Industrialization’s Role in Shaping Employment Trends

India’s economic story since independence has been shaped by a single, powerful idea: that as a country grows richer, workers should move out of farms and into factories. Industrialization was meant to be the engine that pulled millions out of low-productivity agriculture and gave them stable, better-paying jobs. Yet the reality has been far more complicated. Industrial output has expanded, but employment has not always followed. Understanding why reveals a great deal about how cities grow, where people work, and the kind of jobs that define the urban economy today.

Employment shifts from agriculture to industry
The slow pace of the shift
Where employment elasticity falls short
The disconnect between industrial growth and employment
Capital deepening and labour-saving technology
The missing manufacturing middle
The rise of the informal sector
What informal work looks like in cities
Why formal jobs are not keeping pace
The urban planning dimension

Employment shifts from agriculture to industry

For most of the twentieth century, agriculture was both the largest employer and the largest contributor to national income. Right after independence in 1951, the farm sector absorbed roughly 72% of the workforce while industry employed only about 11%. The expectation was that economic development would steadily shift this balance, moving surplus labour from low-productivity fields into higher-productivity industrial work.

This process is called structural transformation, and it is considered essential for raising living standards. Economists broadly agree that a sustained rise in per capita income is not possible without moving surplus labour from agriculture into higher-productivity non-farm activities. The East Asian economies followed exactly this path, with countries like South Korea and Vietnam using labour-intensive manufacturing to absorb workers leaving the countryside.

The slow pace of the shift

India’s transition has been unusually sluggish. The employment structure changed only slightly over four decades, and even today agriculture remains a major employer. According to recent estimates, agriculture’s share of output fell from over 40% in 1980 to about 15% in 2019, yet it still accounted for around 42% of all workers. In other words, output moved out of agriculture much faster than people did. This mismatch leaves a large share of the workforce stuck in a sector that contributes a shrinking slice of the economy, which keeps farm productivity and incomes depressed.

Where employment elasticity falls short

Employment elasticity measures how much employment grows for every one percent of economic growth. A high elasticity means growth creates plenty of jobs; a low one means growth happens with little new hiring. This single number captures the heart of India’s challenge. The most labour-absorbing path would be one where industrial expansion drags workers out of farming in large numbers. Instead, the link between growth and jobs has weakened over time, and the bulk of the workers who did leave agriculture moved into services and construction rather than into stable factory employment.

The disconnect between industrial growth and employment

The most striking feature of recent decades is that industrial growth and employment growth have drifted apart. The economy can post strong GDP numbers while creating relatively few jobs, a phenomenon often described as jobless growth. The manufacturing sector illustrates this clearly: its contribution to GDP has hovered in a narrow band while its share of total employment has lagged well behind. Output rises, but the workforce attached to it does not expand at the same rate.

Capital deepening and labour-saving technology

A central reason is the shift toward more capital-intensive production. As firms invest in machines, automation, and technology, they produce more with fewer workers. This is visible in the data on how much capital is used per worker. Research shows that the capital-worker ratio roughly doubled between the late 1990s and 2017, signalling a clear move toward capital-intensive methods. Higher capital productivity is good for competitiveness, but when production deepens its reliance on machinery rather than labour, each unit of output requires fewer hands.

This dynamic is now intensifying with artificial intelligence and digital automation. In capital-intensive process industries, these technologies accelerate the replacement of routine work, while the labour-absorbing forms of production that historically generated mass employment remain underdeveloped. The result is that output can keep climbing even as the demand for low- and medium-skill labour shrinks.

The missing manufacturing middle

India is often described as having skipped a stage of development. The classic sequence moves an economy from agriculture to manufacturing and then to services. India leapt comparatively quickly toward services, especially high-skill activities like information technology and finance. These sectors generate strong output and well-paid jobs, but they employ relatively few people and demand skills that much of the workforce does not yet have.

Meanwhile, the labour-intensive manufacturing that could have absorbed millions of low-skilled workers did not scale up as hoped. Analysts note that the country struggled to follow the East Asian model of moving labour into job-intensive manufacturing, ceding ground in sectors like textiles and apparel to competitors. Factors such as restrictive labour regulations, infrastructure gaps, and a bias in policy toward large, capital-heavy firms all pushed employers toward automation or contract labour rather than large-scale formal hiring. The economy has plenty of growth, but it is not the kind of growth that creates the mass employment a young workforce needs.

The rise of the informal sector

When formal industry fails to absorb workers, those workers do not simply disappear from the labour market. They find work wherever they can, and overwhelmingly that means the informal sector. Informal employment refers to work in enterprises that are unregistered and to jobs that lack written contracts, social security, or legal protection. This is not a small corner of the economy. Around 90% of workers are informally employed while producing roughly half of GDP, which makes informality the defining feature of the working life of most people.

What informal work looks like in cities

Urban areas are slightly more formalized than rural ones, but the gap is modest. Even in towns and cities, about 80% of workers are in informal arrangements. The texture of this work is captured well by surveys of urban labour. Studies based on official labour force data find that a large share of urban workers are self-employed or casual labourers, and the vast majority lack a job contract, social security, or paid leave. These are street vendors, construction labourers, transport workers, domestic helpers, and small shopkeepers who keep the urban economy running while earning close to subsistence wages.

Construction has historically been the biggest absorber of low-skilled urban workers, taking in millions as casual labour. Increasingly, gig and platform work has joined this list, growing rapidly but remaining largely unregulated. For new entrants to the labour market, and especially for women, the choices are often narrow and precarious.

Why formal jobs are not keeping pace

The growth of informal employment reflects a shortfall in formal job creation rather than a genuine preference for insecure work. When industrial expansion is capital-intensive and formal hiring is constrained, the surplus labour leaving agriculture has nowhere stable to go. Even within registered factories, the use of contract labour has risen sharply over the years, eroding the security that formal employment was supposed to provide.

The informal sector therefore acts as a kind of shock absorber. It provides a livelihood for those whom the formal economy cannot accommodate, and it expands during downturns as people fall back on whatever work is available. This was visible during periods of economic stress, when informal and casual work cushioned the loss of formal jobs. The problem is that this buffer comes at the cost of low wages, no benefits, and chronic insecurity for hundreds of millions of workers.

The urban planning dimension

For anyone studying cities, these employment trends are not abstract. The dominance of informal work shapes the physical and social form of urban areas. Informal livelihoods produce street markets, roadside services, and dense, mixed-use neighbourhoods that formal planning often ignores or tries to clear away. Housing demand, transport patterns, and the location of slums all follow from where informal work is found. A city that plans only for the formal economy ends up planning for a minority of its own workforce. Recognizing informal labour as a permanent and productive part of the urban fabric is essential for planning that actually reflects how people live and earn.

What do you think? If industrial growth continues to create few jobs, should urban planning be redesigned around the informal economy rather than treating it as a problem to be removed? And how might cities balance the push for high-productivity, technology-driven industry with the need to provide secure work for a young and growing workforce?

References

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Industrialization’s Role in Shaping Employment Trends

Table of Contents

Employment shifts from agriculture to industry 🔗

The slow pace of the shift 🔗

Where employment elasticity falls short 🔗

The disconnect between industrial growth and employment 🔗

Capital deepening and labour-saving technology 🔗

The missing manufacturing middle 🔗

The rise of the informal sector 🔗

What informal work looks like in cities 🔗

Why formal jobs are not keeping pace 🔗

The urban planning dimension 🔗