Employment Protection Legislation and Plant-Level Productivity in India

Sean Dougherty, Verónica C. Frisancho Robles, Kala Krishna

NBER Working Paper No. 17693
Issued in December 2011
NBER Program(s):   ITI   PR

Using plant-level data from the Annual Survey of Industries (ASI) for the fiscal years from 1998-99 through 2007-08, this study provides plant-level cross-state/time-series evidence of the impact of employment protection legislation (EPL) on total factor productivity (TFP) and labor productivity in India. Identification of the effect of EPL follows from a difference-in-differences estimator inspired by Rajan and Zingales (1998) that takes advantage of the state-level variation in labor regulation and heterogeneous industry characteristics. The fundamental identification assumption is that EPL is more likely to restrict firms operating in industries with higher labor intensity and/or higher sales volatility. Our results show that firms in labor intensive or more volatile industries benefited the most from labor reforms in their states. Our point estimates indicate that, on average, firms in labor intensive industries and in flexible labor markets have TFP residuals 14% higher than those registered for their counterparts in states with more stringent labor laws. However, no important differences are identified among plants in industries with low labor intensity when comparing states with high and low levels of EPL reform. Similarly, the TFP of plants in volatile industries and in states that experienced more pro-employer reforms is 11% higher than that of firms in volatile industries and in more restrictive states; however, the TFP residuals of plants in industries with low labor intensity are 11% lower in high EPL reform states than in states with lower levels of EPL reform. In sum, the evidence presented here suggests that the high labor costs and rigidities imposed through Indian federal labor laws are lessened by labor market reforms at the state level.

download in pdf format
   (451 K)

email paper

This paper is available as PDF (451 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17693

“Employment Protection Legislation and Plant-Level Productivity in India” With Sean Dougherty and Verónica Frisancho Robles. NBER Working Paper No 17693. Forthcoming India Policy Forum.

Users who downloaded this paper also downloaded these:
Frisancho and Krishna w17727 Affirmative Action in Higher Education in India: Targeting, Catch Up, and Mismatch
Harrison, Martin, and Nataraj w16733 Learning Versus Stealing: How Important are Market-Share Reallocations to India's Productivity Growth?
Hasan, Mitra, and Ramaswamy w9879 Trade Reforms, Labor Regulations and Labor-Demand Elasticities: Empirical Evidence from India
McMillan and Rodrik w17143 Globalization, Structural Change and Productivity Growth
Card and Cardoso w17694 Can Compulsory Military Service Increase Civilian Wages? Evidence from the Peacetime Draft in Portugal
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us