Effects of Labour Regulation on Manufacturing Firms in India: A Leximetric Approach

Abishek S. Choutagunta

doi:10.1515/ajle-2019-0007

Article

Effects of Labour Regulation on Manufacturing Firms in India: A Leximetric Approach

Abishek S. Choutagunta

Published/Copyright: June 8, 2019

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From the journal Asian Journal of Law and Economics Volume 10 Issue 1

Abstract

Inefficiencies and rigidities in the supply of inputs caused by strict laws and regulation could lead to distortions in the production structures of firms. These distortions, when magnified, can have adverse effects on the economic performance of a country. The study by Botero et al. (Botero, Juan C., Simeon Djankov, Rafael La Porta, Florencio Lopez de-Silanes, and Andrei Shleifer. 2004. “The Regulation of Labor.” The Quarterly Journal of Economics 119: 1339–1382.) among others, has observed that richer counties with social welfare supports tend to regulate labour less than relatively poorer countries; but, these studies concentrate mainly on country-wide or cross-country data leaving out variations exclusively found in micro-level data. This study fills a gap in the literature by conducting a comprehensive study of the effects of labour laws on output and productivity of manufacturing firms in Indian states. Unlike previous studies which measure the strength of labour regulation by interpreting labour laws, this study measures the same by mining information from case-law citations of labour laws and builds an index of labour litigiousness which proxies for the strength of labour regulation. Results show that labour litigation and industrial disputes have significant negative influences on both output and productivity of manufacturing firms.

Keywords: firm-level; India; labour regulation; manufacturing; productivity

JEL Classification: D22; J08; J58; K31; L51; L52

Acknowledgments

The author thanks Dr. Wiktor Wojciechowski, Dr. Jaroslaw Beldowski, Dr. Shruti Rajagopalan and the participants of the 14^th Annual Conference of the Asian Law and Economics Association for their constructive suggestions. The author would also like to thank Abhiprerna Smit and Aditya Sundaram for their help with the data.

Appendix A

ASI Cleaning Tabulation state-wise

	Original Dataset		Cleaned Dataset		Deviation
State Code	Observations	Percent	Observations	Percent	Observations	Percent
1. Jammu and Kashmir	4772	0.7	2398	0.81	2374	49.75
2. Himachal Pradesh	8664	1.26	3606	1.22	5058	58.38
3. Punjab	37,391	5.46	16,378	5.52	21,013	56.20
4. Chandigarh(U.T.)	2747	0.4	1209	0.41	1538	55.99
5. Uttaranchal	9187	1.34	4050	1.37	5137	55.92
6. Haryana	26,221	3.83	11,164	3.76	15,057	57.42
7. Delhi	17,583	2.57	7392	2.49	10,191	57.96
8. Rajasthan	24,707	3.61	11,916	4.02	12,791	51.77
9. Uttar Pradesh	47,385	6.91	21,238	7.16	26,147	55.18
10. Bihar	9329	1.36	4543	1.53	4786	51.30
11. Sikkim	226	0.03	61	0.02	165	73.01
13. Nagaland	1687	0.25	891	0.3	796	47.18
14. Manipur	1031	0.15	427	0.14	604	58.58
16. Tripura	4687	0.68	2560	0.86	2127	45.38
17. Meghalaya	891	0.13	438	0.15	453	50.84
18. Assam	12,392	1.81	6795	2.29	5597	45.17
19. West Bengal	29,171	4.26	13,431	4.53	15,740	53.96
20. Jharkhand	10,226	1.49	4171	1.41	6055	59.21
21. Orissa	10,452	1.53	4699	1.58	5753	55.04
22. Chattisgarh	9100	1.33	4418	1.49	4682	51.45
23. Madhya Pradesh	17,980	2.62	7816	2.63	10,164	56.53
24. Gujarat	62,266	9.09	26,604	8.97	35,662	57.27
25. Daman and Diu	8182	1.19	3853	1.3	4329	52.91
26. Dadra and Nagar Haveli	7007	1.02	3424	1.15	3583	51.13
27. Maharashtra	80,684	11.77	30,850	10.4	49,834	61.76
28. Andhra Pradesh	62,177	9.07	26,773	9.03	35,404	56.94
29. Karnataka	41,604	6.07	17,627	5.94	23,977	57.63
30. Goa	5179	0.76	2361	0.8	2818	54.41
32. Kerala	23,620	3.45	11,060	3.73	12,560	53.18
33. Tamil Nadu	102,649	14.98	41,826	14.1	60,823	59.25
34. Pondicherry	5845	0.85	2603	0.88	3242	55.47
35. Andaman and N. Island	307	0.04	68	0.02	239	77.85
Total	685,349	100	296,650	100	388,699	56.72

