Informalization of the formal sector: Evidence from India's manufacturing industries

Radhicka Kapoor; P. P. Krishnapriya

doi:10.2478/izajodm-2023-0005

Figures & Tables

Change in the composition of workers in the formal manufacturing sector over time.Notes: The variable ‘total persons engaged’ reported in ASI is classified into four categories-production workers, employees holding supervisory or managerial positions, unpaid family members/ proprietor/ coop members and other employees. Production workers are subdivided into two categories: those hired directly and those employed through contractors.

Changes in annual real wages for contract and directly hired workers by year.Notes: The ASI dataset provides data on the total wage bill of the plant. Further it reports the disaggregated wage bill for each category of employee i.e. directly employed workers, contract workers and supervisory and managerial staff. The total wage bill in each category is divided by the number of employees in the respective category to arrive at the average wages.

Share (%) of different workers across states and years.Notes: The variable ‘total persons engaged’ reported in ASI is classified into four categories-production workers, employees holding supervisory or managerial positions, unpaid family members/ proprietor/coop members and other employees. Production workers are subdivided into two categories: those hired directly and those employed through contractors. For details on flexible and inflexible states classification, see Table A3 in the Appendix.

Share (%) of different workers across industries and years.Notes: The variable ‘total persons engaged’ reported in ASI is classified into four categories-production workers, employees holding supervisory or managerial positions, unpaid family members/ proprietor/ coop members and other employees. Production workers are subdivided into two categories: those hired directly and those employed through contractors. For details of capital-and labour-intensive industries, see footnote 11.

Share (%) of different workers across plants of different sizes.Notes: The variable ‘total persons engaged’ reported in ASI is classified into four categories-production workers, employees holding supervisory or managerial positions, unpaid family members/ proprietor/ coop members and other employees. Production workers are subdivided into two categories: those hired directly and those employed through contractors.

Real wages (in Rs) of different workers across different industries.Notes: The ASI dataset provides data on the total wage bill of the plant. Further it reports the disaggregated wage bill for each category of employee i.e. directly employed workers, contract workers and supervisory and managerial staff. The total wage bill in each category is divided by the number of employees in the respective category to arrive at the average wages. For details of capital-and labour-intensive industries, see footnote 11.

Distribution of Employment in the Organised and Unorganised Manufacturing Sector.Notes: The variable ‘total persons engaged’ reported in ASI is classified into four categories-production workers, employees holding supervisory or managerial positions, unpaid family members/ proprietor/ coop members and other employees. Production workers are subdivided into two categories: those hired directly and those employed through contractors.

Composition of the workforce in organised manufacturing sector.Notes: The variable ‘total persons engaged’ reported in ASI is classified into four categories-production workers, employees holding supervisory or managerial positions, unpaid family members/ proprietor/ coop members and other employees. Production workers are subdivided into two categories: those hired directly and those employed through contractors.

Share (%) of contract workers in total workers by state.Notes: The variable ‘total persons engaged’ reported in ASI is classified into four categories-production workers, employees holding supervisory or managerial positions, unpaid family members/ proprietor/ coop members and other employees. Production workers are subdivided into two categories: those hired directly and those employed through contractors.

Share (%) of different workers across plants of different sizes and labour intensity.Notes: The variable ‘total persons engaged’ reported in ASI is classified into four categories-production workers, employees holding supervisory or managerial positions, unpaid family members/ proprietor/ coop members and other employees. Production workers are subdivided into two categories: those hired directly and those employed through contractors. For details of capital- and labour-intensive industries, see footnote 11.

Share (%) of different workers across different industries and states.Notes: The variable ‘total persons engaged’ reported in ASI is classified into four categories-production workers, employees holding supervisory or managerial positions, unpaid family members/ proprietor/ coop members and other employees. Production workers are subdivided into two categories: those hired directly, and workers employed through contractors. For details of capital-and labour-intensive industries, see footnote 11. For details on flexible and inflexible states classification, see Table A3 in the Appendix.

Real wages (in Rs) of different workers across different plant sizes.Notes: The variable ‘total persons engaged’ reported in ASI is classified into four categories-production workers, employees holding supervisory or managerial positions, unpaid family members/ proprietor/ coop members and other employees. Production workers are subdivided into two categories: those hired directly and those employed through contractors.

Instrumental variable regression results

Category	All (1)	K-intensive (2)	L-intensive (3)	Small (4)	Medium (5)	Large (6)	Large K-intensive (7)	Large L-intensive (8)	Low CW (9)	High CW (10)
Second stage: dependent variable is ln(CW/TW)

ln(W_C/W_D)	0.653^*** (0.101)	0.331^*** (0.123)	−0.861^** (0.412)	−1.003^*** (0.238)	0.145 (0.127)	0.697^*** (0.224)	0.378^* (0.202)	1.015 (1.451)	0.661^*** (0.100)	−0.090 (0.107)
time trend	0.010^*** (0.001)	0.015^*** (0.001)	0.010^*** (0.002)	0.000 (0.001)	0.016^*** (0.001)	0.019^*** (0.005)	0.024^*** (0.005)	0.017 (0.024)	0.015^*** (0.001)	0.008^*** (0.001)
LMR-GHK	−0.060^*** (0.008)	−0.067^*** (0.010)	0.033 (0.031)	0.009 (0.011)	−0.030^*** (0.010)	−0.070^*** (0.019)	−0.059^*** (0.022)	−0.144 (0.139)	−0.062^*** (0.008)	0.003 (0.004)

