The Role of Labor Market Flexibility in the Job Matching Process in India: An Analysis of the Matching Function Using State-Level Panel Data

Woong Lee*a http://orcid.org/0000-0003-4365-973Xa Department of Asia-Pacific, Korea Institute for International Economic Policy, Sejong-si, KoreaAddress correspondence to Woong Lee, Research Fellow, Department of Asia-Pacific, Korea Institute for International Economic Policy, Building C, Sejong National Research Complex, 370 Sicheongdaero, Sejong-si 30147, Korea. E-mail: wlee@kiep.go.krColor versions of one or more of the figures in the article can be found online at www.tandfonline.com/mree.ABSTRACTUsing state-level panel data in India from 1999 to 2011, I estimate the matching functions to investigate the effect of labor market flexibility on new job matches. Next, I categorize the regions by the labor market flexibility and estimate the matching functions in the respective regions. This is the first original work that uses state-level data to estimate the matching function in India. The results show that there is no direct link between labor market flexibility and new hires, and this implies that overall effect of stringent employment protection legislation on efficiency of the job matching process is limited. However, the findings are consistent with the prediction of the search-matching model. The evidence shows that in a region with inflexible labor market, the job matching process is entirely vacancy-driven, implying a lack of labor demand. For such regions, it is recommended that policies aimed at boosting labor demand, such as employment subsidies, are appropriate for creating more employment.