EMPLOYMENT, WAGE AND OUTPUT RELATIONSHIPS IN INDIA: A COMPARISON OF PRE AND POST REFORM BEHAVIOUR

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1 The Indian Journal of Labour Economics, Vol. 48, No. 2, 2005 EMPLOYMENT, WAGE AND OUTPUT RELATIONSHIPS IN INDIA: A COMPARISON OF PRE AND POST REFORM BEHAVIOUR B.B. Bhattacharya and S. Sakthivel* This paper examines the relationship between employment, wage and output in India in the pre and post reform years, using an employment demand function at one-digit industry level and across states. This exercise using NSS data on employment and real wage (current daily status criterion) and output (GSDP) suggests that despite many institutional bottlenecks, the basic labour function postulated in economic literature is still valid for India. the employment elasticity with respect to output is positive and with respect to real wage negative. The magnitude and significance of elasticities, however, vary across industries and also in different rounds of NSS. It appears that but for the rise in the real wage, the employment growth rate could have been higher in the post reform period. The wage sensitivity, however, does not imply a reduction in real wage can necessarily lead to high employment. Wage rate in the informal sector is abysmally low. Any further reduction in it may not be sustainable because it will directly increase the incidence of poverty, especially in the rural areas, and may even lower the productivity of the labour. Further, the lack of capital and also appropriate technology would continue to be the major obstacles in employment generation even at a lower wage rate. The evidence presented in this paper would therefore have to be interpreted with caution. However, there is no significant change in the behaviour of employment after reforms. I. INTRODUCTION The process of workforce restructuring in India has been initiated as part of liberalisation policies since the early 1990s. The neo-liberal regime is pushing for correcting the distortion in the inflexible Indian labour market. The implication of any restructuring of the labour market has wide ramifications on growth of employment, real wage rates, labour productivity and effective demand. Workforce restructuring involves shifting out labour from inefficient to efficient work brought in by real wage differentials. However, in a labour-surplus developing economy, such a mechanism may not hold, primarily due to the fact that labour supply is elastic at any given point of wage rate. As employment growth declined drastically in the 1990s, it would be of interest to ascertain whether wage rate had caused the fall in employment, as argued by the neo-classicals, or there was no association between them. It is now an established fact that the growth rate of the economy in the nineties is only a continuation of the eighties. However, the story of dismal employment growth in the 1990s is now a well-accepted phenomenon. It is in the context of dismal scenario on employment creation and expansion that the Government of India, through the Planning Commission, had * Vice-Chancellor, Jawaharlal Nehru University, New Delhi ( and Research Associate, Institute of Economic Growth, Delhi ( respectively.

2 244 THE INDIAN JOURNAL OF LABOUR ECONOMICS constituted several committees/working groups within a span of five years to study the emerging trends in employment and provide policy guidance to solve this problem. Unfortunately, GoI (2001) and GoI (2002) came up with diverse policy conclusions based on different employment figures. The former had put the growth rate of employment at 0.98 per cent between and while in the latter it was estimated at 1.07 per cent. Agriculture bore the brunt of the decline in employment growth. Most of industries also witnessed such deceleration. Given these developments, it would be interesting to examine the wage rate, in the backdrop of a moderate economic growth but a declining employment growth. Does moderate growth of the economy affect employment behaviour in the nineties? What has been the impact of wage rate on the employment scenario? This study essentially aims to understand the emerging relationship between employment, wage and output of the economy in the 1980s and 1990s. Following this introduction, this paper is organised as follows. Section 2 would dissect briefly the past literature bringing out the relationship between employment, output and wage. The methodology that would be followed in this paper is contained in Section 3. Section 4 provides estimate of industry-level growth rate of employment followed by an analysis of industry-level wage growth in the eighties and nineties across all major Indian states. Then, the overall industry-level output growth rate in states is examined. An examination of the relationship between employment, wage and output would be dealt in Section 5. Section 6, finally, summarises and concludes the study. II. REVIEW OF PAST STUDIES A plethora of studies on the impact of structural adjustment programme on employment and output have been carried out in the Indian context in recent years. Shariff and Gumber (1999) explore the impact of structural adjustment programme on employment, wage and labour productivity by examining their association. They use NSS quinquinnial data on employment involving the years to , although this period has been hardly useful in analysing the relationship since the overall impact of the structural adjustment programme could be captured only after that period. They observe that during the post-reform years (they consider that is, between 43rd and 50th round of NSS), structural reforms appear to have benefited the urban workforce while on the other hand, its impact in rural areas is limited only to those males who are highly educated. But as far as real wage/earnings are concerned, their study observes that it rose sharply in rural areas than in urban while gender difference in wage appears to be widening, particularly in the rural areas. Bhattacharya and Mitra (1993, 1994) while analysing organised private industry in India, find that employment elasticity to output is low due to several reasons. It could be due to relatively high wage rate, low productivity of labour, shift in relative factor price in favour of capital, and labour market distortions caused by both government regulations and private institutions (see Bhattacharya and Mitra, 1994). They further observe that although it is usually argued that the sharp rise in the relative price of labour during the eighties resulted in a decline in employment, yet their results indicate that employment has been relatively less responsive to real wage in the eighties. According to their results, the elasticity of employment with respect to real wage rate in the eighties declined marginally from 0.09 for the seventies to 0.08 in the eighties. Therefore they suggest that rising real wage rate may not be the sole reason for the decline in employment growth rate while the real reason could be technological and institutional changes.

