Productivity, Wages and Employment in Indian Manufacturing Sector: An Empirical Analysis

Badri Narayan Rath and S.Madheswaran* Institute for Social and Economic Change Nagrabhavi !"# Bangalore $%&&'( Email) badrirath*yahoo.com Abstract +his ,a,er investigates the relationshi, between labour ,roductivity- real wagesem,loyment and ,rices in Indian manufacturing sector. +he em,irical results derived from conventional cointegartion and error correction models ,rovide evidence for long run relationshi, among these variables during ./%&0%. to (&&.0&(. +he results derived from the bloc1 e2ogeneity test indicate that there is uni0directional causality between real wages to labour ,roductivity and causality runs from real wages to labour ,roductivity. 3owever- em,loyment and ,rices are not causing the labour ,roductivity. Similarlylabour ,roductivity and real wages are causing ,rices but there is no causation from em,loyment to ,rices. +he s,eed of ad4ustment ,arameters indicates that the short run dise5uilibrium among these variables is ad4usted through labour ,roductivity and ,ricesbut not by the real wages and em,loyment. +he government functioning needs to be more efficient to ma1e Indian manufacturing globally com,etitive.

Keywords: 6abour !roductivity- Real 7ages- Em,loyment- !rices- Cointegartion- Error Correction- Bloc1 E2ogeneity and Indian Manufacturing. * +he authors are the Research Scholar and 8ssociate !rofessor at the Institute for Social and Economic Change- Bangalore0$%& &'(- India. +he first author is grateful to 9r.M.Ramachandran- !rofessor :niversity of !ondichery for his valuable comments and suggestions. 3owever the authors are res,onsible for any errors.

! Introduction India;s ,ost0inde,endence develo,ment ,lans have em,hasi<ed industriali<ation as a very im,ortant instrument for sustained growth. 8s a result- today in (&&=0&$- the annual growth rate of industrial ,roduction of total industry is >./ ,er cent and higher than country;s overall economy growth. 7ithin industrial sector- manufacturing ,lays an im,ortant role in countries economies and its weight is '/.? ,er cent out of total industrial sector in (&&=0&$ Economic Survey- (&&=0&$#. Manufacturing growth started accelerating in the ./>&s and got further stimulus in the .//&s. +he 1ey reasons for increasing growth is investment in ,ublic infrastructure- gradual reduction in government controls and higher inflow in ,rivate investment in .//&s. 8t ,resent- Indian manufacturing constitutes nearly one fifth of the economy. It em,loys nearly ..> million ,eo,le in the organi<ed sector and contributes more than '$ ,er cent India;s e2,ort.. 9es,ite a steady growth over the several decades- Indian manufacturing faces stiff com,etition from other develo,ing economies in 8sia and elsewhere both in domestic as well as global mar1ets. +he im,ortant re5uisite- which is needed for com,etitiveness is enhancement of ,roductivity. Being a labour abundant economy- India could boost the ,roductivity by em,loyment generation- higher wages to the em,loyees- innovation and technology. So- the issue of ,roductivity and em,loyment in manufacturing sector is the only root to ma1e Indian manufacturing as a global manufacturing hub. !roductivity studies gained ,rominence in India after ./$&s and early ./%&s- when develo,ment was basically growth oriented. In later ,art of ./%&s- a number of studies have been conducted in the manufacturing sector in India.

@uoted from 7+I- (&&?#.

Several studies li1e 8hluwalia .//.#- Aoldar ./>%- (&&&- (&&=#- :,ender .//%#- Bumar (&&(#- 8ggarwal and Bumar .//.#- Bala1rishnan and !ush,angadan .//=#- Rao .//%#- Aango,adhyaya and 7adhwa .//>#- :nel (&&?#- +rivedi et.al. (&&&#- +S6 (&&?#- +endul1ar (&&?#- Bidhe and Balira4an (&&=# have measured the ,roductivity trends- em,loyment trends and growth of Indian organi<ed manufacturing sector during the ,ost inde,endence ,eriod. 8 significant number of studies have focused on the measurement of +otal Cactor !roductivity Arowth +C!A# and found different figures within different underlying methodological framewor1. Recent studies li1e Bala1rishnan and Suresh Babu (&&?#- find the growth rate of labour ,roductivity and em,loyment in the nineties has risen as com,are to eighties. But at the same time- the growth rate of money wage- ,roduct wage and real wages has declined in the ,ost0reform as com,are to ,re0reform ,eriod. Some of the indicators of their study do commensurate with the findings of :nel (&&?# and Aango,adhyay and 7adhwa .//>#. But Aoldar (&&=# finds a deceleration growth in Indian manufacturing during ,ost0reform ,eriods as com,ared to ,re0reform ,eriod. 3e has com,ared his results with :nel (&&?# and +S6 (&&?# and critici<ed their findings on the ground of measurement ,roblems. Aoldar;s study also finds a negative em,loyment growth in Indian organi<ed manufacturing sector after .//'0/>. +he study by Bidhe and Balira4an (&&=# also shows a slow growth rate of em,loyment in organi<ed manufacturing sector in ,ost0reform ,eriod as com,are to ,re0reform ,eriod. Indian government ,olicies with regards to industry- foreign investment and trade have been s,routing over the years. In ./$&s and %&s- the focus of the government was on attaining self0sufficiency in all sectors of the economy- generating em,loyment,romoting small industries and ,reventing ,rivate sector mono,olies. "ver the yearshowever- these ,olicies had detrimental effect on low ,roductivity- lac1 of ,rofessional management in most of the Indian firms. In state owned enter,rises and government ownershi,- the bureaucratic system delayed in decision0ma1ing ,rocess. +he com,ulsory licensing for all the industries- ,rice controls and subsidies removed motivation to im,rove ,erformance. 8fter the .//. reforms- Indian manufacturing has been o,ened out to com,etition from global ,layers. 3owever- the ,ace of reform has been slow. +he government should find

