Labor Retrenchment Laws and their Effect on Wages and Employment: A Theoretical Investigation

Kaushik Basu, Gary Fields (gsf2@cornell.edu) and Shub Debgupta (debguptas@executiveboard.com)
Additional contact information
Shub Debgupta: Corporate Executive Board

No 2742, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Many 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 a 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: labor laws; retrenchment; severance pay; unemployment (search for similar items in EconPapers)
JEL-codes: J32 J63 O15 O17 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2007-04
New Economics Papers: this item is included in nep-dev and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://docs.iza.org/dp2742.pdf (application/pdf)

Related works:
Chapter: LABOR RETRENCHMENT LAWS AND THEIR EFFECT ON WAGES AND EMPLOYMENT: A THEORETICAL INVESTIGATION (2009)
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:iza:izadps:dp2742

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
library@iza.org

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte (hinte@iza.org).