Employment Protection Legislation and Plant-Level Productivity in India

43 Pages Posted: 25 Dec 2011 Last revised: 7 May 2021

See all articles by Sean Michael Dougherty

Sean Michael Dougherty

OECD Economics Department

Verónica Frisancho

Inter-American Development Bank (IDB)

Kala Krishna

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2011

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.

Suggested Citation

Dougherty, Sean Michael and Frisancho, Veronica and Krishna, Kala, Employment Protection Legislation and Plant-Level Productivity in India (December 2011). NBER Working Paper No. w17693, Available at SSRN: https://ssrn.com/abstract=1976489

Sean Michael Dougherty (Contact Author)

OECD Economics Department ( email )

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France

Veronica Frisancho

Inter-American Development Bank (IDB) ( email )

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Washington, DC 20577
United States

Kala Krishna

Pennsylvania State University - Department of Economics ( email )

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University Park, PA 16802-3306
United States
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814-863-4775 (Fax)

National Bureau of Economic Research (NBER)

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