There has been substantial recent interest in the decline of labour shares across countries. For the most part, attention has been focused on developed countries. We examine the evolution of India’s labour share in its formal industrial sector from 1983- 2016. Using two datasets corresponding to sectoral aggregate data and plant-level data respectively, we document a secular decline in the labour share across all sectors from 1983, with a stabilisation at very low levels (around 8 to 10 percent) starting around 2005. We then use the plant-level data to identify correlates that illuminate reasons for the overall decline in the labour share. We find strong evidence to support multiple causes: increased capital intensity, greater informalisation, greater privatisation, and productivity increases in larger firms. As such, we suggest that the declines in labour share experienced are due to a composite set of factors. Conversely, other potential explanations (e.g. regional variation in the labour share) have less explanatory power.
- Arjun Jayadev
- Amay Narayan