Increasing Compulsion to Work for Wages: Old Age Labor Participation and Supply in India over the Past Two Decades

Abstract

Against the backdrop of the general absence of social benefits (for the elderly) and growing nuclearization of families, we examine the changes in determinants of wage labor participation and supply of the elderly (60 years and above) over the last two decades in India. We use national level Employment-Unemployment Surveys (1993–94 and 2009–10) and Probit as well as Heckman sample selection models for the estimation. Findings show that the negative association between wage labor participation and the age of the elderly has weakened during the study period indicating that the extent of decrease in wage labor participation due to increase in age of the elderly has come down during 1993–2010. Findings also indicate that the elders from poorer and weaker sections have higher compulsion for labor participation in both rural and urban areas and more so in 2009–10. Further, we find that the elders from smaller households (with 4 or less members) are more likely to participate in wage labor in rural as well as urban areas. Moreover, we find that the elders from the poorer sections in rural areas are compelled to work for higher number of days in a week in comparison to the richer elders and this relationship has become stronger in 2009–10. The findings call for a universal pension scheme for improved welfare of the elderly population in India.

Appendix 1 Theoretical Framework

We use standard labor participation model based on household models of time allocation (Mincer 1962; Becker 1965; Smith 1994) and adopt the standard one time static labor supply model based on consumer theory. The utility function, U for an individual can be defined as

$$ U=U\left(C,L;X\right) $$

(A1)

where C represents the consumption level, L represents the leisure and X indicates other individual and household characteristics like age, caste, religion and others. The consumption and time constraints (budget constraints) may be expressed in the form of

$$ C+WL=Z+W{L}_0 $$

(A2)

where W is the wage rate, Z is non-labor income and L ₀ is the total time available. Assuming that the individual maximizes her/his utility function over the time constraint, we get the optimization solution (first order conditions)

$$ {U}_C\left(C,L;X\right)=\lambda\;and\;{U}_L\left(C,L;X\right)\ge \lambda W $$

(A3)

Here λ is the marginal utility of income. If the Eq. 3 holds strictly, then the individual is not working and the total time available to her/him, L ₀ becomes her/his leisure, L. Taking the equality case, we get U _L (C, L, X) = λW _R where W _R is the reservation wage below which the individual would not participate in labor market. So we get,

$$ {W}_R={U}_L\left(C,L\right)/{U}_C\left(C,L\right) $$

(A4)

Hence an individual would supply positive labor, only if her/his wage, W > W _R . For the elders in the household, the utility of leisure may be high, which raises their reservation wage, W _R , inducing them not to participate in labor force.

However from (2), we find that C = W(L − L ₀) + Z, which suggest L − L ₀ is the hours of wage labor supplied. In our case, Z can be conceived as the income transferred by the children to the older parents. So if Z increases, the consumption of the parents increases, which decreases U _C (C, L) leading to a rise in W _R inducing the elders not to participate in wage labor. But, at low levels of Z, the individuals might be induced to work. This has been represented graphically in the Fig. 2.

It can be seen from the figure that as we move from Z ₂ to Z ₁ (higher transfer from children to lower transfers), the leisure enjoyed by the elders decreases (from L ₂ to L ₁). In other words, labor participation of the individuals should increase.

Fig. 2

Labor force participation with changes in transfer from children

Table 8 Labor force characteristics of the elderly (60 and above): 1999–2000

Table 9 Labor force characteristics of the elderly (60 and above): 2004–05