Margin—The Journal of Applied Economic Research 8 : 2 (2014): 137–154

SAGE Publications Los Angeles/London/New Delhi/Singapore/Washington DC

DOI: 10.1177/0973801013519997

Macroeconomic Determinants of Employment

Intensity of Growth in India
Falguni Pattanaik
Narayan Chandra Nayak

Despite India’s resurgent growth over the past years, the country seems to have failed
miserably on the employment front. The employment content of economic growth—the
employment intensity of growth—is on the decline. The objective of the present study is
to identify the macroeconomic determinants which influence the employment intensity
of growth in India. The study covers data for the period 1993–94 to 2009–10 across
15 major Indian states and applies a panel data model to find out these determinants.
The results tend to suggest that labour supply, economic structure, price instability and
human capital are major determining factors. Pro-employment growth in India may
require measures like diversification of economic activities towards labour-intensive sec-
tors, price stability, skill-based education and adoption of labour-intensive technology.

Keywords: Employment intensity of growth, Economic structure, Human capital, Labour

supply, Inflation
JEL Classification: J21, J23

1.  Introduction

Growth and employment are twin goals considered central to the economic
policy agenda in both developed and developing countries. Growth of output
may bring changes in the growth of employment. Periods of buoyant gross
domestic product (GDP) expansion are often associated with rising employment
opportunities, and conversely, slow-downs bring about growing unemployment
(Boltho and Glyn, 1995). Linking output growth to employment has wider
ramifications. With the expansion of employment, the benefits of growth
are likely to be shared. Enhanced employment opportunities provide better
and new sources of income (Heintz, 2006). Greater employment content in
economic growth also leads to a reduction in poverty (Islam, 2004). To this
extent, the employment intensity of growth, which measures the responsiveness
of employment growth to output growth, assumes significance.

Falguni Pattanaik (the corresponding author) is Assistant Professor at the School of

Humanities, KIIT University, Bhubaneswar, email: falguni@hss.iitkgp.ernet.in
Narayan Chandra Nayak is Associate Professor at the Department of Humanities and Social
Sciences, Indian Institute of Technology, Kharagpur, email: ncnayak@hss.iitkgp.ernet.in
138  Margin—The Journal of Applied Economic Research 8 : 2 (2014): 137–154

