Labour Law, Judicial Efficiency and Informal Employment in India

This study assesses the effects of industrial disputes legislation and the dispute settlement process on informal versus formal employment in India. It uses indicators of pro-worker court awards and court efficiency as well as amendments to the Industrial Disputes Act (IDA) at the level of Indian states. The state-level IDA amendments are classified as pro-worker or proemployer and enforcement enhancing. Three complementary empirical approaches and data sources are used. These include a quasi-panel dataset constructed from four household employment surveys (NSSO) between 1983-1999, a state-industry level panel dataset for organised (formal) sector industrial units (ASI) for 1980-1997 and a cross-sectional survey of unorganised (informal) manufacturing firms for 2000/2001. The significance of the judicial indicators varies by indicator and the magnitude of relationship with formal employment remains rather small. The evidence is neither robust, nor consistent, enough to confirm that pro-worker judicial change would be related to a lower degree of formal work in the entire service or industrial sectors. However, pro-worker judicial change and judicial efficiency can be linked more consistently to a formalisation of work within the organised industrial sector. More efficient courts are also associated with a lower tendency of unorganised firms to produce for a sub-contractor. Finally, education, personal attributes and social status are found to be significant correlates of employment type, which implies that policies aiming to raise formality should also focus on such factors. JEL Codes: J21, K31, O17