Employment Protection: Does Making Firing Hard Help Workers?

How rules that make it hard to lay off workers can protect jobs but also discourage hiring and firm growth, with India's 100-worker threshold as an example.

Rules that make it difficult or costly for employers to dismiss workers are called employment protection legislation. They aim to protect workers from unfair job loss. But they can have side effects.

The trade-off

Benefits: workers gain security, protection from arbitrary dismissal and time to adjust.
Costs: if firing is costly, employers may be reluctant to hire in the first place, especially when demand is uncertain. They may use temporary contracts or machines instead.

Research across countries suggests strict employment protection may not change overall unemployment much, but it tends to reduce job flows: fewer hires and fewer layoffs, and longer unemployment spells for those without jobs.

India’s example

Under India’s Industrial Disputes Act, 1947, as amended in 1976 and 1982, factories with 100 or more workers needed government permission to lay off or retrench workers or close down. Permission was often hard to get.

Economists argued this contributed to:

Small firms: many firms stayed below 100 workers to avoid the rules, contributing to India’s “missing middle” of medium-sized firms.
Contract labour: firms hired through contractors to avoid permanent employment obligations.
Capital-intensive production: firms used machines rather than hiring more workers.

The labour codes

India’s four labour codes, which took effect in November 2025, raised the threshold for requiring government permission from 100 to 300 workers under the Industrial Relations Code, and allowed states to raise it further. Several states had already raised thresholds earlier.

Supporters expect more hiring and larger factories. Unions worry about weaker job security.

Flexicurity

Denmark’s flexicurity model combines easy hiring and firing with generous unemployment benefits and active job support. Workers are protected through income support and retraining rather than job protection.

Staying small

A garment manufacturer receives a large export order that would require hiring 150 workers. Worried that if orders fall it will be unable to reduce staff, the owner instead splits production across two firms of under 100 workers each and uses contract workers. The business grows, but less efficiently.

Thinking stronger firing rules always create more jobs

Strict rules protect existing jobs but can discourage new hiring and firm growth. The design of protection matters.

Key takeaways

Employment protection reduces layoffs but can also discourage hiring.
India required government permission for layoffs in firms of 100 or more workers.
This may have encouraged small firms, contract labour and machines over workers.
The labour codes raised the threshold to 300 workers.