The Impact of Economic Liberalization on Employment and Wages in

India
Dr. Lakshman Singh,
Department of economics,veer kunwar Singh
university,Bihar,India
Lakshleela2000@yahoo.com
Dr. Leela Sinha , Department of English ,Magadh universityBihar,India
nidhi2437@gmail.com

Abstract
This paper assesses changes in the level and structure of employment and wages in India,
relating them to trends in productivity. The discussion is set in the context of the on-going
economic reforms in India and it therefore focuses on developments through the 1980s and
1990s relative to the previous period.
Broad conclusions are as follows. In the economy as a whole, the worker-population ratio
declined in the 1990s for men and women in rural and urban areas in most age groups in the
range 5-59. Amongst the young, school participation has increased as child and youth labour
have declined. The composition of the workforce has exhibited considerable stability overall
though the share of casual workers in the total has been increasing gradually since the early
1970s, generating the concern that the quality of employment in India is not improving. However,
there was an across- the-board improvement in the growth rate of labour productivity and wages
in the1980s and 1990s, and it is estimated that average per capita earnings per annum
increased in that period. This is fairly remarkable, given that work participation had fallen and
food prices were rising. Consistent with this, poverty incidence declined. So the poor were not
entirely excluded from the changes in progress. By the most comprehensive measure available,
the unemployment rate increased from 6 per cent to 7.3 per cent in the 1990s. In the absence of
any analysis of the dynamics of unemployment, it is difficult to discern whether the increase
denotes the frictional (and transitional) unemployment that one would expect in an adjusting
economy or whether it reflects a lengthening of individual unemployment spells.
As pre-reform regulations and restrictions were concentrated upon the registered manufacturing
sector, this is the seat of reform and the place in which to expect direct effects to show. Although
still small, it is a relatively productive and growing sector which shares backward and forward
linkages with the other sectors in the economy and this makes events in this sector more
pertinent than its size alone would suggest. It also produces most of the good jobs in the

economy and thinkers and planners have for decades looked to it to absorb surplus labour
from agriculture
The economics of manufacturing does seem to have undergone a fundamental change since
the early 1980s. There has been a distinct increase in competition and some perceptible
changes in structure. Up until the late 1970s, Indian manufacturing was characterized by modest
growth in value added, excess capacity in capital and surplus labour and, as a result, a high
degree of inefficiency. The growth of value added has risen and a higher rate of growth has
been sustained in the last two decades than was seen before 1980. In the first decade of
(tentative) reform, total factor productivity displayed a fairly remarkable increase, underlying
which were increases in both the utilization and the productivity of both labour and capital. This
means that output growth was achieved without a very large increase in factor inputs. Indeed,
employment growth collapsed during the 1980s, which seemed to have been a time of dehoarding of labour and upgrading of capital stocks. This adjustment done, employment growth
was restored in the 1980s and the rate of productivity increase slowed down a bit but remained
significantly positive. Real earnings per worker in registered manufacturing exhibited a time
pattern similar to that displayed by labour productivity, increasing rapidly in the 1980s and more
slowly but positively in the 1990s. This suggests that workers were able to share in economic
progress in this sector, despite indications that their bargaining power had declined. Indeed, we
identify robust evidence of insider wage-setting in Indian manufacturing. This is expected to curb
employment growth in the short run but, conditional on product market competition, not in the
long run. In a labour-surplus economy like that of India this is important evidence in relation to
the contentious issue of the spread of the benefits of growth. It is especially relevant to the
question of the ways in which reforms that increase product market competition may impact on
the labour market. We also find evidence of efficiency wage setting and this will tend to modify
the long-run impact of wage increases on employment.

