Growth, Structural Change, and Poverty Reduction: Evidence from India

We examine the relationship between growth in labor productivity and poverty reduction through the lens of changes in the structure of output and employment. Combining state-level data from India on poverty with state-level data on output and employment for 11 production sectors over 1987–2009, we find that the movement of workers from lower to higher productivity sector is an important channel through which increases in aggregate productivity translate into poverty reduction. We also find that the importance of this channel of productivity growth, termed structural change by recent literature, varies across states. Exploratory analysis reveals that indicators of financial development, business regulations that promote competition and flexible labor regulations are associated with larger reallocations of labor from lower to higher productivity sectors. Overall, our findings are consistent with the view that a better investment climate is not only good for business, it is also an important means for making growth more pro-poor in a labor abundant country.