3 EMPLOYMENT, WAGE AND OUTPUT RELATIONSHIPS IN INDIA 245 Using an error correction model for a long-time period and fitting an employment equation for Australia involving quarterly data for the period, , Dixon (2003) finds that the elasticity of employment with respect to non-farm GDP turns out to be little over unity at 1.07, while employment elasticity to real wage is reported to be Dixon (ibid.) quoting Russell and Tease (1991) and Phipps and Sheen (1995) observes that Russell and Tease (1991) found long-run elasticity of employment with respect to output at 0.75 whereas with respect to wage, the elasticity estimate was On the other hand, although the elasticity estimate to output is almost close to that of Russell and Tease (1991), yet with respect to real wage, Phipps and Sheen s (1995) estimate suggests it to be high, at Saget (2001) finds minimum wage level having an insignificant impact on the employment level in Latin America. Apart from wage level (ratio of minimum to average wages which measures relative price of unskilled labour), Saget also included in the regression the following independent regressors, such as, changes in the terms of trade, GDP growth and changes in educational levels. Her paper further concludes that poverty alleviation programme may yield positive spin-offs from having a minimum wage policy. Earlier, Fields (1994) argued that the impact of minimum wage on unemployment effectively depends on three factors: the elasticity of demand for labour in the covered sector, the elasticity of wage in the non-covered sector and the size of the minimum wage rise. These factors ensure that the overall effect is ambiguous (cited in Saget, 2001, p.239). III. METHODOLOGY This study uses industry level data on employment and wage extracted from unit level records of NSS involving four rounds, namely 38th Round (1983), 43rd Round ( ), 50th Round ( ) and 55th Round ( ). This is based on Current Daily Status (CDS) criteria. We have carried out this exercise involving 17 major Indian states and across one-digit industry level. However, we have grouped the following three one-digit industries under the category of service sector. These are namely, (i) wholesale, retail trade, hotels and restaurant; (ii) transport, communication and storage; and (iii) finance, insurance and real estate. The data set for nominal wage earnings are extracted from the same four rounds of NSS. The nominal wages (wages include both in kind and in cash) thus obtained from the unit level record data relate to weekly wages, which was then converted into daily wages by dividing weekly wage earnings by the number of days employed. It must be noted that real wage relating to service sector is an employment-weighted average of wages of all three sub-sectors of service industries. Later, the nominal wage earnings obtained from the unit level record data is transformed into real wages by appropriate sectoral GSDP deflators (or product wage deflators). Normally, nominal wage is converted into real wage by appropriate consumer price index. However, this is applicable only if we are interested in supply-side aspect of labourers. But in this paper, our concern is to estimate demand for labour from the employers side and hence it is appropriate to use sectoral GSDP deflators. Sectoral GSDP deflators are worked out using current and constant GSDP at base. This is obtained at one-digit sectoral level for all major states. As far as output data is concerned, we have considered Gross State Domestic Product (GSDP) of 17 major Indian states relating to four time periods, viz., , , and Although the Central Statistical Organisation (CSO) has released Gross State Domestic Product (GSDP) data for all the Indian states based on prices, the GSDP series based on prices with sectoral breakdown are available only from

