Entry Regulation, Labor Laws, and Informality

Topic: Informality
Author: Siddharth Sharma

Does the regulation of entry cause informality in the manufacturing sector of developing countries? This note presents evidence from India that suggests that a policy reform that lifted barriers to entry lessened informality. This reduction in informality was accompanied by gains in average labor productivity in the informal sector. The most likely reasons for this productivity gain appear to have been a decline in inefficient single- household firms and an increase in more efficient multi-person firms. However, the impact of entry deregulation also appears to have depended on state level labor laws, being measurably larger in states with more pro-employer labor laws.

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