Why Inflation and Unemployment Both Are Rising in India Over the Last Decades?

Introduction: The Indian Paradox of Expensive Living and Insecure Work

For many Indians, the economy no longer feels like a simple story of “growth.” It feels like a double squeeze. Prices of food, transport, rent, education, and basic household goods rise steadily, while secure jobs remain difficult to find—especially for the young, the educated, and the urban middle class. This is the core paradox: inflation hurts people who are earning, and unemployment hurts people who are not. When both pressures are felt together, public frustration rises sharply. The result is not just economic discomfort, but a deeper sense that the system is becoming less fair and less predictable.

In textbook macroeconomics, inflation and unemployment are supposed to move in opposite directions, at least in the short run. But India in the last decade has often looked different. To be precise, official headline unemployment has not risen every single year; in fact, the overall PLFS unemployment rate has fallen to 3.2% in 2023-24. Yet this does not mean labour-market stress has disappeared. Youth unemployment remains high at 10.2%, educated unemployment at 7.1%, graduate unemployment is much higher than the national average, and real wages for many workers have stagnated or declined. So the lived reality is this: even if the overall unemployment rate looks better, the economy is still producing too many insecure, low-paid, informal, or mismatched jobs while inflation keeps eroding purchasing power. That is why many people feel that inflation and unemployment are “rising together.” Source Source

1. Conceptual Background

What is inflation?

Inflation means a sustained rise in the general price level. In simple terms, money buys less than before. Economists usually distinguish between two broad types. Demand-pull inflation happens when demand in the economy rises faster than supply—for example, when incomes, credit, or government spending increase strongly. Cost-push inflation happens when production costs rise—such as fuel, electricity, transport, imported raw materials, fertilizers, or wages—forcing producers to raise prices even when demand is not especially strong.

India’s recent inflation story has often been shaped more by cost-push factors than by overheating demand. Food prices have been affected by weather shocks, lower reservoir levels, crop damage, and supply bottlenecks. Fuel and imported commodity prices were heavily influenced by global energy markets, especially after the pandemic and the Russia-Ukraine war. That matters because cost-push inflation can hurt growth and jobs instead of stimulating them.

What is unemployment?

Unemployment is not just one thing. Cyclical unemployment appears when overall demand in the economy weakens and firms hire less. Structural unemployment happens when the kinds of jobs available do not match the skills, location, or qualifications of workers. Frictional unemployment is the normal short-term gap between leaving one job and finding another. In India, the biggest concern today is structural unemployment mixed with underemployment: people may not be fully jobless, but they are stuck in low-paying, insecure, informal, or mismatched work.

That is why the headline unemployment rate alone can be misleading. In an economy where self-employment, unpaid family work, and low-productivity informal work are common, many people are “employed” statistically without being economically secure. This is one reason public experience often differs from official averages.

What is the Phillips Curve equation?

The Phillips Curve is one of the most famous ideas in macroeconomics. In its simplest form, it suggests an inverse relationship between inflation and unemployment: when unemployment falls, inflation tends to rise; when unemployment rises, inflation tends to fall. A more modern expectations-augmented version is often written as:

where inflation depends on expected inflation, the gap between actual unemployment and the “natural” rate of unemployment, and supply shocks.

The theory matters because it shaped central-bank thinking for decades. It suggested a policy trade-off: governments could accept a little more inflation to reduce unemployment, or accept a little more unemployment to reduce inflation.

Why does it seem to fail in India?

In India over the last decade, the simple Phillips Curve story has become less convincing. Inflation has often been driven by food shocks, fuel costs, climate events, imported inflation, and supply-chain disruptions, while unemployment has remained influenced by jobless growth, informality, skill mismatch, and weak labour absorption. In such a situation, prices can rise even when labour markets are weak. So the theory has not “completely died,” but its old, clean inverse relationship has clearly weakened.

2. Current Situation in India

Over the last 10–20 years, India has moved through several phases. The early 2010s were marked by high inflation. After inflation targeting and tighter macroeconomic management, inflation moderated for a few years. Then came the pandemic shock, followed by global supply disruptions and the Russia-Ukraine war, which pushed inflation back up. According to official and international series, India’s CPI inflation was about 6.62% in 2020, 5.13% in 2021, 6.70% in 2022, 5.65% in 2023, and 4.95% in 2024. The Economic Survey also noted that retail inflation averaged 6.7% in FY23 before moderating to 5.4% in FY24. Source Source

The labour-market picture is more complicated. Official overall unemployment has improved since the start of annual PLFS, falling from 6.1% in 2017-18 to 3.2% in 2023-24. But this improvement coexists with serious stress points: youth unemployment was still 10.2% in 2023-24; educated unemployment was 7.1%; and unemployment among graduates remained far higher than average. The problem, then, is not a simple rise in every unemployment number. It is the persistence of high youth and educated unemployment, weak job quality, and stagnant real wages even during inflationary periods. Source

The unusual and worrying part is that inflationary stress today is not being offset by a broad-based employment boom. In a classic Phillips Curve world, strong inflation might reflect overheating demand and strong hiring. But in India, inflation has often come from food and fuel shocks, while job creation has remained uneven and concentrated in informal or low-quality work. That is why the present situation feels more fragile than a normal business-cycle fluctuation.