out ,ro,er immediate action in order to enhance the ,roductivity- which will accelerate the growth ,rocess and com,etitiveness of the economy. In order to ta1e various ste,s for increasing the ,roductivity- it is more im,ortant to see the dynamic relationshi, between the 1ey variables in the manufacturing sector. +he ,resent ,a,er has a different dimension. It differs from the ,revious literature on the ground of s,ecific focus on e2,laining the long run causal relationshi, between ,roductivity- em,loyment- real wages and ,rice in the manufacturing sector. It is well documented that the mutually reinforcing ,henomena of low ,roductivity in manufacturing sector is the cause for low income. 6ow income in turn leads to low standards of living- which constitute the root cause for ,overty and unem,loyment in the country. So- the issue of labour ,roductivity growth- the only route to enhance labour welfare in the long run has been under e2amined. +he ,a,er is set out as follows. Section ( discusses some of international literature ,ertaining to our study. Section ? briefly outlines the methodological framewor1 for causality issues and the long run e5uilibrium relationshi, among these variables. Section ? discusses the measurement of variables and the sources of data. Section = ,resents the results of cointegration tests- error correction models and causality tests. Concluding remar1s is given in section $. "! #eview $iterature In light of this- we have reviewed some of the international literature ,ertaining to our study. !olicy0ma1ers and financial analysts cite wage ,ressures and ,roductivity gains as leading factors in e2,laining inflation. Mehra (&&&# shows that ,rices e2,lain wages- but that wages are not a causal factor in determining inflation. Studies by 3u and +erhan .//$# and Aordon ./>># re,ort evidence indicating that wage growth has no ,redictive content for inflation- re4ecting the cost0,ush view. Ahali .///#- using Aranger0causality tests- finds that wage growth does hel, to ,redict inflation- su,,orting the cost0,ush view. 6indbec1 ./>?#- Aiersch and 7olter ./>?# and others have e2amined the negative im,act of inflation on labour ,roductivity. +he acceleration of inflation will ,ush wor1ers into higher ta2 brac1ets and it may have im,aired wor1 incentives. Since higher inflation rates can distort the ,rice mechanism they can also reduce the economic efficiency- having negative im,act on ca,ital accumulation and

technological ,rogress. Strauss and 7ohar (&&.# investigate the long0run relationshi, between ,rices and wage0ad4usted ,roductivity as well as between real wages and average labour ,roductivity at the industry level for =$/ :S manufacturing industries over the ,eriod ./$%0/%. +heir ,anel cointegration test results strongly re4ect the null of no cointegration in the ,anel between both ,rice and wage0ad4usted ,roductivity and between labour ,roductivity and real wages. In view of the above- the aim of this ,a,er is to investigate the long0run relationshi, between labour ,roductivity- real ,roduct wages- em,loyment and ,rices of Indian manufacturing industry over the ,eriod ./%&0%. to (&&.0&(. +he 4ustification for choosing real ,roduct wages is that em,loyment decisions are made on the basis of real ,roduct wages not real consum,tion wages. +he following s,ecific 5uestions are addressed in the ,a,er. Cirst- is there is a long0run e5uilibrium relationshi, between labour ,roductivity- real wages- em,loyment and ,ricesD Second- what are the short0term relationshi,s among these variablesD %! Met&odology %! 'ausality Issues "n the basis of theory- a number of causal relations between labour ,roductivity- real wages and ,rices may be hy,othesi<ed. +hese are summari<ed in +able .- along with the e2,ected signs. (able : )ypot&esi*ed 'ausal #elations among t&e +ariables Causal 9irection 6! R7 6! !rice 6! EM! R7 6! R7 !rice R7 EM! !rice 6! !rice R7 E2,ected Sign Rationale E !erformance0based ,ayF bargaining E !roductivity will hi1e the ,rice level 0 Efficiency wage theory says a rise in real wages may induce higher wor1 effort 0and hence ,roductivity0 by raising the costs of 4ob loss. E Efficiency wages E 7or1ers ,urchasing ,ower will hi1e the ,rice level 0 3igher real wages causes em,loyment negatively. 0 0 Inflation will decrease ,roductivity through out,ut Inflationary situation su,,resses the ,urchasing ,ower of the wor1ers.

