Industry level analysis of productivity growth under market imperfections

Abstract

PurposeThis study aims to estimate total factor productivity (TFP) growth for the post-2008 period for selected industries in the manufacturing sector at NIC 3-digit. Total factor productivity growth (TFPG) estimates are based on the theoretical framework provided by studies such Hall (1988), Abraham et al. (2009) and Crepon et al. (2005) that incorporate market imperfection in labour and product market, thereby modifying the traditional TFP estimation as Solow Residual.Design/methodology/approachBased on the theoretical model that incorporates market imperfections in labour as well as product market in modifying the TFP estimates using the Levinsohn–Petrin framework of empirical estimation, the authors have calculated industry wise TFPG for 62 industries at NIC 3-digit level.FindingsThe study finds three distinct trends: first, there are considerable industrial disparities in productivity growth in terms of TFP. The estimates have been found to be higher than the conventional Solow Residual for most industries, indicating the role played by market imperfections in affecting the conventional measure of productivity growth. Second, estimates of bargaining power are found to be lower than those compared to the earlier estimates in Maiti (2013) for the Indian organised manufacturing case for 1998-2005. This observation is commensurate with the observation in recent years of a falling share in labour wage in total output in organised manufacturing sector. Finally, the study also found a statistically significant contribution of greater mechanisation on TFPG while an adverse effect of the rising dependence of organised manufacturing on contractual labour.Originality/valueThe role of market imperfections in measuring TFPG has been undertaken, and it has been found to be an important factor, as the estimated measures vary from the conventional measures of TFPG. Moreover, the study has considered a very recent period from 2008-2015 in estimating TFPG, as well as analysing the factors behind the trends in TFPG at industrial level.