Agricultural Productivity, Labour Reallocation, and Industrial Production in the Short Run: Evidence from India

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This paper examines whether short-run changes in agricultural productivity results in labour reallocation into and out of the manufacturing sector, and whether adjustment costs impede this process, resulting in misallocation. Drawing on the results from a simple theoretical framework, I combine worker, firm, and district-level data with high-resolution data on atmospheric parameters to examine the effects of weather - a strong driver of short-run agricultural productivity on industrial production and labour market outcomes in India. While temperature increases are shown to have a significant negative effect on agricultural yields (-26.7%/1? C), wages (-7%/1?C), and employment (-5.7%/1?C) the effect on manufacturing outcomes is ambiguous due to competing channels. By exploiting spatial variation in, and firm-level exposure to, India’s labour regulation environment, I estimate the labour reallocation effect, net of the remaining channels. In rigid labour markets, with fewer employment opportunities, the production and employment of regulated firms contracts. However, in flexible labour market environments, we observe an expansion in production (9.81%/1?C) and employment (11.4%/1 ?C), exploiting a decline in the cost of unskilled labour (4.9%/1?C), offsetting the contractionary effects of inclement weather. No differential effect between labour regulation environments is observed for unregulated firms. These results imply that labour reallocation between sectors could substantially offset economic losses in more “climate sensitive” sectors, highlighting the empirical relevance of general equilibrium effects, as well as the importance of economic diversification and integration in the management of localized productivity shocks. Work-in-progress aims to understand the effects of seasonal migration between districts on manufacturing productivity (spatial spillover effects) and understand whether skill transferability between agriculture and manufacturing sectors results in heterogenous responses within manufacturing.