Comment on “Labor Regulations, Employment and Wages: Evidence from India's Apparel Sector”

• Date: 01 January 2017
• DOI: http://doi.org/10.1111/aepr.12161
• Author: Hal Hill
• Published date: 01 January 2017

Comment on “Labor Regulations, Employment

and Wages: Evidence from India’sApparel

Sector”

Hal HILL†

AustralianNational University

JEL codes: J31, J46, J48, L11,L67, O14, O17

Rana Hasan and colleagues (Hasan et al., 2017) have produced a fine, empirically rich paper

examining labour regulations, employment and wages in India with reference to the

country’s apparel sector. They motivate their paper by pointing to the fact that, relative to

the size of the economy, India’s manufacturing sector is significantly smaller than East

Asian comparators, while the share of micro and small enterprises in manufacturing is

comparatively high. The standard explanations for these outcomes are poor infrastructure,

over-regulation, trade and Foreign Direct Investment (FDI) restrictions, and market failure.

Hasan et al. use their apparel industry case study to shed light on these competing

explanations, and they emphasize the role of the country’s labour regulations, which have

had the effect of keeping apparel firms smaller and more informal than would otherwise have

been the case. They have also contributed to the country’s indifferent export performance.

The apparel sectoris a very suitable case study.It is the largest source of employmentin

Indian manufacturing, absorbing 16% of the workforce. Its extreme labour intensity is

indicated by the fact that its labour productivity is just one-eighth of the manufacturing

average. It is also one of the country’s major export industries, accounting for about 11%

of the total. However, its export performance has been disappointing. Its share of the US

market –often seen as the most important test of international competitiveness –has

stagnated at around 4%, in contrast to the dynamism displayed by Bangladesh and

Vietnam. It is also underperforming in some dynamic sectors, such as certain synthetics

and the high volume standard apparel lines, for reasons explained by Hasan et al.

Hasan et al. argue that the disproportionately high proportion of small firms is a

contributing factor to the low productivity and hence low wages in the sector. If I read

the data presented in Table 1 of Hasan et al. correctly, for the ASI (formal sector) firms,

the wages of production workers in the largest firm grouping (200 plus workers) are about

one-quarter higher than the smallest group for which data are available (6-9 workers).

Actually,I think this is a rather small difference:since the data refer to monthlywages, quite

a bit of the differencecould be accounted for by longer hours worked in the larger firms,to

the extent that they have an incentive to use their capital equipment more intensively.

(The capital-output ratio for the 6-9 group is among the highest, further supporting this

†Correspondence: Hal Hill, ArndtCorden Department of Economics,College of Asia and the Pacific,

The Australian National University, Canberra 2601, Aus tralia. Email: hal.hill@anu.edu.au

doi: 10.1111/aepr.12161 Asian EconomicPolicy Review (2017) 12, 91–92

©2017 JapanCenter for EconomicResearch 91

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