Labour Regulation, Enforcement and The Incidence of Contract Workers: Empirical Evidence from the Organised Indian Manufacturing Sector

Abstract

There is renewed interest among economists and policy analysts in the question of why do firms in developing countries demand more number of contract workers relative to regular workers. Many studies highlights two factors -trade reform and strict labour regulations are primarily responsible for the rise of contract workers in the organised sector. These studies, however, notably overlook the role of enforcement and dynamics of labour regulation in a single country framework. In this paper, we investigate the effects of labour regulations and their enforcement on the growth of contract workers in the organized sector of the Indian economy for the period 1999-2006. We specifically use a database on total number of conciliation and adjudicated cases in the labor courts as a proxy measure of the enforcement index (the de facto measure) and the formal states wise changes in labour legislations as the de jure measure of labour regulation in India. Our empirical context allows us to disentangle the heterogeneous effects of labour regulation and enforcement across sixteen Indian states. Overall, the findings suggest that, on average the strict labour regulation and labour law enforcement invariably raise adjustment costs and compliance costs of firms. Hence, in order to circumvent these costs, firms use a greater number of contract workers than regular workers. The combined effects of labour regulation and enforcement are higher in pro-workers states as compared to pro-employers states. The empirical results are robust to model specification.