The costs of employment protection

India has some of the more restrictive labour laws in the world. However, these laws cover only the organised sector. Thus, firms thinking of growing in size and becoming formal must weigh the advantages of size against the disadvantages of regulation. This keeps Indian firms small and informal unless they have a lot to lose by staying small, that is, when they are very good indeed. This, it is argued, results in a disproportionately large share of smaller, less productive firms, many of which operate in the informal sector, which employs nearly 90% of the Indian workforce. This makes sense given the uneven protection of employment across formal and informal sectors, with the latter being virtually unregulated. Strict labour laws may also result in very few large firms concentrating most of the total market production, as these regulations act as a barrier to becoming large.