Industry fixed effects	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

N	110,238	46,325	34,985	36,670	40,760	32,808	14,545	10,762	107,781	2,457

First stage

ln(absenteeism)	−0.116^*** (0.010)	−0.098^*** (0.015)	−0.063^*** (0. 016)	−0.080^*** (0.015)	−0.085^*** (0.014)	−0.115^*** (0.020)	−0.133^*** (0.029)	−0.039 (0.027)	−0.116^*** (0.010)	−0.062 (0.065)
ln(min wage)	0.088^*** (0.009)	0.110^*** (0.015)	0.034^** (0.015)	−0.003 (0.013)	0.099^*** (0.013)	0.095^*** (0.019)	0.142^*** (0.030)	0.018 (0.028)	0.089^*** (0.009)	0.003 (0.044)

Industry fixed effects	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

F-statistic	94.54	56.71	56.92	24.28	49.89	61.72	30.41	49.09	94.24	8.73

Proxy variable regression results

Category	All (1)	K-intensive (2)	L-intensive (3)	Small (4)	Medium (5)	Large (6)	Large K-intensive (7)	Large L-intensive (8)	Low CW (9)	High CW (10)
time trend	0.009^*** (0.001)	0.012^*** (0.001)	0.007^*** (0.002)	0.003^*** (0.001)	0.015^*** (0.001)	0.016^*** (0.001)	0.015^*** (0.002)	0.015^*** (0.003)	0.028^*** (0.001)	0.003^*** (0.000)
LMR-GHK	−0.047^*** (0.005)	−0.059^*** (0.007)	−0.060^*** (0.010)	−0.013^*** (0.005)	−0.012^* (0.007)	−0.082^*** (0.010)	−0.061^*** (0.012)	−0.164^*** (0.020)	−0.043^*** (0.006)	−0.001^*** (0.000)
ln(absenteeism)	−0.005 (0.010)	−0.003 (0.012)	0.112^*** (0.023)	0.074^*** (0.012)	0.068^*** (0.015)	−0.041^*** (0.016)	−0.020 (0.017)	0.050 (0.039)	−0.013 (0.010)	0.001^* (0.001)
ln(min wage)	0.109^*** (0.011)	0.112^*** (0.014)	0.013 (0.024)	0.029^*** (0.011)	0.057^*** (0.015)	0.102^*** (0.020)	0.135^*** (0.022)	−0.002 (0.045)	0.125^*** (0.011)	−0.003^*** (0.001)
Industry fixed effects	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	134,436	60,577	41,279	36,670	40,760	57,006	28,797	17,056	120,321	14,115
R-squared	0.077	0.102	0.072	0.023	0.039	0.170	0.207	0.133	0.086	0.153

Share (%) of contract workers in total workers by industry

NIC	Industry	2000–01	2013–14
15	Manufacturing of food products and beverages	21.52	29.45
16	Manufacturing of tobacco products	41.20	36.76
17	Manufacturing of textiles	10.76	16.28
18	Manufacturing of wearing apparels; dressing and dyeing of fur	6.02	16.91
19	Tanning and dressing of leather; Manufacturing of luggage, handbags saddlery, harness and footwear	19.45	23.00
20	Manufacturing of wood and of products of wood and cork, except furniture; Mf of articles of straw and plaiting materials	10.09	31.56
21	Manufacturing of paper and paper products	22.83	30.06
22	Publishing, printing and reproduction of recorded media	5.93	22.52
23	Manufacturing of coke and refined petroleum products and nuclear fuel	19.39	44.62
24	Manufacturing of chemicals and chemical products	20.60	42.94
25	Manufacturing of rubber and plastic products	14.15	37.63
26	Manufacturing of other non-metallic mineral products	34.08	61.47
27	Manufacturing of basic metals	30.13	45.04
28	Manufacturing of fabricated metal products, except machinery and equipment	29.08	43.17
29	Manufacturing of machinery and equipment n.e.c.	11.33	33.07
30	Manufacturing of office, accounting and computing machinery	42.68	37.24
31	Manufacturing of electrical machinery and apparatus n.e.c.	13.45	42.12
32	Manufacturing of radio, television and communication equipment and apparatus	9.60	34.68
33	Manufacturing of medical, precision and optical instruments, watches and clocks	5.45	24.58
34	Manufacturing of motor vehicles, trailers and semi-trailers	13.88	45.76
35	Manufacturing of other transport equipment	14.61	45.14
36	Manufacturing of furniture; manufacturing n.e.c.	16.06	24.35

