The Impact of Lifting Firing Restrictions on Firms: Evidence from a State-Level Labor Law Amendment

Sarur Chaudhary and Siddharth Sharma

No 10039, Policy Research Working Paper Series from The World Bank

Abstract: Stringent employment protection laws are argued to be a cause of reduced employment flexibility, slower growth and increased reliance on temporary employment contracts in many countries, including India. In 2014, the Indian state of Rajasthan amended labor laws to increase employment flexibility in firms. The most discussed of the amendments lifted the requirement for government approval for retrenching regular workers in medium-size factories. This paper first conducts a synthetic control analysis of the policy change using state-level panel data from 1980 to 2018, finding no evidence of an impact on aggregate manufacturing employment and output. The paper then uses firm-level panel data to conduct a difference-in-differences analysis of the main amendment, exploiting its size-dependent feature for identification. This analysis finds that the amendment reduced the implicit regulatory cost of labor in firms, but there is no discernible impact on their total employment and output. The amendment also led to firms substituting temporary (“contract”) workers for permanent workers. This collateral impact is contrary to the expectation that easing the flexibility of permanent employment arrangements would make them more attractive to firms.

Date: 2022-05-09
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://documents.worldbank.org/curated/en/09975120 ... 4ba0e627b6576af2.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:10039

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().