The employment intensity of growth also provides useful insights into the
labour market paradigm, including the overall macroeconomic performance
of an economy. It serves as a valuable instrument to examine how the growth
in output and employment evolve together, creating, in turn, varying impacts
across time and space, and possibly causing structural economic changes
(Kapsos, 2005).
In recent decades, many economies have witnessed far-reaching changes on
several key macroeconomic indicators, thanks to the adoption of globalisation
and liberalisation measures. Along with opportunities, however, the latter have
often brought enormous challenges, especially with regard to employment.
Globalisation has been associated with extensive changes in the structure of
employment, including pressure for increasing flexibility, scenarios of ‘jobless
growth’, unprecedented rise in informalisation and casualisation, and declining
opportunities for the less-skilled (Heintz, 2006). There is growing concern over
the weakening of the linkage between output and employment growth. While
the possibility of a strong output–employment linkage remains an empirical
regularity in some advanced countries, there is evidence of such links weakening
in developing ones (Bhattacharya and Sakhtivel, 2004a; Jha, 2003).
While India has experienced rapid income growth in recent years, this
appears to have failed to improve the employment situation in the country,
even though the growth rate of its labour force has been quite low (Unni and
Raveendran, 2007). The employment performance of post-reform economic
growth has been extremely disappointing, given the ‘jobless growth’ of the
1990s and the ‘near-zero employment growth’ accompanying the highest-
ever GDP growth during 2004–05 to 2009–10. Employment growth in India
has slowed from 2 per cent per annum during 1983–84 to 1993–94 to a meagre
0.22 per cent per annum during 2004–05 to 2009–10 (Papola, 2012). Despite fall-
ing real wages and wage shares, the demand for labour is on the decline (Ghosh
and Chandrasekhar, 2007). Given the magnitude of requirements, employment
opportunities in India must grow at over 3 per cent per annum during the
12th plan to provide work to all by the end of the plan period. Increasing infor-
malisation, casualisation and contractualisation have also raised the questions
about the quality of most of whatever new jobs being created (Papola, 2012).
Ironically, the structural changes in the economy’s employment have not been
as large as in its GDP. Against an increase in the share of services from about
36 per cent in 1972–73 to 59 per cent in 2009–10, the corresponding increase
in employment share has been much slower—from 15 per cent in 1972–73 to
27 per cent in 2009–10. Contrarily, the share of agriculture to GDP has come
down from a high of 41 per cent in 1972–73 to a meagre 15 per cent in 2009–10.
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However, in 2009–10, about 51 per cent of the workers were still engaged in
agriculture, while the remaining 22 per cent were engaged in the secondary
sector with its contribution to GDP standing at 26 per cent. Not only are there
sectoral distortions, but also challenges in the labour market composition, such
as a high share of self-employed (51 per cent in 2009–10), rise in the share of
casual workers (33 per cent in 2009–10), rise in underemployment and the size
of the working poor, and a constant share of regular employees (Papola, 2012;
Sundaram, 2009; Sundaram and Tendulkar, 2005). The continuation of this
pattern of structural change has serious implications for equity as well as for
the sustenance of high growth rates (Papola, 2012).
Persistent regional disparities remain yet another serious challenge for the
country. States differ greatly in both GDP growth and employment generation
(Ahsan and Pages, 2008; Bhattacharya and Sakthivel, 2004b). In recent years,
barring Gujarat, no other fast-growing state has been successful in generating
job-intensive growth. Some of the poorer states have fared far worse than their
richer counterparts.
Against this backdrop, it may be pertinent to identify and understand the
fundamental macroeconomic factors that influence the employment intensity
of growth in India, which is what the present study does, along with examin-
ing the implications. The paper is divided into five sections. A brief review
of literature is presented in Section 2. Section 3 outlines concepts and meth-
odology and the database of the study. The empirical results of the study are
presented in Section 4, while Section 5 offers the implications of the findings
and concludes the study.

2. Review of Literature

The literature on the existence and stability of a relationship between growth

and employment (unemployment) is often confronted with problems of
direction of causality. So, is it the GDP per capita growth that increases
employment growth or the employment growth that increases output growth?
Or are employment growth and output growth determined by other factors
and, hence, no simple and direct relationship exists between growth and output
(Perugini and Signorelli, 2007)?
The logical starting point of the debate on growth and (un)employment is
‘Okun’s law’, which establishes a formal linkage between the output growth rate
and unemployment rate (Okun, 1962). The law suggests that each percentage
point decline in the unemployment rate is associated with an increase in real

