Productivity and job reallocation: evidence from the Indian manufacturing

This study aims to examine the association between productivity growth and job reallocation in terms of job creation and job destruction. It also finds this productivity employment relationship for heterogeneous labor market institutions of the Indian states.

The paper uses longitudinal data of the Annual Survey of Industries of Indian manufacturing from 2009–2010 to 2015–2016 and employs fixed-effect multinomial logistic regression.

The paper finds a mixed result of total factor productivity (TFP) increase on employment. An increase in TFP is positively associated with employment by reducing the probability of destroying jobs, while adversely associated with employment by reducing the probability of creating jobs. The negative association of the increase in TFP on employment is more in the Indian states with strict labor regulations.

The relationship between TFP and employment can be endogenous. TFP is calculated as output changes that are not explained by inputs, capital and labor. So, job creation/destruction may affect TFP by changing the composition of employment and/or returns on labor/capital. In addition, this study is only restricted to Indian organized manufacturing.

The results from this study help deeply understand the Indian labor market. In particular, it provides valuable insights into the “jobless growth” in Indian manufacturing and the recent changes in labor laws.

The findings from this study provide useful information to enhance the robust growth of productive jobs and efficient reallocation of labor.

Unlike most papers, which analyzed the relationship between productivity growth and net employment changes, the present paper finds the relationship between improvement in productivity and job reallocation in terms of simultaneous creation of new jobs and destruction of existing jobs. In addition, the paper links this relationship with the existing heterogeneous labor laws of the Indian states.