Labour market rigidity and total factor productivity: a re-examination of the evidence from India

ABSTRACT

The existing empirical studies concerning labour market rigidity associated with the labour laws in India suggest an adverse impact of rigidity on total factor productivity (TFP). In this paper, we improve upon both the measurement of spatiotemporal variation in labour market flexibility and plant-level TFP from production function estimates in the presence of institutional rigidity in labour inputs adjustment due to job security legislation based on the recent advancement in the literature. We use an unbalanced panel of manufacturing plants from the Annual Survey of Industries panel data from 1999–2000 to 2016–17 to analyse the relationship between labour market rigidity/flexibility and TFP. We find that establishments that fall under the purview of job security legislation have higher productivity than those outside the ambit of job security legislation. The results suggest that rigidity associated with job security provisions does not harm TFP, and higher flexibility is negatively associated with TFP. However, we find considerable heterogeneity in the flexibility–TFP relationship across various industry groups. The heterogeneity in the flexibility–TFP relationship suggests that flexibility-inducing labour policy may improve TFP in some industries and, at the same time, decrease it in others.

KEYWORDS:

• Labour market flexibility
• total factor productivity
• organised manufacturing
• labour policy
• India

JEL CLASSIFICATION:

• J08
• J88
• L51
• L52
• L60
• D22

Acknowledgments

We thank the two anonymous referees and the Editor of the Journal for their helpful comments, which helped us significantly improve the paper. An earlier version of this paper was presented at the 63^rd Indian Society of Labour Economics Conference held at Itanagar, Arunachal Pradesh, during 1–3 March 2023. The authors thank the participants and discussants of the conference presentation for their valuable feedback.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Availability of data

Available publicly through MOSPI, Central Statistical Office, New Delhi, India.

Notes

1. The detailed list of IDA amendments by various states is available through email correspondence with the authors.

2. Till 2014–15, ASI extended its coverage to the entire Factory Sector with factories registered under the Sections 2(m)(i) and 2(m)(ii) of the Factories Act, 1948, and the Bidi & Cigar Workers (Conditions of Employment) Act, 1966. From 2015–16 onwards, the coverage of ASI is extended to include factories with 100 or more employees not registered under Sections 2(m)(i) and 2(m)(ii) of the Factories Act 1948 but registered under the Companies Act. 1956, Factories Act. 1948, Shops and Commercial Establishment Act, Societies Registration Act, Cooperative Societies Act, Khadi and Village Industries Board, and Directorate of Industries.

3. The GVA values calculated from the ASI panel data rounds, from 1999–2000 to 2014–15 (except 2000–2001), provided initially by the Central Statistical Office (CSO), contained an error. It is a standard practice to match the aggregate value generated from the unit level data to the corresponding published values provided by the CSO. The value of the GVA variable provided in the unit level panel data was not aggregating to match the published results. We found out that the underestimation was due to the data entry error in one of the components of GVA in Block-G: Other Output/Receipts (elements G2, G3, and G4) of the schedule. We brought this to the notice of CSO and received the corrected values for G-block for various rounds, which then matched with the published results. We suggest other researchers check and compare the values when using ASI panel data.

4. Real value of capital is measured as Fixed capital as reported in ASI deflated by WPI of Machinery and Transport Equipment.

5. The states included in the analysis are Himachal Pradesh, Punjab, Uttaranchal, Haryana, Delhi, Rajasthan, Uttar Pradesh, Bihar, Assam, West Bengal, Jharkhand, Odisha, Chhattisgarh, Madhya Pradesh, Gujarat, Maharashtra, Andhra Pradesh, Karnataka, Goa, Kerala, Tamil Nadu, Telangana. The dropped states and Union territories have significantly less share of manufacturing industries, and hence, their exclusion is not a cause of concern.

Additional information

Funding

The authors received no specific funding for this work.