ABSTRACT

The issue of flexibility in the labor market has attracted much attention in policy debates in India. The lack of flexibility in the labor market is often cited as the reason for poor performance of the labor market in terms of employment generation and productivity growth. A popular view is that increased integration of the economy and technological change require structural change in the organization of production in firms and the lack of flexibility in the labor market does not permit accommodation of this change; yet the link between the claimed hindrances to the allocative function of the labor market and the slow growth of the formal industrial sector has only been attempted to be demonstrated in a few select articles that are in approach either empirical or theoretical. This paper reviews this literature and draws lessons about the impact of regulations in formal labor markets on employment and output growth.