Appendix B

Labour Laws

Part 1: Acts in Consideration

Abbreviation	Act Name	Link to the Full Text of the Act
CLRA	The Contract Labour (Regulation and Abolition) Act, 1970	http://indiacode.nic.in/rspaging.asp?tfnm=197037
ESIA	Employees’ State Insurance Act, 1948	http://indiacode.nic.in/rspaging.asp?tfnm=194834
ESPFPA	Employees’ Provident Funds and Miscellaneous Provisions Act, 1952	http://indiacode.nic.in/rspaging.asp?tfnm=195219
FAC	The Factories Act, 1948	http://indiacode.nic.in/rspaging.asp?tfnm=194863
IDA	The Industrial Disputes Act, 1947	http://indiacode.nic.in/rspaging.asp?tfnm=194714
IEOSA	Industrial Employment (Standing Orders) Act, 1946	http://indiacode.nic.in/rspaging.asp?tfnm=194620
MBA	The Maternity Benefit Act, 1961	http://indiacode.nic.in/rspaging.asp?tfnm=196153
MWA	The Minimum Wages Act, 1948	http://indiacode.nic.in/rspaging.asp?tfnm=194811
PBA	The Payment of Bonus Act, 1965	http://indiacode.nic.in/rspaging.asp?tfnm=196521
PGA	The Payment of Gratuity Act, 1972	http://indiacode.nic.in/rspaging.asp?tfnm=197239
PWA	The Payment of Wages Act, 1936	http://indiacode.nic.in/rspaging.asp?tfnm=193604
TUA	The Trade Unions Act, 1926	http://indiacode.nic.in/rspaging.asp?tfnm=192616

Part 2: Graphs for Act Specific Indices^[9]

Appendix C

Data Description and Sources

Variable	Symbol	Description	Source	Granularity
Total factor productivity	TFP	Total Factor Productivity of the manufacturing unit computed through the OP methodology	Author calculated. Using the data from Annual Survey of Industries (1999–2012)	Unit wise
EBITDA	EBITDA	Earnings Before Interest, Taxes, Depreciation and Amortization of the manufacturing unit
Output	OUTPUT	Value of output of the manufacturing unit	Annual Survey of Industries (1999–2012)
Age	AGE	Age of the manufacturing unit in the sample
Count	COUNT	Number of times the particular manufacturing unit repeats in the dataset. (Each firm has one unique record every year, count gives a better measure of the unit’s survival)
Labour intensity	LABIN	=(Total Expenses on Labour/ Total Value of Output)
Labour intensity dummy	LINT	=1 if (Total Expenses on Labour/Total Value of Output) >0.5; otherwise = 0
Labour inflexibility	LINF	=1 if (ACTINDEX for the observation) < (Mean ACTINDEX for the Year)	Author Calculated.
Criminal cases disposed	CRIMDIS	Court cases where trials were completed and accused convicted on the basis of the Indian Penal Code	National Crime Records Bureau (NRCB) Compiled by CMIE – States of India	State wise
Criminal cases reported	CRIMREP	Incidence of Cognizable crime under the Indian Penal Code reported to the police
Ratio of disposal	CRIMRAT	The Ratio of Criminal Cases Disposed to Total Cases Reported in the Following Year
Mandays lost due to IS/ID/LO	INDDAYS	Number of Mandays lost to Industrial Strikes, Industrial Disputes and Industrial Lockouts	Handbook of Statistices – Labour Bureau – Government of India
Workers involved IS/ID/LO	INDWORK	Number of workers involved in Industrial Strikes, Industrial Disputes and Industrial Lockouts
Wages Lost due to ID/IS/LO	INDWAGE	Amount of wages lost in Industrial Strikes, Industrial Disputes and Industrial Lockouts (millions of Indian Rupees)
Degree of disruption	LABHABOOK	=(INDDAYS/INDWORK)/(INDWAGE)
Act Index	ACTINDEX	Author Constructed – See Appendix B for details	Author Calculated – using case law details from Indian Kannon’s website
Relative Regulation Index	CASEINDEX	Author Constructed – See Appendix B for details
GDP at factor cost	GDPFC	Net State Domestic Product at Factor Cost – State-Wise (at Current Prices) in billions of Indian Rupees	Handbook of Statistices – Labour Bureau – Government of India
Share of manufacturing output in GDP	GDPSH	=(Manufacturing GDP at Factor Cost/GDP at Factor Cost)	Handbook of Statistices – Labour Bureau – Government of India
Index of industrial production	IIP	Index of Industrial Production is a composite index which is based on the measurement of short term fluctuations in the volume of output of a basket of industrial goods over a period of time using a Laspeyere’s Index	Ministry of Statistics and Programme Implementation – Government of India
Population	POP	Population of the State based on the decadal census, interpolated for each of the missing years for each state	Census of India (1991, 2001, 2011) CMIE – States of India
Value of new MFC products	MFC	The total value of all new investment projects (which involve setting up new firms and machinery) announced in the State. (in millions of Indian Rupees)

