Labor market situation in India over the last two decades, given the growth profile,

which has been quite robust in recent years, one pertinent question is whether India
has experienced pro-poor growth. The recent grow of labors and share of labors in
past two decades has shown a significant rise. The faster employment growth in
this decade is partly because of the revival of agriculture employment, which had
decelerated considerably during the 1990s. The other feature is that some of the
dynamic sectors have continued to grow rapidly, generating employment
opportunities. However, most of the activities in these sectors are less likely to
absorb the poor who are mostly unskilled, and hence the direct effects of growth on
poverty are still not spectacular. All this is compatible with the fact that the extent
of decline in poverty after 1993-94 has been much less than the extent of decline
between 1983 and 1993-94. The employment problem cannot be gauged in terms
of open unemployment rate. It is rather the relative size of the low productivity
informal sector that can throw light on the gravity of this problem. India's economy
has been expanding at more than 5 per cent per annum. But the robust economic
growth has not been translated into employment growth and the poverty level
continues to decline at a very slow pace.
Therefore, it seems that the economic growth has not been generating pro-poor
employment opportunities per se. While there has been rapid growth in some
dynamic sectors, which have generated employment opportunities, those sectors
are restricted to specific skills obtained by only a few.
Then the question of why unemployed workers are unable to bid down the wages
of seemingly comparable employed workers and gain jobs has long perplexed
economists. A burgeoning literature on efficiency wage theories suggests that the
answer may lie in the negative incentive effects of low wages. Thats what KM sir
taught in his respective classes. The efficiency wage model keeps the consistency
in the case of Indian labor market. The basic efficiency wage hypothesis states that
workers' productivities depend positively on their wages. If this is the case, firms
may find it profitable to pay wages in excess of market clearing. This is possible
because the wage that minimizes a firm's labor costs per efficiency unit of labor
may not be the wage that clears the labor market. Employers may be quite reluctant
to cut wages, even in the presence of an excess supply of labor, since reducing
wages may actually lower productivity more than proportionately and increase
labor costs. The central assumption of efficiency wage model is there is a benefit
as well as a cost to a firm of paying a higher wage. The wage is the only
determinant of effort e = e (w), e (.)>0 there are identical workers, each
supplying one unit of labor in elastically.
N identical competitive firms the representative firm seeks to maximize its real

Profits = Y wL where Y is the firms output, w is the real wage and L is the level
of labour employment. Assume the firms output depends both on the level of
employment and the effort of the workers the production function:
Y = F(eL), F(.)>0, F(.)<0 where e is the workers effort.
The problem for the representative firm
Max F(e(w)L)-wL
L,w

If there are unemployed workers, the firm choose the wage freely If
unemployment is zero, the firm must pay at least the wage paid by other firms. The
implication of efficiency wage model is- The firms are identical. Each firm
chooses same value w* and L*. Total labor demanded NL*. If labor supply L
exceeds NL* then firms are unconstrained. The wage is w*, the employment is
NL*, the unemployment is L-NL*. Efficiency wage can give rise to unemployment
explains inertia in the real wage but fluctuations in employment the model does
not fit well with the long-run facts. The simple efficiency wage model can easily
be extended to provide potential rationales for wage differentials among workers
with identical characteristics and the existence of dual labor markets. If the
linkages between wages and effort differ across firms, then the optimal wage will
differ across firms and a distribution of wages for workers with identical
characteristics can arise in equilibrium. These wage differentials are not
compensating differences for no pecuniary aspects of work that directly affect
workers' welfare. Dual labor markets of the type described by Doeringer and Piore
(1971) can also arise if the wage-productivity relationship is more important in
some sectors than in others. High wages and job rationing can arise in the sector
where efficiency wage considerations are salient, while the secondary sector,
where efficiency wage considerations are less important, acts as a competitive
labor market. Its apparently a case of efficiency wage model in Indian case. And
so the general case is intuitive in this case.
If we discuss the matching function properties in Indian context we can say the job
matching matching function characterized by trading friction, incomplete
information, and heterogeneities between job-seekers and firms. The matching
function summarizes the job matching process and plays a key role in describing
the labor market dynamics and efficiencies in search-matching models. Matching
function relates the joint movement of job-seekers and vacancies to new hires and
is generally given by H=m(s, v) where H denotes the number of new hires in a
given interval, S the stock of job-seekers, V the stock of vacant jobs. Variables can

