Analyzing the Nexus between

Employment and GDP: A Regression

Study

- Submitted for: Partial fulfillment of the requirements for INTRODUCTORY ECONOMETRICS

(2272102403)
- Submitted to: Prof. Sutapa Das
- Submitted by: Aashi Solanki (2022/19)
Ayushi (2022/211)

1. Introduction:

In our comprehensive study, we delve into the dynamic relationship between Gross Domestic
Product (GDP) and Employment within the organized sector. The organized sector
encompasses formal employment across public and private sectors, offering higher job security,
better working conditions, and benefits compared to the informal sector. Understanding the
nuances of this relationship is essential for ensuring labor market stability, promoting inclusive
growth, and fostering sustainable development.

Our study also aims to investigate the profound impact of the liberalization policy introduced in
1991 on the GDP-employment nexus within the organized sector. The liberalization policy
marked a paradigm shift in India's economic landscape, ushering in an era of globalization,
privatization, and market-oriented reforms. Its effects on GDP growth, employment patterns, and
the structure of the organized sector are critical areas of analysis to understand how economic
policies shape labor market dynamics and influence overall economic performance.

This study contributes significantly to evidence-based decision-making by providing empirical

insights into the mechanisms through which economic output impacts formal employment,
thereby informing strategic interventions and policy adjustments aimed at enhancing labor
market efficiency and promoting equitable growth.

Hypothesis- GDP has a positive effect on employment in the organized sector, and the
liberalization policy has altered the magnitude of this relationship.
Organisation of the paper:

2 Methodology

2.1 Statistical Software and Packages

2.2 Dummy Variables

2.3 Data Collection and Analysis

2.4 Interpretation of Results

3 Data Source

3.1 Variables

3.2 Data Preparation

3.3 Justification for Clubbing the Data

3.4 Data Specification

4 Inference of Statistical Result

5 Conclusion

6 Appendix

6.1 Statistical Summary- Without Dummy Variable

6.2 Statistical Summary- With Dummy Variable

2. Methodology:

To explore the relationship between GDP and employment in the organized sector, an Ordinary
Least Squares (OLS) regression analysis is conducted. This analysis aims to understand the
potential impact of GDP on employment, while also considering any variations that may have
occurred before and after the introduction of liberalization policies.
2.1 Statistical Software and Packages:

The statistical software R Studio, along with MS Excel, is utilized for the analysis. The `lm()`
function from the `stats` package in R is employed to perform the Ordinary Least Squares
regression. Additionally, the `dplyr` package is used for data manipulation, and the `ggplot2`
package is utilized for visualizing the results.

2.2 Dummy Variables:

To account for potential differences before and after the implementation of liberalization policies,
dummy variables are included in the regression model. Specifically, a dummy variable
representing the time period before liberalization (i.e, D=0) and another representing the time
period after liberalization (i.e, D=1) are created and included in the model.

2.3 Data Collection and Analysis:

Data on GDP and employment in the organized sector are collected for the relevant time period.
The regression analysis is conducted using a time series dataset spanning both pre- and
post-liberalization periods. Diagnostic tests for multicollinearity, heteroscedasticity, and normality
of residuals are performed to ensure the robustness of the regression results.

2.4 Interpretation of Results:

The coefficients of interest are interpreted to understand the magnitude and direction of the
relationship between GDP and employment in the organized sector, both before and after the
introduction of liberalization policies.

3. Data Source

The data used in this study was sourced from the official website of the Reserve Bank of India
(RBI), ensuring reliability and authenticity. It includes information on employment and GDP in
the organized sector from 1983 to 2012.

3.1 Variables

Estimate: Employment=A1+A2D+B1GDP+B2D*GDP

D=1 for 1983-84 to 1991-92

D=0 for 1992-93 to 2011-12

Pre-Liberalisation Equation- Post-Liberalisation Equation-

emp = a1 + b1*GDP emp = (a1 + a2) + (b1 + b2) GDP
- Employment: Represents formal sector employment, including jobs in the public and private
sectors. The unit of measurement for employment is in lakh (100,000).
- GDP: Represents the total economic output level. The unit of measurement for GDP is in
billion Indian Rupees (INR).

3.2 Data Preparation

The data underwent thorough cleaning and preparation for analysis, which involved addressing
missing values, identifying and handling outliers, and performing necessary transformations to
meet the assumptions of the regression model.

3.3 Justification for Clubbing the Data

Data from both public and private sectors was combined to provide a comprehensive view of
employment trends in the organized sector. This approach ensures a more holistic
understanding of the employment dynamics within the formal economy, encompassing a
broader spectrum of job categories and industries.

3.4 Data Specification

Employment Data:
- Period Covered: The dataset spans from the fiscal year 1983-84 to 2011-12.
- Frequency: The data is collected annually.
- Variable Name: "Employment"
- Definition: Represents the total number of individuals employed in the organized sector,
including both public and private sector jobs.
- Unit of Measurement: Employment figures are reported in lakh, where 1 lakh is equivalent to
100,000 individuals.

GDP Data:
- Period Covered: The GDP data spans from the fiscal year 1983-84 to 2011-12, aligning with
the period covered in the employment dataset.
- Frequency: The data is reported annually.
- Variable Name: "GDP"
- Definition: Represents the total Gross Domestic Product of India, which measures the
monetary value of all goods and services produced within the country's borders.
- Unit of Measurement: GDP figures are reported in billion Indian Rupees (INR).
Dummy Variable (D):
- Definition: A binary variable used to distinguish between pre-liberalization and
post-liberalization periods.
- Value Assignment: D = 1 for the fiscal years 1983-84 to 1991-92, indicating the
pre-liberalization period. D = 0 for the fiscal years 1992-93 to 2011-12, indicating the
post-liberalization period.

4. Inference of Statistical Result:

Estimate: Employment=A1+A2D+B1GDP+B2D*GDP

D=1 for 1983-84 to 1991-92

D=0 for 1992-93 to 2011-12

Pre-Liberalisation Equation-

emp = a1 + b1*GDP
emp = 200.87 + 0.0049 GDP
t value = (13.0497) (3.7366)
p value = (1.658) (0.0009)

R2= 0.7699

Post-Liberalisation Equation-
emp = (a1 + a2) + (b1 + b2) GDP
emp = (200.87 + 66.88) + (0.0049 - 0.0046) GDP
t value= (13.0497) (4.2231) (3.7366) (-3.4712)
p value= (1.658) (0.0003) (0.0009) (0.0019)

R2= 0.7699

*Total Employment is represented by Emp.

Mean predicted Total Employment is represented by emp.

Usage of Dummy Variables

In regression analysis, a dummy variable (also known as indicator variable or just dummy) is
one that takes a binary value (0 or 1) to indicate the absence or presence of some categorical
effect that may be expected to shift the outcome.
5. Conclusion:

The study confirms a positive relationship between GDP and employment in the organized
sector. However, the introduction of the liberalization policy seems to have altered the strength
of this relationship. While employment levels are higher post-liberalization, the sensitivity of
employment to changes in GDP appears to have decreased.

These findings suggest that economic growth may have a smaller impact on employment in the
organized sector after liberalization. Further research could explore other factors that may have
contributed to this change in elasticity, such as shifts in industrial composition or advancements
in technology.

6. Appendix:

6.1
Statistical Output (Without Dummy Variable)
6.2
Statistical Output (With Dummy Variable)
*Result on Rstudio