Workers, Managers, and Productivity: How Investments in Workers can Fuel India's Productivity Growth

We describe a set of stylized facts on India’s manufacturing productivity, showing that aggregate productivity growth in India has slowed considerably in the past decade and has been, on average, negative in the past several years. There is also substantial variation in productivity across India, even when controlling for State and industry effects. We focus on one potential determinant of this variation, namely, firms’ investments in their workers. A robust positive association exists between such investments and firm output per worker, even within State and industry. This relationship suggests but does not dispositively demonstrate, that investing more in workers causes productivity improvements. We, therefore, review the literature on four categories of investments in workers that show a high potential to raise productivity: soft skills, voice, environmental conditions, and managerial quality. In each case, we focus on studies that demonstrate the relationship between investments and productivity causally, most often via prospective Randomized Controlled Trials (RCTs). We end with a description of why firms may be systematically under-investing in workers and why more evidence is needed to understand firm behavior.