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Employment Protection Legislation and Plant-Level Productivity in India

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  • Sean Dougherty
  • Verónica C. Frisancho Robles
  • Kala Krishna

Abstract

Using plant-level data from the Annual Survey of Industries (ASI) for the fiscal years from 1998-99 through 2007-08, this study provides plant-level cross-state/time-series evidence of the impact of employment protection legislation (EPL) on total factor productivity (TFP) and labor productivity in India. Identification of the effect of EPL follows from a difference-in-differences estimator inspired by Rajan and Zingales (1998) that takes advantage of the state-level variation in labor regulation and heterogeneous industry characteristics. The fundamental identification assumption is that EPL is more likely to restrict firms operating in industries with higher labor intensity and/or higher sales volatility. Our results show that firms in labor intensive or more volatile industries benefited the most from labor reforms in their states. Our point estimates indicate that, on average, firms in labor intensive industries and in flexible labor markets have TFP residuals 14% higher than those registered for their counterparts in states with more stringent labor laws. However, no important differences are identified among plants in industries with low labor intensity when comparing states with high and low levels of EPL reform. Similarly, the TFP of plants in volatile industries and in states that experienced more pro-employer reforms is 11% higher than that of firms in volatile industries and in more restrictive states; however, the TFP residuals of plants in industries with low labor intensity are 11% lower in high EPL reform states than in states with lower levels of EPL reform. In sum, the evidence presented here suggests that the high labor costs and rigidities imposed through Indian federal labor laws are lessened by labor market reforms at the state level.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17693.

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Date of creation: Dec 2011
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Publication status: published as “Employment Protection Legislation and Plant-Level Productivity in India” With Sean Dougherty and Verónica Frisancho Robles. NBER Working Paper No 17693. Forthcoming India Policy Forum.
Handle: RePEc:nbr:nberwo:17693

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  1. Carlsson, Mikael & Messina, Julián & Nordström Skans, Oskar, 2011. "Wage Adjustment and Productivity Shocks," Working Paper Series 253, Sveriges Riksbank (Central Bank of Sweden).
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  7. Poschke, Markus, 2007. "Employment Protection, Firm Selection, and Growth," IZA Discussion Papers 3164, Institute for the Study of Labor (IZA).
  8. Simon Deakin & Priya Lele & Mathias Siems, 2007. "The Evolution of Labour Law: Calibrating and Comparing Regulatory Regimes," ESRC Centre for Business Research - Working Papers wp352, ESRC Centre for Business Research.
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  10. Ann E. Harrison & Leslie A. Martin & Shanthi Nataraj, 2013. "Learning versus Stealing: How Important Are Market-Share Reallocations to India's Productivity Growth?," World Bank Economic Review, World Bank Group, vol. 27(2), pages 202-228.
  11. Danielle Venn, 2009. "Legislation, Collective Bargaining and Enforcement: Updating the OECD Employment Protection Indicators," OECD Social, Employment and Migration Working Papers 89, OECD Publishing.
  12. Sean M. Dougherty, 2009. "Labour Regulation and Employment Dynamics at the State Level in India," Review of Market Integration, India Development Foundation, vol. 1(3), pages 295-337, December.
  13. Poonam Gupta & Rana Hasan & Utsav Kumar, 2008. "Big Reforms but Small Payoffs: Explaining the Weak Record of Growth in Indian Manufacturing," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 5(1), pages 59-123.
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Cited by:
  1. Gal, Peter N. & Hijzen, Alexander & Wolf, Zoltan, 2013. "The Role of Institutions and Firm Heterogeneity for Labour Market Adjustment: Cross-Country Firm-Level Evidence," IZA Discussion Papers 7404, Institute for the Study of Labor (IZA).
  2. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2013. "Size and age of establishments: evidence from developing countries," Policy Research Working Paper Series 6718, The World Bank.
  3. Betcherman, Gordon, 2014. "Labor market regulations : what do we know about their impacts in developing countries ?," Policy Research Working Paper Series 6819, The World Bank.

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