A new research paper finds that as the capital intensity of production grows, the share of workers’ wages in national income has fallen sharply
The publication of Thomas Piketty’s Capital in the 21st Century caused quite a sensation – particularly by the standards of an academic book – in 2014. Focussed on inequalities on a global scale, particularly in advanced economies, Piketty argues that the functioning of modern day capital is increasing income and wealth inequalities.
What’s happening in India?
While Piketty’s work calls out increasing inequalities created by capitalism in Europe and the US, analysis of Indian data shows that things are not much different here. Several economists have pointed out that inequality of incomes in India is much higher than what is suggested by the consumption expenditure surveys and others have noted the falling wage shares of national income and the declining proportion of GDP going to the informal sector that still accounts for more than four-fifths of all workers in the country.
In a recent working paper, Radhicka Anand – an economist with the Indian Council for Research on International Economic Relations – looks at the impact of the increasingly capital intensive production that has been characteristic of post-reform India’s manufacturing sector. Based on Annual Survey of Industries (ASI) data, she analyses the effect of current modes of manufacturing production on inequality. Anand’s study is focussed on formal sector manufacturing, responsible for 65% of all manufacturing output but only 10% of all manufacturing sector employees.
In a country where the comparative advantage seemingly lies in the quantity of unskilled labour available, it is unexpected that manufacturing should move towards capital intensive production. Yet this is what has happened. Efforts to explain this have not been few or far between, mostly focussing on India’s labour regulations. The argument is that regulations have increased the cost of labour, leading to a decrease in its demand. This has been refuted by economists over the years, who point to the fact that these regulations apply only to formal sector employees (10% of all manufacturing sector employees), and also to the fact that wages and salaries account for only 4.5% (ASI 2011-12) of total input costs in the sector.
Capital intensity of production has been increasing across industries in the last decade, Anand finds in her analysis. This is true not only in capital intensive industries (or those industries whose capital intensity is higher than the median of the manufacturing sector), but also for labour intensive industries. Combine this with the fact that labour intensive industries are growing slower than capital intensive ones, and you have serious doubts on the ability of the organised manufacturing sector to create jobs.
Prabhat Patnaik, emeritus professor of economics at Jawaharlal Nehru University, summarises what he sees as the basis of rising inequalities in India: “The withdrawal of state support from peasant agriculture under neo-liberalism and the resulting agrarian crisis have driven large numbers of peasants to the urban job market. However, there has been very little job creation, even when the GDP growth rate has been high. This has meant a swelling of labour reserves in urban and industrial areas, keeping down real wages even as labour productivity has increased rapidly. This has caused a sharp fall in the share of wages for industrial workers, and an increase in income inequality in general.”
What capital intensive production means for jobs
Historically, workers have been fearful of mechanisation and what this would mean for their jobs. Though economists have tried to reassure them that new jobs would be created even as old ones are eliminated, what they failed to mention was who these jobs would be for.
In the use of capital-intensive techniques of production, skilled workers are favoured while unskilled workers are replaced by technology. This has been true internationally: Radhicka Anand notes that in the US, for instance, technological changes from 1979 to 1995 were associated with drastic shifts in wage distribution – the “college premium” (or wages of college graduates relative to high school graduates) went up by 25%. In India as well, skilled machine operators and those who maintain and manage machinery are the ones benefitting from new occupations created. This is visible in wages; Anand’s paper shows that the share of production workers in total wages fell from 57.6% to 48.8% between 2000-2001 and 2011-12, while that of supervisory and managerial staff increased from 26.1% to 57.6%. In the same time period, the ratio of the average wages of supervisory and managerial staff to production workers increased from 3.57 to 5.82. Wages and salaries to production workers have remained largely stagnant over the last decade, while others have risen sharply.
Economist Surjit Bhalla, chairman of Oxus Investments, says that his analysis of National Sample Survey data shows a “sharp real wage increase of 2.6% per annum for salaries of industrial workers in urban areas between 1983 and 2011”. However, it could be pointed out that over this period national income in the country grew at twice or thrice that rate. Wages, then, did not keep pace with aggregate income growth.
Contractualisation of labour
Bhalla also argues that it is important to distinguish between regular workers and contract workers, who can be hired and fired at the will of the employers, in the ASI data. He suggests that contractualisation does not have to mean rising inequalities. If the wage increase is higher for contract workers than for regular workers, this would mean that inequality is decreasing.
In fact, contract workers receive about half the wages of permanent workers, with no job security or benefits. ASI data from the years 2000-2001 and 2010-11 have shown a steady increase in the number of contract workers, as shown in the chart below. This is at the expense of regular employment. Significantly, contract workers have accounted for 47% of the total increase in employment in the organised manufacturing sector.
Using contract workers means that even formal sector enterprises do not need to follow the full gamut of labour regulations. Contractualisation diminishes the bargaining power of workers and lowers the average wage of production staff, thereby increasing inequalities.
This data still only pertains to the workers in the organised sector, but things may be even worse in the unorganised sector where most Indians work. Even as wages and salaries have declined as a share of income in the organised sector, the share of unorganised sector in national income has also fallen (see chart). So there are good reasons to worry about the trends in inequality.