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Larger plants, more jobs: Early adopters of labor reforms benefit

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Larger plants, more jobs: Early adopters of labor reforms benefit

States with the ecology and environment needed for the industrial sector to expand earlier than others may benefit from changes in labor regulations.

According to research conducted by a think tank affiliated with the Union Labor Ministry, in states where labor rules were changed, average plant sizes and formal employment in the manufacturing sector increased. However, certain outliers may be accounted for by the various levels of industrialization and the types of industries found in multiple states.

The study by the VV Giri National Labor Institute focused on three key reforms: 1) increasing the worker threshold from 100 to 300 to exempt businesses from requesting government approval to close their doors, 2) raising the threshold under the Factories Act from 10 to 20 for units drawing power and 20 to 40 for those not drawing power, and 3) implementing fixed-term employment.

The study divided the sample states into three groups: first, the early adopters between 2014 and 2015, like Rajasthan, Andhra Pradesh, and Maharashtra; second, those that checked in later between 2017 and 2020, including Uttar Pradesh and Jharkhand; and third, non-reformers like Tamil Nadu.

The effect appears to vary among states and over time. In contrast to Jharkhand, which changed its labor rules in 2017, Rajasthan’s 2014 reforms to raise the worker threshold did not substantially impact until 2017. Compared to Tamil Nadu, which did not reform its labor regulations, Maharashtra’s revisions had a favorable effect within a year, leading to an increase in total person-days and plant size.

According to the study, the degree of industrialization in the US is to blame for this variability. More quickly than others, those with an integral ecology and a climate that encourages the growth of the industrial sector could benefit from the changes. According to the paper, “this shows that labor reform is simply one part in the broader policy mix, and if it needs to function as a catalyst and show impacts immediately, then other criteria need to be in place a priori.” It emphasizes, however, that the absence of any notable results cannot be regarded as having a negative effect on the revisions.

Between 2004–05 and 2018–19, all states had a consistent rise in employment in absolute terms. In the initial seven-year period, employment increased most in four states: Maharashtra, Rajasthan, Andhra Pradesh, and Uttar Pradesh (2004-05 to 2011-12). In the second block of seven years, there was more significant growth in many other states, including Tamil Nadu, Rajasthan, Maharashtra, and Jharkhand (2011-12 to 2018-19). However, in the second block of seven years, between 2011–12 and 2018–19, Andhra Pradesh, a pioneer, and Uttar Pradesh, which changed its labor rules considerably later in 2020, had a slight fall in employment. As is clear from these data, there is no proof of a connection between work and labor legislation.

Despite the “relatively sluggish performance in terms of employment generation” that the manufacturing sector as a whole had the industry organized within manufacturing performed better, with employment rising by 1.7 million in the post-reform (2014–15 to 2017–18) period compared to 1 million in the pre-reform (2010–11 to 2014–15) period.

In states like Rajasthan and Andhra Pradesh, which took the lead on labor reforms early on, employment in manufacturing businesses increased by 10.3 percentage points from 40.9 percent in 2010–11 to 51.2 percent in 2017–18 and 7.1 percentage points from 47.2 percent to 54.3 percent, respectively. 

Other states like Uttar Pradesh, which has its own Industrial Disputes Act and is not subject to the ID Act of the Center, had a rise of 4.8 percentage points over the same time, while Maharashtra saw an increase of 4.7 percentage points. Tamil Nadu had a growth in employment in manufacturing businesses of 8 percentage points, from 47.1% to 55.1%, throughout the period without changing its labor laws.

“This growth in employment in big plants with 300 or more people and a decrease in the percentage of plants with fewer than 299 workers across the research periods also imply that the businesses are moving toward reaching economies of size and scope, which would have a favorable impact on the competitiveness of manufacturing products and in turn on the overall economy,” the report notes.

The increase in the average plant size across states reflected the rise in the proportion of employment in large plants. For instance, units with 300 or more employees accounted for over 50% of jobs in the manufacturing sector throughout all states, with this proportion increasing from 51.1% to 55.3% from 2010–11 to 2014–15 and 56.3% by 2017–18. One of the states with a wealth of natural resources is Jharkhand, an outlier with almost 68% of all manufacturing employment recorded in facilities with 300 or more employees in 2010–11 before falling to 63.8 in 2017–18.

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