Formal Manufacturing Sector Research Articles

Demand-growth in support of structural change: Evidence from Nigeria's formal manufacturing sector

An emerging literature on demand-led structural transformation and structuralist macroeconomics finds that demand-growth can positively complement industrial policy and drive structural transformation but there is no firm consensus which policies can achieve a sustained virtuous circle of demand-, output- and productivity growth. Looking at evidence from manufacturing companies listed on the Nigerian Stock Exchange (NSE), this paper supports the view that demand-growth can effectively complement industrial policy but only if demand problems of different nature are addressed simultaneously. Increases in government spending need to be combined with distributional policies favouring the disposable income of workers and subsistence communities and with policies that can address country-specific and historically formed supply-side problems in vertically linked sectors to counteract external demand problems manifesting through the balance of payments.

Informalization of the formal sector: Evidence from India's manufacturing industries

Abstract The employment structure of India's formal manufacturing sector has undergone substantial changes since the early 2000s with a steep rise in the use of contract workers in place of directly hired workers. Much of the existing literature has attributed the widespread use of contract labour to India's rigid employment protection legislation. The resulting informalisation of the workforce in the organised sector raises concerns about the sustainability of employment growth. Using a 14-year plant-level panel data from the Annual Survey of Industries, we find that in addition to labour market rigidities and the existence of a wage differential between contract and directly hired workers, plants in the organised manufacturing sector have another important incentive to hire contract workers. Plants appear to be using contract workers to their strategic advantage against the directly hired workers to keep their bargaining power and wage demand in check. Importantly, the strength of this bargaining channel varies across plants depending on their capital intensity of production, size and existing contract worker intensity.

A sectoral view of conceptualising macroeconomics of a ‘just transition’ in India


 In light of India’s COP26 commitment of reaching net zero by 2070, it is important to understand how India could ensure a ‘just transition.’ Since the transition raises several questions regarding who will benefit from it and who will lose out, this paper offers an assessment of the sectors that will be impacted most by the transition. This includes coal, mining, power, formal manufacturing sectors, and MSMEs. Macroeconomic consequences of the transition in terms of employment intensity, energy intensity, the total value added, and export competitiveness of the above-mentioned sectors have been examined. Using data from the Annual Survey of Industries for 2017-18 and 2018-19 and key informant interviews, the paper presents a sectoral analysis of the transition in the Indian context. In terms of employment, the power and the coal sector will be affected the most. In terms of fuel use, manufacturing sectors that either use coal or purchase electricity (indirectly using coal) will also be impacted. The spatial dimension of the transition will be very important, since certain coal-producing districts will be affected the most. 

What Role Does EPL Play in Wage Determination under Segmented Labour Markets? A State-level Analysis from India’s Formal Manufacturing Sector

This study explores the role of employment protection legislation (EPL) in wage determination using a state-level panel dataset for India’s formal manufacturing sector. Unlike previous studies, we create a quantitative indicator of EPL using state-wise court judgements (on labour disputes), citing various sections of Chapters 5A and 5B of the Industrial Disputes Act, 1947, particularly those dealing with employment and wage-related legislations. Our findings suggest that pro-worker court judgements specifically on wage-related issues lead to an increase in the share of wages in industrial output. The findings are robust to alternative model specifications. However, we find that the share of wages responds negatively to an increase in pro-worker strictness in the overall EPL. We also analyse the consequences of labour market dualism, which is increasingly becoming a norm even in formal sectors. Using insights from labour market segmentation theory, we argue that a divergence in the regulation between regular and contract labour has a potential to undermine the success of active labour market policies in curbing the ill-effects of market segmentation. JEL Codes: J21, K31

Exchange rate fluctuations, labour laws, and gender differences in job flows: Analysis of manufacturing industries across Indian states