4 246 THE INDIAN JOURNAL OF LABOUR ECONOMICS onwards. The same for the earlier years are available at prices. The revision incorporates not only price changes but also quantum changes corresponding to the UN System of National Accounts (1993). In order to derive a consistent time-series for the pre and post reform period, we have extended backwards the GSDP series through appropriate price and quantum factor corrections. The price and quantum correction factors are computed separately for each state and each sector. The detailed methodology and the limitations of using state-level GSDP data were presented in Bhattacharya and Sakthivel (2003). IV. INDUSTRY LEVEL EMPLOYMENT AND WAGE GROWTH 1. One-digit Industry-wise Employment Growth Rate We next move on to examine employment growth in the last two decades across different industries. Here, we confine our analysis only to Current Daily Status (CDS) concept of employment relating to pre and post reform growth rate across major states in India. CDS is a better measure of employment than UPSS and CWS, as it factors in seasonality of employment, a typical characteristic of a developing country agricultural economy. Trends in employment growth rate as displayed in Table 1 emanating from one-digit industry-level bring out certain clear patterns of growth. The story of sharp slump in employment generation in agriculture and allied activities is unmistakably evident across most of the major Indian states. From a robust agricultural growth rate of 2.59 per cent registered at the all-india level during 1983 to (pre reform phase), the same fell drastically to 0.01 per cent during to (post reform years), signifying a virtually zero growth rate. The period between 43rd round ( ) and 50th round ( ) witnessed the highest growth of 3.13 per cent. Such a high growth is due to low base during , a year of severe drought. However, it is disturbing to note that even during the drought year, employment growth did not slacken sharply unlike the post reform years. The story turns even bleak if one were to examine employment growth rate of agriculture across states. A moderate to high growth rate of two to four per cent marked agricultural growth in the pre-liberalisation phase involving 43rd and 50th rounds. During the earlier rounds-involving 38th (1983) and 43rd ( ) rounds-many agricultural-dominated states like Punjab, Rajasthan, Madhya Pradesh, etc. recorded either negative or less than 1 per cent growth in employment, owing to severe drought witnessed during Agricultural sector in the post-reform scenario, however, has reversed and many of the states have either fallen into negative territory or have recorded less than 1 per cent growth rate. Apart from Goa which can be ignored for its relatively insignificant contribution of agriculture to aggregate employment, the other major states which had registered negative employment growth in agriculture were Andhra Pradesh, Assam, Himachal Pradesh, Kerala, Maharastra, Rajasthan, Tamil Nadu, Uttar Pradesh and West Bengal. Only three states could achieve a growth rate of over 1 per cent Bihar, Gujarat and Haryana. It may be noted that agricultural and allied activities still constitute over 60 per cent of employment in many of these major states. As far as mining and quarrying is concerned, there is a clear pattern in the growth of employment. The robust growth of 6 per cent was witnessed at all-india level during the eighties (between 38th and 43rd rounds), but employment growth declined sharply to 1.22 per cent between and and further it went down to register negative growth of 0.72 per cent in the post reform years. Although this pattern of employment growth is visible among

5 EMPLOYMENT, WAGE AND OUTPUT RELATIONSHIPS IN INDIA 247 Table 1 Employment Growth Rate across Industries (Comparison of Pre and Post Reform Periods) (In per cent) Min & Manu- Ele., gas Cons- Com, soc, Sector Agriculture quarrying facturing & water truction Services per. ser. Aggregate / / / / / / / /94 State to to to to to to to to to to to to to to to to 93/94 99/00 93/94 99/00 93/94 99/00 93/94 99/00 93/94 99/00 93/94 99/00 93/94 99/00 93/94 99/00 A.P Assam Bihar Goa Gujarat Haryana H.P Karnataka Kerala M.P Maharastra Orissa Punjab Rajasthan T.N U.P W.B All-India many major states, there are equally many states, which show higher degree of fluctuations in employment growth. It is possible that since in many states, mining and quarrying occupies an insignificant share, even a small change could make phenomenal difference in growth rates. This is evident in the case of states like Punjab, Maharastra, etc., where the share of this particular sector accounts for roughly 0.2 per cent in employment. Consequently, if we consider Punjab, a negative growth of during to has turned into positive growth with an incredible growth rate of during to Manufacturing (registered and unregistered) which accounts for around 11 per cent in total employment at all-india has shown moderate improvement in its growth rate in the post reform period. Against a growth rate of robust 4 per cent registered during 1983 to , it declined sharply to a mere 0.40 per cent between and Recovering smartly, employment growth in manufacturing sector rose up to 2.53 during to Broadly, growth in manufacturing employment followed the pattern of growth in manufacturing output, wherein the period between to witnessed output growth lesser than the early 1980s and late 1990s, although employment growth recorded sharp decline. Except West Bengal, which showed negative growth, and Andhra Pradesh along with Gujarat that had recorded less than 1 per cent growth during post-reform period, all other states had witnessed significant growth rate. Haryana, Assam and Bihar were the top ones in that order in terms of high employment growth in manufacturing in the post reform period with 6 to 7 per cent growth. Among the industrially advanced states, only Maharastra s growth rate had shown notable increase from 1.02 to 4.25 in the pre and post-liberalisation phase respectively. The other industrially advanced states like Gujarat, and Tamil Nadu had recorded relatively lower employment growth during to as compared to the earlier phase.

