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Labour share in Indian economy: An Exploratory analysis of the role of trade, technology and structural transformation

Anwesha Basu () and C. Veeramani ()
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Anwesha Basu: Indira Gandhi Institute of Development Research
C. Veeramani: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: This study analyses the trends, patterns and determinants of the labour share in India. While most of the literature on this topic covers only the organized manufacturing sector, this paper provides a detailed analysis of the labour share at the sectoral level, covering both formal and informal sectors of the entire economy. Using KLEMS data, we find that the aggregate economy-wide labour share declined from 54 in 1980 to 49 in 2016. Shift-share decomposition exercise reveals that both within and between sectoral factors played a role in determining the trends in the aggregate labour share. However, analysis at the disaggregated level reveals that the within sector decline in labour share is neither driven by technological progress, nor by exposure to international trade. Instead, it is mainly driven by two sectors: real estate and construction, neither of which is susceptible to the effects of technological change or trade. The between sector component, on the other hand, is driven by the idiosyncratic nature of the economy's structural transformation, which has favored the high skilled service sector and bypassed manufacturing completely. Within the organized manufacturing sector as well we find that the value-added share of capital-intensive sectors, with the lowest level of labour share, has increased steadily, while that of unskilled manufacturing has declined; leading to a decline in the labour share within the formal manufacturing sector. Sectoral level regression analysis reveals that, controlling for other factors like trade openness and capital intensity, a growth in the share of capital intensive and high skilled sectors leads to a decline in the sectoral wage share. We conclude that the apprehension regarding automation and globalization eating up labour's share of the income might be pre-mature in the context of India. The nature of reallocation of economic activity between sectors has an important role to play.

Keywords: labour share; structural transformation; trade; technological progress (search for similar items in EconPapers)
JEL-codes: D33 E25 F66 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2021-12
New Economics Papers: this item is included in nep-dev, nep-int and nep-mac
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