LABOR RETRENCHMENT LAWS AND THEIR EFFECT ON WAGES AND EMPLOYMENT: A THEORETICAL INVESTIGATION

Kaushik Basu, Gary Fields () and Shub Debgupta
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Shub Debgupta: Corporate Executive Board, 2000 Pennsylvania Avenue, NW, Washington, DC 2006, USA

Chapter 9 in New and Enduring Themes in Development Economics, 2009, pp 181-205 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractMany countries have legislation which make it costly for firms to dismiss or retrench workers. In the case of India, the Industrial Disputes Act, 1947, requires firms that employ 50 or more workers to pay compensation to any worker who is to be retrenched.This paper builds a theoretical model to analyze the effects of such anti-retrenchment laws. Our model reveals that an anti-retrenchment law can cause wages and employment to rise or fall, depending on the parametric conditions prevailing in the market. We then use this simple model to isolate conditions under which an anti-retrenchment law raises wages and employment. In a subsequent section we assume that the law specifies exogenously the amount of compensation, s, a firm has to pay each worker who is being dismissed. It is then shown that as s rises, starting from zero, equilibrium wages fall. However beyond a certain point, further rises in s cause wages to rise. In other words, the relation between the exogenously specified cost to the firm of dismissing a worker and the equilibrium wage is V-shaped.

Keywords: Development Economics; Happiness; Well-Being; Political Economy; Economic of Labour; Agricultural Economics (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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Working Paper: Labor Retrenchment Laws and their Effect on Wages and Employment: A Theoretical Investigation (2007)
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