Reforming labour market in states :
Revisiting the futility thesis, By Achin Chakraborty
A brief summary of the reading
This article presents a critical view of the labour market reforms in India and evaluates them
against the backdrop of trends in the labour force participation and formal informal employment in
organised unorganised sectors. The authors have critically assessed the literature on labour
market exibility in the advanced economies and have tried to understand whether the reforms
which aimed at making the labour market more exible will succeed in Indian marketAnd will raise
the economic rate of growth, will result in gainful employment which has often been advocated by
the proponents of labour market reform.
Key observations:
1. A number of states have made amendments in the provisions of the industrial dispute act
1947 and other act relevant to labour reforms. But by and large those amendments have had
very little impact on the general perception of the industry and businesses that labour laws in
India are rather stringent.
The domestic as well as the foreign investors and entrepreneurs believe that the labour laws in
India provide a high degree of protection to labour. This leads to the companies that form is less
the exibility to adjust to changing economic circumstances in the post reform era.
In this paper and attempt has been made to elaborate on the “Futility argument“ to establish that
it would be wrong to claim that labour reforms alone would achieve what the advocates of reform
expect them to achieve given the realities of Indian labour market. We start by discussing the
issues in the labour market reforms against the backdrop of recent trends in the labour force
participation and And formal/informal employment
in organised/and organised sectors in India.
More importantly we try to examine if reforms aimed at making the labour market more
exible would succeed in raising the rate of economic growth and generating employment
at a faster rate.
Observations in the labour market
1. Indian growth story has so far been one of jobless growth. Despite a marked acceleration in
growth of GDP in the post liberalisation period employment has been falling in the last three
decades.
2. Not only has the employment growth but the structure of employment has also changed. Case
in point, the share of primary sector in total employment has fallen below 50% for the rst time. At
the same time, the share of secondary and tertiary sectors in total employment increased to
24.3% and 26.8% respectively 2012 from 18% and 23.4% in 2005. What has been a dominating
factor has been self employment with a 52.2% share in total employment.
3. Following the de nition of “usual status” India’s total labour force in 2012 is estimated to have
been 484 million. This portion is only 40% of the total population.
4.The overall low labour force participation re ects the disproportionately low labour force
participation rate among women.
5. Given the above overall trends in employment and labour force participation rate the most
outstanding feature of this 484 million workforce is that 90% of this four 84 million belongs to the
category of informal workforce.
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Important concept and terms: there is an important distinction between an organised sector and
informal workers. The author makes them explicitly clear to avoid any confusion. The national
commission for Enterprises in the unorganised sector de nes them.
The NCEUS De nes an organised sector as comprising all and incorporated private
enterprises owned by individuals or households engaged in the sale and production of
goods and services operated on a proprietary or partnership basis and with less than 10
workers in case of electricity and less than 20 workers in case of no electricity.
The NCEUS de nes informal workers as “those working in the informal sector or household
excluding regular workers with social security bene ts provided by the employers, and the
workers in the formal sector without any employment and social security bene ts provided
by the employers“.
The informal employment in the organised sector has gone up. This means that even in the
organised sector the preference is for informal employment.
It can be clearly seen as well that the informal employment in the unorganised sector is almost
hundred percent. This implies that in the unorganised sector mostly there is no job security, social
security bene ts, safe working environment guarantee.
These trends in the formal and informal employment raise the question of how rigid India’s labour
market is.
What has been observed here is often a paradox where there have been loopholes which have
been found in the seemingly rigid labour laws which are meant to protect the labour. However the
loopholes found often result in their exploitation at the maximum. There have been covert
practises and ways to accommodate more and more workers without any security blanket being
o ered to them.
There has been an important feature of the employment in India which tells a lot about the basic
nature of job here. The mobility of people seeking work from rural to semi urban and urban areas
has no doubt increased over time. However this migration of rural people due to various push and
pull factors has often not resulted in in providing a regular job in the organised sector. Instead
the majority of people who desperately move out of agriculture end up in a variety of informal and
seasonal employment which does not o er better wages, security blanket and therefore their
standard of living does not improve.
Sector Contribution to GDP Employment of workforce
Agriculture 14% 49%
Industry / Manufacturing 16% 13%
Services 60% 27%
The above table is very important to point out that the contribution of various sector to GDP and
correspondingly the employment of workforce in that sector. It is normal to assume that if the
contribution to GDP of a particular sector is more then more percentage of workers will be
employed in that sector.
However this is not the case in Indian employment.
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The contribution to GDP by agricultural sector is minimum that is 14% however the employment
of workforce is around 49%. This implies that mostly the manual work goes waste in agriculture ie
mostly it is disguised employment.
Industry sector contribution to GDP as well as its contribution as an employment generating
sector needs to improve urgently.
It can also be seen that the services sector contributes maximum percentage to GDP but it
experiences not very good employment generation. It is a classic case of jobless growth.
Another important observation is that if in formalisation persists it would lead to lower wages this
means a decreasing share of labour in the total value added and an increasing share of capital.
Since the labour is the consumer in the product market and less wages or cash in hand would
create a problem of demand in the economy. Unless the incomes are not increased the
employment is not quality the demand for mass consumption goods may not rise.
Therefore it can be said that the shift of the labour force from agriculture to non-agriculture that
has been observed in India is particularly not a positive development dynamic since there is no
security blanket and no gainful employment created the fear of termination is always there.
Logic of exibility
In the midst of falling wages, informal employment, decreasing standard of living there is often the
case where rms are ready to pay more than the market clearing wage rate.
This is because the labour market is competitive and the rms may choose to pay wages at the
rate above the market clearing one for several bene ts like less shrinking of employees because
of higher cost of job loss, lower turnover, increased motivation to work and so on.
What exibility cannot achieve
By combining the annual survey of industries and the NSSO data Vardhan in 2014 cites the
example of garment industry which is known to be labour intensive and states that 92% of the
garment rms in India employ eight or fewer workers. These rms could have easily expanded if
they wanted to, at least the labour laws would not have been a hindrance unless they had
employed hundred workers but this did not happen. It is therefore safe to conclude that rigidity or
exibility is not the only concern or the only reason why the labour has remained informal and has
not been able to get gainful employment.
As far as the entrepreneur, the employer is concerned there are many other factors which have a
key role to play in providing consistent and increasing wages to their employees.
Some of the problems which the employer may have to deal with are inadequate credit,
marketing opportunities, bad infrastructure , erratic power supply, ease of doing business being
low, bureaucratic hassles, corruption etc.
Just by amending the labour laws, focusing on the exibility or the rigidity of the labour laws is not
enough. There are many other things which the employer has to deal with to increase the
productivity pro tability and the wages and standard of living of their employees.
However this does not at all mean that some labour acts do not need amendments. For instance
employees Provident fund and miscellaneous provisions act raised the statutory wage ceiling to
15,000 in 2014, introducing a minimum pension of 1000 under employee pension scheme.
Also a uni ed labour portal called Shram Suvidha portal has been launched for the timely
redressal of grievances and for conducting a healthy environment for industrial development.
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Conclusion
Labour markets are being subject to changes intended to enhance exibility and lower the labour
costs. Social security measures are perceived as inimical to competitive advantage and
growth .the inevitable result of all this has been widening gaps in income and well-being.
It needs to be emphasised that job security is not the only means by which income security can
be achieved. But in the absence of any security blanket, it would at least partially compensate for
income loss due to job loss, and workers have no other option but cling to the demand for job
security.
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