In developing countries, unemployment rates are much higher for educated people than they are for uneducated individuals. This counterintuitive fact is a ubiquitous feature of labour markets across most low-income economies in the world. It is also extremely concerning, since this highlights the misallocation of millions of educated individuals who await gainful employment, effectively letting their potential waste away. Governments and international organizations spend billions of dollars every year in skill/vocational training, with the hope that a better-trained labour supply would close this unemployment gap. These gaps nevertheless continue to persist. Moreover, the role of labour regulations in shaping these employment outcomes is not well understood. If these regulations pose significant demand-side hurdles that drive this equilibrium, then supply-side interventions such as skilling initiatives will have limited success in creating jobs. In this project, the author poses the research question: how do labour regulations impact employment and firm dynamics in developing countries?
The project exploits unstudied amendments in 1976 and 1982 to India's labour laws that increase firing costs for large plants to provide novel evidence on the causal link between labour market distortions and the reallocation and organization of labour in developing countries. India in this period was a low-income economy, and these policy amendments provide ideal natural experiments to study this important question. Using novel historic plant-level survey data covering this period, the author hopes to provide the first direct evidence of the impact of pro-worker amendments on plant-level labour and investment outcomes. Furthermore, the author plans to embed their data within a structural model that will enable various counterfactual experiments.
The project will shed light on the inefficiencies created by demand side hold-ups in labour markets. Furthermore, with the structural model, the author will also try to understand how labour demand shortage interacts with supply side mechanisms (like human capital investments by workers) in determining the structure of employment in lower-income economies. Altogether, this will offer important insights on what policy levers might best affect positive change in labour market outcomes. Results on policy levers for educated unemployment is directly relevant to Sub-Saharan economies such as Tanzania, Ghana, and Swaziland, which have some of the highest rates of educated unemployment in the world. Moreover, it is well known that through the course of development, the structure of employment shifts from self-employment to salaried jobs within and across sectors. Why are some countries able to make this shift more effectively than others? Which specific labour market frictions impede reallocation in the organization of labour within and across sectors? Through this project, the author aims to expand the understanding of these important issues in the path of development.
