Impact of labour productivity on structural transformation and economic growth: A state‐level analysis

• Author: Annmary Jose
• Published date: 01 May 2019
• Date: 01 May 2019
• DOI: http://doi.org/10.1002/pa.1913

ACADEMIC PAPER

Impact of labour productivity on structural transformation and

economic growth: A state‐level analysis

Annmary Jose

Department of Economics, Institute for

Financial Management and Research (IFMR),

Chennai, India

Correspondence

Annmary Jose, Department of Economics,

Institute for Financial Management and

Research, Chennai, India.

Email: ann.jose@ifmr.ac.in

During the 90th and 20th century, India underwent a remarkable phase of growth and

employment generation. Unlike the usual pattern of structural shift, India experienced

a shift away from agriculture to services, which become the backbone of India's

growth trajectory. Using shift‐share analysis, this paper tries to find out the pattern

of structural change in India's five Southern States and contribution of labour

productivity towards this structural shift. I find that all the South Indian states

witnessed a service lead growth with a high‐labour productivity growth. I also find

that the main driver of productivity surge in all the Southern States of India was

within‐sector productivity growth whereas sectorial reallocation effects being the

important part of productivity growth.

1|INTRODUCTION

The structural change that has taken place in India during the 90th and

20th century was remarkable in terms of growth performance as well

as employment generation. Unlike the usual pattern of a structural

shift, India experienced a shift away from the agrarian economy to a

service‐oriented economy. Service sector becomes the largest and

the fast‐growing sector in India by mid‐90s. The subsectors, Trade,

hotel, transport and communication, insurance and real estate,

financing, business services community social, and personal services

contributed more than 60% of GDP in 2013–2014 (Ministry of

Finance, 2016). The share of services in India's GDP has marked an

acceleration trend since the early 1990s. Similarly, a remarkable

improvement in service sector employment also took place during

these years (Das, Erumban, Aggarwal, & Sengupta, 2013). But the

employment growth has not proportionate with the increase in the

share of India's service sector (Bosworth & Maertens, 2010; Kochhar,

Kumar, Rajan, Subramanian, & Tokatlidis, 2006; Mukherjee, 2012).

“Economic growth may create productive employment using a

combination of rapid growth of output, innovation, productivity

increase and a structural shift of employment towards more dynamic

and high productivity sectors that provides jobs of better quality”

(Aggarwal, 2014). Aggarwal in his study found that the growth in per

capita value added is due to higher output growth rather than

employment growth, which leads to improvement in overall productiv-

ity in India. There are similar studies, which state that relative increase

in productivity of services is likely to affect the nature of employment

(Nayyar, 2009; Pattanaik & Nayak, 2011; Papola & Sahu, 2012). Many

studies also highlighted that higher labour productivity of the service

sector is the main driver of overall economic growth in India

(Bosworth & Collins, 2007; Mukherjee, 2012; Park & Shin, 2012). It

is empirically proven that the growth of the Indian economy mainly

stems from high labour productivity in the service sector rather than

an increase in employment.

The paper contributes to the emerging debates in labour

productivity and employment growth literature by showing the pat-

tern of productivity in overall economic growth. This paper at the

outset examines whether there is structural change happened in

output and employment in India's five Southern States; Karnataka,

Kerala, Tamil Nadu, Andhra, and Telangana. Moreover, the study looks

into the sector‐wise labour productivity growth in the five states and

also analyse whether the high growth of productivity is a consequence

of redistribution of input towards high‐productivity sectors or

whether, on the contrary, it is a consequence of high‐productivity

growth at sectoral level. Using shift‐share analysis, I find that all the

South Indian states witnessed a service lead growth with a high‐labour

productivity growth. I also find that the main driver of productivity

surge in all the southern states of India was within‐sector productivity

growth whereas sectorial reallocation effects being the important part

of productivity growth. I argue that the high‐growth witnessed by

Southern States stems mainly from sector wise improvement in

productivity.

The paper is organised as follows: Section 2 presents the theoret-

ical and empirical literature, Section 3 gives a snapshot of structural

Received: 26 November 2018 Accepted: 27 November 2018

DOI: 10.1002/pa.1913

J Public Affairs. 2019;19:e1913.

https://doi.org/10.1002/pa.1913

© 2019 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/pa 1of8