Microeconomic Flexibility in India and Pakistan: Employment Adjustment at the Firm Level
The Lahore Journal of Economics, Vol. 14, pp. 17-28, September 2009
11 Pages Posted: 6 Nov 2010
Date Written: September 2009
In this paper, we look at the pace at which firms adjust their employment levels as a measure of “microeconomic flexibility.” Flexibility aids in “creative destruction” processes, where less efficient establishments recede and dynamic firms can rapidly expand. Following the techniques used by Caballero, Engel, and Micco (2004), we use firm-level data from India and Pakistan to estimate the proportion of the gap closed in a year between desired and actual employment. The results for the proportion of the gap closed for India were 0.46 in 2001 and 0.45 in 2000. For Pakistan, we estimated the proportion of the gap closed as 0.2 in 2001 and 0.53 in 2000. The results for 2001 were much lower than expected (and lower than previous estimates for both countries), possibly due to the events of 9/11. Pakistan compared favorably to India in various key sectors, including chemicals, food processing, and garments. Exporters did not seem to have a quicker speed of adjustment.
Keywords: Costs, efficiency, flexibility, inputs, labor, India, Pakistan
JEL Classification: E2, J2, J6
Suggested Citation: Suggested Citation