SPECIAL ARTICLE

Wage Inequality in India Decomposition by Sector, Gender and Activity Status

Panchanan Das

Wage differentials are present among various groups and sectors of the economy. The primary motivation of this paper is to investigate the structure of wage inequality and employment in India with the 61st round (2004-05) household survey on employment and unemployment conducted by the National Sample Survey Office. The study measures comprehensively different dimensions of wage inequality as observed in the Indian labour market by using the Gini inequality index. In analysing the structure of wage inequality it considers three major sectors, the public, private formal and informal sectors. Wage inequality in the private formal sector is higher than the inequality even in the informal sector. Wage differentials in India are higher in rural as compared to urban areas, and are higher among women than among men workers. Simple decompositions of wage inequality by sectors reveal that a significant part of wage inequality is accounted for by inequality among individuals between rather than within sectors for every type of working person.

1 Introduction

The author is thankful to Amiya Kumar Bagchi for valuable comments on earlier versions of this paper. Serious comments by an anonymous referee are also gratefully acknowledged. The usual disclaimer applies. Panchanan Das (daspanchanan@ymail.com) is a member of the West Bengal Education Service.

age differentials are present among various groups and sectors of the economy. In many cases, workers performing roughly similar kind of work are paid differently. Even in the same industry, wages are different across units for workers with the same level of skills. The primary motivation of this paper is to investigate the structure of wage inequality and employment in India with the 61st round (2004-05) household survey unit level data on employment and unemployment conducted by the National Sample Survey Ofce (NSSO). Although the pattern of wage inequality is not a reection of the structure of overall income inequality, and in many cases, inequality in asset distribution may typically be greater than income inequality, wage is the largest component of income particularly for working people and its distribution seems roughly to be similar to income distribution (Williamson 1982). Thus wage inequality has been widely used as an alternative to income inequality in the literature (Atkinson 1997). The exibility in the labour market in India, as in other developing countries, in the form of informalisation of work goes hand in hand with the process of neo-liberal reforms (Unni and Rani 2008). This is widely practised by employers in their attempt to reduce wage costs, save on fringe benets and deny trade union rights to their employees. There has been signicant deregulation of labour protection pre-empted by the transfer of ownership from the state to the private enterprises. A considerable number of prot-making public sector units have been handed over to private enterprises in an overzealous attempt to implement the so-called structural adjustment programme and meet International Monetary Fund-World Bank conditionalities. For most of the deals involving privatisation, a signicant proportion of regular workers lost their jobs and were largely replaced by casual workers (Das et al 2009). Neo-liberal economic reforms promised better economic opportunities for everyone and higher economic growth in every country by removing barriers to trade or factor mobility or entry of new players into some specic sectors that previously protected markets from competition. If global competition allows free mobility of labour along with the free movement of capital across the political boundaries of different countries or across different regions within a country, then differences in wage rates of workers performing roughly similar tasks under the same working conditions in different parts of the world would hopefully disappear and income levels will converge.
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But this is hardly ever the case, and, indeed, a large part of the workforce in the developing world is either unemployed or engaged in extremely low-paid contractual employment. Trade openness increases the elasticity of labour demand and thus erodes the bargaining power of labour (Rodrik 1997). Increasing trade openness in India is associated with increasing labour productivity and also wage inequality among skilled and unskilled workers in the organised manufacturing sector (Galbraith et al 2004; Dutta 2005; Das 2007). One of the major explanations put forward for this rising wage inequality is the rise in relative demand for skilled labour due to skill-biased technological change. Our objective is not to relate wage inequality to the skilled-biased technological change as such or to examine what impact trade openness has had on wage inequality, but to explore different dimensions of wage inequality as observed within and between different occupational groups, men and women workers in rural and urban areas by taking sectoral divisions in India after one and a half decade of economic reforms. A few studies captured some aspects of wage inequality in India. Using employment and unemployment surveys 1993-94 and 1999-2000, Glinskaya and Lokshin (2005) investigated wage differentials between the public and private sectors in India, and found, by applying their own methodologies that the public sector premium ranges between 62% and 102% over the private formal sector. Galbraith et al (2004) estimated Theil indices of pay, without specifying whether it covers total wages or total emoluments, in the registered manufacturing sector in India covering the period 1979 to 1997 and observed a rising trend in pay inequality among workers in this sector during the post-liberalisation period. This increase is driven primarily by increases in inequality between industry groups rather than by regional inequality. By using data on minimum daily wages for the lowest paid unskilled workers in the organised sector for the periods 1985-86 and 1993-94, Acharyya and Marjit (2000) illustrated the widening gap between the minimum and maximum wage during this period. Dutta (2005) observed that wage inequality in India increased signicantly during the 1990s. This paper contributes to the literature on inequality by taking into account different dimensions of wage inequality as observed in the Indian labour market during one and a half decades of the post-economic reforms period in a comprehensive way. We have, rst, used Gini index to look at the extent of wage inequality across sectors, gender and activity status in India. But the conventional approach to decomposing the inequality index simply by population subgroups in the shape of within and between components fails to capture the fundamental determinants of inequality. To locate the marginal effects of the major determinants of wage, namely, education, experience and other personal or household characteristics, on total wage inequality as suggested in the literature on human capital theory,1 we carry out decomposition of inequality by factor components. The factors affecting wages will also determine wage inequality and one could identify a list of factors which may explain wage gaps among workers.
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The paper is organised as follows. Section 2 presents some methodological issues in measuring wage inequality and the wage regression model. Section 3 describes the data and the sample used in this study. Section 4 provides the estimated results of wage differentials in India. The estimate of the wage regression model and the contributions of some major covariates to wage inequality are examined in Section 5. Section 6 summarises and concludes.
2 Measuring Wage Inequality 2.1 Unidimensional Gini Index

