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Size-Dependent Labor Regulations and Structural Transformation in India

Wenbiao Cai and Manish Pandey

Departmental Working Papers from The University of Winnipeg, Department of Economics

Abstract: Labor regulations in India increase the cost of hiring labor for larger establishments and have been cited as an important reason for the lack of mid-sized establishments in the manufacturing sector. Using data for India, we calibrate a two-sector model in which agents differ in their managerial ability in manufacturing. In the presence of size-dependent labor regulations, the model generates the observed employment distribution across manufacturing establishments in India. In a counterfactual exercise, removing the regulations increases aggregate output per worker by 2.3% and also increases labor productivity in agriculture relative to manufacturing by 4%. We find that labor regulations in manufacturing have a detrimental effect on the productivity of the agricultural sector and hence impede the process of structural transformation.

JEL-codes: K31 O11 O40 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2012-10
New Economics Papers: this item is included in nep-dev, nep-lab and nep-law
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Journal Article: Size-dependent labor regulations and structural transformation in India (2013) Downloads
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