Changes in labour ,roductivity may cause changes in wages for at least two reasons) i# if individual;s ,ay is ,erformance0basedF and ii# if labour unions bargain for real wage increase on the basis of ,ast im,rovements in ,roductivity 7a1eford- (&&?#. 3igher ,roductivity means that more goods and services can be derived from the same factor in,uts. 8n increase in labour ,roductivity is always a ground for wor1ers to ,ress their claims for higher wages. If the increase in ,roductivity is due to the efforts of labour or their im,roved efficiency- then it will ,ositively cause real wages. +he increase in ,roductivity will lead to higher income and higher standard of living of the wor1ers. +hus- higher standard of living will lead to economic growth in the long run. 8ccording to efficiency wage theory- a rise in real wages may induce higher wor1er ,roductivity by raising the costs of 4ob loss. !roductivity of an industry may be rising- but if it suffers a fall in the ,rices of its ,roduct it would not be ,ossible for it to ade5uate rise in money wage rates. So- increase in ,roduct wages brings the wage burden on the industry. +he effect of an increase in average labour ,roductivity on em,loyment is unclear. It could reduce the demand for labour- as wor1ers are more efficient. 8lternatively- a rise in ,roductivity could have a ,ositive im,act on em,loyment through an Gout,ut effect;which shifts the demand for labour curve outwards 7a1eford- (&&=#. +he Aranger causality tests( are ,erformed to establish the direction of dynamic short0run# relationshi,s among these four variables. Aranger causality says H if I causes J- then changes in I should ,recede changes in J. In ,articular- to say that I causes Jtwo conditions should be met. Cirst- I should hel, to ,redict JF i.e. in a regression of J against ,ast values of J- the addition of ,ast values of I as inde,endent variables should contribute significantly to the e2,lanatory ,ower of the regression. Second- J should not hel,s to ,redict I- it is li1ely that one or more other variables are in fact causing the observed changes in both I and JK.? %!"! (&e 'ointegration (est In the literature- it has been established that most of the macro economic time series data e2hibit nonstationary and the conventional wisdom is that difference all the nonstationary variables before ,utting them into regression analysis. 8lternatively( ?

See C.7.L. Aranger- ./%/. See !indyc1 and Rubinfeld- .//>- ,,. (=?.

regression on nonstationary variables is ,ermitted if their linear combination is stationary. It has been recogni<ed in recent literature that if a linear combination of integrated variables is stationary then such variables are said to be cointegrated. 8lthough Engle and Aranger ./>'# was the first to introduce the cointegration test- the tests ,ro,ounded by Stoc1 and 7atson ./>>#- Lohanson- .//. and Lohansen and Luselius .//&# are more useful in testing the long run e5uilibrium relationshi,s in multivariate setting. +he estimation ,art of Lohansen and Luselius method involves the following ste,s. 6et ,t be an nM.# vector of variables with a sam,le of +. 8ssuming ,t follows I .# ,rocess- identifying the number of cointegrating vector involves estimation of the vector error correction re,resentation)
X t = A& + X t p + Ai X t i + t
i =. p .

.#

In the above e5uation- the vectors ,t and ,t0i are I &# while the vector ,t0i are I .# variables. +herefore- the long run e5uilibrium relationshi, among ,t is determined by the ran1 of matri2. If the ran1 of - say r- is <ero- then E5. .# reduces to a N8R model of pth order and the variables in level do not have any cointegrating relationshi,. Instead- if & O r O n then there are n M r matrices of and such that

(#

where is cointegrating vectorF hence- /Xt is I &# although Xt are I .# and the strength of cointegration relationshi, is measured by ;s. In this framewor1- we have to estimate A&- A.- . . .- A,0.- - # through ma2imum li1elihood ,rocedures- such that G; can be written as in (#. +o estimate all these ,arameters- we have to follow two0ste, ,rocedures. In the first ste,- regress Xt on Xt0.- . . .- Xt0,E. and obtain the residuals ut . In the second ste,- regress Xt0. on Xt0.- Xt0(- . . .- Xt0,E. and obtain the residuals e t . Crom the obtained residuals G u t ; and G e t -; find the variancePcovariance matrices.

