ABSTRACT
Developing countries like India consist of a large informal sector where the productivity growth of the formal sector cannot be understood fully if the existence of the informal sector, and its interaction with the formal sector, are ignored. The pace and pattern of subcontracting or outsourcing have been growing evidences not only across borders but also within borders in the present day world. It has already been discussed in the previous chapter that contractual employment has increased within the formal sector in India, and that it has not helped to contribute to the productivity growth of the economy. Here, we are trying to investigate another aspect of labour market changes in productivity growth, both theoretically and empirically. The existing research has largely discussed the effect of international outsourcing and ignored the similar effects domestically. A growing body of literature has narrated much on the emerging patterns of subcontracting largely to the low-cost sector (known as the informal sector) in the developing world, and some of those experiences are available in the WTO–ILO report (2009). It has been observed that a producer often subcontracts a part of the production process, from the vertical or horizontal tree of production, to outside agents for various reasons (Maiti, 2008). If so, any change in the cost of production or wage rate in the formal sector must have an impact on the extent of subcontracting to the informal sector. What the resultant effect of such subcontracting on the dynamics of the formal sector – in-house RampentityD and labour productivity of a typical formal firm within the country – might be has been ignored seriously in the mainstream literature. The present chapter would like to explore this issue. Here, intuitively, it is assumed that labour productivity is highly inf uenced by RampentityD and thereby total factor productivity growth (TFPG). It seems that the productivity growth of the formal sector would be highly correlated with the cost of the informal sector or the wage that prevailed in the sector. If so, it can be argued that the existence of the informal sector and/or easy subcontracting to the sector could be one of the factors responsible for low productivity growth in India. This issue has been an upcoming concern for two reasons (see Maiti and Marjit, 2011). First, under the competitive pressure after trade reform, formal sector firms are expected to raise their RampentityD efforts for survival in the market and thereby productivity growth in the sector should rise. If the existence of the informal sector enabled them to bypass the competitive pressure by contracting out to the informal sector, then the productivity growth in the formal sector may not rise. Second, since the Indian government usually pays attention to the formal sector wage without considering the condition of the informal sector, any change in the formal wage has an indirect impact on the allocation of labour between sectors and thereby on the formal sector RampentityD. These are completely different issues in the developing economies compared to the developed ones.
