Employment Growth in India’s Organized Manufacturing in the Post-GFC period

Abstract

In the period since 2004, employment in India’s organized manufacturing has grown at a relatively fast rate. This trend of rapid employment growth during 2004-2007 has continued in the period following the global financial crisis (GFC), and employment in organized manufacturing has grown at the rate of about four per cent per annum in this period, well above the growth rate in the population in India and the workforce in the economy. This significantly rapid pace of job creation in India’s organized manufacturing during 2008-2018 has been achieved despite an unfavourable global economic situation and a marked slowdown in global trade in this period. The pace of employment growth in India’s organized manufacturing during 2008-2018 was much higher than the employment growth rate of 0.8 per cent per annum achieved during 1980-1993 and 0.2 per cent per annum during 1994-2003. The hike in the growth rate of employment in the post-GFC period occurred in most industries and most of the states of India. The increase in job opportunities in organized manufacturing in the post-GFC period, reflected in the relatively high growth rate in employment, was accompanied by an increase in the income share of labour in gross value added.

The relatively high rate of employment growth in organized manufacturing in the post-GFC period is not attributable to a change in industrial composition towards labour-intensive industries. Nor is it attributable to a faster rate of entry of new manufacturing plants, although the increased employment size of new plants has contributed to employment growth. The explanation lies mostly in shifts in the labour demand function contributing to employment growth, as brought out by an econometric analysis undertaken with the help of plant-level panel data. These shifts in the labour demand function are probably a reflection of the changes that have taken place in the factor-saving bias of the technical change or certain other changes that have taken place in the industrial sector or both. A part of the employment growth in formal manufacturing, about 10 per cent or more, appears to be attributable to the formalization of informal manufacturing enterprises. Also, some empirical evidence is presented in the paper that suggests that the easing of labour regulations by some of the Indian states since 2014 might have contributed to employment growth.

Keywords: Employment growth, Labour demand function, Indian organized manufacturing

JEL Classification: J21, L60