Impact of state-level labour law reforms in India: an empirical analysis

The impact of Indian state labour law reforms on employment, output, new industrial units, investment and size of industrial units is examined from 2000-01 to 2017-18. States with inflexible labour laws had lower growth of large industrial units and regular employment. Contract worker hiring spiked in firms with 301-500 workers in both flexible and inflexible states. Capital growth was higher than growth of workers in all state categories. Rajasthan, the first state to carry out additional reforms in 2014, had good performance. Regressions carried out to control for factors that impact employment other than labour laws indicate that: (i) reforms had a positive impact on employment; (ii) good infrastructure, reduction in industrial disputes, low crime and better education resulted in significant employment generation. Difference-in-differences estimates show that post-reform, employment, fixed capital, and output were higher for flexible labour law states, when compared to inflexible labour law states.