CAN LABOUR REGULATION HINDER

ECONOMIC PERFORMANCE?

EVIDENCE FROM INDIA.Timothy Besley and Robin Burgess, Quarterly Journal of

Economics, February 2004

• India’s industrial regulation is frequently cited in explanations of India’s poor growth performance over this period.

• India’s manufacturing sector did not increase as much as other Asian countries during the period of 1960- 1995. Manufacturing as a share of GDP grew from:

• 9% to 24% of GDP in Indonesia• 8% to 26% in Malaysia• 12.5% to 28% in Thailand• 13% to 18% in India

• India also did not experience a decrease in absolute poverty compared to other Asian countries.

• Levels of labour market regulation measured using the Industrial Disputes Act of 1947.

The role of labour market regulation in explaining manufacturing performance in Indian states between 1958

and 1992.

Labour regulation

• Manufacturing comprises UnRegistered and Registered sector• The Central and the State governments have jurisdiction over

labour regulation legislation• Our econometric research will study the differences between

the groups of “Treatment” and the groups of “Control”.

Theoretical Consideration

• Two ways which labour regulation affects economic performance:• Relative Price effect• Expropriation effect

• The workers benefit from labour regulation is not clear.

Results of the Econometric Analysis: The impact of Labor Regulations on Output

Variable correlated with LR: Nonagricultural Output, includes manufacturing, is NEGATIVELY correlated

(-0,034) Manufacturing Output is stronger NEGATIVELY correlated, (-0,073) Registered Manufacturing Output confirm the negative effect, (-0,186) Unregistered Manufacturing has had a POSITIVE impact from the Pro Worker

regulations

The impact of Labor Regulations on Manufacturing Performance

Assesses the robustness of Registered Manufacturing Output is NEGATIVELY correlated to Pro Worker Regulations adding controls.

• In column 3 considered the Political Outcomes of states. Hard Left depresses growth in registered manufacturing ( -0,104)

• Columns 5 and 6 excluding West Bengal ( most pro-worker state)

The impact of Labor Regulations on Different Performance Measures in R.M.

• Columns 1 and 2 two measures of Manufacturing Employment, both NEGATIVELY and SIGNIFICANTLY correlated to LR

• No. of Factories is NEGATIVELY correlated• Fixed Capital and Value Added, both negative, are consistent with the EXPROPRIATION

EFFECT

Considering States Vested Interests …Measures as Average level of Union membership. Two way: •Match states experienced Labor market reforms with Control states•Regress LR on difference between RM in Treatment states and Control statesResults:• In the first 3 columns confirmed the NEGATIVE effect of LR on RM Output (-0,132) and

POSITIVE effect on UnRM Output (0,310), NEGATIVE effect on Employment in RM (-0,064)

• These results increase confidence that poor performance in RM was a Consequence rather than a Cause of LR

Disaggregated Evidence: look at the impact of LR at 3-digit Industry level between 1980-1997

Inclusion of 3-digit Industry level to consider different manufacturing bases of Indian states. The results confirms the findings, Pro Worker LR has NEGATIVE impact on

• RM Output• RM Employment• No. RM• Fixed Capital and Value Added (consistent with the EXPROPRIATION EFFECT)

Welfare Consequences

What is the effect of Labour Regulation on poverty?

• As Registered Manufacturing firms are typically located in urban areas and unregistered firms in both rural and urban, we would expect…

• Pro worker regulation to be positively correlated with poverty in urban areas, and for there to be no real correlation with rural areas.

• Besley and Burges did indeed find this to be the case• Pro worker legislation had no effect on overall poverty but had a significant

impact on Urban poverty.

Welfare Consequences

• The economic significance of this can be gauged by examining what urban poverty would have looked like in 1990 had there been no amendments.

• The model predicts that without pro employer reforms Andhra Pradesh would have been home to an Urban poor population of 112% of its 1990 level.

• Meaning that 640.000 have been saved from poverty by the pro employer reforms.

• Similarly, without pro worker reforms West Bengal would have had an urban poor population 11% smaller than it did.

• Meaning 520000 people have been condemned to poverty by the pro worker reforms.

• Thus, despite progressive intentions, it does appear to be true that pro worker reforms can work against the poor!

This paper has examined the link between regulation and long-run development The results leave little doubt that regulation of labour disputes in India has had significant effects. •Regulating in a pro worker direction is associated with lower levels of:

• Investment• Employment• Productivity• Output in Registered Manufacturing

•Has also increased Informal sector activity.•Labour Regulation has been a constraint on Growth and Poverty alleviation. •Suggests attempts to redress the balance of power between capital and labour can end up hurting the poor.

Conclusion