Proxy variable regression results with two-way fixed effects

Category	All (1)	K-intensive (2)	L-intensive (3)	Small (4)	Medium (5)	Large (6)	Large K-intensive (7)	Large L-intensive (8)	Low CW (9)	High CW (10)
ln(absenteeism)	0.005 (0.010)	−0.012 (0.013)	0.045^{^**} (0.020)	0.036^{^***} (0.009)	0.015 (0.011)	0.003 (0.016)	−0.007 (0.022)	0.039 (0.034)	0.007 (0.010)	−0.005 (0.004)
ln(realminwage)	0.031^{^**} (0.013)	0.009 (0.018)	0.079^{^***} (0.024)	0.037^{^***} (0.010)	0.042^{^***} (0.013)	0.066^{^***} (0.020)	0.049 (0.033)	0.061 (0.047)	0.034^{^***} (0.013)	−0.000 (0.005)

Plant fixed effects	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

Year fixed effects	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

N	110238	46325	34985	36670	40760	32808	14545	10762	107781	2457

OLS regression results with two-way fixed effects_

Category	All (1)	K-intensive (2)	L-intensive (3)	Small (4)	Medium (5)	Large (6)	Large K-intensive (7)	Large L-intensive (8)	Low CW (9)	High CW (10)
ln(W_C/W_D)	−0.196^{^***} (0.009)	−0.189^{^***} (0.014)	−0.189^{^***} (0.020)	−0.098^{^***} (0.006)	−0.175^{^***} (0.012)	−0.249^{^***} (0.016)	−0.234^{^***} (0.027)	−0.230^{^***} (0.038)	−0.199^{^***} (0.009)	0.002 (0.002)
Plant fixed effects	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year fixed effects	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	116613	52700	34985	40411	42870	33332	15069	10762	114011	2602

Total Employment in Manufacturing Sector (in millions)

	2000–01	2005–06	2010–11	2015–16
Unorganised sector (NSS)	37.1	36.44	34.88	36.04
Organised sector (ASI)	7.75	8.80	12.25	13.72

OLS regression results

Category	All (1)	K-intensive (2)	L-intensive (3)	Small (4)	Medium (5)	Large (6)	Large K-intensive (7)	Large L-intensive (8)	Low CW (9)	High CW (10)
ln(W_C/W_D)	−0.067^*** (0.008)	−0.097^*** (0.011)	−0.054^*** (0.016)	−0.092^*** (0.006)	−0.162^*** (0.010)	−0.218^*** (0.015)	−0.224^*** (0.021)	−0.196^*** (0.032)	−0.073^*** (0.008)	0.002^** (0.001)
time trend	0.013^*** (0.001)	0.017^*** (0.001)	0.008^*** (0.002)	0.003^*** (0.001)	0.017^*** (0.001)	0.037^*** (0.002)	0.037^*** (0.002)	0.037^*** (0.004)	0.019^*** (0.001)	0.008^*** (0.000)
LMR-GHK	−0.024^*** (0.006)	−0.047^*** (0.008)	−0.024^** (0.011)	−0.022^*** (0.005)	−0.013^** (0.006)	−0.018 (0.012)	−0.020 (0.016)	−0.029 (0.024)	−0.024^*** (0.006)	0.000 (0.001)
Industry fixed effects	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
N	110,238	46,325	34,985	36,670	40,760	32,808	14,545	10,762	107,781	2,457
R-squared	0.051	0.047	0.073	0.032	0.057	0.130	0.084	0.120	0.058	0.324

State-wise classification of Labour Market Regulations (LMR) as per each of various studies and the final classification reported in this study

State	BB^*	AB-permission	AB-threshold	AB-composite	OECD	LMR
Andhra Pradesh	Flexible	0	0	0	Flexible	1
Assam	0	0	0	0	Inflexible	0
Bihar	0	0	0	0	Inflexible	0
Gujarat	0^*	0	0	0	Flexible	0
Haryana	0	0	0	0	Flexible	0
Karnataka	Flexible	Flexible	0	Flexible	0	1
Kerala	Flexible	0	0	0	Inflexible	0
Madhya Pradesh	0^*	0	0	0	0	0
Maharashtra	Inflexible	Inflexible	Inflexible	Inflexible	Inflexible	−1
Odisha	Inflexible	Inflexible	Inflexible	Inflexible	0	−1
Punjab	0	0	0	0	0	0
Rajasthan	Flexible	0	0	0	Flexible	1
Tamil Nadu	Flexible	Flexible	0	Flexible	0	1
Uttar Pradesh	0	Flexible	Flexible	Flexible	Flexible	1
West Bengal	Inflexible	Flexible	Inflexible	0	Inflexible	−1

Informalization of the formal sector: Evidence from India's manufacturing industries

Figures & Tables

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Figure A1

Figure A2

Figure A3

Figure A4

Figure A5

Figure A6

Instrumental variable regression results

Proxy variable regression results

Share (%) of contract workers in total workers by industry

Proxy variable regression results with two-way fixed effects

OLS regression results with two-way fixed effects_

Total Employment in Manufacturing Sector (in millions)

OLS regression results

State-wise classification of Labour Market Regulations (LMR) as per each of various studies and the final classification reported in this study

Paradigm

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