cent during 1991-97.
Goldar explains it
Discussion
Organised Manufacturing
Employment
R NAGARAJ
I n 1993-94, India’s manufacturing sec-
tor employed about 10 per cent of
workforce to produce about 16 per cent
of measured GDP.1 Registered (organised)
manufacturing – that is, all factories
employing 10 or more workers using
power, and 20 or workers without power
– made up 2/3rd of measured manufac-
turing value added (output, hereafter), but
employed only about 1/5 of workers in this
sector. Therefore, the bulk of the workforce
in manufacturing is in the unregistered
(unorganised) sector. It also accounts for
much of India’s net merchandise exports.
Though quantitatively modest, registered
manufacturing sector (manufacturing
hereafter, for short) attracts academic and
policy attention disproportionate to its size
– perhaps, for justifiable reasons. In the
initial years of planning, much of the
development strategy focused on creating
a large and efficient capital goods indus-
tries. But in recent years, this sector has
come to symbolise all that is believed to
have gone wrong with Indian develop-
ment effort: modest long-term output
growth in a comparative economic perspec-
tive with high capital intensity, and low
(or negligible) total factor productivity
growth. It is widely believed that one of
the principal reasons for the poor perfor-
mance is the policy-induced rigidities in
the industrial labour market [for instance,
Lucas 1989; Datt Chaudhuri 1995].
‘Jobless growth’ in manufacturing in
the 1980s was considered as the evidence
for this proposition. During 1980-89, as
the annual earnings per worker (earnings
for short) went up by 3.5 per cent, there
was said to have been a large-scale sub-
stitution of labour for capital that practi-
cally stopped employment growth. This
view has been widely contested. It was
shown that nearly half the earnings growth
represented an increase in mandays, im-
plying, during this period workers worked
longer hours or more number of days,
while the wage rate (for the standard
Economic and Political Weekly September 16, 2000
working day) rose only at about 1½ per
cent per year [Nagaraj 1994]. Bhalotra
(1998) sought to provide a more rigorous
verification of this proposition.
Before the ink was dry, employment
growth turned around in the 1990s (Fig-
ure 1), providing more fodder for the
debate. Recently, Goldar (2000) has sought
to show that wage moderation explained
the turn around. He attributed it to a faster
employment growth in smaller sized fac-
tories, in response to the changes in trade
and industrial policies initiated since 1991.
In providing econometric evidence for the
inverse relationship between employment
and earnings growth, Goldar found no sup-
port for the hypothesis of growth in mandays
– even for the 1980s. To quote him,
Acceleration in employment growth is
found both at the aggregate level, and for
most industries. This may partly be ex-
plained by changes in the size structure
in favour of small and medium sized
factories. Another important explanation
for acceleration in employment seems to
lie in a slow down in the growth in real
wages [Goldar 2000:1195].
This note re-examines the analytical and
empirical bases of Goldar’s conclusions,
and suggests an alternative explanation
for the employment expansion in the 1990s.
Some Analytical Considerations
It is a truism to say that in the conven-
tional competitive equilibrium theory,
employment is inversely related to wages.
However, in theory, if efficiency wage or
labour quality considerations are intro-
duced, then the standard results get suit-
ably modified. Further, in the industrial
sector with mark up pricing, with excess
capacity, and with considerable state inter-
vention in all the markets, one is not sure
if the inferences of a perfectly competitive
economy can be directly applied. Therefore,
in principle, Goldar’s inference that employ-
ment revived in the 1990s due to a wage
moderation appears somewhat simplistic.
From a different analytical perspective,
one can question whether the standard
reasoning, starting from a wage reduction
leading to an increase in employment, and
hence output growth really holds. This
assumes the labour market to be the
‘active’ market, while the product market
‘follows’ the labour market. If, however,
product market is postulated to be the
active one, then the fall in wages may
contract the aggregate demand and hence
output growth.2
Analytically, other things being equal,
labour demand is a function not of wage
rate (product wage), but wage-rental ratio.
In other words, a firm’s decision how much
labour to employ depends not only on the
going wage rate (for the standard working
day), but the wage rate in relation of cost
of capital. Even this may be of limited value,
when labour productivity is rising. There-
fore, one should look at the unit wage cost.
Hence, Goldar’s analytical specification is
open to question. Empirically, however,
Goldar’s findings may still be valid since
cost of capital (proxied by real interest
rates in the economy) has been higher in
the 1990s than in the previous decade.
In Goldar’s conception, wages and
manday’s are seen as competing explana-
tions for labour demand. This is an incor-
rect specification of the relationship.
Earnings per worker (wages according to
Goldar) is a product of wage rate (wage
rate per standard working day) and the
number of days worked. Thus, a given
labour demand can be met either by
(i) increasing the number of workers
(working the standard working day), or
(ii) increasing mandays worked by the ex-
isting workers, or (iii) both.3 In Goldar’s
econometric specification, variation in em-
ployment across industry groups is a
function of variation in (i) wages
(ii) mandays and (iii) gross value added
(GVA) – all in terms of growth rates. Such
a specification is incorrect, because the
variable ‘wages’ already includes the effect
Table 1: Growth in Number of
Establishments and Employment in
Unregistered Manufacturing, 1985 -
1994-95 for all India.
(Percentage change over the previous period)
Year Establishments Employment
1978-79
1984-85 15.1 12.8
1989-90 3.9 –0.8
1994-95 –9.5 –1.3
Source: Lalitha (1999).
3445
 Figure 1: Employment in Registered Manufacturing Figure 2: Employment and Earnings in Registered
6.9 – Manufacturing
6.85 – 5–
6.8 –
Log of value