India’s disappointing performance in creating productive employment for women, in spite of its increased integration with the world markets, contrasts with the experience of several countries in Asia. A number of studies have analysed the supply and demand side factors responsible for this situation. However, no study has examined the gender differences in job flows – job creation, destruction and reallocation. Net employment changes may conceal large changes in gross job flows and the associated adjustment costs. Using plant level panel data from India’s formal manufacturing sector for the period 1998–2014, this paper estimates the magnitude of job flows and analyses the impact of industry-level changes in exchange rates on job flow dynamics of men and women across state-industries. Even as net employment grew sluggishly for women, we find that, the labour market was characterised by a simultaneous process of job destruction and creation. Our analysis provides evidence for an asymmetric impact of exchange rates on job flows, with depreciation (appreciation) resulting in higher (lower) gross job creation rates with no effect on job destruction rates. Exchange rate depreciation results in higher gross and net job creation rates for both men and women in states with flexible labour laws. In states with inflexible labour laws, however, depreciation causes an increase in gross job creation for women (but not for men) with no effect on net job creation. Exchange rate depreciation also causes women to face higher job reallocation than men, particularly in states with inflexible labour laws. Participation in global value chains and output tariff reductions are found to exacerbate the effects of exchange rate changes on women’s job flows. Firms operating under rigid labour market conditions tend to employ female workers as a ‘buffer’ to adjust the workforce in response to short term fluctuations in export competitiveness.

Demand-Growth in Support of Structural Change: Evidence from Nigeria's Formal Manufacturing Sector

Demand-Growth in Support of Structural Change: Evidence from Nigeria's Formal Manufacturing Sector

Is India's formal manufacturing sector ‘hollowing out’- importance of intermediate input

Changes in India's economic policies during the last three decades were expected to spur competition in the domestic market. Greater competition, particularly in capital goods, was expected to improve production efficiency. An important dynamic to analyze manufacturing sector's efficiency is to understand the relationship between industry's value addition and value of output. In the case of India's formal manufacturing sector, the share of value addition in output has declined sharply since 1998–99. This raises a question as to whether the Indian manufacturing sector is going through a phase of ‘hollowing out’. This paper examines the potential reasons behind such decline. One such reason relates to the intensity at which inter- mediate goods are used in the production process. The value of intermediate goods relative to the gross value of output is as high as two-third in India's formal manufacturing sector. Despite the recognition of the importance of intermediate goods as an input, it has received relatively little attention in the literature on development accounting. The paper considers a model on the assumption that a firm's production function is measured in terms of capital, labour, and intermediate goods. The paper estimates the output elasticity of intermediate inputs for the formal manufacturing sector and assesses how it has changed during the 1990s and 2000s. The production function is estimated using both fixed effects and Levinsohn and Petrin model to control for the endogenous productivity problem. The paper quantifies the relationship between the intensity at which a concerned industry utilises intermediate goods in the production process and productivity (TFP) of the sector. The empirical analysis points toward a biasness in productivity that may arise if one ignores the importance of intermediate goods as a production factor. The analysis highlights that the intensity of intermediate-goods impact the productivity observed in India's formal manufacturing sector from 1988–90 to 2015–16.

DISPERSION IN INPUT AND OUTPUT PRICES: A FIRM-LEVEL ANALYSIS

Analyzing representative and rich data on the Indian formal manufacturing sector, this paper tries to establish an empirical relationship between prices of input, output and firm size of the plant. The firm-level data reflect tremendous dispersion in prices that firms pay to purchase material input even within an industry. Price heterogeneity is also observed for prices that firms charge for their output even for narrowly defined products. The paper constructs a model using information on output and input choices by firms to analyze the observed patterns. The paper finds that on average, bigger plants not only pay a premium for the inputs used in the production process, but also charge a premium for their outputs. After documenting the empirical relationship, the paper discusses the possible sources for price dispersion. The paper highlights sectoral variations in the correlation between plant size and prices, which are consistent with the findings in the literature related to the scope for quality differentiation in output as well as inputs. The empirical pattern observed supports the hypothesis that correlation between plant size and price can be driven by market power.

