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Labor Retrenchment Laws And Their Effect On Wages And Employment: A Theoretical Investigation

In: New And Enduring Themes In Development Economics

Author

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  • KAUSHIK BASU

    (Department of Economics, Cornell University, Ithaca, New York 14853, USA)

  • GARY S. FIELDS

    (School of Industrial and Labor Relations, Cornell University, Ithaca, New York 14853, USA)

  • SHUB DEBGUPTA

    (Corporate Executive Board, 2000 Pennsylvania Avenue, NW, Washington, DC 2006, USA)

Abstract

Many countries have legislation which make it costly for firms to dismiss or retrench workers. In the case of India, the Industrial Disputes Act, 1947, requires firms that employ 50 or more workers to pay compensation to any worker who is to be retrenched.This paper builds a theoretical model to analyze the effects of such anti-retrenchment laws. Our model reveals that an anti-retrenchment law can cause wages and employment to rise or fall, depending on the parametric conditions prevailing in the market. We then use this simple model to isolate conditions under which an anti-retrenchment law raises wages and employment. In a subsequent section we assume that the law specifies exogenously the amount of compensation, s, a firm has to pay each worker who is being dismissed. It is then shown that as s rises, starting from zero, equilibrium wages fall. However beyond a certain point, further rises in s cause wages to rise. In other words, the relation between the exogenously specified cost to the firm of dismissing a worker and the equilibrium wage is V-shaped.

Suggested Citation

  • Kaushik Basu & Gary S. Fields & Shub Debgupta, 2009. "Labor Retrenchment Laws And Their Effect On Wages And Employment: A Theoretical Investigation," World Scientific Book Chapters, in: Bhaskar Dutta & Tridip Ray & E Somanathan (ed.), New And Enduring Themes In Development Economics, chapter 9, pages 181-205, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812839428_0009
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    Cited by:

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    2. Petia Topalova, 2010. "Factor Immobility and Regional Impacts of Trade Liberalization: Evidence on Poverty from India," American Economic Journal: Applied Economics, American Economic Association, vol. 2(4), pages 1-41, October.
    3. Indranil Bose & R. K. Mudgal, 2016. "Impact of Globalization on Job-Abolition and Job-Creation in Recent Times: A Brief Research Overview," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 5(4), pages 223-228, November.
    4. Diti Goswami & Sourabh Bikas Paul, 2020. "Labor Reforms in Rajasthan: A boon or a bane?," Papers 2012.01016, arXiv.org.
    5. Meng Zhao & Justin Tan & Seung Park, 2014. "From Voids to Sophistication: Institutional Environment and MNC CSR Crisis in Emerging Markets," Journal of Business Ethics, Springer, vol. 122(4), pages 655-674, July.

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    More about this item

    Keywords

    Development Economics; Happiness; Well-Being; Political Economy; Economic of Labour; Agricultural Economics;
    All these keywords.

    JEL classification:

    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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