Labor Retrenchment Laws And Their Effect On Wages And Employment: A Theoretical Investigation

Many countries have legislation which makes it costly for firms to dismiss or retrench workers. In the case of India, the Industrial Disputes Act, 1947, requires firms that employ 50 or more workers to pay compensation to any worker who is to be retrenched. This paper builds a theoretical model to analyze the effects of such anti-retrenchment laws. The model reveals that an anti-retrenchment law can cause wages and employment to rise or fall, depending on the parametric conditions prevailing in the market. The authors then use this simple model to isolate conditions under which an anti-retrenchment law raises wages and employment.