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Size-Dependent Labor Regulations and Structural Transformation in India

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  • Wenbiao Cai
  • Manish Pandey

Abstract

Labor regulations in India increase the cost of hiring labor for larger establishments and have been cited as an important reason for the lack of mid-sized establishments in the manufacturing sector. Using data for India, we calibrate a two-sector model in which agents differ in their managerial ability in manufacturing. In the presence of size-dependent labor regulations, the model generates the observed employment distribution across manufacturing establishments in India. In a counterfactual exercise, removing the regulations increases aggregate output per worker by 2.3% and also increases labor productivity in agriculture relative to manufacturing by 4%. We find that labor regulations in manufacturing have a detrimental effect on the productivity of the agricultural sector and hence impede the process of structural transformation.

Suggested Citation

  • Wenbiao Cai & Manish Pandey, 2012. "Size-Dependent Labor Regulations and Structural Transformation in India," Departmental Working Papers 2012-03, The University of Winnipeg, Department of Economics.
  • Handle: RePEc:win:winwop:2012-03
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    Cited by:

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    More about this item

    JEL classification:

    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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