6 248 THE INDIAN JOURNAL OF LABOUR ECONOMICS Employment performance of public utilities like electricity, gas and water supply in the post-liberalisation years has however slipped into the negative territory. From a growth rate of around 1.25 during 1983 to , this sector had witnessed its growth rate tumbling down to in post reform phase. In fact the share of this sector in employment is quite insignificant and declining over the years, from 0.43 to 0.32 per cent. The sharp decline in employment growth could be the direct result of reform measures carried out in this sector. The unbundling of state electricity boards, reduction or freeze in recruitment has been responsible for low growth in employment. The sharp decline in employment growth is also reflected across states. States such as Andhra Pradesh, Delhi, Goa, Karnataka, Madhya Pradesh, Orissa, Rajasthan and Uttar Pradesh had registered negative employment rate during to Construction, which accounts for 3 to 4 per cent of employment share, has however shown high employment growth in the post reform years relative to pre-liberalisation years. Even during the pre-reform period, construction had been one of the high growth sectors. The all- India employment growth in construction, which stood at around 4 per cent in 1983 to , moved to 5.72 during the post-reform period. Many major Indian states have also recorded high growth rate in the range of 6 to 7 per cent. But a few exceptions remain. Surprisingly, Assam and Orissa appear to have recorded an exceptionally high growth rate of around 16 and 12 respectively during the post reform years. It is to be noted that these two states are almost on the lower end of the states growth but it is puzzling to note their construction activity on the upswing phenomenally. Service sector is the vital growth engine during the nineties. Reflecting its dynamic growth in output, employment figures also vindicate its high growth. In terms of output growth, service sector has been consistently growing in the range of 7-9 per cent during the last two decades. If we eliminate community, social and personal activities from services, all other sub-sectors in services had witnessed extremely fabulous employment growth rate. Compared to around three and half per cent growth in employment in the service sector during the pre-liberalisation phase, the employment growth doubled to over six and half per cent during post reform years. Service sector employment growth engine in the nineties is primarily driven by wholesale, retail trade, hotels and restaurants. Except Andhra Pradesh, Bihar, Himachal Pradesh, and Orissa all other states had improved their growth performance on employment front in this sector during the post reform years. Industrially developed states in India appear to have registered high workforce growth in this sector. Gujarat, Karnataka and Tamil Nadu have registered over 9 per cent growth rate during the post-liberalisation phase. Public administration, the arm of any government, centre and states, comprises essentially community, social and personal services. How did this service sector perform in terms of job creation in the nineties? Direct fallout of the structural adjustment carried in India and in states is palpable in employment front. Large-scale retrenchment, privatisation of public enterprises and public utilities and exit policies followed by both central and state governments in the nineties has a direct bearing on employment front. The eighties, which witnessed a fairly robust employment expansion of over three per cent, witnessed a sharp decline, to a negative growth of around four per cent in the post-reform period. The declining trend is visibly present across all states, except Assam. Notwithstanding the falling share of public administration in the nineties (it accounts for around 8 to 9 per cent of employment share), the sharp fall in growth rate along with falling share is a cause for serious concern and cannot be brushed away.

7 EMPLOYMENT, WAGE AND OUTPUT RELATIONSHIPS IN INDIA Industry-wise Growth of Real Wage Earnings Wage is a vital element in the determination of employment. Although wage rate and employment are inversely related, rise in wage growth is a necessity in a developing economy. This would help in enhancing effective demand, which is expected to push up output and employment. We observed all-round decline in employment growth in the nineties as against a robust employment growth in the 1980s. It is in this context that it would be worth assessing wage growth during the same period. It is clear from Table 2 that the growth in wage earnings has been quite high across all industries in the pre-reform years vis-à-vis post-liberalisation period. At all-india level, real wage growth registered 3 per cent rise during to as against a phenomenal 15 per cent during the years 1983 to Growth in real wage rate between 38th and 50th rounds of NSS has been above 10 per cent in all the service industries, such as, wholesale, retail and restaurants; transport, storage and communication; finance, insurance and banking and community, social and personal services. However, growth in wage rate has been well below 4 per cent in all these industries during the post reform years. Ironically, growth in agricultural wage, which was one of the highest during pre-reform period, has slumped to less than 1 per cent in the latter period. Notably, employment growth in the farm sector during the former period was quite high as compared to almost zero growth in employment in this sector in the latter phase. As far as states are concerned, wage growth is observed to have recorded handsome acceleration in most of the states during the preliberalisation period. On the other hand, in the post-reform period, the scenario witnessed a reversal wherein many states had recorded negative wage growth. It is a matter of concern to Table 2 Real Wage Growth Rate across Industries (Comparison of Pre and Post Rreform Periods) (In per cent) Min & Manu- Ele., gas Cons- Com, soc, Sector Agriculture quarrying facturing & water truction Services per. ser. Aggregate / / / / / / / /94 State to to to to to to to to to to to to to to to to 93/94 99/00 93/94 99/00 93/94 99/00 93/94 99/00 93/94 99/00 93/94 99/00 93/94 99/00 93/94 99/00 A.P Assam Bihar Goa Gujarat Haryana H.P Karnataka Kerala M.P Maharastra Orissa Punjab Rajasthan T.N U.P W.B All-India