Appendix D

Empirical Observations

Variable	Observations	Mean	SD	Minimum	Manixmum
Log Output	296,650	17.2191	2.196677	8.798454	28.70566
Log Input	296,650	15.52562	2.671679	3.555348	28.67797
Log Capital	296,650	16.27961	2.487541	−0.6931472	27.77996
Log Labour	296,650	14.66911	1.907895	7.047517	23.74488
Log Raw Material	296,650	15.52562	2.671679	3.555348	28.67797
Log Value Added	296,650	16.36569	2.317263	5.849325	28.09363
Log Investments	171,306	13.80659	2.570574	1.609438	26.42137
TFP Olley Pakes	296,650	4.522155	0.7294377	2.333393	14.93705
Log EBITDA	284,070	16.04274	2.675932	0	28.53947
Labour/Output	296,650	0.1436385	0.1764727	9.27e-06	0.9998495
Capital/Output	296,650	0.4909347	0.248648	1.97e-08	0.999992
Age of Firm	296,650	17.95476	17.27431	1	206
CASEINDEX^a	296,650	0.4470907	0.2211045	0.1480875	1.343419
MFC^b	294,931	151,222	232,227.9	0	1,800,000
GFP Factor Cost	289,312	2,190,517	1,986,161	9964.9	1.20e + 07
Manufacturing Share of GDP	289,312	0.1572406	0.0770918	0.0084206	0.4561972
Population	296,589	6.07e + 07	4.53e + 07	146,886	2.03e + 08
IPC Cases Disposed	271,433	25189.88	27112.4	6	95960
IPC Cases Reported	271,433	102757.7	68406.81	198	220,335
IPC(Reported/Disposed)	271,433	0.2205052	0.1513873	0.0024544	1.855691
Mandays Lost ID/IS/IL	201,323	3689.938	7979.385	8.5	47475.2
Workers Involved ID/IS/IL	201,684	229,477	366853.6	596	1862582
Wages Lost ID/IS/IL	131,734	183.2643	194.3685	0	928.2
((Mandays/Workers)/Wages)	130,834	0.0007694	0.0034947	6.34e-06	0.0674044
CLRA Index*	296,650	0.0346465	0.0152807	0.0172414	0.0784314
ESIA Index*	296,650	0.0373568	0.0190828	0.0139535	0.116144
ESPFPA Index*	296,650	0.040779	0.0512717	0	0.4083333
FAC Index*	296,650	0.0347153	0.0119829	0.0191388	0.0931298
IDA Index*	296,650	0.0358537	0.0132371	0.0146511	0.1047926
IEOSA Index*	296,650	0.0341348	0.0118619	0.02	0.0894569
MBA Index*	296,650	0.0407238	0.0789858	0	1
MWA Index*	296,650	0.0353691	0.0173516	0.0121951	0.1795775
PBA Index*	296,650	0.041311	0.0375771	0	0.2
PGA Index*	296,650	0.0421416	0.0404336	0	0.2407733
PWA Index*	296,650	0.036441	0.0170678	0.012945	0.1067961
Dummy Labour Intensity	296,650	0.0554087	0.2287767	0	1
Dummy Inflexible Labour	296,650	0.6460947	0.478181	0	1
Interaction Labour IntensiveInflexible*	296,650	0.0269914	0.1620585	0	1