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gross national product (GNP) by 3 per cent. In this significant work, employment
is taken as exogenous and real GNP as the dependent variable (Perugini and
Signorelli, 2007). There are, however, empirical evidences to assume causality
in the opposite direction as well (Perman and Tavera, 2005).
Despite Okun’s law having received the status of an empirical regularity,
the approach remains implicitly ‘supply-side’ oriented (Prachowny, 1993).
Indeed, one important area of departure is by Okun himself (1970), as he states
that this relationship hides changes in other factors like increases in the size
of the labour force, longer working hours and productivity that accompany
employment growth and foster output growth. In this context, there are attempts
to incorporate capital and labour to augment estimates of Okun’s law from the
perspective of a production function (Sogner and Stiassny, 2002).
Although the direct relationship between growth and employment is not
as popular as Okun’s law is, the employment effect of economic growth—the
employment intensity of growth—has gained momentum in recent years, thanks
to the policy centrality of the issue (Padalino and Vivarelli, 1997; Perugini,
2009). Its simplest formulation relies upon a familiar concept of elasticity—a
responsiveness index—that describes the percentage change in employment to
a one percentage change in output. The concept of elasticity implies a casual
direction (Islam and Nazara, 2000). The common approach considers the
labour-output relationship in a production function context, that is, labour is
one input and the productive circumstances determine the output elasticity to
the factors employed. Arguably, the estimation of elasticity may have certain
advantages over Okun’s coefficient measurement. First, it allows us to avoid
measurement problems pertaining to the unemployment rate. Second, it can
be estimated and studied under various sub-categories like age, sex, regions and
sectors, thereby offering wider implications (Islam, 2004).
The relationship between output and employment is, however, not straight-
forward as it is affected inter alia by various macroeconomic factors, such as
economic structure (Kapsos, 2005), productivity (Mourre, 2006), prices (Flaig
and Rottman, 2001), institutional factors (R. Freeman, 2005), exchange rate
volatility (Stirböck and Buscher, 2000), quality of human capital (Webber, 2002)
and technology (Saget, 2000). Empirical evidences of cross-country comparisons
of these conjectures are provided in the works of Padalino and Vivarelli (1997)
for the G-7 countries, Freeman (2001) for a set of industrialised countries and
Lee (2000) for selected OECD countries. The studies by Perman and Tavera
(2005) focus on European countries, while Izyumov and Vahaly (2002) refer to
transition economies. There are also studies evaluating employment elasticity
in different sectors of various developing countries (Islam, 2004).
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As mentioned above, in India, a growth-led employment strategy seems to

have failed since the 1990s (Papola, 2012; Unni and Raveendran, 2007). There
is disproportionate growth across sectors in terms of the output-employment
share (Joshi, 2004; Kannan and Raveendran, 2009), indicating an unfavourable
structural shift. Arguably, the slowdown in the rate of employment growth
and mismatch between the sectoral composition of employment and output
put forth serious questions about the growth pattern of the last two decades
(Papola, 2008).

3.  Hypotheses Formulation, Model Specification and Database

Following the available literature, the present study identifies four broad
macroeconomic factors, namely labour supply, economic structure, macroeco-
nomic volatility and human capital, which could influence India’s employment
intensity. The rationale behind the selection of these factors and their possible
relations with employment intensity of growth are discussed as follows.

3.1  Hypotheses Formulation

Increasing labour supply tends to raise employment (Beaudry and Collard, 2002).
Following the classical scheme of things, it may be argued that a higher labour
supply lowers the average wage, which may, in turn, lead to increased labour
demand. The relative abundance of low-wage labour and wage flexibility may
enable an economy to experience higher employment intensity with a rise in the
labour supply (ILO, 2006). An increasing labour supply affords India a compara-
tive advantage in terms of availability of cheap labour and, in turn, has led to a
rise in foreign direct investment in the past (Lall and Mohammed, 1983). Hence,
the present study hypothesises a positive relationship between labour supply
and employment intensity. Following the measurement considered by Kapsos
(2005), the labour force participation rate is considered a proxy for labour supply.
Increases in labour productivity tend to decrease employment. If increases
in labour productivity lead to increased wages and such increases bring about
substitution of capital for labour, the effect on employment becomes negative
(Krugman, 1994). Further, given the negative relationship between productivity
and employment, the differences in productivity growth can explain differences
in the employment intensity of growth (Appelbaum and Schettkat, 1995). Hence,
it is proposed that the higher the labour productivity, the lower the employment
intensity of growth. Labour productivity is measured by dividing output by the
total number of persons employed (Mourre, 2006).

