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Abstract

The recent move of Indian policymakers towards a more open economy with less government control is said to have brought about considerable changes in the policy structure with respect to the size of the government—expenditures, taxes and enterprises—legal structure and security of property rights, regulation of labour and business. Economic freedom, which encompasses these indicators, may have a potential impact on, and may facilitate better integration of, labour market outcomes such as labour quality and creating employment opportunities in India. In a federal system like India’s, economic and political institutions such as business regulation, taxation and government spending differ significantly across states. This study, considering 20 major Indian states, tests the hypothesis that greater economic freedom may lead to higher rates of employment for these states. The results indicate that economic freedom is likely to have a favourable impact on employment. The most important dimensions are strong rule of law and flexible regulations governing credit, labour and product markets. The rise in income per capita is a critical factor in this set-up.

JEL Classification: O40, E24

Keywords

Economic freedom employment size of the government legal structure labour regulation

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Economic Freedom and Employment in India

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