Labour Use and its Adjustment in Indian Manufacturing Industries

Abstract

This study provides an empirical investigation of the adjustment process of labour in Indian manufacturing industries, which evolved through structural transformation in the era of globalization. The analysis is based on a dynamic model applied to a panel of 22 two-digit manufacturing industries for the time period of 22 years covering 1980/1981 to 2001/2002. It is assumed that as competition increases industries adjust their employment to a desired level which is both industry and time specific. The results indicate that the manufacturing sector has shown a considerable dynamism in adjusting its workforce. The long-run labour demand responds greatest to the output, followed by capital and least by wages. It is observed that Indian manufacturing is not inefficient in labour use as modest speed of adjustment has led employment size closer to the optimal level.

Keywords:

• Labour use
• employment
• adjustment
• globalization
• manufacturing
• India

The first author is grateful to Dr Byasdeb Dasgupta for his valuable comments and also acknowledges the research project ‘‘Political Economy of Labour in the Globalized Economy’’, funded by ‘‘Indo-Dutch programme for Alternative Development’’ for furnishing available data.

Notes

1. For optimistic view of the impact of structural reform on employment see Joshi and Little (1998) and Goldar (2000) and for a pessimistic view see Bhattacharya and Mitra (1993) and Nagaraj (1994) For the effects of reforms on employment elasticity and the process of labour adjustment in organised manufacturing, see Mazumdar and Sarkar (2004) and Seth and Aggarwal (2004).

2. It is believed that flexible labour market creates more employment (Tella & MacCulloch, 2003).

3. For detailed discussion see Elger (1987), Morginson (1991) and Rifkin and Heilbroner (1995).

4. Important contribution on dynamic adjustment of labour has been made by Kumbhakar et al. (2002), Judson and Owen (1999), Bhalotra (1998), Baltagi and Griffin (1997), Hamermesh (1993), and Arrelano and Bond (1991).

5. The pre and post comparison is the crudest method of assessing the impact of any changes. It is preferred because it is simpler than other alternatives.

6. The inverted factor demand is derived from a production function where the dependent variable output is a function of production factor inputs including capital, labour, intermediate input (material and energy), as well technology.

7. Globalization can have different dimensions such as: economic, personal, technology, political, environmental and financial market. In several recent studies the economic globalization is proxied by foreign direct investment (FDI), openness and capital flows (Mahler, 2001; Bhagwati, 2000). James (2002) analysed the causes of globalization in terms of transaction costs and focuses on information and communication technology (ICT), technical change and FDI deriving globalization. Heshmati (2003) computes a multidimensional index of globalization and analyses the impacts of globalization on income inequality across countries. The concern of Milanovic (2002) is on the effects of openness on income distribution, and those of Sen (2002) and Ravallion (2003) on deprivation and rising disparity in the standards of living.

8. One Rupees was 0.022 US$ in April 2004.

9. In order to conserve space, the results for restricted and rejected models are not reported here. However, these can be obtained from the authors upon request.

10. For detailed discussion see Bhattacherjee (2004).