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Sectoral composition is considered as yet another important factor. Structural

change in favour of fast-growing and job-intensive sectors may lead to an
improvement in the employment intensity of growth (Mourre, 2006). While
most earlier studies have incorporated the share of services into the model to
find out the role of compositional effects, in the context of the Indian economy,
the role of manufacturing as an employment-generating sector remains critical
along with the fast-growing service sector (Kapsos, 2005; Padalino and Vivarelli,
1997). Hence, the present study introduces both these sectors and hypothesises
that the corresponding employment shares of industry and services positively
influence the employment intensity of growth in India.
Macroeconomic volatility may lead to uncertainties in the labour market.
Inflation is one indicator of volatility, but there are conflicting views on
the role of inflation in employment intensity. There are two types of effects
inflation can create, namely the ‘grease effect’ (Tobin, 1972) and the ‘sand effect’
(Friedman, 1977). While the grease effect suggests that inflation can speed up
the adjustment to long-run equilibrium, the sand effect posits the possibility
of resource misallocation leading to a decline in employment. In the empirical
literature on developed countries, the grease effect plays a predominant role,
whereas in developing countries, the sand effect becomes crucial (Loboguerrero
and Panizza, 2003). Further, inflation-causing employment elasticity to reduce
significantly is evident only at very high inflation rates (Kapsos, 2005). With
these inconclusive findings, the impact of inflation on employment intensity
of growth remains an empirical question. Following Loboguerrero and Panizza
(2003), inflation is operationalised by considering the annual rate of inflation
based on the GDP deflator.
High employment content in economic growth presupposes quality human
capital, which may be gauged by the quality of health services (Mayer, 2001) and
the level of education (Knowles and Owen, 1997). Better health and education
may enhance labour productivity, growth and economic development (Webber,
2002). Hence, it is hypothesised that high human capital may lead to high
employment intensity of growth. In the present study, health and education, as
proxies for human capital, are captured by life expectancy at birth and literacy
rate, respectively, following Knowles and Owen (1997). Table 1, accordingly,
presents all the variables, dependent and independent, and indicates the methods
of their measurement.

3.2  Measuring Employment in India

In India, researchers primarily rely on quinquennial surveys released by
the National Sample Survey Organisation (NSSO) to measure the level of
 Pattanaik and Nayak  EMPLOYMENT INTENSITY OF GROWTH IN INDIA  143

Table 1  Method of Measurement of the Variables

Variables Method of Measurement

Employment Intensity
Labour Supply
Economic Structure
Macroeconomic Volatility
Human Capital
Source: Authors’ calculation.
Employment elasticity with respect to GDP
Size of labour force
Share of total employment in secondary sector
Share of total employment in tertiary sector
Labour productivity
Rate of inflation
Literacy rate
Life expectancy at birth

employment. The NSSO defines employment according to the status of

economic activities undertaken (NSSO, 2006). Economic activity is measured
in terms of the ‘Usual Status Approach’ and the ‘Current Status Approach’. While
the former considers the number of persons in the workforce, the latter denotes
the number of man-days.
A person is considered employed under the ‘Usual Status Approach’, if s/he
had pursued gainful economic activity for a relatively longer period of time in
the one year immediately preceding the date of the NSS survey. This is known
as ‘Usual Principal Activity Status’. On the other hand, if a person had spent a
relatively shorter time span in the one year immediately preceding the date of
survey, s/he is accounted under the ‘Usual Subsidiary Activity Status’. Principal
activity status and subsidiary activity status together constitute ‘Usual Activity
Status (UPSS)’.
The ‘Current Status Approach’, however, assigns a unique activity status to
a person engaged in gainful economic activities for a period preceding one
week or the previous day of the survey. If a person has pursued any one or
more gainful economic activities for at least one hour during the preceding
week, s/he is considered employed under the ‘Current Weekly Status’ (CWS).
If a person has spent four hours or more during the previous day of
the survey, s/he is considered employed according to the ‘Current Daily
Status’ (CDS).
The present study uses employment data based on the UPSS. This approach
deals with chronic unemployment over a long period, while the CWS and CDS
primarily deal with seasonal unemployment and underemployment. Since the
current study focuses on chronic unemployment, UPSS may be considered an
ideal approach.