3. Data and Evidence

A snapshot of the numbers

The data tell an important story. The headline unemployment rate has improved, but the economy still suffers from high youth unemployment, high graduate unemployment, a large informal sector, and weak real earnings. According to the India Employment Report 2024, real monthly earnings of regular salaried workers declined from about ₹12,100 in 2012 to ₹10,925 in 2022, while self-employed real earnings also fell after 2019. Casual workers saw only modest gains. This helps explain why many families feel poorer even when the economy grows. Source Source Source Source

4. Why Inflation and Unemployment Are Rising Together

Jobless growth

One major reason is jobless growth. India has achieved periods of respectable GDP growth without generating enough high-quality jobs. Growth has often come from capital-intensive sectors, formal corporate gains, or productivity improvements that do not absorb labour at scale. The result is that output can rise while employment quality lags behind.

Structural issues in the labour market

India’s labour market has a deep structural problem: a large share of workers are in agriculture, low-productivity services, petty self-employment, or informal activities. The India Employment Report notes that nearly 82% of workers are in the informal sector and nearly 90% are informally employed. In such an economy, a fall in headline unemployment may simply mean more people are taking whatever work they can find, not that the economy is creating strong jobs. Source

Automation, technology, and skill mismatch

Technology improves productivity, but it can also reduce labour absorption in manufacturing and routine services. At the same time, education and training have not kept pace with market demand. That is why educated unemployment is so high. The PLFS and parliamentary data show that graduate youth unemployment remains around one-fourth or more, depending on the definition used. This is not merely a shortage of jobs; it is a mismatch between qualifications and employability.

Cost-push inflation and global shocks

India’s recent inflation has been heavily shaped by cost-push pressures. The Economic Survey notes that food inflation rose from 3.8% in FY22 to 6.6% in FY23 and 7.5% in FY24, driven by extreme weather, lower reservoir levels, damaged crops, and supply-side disruptions. The pandemic and then the Russia-Ukraine war raised commodity and fuel prices. In this setting, prices rise not because consumers are too rich, but because supply is unstable and costly. Source

5. Failure of the Phillips Curve

The Phillips Curve has not entirely “failed,” but its simple version has clearly weakened. In modern economies, inflation depends not only on labour-market tightness but also on expectations, global commodity prices, exchange rates, supply shocks, and institutional rigidities. When inflation is driven by imported oil, poor harvests, logistics problems, or geopolitical conflict, it can rise even when unemployment is high.

This phenomenon is often described as stagflation—a mix of high inflation and weak employment or stagnant growth. The best-known historical example is the 1970s oil shock, when many advanced economies faced rising prices and rising unemployment together. More recent global episodes after COVID-19 also showed that supply shocks can break the old inflation-unemployment trade-off. India’s case is not a textbook stagflation every single year, but it shares key features: supply-led inflation, weak real wages, job insecurity, and stubborn educated unemployment.

Expectations also matter. If households and firms expect prices to keep rising, they change wage demands, saving behaviour, and pricing decisions. Economists call this adaptive or rational expectations, depending on how forward-looking people are. Once expectations become embedded, reducing inflation without hurting growth becomes harder. That is one reason central banks focus so strongly on credibility.

For developing economies like India, the Phillips Curve is even less reliable because labour markets are highly informal, food has a large weight in consumption, supply chains are uneven, and structural unemployment remains significant. In such conditions, the old curve becomes a weak guide unless it is adapted to local realities.

6. Impact on Economy and Society

The first impact is reduced purchasing power. When food inflation is high, households cut back on other spending. In India, food inflation remained particularly sticky in FY23 and FY24, affecting vegetables, pulses, and staples. This hurts the poor most, but it also squeezes the middle class.

The second impact is rising inequality. People with assets, pricing power, or secure formal jobs can absorb inflation better than workers in informal, low-paid, or unstable jobs. When real wages stagnate and the cost of essentials rises, the gap between secure and insecure households widens.

The third impact is lower consumption demand. If households spend a larger share of income on food and fuel, they postpone purchases of appliances, education upgrades, health care, transport, and housing improvements. This weakens broader demand and can itself slow the economy. So inflation and weak employment together can create a vicious cycle: high prices reduce demand, weak demand reduces hiring, and weak hiring reinforces insecurity.