The Gini index (Gini 1912), associated with Lorenz (1905),2 is used in this study as a summary measure of wage inequality both within and between groups of workers by sectors in rural and urban India. The index is a fraction of the area between the equivalence line3 L(p) = p and the Lorenz curve. If the area between the line of perfect equality and Lorenz curve is A, and the area under the Lorenz curve is B, then the Gini index is A /(A+B). Since A+B = 0.5, the Gini coefcient, G = A /(0.5) = 2A = 1-2B. In symbolic representation, ...(1) 2n2 y Here, n is the number of wage earners and y is the mean wage. The Gini index satises the Pigou-Dalton transfer principle by which if income is transferred from a rich person to a poor person the resulting distribution is more equal. It also follows the principles of anonymity, scale independence and population independence. The Gini index is able to provide a more meaningful measurement of inequality between different subgroups (Dagum 1997, 1980). It takes into account not only the differences between means, but also differences between other characteristics of the distributions of subgroups of the population. Let a population of n individuals, with wage vector ( y1, y2, ..., yn) and mean wage income y , is disaggregated in k subgroups, k with n = nj and subgroup mean yj. G=
j=1 i=1 j=1

| yi yj|

The Gini index between subgroups j and h can be expressed as nj n h 1 Gjh = | yji yhr | ...(2) njnh (yj + yh ) i=1 r=1 If F( y) be the cumulative distribution function of wage, one can calculate the expected wage difference between groups j and h as
0 y 0

d1jh = dFj(y) (y x)dFh (x), for yji > yhr and yj > yh
0 y

d2jh = dFh(y) (y x)dFj (x), for yji < yhr and yj > yh
0

...(3)

The relative economic afuence is dened as d1jh d2jh Djh = d1jh + d2jh

...(4)

If the population share and wage share in subgroup j n p j yj are pj = nj and sj = y respectively, the contribution to total
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inequality attributable to the differences between the k population subgroups is Gb = GjhDjh(pjsh + phsj)
j=1 h=1 j h k k

...(5)

The Gini index for subgroup j is given by

i=1 r=1

(yij yrj) 2n2 j yj ...(6)

nj nj

Gjj =

The within group inequality index is the sum of Gini indices for all subgroups weighted by the product of population shares and wage shares of the subgroups: Gw = Gjjpjsj
j=1 k

...(7)

If subgroups are non-overlapping, total inequality can be expressed as the sum of within group and between group indices. The groups are non-overlapping means each individuals wage income in one group is greater or lower than each individual in the other groups. But, if the subgroups are overlapping, Dagum (1997) suggests another component of inequality measuring the contribution of the intensity of transvariation. This component is a part of the between-group disparities issued from the overlap between the two distributions. The contribution of the transvariation between the subpopulations to G: Gt = Gjh (1 Djh) (pjsh + phsj)
j=1 h=1 hk k k

...(8)

