Resource Misallocation in India: The Role of Cross-State Labor Market Reform

By Adil Mohommad, Charlotte Sandoz, Piyaporn Sodsriwiboon

February 26, 2021

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Adil Mohommad, Charlotte Sandoz, and Piyaporn Sodsriwiboon. Resource Misallocation in India: The Role of Cross-State Labor Market Reform, (USA: International Monetary Fund, 2021) accessed December 22, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

At the macro level, productivity is driven by technology and the efficiency of resource allocation, as outcomes of firms’ decision making. The relatively high level of resource misallocation in India’s formal manufacturing sector is well documented. We build on this research to further investigate the drivers of misallocation, exploiting micro-level variation across Indian states. We find that states with less rigid labor markets have lesser misallocation. We also examine the interaction of labor market rigidities with informality which is a key feature of India’s labor markets. Our results suggest that reducing labor market rigidities in states with high informality has a net positive effect on aggregate productivity.

Subject: Employment protection, Labor, Labor market reforms, Productivity, Total factor productivity

Keywords: Balance sheet data, Exit from informality, Firm level, Firm TFPR, India, Misallocation, Price distortion, Product market regulation, Revenue TFP, Structural reforms., WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/051
Stock No:

WPIEA2021051
ISBN:

9781513570679
ISSN:

1018-5941

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