Labour Reforms and Growth in Manufacturing Employment in India

There has been limited econometric research on the impact of labour regulations on the growth in manufacturing employment in India, which has been mainly confined to the organised/formal sector of manufacturing, accounting for only about 20–25 per cent of the total manufacturing employment. To give an empirical content to labour reforms in terms of an index, the focus of the past research dealing with labour regulations has been mainly on the amendments made by different states in India to the Industrial Disputes Act, 1947 (IDA). The enhancement of the threshold applicability limit of the IDA from 100 to 300 workers, as several states have done in the past, has received particular attention. However, manufacturing enterprises employing up to nine workers form about 98 per cent of total manufacturing enterprises in India and account for a dominant portion of total manufacturing employment. Employment in such enterprises is unlikely to be impacted much by an enhancement of the threshold applicability limit of the IDA. Rather, employment in such enterprises may get a boost from an enhancement in the threshold applicability limit under the Factories Act, 1948. In this paper, the state-wise manufacturing employment data, covering both formal and informal segments, are used to investigate econometrically the impact of labour reforms, particularly the enhancements of the threshold applicability limit under the Factories Act and the IDA, on manufacturing employment. The results of the analysis indicate that labour reforms significantly positively impacted manufacturing employment in India and contributed to employment growth.