ECONOMIC growth in the long run depends on the growth of productivity. Productivity is measured with respect to inputs used, that is labour, capital and energy, and in terms of the efficient use of the combination of these inputs. The growth of the economy or the per capita income depends on the growth of labour productivity and the growth of employment. Labour productivity implies value added per worker and is sometimes measured in terms of value added per hour of labour worked. Generally, labour productivity grows at a faster pace compared to the growth of the labour force in capitalism because entrepreneurs deploy new technology independent of the aggregate supply of labour force and technological development is broadly uncoordinated. This may cause an employment growth lower than the growth of the labour force resulting in unemployment. But the important point remains what constitutes the growth of labour productivity. How much a labourer can produce depends on several factors such as the machines with which the worker is working, the level of innovation depending on investment in research and development and the quality of labour. With increasing use of sophisticated machines, labour productivity increases only if the worker is adequately skilled to handle new machines.

In developing countries, labour productivity depends on capital deepening, which is an indicator of capital intensity or the use of capital per unit of labour. The huge gap with developed countries in terms of labour productivity explains why despite being repositories of cheap labour developing countries rank low in exports even for labour-intensive products. Enhancing labour productivity is important because it determines the unit labour cost of production in specific sectors. Even if wages are low in developing countries, since unit labour cost measures the wage to productivity ratio or wages per unit of labour productivity, if the latter continues to be very low, lower wages cannot reduce the unit cost of production. For instance, if a worker in country A is five times more productive than a worker in country B even if the wages in country B are half of what they are in country A, the unit cost of production turns out to be lower in country A compared to country B. Competition in the global market is based on unit labour cost and cheapening of wages would not help if labour productivity grows at a slow pace. In 2023, India’s labour productivity measured as GDP per worker at constant 2021 purchasing power parity dollars is much lower than China’s labour productivity. Although labour productivity increased considerably in India compared to the past, the gap with other countries continues to be very high.

LABOUR PRODUCTIVITY: INDIA AND CHINA

A report on productivity trends of Asian countries suggest that Asia has emerged as the new growth centre of the world and South Asia is going to be the fastest engine of growth within Asia bypassing Southeast Asia by 2030. India is going to emerge as the fastest growing economy of the world with a low proportion of dependent population and because China’s pace of growth is expected to moderate as her per capita income reaches the group of high-income countries soon. But the concern is growth must be sustained by faster growth of labour productivity. In the case of India, per worker labour productivity growth declined from 5.8 per cent during 2000-10 to 4.8 per cent annual average growth during 2010-23. Labour input growth also declined from annual growth of 3 per cent to 1.8 per cent and labour quality growth has almost halved from 1.5 per cent to 0.8 per cent for the same reference periods. The growth of number of hours worked has also declined from 1.5 per cent annual growth during 2000-10 down to 1 per cent average growth for the period 2010-23. Not only the growth of productivity is declining, the level of per worker labour productivity and per hour labour productivity is very low in India compared to China. Per worker labour productivity in India in 2023 is 24.9 thousand US dollar while for China it is 142.9 thousand US dollar, that is 5.7 times that of India’s productivity. On the basis of per hour labour productivity, China’s count is 5.9 times higher than India’s. Higher productivity of labour largely depends on the capital deepening of the production process, that is the extent of use of machines and updated technology. In the case of India, capital stock per worker in 2023 is $39.4 and that figure in the case of China is $156.7. It is also important that workers working with improved machines would generally require higher skills and schooling. The average years of schooling of workers in India is only 6.3 years while in China it is 13.5 years. These facts indicate that India is still lagging far behind her peers in terms of different measures of labour productivity growth and by the growth of quality of labour. It is extremely important for a fast-growing economy to develop a capable labour force particularly when the world has entered a new wave of technological development. Comparative advantage based on low wage and vulnerable labour force is not going to work anymore. Production structures are changing and competition is not about low cost of production but also about offering higher quality at a cheaper rate. New technology would open new possibilities in this regard and countries that are endowed with greater capabilities would only be able to take advantage of such potentials.

VICIOUS CYCLE

Labour productivity in the aggregate economy depends upon the pace of structural change by which a large proportion of people are shifted to more productive activities. If a large section of the population is dependent on low productive activities in agriculture, then average labour productivity of the economy would be low. This is not about sectoral shifts but linked to involving an increasing proportion of people in higher productivity activities. For instance, agricultural productivity can be enhanced in India through augmenting of irrigation infrastructure, soil conservation, research on agriculture. These would create avenues for producing high valued agricultural products and also by creating link with high value-added output using agricultural raw materials. On the other hand, if manufacturing and services emerge as repositories of low value-added jobs then a sectoral shift would not make the necessary change in labour productivity growth. This has been the case in India where a vast majority of people involved in manufacturing activities are absorbed in the low productivity low wage informal segment or in low wage gig services. Agricultural productivity has grown in China much faster than in India. Manufacturing’s share in GDP in India is 14.3 per cent which is 36 per cent in China. More importantly, Indian producers still rely on the low road of competition based on reducing wage costs. Also relying more on the low productive informal sector for outsourcing and subcontracting restricts vertical movement in technology that requires skilled labour, who demand higher wages. As a result, people who are moving out of agriculture are not necessarily employed in high productive manufacturing or services activities but are getting absorbed in the pit of low value-added activities. Such low wages also restrict the demand for standardised products and reinforces the market for informal capital and labour, hence, creating a vicious cycle of low labour productivity and low wages.