An intense debate on labour market reforms has been raging in India ever since the economy was liberalised in 1991. It is argued that the Indian economy would have experienced higher growth rates and employment generation but for the restrictive laws that create inflexibility in the labour market. This view is contested by trade unions and some economists who insist that labour laws are key to the protection of workers’ rights.
A major focus of the ongoing debate over labour market flexibility has been the statutory requirement that firms employing 100 or more workers cannot dismiss employees without prior government permission, as stipulated by the Industrial Disputes Act 1947. The case for repealing this requirement (or greatly increasing the workforce threshold) is highlighted by employers and scholars. The recently enacted Industrial Relations Code 2020 has increased this threshold from 100 to 300.
Washington Consensus on labour reforms
Labour flexibility is part of a package called the Washington Consensus. This framework for producing labour market flexibility was designed to deregulate the labour market and remove protective regulations (Standing 2002). The Washington Consensus was based on what Stiglitz (2002) called market fundamentalism. The basic idea behind this was that free-market outcomes are efficient and Pareto optimal. It says that free play of market forces results in the employment of resources at the market-clearing prices; this leads to both efficiency (as almost all resources are employed) and equity (all are rewarded according to their marginal contribution).
Regulation of the market by the state leads to deviation from the full employment of resources. Hence, attempts should be made to remove these imperfections in the market so as to achieve full employment of all resources and optimal social welfare.
The dominant narrative in the flexibility debate sees labour laws as a deterrent to income and employment growth. According to this narrative, trade unions and protective labour legislation are market-distorting agents which curtail the free operation of market forces to ensure full employment of labour. Interference by collective institutions (law and trade unions) in the market process increases transaction costs which affect investment, resulting in unemployment and welfare loss.
Market fundamentalism in labour reform debate
According to this narrative, these institutional interventions in the name of equity and social justice superimpose terms set above the market-clearing prices. As a result, markets do not clear, wages become sticky and the cost calculations of firms go haywire. These institutions not only tamper with the price and essential market signals that enable the efficient functioning of the market, but also affect the freedom of employers to adjust the quantities of resources, which, in turn, leads to unemployment. As per this argument, they also result in inequity because by protecting the interests of insiders, they hurt the chances of outsiders entering the labour market.
According to this side of the debate, such institutions create a social divide which perpetuates inequality. While the outsiders remain scattered and their political power becomes diffused, the insiders are well-organised and vocal, influencing policy decisions. Hence it is argued that the labour market should be deregulated for stimulating investment and employment as well as equality.
Several economists (Wilkinson 1992, Sengenberger and Campbell 1994) contest this view with their microeconomic and macroeconomic logic. Their argument is as follows. Competing firms may compete either based on reducing their unit costs by lowering wages and labour standards (low road to growth) or by pushing up productivity with innovation in technology, product design, and organisation (high road to growth).
As long as a firm can continue competing based on low wages and bad working conditions, there is no motivation to innovate for improving productivity. Only when the path to competition based on low wages and bad working conditions is barred by providing a floor of labour standards can firms become enterprising and invest in technological and organisational innovation which, in turn, will lead to better wages and working conditions. The absence of a minimum floor of labour standards would inevitably ensnare the industrial economy in the syndrome of low wages and low productivity. This is what leads to the ‘race to the bottom’.
Studies show that higher wages are associated with higher employment, implying that unemployment could be the result of many factors except high wages. Deregulation of the labour market in advanced capitalist countries has not been able to address high unemployment, even after decades of implementation.
In the Indian context, several economists, industry associations and mainstream media have attributed the deceleration in employment growth in India, particularly in the organised sector, to inflexibility in the labour market which is believed to have increased the labour costs for enterprises. Employment protection laws are believed to be inefficient and inequitable, leading to a slowdown in growth and dividing workers into protected and unprotected categories. Social security of a limited kind is enjoyed by only 8-9% of the workforce.
Protection of small sections of labour
Overprotection of a small section of workers is not only inimical to the growth of employment, but also goes against social justice. A study on the pattern of manufacturing growth during 1958-1992 concluded thus: “States which amended the Industrial Disputes Act in a pro-worker direction experienced lowered output, employment and investment in registered formal manufacturing. In contrast, output in unregistered or informal manufacturing increased. Legislating in a pro-worker direction was also associated with an increase in urban poverty. This suggests that attempts to redress the balance of power between capital and labour can end up hurting the poor.” (Besley and Burgess 2004)
On the other hand, trade unions and some economists claim that labour cannot be treated like any other commodity, and measures like minimum wages, job security, separation benefits, social security and trade union rights are socially and politically necessary even for sustaining the process of globalisation as they increase labour productivity.
