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Wage–Productivity Relationship in Indian Manufacturing Industries: Evidences from State-level Panel Data

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  • Hansa Jain

Abstract

Indian manufacturing industries have experienced the major effects of economic reforms. Since the effect of any policy is ultimately transferred to workers, this article is an attempt to determine the extent to which labour productivity and wages are inter-related in manufacturing industries. The study uses state-level panel data of manufacturing industries and empirically tests the relevance of marginal productivity theory of wages and efficiency wage theory. After confirming the stationarity of the series, various empirical tests such as cointegration, vector error correction mechanism and Granger causality are applied to check the long-run equilibrium relationship between wage growth and productivity growth. The study finds a divergence between wages and productivity in India as well as in the states. The empirical analysis confirms the existence of long-run relationship between the two variables and finds efficiency wage theory to be more appropriate as its long-term disequilibrium correcting process is quicker as compared to the marginal productivity theory. The study suggests for having a skill intensity matching with capital intensity. Appropriate level of skill and training among the workers will, on the one hand, increase their bargaining strength for more compensation, and on the other hand, will encourage them to produce more. JEL: J31, J24, O30, F66, L66

Suggested Citation

  • Hansa Jain, 2019. "Wage–Productivity Relationship in Indian Manufacturing Industries: Evidences from State-level Panel Data," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 13(3), pages 277-305, August.
    • Handle: RePEc:sae:mareco:v:13:y:2019:i:3:p:277-305
    DOI: 10.1177/0973801019841258
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    Cited by:

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    2. Nurliyana Mohd Basri & Zulkefly Abdul Karim & Noorasiah Sulaiman, 2020. "The Effects of Factors of Production Shocks on Labor Productivity: New Evidence Using Panel VAR Analysis," Sustainability, MDPI, vol. 12(20), pages 1-23, October.
    3. Nidhi Sharma, 2021. "Interstate Wage Differentials in Organized Manufacturing Industries," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 64(4), pages 961-979, December.
    4. Andrei Dalina-Maria, 2022. "Human Capital and Economic Growth in Romania: A Vector Error Correction Model (VECM)," HOLISTICA – Journal of Business and Public Administration, Sciendo, vol. 13(1), pages 110-124, July.
    5. Manuel David Cruz, 2022. "Labor productivity, real wages, and employment: evidence from a panel of OECD economies over 1960-2019," Working Papers PKWP2203, Post Keynesian Economics Society (PKES).

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    More about this item

    Keywords

    Real Wages; Labour Productivity; Capital Intensity; Contractualisation; Manufacturing Industries; India;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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