Employment Protection Legislation And Informality: Theory And Evidence From India

Ritam Chaurey, Gaurav Chiplunkar and Vidhya Soundararajan
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Ritam Chaurey: Johns Hopkins University
Gaurav Chiplunkar: University of Virginia

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: We present causal evidence on how employment protection legislation (EPL) that penalize firms for hiring contractual workers can have adverse effects in contexts characterized by high levels of informality. While they increase compliance and reduce informality on the “intensive margin” as formal sector firms reduce hiring contract workers “off-the-books”, they increase informality on the “extensive margin”, as firms move to operating in the informal sector instead. This lowers aggregate productivity, wages and welfare in equilibrium. Counterfactual simulations demonstrate the significance of carefully designing EPL in contexts where informality is prevalent.

Keywords: Contract labor; Employment Protection Legislation; Firms; Informality (search for similar items in EconPapers)
JEL-codes: D22 E26 J46 O12 O17 (search for similar items in EconPapers)
Pages: 55
Date: 2023-07
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Forthcoming in Journal of Political Economy

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Persistent link: https://EconPapers.repec.org/RePEc:ris:cafral:022280

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