Of “Missing Middle” and Size-based Regulation

R. Nagaraj, Professor, Indira Gandhi Institute of Development Research

Abstract

Preponderance of small (that is, less than 10 workers) sized manufacturing
establishments in India is said to reflect their inability to growth in size on account of
prohibitive cost of regulatory compliance (and the associated corruption). Similarly, the
“U” shaped (or bi-modal) distribution of manufacturing employment by size of
establishment or enterprise – popularly termed the “missing middle” – is argued to be
the outcome of the rigid labour laws, adversely affecting productivity growth. Do the
foregoing propositions represent hard facts, or artefacts of mis-measurement and
misinterpretation of the evidence? The paper contends that it is the latter: the observed
employment distribution by size is more likely to reflect the widespread and growing
evasion of official registration, and under-reporting or mis-representation in the
administrative data. Further, the wide schism observed between the organised (formal)
and unorganised (informal) labour markets represents persistence of surplus labour, and
organisational dualism – a la Hella Myint – on account of technology and organisation of
production in the modern sector; and perhaps not on account of policy induced rigidities
in the labour market, as many contend.

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Suggested citation:

R. Nagaraj, Of “Missing Middle” and Size-based Regulation CSE Working Paper#7, Azim Premji University, April 2018.