Employment :changes in level and structure

Priorities and Problems
2007-08 estimates are important because of important changes with
respect to employment during first five years of this decade relative
to earlier period.
During late 1990s ,there was dramatic deceleration of employment
growth in India.
Significant recovery during 1999-2000 to 2004-05

 Recovery most marked in rural areas where earlier slowdown had

been sharper
Reason was increase in labour force participation rates for men and
women in 2004-05 relative to 1999-2000

Quality of employment
Unorganised labour issues included unprotected jobs,low
wages,irregular days of work,unsafe conditiion and poor living
Poverty declined by 12% among casual labourers ,regular waged
and self employed from 1983-1993 to 1999-2004

Reasons were:
GDP growth with variations across country
Growth was more due to rapid growth in total factor productivity a
combination of changes in efficiency with which inputs are used and
changes in technology

Policy Intervention: Investment in education and training of workforce will

deliver increase in labour productivity ,qualit y emploment & higher rates
of sustainable economic growth

Task Force Report on Employment opprtunities by planning

commision of India:
Accelerating GDP growth with emphasis on sector which ensure
spread of income to low income segment of labour force.
Pursuing appropriate sector policies in individual sector which are
important for employment generation,these policies must be broadly
consistent with overall objective of accelerating GDP growth.
Implementing focussed special programmes for creating additional
employment of enhancing income generation from existing activities
aimed at helping vulnerable groups that may not be sufficiently
benefited by more general growth promoting policies.
Pursuing suitable policies for education and skill development which
would upgrade the quality of labour force and make it capable of
supporting a growth process which generate high quality jobs.
Ensuring that policies and legal environment governing the labour
market encourages labour absorption ,especially in organised sector.

Role of GDP growth in generating employment

Industry accounts for 26% of GDP and employs 22% of total
workforce ,the industry underwent significant changes as a result of
economic liberalisation in India economic reforms of 1991,which
removed import restrictions,brought in foreign competition , led to
privatisation of certain public sector industries ,liberalised FDI
regime ,improved infrastructure and led to an expansion in the
production of foreign goods.
Textil manufacturing,the 2nd largest source of employment after
agriculture ,contributes 4% to GDP growth,17% to export earning
providing direct employment to over 35 million people .
Indias service sector provides employment to 27% of work force and
is growing quickly with a growth rate of 7.5% in 1991-2000 ,up from
4.5% in 1951-80.Its GDP share in 2012 was 57% ,up from 15% in
1950.
The share of Indian IT Industry in countrys GDP increased from 4.8%
in 2005-06 to 7% in 2008.

 Agriculture and allied sector like forestry ,logging and fishing

accounted for 17% of the GDP in 2012,employed 51% of the total
workforce .
According to NSSO survey ,in 2004-05 ,8.3% of population was
unemplyed ,an increase of 2.2% over 1993 level,with unemployment
uniformity higher in urban areas and among women.
When GDP grew at 4.7% per annum during 1972-73 to 1983
,employment growth was 2.4 % ;GDP growth increased to 5% ,but
employment declined to 2.0% during 1983/1993-94;during 199394/2004-05 GDP growth accelerated to 6.3% ,but employment
growth further declined to 1.8% and during 2004-05/2009-10 ,when
GDP growth was as high as 9% ,employment grew at an insignificant
rate of 0.22%.

Employment changes in reform era

Decline in crude worker population ratio for men and women in
rural and urban areas and in all age groups in 5-59 yr range.
Number of women worker in rural area has declined which is offset
by a rise in number of women worker in urban areas.
Decrease in share of population engaged in agriculture and rise in
share engaged in manufacturing.
Decline in child and youth work participation,rise in school
enrollment at primary and higher level.
Employment growth in organised industry in 1973-97 :public versus
private sector:

1973-80

1980-90

1990-97

Public sector

5.97

1.27

0.39

Private & joint

sector

3.50

0.30

3.72

Aggregate ASI

4.11

0.57

2.83

NOTES: figures are growth rate in % per annum.Data for manufacturing alone are
not available so these figures include electriciti,gas etc.Joint sector refers to publicprivate partnership.
*ASI is the annual survey of industries published by central statistics office in New
Delhi

Manufacturing sector created 28.5% growth in employment

generation during 11th plan
2.9 million jobs were created in registered manufacturing sector
during 2007-08 to 2011-12 from over 10.45 million jobs in 2007-08.
Highest jobs generated by Tamil Nadu of 14.5% by registered
manufacturing sector followed by Maharashtra(14%) and Gujarat
( 10%), while slowest growth rate in employment in chhatisgarh
( 19%,UP ( 15% ) ,Hary ana ( 14% ), kerala ( 10.5% ) and punjab
( 9% ).
Gradual revival of manufacturing sector together with improved
economic performance may help generate 3.2 million additional jobs
during 12th plan period.
Need to empower rural youth with necessary skills to make them
employable and create an ecosystem enabling the enterprises to
improve their effectivness.

