Labor Reforms in Rajasthan: A boon or a bane?

TL;DR

This study investigates the effects of labour law deregulations in Rajasthan, India, on manufacturing plant employment and productivity, revealing complex impacts including employment decline but productivity improvements.

Contribution

It provides the first quasi-natural experiment analysis of Rajasthan's labour reforms using a difference-in-difference approach with plant-level data.

Findings

Labour reforms led to a decline in employment, especially among directly employed workers.

Reforms increased plant productivity and value-added.

Effects varied across industries and reform structures.

Abstract

We examine the impact of labour law deregulations in the Indian state of Rajasthan on plant employment and productivity. In 2014, after a long time, Rajasthan was the first Indian state that introduced labour reforms in the Industrial Disputes Act (1947), the Factories Act (1948), the Contract Labour (Regulation and Abolition) Act (1970), and the Apprentices Act (1961). Exploiting this unique quasi-natural experiment, we apply a difference-in-difference framework using the Annual Survey of Industries panel data of manufacturing plants. Our results show that reforms had an unintended consequence of the decline in labour use. Also, worryingly, the flexibility resulted in the disproportionate decline in the directly employed worker. Evidence suggests that the reforms positively impacted the plants' value-added and productivity. The strength of these effects varies depending on the underlying industry and reform structure. These findings prove robust to a set of specifications.