DEPP working paper

This Working Paper is part of the Development Economics and Public Policy series

Where Have All The Workers Gone? The Puzzle of Declining Labour Intensity in Organized Indian Manufacturing

Kunal Sen and Deb Kusum Das

Abstract

A puzzling feature of India’s post-reform economic development has been the sustained decline in labour-intensity in the organized manufacturing sector, especially in the labour-intensive industries. In this paper, we argue that this has occurred due to an increase in the real wage to rental price of capital ratio. This in turn has been mostly due to a fall in the relative price of capital goods, driven by trade reforms in capital goods, and falling import tariffs on capital goods over time. Therefore, while the fall in the relative price of capital may have led to an increase in the rate of private fixed investment in machines, and consequently, economic growth, one inadvertent consequence of the trade reforms was the disincentive to firms to hire labour, and to quicken the adoption of machines in their workplaces.

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