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3.3  Measuring Employment Intensity of Growth

The employment intensity of growth is defined as the elasticity of employment
with respect to output growth. Quantitative estimates of employment elasticity
are based on the assumption that employment is primarily a function of output.
Accordingly, employment elasticity during a given period can be measured either
arithmetically through the ratio of the proportionate change in employment
to the proportionate change in output or by applying regression analysis
postulating a functional relationship between employment and output (Islam
and Nazara, 2000). The present study measures employment intensity of growth
for each state by estimating an economy-wide total. The relevant formula is
DL/L
E= (1)
DY/Y
where L stands for employment at the state level and Y represents gross state
domestic product (GSDP). Elasticity is, thus, interpreted as the percentage
change in employment for a state for a one percentage change in its GSDP
(ILO, 2006; Islam, 2004; Islam and Nazara, 2000). Accordingly, annual estimates
of employment elasticity have been obtained for all states in the study. The
estimates so obtained measure the arc elasticity that computes the elasticity
between two different points in time for each state.

3.4  Model Specification

The present study, in order to find out the impact of macroeconomic factors
on employment intensity of growth, considers 15 time periods and 15 major
states. Time-series analysis for such a short period is inappropriate. A study
based on simple cross-sectional data at the state level also becomes ineffective
due to the limited number of observations (Baltagi, 2005). Since employment
is a dynamic process, panel data may become more appropriate for a systematic
and efficient analysis of determinants (Dunning, 1993).
Accordingly, the following panel data model is specified.
K
Yit = a it + | b kit ln X kit + uit(2)
k=1

where, i = 1, 2 … N refer to cross-section units

t = 1, 2 … T refer to time periods

k = 1, 2 … K refer to number of explanatory variables

where Yit is employment elasticity for the ith individual (state) at time t. Xkit
represents the determinants, namely, labour force participation rate, share of
 Pattanaik and Nayak  EMPLOYMENT INTENSITY OF GROWTH IN INDIA  145

Table 2  Summary of the Econometric Models Applied in the Study

Model
Objective Applied Functional Form Justification
To find the Panel Data Pooled Linear Regression Model: It increases the
K
Yit = a i + | b k X kit + uit
impact of Model efficiency of
macroeconomic k =1 econometric
factors on Fixed Effect Model: estimates and
employment captures the
Yit = (a + n i) + X itl b + v it
intensity of dynamics of both
growth Random Effect Model: cross-sectional
Yit = a + X itl b + n i + v it and time-series
data set.
Specification Tests:
Incremental F test: OLS Model vs Fixed Effect Model
Breusch–Pagan LM test: OLS Model vs Random Effect Model
Hausman test: Fixed Effect Model vs Random Effect Model
Source: Authors’ calculation.

total employment in the secondary and tertiary sectors, labour productivity,

rate of inflation, literacy rate and life expectancy in the ith state at time t. The
independent variables are expressed in percentages and then transformed into
log-linear functional forms. bk in the above lin-log model directly measures
elasticity coefficients with respect to the explanatory variables (Table 2).

3.4.1  Fixed Effect (FE) Model

Generalisation of the constant intercept and slope for the panel data involves
introduction of a dummy variable to allow for the effects of those omitted
variables that are specific to the state cross-sectional units, but stay constant
over time and the effects that are specific to each time-period but are the same
for all cross-sectional units. In the present study, no time-specific effects are
considered and the focus is only on individual-specific effects.
Thus, the dependent variable Yit, depends on the Kth exogenous variables
(X1it, X2it………, Xkit) that differ across individuals at time t and also shows
variation through time, but the variables specific to the ith units stay constant
over time.
In the FE model, since ai are assumed to be fixed, we can write the model as:

Yit = ei a i + bl X it + uit(3)
( 1 * k) ( k * 1 )

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where b' (1*K) is a constant vector and the a i (1*1) scalar is constant
representing the effects of those variables peculiar to the ith state cross-sectional
units that stay constant over time. ei is the dummy variable for the ith state, and
uit represents the effects of the omitted variables peculiar to both individuals
and time. We assume uit to be uncorrelated with Xit and independently and
identically distributed random variables with mean zero and variance v 2u.

