Resource Misallocation in India: The Role of Cross-State Labor Market Reform

Author/Editor:

Adil Mohommad ; Charlotte Sandoz ; Piyaporn Sodsriwiboon

Publication Date:

February 26, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

At the macro level, productivity is driven by technology and the efficiency of resource allocation, as outcomes of firms’ decision making. The relatively high level of resource misallocation in India’s formal manufacturing sector is well documented. We build on this research to further investigate the drivers of misallocation, exploiting micro-level variation across Indian states. We find that states with less rigid labor markets have lesser misallocation. We also examine the interaction of labor market rigidities with informality which is a key feature of India’s labor markets. Our results suggest that reducing labor market rigidities in states with high informality has a net positive effect on aggregate productivity.

Series:

Working Paper No. 2021/051

Frequency:

regular

English

Publication Date:

February 26, 2021

ISBN/ISSN:

9781513570679/1018-5941

Stock No:

WPIEA2021051

Format:

Paper

Pages:

34

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