Labour Demand Function for the Indian Organized Industry : An Instrument Variable Approach

In most of the empirical writings regarding demand for labour in the Indian organized industry, scholars have estimated mostly gross employment-output elasticity for different sub-periods representing different decades. They have computed growth rates in output and employment by either the simple average for the period or by simple exponential method. Some authors have also obtained labour demand functions for the same sub-periods. The present paper is a departure from earlier studies in respect of, (i) the use of kink method to find out the growth rates for the sub-periods of structural breaks; (ii) testing the structural breaks with the help of CHOW test; (iii) testing the time series for stationarity; (iv) use of capital cost as an input in labour demand function; (v) the estimation of the function separately for production and non-production workers; and (vi) estimation of the functions with the help of Instrument Variable method. It has been observed that the kink method is the most appropriate for finding out growth rates. Instrument Variable method, which provides consistent estimates, gives higher values for short run elasticity and lower values for long run elasticity as compared to OLS. Therefore, any employment projections based on OLS estimates will be biased and have far reaching policy consequences