Job Reallocation Dynamics in India: Evidence from Large Manufacturing Plants
| Author | Bhaskar Jyoti Neog,Bimal Kishore Sahoo |
| DOI | http://doi.org/10.1111/obes.12350 |
| Date | 01 August 2020 |
| Published date | 01 August 2020 |
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©2019 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 82, 4 (2020) 0305–9049
doi: 10.1111/obes.12350
Job Reallocation Dynamics in India: Evidence from
Large Manufacturing Plants*
Bhaskar Jyoti Neog and Bimal Kishore Sahoo
Indian Institute of Technology Kharagpur, Kharagpur, West Bengal 721302, India
(e-mail: bneog8@gmail.com; bimalkishore.sahoo@gmail.com)
Abstract
The paper contributes to the limited literature on job reallocation dynamics in Indian
manufacturing. The study uses annual data from the Annual Survey of Industries (ASI)
for the years 2000–01 to 2015–16. The study finds job reallocation in India to be quite
high compared to flexible labour markets such as the United States and Canada. Gross
job reallocation shows a rising trend over time, which is driven partially by the increasing
share of contract workers in the workforce. There is heterogeneity in the job reallocation
dynamics across job types. This is evident in the relative importance of the different job
types as plants adjust to permanent and temporary changes in demand. Labour regulations
also play an important role in such a process. Finally, in contrast to the evidence for
the United States and the United Kingdom, our study found firm evidence to reject the
hypothesis that job reallocation is countercyclical in India.
I. Introduction
There is now a large and burgeoning literature that emphasizes the important role of gross
employment flows, characterized by simultaneous job creation and destruction, in overall
resource allocation and economic growth. Examining gross employment flowsis important
for three reasons: First, high rates of job reallocation even within narrowly defined sectors
have important theoretical implications regarding the different channels through which
such flows manifest themselves (Davis and Haltiwanger, 1999). It also provides support
to recent models of heterogeneous firms as opposed to groups of homogeneous firms in
traditional theoretical models (Bernard et al., 2003; Melitz, 2003; Harrison, Martin and
Nataraj, 2013). Second, gross employment flows offer a useful channel for studying the
implications of demand-drivenlabour reallocation on worker mobility, labour retrenchment
and consequent worker well-being (Davis and Haltiwanger, 1999; Hijzen, Upward and
Wright, 2010).Although such reallocation of jobs f acilitates the movementof workers from
*We would like to thank the editor, James Fenske, and three anonymous referees for their valuable comments
and suggestions. We also thank Bishwanath Goldar, Arup Mitra, K. V. Ramaswamy and Pulak Mishra, as well as
participants at the 9th National Seminar on Industrial Statistics (2018) and the invited talk at the Strategic Research
Unit, Reserve Bank of India, India (2019) for fruitful discussions. The usual disclaimers apply.
Job reallocation dynamics in India 935
less productive to more productive jobs, such reallocation can come with earnings losses
and the added cost of searching for and switching into new jobs, especially if the job loss
is involuntary (Jacobson, Lalonde and Sullivan, 1993; Couch and Placzek, 2010; OECD,
2010; Davis and vonWachter, 2011; Martin and Scarpetta, 2012). Third, gross employment
flows allow firms to adjust their workforce to current fluctuations in demand conditions.
It also enables the reallocation of resources from less productive to more productive uses,
facilitating higher productivity for the firm and the economy (Foster, Haltiwanger and
Krizan, 2001). However, excessively large employment flows can be costly for firms, too,
in terms of ‘specific human capital’ lost as well as resources expended in filling vacancies
(Dolado, Ortigueira and Stucchi, 2016).
A flexible macroeconomic regime facilitating better reallocation of resources was also
one of the objectives of the economic reforms initiated in India and other developing
countries around the 1990s. Although the overall impact of such reforms for efficiency,
growth and poverty has been found to be positive, reforms have not been an unqualified
success (Krishna and Mitra, 1998; Sivadasan, 2009; Chari, 2011; Kotwal,Ramaswami and
Wadhwa,2011; Nataraj, 2011; Garc´
ia-Santana and Pijoan-Mas, 2014; Martin, Nataraj and
Harrison, 2017; Mitra, Sharma and Veganzones-Varoudakis, 2014; Balakrishnan, Pushpan-
gadan and Babu, 2018). One of the areas in which reforms have failed to produce desirable
effects is the manufacturing sector. In fact, the performance of Indian manufacturing has
been less than satisfactory as evident from the large share of the unorganized segment and
low employment generation in the sector (Kotwal et al., 2011).
Although the impact of reforms on the manufacturing sector has been found to be
positive, its effect has been dampened by various factors such as rigid labour laws, among
others (Hasan, Mitra and Ramaswamy,2007; Aghion et al., 2008). This has led to a demand
for more flexible labour laws in the country. In contrast, the critics of such a policy contend
that the labour market regime is already quite flexible in the country due to the widespread
and unhindered use of contractual labour by firms (Sharma, 2006). Related studies also
document the widespread use of contract labour by plants in order to adjust to fluctuations
in demand in the face of stringent labour laws (Saha, Sen and Maiti, 2013; Chaurey, 2015;
Bertrand, Hsieh and Tsivanidis, 2017).
Given this background, our study attempts to analyse job reallocation dynamics in the
Indian manufacturing sector for large manufacturing plants. The study sample is especially
interesting, given that the labour lawregime applicable to such plants is very stringent even
by European standards (Dougherty, 2009). We study job flow rates separately byjob types
to better understand how job reallocation dynamics varyin response to the labour regulation
regime.
There have been only a limited number of studies on job reallocation in the Indian
context. Dougherty (2009) estimates job reallocation rates in Indian manufacturing from
2000 to 2008 and finds a negative relation between stringent labour regulationsand labour
turnover.However,his study is based on 5-digit industry-level employment data and ignores
idiosyncratic shocks at the plant level.1Similarly, Nayar et al. (2012) provide estimates of
job reallocation for large manufacturing plants in India using plant-level data. However,
1Additionally, the measures of job reallocation based on 5-digit industry employment are likely to underestimate
the true values of job reallocation based on unit plant-level data.
©2019 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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