Labour Market Regulation and Manufacturing Employment: A Study of Organized Manufacturing Sector Across Indian States

Labour regulation varies across different states in India. Using the state-level labour amendments of the Industrial Dispute Act (IDA), Besley and Burgess (Q J Econ 119:91–134, 2004) classified states as pro-worker and pro-employer states. Bhattacharjea (Indian J Labor Econ 49(2):211–232, 2006; Working paper, Center on Democracy, Development, and The Rule of Law Freeman Spogli Institute for International Studies, Stanford University, 2009) criticized Besley and Burgess’s (2004) paper both in terms of its methodology and in terms of its overall coding of the labour regulation index. The current paper uses the Besley and Burgess’s (2004) methodology, classifies states as flexible and inflexible based on the state-level amendments of the IDA and looks into the issue of manufacturing employment for the three-digit manufacturing industries across Indian states. Data on industrial outputs and employment were extracted from ASI three-digit manufacturing industries for the period from 1980–1981 to 2006–2007. The employment function was estimated for both total workers (measured as ‘total persons engaged’) and production workers (measured as ‘workers’) as dependent variables regressed on the labour market regulation index. The variables are found to be stationary under panel unit root tests. Controlling for industry-fixed and year-fixed effects, we found stringent labour regulation to adversely affect manufacturing employment. We did not find enough evidence to support the hypothesis that labour-intensive industries are worst affected from rigid labour laws. The results are found to be robust under dynamic panel estimation.