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Firing Costs and Flexibility Evidence from Firms' Employment Responses to Shocks in India

Author

Listed:
  • Achyuta Adhvaryu
  • Amalavoyal V. Chari
  • Siddharth Sharma

Abstract

A key prediction of models of dynamic labor demand is that restrictions on firing attenuate firms' employment responses to economic fluctuations. The authors provide the first direct empirical test of this prediction using data on industrial firms in India. They exploit the fact that fluctuation in rainfall within districts, through its effects on agricultural productivity, generates variation in local demand and local labor supply. Using a measure of labor regulation strictness, they compare factories' input and output responses to these shocks in pro-worker and pro-employer districts. Their results confirm the theory's predictions: industrial employment is more sensitive to shocks in areas where labor regulations are less restrictive. They verify that their results are robust to controlling for endogenous firm placement and vary across factory size in the pattern predicted by the institutional features of labor laws in India. However, their results also indicate that the inability to adjust employment does not significantly appear to affect firm profits, suggesting that firms may be adjusting along other (unobservable) margins.

Suggested Citation

  • Achyuta Adhvaryu & Amalavoyal V. Chari & Siddharth Sharma, 2011. "Firing Costs and Flexibility Evidence from Firms' Employment Responses to Shocks in India," Working Papers WR-901, RAND Corporation.
  • Handle: RePEc:ran:wpaper:wr-901
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies

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