Per cent per year

4–
6.75 –
6.7 – 3–
6.65 –
6.6 – 2–
6.55 – 1–
6.5 –
74

76

78

80

82

84

86

88

90

92

94

96

98
0–
1975-80 1981-91 1991-98
Year ending
Years
Employment
Employment Earnings

Figure 3: Growth in Employment and Mandays in Registered Manufacturing 1950, to less than 60 in 1976. This result
3.5 –
was true for most 2-digit industry group
– a glaring fact that many studies on Indian
3 – industry chose to ignore [Sandesera 1979;
Nagaraj 1985]. The trend decline contin-
2.5 – ued in the 1970s and the 1980s as well
Per cent per year

[Nagaraj 1994, Figures 8 and 9]. There-

2 – fore, Goldar’s observation of the changes
in the size distribution of employment is
1.5 –
part of a long-term trend, observed over
half a century. Therefore, it has probably
got little to do with the reforms initiated
1 –
in the 1990s. Thus, the evidence does not
really support his explanation.
0.5 – Finally, and perhaps more significantly,
Goldar’s econometric estimates seem to
0 – have serious problems. Using his data in
1980-91 1992-97
Years Tables 3 and 4 (pp 1193-94), we have re-
Workers Mandays estimated the regression equations, by
introducing the independent variables one
of ‘mandays’. Therefore, by definition, Some Empirical Considerations by one, to understand the incremental
one cannot expect to find an independent contribution of each of them in explaining
effect of mandays reflected on the depen- In Goldar’s view, the faster growth of the variations in the dependent variable
dent variable. Econometrically, there employment in smaller sized factories, and (Tables 2 and 3).6
is bound to be high multi-collinearity loss of employment in larger size classes
between wages and mandays. is in response to industrial and trade policy Table 2 (ii): Inter-correlation Matrix
If Goldar’s argument that much of the reforms initiated in the 1990s. But this
employment has occurred in smaller sized argument ignores the fact that such a change Employ Wages Mandays GVA
factories in response to lower wages, in in the size structure has been taking place Employ 1
a regime of more appropriate industrial over the last five decades. For instance, in Wages –0.197 1
Mandays –0.326 0.622* 1
and trade policy regime, then the same the factory sector, the average factory size
GVA 0.709* 0.426 0.155 1
argument should hold more true for the fell from over 140 workers per factory in
unregistered manufacturing as well. In Table 2 (i): Regression Analysis, 1980–90
principle, these policy changes should –2
increase demand for labour-intensive Sl No Constant Term Wages Mandays GVA R
manufacture that should boost output and 1 2.229 –0.200 0.041
employment growth.4 But the evidence is (0.779)
2 1.903 –0.009 –0.746 –0.009
not consistent with such an explanation.5 (0.028) (1.028)
Successive five-yearly economic census 3 –0.769 –0.507 –0.361 0.526 0.785
data, between 1984-85 and 1994-95, sug- (3.044)* (1.066) (7.258)*
4 – 0.667 –0.618 0.538 0.782
gests a decline in absolute number of (4.709)* (7.480)*
factories (establishments), and employment 5 –1.882 0.394 0.498
during 1984-95 (Table 1). Therefore, (3.895)*
Goldar’s argument that the changes in trade Note: Dependent variable: employment; GVA – gross value added. All variables are in growth rates. It is
and industrial policies have had a a cross-section regression of growth rates of the variables at 2–digit industries as the observation.
favourable impact on smaller sized facto- Number of observations, 17. Data are from Tables 3 and 4 of Goldar’s paper. Figures in brackets are
absolute values of t–statistics.
ries in the factory sector needs to taken * represents statistical significance at least at 5 per cent significance level. This notation holds for the
with great caution. other tables in this study as well.

