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State-level Labor Reform and Firm-level Productivity in India

Author

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  • Sean, Dougherty
  • Veronica, Frisancho
  • Kala, Krishna

Abstract

We examine the effects of labor market reform on establishment performance in different Indian states over a contemporaneous period. Using plant-level data for a period from the late 1990s to the late 2000s, the study provides plant-level cross-state/time-series evidence of the impact of reforms of employment protection legislation and related labor market policies on productivity in India. Identification of the effect of employment protection legislation follows from a difference-indifferences 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 employment protection legislation is more likely to restrict firms operating in industries with higher labor intensity and/or higher sales volatility. The results show that firms in labor intensive or more volatile industries benefited the most from labor reforms in their states. Point estimates indicate that, on average, firms in labor intensive industries and in flexible labor markets have total factor productivity residuals 25.4% higher than those registered for their counterparts in states with more stringent labor laws.

Suggested Citation

  • Sean, Dougherty & Veronica, Frisancho & Kala, Krishna, 2014. "State-level Labor Reform and Firm-level Productivity in India," India Policy Forum, National Council of Applied Economic Research, vol. 10(1), pages 1-56.
    • Handle: RePEc:nca:ncaerj:v:10:y:2014:i:1:p:1-56
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    Citations

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    Cited by:

    1. Amrit Amirapu & Michael Gechter, 2020. "Labor Regulations and the Cost of Corruption: Evidence from the Indian Firm Size Distribution," The Review of Economics and Statistics, MIT Press, vol. 102(1), pages 34-48, March.
    2. Gopal Krishna Roy & Amaresh Dubey & Suresh Ramaiah, 2020. "Labour Market Flexibility and Changes in Employment: Spatial and Temporal Evidence from Indian Manufacturing," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 63(1), pages 81-98, March.
    3. Choutagunta Abishek S., 2019. "Effects of Labour Regulation on Manufacturing Firms in India: A Leximetric Approach," Asian Journal of Law and Economics, De Gruyter, vol. 10(1), pages 1-15, April.
    4. Daniel Schwab, 2019. "Labor protection laws and the drain on productivity: Evidence from India," Working Papers 1906, College of the Holy Cross, Department of Economics.
    5. Daniel Schwab, 2016. "Employment Protection and the Labor Informality of the Youth: Evidence from India," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-280, Boston University - Department of Economics.
    6. Aditya Bhattacharjea, 2019. "Labour Market Flexibility in Indian Industry A Critical Survey of the Literature," Working papers 296, Centre for Development Economics, Delhi School of Economics.

    More about this item

    Keywords

    Employment Regulation Legislation; Labor Laws; Job Protection; Total Factor Productivity; Firm-Level Volatility;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
    • J8 - Labor and Demographic Economics - - Labor Standards
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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