8 250 THE INDIAN JOURNAL OF LABOUR ECONOMICS note that during post reform years, both employment growth and wage growth in the agricultural sector had taken a severe beating. In addition, there is a mild deceleration in output growth of agriculture as well. Such large-scale dampening in this sector is already visible with many lives lost in suicides, particularly in states such as Andhra Pradesh, Karnataka and Maharashtra. Unless employment guarantee programme is taken up seriously and extensively with assured minimum wage, any policy tinkering here and there is not going to yield any dividend. Manufacturing sector also witnessed similar trend wherein wage growth has been quite robust at around 12 per cent in the pre reform years while in the post-liberalisation period, the same had decelerated to less than 8 per cent. Mirroring this trend, wage growth in many states in the pre reform years was quite impressive of over 12 per cent while on the other, in the postreform period, states like Assam, Orissa and Uttar Pradesh recorded less than 3 per cent wage growth during to Growth in wage rate in the construction sector had declined from 4.44 to 0.77 per cent during the period under consideration. Similar scenario is evident in mining and quarrying while wage growth in electricity, water supply and gas remained at over 8 per cent during both the periods under consideration. It is evident from Table 2 that significant real wage growth was witnessed among all major Indian states under consideration during the pre-liberalisation phase in the service sector. Wage growth was more pronounced in wholesale, retail, hotels and restaurants during 1983 to , while in the latter period, many states had not only witnessed growth rate slumping but some of them even registered negative wage growth. In community, social and personal services, which is predominantly a public sector industry, wage growth has been positive and more or less similar across states in the post reform years. V. RELATIONSHIP BETWEEN EMPLOYMENT, WAGE AND OUTPUT Neo-classical economics posits a negative relationship between employment and wage. Wage plays an equilibrating mechanism to bring employment to equilibrium. However, in a labour-surplus developing economy, such a mechanism may not hold, primarily due to the fact that labour supply is elastic at any given point of wage rate. As employment growth declined drastically in the 1990s, it would be of interest to ascertain whether wage rate had caused the fall in employment, as argued by the neo-classicals, or there was no association between them. We have probed the association between employment, wage and output using four rounds of NSS, viz., 38th round (1983), 43rd round ( ), 50th round ( ) and 55th round ( ) across one-digit industry level. The relationship is estimated by regressing wage and output on employment. The relationship between employment, wage and output can be examined through either a labour demand or labour supply function. In a labour surplus economy like India, supply of labour is not a problem. And we have also examined the low growth of employment vis-à-vis output. In this paper, therefore, we examine this from the point of view of demand for labour. We postulate a basic labour demand function as follows: L = f (O, W) where, L refers to labour; O to Output and W to Wage. In reality, however, employment depends not merely on output and wage rate. A host of other factors-socio-economic factors and labour laws determine the actual employment

