Impact of Elasticities of Substitution, Technical Change, and Labour Regulations on Labour Welfare in Indian Industries

This paper primarily investigates the issue of labour welfare in Indian industries, and seeks to make a contribution to the debate on labour reforms currently underway in India. It investigates the relative importance of technical change, elasticities of substitution, and labour regulations for labour welfare, proxied by the income shares of skilled and unskilled labour in total costs. Three primary conclusions arise. First, pure technical change has no discernible impact on income shares. Second, there is a clear pattern between the magnitudes of and changes in elasticities of substitution and associated incomes shares. Elasticity changes have tended to favour skilled labour and hurt unskilled labour. Finally, pro-worker labour regulations have a somewhat positive impact on unskilled labour shares, by mitigating the negative impact of substitution elasticities, but not completely reversing them. Pro-employer regulations, by contrast, do not have a good record of safeguarding labour interests. Based on these conclusions, the paper makes the case that a clear articulation of the goals for labour reforms should precede their designing.