What role does the employment protection legislation (EPL)protection legislation play in the wage determination under segmented labour markets? A state-level analysis

Abstract

Over the past few decades, policy makers and researchers have profoundly studied and debated India’s employment protection legislation (EPL) , which is believed to be among the complex labour law regimes in the world. Previous research studies mostly focus on employment and productivity effects of EPL and ignore its role in wage determination. Using a novel approach to the measurement of EPL, we examine its role in wage determination in India’s formal manufacturing sector, which has increasingly become segmented especially in the post-reform period. We carry out a detailed review of as many as 1057 court judgments distributed across 15 major states of India. Only those labour disputes are considered that were resolved under Chapter 5A and 5B of the Industrial Disputes Act, 1947 which concern with majority of the employment protection legislation in India. Under Chapter 5A and 5B of the IDA, 1947 we consider eight sections: Section 25-B, 25-F, 25-C, 25-FF, 25-O, 25-FFF, 25-M, and 25-N. Our study deals with only those court cases that were resolved by the respective state high courts. We follow the Leximetrics approach to arrive at the final index of EPL. Two separate measures of EPL are constructed: a broader measure of EPL and a specific measure. The broader measure of EPL concerns with overall judicial outcomes, irrespective of whether the labour disputes arises from employment conflict, wage conflict, or any other job related conflicts. On the other hand, the specific measure of EPL deals with only those court judgments that pertain to wage-related disputes. Additionally, we perform separate analyses using Besley and Burgess Index combined with OECD Index, and compare the results with that of our own judicial outcome-based Index of EPL. We use state-level panel data sets of different time-periods. The descriptive analysis of this study covers time-period 1990-91 to 2013-14. However, the wage discrimination analysis (descriptive) of contractual vs. regular workers is restricted to 2002-03 to 2013-14 because of the lack of worker-category-wisewage data before 2002-03. As far the econometric analysis is concerned, it covers time period1999-00 to 2013-14 only because the data on court judgments could not be collected beyond such time period. We estimate both fixed and random effects regression and report Hausman test results enabling the reader to make a right choice between the two sets of results for policy implications.