Thus Gini index can be decomposed into three components: within group inequality, between group inequality and inequality due to group overlapping: G = Gw + Gb + Gt
2.2 Wage Regression Model

...(9)

Here yij is wage of individual i in group j. Vector xij contains a set of explanatory variables (covariates) augmented of job attributes, labour market features and demographic characteristics for group j, ij is an identically independently distributed (i.i.d.) 2. idiosyncratic error term with mean zero and constant variance As the mean of the residual term in the wage equation is zero, the inequality index for it cannot be dened by the usual process. Again, as the intercept component, representing the effects of other factors, is constant, the inequality index for it will be zero. To overcome such problems, we can proceed in the following way. Let, and be the estimated wage using the intercept and without using it respectively. Then the contribution of the unobserved factors to total inequality is I(y) I() and that of the intercept term is I() I(), where I () denotes the inequality index. By using the estimated wage equation we can calculate the predicted contributions of the major covariates to the expected overall inequality. We have utilised the Shapley decomposition approach developed by Shorrocks A F (1980), and Araar and Duclos (2008). This approach is based on the expected marginal contribution of covariates to the total inequality and can be obtained in the following manner. If yk is the estimated wage after replacing xk, the kth explanatory variable in the wage regression equation, by its sample mean, inequality in yk, denoted by I( yk), cannot be attributed to xk any more. This is because this replacement would eliminate any differences in xk among individuals. The contribution of xk to total inequality, I( y) I( yk), obtained when only one independent variable xk is replaced by its sample mean in the wage equation, is the rst round effect. By replacing two variables xk and xl with their sample means in computing ykl, one can obtain a second round contribution, I( yl) I( ylk) for k l, of xk to total inequality. In the same way, the third round contribution can be obtained as I( yml) I( ymlk). This process continues until all xs are replaced by their sample means.
3 The Data

A simple way to look at the wage gap between two or more groups of workers is to consider group dummies in a single wage regression. The underlying assumption here is that wages differ between groups by a xed amount, while the individual and other characteristics have the same effect on their wages. A more exible approach to investigate the earnings gap relates to the human capital theory (Mincer 1958, 1974; Becker 1964), where an individuals wage rate reects the productivity potential based on various human capital characteristics. According to human capital theory, accumulation of human capital through education enhances workers productivity and their life cycle earnings. Mincer (1974) estimated the statistical relationship between market wages, education and experience. The Mincerian wage regression, however, disregards the endogeneity of post-schooling human capital accumulation and treats schooling and training symmetrically. Griliches (1977) pointed out several econometric problems that arise in estimating the returns to schooling and, in particular, those pertaining to the measurement of both schooling and ability. We assume the following log-linear wage regression model: ln yji = xji j + ji ...(10)
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The data used in this study come from the NSS 61st round survey (2004-05) on employment and unemployment. The survey is based on stratied two-stage sampling. The 2001 Census villages in the rural sector and urban frame survey blocks in the urban sector are the rst stage sample units. The nal stage ultimate sample units are households selected by simple random sampling without replacement in both the sectors. The data set covers geographical areas all over India, excepting for a few regions.4 The cross-sectional survey is roughly representative of the national, state, and so-called NSS region level. It gathers information about demographic characteristics of household members, weekly time disposition, and their main and secondary job activities. The principal job activities are dened for all household members as self-employed, regular salaried worker, casual wage labourer and so on. The sample selected for analysis in this study consists of 96,162 persons working for wages. We dene total wages as the sum of weekly cash and in-kind wages from the principal activity. Workers reported in the NSS schedule are of eight categories by enterprise type: proprietary male, proprietary female, proprietary
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partnership with members of the same household, proprietary partnership with members of a different household, public sector, semi-public sector, and cooperative society or an enterprise covered by the Annual Survey of Industries. In this study we have reclassied them into the public, private formal and informal sectors by following the denition of the informal sector provided by NCEUS (2008).5 In NSS, the activity status determined on the basis of the reference period of one year is known as the usual activity status of a person, that determined on the basis of a reference period of one week is known as the current weekly status of the person and the activity status determined on the basis of a reference period of one day is known as the current daily status of the person. The activity status on which a person spent a relatively longer time during the 365 days preceding the date of survey is considered the usual principal activity status of a person. The subsidiary economic activity status of the person, whose principal usual status is determined on the basis of the major time criterion, is dened on the basis of some economic activity for 30 days or more during the reference period of 365 days preceding the date of survey. This study concentrates on the usual principal activity status of a person. Persons who operate their own farm or non-farm enterprises or are engaged independently in a profession or trade on ownaccount or with one or a few partners are self-employed in household enterprises. The self-employed workers operating their enterprises on their own account without hiring any labour are dened as own-account workers and those run by hiring labour are employers. Persons working in others farm or non-farm enterprises and getting in return salary or wages on a regular basis are the regular salaried or wage employees. A person casually engaged in others farm or non-farm enterprises and getting in return a wage according to the terms of the daily or periodic work contract is a casual wage labourer.
4 Estimates of Wage Inequality