^aCase Citation Index, * Act-wise Labour Regulation Index.
^bValue of New Manufacturing Projects Announced.

Part 2: Hausman Specification Test

Part 3: CDF: TFP & Output for Flexible and Inflexible Labour Markets

Appendix E

Observations and Robustness Checks

Variables	Column 1: Output		Column 2: TFP		Column 3: Output
	(1)	(2)	(1)	(2)	(3)	(4)
LINT	0.548***	0.633***	0.0254***	0.0258***	−0.913***	−0.907***
	(0.0127)	(0.0208)	(0.00957)	(0.00961)	(0.0117)	(0.0117)
LABIN		−4.275***
		(0.0350)
LINF	0.00263	0.00208	0.0105***	0.0104**	−0.00672	0.00471
	(0.00293)	(0.00883)	(0.00364)	(0.00418)	(0.00443)	(0.00510)
LINT*LINF	0.0462***	−0.00603	−0.132***	−0.132***	0.126***	0.120***
	(0.0106)	(0.0160)	(0.00974)	(0.00982)	(0.0119)	(0.0120)
CLRA^†				0.356***		0.358***
				(0.0891)		(0.108)
ESIA^†				0.0347		0.0330
				(0.103)		(0.125)
ESPFPA^†				0.0911**		−0.0601
				(0.0356)		(0.0434)
FAC^†				0.342*		0.380*
				(0.188)		(0.229)
IDA^†				−0.167		−0.0947
				(0.177)		(0.216)
IEOSA^†				0.0480		−0.919***
				(0.169)		(0.206)
MBA^†				0.0120		0.00634
				(0.0151)		(0.0184)
MWA^†				0.0523		−0.0912
				(0.0906)		(0.110)
PBA^†				−0.0904*		−0.284***
				(0.0515)		(0.0627)
PGA^†				0.0959**		0.332***
				(0.0407)		(0.0496)
PWA^†				0.0486		0.263**
				(0.107)		(0.130)
TUA^†				0.191		−0.149
				(0.196)		(0.238)
ACTINDEX		0.0249	0.0488***		−0.00640
		(0.0273)	(0.00867)		(0.0106)
MFC		1.49e-08
		(1.03e-08)
GDPFC		2.94e-08***
		(5.35e-09)
IPC		0.209***
		(0.0496)
INDDAYS		7.79e-07
		(2.04e-06)
INDWORK		−8.10e-09
		(2.30e-08)
INDWAGE		0.000101***
		(1.84e-05)
CONSTANT	17.31***	17.08***	4.025***	4.008***	16.71***	16.70***
	(0.00636)	(0.0469)	(0.0206)	(0.0219)	(0.0251)	(0.0266)
Year fixed effects	Yes	Yes	No	No	No	No
Observations	296,650	117,611	296,650	296,650	296,650	296,650
R-squared	0.430	0.420	0.194	0.194	0.295	0.295
Number of firms	127,775	64,361	127,775	127,775	127,775	127,775

^†Indicates act-specific labour regulation indices. Abbreviations for the acts mentioned in Appendix C, Standard errors in parentheses, ***p < 0.01, **p < 0.05, * p < 0.1.

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Published Online: 2019-06-08

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https://doi.org/10.1515/ajle-2019-0007

Keywords for this article

firm-level; India; labour regulation; manufacturing; productivity