2012 Reports

Labor Regulations and the Firm Size Distribution in Indian Manufacturing

Hasan, Rana; Jandoc, Karl Robert L.

We use data from Indian manufacturing to describe the distribution of firm size in terms of employment and discuss implications for public policy, especially labor regulations. A unique feature of our analysis is the use of nationally representative establishment-level data from both the registered (formal) and unregistered (informal) segments of the Indian manufacturing sector. While we find there to be little difference in the size distribution of firms across states believed to have flexible labor regulations versus those with inflexible labor regulations, restricting attention to labor-intensive industries changes the picture dramatically. Here, we find greater prevalence of larger sized firms in states with flexible labor regulations. Moreover, this differential prevalence is higher among firms that commenced production after 1982, when a key aspect of Indian labor regulations was tightened. Overall, our findings are consistent with the argument that labor regulations have affected firm size adversely.