3446 Economic and Political Weekly September 16, 2000

 Figure 4: Fixed Investment Growth in Registered Manufacturing
20 –
Per cent per year
15 –
10 –
5 –
0 –
1974-80
Gross fixed capital formation
We find that simple linear regression
between employment (dependent variable)
and wages (independent variable) – both
in terms of growth rates for the cross-
section of 17 2-digit industry groups –
has no explanatory power. The explana-
tory power does not improve either, when
‘mandays’ variable is added. This simply
confirms our earlier argument that, by
definition, one cannot expect mandays to
have an independent explanatory power,
once wages is included. But, interestingly,
when gross value (GVA) added is in-
cluded, the regression equation becomes
statistically significant, with both the
wages and GVA turning out to be statis-
tically significant, with the expected signs.
How does it happen?
To understand this, we computed inter-
correlation matrix of all the four variables.
Simple (linear) correlation coefficient
between employment and wages is insig-
nificant, though it has the expected nega-
tive sign. However, GVA is correlated,
statistically significantly, with employ-
ment in the 1980s, and with wages in the
1990s. This suggests that the associations
between employment and wages are me-
diated by GVA. But independent of it, the
variation wages across the industry-groups
hardly explains the variation in employ-
ment, during both the periods. Therefore,
unless one has a priori explanation as to
how GVA affects both employment and
wages across the industry groups,
Goldar’s econometric results have little
economic meaning.7
Here, our earlier analytical discussion
could be of some value. Perhaps, these
results suggests that wages and employ-
ment are together driven by some aspect
of the product market – indicating that the
likely causation runs from the product
market to the labour market. This seems
consistent with the Keynesian postulate –
rather than with the neo-classical causa-
tion running from an active labour market,
to the product market. If this reasoning
Economic and Political Weekly
1981-86 1987-91 1992-97
Years
is correct, then it could be of some value
in exploring an alternative explanation.
An Alternative Explanation
How does one explain the revival of
employment in the 1990s, if Goldar’s
proposition (of wage moderation) is not
valid? Figure 1 plots, on a log scale,
employment of workers over the period,
1973-74 to 1997-98.8 During 1974-83,
employment grew steadily at 3.4 per cent
per year. Then, there was a fall in the
absolute number of workers for four years,
between 1982-83 and 1986-87. Employ-
ment growth recovered thereafter – though
at a slower rate and with a greater fluctua-
tion – peaking in 1995-96. The trend growth
rate in employment during 1987-98 is about
3.2 per cent per year. Evidently, there is
no break in the trend in 1991-92.
Since the output growth rate in the 1970s
was lower, in relation to employment
growth, there developed an overhang of
employment in the 1980s (Figure 2).9 As
we hypothesised earlier [Nagaraj 1994],
this is probably what caused the decline in
employment during the mid-1980s, for about
four years. As output demand picked up,
firms first sought to maximise the use the
existing stock of capital and labour re-
sources. This got reflected in greater
mandays than growth in employment. In
other words, growth in earnings in the 1980s
was more on account of growth in mandays
than the growth in employment (Figure 3).
Table 3: Regression Analysis, 1990-97
Sl No Constant Term Wages
1 3.097 0.017
(0.081)
2 3.454 -0.044
(0.199)
3 -0.002 -0.673
(2.713)*
4 0.884 -0.673
(2.809)*
5 -1.392
September 16, 2000
However, as output expanded, the over-
hand got exhausted, and the employment
growth recovered. Then, the question arises,
how was the employment growth sustained
in the 1990s, despite a modestly slower
output growth compared to the previous
decade? The explanation probably lies not
