Labour Laws and Informalisation of Employment: Panel Evidences from Indian Formal Manufacturing Sector

Abstract

Labour law is widely being cited as one of the principal factors creating rigidities in industrial business and, thereby, holding back productivity growth and employment generation. However, a substantial chunk of literature disputes the "rigidity argument" on the ground that there has been a sharp growth in informal employment, which is often considered as flexible labor input as it does not fall under the purview of what is believed to be directly related with rigidity -employment protection legislation (EPL). However, given empirical evidence showing that informal worker is less productive as compared to its formal (regular) counterpart, the question arises: what motivates the employer to employ less productive worker? Using three-dimensional panel data on 28 industrial sectors between 1999-2000 and 2007-2008 across 13 states of India, our results show that the incidence of informal employment is directly linked with EPL, volatility, and labor bargaining power. We utilize instrumental variable two stage least square (IV 2SLS) to overcome the endogeneity issues. The results are robust.

What Role Does EPL Play in Wage Determination under Segmented Labour Markets? A State-level Analysis from India’s Formal Manufacturing Sector

“…The trajectory of contract labour share is relatively higher in pro-worker States than the pro-employer States, as shown in Figure 6. A similar observation is made in previous literature also (Chaurey, 2015; Sapkal, 2016; Singh et al, 2019; Sofi & Sharma, 2015a). Can it be attributed to labour laws?…”

“…Employers counter the strictness in the overall EPL, including the hiring and firing laws, by replacing permanent workers with contract workers. Contract workers, who fall outside the purview of both hiring/firing laws and collective bargaining, are subject to wage discrimination, as indicated by ASI data discussed in the previous literature (Sofi & Sharma, 2015b). Previous literature reports a higher incidence of contractualisation in states with a stricter EPL.…”

“…The empirical studies published in the recent years from India include Hasan et al (2021), Roy et al (2020), Schwab (2020), Roychowdhury (2018), Singh et al (2019), Sofi and Kunroo (2018), Sofi et al (2016), Sofi and Sharma (2015a and 2015b), Sapkal (2016), Chaurey (2015), Roychowdhury (2014), Adhvaryu et al (2014), Dougherty et al (2013/2014), Maiti (2013), Saha et al (2013), Goldar and Agarwal (2012), Deakin and Sarkar (2011), Fragenas (2010) and Besley and Burgess (2004). These studies have generally focused on productivity, output and the labour demand effects of EPL.…”

“…Since contract workers are excluded from EPL, they can be subjected to sudden dismissals and wage discrimination. According to ASI, contract workers receive less than 70 per cent wages of that of their regular counterparts (Sofi & Sharma, 2015b). Moreover, contract workers cannot form labour unions and are usually not registered with existing labour unions.…”

“…This is a worrying trend since it can have negative effects not only for the workers but also for the businesses in the long run. Previous empirical research shows that contractual employment in the Indian manufacturing sector has a negative effect on labour productivity or efficiency, since it does not provide motivation for investment in training and skill enhancement (Maiti, 2013; Sofi & Sharma, 2015b). On the other hand, contractual employment can negatively affect workers since it does not fall within the purview of most of labour laws, and is hence considered as informal employment.…”