normally engaged in economic activities with low productivity resulting in low incomes. Workers in the formal sector, on the other hand, are able to enjoy relatively higher wages on regular basis and better working conditions. In India, the average wage in the formal private sector job is higher than that in the public sector. Workers in the formal sector are protected by labour market regulations with employment security and social security benets. However, wage inequality in the private formal sector is signicantly higher as compared with the public sector and, indeed, is higher than the degree of inequality as prevailed in the informal sector (Table 1). The overall wage inequality among workers persists in India mainly because of signicant wage differences between sectors.
Table 1: Wage Inequality by Sectors in India
Mean Wage* Employment Share Gini Index

Public sector Private formal sector Informal sector Overall inequality Contribution of within group inequality Contribution of between group inequality Contribution of group overlap inequality

1,736 1,909 562

25 14 62

0.36 0.49 0.44 0.55 0.10 0.48 -0.04

* Weekly wages in rupees. Source: Authors calculation based on NSS 61st round unit level data on Employment and Unemployment in India.

We have estimated mean weekly wages, employment structure and wage inequality measured by Gini index of wage distribution by sectors, location, activity status and gender division of workers. The Gini index is decomposed into within, between and overlapping groups to locate the major sources of overall inequality. The sample for the present analysis consists of 96,162 workers who earn wages either in cash or in kind or in both forms from their principal activities. We have excluded non-paid workers as well as own account workers. In analysing the structure of wage inequality we have concentrated on three major sectors, the public, private formal and informal.6 The coexistence of formal and informal sectors implies the dual character of the Indian labour market. The informal sector provides employment to over 60% of all workers in India and the rest are distributed between the public and private formal sectors (Table 1). Workers in the informal sector are paid even less than one-third of the formal sector wage. They are forced to accept below subsistence wages and normally suffer from terrible working conditions with practically no income or social security. Workers in the informal sector are
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The rural economy in India absorbs more than 70% of total workers, but the average wage for rural workers is roughly one-third of the average urban wage (Table 2). Urban workers earn signicantly higher wages in the public sector as well as in the informal sector (Table 2a). But in the private formal sector, the rural wage is higher than the urban wage and probably this type of surprising result appears because of a sampling bias. Workers in white collar jobs in urban locations are normally not included in the sample covered by the NSSO. This is the major limitation while working with NSS data. Wage inequality in the rural economy is higher than in the urban economy. However, the contribution of within group variation is more signicant than the contribution of between group variation to total inequality in wages for all workers in both
Table 2: Wage Inequality in Rural and Urban India
Mean Wage* Employment Share Gini Index

Rural Urban Overall inequality Contribution of within group inequality Contribution of between group inequality Contribution of group overlap inequality
* Weekly wages in rupees. Source: As for Table 1.

375 1,045

71 29

0.56 0.49 0.55 0.26 0.14 0.15

Table 2a: Wage Inequality among Rural and Urban Workers by Sectors
Mean Wage* Rural Urban Employment Share Rural Urban Gini Index Rural Urban

Public sector 1,291 2,090 Private formal sector 2,439 1,587 Informal sector 392 724 Overall inequality Contribution of within group inequality Contribution of between group inequality Contribution of group overlap inequality
* Weekly wages in rupees. Source: As for Table 1.

