Can Labour Regulation Hinder
Economic Performance?
Evidence from India
Timothy Besley and Robin Burgess
PRESENTED BY:
TS’OLO S. LEHATA & EDMUND OFEI
Outline
 Introduction
 Methodology and Results
 Robustness Tests
 Extensions
 Conclusions
 Remarks
Introduction
 Aim: To study the role of labour market regulation in
explaining manufacturing performance in Indian
states between 1958 and 1992
 Contribution: Sheds light on the long standing
debate on the role of the state in promoting or
hindering economic development
 It adds to a growing body of sub-national evidence of
labour regulation effects on economic performance.
Manufacturing in India
 Consists of 2 sub-sectors: Registered (9% of output)
& unregistered (5%) of output
 Saw an overall growth of 3% from 1960 to 1992
 Differences across states: West Bengal moved from
1st to 7th while Andhra Pradesh grew by 7%
Labour Regulation in India
 India has a central industrial regulation
 Industries (Regulation and Development) Act of 1951
 No formal amendments to this act at the state level
 Common set of industrial policies except in the area
of industrial relations (Industrial Disputes Act of 1947)
for registered firms
Data
 Data on labour regulations comes from 113
amendments of Industrial Disputes Act of 1947
 pro-worker 1, pro-employer - 1 or neutral 0
 This Act applies to formal manufacturing sector,
included in Annual Survey of Industries, ASI
 ASI provides data on output, employment, wages,
investment and productivity at state level
Amendments Coding
 A sample pro-employer reform from Andhra Pradesh in 1987
 “If in the opinion of the state government it is necessary or
expedient for securing the public safety or the maintenance
of public order or services or supplies essential to the life of
the community or for maintaining employment or
industrial peace in the industrial establishment it may issue
an order which (i) requires employers and workers to
observe the terms and conditions of an order and (ii)
prohibits strikes and lockouts in connection with any
industrial dispute.” GETS CODED MINUS ONE IN THE DATA
 A sample pro-worker reform from West Bengal in 1980
 “The limit of 45 days for workers receiving 50% of their
wages upon being laid off (if they worked for more than a
year) is removed.” GETS CODED ONE IN THE DATA
Methodology
 classifies states as either “treatment” or “control”
states.
 Control States do not experience any amendment
activity in a pro-worker or pro-employer direction
over the 1958-1992 period
 They develop an econometric analysis to see whether
regulation explains manufacturing patterns over
time
 Uses both time and cross section variation of labour
regulation (common regulation provides best testing
ground)
Labour Regulation as a Proxy for IR
Theoretical Considerations
 We can reasonably suppose that all firms operate in
a common set of factor markets whose prices they
treat as parametric.
 Assume firms produce a common manufactured
good
 Then labour regulation can affect productivity via:
-Relative Price Effect and
-Expropriation Effect
Basic Estimation
Yst = αs + βt + μrst−1 + ξXst + εst
Where:
Yst= logged outcome variable in state s at time t.
rst= A Regulatory Measure ( Lagged one period
to capture the GAP between enactment and
implementation.)
Xst = Other Exogenous Variables.
αs = State Fixed Effects ( To capture state
specific factors)
βt = Year fixed Effects
Basic Estimation
 Panel Data Regression
 Pooled OLS
 Impact of Labour regulation on measures of output is
investigated.
 Measures of output: State output, Agricultural , Non-
Agricultural, Construction, Total manufacturing ,
Registered manufacturing, Unregistered manufacturing
outputs per capita.
Results: Basic Estimation
 Effect on output is higher for unregistered
manufacturing firms than for registered
manufacturing firms.
 This suggests that labour regulation deter formal
registration and encourages firms to remain in the
informal sector.
Robustness Test
 Economic Control Variables, Political Complexions,
State time trends, and regressions without West
Bengal are introduced.
 Other performance measures different from output
are used to ascertain the validity and reliability of the
output results.
Robustness Test
 Other measures of Performance:
 Employment of Registered Manufacturing
 Daily employment in registered manufacturing
 Earnings per worker in registered manufacturing
 Fixed capital formation
 Number of factories per capita
 Value added per employee
Robustness Test: Conclusion
 Labour Regulation is correlated with Poor Economic
Performance in the registered manufacturing sector
 Labour regulation leads to the rise of an informal
sector.
Robustness Test: Implications
 Two states at the extreme ends:
 Andhra Pradesh (A Pro-Employer State) would have
registered manufacturing output, 72% of what she
had in 1990 and 73% of her employment rate in
1990.
