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Employment Protection Legislation and Plant-Level Productivity in India

Author

Listed:
  • Sean Dougherty

    (OECD)

  • Verónica Frisancho Robles

    (Pennsylvania State University)

  • Kala Krishna

    (Pennsylvania State University)

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 labour 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 labour regulation and heterogeneous industry characteristics. The fundamental identification assumption is that EPL is more likely to restrict firms operating in industries with higher labour intensity and/or higher sales volatility. Our results show that firms in labour intensive or more volatile industries benefited the most from labour reforms in their states. Our point estimates indicate that, on average, firms in labour intensive industries and in flexible labour markets have TFP residuals 14% higher than those registered for their counterparts in states with more stringent labour laws. However, no important differences are identified among plants in industries with low labour 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 labour 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 labour costs and rigidities imposed through Indian federal labour laws are lessened by labour market reforms at the state level. La législation sur la protection de l'emploi et la productivité des entreprises en Inde À l’aide de données au niveau des entreprises, tirées de l’enquête annuelle sur les industries (ASI) pour l’ensemble des exercices comptables entre 1998-99 et 2007-08, cette étude présente des séries chronologiques pour des États indiens mettant en lumière l’incidence de la législation sur la protection de l’emploi (LPE) sur la productivité totale des facteurs (PTF) et la productivité du travail dans les entreprises indiennes. L’incidence de la LPE est déterminée à partir d’un estimateur de la différence des différences inspiré de Rajan et Zingales (1998), qui tire parti des différences de réglementation au niveau des États et des caractéristiques hétérogènes des secteurs d’activité. L’hypothèse de base retenue pour la détermination de l’incidence est que la LPE est plus susceptible de peser sur les entreprises exerçant leurs activités dans un secteur à forte intensité de main-d’oeuvre et/ou dont la volatilité des ventes est élevée. Nos résultats montrent que les entreprises relevant de secteurs à forte intensité de main-d’oeuvre ou plus volatils sont celles qui ont le plus tiré profit des réformes du marché du travail mises en place dans leurs États. Nos évaluations de point indiquent qu’en moyenne, les entreprises de secteurs à forte intensité de main-d’oeuvre et évoluant dans un marché du travail flexible affichent, pour la PTF, des chiffres résiduels supérieurs de 14 % à ceux de leurs homologues implantées dans des États dont la législation sur le travail est plus stricte. Toutefois, aucun écart important n’a été décelé entre les entreprises de secteurs à faible intensité de main-d’oeuvre lorsque l’on compare les États qui ont peu et beaucoup réformé leur LPE. De même, la PTF des entreprises de secteurs volatils implantées dans des États ayant imposé des réformes plus favorables aux employeurs est supérieure de 11 % à celle des entreprises de secteurs volatils implantées dans des États plus restrictifs. Cependant, les chiffres résiduels de la PTF des entreprises exerçant leurs activités dans des secteurs à faible intensité de main-d’oeuvre sont inférieurs de 11 % dans les États ayant beaucoup réformé leur LPE par rapport à ceux qui ont peu réformé leur législation dans ce domaine. En conclusion, les éléments présentés ici donnent à penser que les effets des coûts élevés du travail et des rigidités imposées par la législation fédérale indienne sur l’emploi sont atténués par les réformes du marché du travail mises en oeuvre au niveau des États.

Suggested Citation

  • Sean Dougherty & Verónica Frisancho Robles & Kala Krishna, 2011. "Employment Protection Legislation and Plant-Level Productivity in India," OECD Economics Department Working Papers 917, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:917-en
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    File URL: http://dx.doi.org/10.1787/5kg0ndktrx46-en
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2014. "Does local financial development matter for firm lifecycle in India ?," Policy Research Working Paper Series 7008, The World Bank.
    3. Isabelle Joumard & Urban Sila & Hermes Morgavi, 2015. "Challenges and Opportunities of India's Manufacturing Sector," OECD Economics Department Working Papers 1183, OECD Publishing.
    4. Peter Gal & Alexander Hijzen & Zoltan Wolf, 2012. "The Role of Institutions and Firm Heterogeneity for Labour Market Adjustment: Cross-Country Firm-Level Evidence," OECD Social, Employment and Migration Working Papers 134, OECD Publishing.
    5. 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.
    6. Meghana Ayyagari & Asli Demirguc-Kunt & Vojislav Maksimovic, 2017. "What Determines Entrepreneurial Outcomes in Emerging Markets? The Role of Initial Conditions," Review of Financial Studies, Society for Financial Studies, vol. 30(7), pages 2478-2522.
    7. repec:wsi:jicepx:v:08:y:2017:i:02:n:s1793993317500120 is not listed on IDEAS
    8. Srivastava, Ravi., 2016. "Structural change and non-standard forms of employment in India," ILO Working Papers 994897513402676, International Labour Organization.
    9. Ravi S. Srivastava, 2016. "Myth and reality of labour flexibility in India," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 59(1), pages 1-38, March.
    10. Chaurey, Ritam, 2015. "Labor regulations and contract labor use: Evidence from Indian firms," Journal of Development Economics, Elsevier, vol. 114(C), pages 224-232.
    11. Beck, T.H.L. & Hoseini, M., 2014. "Informality and Access to Finance : Evidence from India," Discussion Paper 2014-052, Tilburg University, Center for Economic Research.
    12. Radhicka Kapoor, 2014. "Creating Jobs in India’s Organised Manufacturing Sector," Working Papers id:6208, eSocialSciences.

    More about this item

    Keywords

    difference-in-differences; différence des différences; firm heterogeneity; hétérogénéité des entreprises; labour regulation; productivité totale des facteurs; réformes au niveau des États; réglementation du travail; state-level reforms; total factor productivity;

    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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