Labour Market Regulation and Industrial Performance in India: A Critical Review of the Empirical Evidence

Abstract

This paper offers a critique of recent empirical research on the impact of labour regulation on industrial performance in India. It begins with a review of earlier studies that tried to infer the effects on manufacturing employment of amendments made by the central government to the Industrial Disputes Act (IDA) in 1976 and 1982, requiring official permission for layoffs, retrenchments and closures. The results of these studies are ambiguous, and this literature ignored crucial developments in the political and legal spheres which vitiate many of these findings. The widely-used index of state-level labour regulation devised by Besley and Burgess (Quarterly Journal of Economics, 2004) is then criticised for its miscoding of individual amendments and its misleading aggregation and cumulation procedures. Their econometric results, which indicate that states that enacted excessively pro-worker amendments to the IDA have displayed poorer performance in manufacturing, do not appear to be robust and also suffer from other methodological problems. Several recent studies that have used the Besley-Burgess index are also surveyed, and their limitations highlighted. Finally, the paper reviews a wide range of other evidence, pointing in a very different direction, on the actual enforcement of labour laws, labour flexibility, and industrial employment. Throughout, attention is paid to the crucial role of judicial interpretation of the IDA, which has been neglected in this literature.

Keywords: India, manufacturing, industrial relations, employment protection, job security regulations, labour flexibility

JEL Classification: J53, J68, O53