According to the latest Periodic Labour Force Survey (PLFS), India’s unemployment rate reached 5.5 per cent in June after increasing from 5 per cent in March and 5.2 per cent in April. The figure is comparable with advanced economies such as the United States, where unemployment has remained around 4-4.5 per cent, and below the Eurozone average of approximately 6 per cent. Despite this comparison, India’s labour market continues to face structural challenges.
Underemployment Emerging as a Key Concern
Experts point out that the central issue is underemployment rather than unemployment alone. India’s Labour Force Participation Rate (LFPR) declined to 54.4 per cent in June, marking the lowest level in nearly a year. The Worker Population Ratio (WPR), which measures the proportion of employed individuals within the population, also dropped to 51.4 per cent.
The decline in these indicators suggests that fewer people are either participating in the workforce or actively searching for employment opportunities.
Young Indians continue to face significant employment challenges. Earlier PLFS data revealed that unemployment among individuals aged 15-29 reached 15.2 per cent in March, nearly three times the national average. A considerable number of young people remain outside employment, education or training, while only a limited section of the working-age population has received formal vocational training.
Industry experts describe the situation as a structural issue rather than merely a shortage of jobs.
“The issue is underemployment, not just unemployment,” said Suchita Dutta, Executive Director of the Indian Staffing Federation (ISF). She stated that millions of Indians are considered employed but remain trapped in low-productivity informal work, including disguised agricultural employment, which often fails to match their skills or provide sufficient income.
Formal Employment Expansion Becomes Critical
Dutta highlighted that expanding formal staffing opportunities could play a significant role in reducing the employment gap.
According to Employees’ Provident Fund Organisation (EPFO) data, India adds approximately 19-22 lakh net payroll subscribers every month, with nearly 60 per cent of new members belonging to the 18-25 age group. Staffing companies contribute around 40-44 per cent of these new payroll additions, making the sector one of the largest entry points into formal employment.
The growth has continued despite a weaker hiring environment. ISF member companies added around 1.18 lakh flexible workers during financial year 2026, increasing the total workforce employed through them to 1.91 million, representing growth of nearly 8 per cent.
However, temporary and flexible staffing continues to represent only a small portion of India’s overall labour market.
Agency staffing accounts for approximately 1.3 per cent of India’s workforce, compared with the global average of around 1.8 per cent. In countries such as the United Kingdom and the Netherlands, the share exceeds 3.3 per cent.
Dutta said achieving the global average could help formalise employment for nearly 2.7 million additional workers. This expansion would provide access to Provident Fund accounts, Employees’ State Insurance benefits and formal appointment letters, protections that remain unavailable to millions of informal workers.
Labour Reforms and Social Security Expansion
India has strengthened its legal framework for formal employment through major labour reforms. The four Labour Codes became operational in late 2025, followed by the notification of Central Rules in May 2026.
Under the revised framework, fixed-term employees receive wage and benefit parity with permanent workers, while the eligibility period for gratuity has been reduced to one year from the earlier five-year requirement.
The country’s social security coverage has also expanded significantly over the past decade, increasing from around 19 per cent of the workforce in 2015 to more than 64 per cent in 2025, according to government estimates.
GST Burden Remains a Challenge for Formal Hiring
Dutta identified taxation as another major obstacle to expanding formal employment. She stated that manpower services currently attract 18 per cent Goods and Services Tax (GST) on the entire billing value, including employee wages and statutory contributions such as Provident Fund and Employees’ State Insurance, instead of only the staffing service fee.
According to her, this raises the cost of formal hiring, while informal employment remains outside similar financial obligations.
Dutta said reducing GST on staffing services to 5 per cent could encourage businesses to adopt formal employment models and increase workforce formalisation.
India’s labour market situation highlights a growing divide between employment numbers and employment quality. While the unemployment rate remains relatively controlled, declining participation levels, youth unemployment and widespread informal work indicate that improving job quality, expanding formal opportunities and strengthening worker protections will remain central challenges for the country’s economic future.
About The Author
Comment List