 West Bengal (A Pro- Worker State) would have had
manufacturing output 24% higher than her 1990
levels and employment, 23% higher had she not
passed pro-worker amendments.
Potential Endogeneity
 States with larger vested interests in manufacturing
may have experienced more pressure to pass proworker amendments hence slower growth
 political insiders can see development as a threat to
their rents and hence lobby for protection- Krusell
and Rios-Rull (1996)
 Reverse causality possibility
Vested interests measure
 The average level of union membership (union
members divided by population) before 1977
 Labour regulation is then regressed on the
difference between registered manufacturing in a
‘treatment’ state and that in its matched ‘control’
state while also including match dummies in the
regression.
 The results confirm baseline results (TBS), against
initial condition effects concerns
An extension: IV Approach
 Most of the labour regulation changes take place
after 1977 Following Prime Minister Indira Gandhi’s
declaration of a state of emergency (suspending
democratic institutions)
 The direction that post-1977 amendments took
would depend, in part, on the importance of the
initial vested interests (as proxied by union
membership)
 Interact Union Membership with a Dummy=1 for
post 1977
IVs
 Historical patterns of land tenure as an IV
 There is a possibility that it is correlated with
contemporary patterns of political development
 Areas dominated by non-landlord based revenue
collection have larger concentrations of regional parties
today...benefited from SOE
 Interact such districts with a Dummy variable which
equals one after 1977 to mark the persistent shift in
political control after the state of emergency
Disaggregated Evidence
 Indian states have quite different manufacturing
bases
 Hence, there might be a suspicion that patterns of
specialization affect the direction of regulation in
ways that could bias the results
 E.g early industrializing states might specialize in
slow growing labour intensive industries
 In response, the results on disaggregated data
which look at the impact of labour regulation at the
3-digit industry level for the period 1980-97 are
presented
 Investigate the link between performance and
labour regulation
Welfare Consequences
The Effects of the Labour Regulations on Poverty in
India.
Rationale:
 It may give a sense of where the burden of the
previously identified effects have been felt.
Welfare Consequences
 Poverty Data from Ozler, Datt, and Ravallion (1996)
is used
 Overall Poverty headcount in India is decomposed
into two : Urban Poverty and Rural Poverty
 The direct effect of Poverty is expected to depend on
the extent to which the earnings of the poor are
derived from Registered Manufacturing
Welfare Consequences
 State Output is also disaggregated into Agricultural,
Registered Manufacturing, and “Other” ( NonAgricultural and Non-Manufacturing) outputs
 The correlation between Poverty rates and the
different components of state output in India is
looked at
Welfare Consequences
 For Urban Poverty: There is a look at the effect of
regulation on Registered Manufacturing, and
“Other” outputs on poverty since Agricultural and
Unregistered Manufactured outputs are not
significantly correlated with urban poverty.
 For Rural Poverty: A look at Unregistered output and
not Registered manufacturing output since it has no
significant correlation with poverty.
Welfare Consequences: Results
 It is apparent that the coefficient on labour
regulation in Urban poverty headcount regressions
remain high across all specifications but for that
which includes State time trends.
Welfare Consequences: Implication of results
 Andhra Pradesh: Urban Poverty of 112% of her 1990
levels. ( i.e. 640,000 more Urban Poor People in
1990 without the reform.)
 West Bengal: Urban Poverty of 11% lower in 1990.
(i.e. 520,000 less urban poor people without the
reform)
 Therefore No Evidence that Pro-worker Labour
market policies redress the unfavorable balance of
power between Capital and Labour and thus a
progressive effect on income distribution.
Conclusion: Recap of Findings
 Pro-worker regulation is associated with lower levels
of Investment, Employment, Productivity, and
Output in registered manufacturing.
 Pro-worker regulation increased informal sector
activity.
 Pro-worker regulation is associated with rising urban
poverty.
Conclusion
 As such, there is little evidence that Pro-worker
regulations have Promoted the interest of Labour.
INSTEAD, it has been a constraint on growth and
poverty alleviation.
 Intention behind the Labour reform in India was
wrong!!
Remarks
 India Manufacturing Today: 16% of GDP
 Improved by 3 places to 6th in largest manufacturing
countries
 “Make in India” Drive by President Modi (target 25%
of GDP by 2025 and 90mil domestic jobs)
 (US$ 225.32 billion in investment commitments at
MII initiative in Feb 2016
 In Sept 2016 FDI in electronic manufacturing has
reached an all-time high of US$ 18.36 billion
The End.
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