Economic Reform, Labour Markets and Informal Sector Employment: Evidence from India

Nihar Shembavnekar

doi:10.3390/economies7020055

Abstract

Theory and economic intuition suggest that domestic institutions influence the employment impact of economic reform, but the evidence base is thin. This paper seeks to address this by examining the extent to which differences in regional labour market flexibility shaped the impact of unanticipated economic reforms on employment in informal (unregistered) manufacturing enterprises in India (1990–2001). It employs a difference-in-differences strategy and finds that tariff reductions are not associated with significant employment shifts in informal enterprises, a finding that may be attributable to the fact that these enterprises rarely engage in international trade. However, on average and ceteris paribus, delicensing (FDI reform) is associated with statistically significant increases (increases) in informal employment and informal enterprise numbers in inflexible (flexible) labour markets. There is some evidence that the delicensing effect is attributable to increases in product market competition in delicensed industries. However, the channel underlying the result associated with FDI reform is less clear. In light of the persistent primacy of the informal sector in India and other developing economies, these findings have substantial policy relevance.

Highlights

In the latter half of the twentieth century, several developing economies initiated comprehensive economic reform policies
I assess whether the reforms are associated with statistically significant employment shifts at the enterprise level, irrespective of variations in regional labour market flexibility
This result is robust to controlling for foreign direct investment (FDI) reform, which shows no significant link with enterprise-level employment

Summary

Introduction

In the latter half of the twentieth century, several developing economies initiated comprehensive economic reform policies. The labour market impacts of these reforms remain somewhat poorly studied. Several studies, Nunn and Trefler (2013) and Ahsan (2013) being among the more recent, have documented that this impact is likely to be influenced by domestic institutions. This view has received scant attention in the Indian context, in particular at a ‘micro’ or firm level. Existing research largely avoids the issue of economic duality that is typical of India and other developing economies.

Methods

Results

Conclusion