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The effects of labor regulation on firms and exports: Evidence from Indian apparel manufacturing

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  • Hasan, Rana
  • Mehta, Aashish
  • Sundaram, Asha

Abstract

We examine the impact of labor regulations on firm outcomes and explore their differential effects on exporters. Building on a conceptual framework developed from standard theory and a detailed qualitative study of India's apparel industry, our econometric analysis exploits establishment-level data on formal Indian garment manufacturers between 2009-10 and 2013-14 and interstate variation in labor laws. We find a close fit between the implications of our conceptual framework, the qualitative evidence and the data. Apparel producers in states with pro-worker labor regulations tend to replace labor with capital. This choice of technique effect is smaller for exporting firms, which are more tightly bound to norms for organizing production in global supply chains. Pro-worker labor regulations also reduce output levels more for exporters than for non-exporters, consistent with exporters being bound to international pricing norms. Labor regulations thus have a particularly adverse impact on exporters. Our findings underscore the cost of poorly-designed and implemented labor regulations in a labor-abundant country wishing to spur exports, employment and industrial activity in labor-intensive industries.

Suggested Citation

  • Hasan, Rana & Mehta, Aashish & Sundaram, Asha, 2021. "The effects of labor regulation on firms and exports: Evidence from Indian apparel manufacturing," Journal of Comparative Economics, Elsevier, vol. 49(1), pages 183-200.
    • Handle: RePEc:eee:jcecon:v:49:y:2021:i:1:p:183-200
    DOI: 10.1016/j.jce.2020.04.007
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    2. Diti Goswami & Sourabh Bikas Paul, 2020. "Labor Reforms in Rajasthan: A boon or a bane?," Papers 2012.01016, arXiv.org.

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    More about this item

    Keywords

    labor regulation; exports; India; apparel; manufacturing; firms;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor
    • L67 - Industrial Organization - - Industry Studies: Manufacturing - - - Other Consumer Nondurables: Clothing, Textiles, Shoes, and Leather Goods; Household Goods; Sports Equipment
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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