How Labor Regulations and Economic Policies Shape Industries and Lives: Insights from India

A doctoral thesis by IIES graduate student, Sreyashi Sen, has delved deep into the complexities of labor regulations, job security provisions, and capital market frictions to understand their effects on India's industrial performance and economic inequality. By examining state-level labor reforms, the impact of job security laws on plant size and efficiency, and the long-term economic outcomes of initial wealth conditions in the presence of capital market imperfections, the three chapters in the thesis provide a comprehensive view of how policies and market imperfections influence industrial growth and societal prosperity. Here’s a closer look at the findings and their implications for policymakers and stakeholders.


Labor Regulations and Industrial Performance: Evidence from India

The first paper studies Indian state-level labor reforms between 2003 and 2016, and provides a nuanced understanding of how different types of labor regulations affect the process of industrial development. Using a novel design to investigate the impact of state level legislative changes to the Industrial Disputes Act of 1947, Sreyashi finds that pro-employer reforms increase plant output, wage bill and average worker earnings in the formal manufacturing sector by 2.8%, 2.1% and 2.1% respectively. Contrary to previous work, Sreyashi finds that pro-worker reforms do not have large adverse effects on plant performance. There is also evidence of heterogeneity in the effects of different types of pro-employer reforms, with place-based reforms targeting certain industrial zones proving to be particularly effective in boosting industrial performance. 


The Impact of Job Security Regulations on Plant Size in India

How do job security laws which impose additional regulatory requirements on plants with than a 100 workers affect the number of plants and their performance at the key regulatory threshold? Analyzing plant level data data from 1998 to 2018 in the formal manufacturing sector in India, Sreyashi finds no significant discontinuities in the size distribution of plants at the 100 worker threshold. However, using a sharp regression discontinuity design, Sreyashi provides suggestive evidence of misallocation of resources with declines in plant output as a result of the regulatory provisions at the 100 worker threshold. 


A Quantitative Study of Poverty Traps

In the final paper, Sreyashi delves into the long-term economic implications of initial conditions when there are imperfections in capital markets. She uses a model of occupational choice with financial frictions to explore how starting wealth levels can lead to persistent economic disparities. She finds that individuals with different initial wealth levels can end up in vastly different economic states, illustrating the concept of individual level poverty traps. Sreyashi’s theoretical framework also exhibits aggregate poverty traps that arise due to general equilibrium effects of wages adjusting to individual occupational choices. For some initial distributions of wealth, economies converge to a high type equilibrium characterised by high wages and productive efficiency, while for other initial distributions, economies stay stuck in low type equilibria characterised by low wages for the many and high entrepreneurial profits for the few. 


Bridging Policy and Practice: Lessons Learned

These chapters collectively highlight the profound impact that labor regulations and initial economic conditions can have on industrial performance and long-term economic outcomes. Pro-employer reforms are associated with positive changes in plant outcomes on average, with interesting patterns of heterogeneity in treatment effects. Pro-worker reforms, on the other hand, do not have meaningful effects on plant outcomes and the evidence rules out large adverse effects. Additionally, the presence of poverty traps under certain theoretical conditions underscores how redistributive policies and financial reform alleviating borrowing constraints can help ensure equitable development. Policymakers can draw valuable insights from these findings to craft strategies that foster industrial growth and mitigate economic disparities.

The thesis “Essays on Markets and Institutions in Developing Countries” can be downloaded and read in its entirety at DiVA:

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Sreyashi will defend her thesis on 13 June at 1:00 pm.

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