9 EMPLOYMENT, WAGE AND OUTPUT RELATIONSHIPS IN INDIA 251 behaviour. But in this study, we confine ourselves to output and wage effects on employment, as employment in India is basically determined by output and wage. We estimate this function in log-linear form for each of the four NSS rounds and across industries in 17 major states. The equations are estimated by ordinary least squares using panel data. In some cases, notably mining and quarrying we have observed the problem of heteroscedasticity. Similar problems were also observed in agriculture and manufacturing in the quinquinnial round of However, there are no problems of heteroscedasticity in other equations. The elasticity obtained from the result relates to only partial elasticity, the proportionate change in employment corresponding to proportionate change either to wage or output. This should not be compared to simple elasticity obtained by dividing the employment growth rate by output growth rate, as reported in Bhattacharya and Sakthivel (2003). We estimate the relationships by ordinary least squares method for each industry (seven industries and all-industry) separately. The estimated equation is as follows : E = α+ βo - γw + U Tables 3a and 3b provide only the elasticities while we report the entire estimated equation results for four periods, namely, 1983, , and in the Appendix Tables A1 to A4. Results from the estimated association reveal that employment responded inversely to change in wage rate, as employment elasticity of wage turned out to be negative in most of the industries and across all four rounds. Mining and quarrying alone deviated from the general trend, which turned out to be positive during pre-liberalisation rounds under consideration. The other exception was electricity, gas and water supply which showed positive association during It appears that since these industries are essentially government sectors, for instance, a rise in wage rate does not seem to have any adverse impact on the employment front and vice versa. Overall, all-industry elasticity suggests that with a 100 per cent rise in wage rate, employers responded by reducing employment by per cent during the pre-liberalisation phase. The pattern appears to have intensified in the post-reform period with a sharp reduction in the workforce by per cent for a given 100 per cent wage increase. In fact, the farm sector appears to have responded in a significant magnitude to this trend wherein during the pre-liberalisation era, employment decline was quite low at around 25 per cent while in the post reform period, the reduction in farm employment has been to the extent of over 135 per cent for every 100 per cent rise in real wage. Table 3a Elasticity of Employment to Wage Elasticity of employment to wage Industry Agriculture & allied industries ** -1.36* -1.35* Mining & quarrying Manufacturing -1.18* Electricity, gas & water supply ** ** Construction -1.17* -0.26*** * Service sector * Social, com. & personal serv * * All-industry ** Note : *, ** and *** denote 1 per cent, 5 per cent and 10 per cent significance level.

10 252 THE INDIAN JOURNAL OF LABOUR ECONOMICS We next move on to understand the emerging association between employment and output. Analysis by one-digit industry level involving four rounds of NSS suggests that overall the association remained positive across all industries during all the four periods. Table 3b shows that during the pre-liberalisation year, 1983, agricultural sector had the highest employment elasticity with respect to output. This is particularly true during pre reform period that witnessed farm sector recording an elasticity above unity. However, during the postliberalisation phase, it had mildly declined. With a 10 per cent growth in agricultural output, growth of employment is estimated to be over per cent in the pre reform years while in the post reform phase, the same stood at little over 10 per cent. Manufacturing sector consistently displayed an employment elasticity of output of over one per cent during the 1980s and 1990s. This shows that with a 10 per cent increase in output, manufacturing employment could rise over 10 per cent. Service sector too responded in similar pattern except with a blip in Employment elasticity to output in the construction sector had tended to rise continuously during the first three rounds but took a mild downturn in the last round. As far as (i) electricity, gas and water supply and (ii) social, community and personal services are concerned, evidence suggests that employment elasticity had continuously improved over the last two decades. Overall, all-industry trend shows that employment elasticity with respect to output has been either unity or little over unity during the 1980s and 1990s. That is, with a 100 per cent rise in output, employment elasticity suggests that workforce can be enhanced by more than 100 per cent. Table 3b Elasticity of Employment to Output Elasticity of employment to output Industry Agriculture & allied industries 1.25* 1.33* 0.93* 1.06* Mining & quarrying 0.50* 0.39** 1.04* 0.55* Manufacturing 1.07* 1.07* 1.08* 0.99* Electricity, gas & water supply 0.51* 0.77* 0.71* 0.73* Construction 0.89* 1.02* 1.05* 0.88* Service sector 1.17* 1.24* 0.77* 1.10* Social, com & personal serv. 0.75* 1.05* 1.08* 1.10* All-industry 1.06* 1.21* 0.99* 1.02* Note : Same as for Table 3a. Having examined the relationship between employment with respect to output and wage, we now examine the differential behaviour in the pre and post reform period. For this, we differentiate the policy change by bringing in intercept dummies, such as, D1 87, D2 93 and D3 99. E = α + βo - γ W + D187 + D D399 + U Table 4 shows employment elasticity of output and wage at industry-level with three time dummies, namely, , and , capturing the post-liberalisation phase as against the pre-liberalisation era. Table A5 in the Appendix provides the entire results of the regression equation involving reform dummies. As expected, all other industries recorded negative relationship between wage and employment, the only exception being mining and quarrying, while the estimated employment elasticity of output turned out to be positive and significant across all industries.

