It is well known that through the course of development, the structure of employment shifts from self-employment to salaried jobs within and across sectors. Why are some countries able to make this shift more effectively than others? Which specific labour market frictions impede reallocation in the organisation of labour within and across sectors? There is little consensus on these questions. Many studies have stressed the importance of supply-side frictions like the scarcity of human capital that may impede technology adoption and lower non-agricultural wages. However, there is a lack of evidence on the role of demand-side frictions and the role of firms in such labour reallocation.
This project seeks to digitise historical plant-level data from India to evaluate the impact of two unstudied amendments to India’s labour laws from the 1970s and 1980s to study these questions. These policy amendments increased firing costs for large plants relative to smaller ones, thereby inducing variation in labour costs across firms. The project exploits this natural experiment to provide novel evidence on the causal link between labor market distortions and the reallocation and organisation of labour in developing countries.
This study will deepen the knowledge of resource misallocation during structural economic development. In particular, the project will allow policymakers to better understand the levers that can be used to improve allocative efficiency and boost economic growth. Moreover, by creating a whole new base of plant survey data freely available to researchers, it will provide a stepping stone for future research contributions.
