Paul Graham tweeted something interesting about a month ago:
Anything that the French can do, we can too, of course:
To the extent that the labor regulations impose significant costs on an individual firm, we can expect an incentive for firms to stay below the relevant threshold, all else being equal.
Hasan, R., & Jandoc, K. R. (2010). The distribution of firm size in India: What can survey data tell us?. Asian Development Bank Economics Working Paper Series, (213).
The specific regulations that have been pointed to by analysts as being especially onerous from the perspective of firm owners include Chapter VB of the Industrial Disputes Act (IDA) and Section 9A of the IDA and the Industrial Employment (Standing Orders) Act (see, for example, the arguments of Panagariya 2008; see also Anant et al. 2006 for a comprehensive discussion of Indian labor regulations). The first of these makes it necessary for firms employing more than 50–100 workers to obtain the permission of
state governments in order to retrench or lay off workers—permission that some argue is rarely forthcoming and thereby ends up raising the effective cost of labor usage in production. The second regulation pertains to terms and conditions of work and applies to firms employing over 10 workers (20 if the production process does not use electricity) that are legally mandated to operate in the registered sector of manufacturing. While these two regulations seek to make labor contracts complete, fair, and legally binding, they can constrain firms from making quick adjustments to changing conditions, especially in view of weaknesses in collective bargaining mechanisms
“…they can constrain firms from making quick adjustments to changing conditions” simply means “it becomes expensive for firms to comply with these regulations”.
How do firms respond to these incentives? Here’s one of my favorite charts of all time:
The darker shade of grey is China, while the lighter one is India. This data is as of 2010, of course, and I hope that an updated chart will tell a better story.
But as a person who loves teaching principles of economics, the power of incentives comes across very nicely in both the chart about France, and alas, so also the chart about India.
EconForEverybody 