Co-location of Formal and Informal Manufacturing and Firm’s Performance: Evidence from India

This study analyses the impact of co-location between formal and informal manufacturing sectors on plant-level productivity. We employ a unique data obtained by merging plant-level data from Annual Survey of Industries (ASI 2011–2012) and Survey of Unorganised Manufacturing and Repairing Enterprises provided by National Sample Survey Office (NSSO 67th round). We find that formal and informal manufacturing plants gain from localisation. Further, co-location with informal enterprises has a positive impact on productivity of formal sector plants; however, we observe insignificant impact of co-location on informal sector enterprises. Additionally, we find evidence that informal sector enterprises benefit from industrially diversified regions. JEL Codes: D24, R12, R3

Adjustment to trade opening: The case of labor share in India's manufacturing industry

While trade opening is generally welfare enhancing, it requires a reallocation of capital and labor across sectors and firms. The empirical evidence on how this reallocation works is still relatively thin. Our paper contributes to this literature by studying how the labor’s share of income adjusted due to trade liberalization in India’s formal manufacturing sector during the period 1998–99 to 2007–08. Our baseline model suggests that a fall in output tariffs led to an increase in the labor share while a fall in input tariffs brought about a decrease in labor share. However, once we control for factor and technology intensity of production, we find that this differential impact of tariff reduction on labor share aligns with these classifications. Tariff liberalization led to a decline in labor share in technology and capital-intensive sectors while in labor-intensive and low-tech sectors it brought about an increase. This suggests that following trade opening, demand for labor improved in labor-intensive and low-tech sectors but deteriorated in capital-intensive and high-tech sectors. India’s manufacturing bias towards the latter explains the overall decline in labor share in the post-reform period. Furthermore, we find that labor adjustment occurred more efficiently in states with flexible labor laws.

Resource Misallocation in India

At the macro level, productivity is driven by technology and the efficiency of resource allocation, as outcomes of firms’ decision making. The relatively high level of resource misallocation in India’s formal manufacturing sector is well documented. We build on this research to further investigate the drivers of misallocation, exploiting micro-level variation across Indian states. We find that states with less rigid labor markets have lesser misallocation. We also examine the interaction of labor market rigidities with informality which is a key feature of India’s labor markets. Our results suggest that reducing labor market rigidities in states with high informality has a net positive effect on aggregate productivity.

Resource Misallocation in India: The Role of Cross-State Labor Market Reform

At the macro level, productivity is driven by technology and the efficiency of resource allocation, as outcomes of firms’ decision making. The relatively high level of resource misallocation in India’s formal manufacturing sector is well documented. We build on this research to further investigate the drivers of misallocation, exploiting micro-level variation across Indian states. We find that states with less rigid labor markets have lesser misallocation. We also examine the interaction of labor market rigidities with informality which is a key feature of India’s labor markets. Our results suggest that reducing labor market rigidities in states with high informality has a net positive effect on aggregate productivity.

Globalization and Workforce Composition in Indian Formal Manufacturing: New Evidence on Product Market Competition Channel

A variety of mechanisms linking globalization and margins of adjustments in the labor markets have been empirically tested in recent years. How globalization could affect the workforce composition of industries and thereby the quality of jobs, a key labor market indicator is much less studied and the econometric evidence is sparse. This study contributes to filling the gap by studying India’s formal manufacturing sector that experienced deep trade and industrial reforms since the 1990s. Industry-level panel data are analyzed to establish the indirect link between product market structure (concentration) and workforce composition of firms (usage of contract workers). We explicitly measure changes in market concentration using a newly constructed trade-adjusted concentration ratio, profitability (price-cost mark-up), and workforce composition (usage of contract workers) to show how the effect of globalization is mediated indirectly through the product market structure. Our sample includes 46 three-digit formal manufacturing industries spanning from 1998 to 2014. The findings provide significant evidence that Indian manufacturing firms responded to globalization by hiring relatively more contract workers a key margin of labor market flexibility. This finding underlines the importance of understanding the indirect ways in which globalization could affect labor market conditions and workers' welfare in developing countries.