. Q = Qt u Q t u uu T t =.
T

?#

'

. Q = Qt e Qt e ee T t =.
T

=#

. Q = Qt e Qt u ue T t =.
T

$#

+he ma2imum li1elihood estimator of G ; can be obtained by solving)

R Q e Q eu INV Q u #Q ue R= &
by obtaining the following statistics) trace U 68 P 6" 7here

%#

Q S Q ST.. S Qn . +he normali<ed cointegrating vectors are) 7ith the eigenvalues . (

Q = Q - Q -.... Q #- such that . ( n

Q Q = I Q ee

Now we can test the null hy,othesis that r U h- & h O n against the alternative of r U n

Tn Tn T T h Q LO = log ( # log R uu R log . Qi # ( ( ( ( i =.

and

'#

Tn Tn T T n Q L A = log ( # log R uu R log . Qi # ( ( ( ( i =.

3ence- 68 P 6" U 0 +V(# ( 68 P 6"# U 0 +

>#

i =h +.

Q # log . i /#

i =r + .

Q # log .
i

E5uation /# follows ( distribution and called as trace statistics. Curther- the null hy,othesis that there are r against r E . cointegrating vectors can be tested by obtaining the following statistic)
Q # ma2 = 0 + log .0 r+ .

.&#

>

-! .ata Sources and .efining t&e +ariables +he ,resent study uses annual data from ./%&0%. to (&&.0&(. +he variables considered in the above model are labour ,roductivity 6!#- Real ,roduct wages !7#Em,loyment EM!# and 7holesale !rice Inde2. +he data are collected from 8nnual Survey of Industries 8SI ,ublished by the Central Statistical "rgani<ation#. +he data on wholesale ,rice inde2 has been collected from 3andboo1 of Statistics on Indian Economy. In order to measure the variables- we have used the following data) gross value added- em,loyment- emoluments and 7holesale !rice Inde2 for all commodities. +he labour ,roductivity is defined as real out,ut ,er em,loyee. Collowing Aoldar ./>%#- we have ,referred gross value added as an inde2 of out,ut in ,lace of net value added because de,reciation charges in the Indian industries are 1nown to be highly arbitrary- fi2ed by income ta2 authorities and seldom re,resent actual consum,tion. 3owever- it is e2tremely difficult to arrive at ,ro,er estimate of ca,ital consum,tion from the available data. +o ma1e correction for nominal value added to real one- the yearly current value has been deflated by wholesale ,rice inde2 of manufacturing ,roducts base .//?0/= U .&&. In order to obtain the general ,rice level- the wholesale ,rice inde2 of the manufacturing ,roducts base .//?0/=U.&& has been ta1en. Em,loyment is defined as the total em,loyees of an industry. Real wages are defined in different ways in the literature. Collowing 7a1eford- (&&?#- this study chooses a variant of real ,roduct wages- where the gross domestic ,roduct of manufacturing sector deflator is used to deflate nominal wage rate. +his ma1es it fit most closely with measure of labour ,roductivity used- which is based on real value added. 8 final ,oint to note is that nominal wage is defined as average emoluments i.e. ,er em,loyee#. /! Empirical #esults /! ! Preliminary .ata Analysis 8 visual e2amination of time ,lots of the variables ,rovides a useful orientation to the data see Cigure .#. 6abour ,roductivity of the manufacturing sector has shown an u,ward trend during the ,eriod ./%&0%. to (&&.0&(- although there was decline in the year ./>(0>?. +he real wages in the manufacturing sector have also shown an u,ward trend- but fairly high degree of volatility over the ,ast four decades. +he em,loyment series shows most volatility during ./%&0%. to (&&&0&(. Cinally- the /

wholesale ,rice inde2 for manufacturing series has demonstrated an u,ward smooth curve. 0igure : $abour productivity, #eal product wages and Price, 12342 to "33 43"

.&

Labour Productivity

12.5

12

11.5

p L n l

11

10.5

10

9.5

Year
ln LP

Real Wages 8.5 ln Wages in rupees 8 7.5 7 6.5

1960 1968 1976 1984 1992 2000

Year

ln Wage

..