in output growth but in investment boom
that was witnessed in response to the in-
dustrial deregulation and trade policy re-
form. As Figure 4 shows, average of an-
nual growth rate of fixed investment (gross
fixed capital formation) went up from 9
per cent during 1986-91 to 15 per cent
during 1992-97.10 Although the interest
rates in the economy were high, dampen-
ing investment demand, the cost of capital
for the large private corporate firms was
lower during the first half of the 1990s as
the stock market boom reduced real cost
of investable funds. This was perhaps aided
by a freer access to international capital
markets for large Indian firms. Hence, we
would hypothesise this aspect of the prod-
uct market is primarily responsible for the
improved employment growth in the 1990s.
Conclusions
To sum up, contrary to the jobless growth
in the 1980s, registered manufacturing
employment grew annually at about 3 per
cent during 1991-97. Goldar explains it
mainly as a response to wage moderation:
the annual growth rate of earnings per
worker declined from 4.8 per cent in the
1980s, to 2.5 per cent in the 1990s. He
further argued that the decline in wage
growth partly represents changing size
distribution of factories in the 1990s
Table 3 (ii): Inter-correlation Matrix,
1990-97
Employ- Wages Mandays GVA
ment
Employment 1
Wages 0.021 1
Mandays -0.231 -0.303 1
GVA 0.4695 0.768* -0.396 1
–2
Mandays GVA R
0.0
-1.437 -0.079
(0.909)
-0.305 0.551 0.389
(0.246) (3.424)*
0.561 0.430
(3.751)*
0.239 0.220
(2.059)*
3447
towards smaller sized factories, which he,
in turn, attributes to the industrial and trade
policy reforms initiated since 1991. More-
over, he contested the view that the growth
in mandays played no role in explaining
the employment trends – not even in the
1980s, as some studies have contended.
This paper re-examined Goldar’s find-
ings, both from analytical and empirical
points of view. The following are the main
results of such an attempt:
– The inverse relationship between employ-
ment and wages is a truism in a conven-
tional equilibrium analysis. However,
when efficiency wage considerations
or quality of labour are introduced, one
cannot be sure if the competitive equi-
librium conditions really hold.
– Viewed from a Keynesian perspective,
one could argue that the economic cau-
sation could run from the goods market
to labour market, and not the other way
round. Since the evidence from the de-
veloped economies is very mixed on
this issue, there is little basis to be sure
that the transmission mechanism runs
from the active labour market to the
product market, as postulated in the
neo-classical theory.
– Goldar’s postulated relationship be-
tween employment and wages is incor-
rect, as employment depends not on
wages but on wage-rental ratio. How-
ever, this may not vitiate his results as
the wage-rental ratio could, in fact, have
fallen since the economy’s real interest
rate rose rapidly in the 1990s.
– To test if the mandays have an indepen-
dent influence on employment, Goldar
regressed employment on (i) wages and
(ii) mandays, in a cross-section regres-
sion of 17 industry groups (all in growth
rates). This is an incorrect specification
since wages, by definition, is a product
of wage rate (for the standard working
day) and number of mandays. As
Goldar’s independent variables are
inter-related, by definition, the effect of
mandays will not be captured in such
a multiple regression equation. More-
over, econometrically, there is bound
to be high multi-collinearity.
– According to Goldar, changes in em-
ployment in favour of smaller sized
factories in the 1990s partly account for
the wage moderation. And he attributes
the changes in the size distribution to
the industrial and trade policy reforms
initiated since 1991. This view is per-
haps overly simplistic, since size dis-
tribution has been steadily moving in
3448
favour of smaller sized factories for the
last five decades.
