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An Inquiry into the Theoretical Structure Underlying the Labour Market Flexibility Argument in India
The theory underlying the labour market flexibility argument in India is identified and critically examined. A review of the empirical studies reveals that this argument is based on rigid real wages, in turn, explained by hiring and firing costs. Such explanations are provided by the insider–outsider theory of employment and unemployment due to Lindbeck and Snower (1988). A scrutiny of the I–O theory reveals that it could not even explain the existence of involuntary unemployment under reasonable assumptions. Further, it is shown that its policy recommendation necessarily assumes Say’s law. Thus, it is concluded the theoretical foundation underlying the LMF is unsound.
The author wishes to thank Prabhat Patnaik, Nivedita Sarkar and the participants at the 55th Annual Conference of the Indian Society of Labour Economics, 2013 for their helpful comments.
India’s labour laws have evolved in a manner which has greatly reduced the flexibility available to the employers to adjust the [organised] labour force in the light of changing economic circumstances …Some changes in the laws are therefore necessary if we want to see rapid [economic] growth. (Government of India 2001: 171)
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