Productivity Shock and Labour Input: Evidence from Correlated Unobserved Component Model

Abstract

This note assesses the relationship between labour productivity and employment in the framework of the unobserved component model as well as the vector autoregressive model. In the case of the organized/formal manufacturing sector in India, the transitory increase in productivity is seen to reduce the man-days in the short run, though it is not statistically significant. Permanent shock to productivity decreases labour inputs permanently, and vice versa and their association is also statistically significant. Incentivizing the firms to expand their activities, diversify production and process secondary products may help restore employment in the face of a permanent productivity shock. JEL Classification: C11, C32, E32