Abstract
This paper uses labor force survey data from India for 2000 and 2012 to examine how wages behave over the course of structural transformation. We find that wage employment between 2000 and 2012 displays the patterns one would expect for an economy undergoing structural transformation, with employment shares shifting from agriculture to industry and services, and from rural to urban areas and larger cities within urban areas. These shifts, as well as a shift to nonroutine occupations and routine manual occupations outside of agriculture, are associated with an improvement in average wages. Finally, simple Mincerian wage regressions confirm that jobs in larger firms and big cities are associated with significantly higher wages—even more so for women. Overall, our results are consistent with the notion that policies that encourage the expansion of the formal sector and employment in larger firms are crucial for development.
Highlights
There is a large empirical literature on structural transformation that documents and analyzes the shift of output and employment across sectors. (See Asian Development Bank [ADB] 2013 for a comprehensive survey and analysis for Asia and the Pacific.) By and large, the shift takes place from lower to higher productivity sectors and locations over the course of development
We take a step back and use labor force survey data from India to examine how wages behave over the course of structural transformation, especially in terms of its less studied aspects
As for average wages, agriculture experiences one of the highest rates of growth at 4.2% annually. (This dips to 4% annually when spatial price differentials in addition to temporal changes in prices are taken into account.) Business services, which are one of the highest paying sectors on average, experience the lowest growth in wages: 1% annually when correcting only for temporal price changes and 1.8% annually when spatial price differentials are taken into account
Summary
There is a large empirical literature on structural transformation that documents and analyzes the shift of output and employment across sectors. (See Asian Development Bank [ADB] 2013 for a comprehensive survey and analysis for Asia and the Pacific.) By and large, the shift takes place from lower to higher productivity sectors and locations over the course of development. As Henderson (2014) notes, this is because the reallocation of employment from agriculture into industry, in particular, takes place most effectively in cities given agglomeration economies These additional dimensions we analyze are closely tied to the idea that structural transformation involves the capability to produce more diversified and complex products. The latter requires the emergence of more capable and sophisticated firms, a proxy for which would be the expansion of employment in firms in the formal sector and/or firms with employment above some threshold level (e.g., 10 or more workers), and a shift in occupations—a growth in occupations that involve more analytical work.
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