Can Labor Regulation Hinder Economic Performance? Evidence from India

This paper investigates whether the industrial relations climate in Indian states has affected the pattern of manufacturing growth in the period 1958-1992. We show that states which amended the Industrial Disputes Act in a pro-worker direction experienced lowered output, employment, investment, and productivity in registered or formal manufacturing. In contrast, output in unregistered or informal manufacturing increased. Regulating in a pro-worker direction was also associated with increases in urban poverty. This suggests that attempts to redress the balance of power between capital and labor can end up hurting the poor.