cumbersome labor regulations are more likely to adopt computer technology, consistent with the notion that labor-saving technology will be adopted to cushion the blow of labor regulations. They alternatively use state share of firms viewing labor regulations as “minor obstacles and above” in his data or the regulation index provided by Besley and Burgesss (2004) and obtain the same findings. Similarly, Adhvaryu et al. (2010) use comprehensive firm-level data (aggregated to the level of district) in India to study how rainfall shocks affect labor adjustments differently in Indian states with various degree of labor regulation—again using the Besley-Burges index of labor regulation in India. They find that, indeed, districts facing more flexible labor regulations are able to adjust their labor to a significantly greater extent facing rain shocks. More interestingly, they also find that the labor adjustment effects exist only for regulated firms (that is, firms with more than 50 employees)—and do not exist for small firms that are not regulated in labor. The evidence thus points to causal effects.<sup>21</sup> Recent evidence from Indonesia highlights the tradeoff between equity and efficiency associated with labor regulations. In the 1990s, Indonesia experienced two changes in labor regulation. First, the minimum wage more than doubled, and second, there was a strong antisweatshop campaign targeted at the textile, footwear and apparel sectors, especially in those districts housing Nike, Addidas and Reebok. As a result of the anti-sweatshop campaign, the targeted firms were induced to sign codes of conduct pledging to raise wages and improve working conditions. The anti-sweatshop campaign therefore amounts to informal labor regulations. Harrison (2010) use two waves of the annual manufacturing surveys of Indonesia to identify the causal effects of these two types of labor regulation through the difference-in-differences approach. By comparing the beforeafter difference for the treated group and the before-after difference for the comparison group (after controlling for other necessary covariates), Harrison identifies the effects of the change in minimum wage and the anti-sweatshop campaign on wages, employment and other firm outcomes. She also demonstrates the robustness of key results using a variety of robustness checks such as alternative definition of treatment and various controls of confounding factors. The results indicate that minimum wages have a significantly negative effect on employment, so there is a tradeoff between quantity and quality of jobs. In addition, anti-sweatshop campaign is found to increase wages of affected firms by 10-30 percent. While the campaign did not have additional adverse effects on employment within the affected sectors, it led to falling profits, lower productivity growth, and plant

> 21 Somewhat surprisingly, they find that firms in districts with more cumbersome labor regulations are able to adjust their other production factors (materials, fuel, and capital) to a greater extent—such that when examining the effects of labor regulation on total value added and profits, there are no differences between states with heavy and light labor regulations.

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