11 EMPLOYMENT, WAGE AND OUTPUT RELATIONSHIPS IN INDIA 253 Table 4 Industry-wise Elasticity of Employment to Output and Wage with Intercept Dummies Output Wage Dummy Dummy Dummy Industry Agriculture & allied industries 1.22* -0.33* *** 0.17 Mining & quarrying 0.61* Manufacturing 1.07* -0.55* Elec., gas & water supply 0.66* -0.43* ** Construction 0.99* -0.37* Service sector 1.08* -0.49* -2.70*** Soc, com, & personal serv. 0.99* -0.56* -0.20** Aggregate 1.09* -0.37* Note : Same as for Table 3a. We next move on to estimate the relationship by fitting slope dummies to output and wage for the three years, viz., , and The underlying relationship is estimated using the following function for each of the industry and all-industry separately: E = α + βo - γ W + D870 + D87W+ D930 + D93W+ D99W+ U where E, O and W indicate Employment, Output and Wage respectively, and D87O = D87 * ln O D87W = D87 * ln W D93O = D93 * ln O D93W = D93 * ln W D99O = D99 * ln O D99W = D99 * ln W It is clear from Table 5 that except one industry, output is positively related to employment while wage is negatively associated with employment. Further, slope dummies of wage and output for both the post reform periods show that reform policies do not appear to have had any significant effect, as can be seen from the results of the regression equation presented in Table A6 in the Appendix. This is due to the fact that since it is observed that many industries had a negative effect on reform dummies (involving the periods , and ) and moreover the coefficients turned out to be insignificant numbers. This suggests that employment has tended to be indifferent to reform measures. The underlying labour demand function appears to have stayed stable despite reform measures. Table 5 Employment Elasticities of Output and Wage along with Slope Dummies Variables Output Wage D87O D87W D93O D93W D99O D99W Agriculture & allied industries 1.21* -0.27*** Min & quarrying 0.50* * -0.03*** Manufacturing 1.11* -0.59* Elec., gas & water supply 0.50* -0.38*** 0.30*** *** *** Construction 0.96* -0.39* Service sector 1.17* -0.42** * 0.35** Soc, com, & per serv. 0.81* -0.43* *** 0.27*** -0.18** 0.29** Aggregate 1.08* Note : Same as for Table 3a.

12 254 THE INDIAN JOURNAL OF LABOUR ECONOMICS VI. SUMMARY AND CONCLUSION While there have been many studies measuring elasticity of employment with respect to output, by simply comparing the relative growth rate of employment and output in India, there has been no serious effort to estimate an employment demand function for the entire economy. This exercise using NSS data on employment and real wage (current daily status criterion) and output (GSDP) suggests that despite many institutional bottlenecks, the basic labour demand function postulated in economic literature is still valid for India. We find the employment elasticity with respect to output to be positive and with respect to real wage negative. The magnitude of elasticities, however, varies across industries and also in different rounds of NSS. The industries dominated by the public sector, such as, mining and quarrying, however, do not conform to the basic employment behaviour. It appears that but for the rise in the real wage, the employment growth rate could have been higher in the post-reform period. The wage sensitivity, however, does not imply that a reduction in real wage can necessarily lead to high employment. Wage rate in the informal sector is abysmally low. Any further reduction in it may not be sustainable because it will directly increase the incidence of poverty, especially in the rural areas, and may even lower the productivity of the labour. Further, the lack of capital and also appropriate technology would continue to be the major obstacles in employment generation even at a lower wage rate. The evidence presented in this paper would therefore have to be interpreted with caution. However, there is no significant change in the behaviour of employment after reforms as neither the intercept nor the slope dummies have been significant. Appendix Table A1 Demand for Labour w.r.t. Output and Wage (One Digit Industry Level), 1983 Industry Variables Coefficient t Value Chi square Adj. R 2 Agriculture Wage Output Constant Mining & quarrying Wage Output Constant Manufacturing Wage Output Constant Elec., gas & water supply Wage Output Constant Construction Wage Output Constant Service sector Wage Output Constant Social, community & personal Wage services Output Constant All-industries Wage Output Constant Note : (i) Number of observations are 17 in each industry; (ii) *, ** and *** denote 1 per cent, 5 per cent and 10 per cent significance level.

13 EMPLOYMENT, WAGE AND OUTPUT RELATIONSHIPS IN INDIA 255 Table A2 Demand for Labour w.r.t. Output and Wage (One Digit Industry Level), Industry Variables Coefficient t Value Chi square Adj. R 2 Agriculture Wage Output Constant Mining & quarrying Wage Output Constant Manufacturing Wage Output Constant Elec., gas & water supply Wage Output Constant Construction Wage Output Constant Service sector Wage Output Constant Social, community & personal Wage services Output Constant All-industries Wage Output Constant Note: Same as for Table A1. Table A3 Demand for Labour w.r.t. Output and Wage (One Digit Industry Level), Industry Variables Coefficient t Value Chi square Adj. R 2 Agriculture Wage Output Constant Mining & quarrying Wage ** 0.67 Output Constant Manufacturing Wage Output Constant Elec., gas & water supply Wage Output Constant Construction Wage Output Constant Service sector Wage Output Constant Social, community & personal Wage services Output Constant All-industries Wage Output Constant Note: Same as for Table A1.

