To beat slow growth, India needs to create better-paying jobs at scale

A slow increase in wages can have troubling implications for economic growth and equity. The Annual Survey of Industries (2023-24), recently released, underscores this concern: Profits per factory rose 7 per cent, while wages per worker increased only 5.5 per cent. Profits grew faster than wages for several years in the recent past. The Economic Survey for 2024-25 also flagged weak wage growth, while corporate profitability increased to a 15-year high in 2023-24. The data shows that gains in labour productivity too have faltered, with output per worker showing weaker growth after 2013-14 than earlier years did. At the same time, the share of formal manufacturing in gross domestic product has nearly halved since 2010-11, limiting access to stable, high-quality jobs. The combination of slower productivity and a shrinking formal sector has substantially restrained wage growth, undermining both worker income and domestic demand. 

However, this disconnect is not confined to India. Globally, the balance between wages and profits has tilted toward capital. Rapid technological change might deepen this divide. The International Labour Organization’s World Employment and Social Outlook 2025 warns that nearly one in four workers could see their role significantly transformed by generative artificial intelligence. It is being argued that young people entering the workforce now face significant challenges, as the automation of entry-level jobs limits skill-building and wealth accumulation, potentially leading to stagnant wages and a widening intergenerational wealth gap. 

In India, the intent behind strengthening labour protection has been to improve workers’ conditions. However, excessively stringent laws have had unintended consequences. Research shows that stringent labour laws have incentivised firms to shift towards contract-based employment, thereby reducing the number of directly hired, formally employed workers. This shift has been particularly evident in the manufacturing sector, in which the use of contract labour has increased significantly since the early 2000s, with a direct impact on wages. The data on Periodic Labour Force Surveys also shows that only a small minority of India’s labour force has formal employment. 

Further, as a Goldman Sachs report shows, over the years, India’s capital-intensive manufacturing subsectors (such as machinery, chemicals, electronics, and pharmaceuticals) have seen stronger growth in both exports and employment than in many of the labour-intensive sectors (textiles, footwear, and food & beverages). This suggests that investment and export efforts are favouring industries that use more machines and more capital, which often require more skill and pay higher wages, rather than ones that absorb large numbers of lower-skilled workers. Stringent labour laws are said to be one of the biggest reasons why India has underperformed in labour-intensive industries over the past decades, which has affected employment generation and with implications for wages and overall economic growth. The new Labour Codes, awaiting implementation, are expected to improve the situation. Without employment creation in low-skill labour-intensive sectors, which can potentially provide decent wages to a large part of India’s workforce, it would be difficult to sustain higher aggregate demand over the long run. The problem can further be exacerbated by a sustained increase in profit growth over wage growth. To be fair, there is no easy near-term solution, but these issues must be debated.