Labour Laws and Informalisation of Employment: Panel Evidences from Indian Formal Manufacturing Sector

Sofi Irfan Ahmad () and Sharma Pritee
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Sofi Irfan Ahmad: School of Humanities and Social Science, Indian Institute of Technology Indore, M-Block, IET DAVV Campus Khandwa Road Indore, Madhya Pradesh, Pin Code: 452017, India
Sharma Pritee: School of Humanities and Social Science, Indian Institute of Technology Indore, M-Block, IET DAVV Campus Khandwa Road Indore, Madhya Pradesh, Pin Code: 452017, India

Asian Journal of Law and Economics, 2015, vol. 6, issue 1, 65-84

Abstract: Labour law is widely being cited as one of the principal factors creating rigidities in industrial business and, thereby, holding back productivity growth and employment generation. However, a substantial chunk of literature disputes the “rigidity argument” on the ground that there has been a sharp growth in informal employment, which is often considered as flexible labor input as it does not fall under the purview of what is believed to be directly related with rigidity – employment protection legislation (EPL). However, given empirical evidence showing that informal worker is less productive as compared to its formal (regular) counterpart, the question arises: what motivates the employer to employ less productive worker? Using three-dimensional panel data on 28 industrial sectors between 1999–2000 and 2007–2008 across 13 states of India, our results show that the incidence of informal employment is directly linked with EPL, volatility, and labor bargaining power. We utilize instrumental variable two stage least square (IV 2SLS) to overcome the endogeneity issues. The results are robust.

Keywords: bargaining power; employment protection legislation; informal employment; rigidity; volatility (search for similar items in EconPapers)
JEL-codes: J21 K31 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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DOI: 10.1515/ajle-2014-0007

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