7. Real Examples from Everyday India

The most visible example is the family budget. A household may not buy more food than before, yet its monthly grocery bill keeps rising because vegetables, pulses, spices, edible oil, and transport costs become volatile. Even when fuel inflation softens temporarily, accumulated price increases in daily life remain. This is why many people say, “salary same hai, kharcha zyada ho gaya,” even if official inflation has moderated from its peak.

Another example is the educated job seeker. A graduate or postgraduate may spend years preparing for competitive exams or searching for a stable job, only to end up in low-paying gig work, coaching, unpaid family work, or long spells of waiting. Official data show that graduate youth unemployment remains very high, and female graduate unemployment is even worse. That is one of the clearest signs of structural weakness in the economy.

For the middle class, the result is pressure from both sides: stagnant real incomes and rising costs. This produces anxiety, delayed marriages, postponed home purchases, lower discretionary spending, and growing dissatisfaction with the quality of economic opportunity.

8. Government Policies and Their Effectiveness

The Reserve Bank of India has relied on inflation targeting and repo-rate increases to contain price pressures. The policy framework aims to keep inflation within the 2–6% range, with 4% as the medium-term target. The Economic Survey notes that the RBI raised the repo rate by 250 basis points between May 2022 and February 2023, helping bring down core inflation. Retail inflation declined from 6.7% in FY23 to 5.4% in FY24, which shows that monetary tightening and administrative measures did have an effect. Source

But monetary policy cannot solve structural unemployment. Higher interest rates can reduce demand-side inflation, but they cannot create high-quality jobs by themselves. That requires labour-intensive growth, stronger manufacturing, better logistics, education reform, MSME support, and more effective industrial policy.

On the fiscal side, schemes such as MGNREGA, food subsidies, fuel-tax adjustments, and welfare transfers help cushion distress. They are useful as social protection, especially during rural or demand stress. Employment and employability programmes such as Skill India, apprenticeship efforts, and employment-linked incentive schemes show that the government recognizes the jobs problem. But the deeper issue is that skilling without sufficient labour demand has limited effect. Training cannot substitute for a broad-based job-creation engine.

Similarly, programmes like Make in India have had mixed results. They improved the policy conversation around manufacturing, but India still has not generated manufacturing employment at the scale needed to absorb its young workforce. The gap between aspiration and labour absorption remains wide.

9. Possible Solutions

India needs a solution that addresses both inflation and employment together rather than treating them as separate problems.

Create more labour-intensive jobs

Manufacturing, construction, logistics, tourism, food processing, green energy, and MSMEs should be at the centre of job strategy. India does not only need more growth; it needs employment-rich growth. That means helping firms that can hire at scale, not just sectors that raise output with little labour.

Reform skills and education

The education system must become more employment-oriented. More vocational training, apprenticeships, digital skills, practical industry exposure, and better alignment between curriculum and labour demand are essential. Graduate unemployment is too high to ignore.

Control inflation through supply-side measures

India cannot fight food inflation only with interest rates. It also needs better storage, cold chains, transport, crop diversification, irrigation, edible-oil strategy, and faster responses to shortages in pulses, onions, and vegetables. The Economic Survey explicitly recommends expanding pulses and oilseeds cultivation and improving storage and processing systems.

Strengthen labour-market policies

Better labour-market data, urban employment support, stronger minimum-wage enforcement, easier formalization for small firms, and social security for informal workers would improve job quality. If real wage erosion continues, even low inflation will not restore confidence.

Balance macro policy

India needs balanced macroeconomic policy: credible inflation control, but also public investment, targeted industrial strategy, and reforms that improve labour absorption. In other words, the inflation problem and the employment problem must be addressed together.

10. Conclusion

The Indian debate on inflation and unemployment should move beyond slogans. The real issue is not whether every official unemployment number has risen continuously; it has not. The real issue is that high inflation episodes are occurring in an economy where youth unemployment, graduate unemployment, informality, and weak real wages remain stubbornly serious. That is why many households feel trapped.

So, has the Phillips Curve failed in India? The best answer is: its simple textbook version is no longer enough. Inflation in India today is often driven by supply shocks, global pressures, and food volatility, while unemployment is shaped by structural weaknesses, jobless growth, and labour-market mismatch. Traditional theory still offers insight, but modern India needs a more realistic framework—one that takes informality, expectations, supply bottlenecks, climate shocks, and unequal job creation seriously.

The final lesson is simple: a country cannot feel economically secure if prices rise faster than comfort and jobs grow slower than hope. India needs structural reform, not just cyclical management. Without that, the paradox of costly living and insecure work will remain one of the defining economic frustrations of our time.

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