Is India’s labour market moving towards a May Day situation?

While economists disagree on the extent of rigidity in India’s labour regime, there is a broad consensus on the need to simplify labour laws


Labour reforms are a politically sensitive issue. But at the same time they are an important policy instrument to catalyze economic growth. Photo: Bloomberg
Labour reforms are a politically sensitive issue. But at the same time they are an important policy instrument to catalyze economic growth. Photo: Bloomberg

After showing a sense of urgency initially, the Modi government seemed to have put labour law reforms on the backburner in between. Now, things are simmering once again as the government contemplates integrating three laws—the Trade Unions Act, the Industrial Disputes Act and the Industrial Employment (Standing Orders) Act—into a single code for industrial relations, according to the Business Standard. While economists disagree on the extent of rigidity in India’s labour regime, there is a broad consensus on the need to simplify labour laws. That is necessary not only to reap the full benefits of the ‘Make in India’ programme, but also boost India’s performance in a broad array of development indicators. The industrial worker, in particular, seems to have got a raw deal, as the charts below show.

One of the basic indicators of distribution of economic products is the ratio of wages to profits. Since the latter accrues to a much smaller share of the population, an adverse movement in the ratio indicates a skewed earnings distribution in the industrial sector. The Annual Survey of Industry (ASI) data shows that the wage-profit ratio started declining from the second half of the 1980s in India. The fall has been spectacular. From a value of more than 2.5 in the late 1980s, it had come down to less than 0.3 by the end of 2012-13. Various factors might have led to this decline.

The reform period has seen an absolute decline in the number of public sector jobs, while private sector employment has increased. However, wages of both regular workers and rural casual labour have grown at a much slower rate than in the public sector since the 1990s. This mismatch between employment generation and wage growth could be a reason for the overall decline in wage share. The long-term drop in the share of wages points to weakening of trade unions as well as a structural shift towards capital-intensive industries.

Even within the private sector, a complex set of factors have been at play. Firstly, more and more employment generation has been contractual in nature as companies become reluctant to hire regular workers, given the absence of transparent labour market reforms. Since contract workers receive lower wages than regular workers for the same kind of job, this also contributed to a reduction in wage share.

Secondly, the share of wages paid to workers as a proportion of total emoluments has come down. ASI defines workers as all those who are involved directly in the production process. This could be owing to an increase in managerial or supervisory staff as the industry moves to more mechanisation.

These market-based iniquities, which have led to an unstable labour regime in India, have been compounded by a poor social security net in the country. According to the International Labour Organization’s World Social Protection Report 2014-15, less than one-fifth of the Indian population above the statutory pensionable age received pension. This is the lowest bracket among countries for which data is available. The report also said that even African countries spend more on social protection and health than India.

Labour reforms are a politically sensitive issue. But at the same time they are an important policy instrument to catalyze economic growth. Focusing on better social security and skill enhancement levels will go some way in bringing some stability to the labour markets in the country.

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