24 11 65

26 16 59

0.46 0.58 0.38 0.56 0.04 0.77 -0.25

0.35 0.45 0.41 0.49 0.13 0.33 0.03

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rural and urban locations in India. Wage inequality among rural workers is higher in both the public and private sectors, while it is lower in the informal sector as compared with the inequality among urban workers. Within the rural economy, inequality is much higher in the private formal sector. The contribution of between sector inequality to overall inequality in the countryside is more prominent than in urban areas (Table 2a). A considerable wage differentiation persists between men and women workers in the Indian labour market. The average wage for men workers, consisting of three-fourths of the total workers, is more than two and a half times the wage for women counterparts (Table 3). Wage differentials among women are higher than those among men workers. Wage inequality among women is the highest in the public sector as compared to the other sectors (Table 3a). On the other hand, wage differential among men workers is relatively more in the private sector. In the case of gender division of the workforce, the within group inequality contributes signicantly more to overall inequality.
Table 3: Wage Inequality by Gender
Mean Wage* Employment Share Gini Index

Table 4a displays the composition of formal and informal employment along with mean weekly wage and inequality index of regular and casual workers. The wage rate for casual workers is lower in the public sector than even in the informal sector. However, the dispersion of wages among casual workers
Table 4a: Wage Inequality among Regular and Casual Workers across Sectors
Mean Wage* Regular Casual Worker Worker Employment Share Regular Casual Worker Worker Gini Index Regular Casual Worker Worker

Public sector 1,766 345 Private formal sector 2,165 513 Informal sector 719 395 Overall inequality Contribution of within group inequality Contribution of between group inequality Contribution of group overlap inequality
* Weekly wages in rupees. Source: As for Table 1.

35 17 48

2 7 91

0.36 0.47 0.42 0.45 0.15 0.25 0.05

0.35 0.23 0.35 0.36 0.08 0.56 -0.27

Male worker Female worker Overall inequality Contribution of within group inequality Contribution of between group inequality Contribution of group overlap inequality
* Weekly wages in rupees. Source: As for Table 1.

802 310

76 24

0.50 0.58 0.55 0.37 0.10 0.08

is lower than that among regular workers (Table 4a). Wage inequality among the former type of workers is relatively low in the private formal sector. Although workers permanently absorbed are paid better in the private sector, the pay inequality among them is the highest in that sector. The results in Table 4a reveal that the major portion of wage inequality, particularly for casual workers, is accounted for by inequality among individuals between sectors rather than within a particular sector.
5 Estimating a Wage Regression Model

Table 3a: Wage Inequality among Men and Women across Sectors
Mean Wage* Male Female Employment Share Male Female Gini Index Male Female

Public sector 1,885 814 Private formal sector 1,506 1,390 Informal sector 587 534 Overall inequality Contribution of within group inequality Contribution of between group inequality Contribution of group overlap inequality
* Weekly wages in rupees. Source: As for Table 1.

29 16 54

31 14 55

0.30 0.43 0.38 0.50 0.09 0.44 -0.04

0.43 0.09 0.38 0.58 0.10 0.60 -0.11

In analysing wage inequality in the Indian labour market, we have looked at the employment status of workers. As selfemployed workers do not earn wage income, we have ignored them in analysing wage distribution. Workers with regular employment have a better chance of securing employment security, work security and social security than the casual workers.7 The extent of labour market exibility is obvious in the distributional pattern of wage workers. A majority of workers in India (58%) are employed on a casual basis and the wage gap between casual and regular workers is substantial as expected (Table 4).
Table 4: Wage Inequality by Types of Employment
Mean Wage* Employment Share Gini Index

Regular worker Casual worker Overall inequality Contribution of within group inequality Contribution of between group inequality Contribution of group overlap inequality
* Weekly wages in rupees. Source: As for Table 1.

