign Bank. He is with the software division of the Bank. I called him to ask about the situation in the IT industry. The irony is he has to sack 30 employees by this weekend. The total employee count in his division is 120. And that is 25%. The situation is grim.

Mushrooming engineering colleges led to a minimum of one engineer for every family or in other words, every family (Middle class) has one guy studying in an engineering college at a given point of time hoping to be hired by an IT company. Do not know, whether our economy can afford to employ all these people who pass out of these colleges. The quality of education is at a historical low. Large number of freshers sans quality will make our country a Banana Republic. Be prepared for more protests by students, unemployed youths, law and order issues. If you're a street smart entrepreneur, I am sure, now you would be thinking of ideas to encash this wonderful opportunity. If you have got one, kindly buzz me, I have got few up my sleeve too.

Now to the analysis part, is there a relation between unemployment and GDP? Yes, there exists a relationship. Okun's law or "Okun's rule of thumb" says there exists an relationship between GDP and Unemployment. Before getting into the law, let me tell you where we stand as a country in GDP. The GDP forecast of our country has been reduced to 5% from the earlier 8.5%. This amounts to a 40% reduction. Now let us get back to Okun's law. No point in making Arthur Melvin Okun wait. What the law states is, for every additional 1% increase in unemployment a country's GDP will fall by 2% compared to the potential GDP. If the GDP forecast is reduced by 40% then the unemployment rate prevailing in our nation is around 20%. There may be other factors contributing to a less GDP too. Ceteris paribus, unemployment is around 20%. Can you believe that? I am sure you're shockingly surprised as me. God save our economy!

Disclaimer- The Unemployment calculation is a theoretical one and is based on Okun's law. There may/may not be a similarity to the actual unemployment rates.