Job Polarisation in India: Structural Causes and Policy Implications

Automation impacts wage levels at the micro-level and the structure of employment at the macro-level. Job polarisation is defined as the automation of ‘middle-skilled’ jobs that require routine cognitive and manual applications, whilst high- and low-skilled occupations are preserved. This paper examines the nature of job polarisation in India during the period 1983–2012 when Indian manufacturing sector was being automated. The research uses disaggregated data from National Sample Survey Office and examines the impact of supply-side factors such as nature of employment and presence of educated labour force. The study has three observations. First, the increased demand for high-skilled workers in the formal manufacturing sector is due to skill bias of technology and conforms to theoretical expectation. Second, the transition of agricultural labourers to low-skilled manufacturing sectors such as construction and textiles signals distress in traditional manufacturing sector to provide employment to these groups. Third, the over-supply of secondary and tertiary educated labour force has resulted in the squeezing out of middle-skilled workers from middle-skilled jobs to relatively low-skilled manufacturing and service occupations. This explains the persistence of routine occupations even after automation. The study concludes that in the Indian manufacturing sector, increased demand for high- and low-skilled jobs has coexisted with the middle-skilled jobs due to supply-side factors.

Job Polarisation in India: Structural Causes and Policy Implications

Automation impacts wage levels at the micro-level and the structure of employment at the macro-level. Job polarisation is defined as the automation of ‘middle-skilled’ jobs that require routine cognitive and manual applications, whilst high- and low-skilled occupations are preserved. This paper examines the nature of job polarisation in India during the period 1983–2012 when Indian manufacturing sector was being automated. The research uses disaggregated data from National Sample Survey Office and examines the impact of supply-side factors such as nature of employment and presence of educated labour force. The study has three observations. First, the increased demand for high-skilled workers in the formal manufacturing sector is due to skill bias of technology and conforms to theoretical expectation. Second, the transition of agricultural labourers to low-skilled manufacturing sectors such as construction and textiles signals distress in traditional manufacturing sector to provide employment to these groups. Third, the over-supply of secondary and tertiary educated labour force has resulted in the squeezing out of middle-skilled workers from middle-skilled jobs to relatively low-skilled manufacturing and service occupations. This explains the persistence of routine occupations even after automation. The study concludes that in the Indian manufacturing sector, increased demand for high- and low-skilled jobs has coexisted with the middle-skilled jobs due to supply-side factors.

Spinners or sitters? Regimes of social reproduction and urban Chinese workers’ employment choices

Despite China being the world’s factory, its labor market is now primarily service-based with a high level of informality. When formal manufacturing and informal service sectors co-exist, how do workers make their choices? While existing literature focuses on rural migrant workers’ experience in the Chinese labor system, this study extends the analytical scope to low-skill urban workers. Drawing on archival, interview, and ethnographic data in a large industrial city in central China, I compare urban women’s different trajectories in textile manufacturing and informal domestic service. Building on labor regime studies and Social Reproduction Theory, I develop a framework called “regimes of social reproduction” to explain workers’ job choices. I argue that China’s post-socialist industrial restructuring has given rise to a public–private hybrid regime of social reproduction, which keeps workers’ pension and healthcare schemes in the public domain and pushes childcare, elderly care, and domestic work to the private sphere and then marketizes them. For urban workers, when choosing between formal manufacturing and informal service, it is their position within the regime of social reproduction that plays a decisive role. Their position is assessed along the following two dimensions: (1) the degree of a worker’s dependency on the employment-based welfare provisions and (2) the degree of demand for reproductive labor in a worker’s family. Challenging the conventional view that formal manufacturing jobs are more desirable than informal service jobs, I conclude that under the current regime of social reproduction, the booming informal service market may provide some best earning opportunities for low-skilled urban workers. However, the same regime has also set significant limits on such opportunities as these urbanites’ availability to work is highly contingent on (lack of) demand for reproductive labor from their own family.

