Does Employment Protection Legislation Matter in Dualistic Labor Market? Panel Evidence from Indian Manufacturing Sector

The critics of pro-worker labor laws argue that employment protection legislation (EPL) hurts productivity and employment generation by creating rigidity in employment adjustments. The discourse on labor market rigidity has taken center stage in this neo-liberal phase of the global economy and is now being echoed by the state as well. However, the sharp growth in informal employment over the last two decades, cutting across developing as well as developed countries, puts a question mark over the tenability of the “flexibility thought” invoked by employers while demanding abrogation of job security legislation. In this study, we argue that there exists a substantial flexibility in contemporary labor markets. Using a panel dataset on twenty-eight industrial sectors across thirteen major states of India for the period 1999-2000 to 2007-2008, we find that EPL does not affect total factor productivity of industries. The impact of EPL is not significant even in highly volatile industries. The paper underlines the failure of the state to translate EPL into meaningful job security. The findings of this study suggest that the debates on labor regulations must be expanded to bring into its focus the issues of growing informalization and its consequences on workers.