Size-dependent labor regulations and structural transformation in India

We calibrate a two-sector span-of-control model and show that size-dependent labor regulations generate the observed employment distribution across manufacturing establishments in India. We find that such regulations in manufacturing reduce productivity in agriculture and impede the process of structural transformation. •Two-sector model with size-dependent regulation is calibrated using data for India.•The model generates the observed “missing middle” in Indian manufacturing.•Removing the regulation reallocates labor to more productive establishments.•Regulations in manufacturing are found to reduce productivity in agriculture.•Size-dependent labor regulations impede structural transformation in India.