! ploy! ent 9.2 9 8.8 8.6 8.4 8.2 8 7.8 7.6

1960 1969 1978 1987 1996

Price 6 5 4 3 2 1 0
1960 1967 1974 1981 1988 199#

ln "P in nu!ber

ln WP$

Year

ln EMP

Year

ln Price

8 scrutiny of +able . allows us to ma1e the following observations. Cirst- the com,arative analysis of the trend growth ,attern between labour ,roductivity and wages highlights that labour ,roductivity growth is higher than the real wage growth e2ce,t the sub ,eriod ./>.0>( to .//.0/(.= +he +able shows that there is a constant relationshi, between labour ,roductivity and real wages. 9uring ./%& to ./>&- the growth rate of real wages and labour ,roductivity are very low. +he main reason for the low growth is due to the deceleration ,rocess of Indian industry and other factors li1e drought- war- oil crisis etc. Crom ./>.0>( to .//.0/( the growth of labour ,roductivity and real wages have increased. 9uring this ,eriod the real wages of the wor1ers have increased. So- the rise in real wages was the main factor for increase in labour ,roductivity in the ./>&s. But during the ,ost0reform- again labour ,roductivity growth and real wages growth have declined. +he labour ,roductivity of the em,loyees in aggregate manufacturing sector grew at the rate of =.$= ,er cent during ./%&0%. to (&&.0&(- while the wage rate of the em,loyees grew only at the rate of (.$. ,er cent. Similarly- the ,rice level shows an increase of >..= ,er cent during the overall ,eriod- whereas- a negative of =.&% ,er cent during ,ost0reform ,eriod.

(able : 5rowt& rates of $abour productivity, #eal wages and Price level 678
=

+he growth rates have been estimated through semi0log model.

.(

+ariable 1234"33 123493 19 41 6! =.$=* ..>>* '.&/* R7 (.$.* &.'. '.'$** EM! ..$%* (.=/* ..&( !rice >..=* >.>?* '.&?* * significant at .W level- ** significant at $W level

11"4"33 $.$$* ?.$.* 0..=> 0=.&%*

+he correlation coefficients ,resented in +able ( ,rovide an initial indication of the relationshi,s among the three variables. 9uring ,re0reform ,eriod i.e. ./%&0%. to .//.0/( all the three variables e2hibited u,ward trends and so their correlations all are ,ositive. In the ,ost0reform ,eriod .//(0/? to (&&.0&(# most of the ,airwise correlation coefficients are ,ositive but declining- which is ,robably due to volatility of ,olitical factors and mar1ed business cycle movements. In the entire ,eriod- ./%&0%. to (&&.0&(the ,airwise correlations are all ,ositive. (able ": Pairwise 'orrelation 'oefficients +ariables Pair 6! P R7 6! P EM! 6!0!rice R70EM! R70!rice EM!0!rice 12342 to 11 41" &./> &.'' &./? &.>& &./( &./? 11"41% to "33 43" &./% &.$. &./> &.$= &./> &.$% 12342 to "33 43" &.// &.>% &./' &./& &./' &./%

/!"! (&e 'ointegartion #esults 7e now turn to an analysis of the stationarity ,ro,erties of the series in logged form#. +he visible evidence of u,ward trends see Cigure .# suggests- a ,riori , that all the series are non0stationary. 7e use both 89C and !! test for e2amining the order of integration of the variables. +he results in +able ? show that all the three variables are stationary at their first differences confirming the ,resence of stochastic trends. 8s the variables follow the same order of integration- we can test for cointegration to e2amine the long run e5uilibrium among the four variables. $ (able %: :nit #oot (ests A.0 PP

7hile estimating E5uation .# the choice of lag length ,# is very crucial- since the results are highly sensitive to alternative lag s,ecifications. 7e have chosen an o,timal lag length of . as suggested by Cinal !rediction Error- 3annan P@uinn information criteria and Sims ./>&# 6i1elihood Ratio test.

.?

+ariables $evel 6! R7 EM! &.?/%? &.&=>( 0..'$

st

.ifference

$evel &.=%&% 0&.((>. 0..'&

st

.ifference

0=.'>* 0?./%* 0?.$'**

0$.>%* 0%.%.'* 0$.$>*

!rice

&.&.'/

0=.''*

&.$/./

0=..%$>*

Note) +he McBinnon critical values for 89C and !! tests at .W- $W- and .&W levels are 0=.&=-

0?.=$- and P?..$ res,ectively. +he two test statistics defined in E5. /# and .&# are ,resented in +able =. +he results show that trace statistics confirm the ,resence of one cointegrating vector at both $W and .W significance level whereas the ma2imum eigenvalue test indicates the ,resence of two cointegrating vector at $ ,ercent level of significance. If we select r U . and normali<e the cointegrating vector with res,ect to log 6!# then the cointegrating relation is log 6!# U =../'log R7# E ?.$?$log EM!# P ..%&log !rice# '.&$# =.>># =./># ..#