1,308 282

42 58

0.45 0.36 0.55 0.25 0.29 0.01

Wage in the labour market induces the way through which workers decide to provide their services. In India, as in other less developed countries, the labour market is not well developed and in many cases wages are determined not by the interaction of demand and supply but by a variety of ways. Some workers are paid wages on a daily basis, while some others who perform similar kind of work are paid on a tenure basis. Although workers in the formal sector are organised under trade unions, those in the informal sector are unorganised. Thus the demandsupply analysis in a competitive frame may not be appropriate in understanding how wages and employment are determined in the Indian labour market. Although, at least theoretically, an individuals choice of job is based on the utility maximisation principle, the choices for a large section of the workforce are highly restricted by various social and economic factors in a third world economy and in many cases they are forced to sell their capacity to labour without following the norms of optimisation. As mentioned above, in India more than 60% of the workers are absorbed in the informal sector. India has a long history of wage determination through an administrative process8 even in the organised sector. A serious attempt was taken by the interim government in 1946 to determine wages and differentials in wage rates as between various occupations in major industries. The Industrial Policy Resolution of 1948 emphasised xation of statutory minimum wages in organised industries. In the Indian labour market, labour productivity had not so far been a potent factor in the determination of wages. Wage boards were set up through government initiatives for different industries where the government was the dominant player. Because of the increase in workers
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protests and labour militancy during the 1970s, wage bargaining took place at the industry level through the government controlled wage boards. Thus, it is hardly possible to explain wage differences among workers of roughly homogeneous type not only in the unorganised sector but also in the organised sector in terms of the demand-supply mechanism. In an economy where the labour market is imperfect, and there is distress selling of labour, a multiplicity of wage rates may exist because of the lack of bargaining power of ordinary workers. In estimating wage regression for the Indian labour market and decomposing wage inequality based on the estimated wage equation, we have drawn on human capital theory which calls for inclusion of skill variables such as education, training and experience into the model. By following Mincer (1974), the wage equation is specied as yi = 0 + 1x1i + 2x2i + 3x3i + 4x2 3i + i ...(11)

Here x1 and x2 denote the year of schooling in general education and technical education respectively, x3 represents work experience proxied by age, and is the normally distributed error term with mean 0 and variance 2 measuring the effects of unobservable factors. The quadratic term in experience allows for the possible diminishing return to human capital accumulated through schooling. The intercept term measures the initial ability. The coefcients 1 and 2 act as the marginal effects of schooling and technical know-how respectively, 3 and 4 are those that correspond to the return to experience and reect concavity of the age earnings prole when 4 is negative. Table 5 presents estimated coefcients of the wage equation specied in equation (11) for different sectors. The estimated results indicate that all explanatory variables are statistically signicant at less than 1% level and the coefcients have the desired sign. The marginal effects of education and technical knowledge on wage are higher in the private formal sector than in the others. But experience has a stronger positive effect in the public sector jobs. The diminishing return to human capital is more effective in the private formal sector. As the effects of education, technical skill and experience are different in
Table 5: Estimated Results of Wage Regression
Sectors Variables Coefficients t-statistic P>t

different sectors, workers endowed with education and skill of similar standard may receive different wage simply because they are absorbed in different sectors. On the basis of the estimated wage regression for different sectors as shown in Table 5, total inequality is decomposed into predicted contributions of the covariates used in equation (11). The Shapley decomposition of Table 6: Absolute Contributions to Gini coefcients on the basis of Total Inequality Variables Public Private Informal the estimated model is shown Sector Formal Sector Sector in Table 6. This decomposition Intercept 0 0 0 allows us to have a clear idea 0.098 0.182 0.129 x1 on how each covariate contri0.007 0.023 0.014 x2 butes to the total inequality. x 0.104 0.130 0.099 3 There has been no mismatch x2 0.000 0.003 0.008 3 in the variation of Gini indices 0.142 0.183 0.164 of the actual wages reported Total 0.351 0.521 0.414 in Table 1 and that of the esti- Source: As for Table 1. mated wages shown in Table 6 across different sectors. Wage inequality is the highest in the private formal sector. The entries in Table 6 are the predicted contributions of the major determinants of wage income used in this study to the Gini index of the estimated wages. Education is found to play a dominant role in determining total inequality in wages and in the private formal sector the contribution of variation in education level to the variation in wage is the highest. The contribution of work experience is also more in this sector. Technical knowledge contributes a little to total inequality particularly in the public sector. The results presented in Table 6 reveal that a considerable part of total inequality is accounted for by unobserved factors. The contributions of each covariate to total inequality are further decomposed into marginal contributions and are shown by the round effects in Table 7. Round 1 effect of education (x1), for example, measures the contribution of education under the assumption that all covariates present in the wage equation. Round 2 effect is its contribution after eliminating the effect of technical skill on wage. The Round 3 contribution is obtained after removing the impact of technical skill and experience. In a similar way the Rounds 4 and 5 contributions of education
Table 7: Marginal Contributions to Total Inequality
Sectors Variables Round 1 Round 2 Round 3 Round 4 Round 5

Public sector

Intercept x1 x2 x3 x2 3 Intercept x1 x2 x3 x2 3 Intercept x1 x2 x3 x2 3

-2,402.44 167.40 35.33 85.50 -0.54 -2,146.96 178.86 62.27 75.30 -0.55 -429.34 56.21 47.22 26.43 -0.23

