Employment Protection Legislation and Plant-Level Productivity in India

Sean Dougherty, Veronica Frisancho and Kala Krishna ()

No 17693, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using plant-level data from the Annual Survey of Industries (ASI) for the fiscal years from 1998-99 through 2007-08, this study provides plant-level cross-state/time-series evidence of the impact of employment protection legislation (EPL) on total factor productivity (TFP) and labor productivity in India. Identification of the effect of EPL follows from a difference-in-differences 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 EPL is more likely to restrict firms operating in industries with higher labor intensity and/or higher sales volatility. Our results show that firms in labor intensive or more volatile industries benefited the most from labor reforms in their states. Our point estimates indicate that, on average, firms in labor intensive industries and in flexible labor markets have TFP residuals 14% higher than those registered for their counterparts in states with more stringent labor laws. However, no important differences are identified among plants in industries with low labor intensity when comparing states with high and low levels of EPL reform. Similarly, the TFP of plants in volatile industries and in states that experienced more pro-employer reforms is 11% higher than that of firms in volatile industries and in more restrictive states; however, the TFP residuals of plants in industries with low labor intensity are 11% lower in high EPL reform states than in states with lower levels of EPL reform. In sum, the evidence presented here suggests that the high labor costs and rigidities imposed through Indian federal labor laws are lessened by labor market reforms at the state level.

JEL-codes: D24 F16 J5 J8 K31 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-dev, nep-eff and nep-lab
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Citations: View citations in EconPapers (15)

Published as "Employment Protection Legislation and Plant-Level Productivity in India" With Sean Dougherty and Verónica Frisancho Robles. India Policy Forum, Volume 10.

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Working Paper: Employment Protection Legislation and Plant-Level Productivity in India (2011)
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