CAN LABOUR

REGULATION HINDER
ECONOMIC
PERFORMANCE?
EVIDENCE FROM INDIA.
Timothy Besley and Robin Burgess, Quarterly Journal of Economics,
February 2004
Indias industrial regulation is frequently cited in explanations of Indias
poor growth performance over this period.
Indias 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 states
Results:
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