The government is facing a dilemma over this issue and labour and management are at loggerheads with each other, forcing the government to be circumspect on labour reforms. This dilemma is rooted in the philosophy of social and labour policy in the country. The essential ingredient of social policy concerning labour and employment in the country, particularly during the first three decades of planning, has been to treat labour not as a mere resource for development, but as a partner in and beneficiary of social and economic development.
This philosophy of labour had its roots in the national movement and many legislative provisions for protecting labour were enacted before independence and were strengthened later. Accordingly, provisions of social security were made more comprehensive and expanded to include various kinds of risks. Further, detailed laws governing industrial relations were enacted, and a mechanism for fixing and implementing minimum wages was developed.
The basic idea behind all these protective measures adopted for labour was that the workforce was a relatively weaker partner vis-à-vis capital in the production process and that in a poor country like India, it was desirable to safeguard workers to promote both social justice and an appropriate industrial and productive climate.
The debate has been intensifying over the years. In the earlier years of planning when the expectations of economic growth were higher and unemployment was not thought to be a serious problem, the issue did not draw much attention. However, with a significant slowdown in employment growth in the organised sector, the debate has taken centre stage in recent years.
The Economic Survey 2005-06 commented: “…Indian Labour Laws are highly protective of labour, and labour markets are relatively inflexible. These laws apply only to the organised sector. Consequently, these laws have restricted labour mobility, have led to capital-intensive methods in the organised sector and adversely affected the sector’s long-run demand for labour” (p. 209).
The China example
In this context, the example of China is given very often as it has drastically changed its system of the labour market from rigid security of employment to one in which labour is extremely mobile. It is said that this has greatly helped China in generating employment as well as successfully redeploying workers who were laid off in the process of restructuring enterprises. It is argued that more than 100 developing countries have reformed their labour laws in response to competitiveness in the era of globalisation, but India remains among a select few countries with a rigid system of labour protection.
While there is an element of truth in this argument, often there is a lack of objectivity in the debate. Also, the ground realities prevailing in the Indian labour market in terms of insecurity, dynamics of labour processes, the extent of the implementation of labour laws and regulations, etc., are generally overlooked.
The Indian labour market is quite flexible despite the so-called restrictive labour laws. However, at the same time, Indian labour laws are so numerous, complex and ambiguous that they promote litigation rather than resolution of problems related to industrial relations. A comprehensive view of labour market reforms is required, one that addresses the needs of both employers and workers.
A rational way out would be simplifying and rationalizing the complex and ambiguous extant pieces of labour legislation into a simple code that allows for labour adjustment with adequate social and income security for workers.
The formulation of the four labour codes (wage, social security, industrial relations and occupational health safety) is a step towards that direction. The Wage Code was enacted in 2019 and rest three codes in 2020. These codes will probably be implemented from April 1, 2022. To what extent the labour reforms debate influenced the formulation of the codes is a matter of conjecture and further debate. One thing is sure: the labour reforms debate in the last few decades provides the backdrop of the labour code formulation.
Besley, Timothy and Robin Burgess (2004): Can Labour Regulation Hinder Economic Performance? Evidence from India, Quarterly Journal of Economics, February.
Fallon, P and R Lucas (1991): The Impact of Changes in Job Security Regulations in India and Zimbabwe, World Bank Economic Review, Vol 5, No 3.
ILO-ARTEP (1993): India: Employment, Poverty and Labour Policies, New Delhi.
ILO-SAAT (1996): India: Economic Reforms and Labour Policies, International Labour Office and South Asia Multidisciplinary Team (SAAT), New Delhi.
Ministry of Finance (2006): Economic Survey 2005-06, Government of India, New Delhi.
Sengenberger, Werner and Duncan Campbell (1994): Creating Opportunities: Role of Labour Standards in Industrial Restructuring, International Institute of Labour Studies, Geneva.
Sharma, Alakh N (2004): Globalisation, Work and Social Exclusion in India, Kunda Datar Memorial Lecture, Gokhale Institute of Politics and Economics, Pune, 26-27.
Standing, Guy (2002): Beyond the New Paternalism: Basic Security as Equality, Verso, New York.
Stiglitz, Joseph (2002): Globalisation and Its Discontents, Penguin, London.
Sundaram, K and S Tendulkar (2002): The Working Poor in India: Employment- Poverty Linkages and Employment Policy Options, Discussion Paper 4, ILO, Geneva. Wilkinson, Frank (1992): Why Britain Needs a National Minimum Wage? NBER, London.