Comparison of sectoral growth in employment in india with other

countries

Table 2.2 Sectoral Employment as % of Total Employment

Country/Countri
es

Agriculture
198 200
0
0

Industry

200 198 200 200

7
0
0
7

Services
198 200 200
0
0 7

India

68.1 59.3 50.2 13.9 18.2 20.4 18.6 22.4 29.4

*
*
*

Brazil *

29.3 24.2 19.0 24.7 19.3 21.0 46.1 56.5 59.0

China

68.7 46.9 44.0 18.2 23.0 18.0 11.7 29.9 16.0

Indonesia

55.9 45.3 41.0 13.2 17.3 19.0 30.2 37.3 40.0

Korea

34.0 10.9

Malaysia

37.2 18.4 15.0 24.1 32.2 29.0 38.7 49.5 57.0

Mexico

23.5 17.5 14.0 26.5 26.9 26.0 49.0 55.2 60.0

Thailand

70.8 48.8 42.0 10.3 19.0 21.0 18.9 32.2 37.0

Turkey

43.0 34.5 26.0 34.9 24.5 26.0 22.1 40.9 48.0

Low income

74.6 64.5

n.a

8.7 12.3

n.a 16.5 23.2

n.a

Lower middle
income

64.0 43.2

n.a 18.5 18.5

n.a 16.4 38.3

n.a

7.0 29.0 28.0 26.0 37.0 61.0 67.0

Source: Kochhar et al (2006) and www.worldbank.database.org.

Note: For Brazil, the latest data available is for 2006 and for Turkey it
is for 2008 and these have been reported in the Table instead of data
for 2007.
* Based on Current Daily Status (2006-07).

Unemployment in India :
Unemployment rate in india decreased to 3.80% in 2011 from 9.40% in 2010.It averaged
7.57%from 1983 until 2011 ,reaching an all time high of 9.40% in 2009 and a record low of
3.80% in 2011 .

Unemployment Rates* in various NSS rounds (CDS basis)

Unemployment rates as percentage to labour

force
1972-73

8.35

1977-78

8.18

1983

9.22

1993-94

6.06

19992000

7.31

2004-05
2009-10

8.28
6.53

Unemployment rate in india state wise distribution:

Alternative explanation of Persistent unemployment rate

differentials:

Migration does appear to occur in the direction of expected wages and barriers do
not seem to be binding.

Regions with high wages and good amenities attract high unemployment .

However ,the tendency towards an equilibrium in interstate urban unemployment

differences is upset by the more speedy tendency for urban regions to equilibriate
with their neighbouring rural regions: the urban sector of any state is unable to
run away from its rural sector.

Demand increases the volume of unemployment but,in equilibrium ,it also

increases the labour force of the region by just so much as to leave the
employment rate unchanged.

Wage dampening effect of unemployment:

The unemployment elasticity of wages is estimated to lie between -0.24 and -0.28.

Within regions,wage growth is dampened by the presence of unemployment .

The size of the unemployment elasticity depends upon the extent to which the
prospect of job loss tempers wage demands.

If Indias exceptionally strict job security provisions were effective then we should
expect to see a small elasticity.

The appearance of such a large elasticity suggests that the scope and effectivenessof
the job security is limited.

Long run wage unemployment relation across regions:

A positive wage differential of 10% is associated with a positive unemployment rate

differential of 26%.

The Urban unemployment in a state is a positive function of left-wing government

,public sector predominance,the ;literacy rate,the rural unemployment rate ,the rural
urban labour force ratio and the percentage of casual and construction workers.

Additional variables are underemployment,residence in a metropolis , the fraction of

youth , the fraction holding regular jobs and the percentage of landless workers.

Condition in the rural labour market have a significant effect on the conditions of
urban workers.

States with a higher fraction designated as lower castes have lower

underemployment ,probably a reflection of lower reservation wages in this group.

States with more literate population have higher unemployment.

Wages :growth and distribution:

Daily average wage rate of casual labourers increased in period from 1993-94 to
1999-2000 at a rate of about 3.5% p.a

With fall in work participation rate ,earning increased at a rate of 2.5% p.a

Rate of growth higher for females than for males in rural and urban areas..