Note that the normali<ed cointegration ,arameters bear theoretically ,redicted sign and t0 statistics in ,arentheses indicate that they are significantly different from <ero at . ,ercent level. E5uation .. im,lies that . ,ercent increase in real wage is associated with a =.( ,ercent rise in growth of labour ,roductivity in manufacturing sector in the long run. It is also found that an increase in the average ,rice level- say . ,ercent- ceteris ,aribus- can decline labour ,roductivity growth by ..% ,ercent. (able -: :nrestricted 'ointegration #an; (est Null hy,othesis rU& r. r( r? Null hy,othesis +race statistics $%.>>.$** (%.$??=/ =.>/=>$ &..%=$% Ma20Eigen Statistics $W Critical Nalue ='.(. (/.%> .$.=. ?.'% $W Critical Nalue .W Critical Nalue $=.=% ?$.%$ (&.&= %.%$ .W Critical Nalue

.=

rU& ?&.?=>&.* ('.&' ?(.(= rU. (..%?>%* (&./' ($.$( rU( =.'?&(> .=.&' .>.%? rU( &..%=$% ?.'% %.%$ *and ** indicate $W and .W level of significance- res,ectively. /!%! Error 'orrection Models and 5ranger 'ausality (able /: Pair wise 5ranger causality<bloc; e=ogeneity Wald tests .ependent +ariable .6$P8 E=clude '&i4S>uare
D(RW) D(EMP) D(PRICE) ll D(LP) D(EMP) D(PRICE) ll D(LP) D(RW) D(PRICE) ll D(LP) D(RW) D(EMP) ll 3.452680 0.147532 0.025528 5.010177 1.90E!05 0.242185 0.012645 0.477990 1.134943 0.439010 0.775680 2.162234 3.230993 2.705046 1.947743 4.767730

df
1 1 1 3 1 1 1 3 1 1 1 3 1 1 1 3

Probability
0.0631 0.7009 0.8731 0.0711 0.9965 0.6226 0.9105 0.9237 0.2867 0.5076 0.3785 0.5394 0.0723 0.1000 0.1628 0.0896

.ependent +ariable .6#W8

.ependent +ariable .6EMP8

.ependent +ariable .6Price8

8s cointegartion found between labour ,roductivity- real wages- em,loyment and ,rice level for the ,eriod ./%&0%. to (&&.0&(- ECM may be estimated and used to test for a long run causal relationshi, between the variables. +he results in +able $ ,rovide evidence of ,air wise Aranger causality and bloc1 e2ogeneity tests. % +he first and second rows of each case refer to bi0variable Aranger causality test whereas the third row refers to the 7ald bloc1 e2ogeneity test. +he results show that there is uni0directional causality from real wages to labour ,roductivity and from real wages to ,rice. Similarly- labour

+esting for Aranger causality and bloc1 e2ogeneity in an error correction s,ecification involves im,osing <ero restriction on ,arameter matri2 8i. +he ,air wise Aranger causality test between I . and I( can be conducted by restricting the coefficients of lagged values of one variable to be <ero in the e5uation of the other variable.

.$

,roductivity causes ,rice level while em,loyment neither Aranger causes labour ,roductivity- real wages and ,rice level nor Aranger caused by these three variables. +he 7ald test indicates that real wages- em,loyment and ,rice level are to be included in the labour ,roductivity e5uation and labour ,roductivity- em,loyment and real wages are to be included in ,rice e5uation. 3owever- the bloc1 e2ogeneity test re4ects the inclusion of lags of labour ,roductivity- real wages and ,rice in the labour em,loyment e5uation. Similarly- the bloc1 e2ogeneity test also re4ects the inclusion of lags labour ,roductivity- em,loyment and ,rice in the real wage e5uation. +he results in +able $ are not the final one as the s,eed of ad4ustment ,arameters ;s# ,rovides additional base for inferring the causal lin1 among these variables. Cor the cointegrating vector ,resented above- the s,eed of ad4ustment ,arameters are U

( 0&.&%
&.&=#

&.&=
&.&?#

&..& 0&.&'
&.&(#

.(#

&.&(#

+he coefficients in E5. .(# show the change in labour ,roductivity- real wageem,loyment and ,rice- res,ectively- in res,onse to a ,ositive deviation of labour ,roductivity from its long run e5uilibrium relationshi,. +he s,eed of ad4ustment ,arameters is found to be significant in labour ,roductivity e5uation- confirming the Granger representation theorem that error correction model for I .# variables necessarily im,lies cointegration.

