Employment problem in India and the phenomenon of the missing middle
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2008
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Abstract
Economic growth in India, which has accelerated in recent years, has been characterized
by some disturbing characteristics—which seem to set the pattern out of line with international
experience of sustained economic development. These include three critical ones;
First, the growth process seems to have been led by the tertiary sector—both in terms of value
added and employment, rather than manufacturing;
Second: while the expectation in labor-abundant economy might be that the tertiary sector had
disproportionately absorbed labor displaced from agriculture at low levels of earnings, the data
seems to suggest that this has not been so. Earnings level in the tertiary sector has been
significantly above those in manufacturing, suggesting that growth in the tertiary sector has been
productivity-led rather than employment led.
Third: the manufacturing sector in India has been characterized by the persistence in “dualism”.
There has been a strong bi-modal distribution in employment—even when we confine our
attention to the non-household sub-sector in manufacturing—with strong concentration of
employment at the small and large size-groups of establishments, with a conspicuous ‘missing
middle’. A related point is that the productivity (and wage) gap between the two extreme size
groups is much larger in India than in even other Asian economies.
It is our contention that these three phenomena are inter-related. It is the ‘dualism’ in the
manufacturing sector which has slowed down the expected dynamic role of this sector in the
growth of the economy. The bias towards the tertiary sector in the growth a pattern and the
productivity gap in its favor can also be traced to the persistence of dualism in manufacturing.
Section I of the paper documents the empirical evidence of the bias towards the tertiary sector in
Indian development in the context of international experience. In section II we set out the
evidence on dualism in the manufacturing sector—again stressing the extreme position of India
compared top other Asian economies. Section III develops the argument as to why this type of
‘dualism’ is a problem and a drag on the growth experience. Section IV explores some
hypotheses about the origins and persistence of dualism in Indian manufacturing.
Description
Draft paper for the Canadian Economic Conference 2008, Vancouver June 6-8
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Keywords
ECONOMIC GROWTH, VALUE ADDED, SMALL ENTERPRISES, LARGE SCALE INDUSTRY, INDUSTRIAL SECTOR, EMPLOYMENT, LABOUR MARKET, INDIA, SUSTAINABLE DEVELOPMENT