Description

Article written by 2009 DPDF Revitalizing Development Studies Fellow Sheba Tejani, featured in the Cambridge Journal of Economics:

This paper investigates the relationship between output growth and employment growth in India for the period 1978–2010 at the aggregate and sectoral levels. Using a Kaldorian framework of endogenous productivity growth, we find that Kaldor–Verdoorn effects in the economy have become more predominant over time, especially in the post-reform (1994–2010) period. Our estimated Kaldor–Verdoorn coefficients, measured as the employment elasticity of output growth, for both formal sector and total employment have dropped dramatically over time, suggesting that India has leapfrogged into a high-productivity regime without the broad-based expansion of labour-intensive production that has been characteristic of fast-growing economies in East Asia. We examine some explanations for why these Kaldor–Verdoorn effects have become pronounced over time and are not convinced that wage pressure has been one of the reasons. A shift in the composition of demand towards higher-productivity sectors, however, does appear to be an important part of the explanation. We also find mixed evidence that forces of international competition have generated pressures to adopt more capital-intensive techniques of production.