Abstract
This paper delves into the debates concerning labour market flexibility in India and suggests an improved measure of labour market flexibility to overcome the shortcomings of the existing measures. A state-wise time-variant composite index considering both de jure and de facto indicators of flexibility is constructed to account for the stringency of regulation of hiring and firing practices that affect labour adjustment mechanism of organised manufacturing sector firms in India. The newly built index reaffirms the criticism and limitations of the existing measures which solely rely on de jure indicators by pointing out that de jure measures alone are highly misleading and insufficient to identify a state’s labour market flexibility status. The index has been put to application in examining the role of spatial variation in labour market flexibility in explaining the difference in employment growth in India’s organised manufacturing sector. The paper finds no evidence in support of a statistically significant effect of spatial variation in flexibility in explaining the variation in employment growth. Interestingly, the paper demonstrates that employment elasticity of growth was lower in “flexible” states as compared to the “rigid” states, indicating that greater flexibility is associated with a weaker employment performance.
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The complete list, along with the sources and interpretation of the amendments to the IDA act used in the study, has been shared as supplementary documents with the paper. The data are also available to anyone upon request made to the authors via e-mail correspondence.
The observations belonging to the manufacturing sector (NIC 3-Digit code 151 to 372) are only considered for the analysis to restrict the study to the manufacturing sector.
The Factories Act defines a factory as “any premises” where a manufacturing process has been carried out involving ten or more workers with the aid of electricity, or twenty or more workers without power on any day in the past 12 months. In addition to units covered under the Factories Act, units registered under the Beedi and Cigar Workers (Conditions of Employment) Act, 1966, are also surveyed in ASI.
Five industrially backward states/UTs include Manipur, Meghalaya, Nagaland, Tripura and Andaman and Nicobar Islands.
Fixed capital as reported in ASI deflated by WPI of machinery and transport equipment.
A static linear panel data model which controls for time-invariant individual-specific unobserved effects can be estimated using two types of panel data estimation procedures, namely the fixed effect model (FE) and the random effect model (RE). The choice of the appropriate model between a FE and a RE is guided by using the Hausman test (Wooldridge 2002). The result of the Hausman test for the balanced and unbalanced data sets suggested the use of FE as the suitable model.
The flexible states are assigned a value equal to one and zero otherwise.
There is a possible threat of collinearity between the choice of technology and the labour market flexibility index. The rise in capital intensity of production process has been a uniform phenomenon in both the rigid and the flexible states. We performed the collinearity diagnostic test, which ruled out the possibility of a severe threat from collinearity between the two variables.
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Roy, G.K., Dubey, A. & Ramaiah, S. Labour Market Flexibility and Changes in Employment: Spatial and Temporal Evidence from Indian Manufacturing. Ind. J. Labour Econ. 63, 81–98 (2020). https://doi.org/10.1007/s41027-020-00207-8
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DOI: https://doi.org/10.1007/s41027-020-00207-8