In the mid-1950s, the government of India instituted the Freight Equalization Policy, which was designed to give all Indian regions equal access to 'essential' raw materials such as steel and cement. Some observers have suggested that this policy deprived India's main steel-producing region of its natural comparative advantage in steel-intensive downstream industries. This presentation will assess the effects of the Freight Equalization Policy using historical data on Indian manufacturing production and internal trade. In particular, it will examine changes in the distribution of steel prices, inter-state trade in steel and output of industries downstream of steel around the time of the imposition of the policy.

Mr Jason Garred is a Bagri Fellow and currently a PhD candidate at LSE in the Department of Economics.

The Productivity Effects of Labour Demand Shocks: Evidence from India

Speaker: Jonathan Colmer

To what degree are workers able to reallocate across sectors in response to labour demand shocks, what are the effects of this reallocation on productivity and wages in destination sectors, and what does this imply about the sectoral misallocation of labour? I combine worker, firm, and district-level data with high-resolution data on atmospheric parameters to examine the effects of weather - a strong driver of short-run agricultural productivity - on industrial production and labour market outcomes in India. By exploiting spatial variation in, and firm-level exposure to, India’s labour regulation environment, I identify the sign and magnitude of the labour reallocation effect. The labour reallocation effect is associated with an increase in production and an increase in the employment of casual workers. These results imply that labour reallocation between sectors could substantially offset economic losses in response to local labour demand shocks, highlighting the importance of economic diversification and market integration. In addition, I estimate that the reallocation of workers is associated with an increase in productivity and average wages for permanent workers in destination sectors. I present a multi-sector model with heterogeneous workers, which predicts that productivity and wages should fall. I extend this model to demonstrate that an increase in productivity and average wages arises in the presence of labour market frictions. This implies that an increase in productivity and wages is a sufficient condition for the existence of misallocation. As such, my results suggest that there may be productivity gains from moving workers out of agriculture into other sectors of the economy.

Mr Jonathan Colmer is a Bagri Fellow and currently a PhD candidate at LSE in the Department of Economics.

Chair: Ruth Kattumuri

Dr Ruth Kattumuri| is Co-Director of the LSE Asia Research Centre and India Observatory.

Additional Information

This event is free and open to all with no ticket required. Entry is on a first come, first served basis. Please direct any queries to arc@lse.ac.uk| or call 020 7955 7615.