Labour market flexibility in Indian manufacturing: A critical survey of the literature

This paper critically reviews the growing literature on the relationship between India’s supposedly ‘restrictive’ labour laws and poor performance on a range of industrial and social indicators. I first summarize the main claims of this literature, and the construction of the indices that it uses to measure inter-state differences in labour regulation. I show, on the basis of a detailed textual analysis of the relevant laws, that the original authors made multiple errors in coding the legal provisions, and that later contributors to the literature misinterpreted the resulting indices as measures of labour market flexibility. I then highlight some econometric issues that undermine their findings, and the difficulties involved in replicating their analyses with a ‘corrected’ and updated indicator. In the course of this discussion, I briefly describe some very recent changes in the labour laws. I go on to point out some flaws in recent papers: they inaccurately capture the employment thresholds at which different sections of the law become applicable; they ignore reasons other than labour regulations for why firms choose to stay small; and they ignore other forms of flexible employment while creating a misleading dichotomy between contract workers and ‘permanent’ workers. I conclude by summarizing evidence of growing de facto flexibility in Indian industry and deteriorating labour market outcomes for workers, without any de jure changes in the regulatory framework.