May 2005

IZA DP No. 1596: Labour Use and Its Adjustment in Indian Manufacturing Industries

published in: Global Economic Review, 2005, 32(3), 261-290

This study provides an empirical investigation of the adjustment process of labour in Indian manufacturing industries, which evolved through structural transformation in the era of globalization. The analysis is based on a dynamic model applied to a panel of 22 two-digit manufacturing industries for the time period of 22 years covering 1980/81 to 2001/02. We assume that as competition increases industries adjust their employment to a desired level which is both industry and time specific. The results indicate that the manufacturing sector has shown a considerable dynamism in adjusting its workforce. The long run labour demand responds greatest to the output, followed by capital and least by wages. It is observed that Indian manufacturing is not inefficient in labour use as modest speed of adjustment has led employment size closer to the optimal level.