Abstract:-

From the infamous “Hindu Rate of Growth” of 3.5% per annum between 1950 and mid-1980s, the Indian economy experienced a long period of high growth starting 1991, following fairly radical economic reforms involving privatisation, liberalisation and globalisation of the economy. The period of high growth was accompanied by noticeable sectoral transformation of the economy. Alongside, the composition of workers changed over this period with a steady, consistent rise in their education. Using nationally representative labour force survey data spanning 25 years, this paper assesses the evolution of skill premium in the Indian labour market. We investigate the puzzle of the rising proportion of workers in high-skilled occupations along with a downward trend in their skill wage premium between 1993-94 and 2018-19 using two hypotheses – occupation-skill mismatch, and demand- supply mismatch. The study looks at both the levels and trends of skill wage premium, for male workers in rural and urban sectors, belonging to different age groups. The results indicate that the skill wage premium for the high-skilled occupations vis-a-vis the low-skilled occupations narrowed sharply over this time period. We also estimate the penalty faced by mismatched workers as compared to their well-matched counterparts. For all categories of workers, mismatched workers earn a significantly lower level of premium than their well-matched counterparts. The downward trend in skill-wage premium begins around 2004-05. We attempt to explain this trend using a demand-supply framework. Together, the quality of tertiary education along with an excess supply of “qualified” workers fit for skilled occupations has contributed to a drop in the premium for workers in skilled occupations. Our results suggest that better-matched worker-occupation pairing leads to higher levels of premium. Additionally, a higher employment elasticity clubbed with enhanced employability can arrest the downward trend in premium over time.