Wages in organised manufacturing sector increased at a rate of 2.5% p.a in 1990-97

which was slower than in 1980-90( 3.6% p.a) .

Overall wages and earnings increased ,reason being higher growth rate of labour
productivity in organised manufacturing as well as in broader economywhich
contributed to poverty decline in
the year between 1993-94 and 1999-2000.

Wage structure:
There is a wide income disparity across states in India with Bihar at the lowest and
Goa at the top position.

Sectors
Regular
Agriculture
Mining &
quarrying
Manufacturing
( 15-22)
Manufacturing
( 23-37)
Public utilities
Construction
Trade,hotels &
Restaurents
Transport etc
Services ( 65-74)
Services ( 75-93)

1993-94 to 19992000

1999-2000 to
2004-05

1993-94 to 200405

8.91
9.27
1.56
4.75
7.22
2.86
6.03

-10.20
2.02
-2.11
-2.32
1.76
0.89
-3.57

-0.24
5.91
-0.13
1.48
4.70
1.96
1.55

4.96
4.79
7.71

0.99
1.38
-0.61

3.14
3.23
3.84

Casual
Agriculture
Mining &
quarrying
Manufacturing
( 15-22)
Manufacturing
( 23-37)
Public utilities
Construction
Trade,Hotels &
Restaurents
Transport
Services(65-74)
Services ( 75-93)

3.20
8.67
4.70
5.58
2.71
2.41
3.20

-2.54
-4.98
-4.23
-3.03
-2.44
-0.17
-2.76

0.55
2.24
0.54
1.57
0.34
1.23
0.45

2.34
5.74
0.40

0.59
1.34
1.95

1.54
3.72
1.10

Annual growth rate( % ) of sectoral wages of regular and casual workers in urban
india

Above table shows that while wage rates are not only relatively
higher in government owned sectors, growth of wage rate among
regular workers in urban india also appear to be comparatively
higher in sectors of government dominance than in sectors that are
largely private and informal.
In the post reform period spanning 1993-94 to 2004-05,highest
growth in wage rates were recorded in Mining & Quarrying ,followed
by public utilities & services ,largely dominated by government
sectors.
Manufacturing wages declined sharply to negative figures.
Wage growth in Trade,hotels & Restaurents registered little more
than 1.5% growth.
For urban casual workers ,Mining & quarrying and services are the
only two sectors that show 2-3% annual growth rate in daily wages .
Except Transport and services ,all other sectors witnessed negative
growth of daily wages during 1994-2004.

Imperfectly competitive Labour Markets:

Due to wide range of incomes among self-employed ,tha casual wage is ,on average
,only a third of the regular wage,so there is fierce competition for regular jobs.

The protected product markets have yielded substantial rents which organised workers
in large firms have successfully contended for a share of .

With the introduction of job security legislation for large firms in 1976 ,the disciplining
effect of the threat of job loss were probably mitigated ,encouraging workers to raise
wage demands.

Alternatively ,firms may have had to use the wage as an incentive instrument to get
job-secure workers to exert effort.

Conclusion:

Experience of economic Liberalisation in India have been better than in many other
countries.

Early reforms were initiated in the 1980s and which have been consolidated and
pushed further since 1991.

Both growth and productivity have accelerated in the economy as a whole and also in
organised manufacturing .

Capital stocks have been upgraded and investment in manufacturing have increased.

Real earnings in this sector have been rising at a rapid pace.

Organised sector employment suffered a severe collapse in the early years of

adjustment process but has since recovered to a pace similar to that in the pre-reform
area.

The share of the public sector in organised manufacturing employment has been
shrinking at a fairly remarkable rate.

The worker poulation ratio fell in the mid-90s after having increased for two decades.

The shift in work force composition from self-employment to casual wage employment
that has been in progress since 1970s continued through 1990s.

Average daily income per person per annum in the economy increased at a significant
pace in the rural and urban areas and for men and women,poverty incidence declined.

This paper has pointed to directions for further research,which remains

very relevant as the reforms are continuing.Analysis of labour markets
outcomes which attempt to uncover structural relations ,which
investigates the dynamics of change ,and which use micro-data could
make a very strong contribution to current debates on the costs and
benefits of Economic Liberalisation.