The Impact of Lifting Firing Restrictions on Firms : Evidence from a State-Level Labor Law Amendment
Stringent employment protection laws are argued to be a cause of reduced employment flexibility, slower growth and increased reliance on temporary employment contracts in many countries, including India. In 2014, the Indian state of Rajasthan amend...
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| Language: | English |
| Published: |
Washington, DC: World Bank
2022
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| Online Access: | http://documents.worldbank.org/curated/en/099751205092221721/IDU0de829349018930480b0a4ba0e627b6576af2 http://hdl.handle.net/10986/37417 |
| Summary: | Stringent employment protection laws
are argued to be a cause of reduced employment flexibility,
slower growth and increased reliance on temporary employment
contracts in many countries, including India. In 2014, the
Indian state of Rajasthan amended labor laws to increase
employment flexibility in firms. The most discussed of the
amendments lifted the requirement for government approval
for retrenching regular workers in medium-size factories.
This paper first conducts a synthetic control analysis of
the policy change using state-level panel data from 1980 to
2018, finding no evidence of an impact on aggregate
manufacturing employment and output. The paper then uses
firm-level panel data to conduct a difference-in-differences
analysis of the main amendment, exploiting its
size-dependent feature for identification. This analysis
finds that the amendment reduced the implicit regulatory
cost of labor in firms, but there is no discernible impact
on their total employment and output. The amendment also led
to firms substituting temporary (“contract”) workers for
permanent workers. This collateral impact is contrary to the
expectation that easing the flexibility of permanent
employment arrangements would make them more attractive to firms. |
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