Are De Jure Labor Laws Absolute? Formal Manufacturing in India

• Main Author: GHUMMAN, Gurmeet Singh
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: economic development; employment; labour economics; labour market; productivity; wage; Labor and Employment Law; Labor Economics
• Online Access: https://ink.library.smu.edu.sg/etd_coll/5; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1004&context=etd_coll
• Institution: Singapore Management University

We investigate the view that de facto labor market conditions are important in evaluating the effects of labor institutions in developing countries where enactment does not necessarily imply enforcement. Using India as a case study we empirically investigate the effects of labor markets on the organized manufacturing sector from 1970 to 1997. Recognizing that the state can intervene in the outcome of labor disputes we construct a measure to proxy the degree of the state legislature's prejudice towards pro-worker causes. We argue that leftist and communist political parties can interfere in the resolution of disputes in favor of workers through conciliation, arbitration, and the adjudication machinery, and so we use the share of seats won by left parties as a proxy for how supportive the state legislature is towards workers' concerns. Our findings suggest that manufacturing output in the formal sector reduces with a higher presence of the left in the state legislature, and this effect is greater in states enacting pro-worker laws. In addition we also find that the intensity of worker usage is adjusted downwards, and factory registration declines with a greater presence of the left and is also intensified when states amending laws favoring workers. A more pro-worker state legislature itself however, does not significantly affect employment, worker productivity, fixed capital stock, and investment. Our results are most robust from 1980 onwards as it coincides with the changes in the Indian polity. We get some indication that the insignificance of labor market conditions on employment and wages is possibly due to the left parties in West Bengal functioning differently than parties in other states. In addition, disaggregate data confirms our main findings and reveals that the average factory size reduces in labor intensive sectors with left-leaning parties, and this effect is worse in states with pro-worker labor laws.