Creative Destruction or Just Destruction? Effects of Floods on Manufacturing Establishments in India

Climate change is projected to increase the frequency and severity of flooding. In this paper, I examine the direct consequences of floods on manufacturing establishments in India as well as indirect effects on the entire manufacturing sector through the sect-oral reallocation of labor. I construct a unique panel data set of flood inundations using high-precision satellite images, which I match with formal and informal sector establishment-level data. I show that floods cause a significant reduction in output, capital, and employment in formal establishments. I also document significant heterogeneity in vulnerability and resilience to floods within the formal manufacturing sector. The least-productive formal establishments are the most vulnerable to floods: a 10 percent increase in flood exposure leads to a 0.6 percentage point increased probability of exit among low-productivity firms. I do not observe any associated labor reallocation to more productive establishments, which could support the creative destruction hypothesis. Rather, I find suggestive evidence of labor reallocation to informal household-run micro-enterprises. As there is a large labor productivity gap across formal and informal sectors, I show that because of the disaster-induced labor reallocation, a 10 percent increase in the incidence of flooding causes a 17.3 percent reduction in aggregate productivity in the manufacturing sector.

Dynamics of Reallocation Within India’s Income Distribution

We investigate the nature and extent of reallocation occurring within the Indian income distribution, with a particular focus on the dynamics of the bottom of the distribution. We argue that income evolution is appropriately modeled using Geometric Brownian Motion (GBM). Specifically, we use the mechanism of GBM with a reallocation parameter that quantifies the extent and direction of reallocation in the distribution, as proposed by Berman et al. We find that since the early 2000s reallocation is negative, meaning that incomes are exponentially diverging and that there is a perverse redistribution of resources from the poor to the rich. It is well known that inequality has been rising in India in the recent past, but the assumption has been that while the rich benefit more than proportionally from economic growth, the poor are also better off than before. Our work refutes this as we find that India has moved from a regime of progressive to regressive redistribution, where continued impoverishment of the poor is directly spurring multiplicative income growth of the rich. Outcomes from the model suggest that income shares of the bottom decile (~1%) and bottom percentile (~0.03%) are at historic lows. We characterize these findings in the context of increasing in-formalization of the workforce in the formal manufacturing and service sectors, as well as the growing economic insecurity of the agricultural workforce in India. Significant structural changes will be required to address this phenomenon.

Do Global Value Chains Enhance Economic Upgrading? A Long View

Exporting through global value chains (GVCs) has recently been highlighted as a panacea for weak industrialisation trends in the South. We study the long-run effects of GVC participation for a large set of countries between 1970 and 2008. We find strong evidence for the positive effects on productivity growth in the formal manufacturing sector. This effect is stronger when the gap with the global productivity frontier is larger. However, we find no evidence for a positive effect on employment generation. These findings also hold in analyses of sub-sets of countries and industries and are robust to the inclusion of non-manufacturing employment.

Factors influencing the decision to hire contract labour by Indian manufacturing firms

ABSTRACTOver a third of workers employed in the Indian formal manufacturing sector are ‘contract’ workers – hired through the services of labour contractors, facing lower wages and no job security in relation to regular workers. We investigate the role of a variety of factors that influence the decision of employers to hire in contract workers, using information from a specially commissioned survey of manufacturing firms. While there are immediate cost advantages that tilt firms towards hiring in contract labour, a counterforce has employers favouring regular workers in firms that have a large proportion of their workforce concentrating on production activity – probably instances where long-term human capital investment by regular workers is important for the firm.Abbreviation: CLA: Contract Labour (Regulation and Abolition) Act, 1970 ASI: Annual Survey of Industries NIC: National Industrial Classification MSME: Micro, Small and Medium Enterprises SEZ: Special Economic Zone ICRIER: Indian Council for Research on International Economic Relations