Exploring Wage-Employment Dynamics in India's Organized Manufacturing Sector

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Nitin Arora,Sonali Chadha, Ruhani Seth

Abstract

This paper examines the relationship between real wages and employment trends in India’s organized manufacturing sector using Annual Survey of Industries for the period 1981-1982 to 2022-2023. Using Vector Error Correction Model (VECM), we examine the response of employment to shocks in different variables like real wages, prices and real Gross Value Added. We attempt to find a long-run cointegrating relationship and direction of causality between these variables. Through Variance Decomposition results, we find that output and prices play an important role in explaining variation in employment while wages account for negligible employment variance. Thus, allowing downward flexibility in wages to achieve the objective of ‘Ease of Doing Business in India’ is a sub-optimal strategy since it neither generates jobs nor enhances workers’ welfare. The government must rather use output and price incentives to create more jobs in the organised manufacturing sector.

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