2! 'onclusions Manufacturing sector ,lays a significant role in our country since it has been growing steadily over the years. India is currently e2,orting more labour intensive ,roducts li1e te2tiles and leather. Its com,arative advantage also lies ,rimarily in the availability of raw material and low cost of labour. 8 number of studies have attem,ted to evaluate the strength and wea1ness of the Indian manufacturing sector. 8 brief review of em,irical studies since inde,endence showed growth rate of ,roductivity- out,ut-

.%

em,loyment and wage rate both at aggregate and disaggregate level of manufacturing. But- less attention has been ,aid to assess the dynamic relationshi, between these variables. In light of this- our ,a,er estimates the em,irical relationshi, between labour ,roductivity- real wages- em,loyment and ,rices in Indian manufacturing sector- using cointegration test. +he cointegration test ,roduced evidence in favour of a long run e5uilibrium relationshi, among labour ,roductivity- real wages- em,loyment and ,ricesconfirming the e2istence of causal lin1 among these variables. +he results derived from the error variance forecast decom,osition indicate that there is bi0directional causality between real wages to labour ,roductivityF however- em,loyment and ,rices are not causing the labour ,roductivity. Similarly- labour ,roductivity and real wages are causing em,loyment but there is no causation from em,loyment to labour ,roductivity and real wages. +he s,eed of ad4ustment ,arameters indicates that the short run dise5uilibrium among these variables is ad4usted through labour ,roductivity and ,rices- but not by the real wages and em,loyment. Coming to the ,olicy recommendation- the manufacturing sector should im,rove the labour ,roductivity growth by im,roving wages and other benefits of the wor1ers. +he value added ,er wor1er in our country is very low as com,are to +hailand!hili,,ines- Malaysia and South Borea 8cademic Coundation- (&&?#. +he main reason for low labour ,roductivity is innovation- ,roduct design and lac1 of infrastructure facility. So- higher the ,roductivity will enhance the economic growth and standard of living of the wor1ers. Crom our results- we also find that labour ,roductivity- real wages and em,loyment are moving in same direction. "ur conclusion im,lies that the u,ward movement of labour ,roductivity may increase wage rates and em,loyment generation. +he ,roductivity can increase only through em,loyment generation and higher wages. +he government should give ,riorities to more e2,ort0intensive industries li1e te2tilesleather- Aems and Lewellery- which have considerable ,otential to generate em,loyment. So- without increasing the ,roductivity- our government should not e2,ect more em,loyment generation and better standard of living of the wor1ers in manufacturing sector because our conclusion shows that these four variables cannot move

.'

inde,endently. +he government functioning needs to be more efficient to ma1e Indian manufacturing globally com,etitive.

#eferences
8ggarwal- 8.B and Aanesh Bumar.- .//.#- H Indian Manufacturing Industry) Nerdoorn;s 6aw RevisitedK- Indian Economic Journal, ?/ (#- %.0>.. 8hluwalia- I.L.- .//.#- H !roductivity and Arowth in Indian ManufacturingK- New 9elhi- "2ford :niversity !ress. Bala1rishnan- ! and B. !ush,angadan.- .//=#- H +otal Cactor !roductivity Arowth in Manufacturing Industry) 8 Cresh 6oo1K- Economic and Political ee!l"- Luly ?&- (&(> P (&?$. Bala1rishnan- !. and M. Suresh Babu (&&?#- HArowth and 9istribution in Indian Industry in the Nineties-K Economic and Political ee!l"- ?>) ?%'/0>(. Banga- Rashmi.- (&&$#- H Im,act of 6iberali<ation on 7ages and Em,loyment in Indian Manufacturing IndustriesK- I#$IE$ or!ing Paper- .$?- .0?&. Bidhe- S and B ! Balira4an.- (&&=#- HIm,act of +rade 6iberalisation on Em,loyment in Indian Manufacturing) Evidence from the "rganised SectorK- Journal o% &ocial and Economic 'e(elopment, Corthcoming Issue. Economic Survey- (&&=0&$- Aovt. of India- )inistr" o% *inance- Economic 9ivision. Ehernberg- R.A and Robert S. Smith.- (&&&#- H Modern 6abour Economics) +heory and !ublic !olicyK- 8ddison 7esley 6ongman- Inc.- :S8. Engle- R. C.-XAranger- C.7. L. ./>'#. Cointegration and error correction) re,resentation- estimation- and testing. Econometrica- ($.P('%. Aango,adhyay- S and 7 7adhwa.- .//>#- HEconomic Reforms and 6abourK- Economic and Political ee!l"- ?? ((#- 60=& to 60=>. Ahali- Bhalifa.- .///#- H 7age Arowth and Inflation !rocess) 8 Multivariate Cointegartion 8nalysisK- Lournal of Money- Credit and Ban1ing- ?.- =.'0=?.. Aiersch- 3 and Cran1 7olter ./>?#- H +owards 8n E2,lanation of the !roductivity Slowdown) 8n 8cceleration0 9eceleration 3y,othesisK- Economic Journal- /??$0$$. Aoldar- B.- ./>%#- H !roductivity Arowth in Indian IndustryK. 8llied !ublishers- New 9elhi. Aoldar- B.- (&&&#- H Em,loyment Arowth in "rgani<ed Manufacturing Sector in IndiaKEconomic and Political ee!l"- ?$ .=#- 8,ril .- ../.0../$.

