This paper investigates the effects of an important but little-researched set of Indian labor and industrial regulations. We use a novel methodology to provide a) the first objective cost estimates of any Indian labor regulations and b) evidence of their impact on misallocation of resources across firms. Our methodology takes advantage of the fact that some regulations only apply to establishments which hire 10 or more employees. Using data from India’s 2005 Economic Census, we observe that the distribution of establishments by size closely follows a power law, but with a significant drop in the distribution for establishments with 10 or more workers. Guided by a model based on Garicano, LeLarge and Van Reenen (2013) - but augmented to allow for the possibility of misreporting - we use this drop to estimate the implied costs of the regulation. We find that there is substantial variation in our estimated costs across states, industries and ownership types, and that our costs are more robustly correlated with measures of corruption than with any other factors, suggesting that poor state implementation may be as much or more to blame for the high costs than the regulations themselves. We find further that higher costs are associated with lower rates of future employment growth in registered (but not unregistered) manufacturing, suggesting that these costs may play a role in encouraging informality.
Amrit Amirapu is a PhD Candidate in Economics at Boston University. He received his BA in Physics and Political Philosophy from Amherst College, and his MA in Quantitative Methods in the Social Sciences from Columbia University. His fields of expertise include Development Economics, Labor Economics and Industrial Organization. He has worked for organizations including The World Bank, The Center for Global Development and The Millennium Villages Project. His present research focuses on studying the effects of government institutions and industrial policies on firms in developing countries. He is particularly interested in the ways in which governments can affect the pattern of structural transformation in their countries. -