3.4.2 Random Effect (RE) Model

In the RE model, the individual-specific effects are treated as random. In
this case, ai is distributed independently and identically with mean zero and
constant variance.
Hence, the model is:

Yit = n + bl X it + v it(4)
1 * k k* 1

vit = ai + uit(5)

where ai is the individual-specific time invariant variable and uit represents

the effects of the omitted variables that vary with both individuals and time.
The properties of ai are as follows:

E (a i) = E (uit) = 0

E (a i a j) = {v 2a if i = j

E (a i a j) = {0 if i ≠ j

E (uit ujs) = {v 2u if i = j, t = s or = 0 (otherwise)}

and E (a i x it) = E (uit x it) = 0

It exhibits serial correlation over time between disturbances of the same

individual because oit and ois both contain ai, and so the residuals are correlated.
To get an efficient estimate, we have to use the generalised least squares (GLS)
estimator. The BLUE in the latter case is the GLS estimator.

3.5 Sources of Data
The study is based on secondary data. The span of the study for the panel data
regression is 15 years from 1993–94 to 2009–10. The study considers data of both
thick and thin rounds of the NSS surveys. Due to non-availability of NSSO data
on employment for 2006–07 and 2008–09, those two years are not considered
 Pattanaik and Nayak  EMPLOYMENT INTENSITY OF GROWTH IN INDIA  147

for the study. In order to estimate employment elasticity for the initial year
1993–94, the employment and GSDP data for 1992–93 are used. State-level
data on labour force participation rates, share of employment in service and
industry, and employment were collected from the NSSO, while GDP data were
collected from the Central Statistical Office. Data on inflation were collected
from publications of the Reserve Bank of India. Data on life expectancy at birth
and literacy rate were procured from the publications of the Ministry of Health
and Census of India, respectively.

4. Results and Discussion

For the present data set, the F test and LM test results tend to suggest the
superiority of a panel model over a pooled model. The Hausman test proves
that the FE model is relatively more efficient than the RE model. The economic
interpretation of the results is, thus, based on the FE model only. However, for
the sake of comparison, the results of the FE, RE and pooled data models are
presented in Table 3.
The results, by and large, follow the expected lines. The findings support
the notion of a positive relationship between the economy’s shares of employ-
ment in the tertiary and secondary sectors and the employment elasticities.

Table 3  Coefficients of Employment Intensity of Growth on Determining

Variables (State-wise Panel Data Results)

Variable Pooled Fixed Effects Random Effects

Work Force 0.356*** 0.169*** 0.025***
Secondary (26.128) (10.160) (17.606)
Work Force 0.603*** 0.038*** 0.058***
Tertiary (32.432) (11.760) (26.396)
Labour Force 0.422** 0.230*** 0.207
(1.882) (2.000) (0.186)
Inflation −0.837 −0.011*** −0.746**
(−1.541) (−3.621) (−2.422)
Literacy Rate −0.963*** 0.752* −0.161
(−3.131) (1.728) (−0.430)
Life Expectancy −0.003 *** 0.044** −0.222
(−5.312) (2.521) (−0.163)
Labour Productivity −0.057*** −0.064*** −0.065***
(−30.456) (−23.751) (−26.781)
(Table 3 continued)

