Regulation and employment: assessing wage elasticity in Indian manufacturing

ABSTRACT

Is wage ‘flexibility’ a prerequisite to raise employment, and if so, can wage reduction actually bring a sizable increase in employment? These are the two important and related questions that this paper deals with. Based on the panel data (time-series, cross-section-pooled) across various groups of industries over the time period, 2008–2009 to 2011–2012, the paper estimates for the organized/formal manufacturing sector in India the relationship between wage and employment, and the correspondence between income share of labour and growth in employment. The statistically weak relationship between wage and employment, estimated econometrically in terms of wage elasticity of employment, may be taken to suggest that deregulation perceived through wage flexibility cannot raise employment. In addition, the wage share of workers in gross value added has already attained a low magnitude, along with its skewed distribution towards the low end. Hence, the argument for introducing flexibility in wage and hiring and firing practices to facilitate labour cost adjustments and raise employment does not seem be an effective policy option. Rather, other initiatives related to skill formation and infrastructural investment, encouraging industrial expansion, need to be pursued.

KEYWORDS:

• Deregulation
• employment
• growth
• labour
• wages

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Page 56, Chapter-5 on, ‘Falling labour shares and equitable growth’, http://www.ilo.org/wcmsp5/groups/public/@dgreports/@dcomm/@publ/documents/publication/wcms_194843.pdf

2. http://labour.nic.in/upload/uploadfiles/files/latest_update/what_new/53a03358f4233publicdomaininformation0001.pdf

3. Rangarajan (EPW: June, 2014) estimated creation of around 11 million jobs between 2009–2010 and 2011–2012 in the economy.

4. The total employment estimates for manufacturing include organised and unorganised, and based on NSSO survey, while estimates of the total person engaged are based on Annual Survey of Industries. These figures are not strictly comparable as there are definitional differences.

5. Some of these are: ‘extraction of salt’, ‘processing and preserving of meat’, ‘processing and preserving of fruit and vegetables’, ‘dairy products’, ‘bakery products’, ‘macaroni, noodles, couscous, and similar farinaceous products’, ‘bakery products’, ‘prepared animal feeds’, ‘made-up textile articles, except apparel’, ‘luggage, handbags, and the like, saddlery and harness’, ‘wooden containers’, ‘other products of wood; manufacture of articles of cork, straw, and plaiting materials’, ‘printing’, ‘pharmaceuticals, medicinal chemical, and botanical products’, ‘other porcelain and ceramic products’, ‘tanks, reservoirs, and containers of metal’, ‘weapons and ammunition’, ‘other fabricated metal products n.e.c.’, ‘irradiation, electro medical, and electrotherapeutic equipment’, ‘electric motors, generators, transformers and electricity distribution, and control apparatus’, ‘fibre optic cables for data transmission or live transmission of images’, ‘domestic appliances’, ‘other electrical equipment’, ‘lifting and handling equipment’, ‘office machinery and equipment’, ‘metal-forming machinery and machine tools’, ‘bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers’, ‘parts and accessories for motor vehicles’, ‘railway locomotives and rolling stock’, ‘musical instruments’, ‘sports goods’, ‘repair of fabricated metal products’, ‘repair of electronic and optical equipment’, ‘repair of other equipment’, ‘collection of hazardous waste’, ‘treatment and disposal of non-hazardous waste’, ‘treatment and disposal of hazardous waste’, and ‘book publishing’.

6. These industries are ‘extraction of salt’, ‘processing and preserving of meat’, ‘processing and preserving of fruit and vegetables’, ‘dairy products’, ‘cocoa, chocolate and sugar confectionery’, ‘macaroni, noodles, couscous, and similar farinaceous products’, ‘bakery products’, ‘prepared animal feeds’, ‘made-up textile articles, except apparel’, ‘luggage, handbags, and the like, saddlery and harness’, ‘wooden containers’, ‘other products of wood; manufacture of articles of cork, straw, and plaiting materials’, ‘printing’, ‘other rubber products’, ‘manufacture of pharmaceuticals, medicinal chemical, and botanical products’, ‘manufacture of other porcelain and ceramic products’, ‘tanks, reservoirs, and containers of metal’, ‘weapons and ammunition’, ‘other fabricated metal products n.e.c.’, ‘irradiation, electromedical, and electrotherapeutic equipment’, ‘electric motors, generators, transformers, and electricity distribution and control apparatus’, ‘fibre optic cables for data transmission or live transmission of images’, ‘Electric lighting equipment’, ‘other electrical equipment’, ‘other pumps, compressors, taps, and valves’, ‘lifting and handling equipment’, ‘office machinery and equipment’, ‘power-driven hand tools’, ‘metal-forming machinery and machine tools’, ‘machinery for mining, quarrying, and construction’, ‘bodies (coachwork) for motor vehicles; trailers and semi-trailers’, ‘parts and accessories for motor vehicles’, ‘railway locomotives and rolling stock’, ‘motorcycles’, ‘musical instruments’, ‘sports goods’, ‘repair of fabricated metal products’, ‘repair of transport equipment, except motor vehicles’, ‘repair of other equipment’, ‘collection of hazardous waste’, ‘treatment and disposal of non-hazardous waste’, ‘treatment and disposal of hazardous waste’, ‘materials recovery’, and ‘book publishing’.

7. Paper on ‘Growth, Productivity Increase and Changes in Labour Income Share in India’s Organized Manufacturing’ presented in a Seminar 2014, organized by Institute of Economic Growth in collaboration with Friedrich-Ebert-Stiftung Venue: VKRV Rao Room, Institute of Economic Growth, Delhi University Enclave, Delhi-110007.

Additional information

Notes on contributors

Jitender Singh

Jitender Singh is Ph.D. scholar in Jawaharlal Nehru University, New Delhi. He is 2008 batch Indian Economic Service officer, working as Deputy Director in Ministry of Finance, Government of India, New Delhi.

Arup Mitra

Arup Mitra is Professor at Institute of Economic Growth, Delhi. His specialization includes labour and welfare, urban development, industrial growth and productivity, services sector, development economics and gender inequality, areas in which he has more than hundred publications in various academic journals and edited volumes. Some of his recent books are on inclusive growth (Springer, 2013), industry-led growth (Springer, 2015) and on corruption (co-authored; Cambridge, 2016).