Labor protection laws and the drain on productivity: Evidence from India

Daniel Schwab ()
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Daniel Schwab: Department of Economics and Accounting, College of the Holy Cross

No 1906, Working Papers from College of the Holy Cross, Department of Economics

Abstract: Employment protection legislation (EPL) is designed to promote security for workers by placing restrictions on firing, but it generates unintended consequences. With India as a setting, I argue that EPL shifts jobs from younger to older workers in two ways: by discouraging the hiring of unproven young workers and by preventing the firing of low-productivity workers. The identification strategy is motivated by Rajan and Zingales (1998): I assume that EPL is more binding in those manufacturing sectors where the involuntary separation rate in other countries is high. The data show that older workers are more likely to have formal jobs, and the effect is strongest in high-firing sectors, which indicates EPL shifts jobs from young to old. Additionally, EPL reduces plant-level total productivity (TFP), and this effect is seen only in plants which are large enough to fall within the purview of EPL, which provides a useful placebo test.

Keywords: Unemployment; labor security (search for similar items in EconPapers)
JEL-codes: J60 J83 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2019-08
New Economics Papers: this item is included in nep-dev, nep-eff, nep-lab and nep-law
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