Demand shocks and employment adjustments: Does employment protection legislation create rigidity?

Abstract

With state-level panel data from the Indian manufacturing sector for 2000–12, and labour turnover as a proxy for employment adjustments, the authors estimate differential effects of demand shocks on employment adjustment across states with high and low levels of EPL. They find that EPL does not hinder employment adjustment; the response of labour separation rates to negative demand shocks is relatively higher in states with high levels of EPL, and labour turnover is inversely associated with EPL, which may be viewed as indicative of the beneficial effects of EPL for both enterprises and workers.