The Effects of Employment Protection Legislation on Indian Manufacturing

Working Papers

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CDDRL Working Papers

January 2009

No 96 Bhattacharjea Effects of employment protection

This paper summarizes and extends my earlier critique (Bhattacharjea, 2006) of the empirical literature on labour regulation and industrial performance in India. I now focus only on the impact of legal restrictions on temporary layoff, permanent retrenchment and plant closures. After summarizing my earlier paper, I describe in detail the variability of employment protection regimes across Indian states attributable to court judgments, a key factor which other authors have ignored.

I hypothesize that firms may adapt to restrictions on labour flexibility thru fragmentation and outsourcing, a phenomenon that has not been recognized in the literature. I then draw attention to features of the official industrial statistics which undermine many of the conclusions of earlier studies, and propose an alternative methodology to test the new hypotheses while avoiding these pitfalls. The results of this empirical exercise are inconclusive, but reinforce my skepticism about the literature that tries to relate legal restrictions on labour flexibility to industrial outcomes.

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