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(Table 3 continued)
Variable Pooled Fixed Effects Random Effects
Constant 0.456*** ----------- 0.485***
(55.193) (41.950)
Within = 0.80 Within = 0.74
Between = 0.94 Between = 0.98
R2 0.98 Overall = 0.94 Overall = 0.98
F(7,217) = 2738.26 F(21,203) = Waldc2(21,203) =
(P > F = 0.001) 4784.85 1396.47
(P > F = 0.001) (P > c2 = 0.001)
Nobs, Nvar 225,7 225,7 225,7
F-Test F(14, 210) =1405.62 (P > F = 0.001)
LM Test c2(1) = 579.01 (P >c2 = 0.001)
Hausman Test c2(7) = 100.69 (P > c2 = 0.001)
Source: Authors’ calculation.
Notes: Against each variable, the first row represents the coefficient followed by
t-statistics in parentheses. Nobs: number of observations; Nvar: number of variables.
*Significant at the 10 per cent level; **significant at the 5 per cent level; ***significant
at the 1 per cent level.

These two factors represent the structure of the economy and seem to be
powerful explanatory variables for an improvement in employment elasticity.
The study considers the labour force participation rate as a proxy for labour
supply. The empirical analysis indicates a systematic positive relationship
between the labour force participation rate and the employment intensity
of growth, corroborating past findings that growth in labour supply deters
productivity growth, leading to improvements in employment (Kapsos, 2005).
There exists an inverse relationship between the inflation rate and employment
elasticity, supporting thereby the sand effect (Friedman, 1977). It is further found
that a rise in the life expectancy and literacy rates, considered proxies for human
capital, ensures high employment intensity of growth. Further, the lower the
labour productivity, the higher is the employment intensity of growth, thereby
supporting Keynesian fundamentals (Hussain and Nadol, 1997).

5.  Implications and Conclusion

Given the preceding discussions on the determinants of employment inten-

sity of growth in India, the following possible implications can be offered.
The empirical analysis indicates a positive relationship between labour supply
 Pattanaik and Nayak  EMPLOYMENT INTENSITY OF GROWTH IN INDIA  149

and the employment intensity of growth. This corroborates previous findings

that growth in labour supply tends to lower productivity growth leading to
an improvement in employment (Kapsos, 2005). The Indian economy may
have the scope to build on the comparative advantage of its abundant labour.
It is, however, important to ensure that education and skill levels match with
the requirements.
The notion of a positive relationship between the shares of the secondary
and tertiary sectors and the employment elasticities may indicate a favourable
scenario for the Indian economy. The Indian economy has been experiencing
structural economic changes, with its service sector growing at the fastest rate
followed by industry. Consequently, the country is expected to transfer its labour
force from agriculture to the industry and service sectors, and in turn, reduce
pressure on the primary sector.
There is a need to maintain a fair degree of price stability. It is also pertinent
to create a healthy and educated labour force to ensure a high employment
intensity of growth in India. The possibility of a mismatch between the
requirements of skilled manpower in industry and services and its availability
needs to be addressed.
Further, as the results indicate that the lower the labour productivity the
greater would be the employment intensity of growth, it suggests for an inter-
sectoral transfer of labour and convergence of sectoral labour productivities,
which may bring about improvement in employment conditions in India. In
India, not only is the pace of transfer slow but the economy has a divergence
in labour productivity between the agricultural and non-agricultural sectors.
India does not seem to have followed the conventional path of agriculture–
industry–service shifts. The growth of industrial output has been quite slow,
while the service sector has grown at a remarkable pace with, however, no
commensurate rise in its share in employment (Papola, 2012). Hence, it may be
necessary to put a thrust on developing the industrial sector, which is relatively
more labour-intensive. The skills required for the latter would be relatively lower
and, thus, the transfer of the labour force from agriculture to industry could
be easily achievable. This would open the door for a further shift to services in
the later stages inter alia through an upgradation of skills.
Following Keynesian principles, one may argue that the level of employment
in an economy is dependent on aggregate demand which, in turn, is dependent
on both private and public spending. Private investment in a market-driven
economy is likely to be highly capital intensive. Government spending should,
therefore, be given a boost, especially on basic infrastructure and social services.
This, via the multiplier effect, is likely to enhance employment (Floyd, 1979).