-24.03 75.57 11.74 17.19 -8.96 -6.89 17.93 4.05 4.26 -2.36 -23.04 69.51 20.17 24.82 -16.36

0 0 0 0 0 0 0 0 0 0.018 0 0 0 0 0

Public sector

Intercept x1 x2 x3

0 0.032 0.003 0.054 0.028 0 0.052 0.007 0.069 0.036 0 0.04 0.003 0.067 0.041

0 0.022 0.001 0.033 0.01 0 0.038 0.004 0.04 0.011 0 0.028 0.002 0.038 0.016

0 0.016 0.001 0.017 -0.004 0 0.03 0.003 0.019 -0.006 0 0.021 0.002 0.014 -0.004

0 0.014 0.001 0.004 -0.014 0 0.029 0.004 0.005

0 0.016 0.001 -0.004 -0.02 0 0.033 0.005 -0.004

Private formal sector

x2 3 Private formal sector Intercept x1 x2 x3 Informal sector x2 3 Intercept x1 x2 x3 x2 3

Source: As for Table 1.

Informal sector

-0.017 -0.022 0 0 0.019 0.003 0.022 0.003

-0.004 -0.016 -0.018 -0.027

Source: As for Table 1.

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are obtained. Work experience has an inequality reducing effect, although it is very marginal in all sectors only after removing the impacts of all other covariates on wage at Round 5.
6 Conclusions

Inequality in the labour market is a signicant determinant of disparities in living standards. This study is essentially an empirical exercise in exploring inequality in the Indian labour market. It comprehensively examines the structure of wage inequality and employment for different types of male and female workers engaged in formal and informal sectors both in the rural and urban economy in India with the NSS 61st round (2004-05) household level information on employment and unemployment in India. A substantial wage gap exists between workers engaged in different sectors. Workers in the informal sector are paid even less than one-third of the formal sector wage. In India, the average wage in the formal private sector job is higher than that in the public sector. The wage differential is higher in rural as compared to urban areas, and is also higher among women than among men workers. By examining wages in public, private-formal and informal sectors, it is observed that the differences in wages among workers are the highest in the private-formal sector. Wage inequality among regular workers is considerably higher
Notes
1 Human capital is accumulated through education in enhancing productivity and increasing life cycle earnings. The Lorenz curve, L (p), plots the relationship between the cumulative percentage of recipient units, arranged in ascending order of income, and the cumulative percentage of income they earn. If all had the same income, the cumulative percentage of total income held by any bottom proportion p of the population would also be p. (i) Leh (Ladakh) and Kargil districts of Jammu and Kashmir, (ii) interior villages of Nagaland situated beyond ve kilometres of the bus route, and (iii) villages in Andaman and Nicobar Islands which remain inaccessible throughout the year. The informal sector consists of all private enterprises owned by individuals or households engaged in the sale and production of goods and services operated on a proprietary or partnership basis and with less than 10 workers. All public sector units as well as the private sector units with employment of 10 or more workers using power and 20 or more workers without using power form the formal or organised sector, while the rest fall into the private unorganised or informal sector. Casual workers are informal workers consisting of those who have worked in unorganised enterprises or households and workers in the formal sector without any employment or social security benets provided by the employers. For detail see Report of the National Commission on Labour (2002).

than that among casual workers. Women workers earn much lower wages than their men counterparts and inequality among the former is much higher than among the latter. Surprisingly enough, wage inequality among women is the highest in public sector jobs in the country. Decomposition of wage inequality by sub-population reveals that a signicant part of wage inequality as observed in India is accounted for by inequality between groups rather than inequality within group for every type of working people. In fact, wage inequality persists in India mainly because of signicant wage differences between sectors. But gender inequality in wage earnings is explained more by the within component than the between component of total inequality. Estimating results of the wage regression model suggest that the effects of education, technical skill and experiences on wage are different across sectors, and this is, probably, why wage inequality persists among workers of a roughly homogeneous type between sectors. It is observed that education has more effect on the expected wage and also on wage inequality in the Indian labour market. The study also infers about the presence of diminishing returns to human capital in determining wages. However, a signicant part of wage inequality in India is accounted for by factors which are not considered in human capital theory.
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