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

Radhicka Kapoor
Radhicka Kapoor
 and 
P. P. Krishnapriya
P. P. Krishnapriya
   | Dec 08, 2023
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Published Online: Dec 08, 2023
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Received: Mar 01, 2023
DOI: https://doi.org/10.2478/izajodm-2023-0005
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© 2023 Radhicka Kapoor et al., published by Sciendo
This work is licensed under the Creative Commons Attribution 4.0 International License.

Figure 1

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.
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.

Figure 2

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.
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.

Figure 3

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 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.

Figure 4

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 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.

Figure 5

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.
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.

Figure 6

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.
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.

Figure A1

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.
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.

Figure A2

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.
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.

Figure A3

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 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.

Figure A4

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 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.

Figure A5

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.
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.

Figure A6

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.
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(WC/WD) 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(WC/WD) −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(WC/WD) −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
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