be time-series, cross-section, or both dimensions. The following properties are

natural and testable assumptions of the matching function
m > 0 ; m(0,v)= m(U,0) mss = 0, mss<0 mvv<0
v
which indicate that new hires increase with respect to both arguments, at least
one job-seeker and one vacancy are required to generate a new hire, and the
matching function is concave with respect to both arguments. Furthermore, for a
stable and unique equilibrium of the unemployment, matching functions are
assumed to be constant returns to scale in search-matching models
Here we employ a specification of the matching function shown in Equation
Ht=Mt (st,vt) =At StVt

Where At= A. exp(t+t) Its a cob-Douglas function.

With and without instruments, the effect of trade openness is negative and statistically significant;
this finding indicates that new hires in the employment service decline as the degree of trade
openness increases. It implies a negative effect of trade liberalization on new job creation in India,
which also shows a negative impact on unemployment. This negative correlation between trade
liberalization and new hires as well as vacancy-dependent job matching process in India does not
change after serial correlation is corrected by different specifications of the regression model
including the first lag of the dependent variable and different estimation methods, FGLS and AR
model. The result may be consistent with a widely held public view that trade liberalization
increases unemployment. But the finding contradicts the previous find that a strong and robust
negative relationship exists between trade openness and unemployment in cross-country analysis.
While focusing on India shows that on average there is no correlation between tariff reductions and
unemployment. However in some analysis when domestic firm and industry performance in
previous years was reflected in economic reforms. The negative effect of trade openness on new
hires is significant only in some period and it is not statistically significant in other periods. This
result implies that a gradual liberalization to protect domestic sectors could actually cause a decline
in new job hires, and in turn, an increase in unemployment. It also implies that unless trade
liberalization is progressive, its impact is limited in the job matching process. Therefore, it is
suggested that trade liberalization is not harmful to the Indian labor market because the effect of
openness on new job hires, and hence unemployment, is limited in India. The evidence also
recommends that the Indian government continue to promote external economic liberalization. It
was found the relationship between trade liberalization n and the job matching process is
empirically examined using the data from Employment Exchange in India, the only public
employment service in the country. It is found that the job matching process in India is vacancydependent, meaning that job vacancies contribution to creation of new hires is much larger than
job-seekers importance. The key result shows that the link between trade liberalization and the job
matching process in India is negatively associated only in the period of delayed economic reform.
Although overall effect is negative, the analysis of period decomposition supports no relationship
between trade liberalization and new job hires except the period of political influence.

Now if we discuss the jobless and implicit contract, most workers have one
employment contract that is explicit and another one that is implicit. The explicit
employment contract specifies working hours, compensation, and job tasks. The
implicit contract involves expectations about the extent to which the employment
relationship is not just a payment for labor on the spot market but instead is likely
to continue over time The standard labor spot market model of the labor market
described in textbooks assumes that wages are set equal to workers marginal
products and are constantly updated depending on economic conditions. To the extent
that implicit labor contracts exist, firms may shield workers from economic
vicissitudes by, for example, not readily laying them off except under extreme
duress, and perhaps also insulating their wages and benefits at the cost of profits
during downturns. (It should be noted that keeping workers on during downturns
may also in some cases be nothing more than profit-seeking behavior by a firm
looking to avoid the substantial hiring and firing costs that some firms face.
Some also argue that the employment contract may also include reciprocal
obligations from workers to firms. Loyalty from workers to firms would be very
difficult to measure, but would be an interesting subject for future contract. A starting
point is to consider ways
in which the burden of layoffs could be spread across the workforce of a company
in a way that would impose less household risk on a few, through mechanisms like
widespread reductions in pay, trying to make sure that reductions on hours fall on
those most able to bear them, and even widespread Work Sharing Unemployment
Insurance