Structural Change and Labour Productivity Growth in India: Role of Informal Workers

Labour productivity in an economy or industry may increase due to intrinsic increase in productivity (due to capital deepening or TFP growth) or due to the reallocation of workers to more productive sectors (structural change). Recent trends in the labour force indicate that workers are increasingly being engaged informally, in what may potentially be productivity dampening activities. In this context, this paper examines the productivity implications of the increasing informalisation of the Indian labour force by examining labour productivity by type of worker. The results show that although the movement of workers has been in the direction of relatively higher productivity sectors, the allocation of workers in employment types has not been towards the most productive activity/jobs in that new sector, instead, it has been towards relatively less productive informal activities. The increase in labour productivity from structural change is dampened as workers who move out of agriculture are employed in low productive activities in the non-agricultural sector.