Employment Elasticity in Organized Manufacturing in India

Abstract

This paper unravels a cyclical pattern in the value of employment elasticity in organized manufacturing in India over the period 1976-2002. Four periods are distinguished: the ‘benign’ growth period of the late seventies; the period of ‘jobless growth’ of the first half of the eighties; the ‘reform period extending from the mid-eighties to the mid-nineties; and finally the post-reform period. The paper uses an integrated framework which quantifies the relative importance of the key factors determining of employment elasticity and its variations over the four periods. These are: (i) the relative movement of the indices of producer prices and consumer prices (sometimes called the DRER, the domestic real exchange rate); (ii) the share of wages in value added or alternatively by the parameter α used in this paper (defined as the elasticity of wages with respect to value added); and (iii) the trade-off between employment growth and wage growth. Section III provides an analysis of some key disaggregated groups within the sector. While the secular decline in the DRER rate is found to be important, two labor market variables (ii) and (iii) are instrumental in explaining the cyclical pattern.