State-level Labor Reform and Firm-level Productivity in India

Sean Dougherty, Veronica Frisancho and Kala Krishna ()

India Policy Forum, 2014, vol. 10, issue 1, 1-56

Abstract: We examine the effects of labor market reform on establishment performance in different Indian states over a contemporaneous period. Using plant-level data for a period from the late 1990s to the late 2000s, the study provides plant-level cross-state/time-series evidence of the impact of reforms of employment protection legislation and related labor market policies on productivity in India. Identification of the effect of employment protection legislation follows from a difference-indifferences estimator inspired by Rajan and Zingales (1998) that takes advantage of the state-level variation in labor regulation and heterogeneous industry characteristics. The fundamental identification assumption is that employment protection legislation is more likely to restrict firms operating in industries with higher labor intensity and/or higher sales volatility. The results show that firms in labor intensive or more volatile industries benefited the most from labor reforms in their states. Point estimates indicate that, on average, firms in labor intensive industries and in flexible labor markets have total factor productivity residuals 25.4% higher than those registered for their counterparts in states with more stringent labor laws.

Keywords: Employment Regulation Legislation; Labor Laws; Job Protection; Total Factor Productivity; Firm-Level Volatility (search for similar items in EconPapers)
JEL-codes: D24 F16 J5 J8 K31 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (13)

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