14 256 THE INDIAN JOURNAL OF LABOUR ECONOMICS Table A4 Demand for Labour w.r.t. Output and Wage (One Digit Industry Level), Industry Variables Coefficient t Value Chi square Adj. R 2 Agriculture Wage ** 0.92 Output Constant Mining & quarrying Wage Output Constant Manufacturing Wage ** 0.74 Output Constant Elec., gas & water supply Wage Output Constant Construction Wage Output Constant Service sector Wage Output Constant Social, community & personal Wage services Output Constant All-industries Wage ** 0.84 Output Constant Note: Same as for Table A1. Table A5 Demand for Labour w.r.t. Output and Wage (One Digit Industry Level): With Intercept Dummies Industry Variables Coefficient t value Chi square Adj. R 2 Agriculture Output Wage D D D Constant Mining & quarrying Output * 0.45 Wage D D D Constant Manufactuirng Output Wage D D D Constant Electricity, gas & water supply Output * 0.66 Wage D D D Constant Construction Output Wage D D D Constant

15 EMPLOYMENT, WAGE AND OUTPUT RELATIONSHIPS IN INDIA 257 Table A5 contd. Industry Variables Coefficient t value Chi square Adj. R 2 Service sector Output Wage D D D Constant Social, community & Output * 0.83 personal services Wage D D D Constant All-industries Output Wage D D D Constant Note : (i) Number of observations are 68 in each industry; (ii) *, ** and *** denote 1 per cent, 5 per cent and 10 per cent significance level. Table A6 Demand for Labour w.r.t. Output and Wage (One Digit Industry Level) : With Slope Dummies Industry Variables Coefficient t value Chi square Adj. R 2 Agriculture Output Wage D87G D87W D93G D93W D99G D99W Constant Mining & quarrying Output ** 0.51 Wage D87G D87W D93G D93W D99G D99W Constant Manufactuirng Output Wage D87G D87W D93G D93W D99G D99W Constant Electricity, gas & water Output supply Wage D87G D87W D93G D93W D99G D99W Constant

16 258 THE INDIAN JOURNAL OF LABOUR ECONOMICS Table A6 contd. Industry Variables Coefficient t value Chi square Adj. R 2 Construction Output Wage D87G D87W D93G D93W D99G D99W Constant Service sector Output Wage D87G D87W D93G D93W D99G D99W Constant Social, community & Output personal services Wage D87G D87W D93G D93W D99G D99W Constant All-industries Output Wage D87G D87W D93G D93W D99G D99W Constant Note: (i) Number of observations are 17 in each industry; (ii) *, ** and *** denote 1 per cent, 5 per cent and 10 per cent significance level; (iii) G and W denote Output and Wage, respectively. References Bhattacharya, B.B. and Mitra, Arup(1993), Employment and Structural Adjustment : A Look at the 1991 Census, Economic and Political Weekly, September 18. (1994), Employment, Labour Productivity and Wage Rate in Public and Organised Private Sectors in the Context of Structural Reforms, The Indian Journal of Labour Economics, Vol. 36, No. 2. Bhattacharya, B.B. and Sakthivel, S. (2003), Extending GSDP Series Backwards : A Methodology, The Journal of Income and Wealth, Vol. 24, Nos. 1 & 2, January-December, pp Dixon, Robert ; Freebairn, John and Lim, G.C. (2003), An Employment Equation for Australia : , Reserve Bank of Australia. Fields, G.S. (1994), The Unemployment Effects of Minimum Wages, International Journal of Manpower, Vol. 15, Nos. 2-3, pp GoI (2001), Report of the Task Force on Employment Opportunities, Planning Commission, Government of India, New Delhi, July. (2002), Report of the Special Group on Targetting Ten Million Employment Opportunities Per Year, Planning Commission, Government of India, New Delhi, May. Phipps, A. and Sheen, J. (1995), Macro Economic Policy and Employment Growth in Australia, Australian Economic Review, Vol. 28, No. 1. Russel, B. and Tease, W. (1991), Employment Output and Real Wages, Economic Record, Vol. 67, No Saget, Catherine (2001), Poverty Reduction and Decent Work in Developing Countries: Do Minimum Wages Help?, International Labour Review, Vol. 140, No. 3, pp Shariff, Abusaleh and Gumber, Anil (1999), Employment and Wages in India : Pre and Post Reform Scenario, The Indian Journal of Labour Economics, Vol. 42, No. 2.