What Role Does EPL Play in Wage Determination under Segmented Labour Markets? A State-level Analysis from India’s Formal Manufacturing Sector

Abstract

This study explores the role of employment protection legislation (EPL) in wage determination using a state-level panel dataset for India’s formal manufacturing sector. Unlike previous studies, we create a quantitative indicator of EPL using state-wise court judgements (on labour disputes), citing various sections of Chapters 5A and 5B of the Industrial Disputes Act, 1947, particularly those dealing with employment and wage-related legislations. Our findings suggest that pro-worker court judgements specifically on wage-related issues lead to an increase in the share of wages in industrial output. The findings are robust to alternative model specifications. However, we find that the share of wages responds negatively to an increase in pro-worker strictness in the overall EPL. We also analyse the consequences of labour market dualism, which is increasingly becoming a norm even in formal sectors. Using insights from labour market segmentation theory, we argue that a divergence in the regulation between regular and contract labour has a potential to undermine the success of active labour market policies in curbing the ill-effects of market segmentation. JEL Codes: J21, K31