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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

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Employment Protection Legislation and Plant-Level Productivity in India You or your institution have access to this content

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Sean Dougherty1, Verónica Frisancho Robles2, Kala Krishna2
Author Affiliations
  • 1: OECD, France

  • 2: Pennsylvania State University, United States

16 Dec 2011
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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 labour 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 labour regulation and heterogeneous industry characteristics. The fundamental identification assumption is that EPL is more likely to restrict firms operating in industries with higher labour intensity and/or higher sales volatility. Our results show that firms in labour intensive or more volatile industries benefited the most from labour reforms in their states. Our point estimates indicate that, on average, firms in labour intensive industries and in flexible labour markets have TFP residuals 14% higher than those registered for their counterparts in states with more stringent labour laws. However, no important differences are identified among plants in industries with low labour 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 labour 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 labour costs and rigidities imposed through Indian federal labour laws are lessened by labour market reforms at the state level.
state-level reforms, difference-in-differences, labour regulation, firm heterogeneity, total factor productivity
JEL Classification:
  • D24: Microeconomics / Production and Organizations / Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
  • F16: International Economics / Trade / Trade and Labor Market Interactions
  • J5: Labor and Demographic Economics / Labor-Management Relations, Trade Unions, and Collective Bargaining
  • J8: Labor and Demographic Economics / Labor Standards: National and International
  • K31: Law and Economics / Other Substantive Areas of Law / Labor Law
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