Labor Laws and Manufacturing Performance in India: How Priors Trump Evidence and Progress Gets Stalled

34 Pages Posted: 5 Mar 2019

See all articles by Servaas Storm

Servaas Storm

Delft University of Technology - Department of Economics

Date Written: January 2019

Abstract

Strong labor protections for ordinary workers are often portrayed as a ‘luxury developing countries cannot afford’. No study has been more influential in propagating this perversity trope in the context of the Indian economy than the QJE article of Besley and Burgess (2004). Their article provides econometric evidence that pro-worker regulation resulted in lower output, employment, investment and productivity in India’s registered manufacturing sector. This paper reviews existing critiques of Besley and Burgess (2004), which highlight conceptual and measurement errors and uncover econometric weaknesses. The paper takes a step beyond these: it reports a failure to replicate Besley and Burgess’ findings and demonstrate the non-robustness of their results. My deconstruction is not only about the econometrics, however. I show that Besley and Burgess’ findings are not just inconsistent with their theoretical priors, but also internally contradictory and empirically implausible, taxing any person’s capacity for belief. The paper, written by two ‘useful economists’, exhibits a gratuitous empiricism in which priors trump evidence. On all counts, it fails the test of being useful to the purpose of ‘evidence-based’ public policy advice.

Keywords: manufacturing performance; industrial relations; pro-worker regulation; labor laws; Indian economy; Industrial Disputes Act (IDA)

JEL Classification: B50, C26, O10

Suggested Citation

Storm, Servaas, Labor Laws and Manufacturing Performance in India: How Priors Trump Evidence and Progress Gets Stalled (January 2019). Institute for New Economic Thinking Working Paper Series No. 90 (2019), Available at SSRN: https://ssrn.com/abstract=3346760 or http://dx.doi.org/10.2139/ssrn.3346760

Servaas Storm (Contact Author)

Delft University of Technology - Department of Economics ( email )

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