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Size-Dependent Labor Regulations and Structural Transformation in India

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  • Wenbiao Cai
  • Manish Pandey

Abstract

Labor regulations in India increase the cost of hiring labor for larger establishments and have been cited as an important reason for the lack of mid-sized establishments in the manufacturing sector. Using data for India, we calibrate a two-sector model in which agents differ in their managerial ability in manufacturing. In the presence of size-dependent labor regulations, the model generates the observed employment distribution across manufacturing establishments in India. In a counterfactual exercise, removing the regulations increases aggregate output per worker by 2.3% and also increases labor productivity in agriculture relative to manufacturing by 4%. We find that labor regulations in manufacturing have a detrimental effect on the productivity of the agricultural sector and hence impede the process of structural transformation.

Suggested Citation

  • Wenbiao Cai & Manish Pandey, 2012. "Size-Dependent Labor Regulations and Structural Transformation in India," Departmental Working Papers 2012-03, The University of Winnipeg, Department of Economics.
    • Handle: RePEc:win:winwop:2012-03
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    Cited by:

    1. Cai, Wenbiao, 2015. "Structural change accounting with labor market distortions," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 54-64.
    2. Ravi Kanbur, 2017. "Informality: Causes, consequences and policy responses," Review of Development Economics, Wiley Blackwell, vol. 21(4), pages 939-961, November.
    3. Wenbiao Cai, 2019. "Technology, Policy Distortions, And The Rise Of Large Farms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(1), pages 387-411, February.

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    More about this item

    JEL classification:

    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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