How competitive is product market regulation in India?

Conway, Paul; Herd, Richard

doi:10.1787/eco_studies-v2009-art6-en

“…12 The OECD labor reform index has been re-scaled so that 0 corresponds to the lowest level of reform and 1 indicates the highest level of reform at the state level. and (d) show that, irrespective of the industry's labor usage, the distribution of labor productivity 13 Let the subscripts 0 and 1 correspond to outcomes in inflexible and flexible labor markets, respectively. Output differences can be decomposed in the following way:…”

Section: Basic Patternsmentioning

confidence: 99%

Employment Protection Legislation and Plant-Level Productivity in India

Dougherty

¹

,

Robles

²

,

Krishna

³

2011

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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.

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“…Although the country has recorded impressive output growth rates since the 1970s, the share of manufactures in total output has remained between 14% and 18%. Though infrastructure and product market regulation have been major challenges, strict labour laws have been blamed in particular for the poor performance of large-scale labour intensive manufactures despite India's labour abundance (Panagariya, 2008;Conway and Herd, 2009;Dougherty et al, 2009). According to the Indian Ministry of Commerce and Industry (2011), the top five goods exported during 2010-11 represented almost 50% of the country's total exports and they were all relatively capital intensive goods such as petroleum products, gems and jewelry, transport equipment, machinery and instruments, and pharmaceutical products.…”

Section: Introductionmentioning

confidence: 99%

“…However, most of this "advantage" seems to be explained by the evolution of the extensive margin. On average, intensive margin differences explain about 36% of the output gap and 9% of the employment differences between flexible and inflexible states 13.…”

mentioning

confidence: 99%

Employment Protection Legislation and Plant-Level Productivity in India

Dougherty¹,

Robles²,

Krishna³

2011

OECD Economics Department Working Papers

4

0

View full text Add to dashboard Cite

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 labour 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 labour regulation and heterogeneous industry characteristics. The fundamental identification assumption is that EPL is more likely to restrict firms operating in industries with higher labour intensity and/or higher sales volatility. Our results show that firms in labour intensive or more volatile industries benefited the most from labour reforms in their states. Our point estimates indicate that, on average, firms in labour intensive industries and in flexible labour markets have TFP residuals 14% higher than those registered for their counterparts in states with more stringent labour laws. However, no important differences are identified among plants in industries with low labour 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 labour 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 labour costs and rigidities imposed through Indian federal labour laws are lessened by labour market reforms at the state level. La législation sur la protection de l'emploi et la productivité des entreprises en Inde À l’aide de données au niveau des entreprises, tirées de l’enquête annuelle sur les industries (ASI) pour l’ensemble des exercices comptables entre 1998-99 et 2007-08, cette étude présente des séries chronologiques pour des États indiens mettant en lumière l’incidence de la législation sur la protection de l’emploi (LPE) sur la productivité totale des facteurs (PTF) et la productivité du travail dans les entreprises indiennes. L’incidence de la LPE est déterminée à partir d’un estimateur de la différence des différences inspiré de Rajan et Zingales (1998), qui tire parti des différences de réglementation au niveau des États et des caractéristiques hétérogènes des secteurs d’activité. L’hypothèse de base retenue pour la détermination de l’incidence est que la LPE est plus susceptible de peser sur les entreprises exerçant leurs activités dans un secteur à forte intensité de main-d’oeuvre et/ou dont la volatilité des ventes est élevée. Nos résultats montrent que les entreprises relevant de secteurs à forte intensité de main-d’oeuvre ou plus volatils sont celles qui ont le plus tiré profit des réformes du marché du travail mises en place dans leurs États. Nos évaluat...

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“…The index is scaled from zero to one, and an Indian state with a higher index is more advanced in labor market reforms at the time of the study. The product market reform ("PMR") index is provided by OECD's Conway and Herd (2009), computed in 2006, and again time invariant. A higher index means the regulatory environment is more supportive of competition.…”

mentioning

confidence: 99%