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Where Have All the Workers Gone?
India's post-reform economic development has seen a sustained decline in the labour intensity of the organised manufacturing sector, including in labour-intensive industries. This paper argues that this occurred due to an increase in the real wage to rental price of capital ratio, which, in turn, was mostly due to a fall in the relative price of capital goods. The decrease was driven by trade reforms in capital goods, and falling import tariffs on capital goods. While a fall in the relative price of capital may have led to an increase in the rate of private fixed investment in machines, and consequently, economic growth, one inadvertent consequence of the trade reforms was that they disincentivised firms from hiring labour.
This paper is an outcome of an ESRC–ICSSR research grant. An earlier version of this paper was published as Working Paper No 35 of the Development Economics and Public Policy Working Paper series of the University of Manchester. Pilu Chandra Das provided able research assistance, for which we are grateful. We thank an anonymous reviewer and Aditya Bhattacharya for their comments. We also thank the participants in a seminar at the Indian Council for Research on International Economic Relations for their comments. The usual disclaimer applies.
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