Labour Regulation and Firm Transition in Indian Manufacturing

Labour regulations are often cited as a key constraint on firms’ ability to optimise size, with implications for productivity and profitability. This study examines how labour regulations influence firm transition in India’s manufacturing, focusing on legislative amendments (de jure) and firms’ perceived regulatory constraints (de facto). Using World Bank Enterprise Survey data for 2014 and 2022, the article analyses firm transition across size categories. Findings show upward mobility for medium and large firms in states with flexible labour regulations, while firms in heavily regulated states tend to remain in their initial size categories. Fixed effects and difference-in-differences results reveal nuanced and modest effects of labour regulations on firm transition. Although de jure reforms contribute to employment growth, firms are more likely to stay in the same size category than to expand, highlighting the need for stronger enforcement and compliance to improve firm mobility and productivity.