Labour Disputes and the Manufacturing Sector’s Growth: Recent Evidence from Indian States

Abstract

The persistent variation among Indian states in per-capita value added from manufacturing sector has raised question whether the long-run equilibria in the manufacturing sector differ among the states. In this paper, we provide empirical evidence on whether labour disputes in the form of strikes, lockouts, temporary closure etc., have caused any variation in these equilibria for the recent period. Available data suggests that in 9 out of 16 states in our sample, labour disputes have generally reduced between 2001 and 2017, while in others labour disputes mostly characterised as random shocks with little predictability. Our two-stage least squares estimates using states’ election cycles as instrument for the labour disputes suggest that these labour disputes with little persistence did not have much influence over the inter-state differences in the equilibrium capital-labour ratios in “registered” manufacturing units between 2001 and 2017. However, 1 percent increase in labour disputes might be associated with 3.2 percent reduction in total factor productivity for the sector in states where disputes were random events. In the remaining states, where labour disputes have consistently fallen over time, this effect is significantly reduced. Our findings are robust in different sample of firms.