Infrastructure and Labour Productivity: Panel Co-Integration and DOLS Evidence from the Indian Manufacturing Sector

Abstract

Using data on the Indian manufacturing sector, which cover the years 1994 to 2006, the study assesses the labour productivity elasticity with respect to public infrastructure. Since earlier studies have merely examined the effect either on the total factor productivity (TFP) growth of the manufacturing sector or on the national income of the country and widely neglected direct effects on the labour productivity of the manufacturing sector, the present study attempts to fill this gap. Second, this study tests the panel variables for unit roots and show that they exhibit the unit root process. This is a highly significant finding because most investigators have applied Ordinary Least Square (OLS) or Generalised Least Square (GLS) to non-stationary (panel) variables, thereby generating spurious results. Finally, in contrast to most of the previous studies, this article utilizes the methodologically sound Dynamic OLS (DOLS) procedure to generate consistent estimates of the relevant panel variables in the co-integrated production function. The results of our analysis suggest that infrastructure does affect labor productivity in India. Its effect on labour productivity is positive, nonetheless very small. Finally, the labour productivity is found to be more sensitive to private capital than to public capital.