.>

Aoldar- B.- (&&=#- H !roductivity +rends in Indian Manufacturing in the !re0and !ost0 reform !eriodK- I#$IE$ or!ing Paper No. +,-- .0?=. Aordon- Robert L.- ./>>#- H +he Role of 7age in the Inflation !rocessK- American Economic $e(ie.- '>- ('%0(>?. Aranger- C. 7.L.- ./%/#- H Investigation Causal Realtions by Econometrics Model and Cross S,ectral MethodsK- Econometrica- ?'- =(=0=?>. 3u- Chan A and Bharat +rehan.- .//$#- H Modeling the +ime Series Behaviour of the 8ggregate 7age RateK- *ederal $eser(e /an! o% &an *rancisco, Economic $e(ie.- ?0.?. Lohansen- S.- X Luselius- B. .//&#. Ma2imum li1elihood estimation and inference on cointegration with a,,lication to the demand for money. O0%ord /ulletin o% Economics and &tatistics- .%/P(.&. Lohanson- S. .//.#. Estimation and hy,othesis testing of cointegrating vectors in Aaussian vector $(. autoregressive models. Econometrica- .$$.P.$>&. Bumar Sunil.- (&&(#- HRegional Nariations in 6abor !roductivity Arowth in Indian 6indbec1- 8.- ./>?#- H +he Recent Slowdown of !roductivity ArowthK- Economics Journal- /?-.?0?=. Manufacturing SectorK. An(esa!- ?( (#- ... P .?%. Mehar- Jash !.- (&&&#- H 7age0!rice 9ynamics) 8re +hey Consistent with Cost0 !ushDK- *ederal $eser(e /an! o% $ichmond Economic 1uarterl"- >%- ('0=?. !indyc1- Robert S and 9.6.Rubinfeld.- .//>#- H Econometrics Model and Economic CorecastsK- Irwin McAraw03ill- Singa,ore. Rao Mohan- L.- .//%#- H Manufacturing !roductivity Arowth) Method and MeasurementK- Economic and Political ee!l"- November (- (/(' P (/?%. Stoc1- L.-X7atson- M. ./>>#.+esting for common trends. Journal o% American &tatistical Association- .&/'P..&'. Strauss- Lac1 and M E 7ohar.- (&&.#- H +he 6in1age between !rices- 7ages and 6abour !roductivity) 8 !anel Study of Manufacturing IndustriesK- /roo!ing Paper on Economic Acti(it"- $- .0??. +endul1ar- S.9. (&&?#- HEm,loyment Arowth in Cactory Manufacturing Sector during ,re and ,ost0Reform !eriodsK- ,a,er ,resented at the NBER0NC8ER 8nnual Conference on Indian Economy- New 9elhi. +rivedi- !.- 8. !ra1ash- and 9. Sinate (&&&#- H!roductivity in Ma4or Manufacturing Industries in India) ./'?0'= to .//'0/>-K 9evelo,ment Research Arou, Study no.

./

(&- 9e,artment of Economic 8nalysis and !olicy- Reserve Ban1 of IndiaMumbai. :nel- Bulent (&&?#- H!roductivity +rends in India;s Manufacturing Sectors in the last +wo 9ecadesK- IMC 7or1ing !a,er no. 7!V&?V((. :,ender- M.- .//%#- HElasticity of 6abor !roductivity in Indian manufacturingKEconomic and Political ee!l", ?. (.#- M0' P M 0.&. 7a1eford- Leremy.- (&&?#- H +he !roductivity07age Relationshi, in South 8frica) 8n Em,irical InvestigationK- !a,er !resented at +I!SV9!R: ConferenceLohannesburg. 7a1eford- Leremy.- (&&=#- H !roductivity- 7ages and Em,loyment in South 8frica;s Manufacturing Sector- ./'&0(&&(K- 'e(elopment Polic" $esearch 2nit or!ing Paper- School of Economics- :niversity of Ca,e +own- &=V>$- ,,..0?(. 7+I.(&&?#- H India;s Manufacturing Sector) !olicy Cramewor1K- 8cademic Coundation- New 9elhi.

(&