Do Labour Laws and Rising Real Wages Explain Employment Stagnation in the Organized Manufacturing Sector of India? An Empirical Investigation

One of the most contentious policy issues in India is the demand for labour market flexibility. This paper empirically investigates two major reasons normally advanced in literature for explaining the phenomena of ‘jobless growth’ in the organized manufacturing sector and consequently introducing labour flexibility, namely (i) job security laws by strictly regulating hire and fire of workers makes labour adjustment process virtually impossible to undertake and (ii) rising real wages encourage adoption of capital intensive techniques in production – each impeding (not necessarily independently) employment growth. From our empirical analysis we find little evidence to support these claims. In fact, evidence suggests considerable flexibility in workforce adjustment already enjoyed by firms through growing use of contract workers. Employment stagnation is rather explained by the method employed by Annual Survey of Industries to estimate workers and the underlying nature of technological progress witnessed in the organized manufacturing sector during the study period