The Effects of Labor Regulation on Firms and Exports : Evidence from Indian Apparel Manufacturing

We examine the impact of labor regulations on firm outcomes and explore their differential ef-fects on exporters. Building on a conceptual framework developed from standard theory and a detailed qualitative study of India’s apparel industry, our econometric analysis exploits establishment-level data on formal Indian garment manufacturers between 2009-10 and 2013-14 and interstate variation in labor laws. We find a close fit between the implications of our con-ceptual framework, the qualitative evidence and the data. Apparel producers in states with pro- worker labor regulations tend to replace labor with capital. This choice of technique effect is smaller for exporting firms, which are more tightly bound to norms for organizing production in global supply chains. Pro-worker labor regulations also reduce output levels more for exporters than for non-exporters, consistent with exporters being bound to international pricing norms. Labor regulations thus have a particularly adverse impact on exporters. Our findings underscore the cost of poorly-designed and implemented labor regulations in a labor-abundant country wishing to spur exports, employment and industrial activity in labor-intensive industries. Full paper available at http://doi.org/10.1016/j.jce.2020.04.007