Striking a Balance: Enforcement of Job Security Laws and Firm Performance India’s Manufacturing

Irfan Sofi () and Santosh Mehrotra ()
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Irfan Sofi: Head, Department of Econ, Islamic University of Science & Technology, Kashmir, India
Santosh Mehrotra: Higher School of Economics

No 18687, IZA Discussion Papers from IZA Network @ LISER

Abstract: This study examines the relationship between employment protection legislation (EPL), measured through pro-worker judicial outcomes (PWCJ), and firm performance in India's formal manufacturing sector. We construct a novel state-level indicator of EP based on 1,471 high court judgments covering 18 states from 1999 to 2022. Using plant-level panel data from the Annual Survey of Industries, we analyse the impact of EP on labour productivity growth, employment growth, and wage growth. The results indicate a non-linear (inverted Ushaped) relationship. A 1% increase in PWCJ is associated with a 3% rise in labour productivity, 2.59% increase in employment, and 2.95% increase in wages. However, beyond a threshold, further increases in PWCJ negatively affect all three outcomes. The results are robust to alternative specifications and controls. Our findings highlight the importance of balancing job security with flexibility to foster industrial performance. The study contributes new empirical insights to the debate on labour laws and firm outcomes in India.

Keywords: employment protection; labour disputes; court judgements; productivity; employment; wages; India (search for similar items in EconPapers)
JEL-codes: D24 K31 L51 L60 (search for similar items in EconPapers)
Date: 2026-05
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