Pakistans Sectoral Labour Productivity In The Manufacturing Sector Economics Essay

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This paper attempts contribute research to Pakistan's sectoral labour productivity in the manufacturing sector, an area which has not been thoroughly explored by researchers. It seeks to analyze the factors affecting sectoral labour productivity using fixed effect panel estimation approach


Pakistan labour productivity has seen very positive growth through the period 1976-77 to 1986-87. However during 1995-96 to 2000-01, a period that also happens to be a part of the "Lost decade era", the trends got reversed. Fortunately, after 2001 the growth picked up and witnesses a very rapid growth.

Much emphasis is placed on labour productivity in developing countries, as it a leading indicator for social welfare. Improvements in labour productivity lead to a transformation of lower income groups in to middle income groups (Kemal 1981). There is also evidence that by shifting more towards labour intensive process does have positive impact on productivity (Zahid et al 1992).

Pakistan manufacturing sector represents about XYZ% of the total labour force employed. Which emphasizes the importance of studying labour productivity in Pakistan's manufacturing sector.

This paper attempts contribute research to Pakistan's sectoral labour productivity in the manufacturing sector, an area which has not been thoroughly explored by researchers. It seeks to analyze the factors affecting sectoral labour productivity using fixed effect panel estimation approach. The paper is organized in the manner that, section II reviews the literature available on labour productivity; section III Discusses the data and its issues; section IV the methodology and Section V shall be a discussion of the results and findings

Literature review

There has been substantial work available in economic literature explaining labour productivity. However there are very few studies that can be cited in Pakistan's context. The productivity research literature generally focuses on total factor productivity and its explanation Wizarat (1981).

Zahid et. al (1992) studies Capital-labour substitution and technical efficiency in Pakistan's LSM sector using 17 sectors from CMI. Their findings suggested their is little benefit in substituting capital for labour in the short run, but in the long run this policy might improve productivity. Further evidence that re-allocating capital and labour can have positive impact can be taken from Chang-tai (2007). He argued that by re-allocating labour and capital to equalize marginal products observed in US, 30-50% increase in productivity in China and 40-60% in India Can be achieved.

Federik Huizinga (2004) study of the Dutch Labour productivity argued that the period 1960-1975, increase in labour productivity can be explained by wage pushes in the sixties and early seventies, however he argued that this was neither efficient and nor was it sustainable. It was not efficient because the wage costs did not fully reflect the scarcity of labour. The productivity levels were not sustained because wage pushes increased unemployment, which caused the wages to fall down. As a result,in the long run capital-labour ratios and productivities fell back to original values.

The impact of unions on labour productivities in US markets was studied by Callabller and Hammour (1998a). They found that, the net impact of unions is that the average labour productivity declines.

Another strand of literature studies the flows of FDI and its impact on labour productivity. FDI inflows have spillover effects in different sectors of the economy. FDI supplements transfer of technology and knowledge, which promotes investment in R&D. Studies that provide theoretical models linking FDI and productivity include Barro & Sala-i-Martin (1995) and Wieser (2004).

Studies have also used government's expenditure ICT to explain labour productivity Basu et. Al (2007) and Razzak (2007). Financial depth has also been used as measure in explain labour productivity (Razzak 2007) and Choudry (2009).


Value-added, no. of average daily employed, employment cost, production values has all been taken from varius issues of Census of manufacturing Industries Pakistan.

Direct method of estimation was employed; value-added divided by number of labour employed gave an estimate of labour. The Value-added added was adjusted by LSM deflator to give an estimate of real value added.

Capital-Labour ratio was estimated using Fixed Assets divided Cost of employment. Fixed assets were also adjusted for inflation by dividing with LSM deflator.

Real wages was estimated using Real cost of employment divided by average daily no. of workers employed.

Financial Depth has been estimated using sectoral Credit data divided by GDP.

Aggregate FDI has been used to estimate spillover effects.


Where i represents sectors and t represents time. LP denotes labour productivity. Rwage is a measure of real wage rate. Caplab is Capital over labour ratio, which is measured by Fixed assets divided by employment cost. Fin is measure of financial depth, estimated by dividing sectoral credit by GDP. fdi is aggregate FDI measured by FDI inflows.




Barro, R. and X. Sala-i-Martin (1995). Economic Growth, MIT Press.

Barro, R. J. and Lee, J. (1994). 'International comparisons of educational attainments'. Journal of Monetary Economics 32: 363-94.

Griliches, Z. (1994). 'Productivity, R&D and the data constraint'. American Economic Review 84(1): 1-23.

Harris, R., "Is There a Case for Exchange Rate Induced Productivity Change?" Discussion Paper No.0110, Centre for International Economic Studies, 2001

Helpman, E. and M. Trajtenberg, "Diffusion of General Purpose Technologies: In General Purpose Technologies and Economic Growth, (ed.) E. Helpman: MIT Press, 1998

Huizinga, Frederik & Broer, Peter "Wage moderation and labour productivity" CPB Discussion Paper No. 28, 2004

Kemal, A. R. (1981) Substitution Elasticities in Large scale manufacturing Industries of Pakistan - A Rejoinder. The Pakistan Development Review 21:2

Mahoney, P. G., "The Common Law and Economic Growth: Hayek Might be Right," University of Virginia School of Law Working Paper 00-8, January 2000

Masood Ahmed, Qazi & Kalim Hyder Bukhari, Syed (2007) "Determinants of Total Factor Productivity in Pakistan" MPRA Paper No. 16253

Sachs, J. D., "Notes on a New Sociology of Economic Development," in Lawrence E. Harrison and Samuel P. Huntington (eds.,) Cultural Matters: How Values Shape Human Progress, Basic Books, New York, 2000.

Zahid, Shahid N. et al (1992) "Technical Change, Efficiency, Capital-Labour Substitution in Pakistan's Large-Scale Manufacturing Sector" The Pakistan Development Review 31:2

Wieser, R., "R&D Productivity and Spillovers: Empirical Evidence at the Firm Level," Forthcoming at the Journal of Economic surveys, Institute of Public Finance and Infrastructure Policy at Vienna University of Technology, 2004.