– Finally, and perhaps most significantly,
Goldar’s regression results have a prob-
lem of interpretation. Our re-estimation
of Goldar’s model by introducing one
independent variable after another (to
understand the incremental contribu-
tion of each additional variable intro-
duced) suggests that there is, in fact, no
statistically valid relationship between
growth in employment and wages across
industries (as postulated). The relation-
ship is ‘driven’ by gross value added,
which is statistically significantly asso-
ciated with both employment in one
case and with wages in the other. It, thus,
suggests that the labour market vari-
ables seem to be mediated by product
market variables. Therefore, Goldar’s
empirical evidence to support the in-
verse relationship between employment
and wages appears seriously flawed.
– We hypothesise that the product market
variable that could explain the employ-
ment growth in the 1990s is the growth
in fixed investment. It seems likely that
industrial deregulation led to an invest-
ment boom, aided by the stock market
boom in the first half of the 1990s that
reduced capital cost for large private
corporate firms. EPW
Notes
[Following the usual disclaimers, I thank Chandan
Mukherjee, K V Ramaswamy and M H Surya-
narayana for their comments and suggestions on
an earlier draft of this paper; and Ramesh Datt,
and Errol D’Souza, for discussions on this study.]
1 Unless otherwise mentioned, in this study, all
variables in value terms are at constant prices.
2 In economic theory there is no consensus on
which kind of transmission mechanism – neo-
classical or Keynesian – is empirically more
valid. As Amit Bhaduri said, “Economists are
sharply divided regarding the question of the
relevant transmission mechanism... It is only
fair to say that the state of our knowledge in
this respect is fluid, and the ‘Keynesian
consensus’ no longer rules supreme; nor do
monetarist conclusions” [Bhaduri 1996:15].
3 For simplicity, we have ignored intensity (or
porosity of the working day), which is amenable
to change by piece rate work, by incentive
income, or more intensive supervision.
4 For an exposition of the effects of trade policy
reforms on employment, see Edwards and
Edwards (1994).
5 One could argue that with a reduction in the
rigidities in the labour market after the reforms,
employment would shift from the unorganised
to the organised. Hence, the evidence in the
1990s is consistent with the theory. Such
reasoning may be a bit simplistic because
wages differential across the organised and
unorganised sectors is not merely due to the
policy induced rigidities. There are sound
Economic and Political Weekly
economic reasons in terms of labour quality,
efficiency wages, etc, which probably account
for much of the observed wage differential
[Mazumdar 1989].
6 Just as Goldar, we have made computations
separately for 1980-90, and for 1990-97. The
results for the two decades are broadly similar,
though they are generally stronger for the 1980s.
7 In the absence of a clearly articulated economic
reasoning for including the variables in the
regression equation, and the form chosen to
represent them, Goldar’s model remains a mere
statistical exercise.
8 This refers to employment of workers, taken
from the ASI. We have used 1973-74 as the
starting point of the series as the official
summary results for the factory sector are
available continuously from this year.
9 One could argue that the overhang is a clear
evidence of the rigidities in the labour market.
Not necessarily, we would contend, since the
overhand may in fact reflect efficiency wage
hypothesis, as industrial skills are in short supply.
10 In contrast, investment growth in the un-
registered manufacturing declined perceptibly
as the real interest rate shot up in the 1990s.
Moreover, in the changed policy regime,
reduced credit flow to the small-scale sector
also perhaps contributed to the investment
decline.
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