IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789812839428_0009.html
   My bibliography  Save this book chapter

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

In: New And Enduring Themes In Development Economics

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789812839428_0009
    Download Restriction: Ebook Access is only available upon purchase of title/chapter from Publisher's website.

    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789812839428_0009
    Download Restriction: Ebook Access is only available upon purchase of title/chapter from Publisher's website.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Pranab K. Bardhan, 1983. "Labor-tying in a Poor Agrarian Economy: A Theoretical and Empirical Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 98(3), pages 501-514.
    2. Basu, Kaushik, 2005. "Labor Laws and Labor Welfare in the Context of the Indian Experience," Working Papers 05-17, Cornell University, Center for Analytic Economics.
    3. Mrinal Datta Chaudhuri, 1994. "Labour Markets As Social Institutions In India," Working papers 16, Centre for Development Economics, Delhi School of Economics.
    4. Meng,Xin, 2009. "Labour Market Reform in China," Cambridge Books, Cambridge University Press, number 9780521121118, May.
    5. Rama, Martin, 1999. "Public Sector Downsizing: An Introduction," World Bank Economic Review, World Bank Group, vol. 13(1), pages 1-22, January.
    6. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
    7. Timothy Besley & Robin Burgess, 2004. "Can Labor Regulation Hinder Economic Performance? Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 91-134.
    8. Fallon, Peter R & Lucas, Robert E B, 1991. "The Impact of Changes in Job Security Regulations in India and Zimbabwe," World Bank Economic Review, World Bank Group, vol. 5(3), pages 395-413, September.
    9. Fallon, Peter R. & Lucas, Robert E. B., 1993. "Job security regulations and the dynamic demand for industrial labor in India and Zimbabwe," Journal of Development Economics, Elsevier, vol. 40(2), pages 241-275, April.
    10. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    11. Patricia M. Anderson & Bruce D. Meyer, 1994. "The Effects of Unemployment Insurance Taxes and Benefits on Layoffs Using Firm and Individual Data," NBER Working Papers 4960, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Joel Isabirye, 2021. "A Thematic Review of the Efficacy of Firms' Responses to Economic Crises: A Ugandan Perspective," Technium Social Sciences Journal, Technium Science, vol. 19(1), pages 311-323, May.
    2. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Basu, Kaushik & Fields, Gary S. & Debgupta, Shub, 2000. "Alternative Labor Retrenchment Laws and Their Effect on Wages and Employment: A Theoretical Investigation with Special Reference to Developing Countries," Working Papers 00-11, Cornell University, Center for Analytic Economics.
    2. Milan Vodopivec, 2004. "Income Support for the Unemployed : Issues and Options," World Bank Publications, The World Bank, number 14922.
    3. Achyuta Adhvaryu & A. V. Chari & Siddharth Sharma, 2013. "Firing Costs and Flexibility: Evidence from Firms' Employment Responses to Shocks in India," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 725-740, July.
    4. Carmen Pagés & Claudio E. Montenegro, 2007. "Job security and the age-composition of employment: evidence from Chile," Estudios de Economia, University of Chile, Department of Economics, vol. 34(2 Year 20), pages 109-139, December.
    5. P R Agénor, 2005. "The Analytics of Segmented Labor Markets," Centre for Growth and Business Cycle Research Discussion Paper Series 52, Economics, The Univeristy of Manchester.
    6. Djankov, Simeon & Ramalho, Rita, 2009. "Employment laws in developing countries," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 3-13, March.
    7. Pierre, Gaëlle & Scarpetta, Stefano, 2004. "Employment Regulations through the Eyes of Employers: Do They Matter and How Do Firms Respond to Them?," IZA Discussion Papers 1424, Institute of Labor Economics (IZA).
    8. Romain Duval & Prakash Loungani, 2021. "Designing Labor Market Institutions in Emerging Market and Developing Economies: A Review of Evidence and IMF Policy Advice," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(1), pages 31-83, March.
    9. Fernando Alvarez & Marcelo Veracierto, 2000. "Labor-Market Policies in an Equilibrium Search Model," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 265-316, National Bureau of Economic Research, Inc.
    10. Sher Singh Verick, 2016. "Manufacturing and jobs: is India different?," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 59(1), pages 57-84, March.
    11. Hiroko Okudaira, 2009. "The Economic Costs of Court Decisions Concerning Dismissals in Japan: Identification by Judge Transfers," ISER Discussion Paper 0733r, Institute of Social and Economic Research, Osaka University, revised Sep 2015.
    12. 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.
    13. MacIsaac, Donna & Rama, Martin, 2001. "Mandatory severance pay : its coverage and effects in Peru," Policy Research Working Paper Series 2626, The World Bank.
    14. Ahsan, Ahmad & Pagés, Carmen, 2009. "Are all labor regulations equal? Evidence from Indian manufacturing," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 62-75, March.
    15. Fernando Alvarez & Marcelo Veracierto, 1998. "Search, self-insurance and job-security provisions," Working Paper Series WP-98-2, Federal Reserve Bank of Chicago.
    16. González, Xulia & Miles-Touya, Daniel, 2012. "Labor market rigidities and economic efficiency: Evidence from Spain," Labour Economics, Elsevier, vol. 19(6), pages 833-845.
    17. Jackline Wahba & Ragui Assaad, 2017. "Flexible Labor Regulations and Informality in Egypt," Review of Development Economics, Wiley Blackwell, vol. 21(4), pages 962-984, November.
    18. Fan Cui & Ying Ge & Fengchun Jing, 2013. "The Effects of the Labor Contract Law on the Chinese Labor Market," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 10(3), pages 462-483, September.
    19. Marcelo Veracierto, 2007. "Establishments dynamics and matching frictions in classical competitive equilibrium," Working Paper Series WP-07-16, Federal Reserve Bank of Chicago.
    20. Adriana Kugler, 2000. "The Incidence of Job Security Regulations on Labor Market Flexibility and Compliance in Colombia: Evidence from the 1990 Reform," Research Department Publications 3094, Inter-American Development Bank, Research Department.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789812839428_0009. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.