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An expansionary fiscal policy seems to be an important instrument, which may

enhance not only growth but also employment and it may also become instru-
mental in eradicating poverty. Although the present study did not incorporate
public expenditure as a variable in the model, following the findings of Sahoo
(2009) that public organised sector employment is highly responsive to total
public expenditure, it may be stated that an increase in public developmental
expenditure especially on the capital account may be a necessity.
There is also strong debate on labour market reforms in India today. It is
argued that but for restrictive labour laws that have introduced inflexibility
in the labour market, the Indian economy would have experienced a higher
growth of employment. Indian labour laws are so numerous, complex and even
ambiguous that they promote litigation rather than the resolution of problems
related to industrial relations (Sharma, 2006). The problem with the debate
on labour market reforms is that an integral view of labour market regulation
is missing. Chapter VB of the Industrial Disputes Act, 1947 and the Contract
Labour (Regulation and Abolition) Act, 1976 appear to restrict both employers
and labour to take a holistic view of labour market regulations.
Further, Indian labour laws are highly protective of labour, and inflexible
labour markets are applicable to the organised sector only. As a consequence
of unfriendly labour laws, labour mobility is restricted, leading to a rise in
labour costs. This, in turn, hinders investment and growth, and promotes
capital-intensive methods of production in the organised sector which
adversely affects the sector’s long-run demand for labour (Government of India,
2006). A past study on the pattern of manufacturing growth during 1958–92
established that states which amended the Industrial Disputes Act in a pro-
worker direction, experienced lowered output, employment and investment
in registered formal manufacturing (Besley and Burgess, 2004). In 1980s,
employment in the manufacturing sector was adversely affected (Sundaram
and Tendulkar, 2002) primarily by labour market rigidities, leading to high
labour adjustment costs (Besley and Burgess, 2004) and a failure to link wages
to productivity.
A balanced approach towards labour market flexibility should be adopted for
stimulating investment and employment, guaranteeing equity (Standing, 2002).
An active labour market policy of skill development and re-deployment should
be pursued in which trade unions, employers and government should closely
collaborate. Furthermore, increasing employment in the informal sector, along
with its low productivity, low wages, fragile employment and income insecurity,
necessitates regulations for this sector in such a way as to create organised
sector-like conditions of improved productivity with better employment and
wages (Sharma, 2006).
 Pattanaik and Nayak  EMPLOYMENT INTENSITY OF GROWTH IN INDIA  151

To conclude, it may be stated that the present study is an attempt to analyse

the determinants of employment intensity of growth across major Indian
states by examining the econometric properties of the data set within a panel
framework. The results provide an empirical overview of the relationship
between employment intensity of growth and macroeconomic factors. India
is expected to reap the benefits of its surplus labour as labour supply acts as a
favourable factor. The findings also support the notion of a positive role of the
economy’s share in services and industries. As agriculture is over-manned, the
pressure from agriculture is likely to reduce with the increase in the share of
manufacturing and services. In order to maintain and sustain high employment
elasticity, it is also pertinent to maintain price stability. Besides, the creation
of a healthy and educated workforce is yet another important measure, which
cannot be wished away. There is perhaps a need for inter-sectoral transfer of
labour and the convergence of sectoral labour productivities to bring about an
improvement in employment conditions in India.
In a labour surplus economy like India, the attainment of higher growth
without a commensurate rise in employment would accentuate poverty and
inequality. Unless a well-thought-through attempt is made to address the
employment issue, the latter may act as a grave threat to India’s thrust towards
achieving prosperity. The ‘one-size fits all’ approach to macroeconomic policies
may fail to provide solutions (ILO, 2012). There is a need to take a multi-
pronged approach with measures to foster pro-employment growth. In order
for growth to become truly inclusive, it must ensure high employment content
and the direct and underlying macroeconomic factors affecting the same need
adequate attention.

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