A Tale of Power and Progress: Productivity, Markups, and Markdowns in India’s Automotive Sector

Research Poster Social & Behavioral Sciences 2025 Graduate Exhibition

Presentation by Davide Luparello

Exhibition Number 70

Abstract

India's automotive sector presents a unique case study in industrial development, revealing tensions between productivity growth and labor market outcomes. Despite the sector's strategic importance to India's manufacturing ambitions—contributing 7.2% to GDP and creating 25 million jobs between 2006-2016—persistent structural challenges remain. This study examines the political economy of India's automotive transformation, focusing on the relationship between productivity gains, market power, and labor market outcomes. Using comprehensive establishment-level data from the Annual Survey of Industries, we analyze patterns in temporary worker utilization, firm profitability, and productivity dynamics. Our research reveals an empirical puzzle: rising temporary worker intensity despite increasing relative wages, contradicting standard cost minimization logic. Through structural estimation incorporating heterogeneous labor and differential market power, we find significant distributional asymmetries: permanent blue-collar workers capture 10 cents of each marginal revenue dollar, while temporary workers secure only 4 cents. The analysis advances methodological frontiers by simultaneously estimating labor-specific productivity, output price markups, and wage markdowns. Counterfactual exercises indicate that wage markdowns and adjustment costs across worker categories would decrease output by 25% relative to the competitive benchmark. Our findings contribute to scholarly understanding of imperfect labor market competition and its welfare implications in developing economies, while providing the first structural analysis of productivity and market power dynamics in India's automotive sector.

Importance

This research addresses a critical puzzle in economic development: why industrial upgrading and productivity gains often fail to translate into improved worker welfare. By examining India's automotive sector—a cornerstone of the nation's manufacturing ambitions—we reveal how labor market power and structural frictions create substantial distributional inequities between permanent and temporary workers. Our findings demonstrate that these distortions decrease sector output by 25%, suggesting significant efficiency losses from current labor market arrangements. The methodological innovation of jointly estimating labor-specific productivity and wage markdowns provides a new framework for analyzing imperfect labor markets. These insights are crucial for policymakers seeking to balance industrial competitiveness with worker welfare in developing economies.

DEI Statement

This study illuminates critical equity issues in India's industrial development by examining systematic wage and employment disparities between permanent and temporary workers in the automotive sector. Our findings reveal how market structures and institutional arrangements create and perpetuate a two-tier labor system that may disproportionately impact vulnerable workers. The research shows that temporary workers—comprising rural-to-urban migrants and workers from lower socioeconomic strata—capture only 4 cents of each marginal revenue dollar compared to 10 cents for permanent workers, highlighting systemic inequities in rent distribution. These disparities reflect labor market exclusion and precarity patterns that may particularly affect historically disadvantaged groups. The study's framework provides policymakers with tools to identify and address structural barriers to workplace equity and inclusive economic growth.