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Section II
MANUFACTURING PRODUCTIVITY AT THE INDIAN PERSPECTIVES
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Chapter 10
Workforce Compensation and Productivity Growth in the Indian Manufacturing Sector: Lessons for Human Resource Management
Sudhanshu Daharwal and Pulak Mishra
Abstract
With economic reforms increasing market competition, greater efficiency and productivity of factors of production, particularly of the workforce, have become important prerequisites for firms' growth and survival. Consequently, designing appropriate strategies to motivate the workforce in this direction appears as a critical aspect of human resource management. However, an important issue is if increase in wages, salaries, and other benefits can necessarily result in the desired outcomes. This chapter will examine this aspect. Estimating long-term trends in share of wages, salaries, and total emoluments in major industries, it is found that while the share of wages, salaries, and total emoluments has increased in recent years, such changes are not reflected in higher productivity. It is, therefore, suggested that, in addition to higher wages, salaries, and other benefits, enhancing efficiency and productivity of human resources requires adequate emphasis on human aspects as well.
Keywords: Economic reforms; wages and salaries; emoluments; efficiency; productivity; human resource management; manufacturing sector; India
JEL Classification: E24; J24; J30; J45; O14; O15; P11
1. Introduction
With changes in economic policies, business strategies, and regulations in different economies across the world, level of competition has increased considerably leading to emphasis on improvement in efficiency and productivity of factors of production. While enhanced competition has limited the scope of increasing profitability by exercising market power, it has forced firms to improve cost-efficiency, inventory management, and product quality. This is crucial particularly in labor-intensive industries where labor productivity can significantly affect efficiency of other factors. Accordingly, it is often suggested to increase financial compensation to the workforce in such industries.
However, there are also various other (nonfinancial) aspects that directly or indirectly affect employee satisfaction and motivate them at the workplace, and higher financial compensation may not necessarily yield desired outcomes. Even low wages and salaries can lead to greater efficiency and productivity if properly managed. Such dichotomy in Indian industries requires a detailed analysis of underlying issues in a long-run perspective for deeper insights, particularly in respect of the implications of human factors in human resource management. This chapter bridges the gap in the existing studies. The findings would provide important insights for policies and strategies relating to improvement in workforce efficiency and productivity and thus firms' competitiveness.
2. Literature Review
A critical issue in modern business is the changing share of various factors in output as they incentivize them in business operations. According to Keynes (1939), inequitable distribution of income and wealth led to failure of the capitalist systems. On one hand, the share of wages remains constant over a long period of time (Giovannoni, 2013). This constancy in factor share is termed as a stylized fact (Kaldor, 1961) and is explained in the line of Bowley's law (Samuelson, 1964). Accordingly, one may expect wage share in a country to be constant in the long run (Kramer, 2011). On the other hand, Ricardo perceived inherent flexibilities in share of land, labor, and capital (Kramer, 2011).
The recent trends in both the developing and developed countries indicate a decreasing share of wages (Charpe, 2011; Goldberg & Pavcnik, 2007). A continuous declining trend of wage share and a widening gap between real wage rate and labor productivity is evident in the Indian context as well (Abraham & Sasikumar, 2017; Kannan & Raveendran, 2009; Shastri & Murthy, 2005). Such a significant gap between real wage rate and labor productivity is seen, particularly since the late 1990s, causing significant negative effect on employment in many industries (Das, Basu, & Halder, 2017).
Nevertheless, capital-deepening production technologies (Arpaia, Pérez, & Pichelmann, 2009; Driver & Muñoz-Bugarin, 2010) and availability of cheaper capital (Chandrasekhar, 2008; Goldar, 2013; Kannan & Raveendran, 2009) seem to have resulted in decreasing share of wages and salaries in manufacturing output. However, studies in the Indian context used different indicators and methodologies to examine the trends. For example, while Kannan and Raveendran (2009) focused mainly on capital intensity, Abraham and Sasikumar (2017) analyzed the trends in wage share and labor productivity. Similarly, Unni & Raveendran (2001) focused on the trends in wage share and total factor productivity in the unorganized sector.
Existing studies found a positive impact of trade-related policy reforms on productivity (e.g., Chand & Sen, 2002; Ghosh &Roy, 2014; Goldar & Kumari, 2003; Kambhampati, 2003; Krishna & Mitra, 1998; Topalova, 2004), though the effects differ across different industries. However, there are also evidence of no significant relationship between wage rate and productivity in some industries (Das et al. 2017). Broadly, the findings may be sensitive to the methodologies and indices used for measurement of productivity (Ahluwalia, 1991; Balakrishnan & Pushpangadan, 1994; Rao, 1996).
In addition, labor market reforms and import competition can influence industrial wages (Goldar & Banga, 2005; Goldar & Aggarwal, 2012), and labor productivity contributes only partially to wage rate with changing forms of employment (Srivastava, 2016) and the contractual nature of jobs (Jain, 2019). Further, growing informalization has weakened the incentive to invest in productivity enhancement (Berg, 2017), and the firms function differently in this regard depending on ow...
