Labour reforms and employment challenge: barking up the wrong tree

Labour reforms and employment challenge: barking up the wrong tree
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First Published: Tue, May 12 2009. 09 42 PM IST

Updated: Tue, May 12 2009. 09 42 PM IST
Whichever political formation comes to power, one major issue that will require its immediate attention is the economic crisis, particularly its fallout on employment.
Contrary to popular belief, the challenge is not only to create jobs in a slowing economy, but also to ensure that the jobs offer decent compensation and social security. The past experience, as documented by a recent report of the National Commission for Enterprises in the Unorganized Sector (NCEUS), is anything but positive. Not only did the organized sector create fewer jobs than the unorganized sector, a large part of the employment it generated carried no social security and other benefits that are normally available to regular workers.
The problem then is not of quantity, but quality of employment. In fact, of the 59.3 million additional jobs generated during 1999-2000 and 2004-05, 57.9 million, or 97.6%, were in the so-called informal sector, offering no job security or social security benefits. The organized sector contributed little; the employment it generated was largely of informal nature. According to estimates presented in the NCEUS report, 46% of all jobs in the organized sector in 2004-05 were accounted for by informal workers.
But how much of the lack of job creation in the formal sector attributable to the rigidity of labour laws? Going by the analysis of NCEUS, these trends appear to be part of the international trend towards greater flexibility of employment, unbundling of manufacturing employment (leading to outsourcing of various services) and an expansion in other types of outsourcing and contract services. Simultaneously, there is very little evidence to suggest that this has been due to the existing rigidities in labour laws, often put forward as the central argument to explain low labour absorption in the formal sector.
The consistent data series created for organized manufacturing by NCEUS shows that between 1996-97 and 2003-04, the public sector shed 0.86 million workers while the private sector shed 0.68 million. The report also suggests that in the recent period, there were hardly any cases where firms were refused permission to retrench workers; the percentage of contract workers has steadily increased. The industrial relations climate has visibly improved because of a number of factors and this is shown in the reduced number of days lost due to strikes. A recent paper by K.P. Kannan and G. Raveendran in the Economic and Political Weekly also suggests that despite rigid labour laws, there are a number of industry groups that have posted a significant increase in employment.
Political apathy: The social security of workers in informal sectors such as construction has hardly caught the attention of policymakers. Ramesh Pathania / Mint
So if labour laws are not responsible for slow growth of employment in the organized manufacturing sector, what is? One prominent reason advanced by recent studies for the rising capital intensity and slow growth of employment is the changing composition of demand, which has moved in favour of highly capital- and skill-intensive export goods. Moreover, expansion in domestic demand has been for products consumed by high income groups, fuelled by rising earnings and availability of credit. Firms chose capital-intensive technologies despite the fact that labour was becoming relatively cheap, as is evident from the deceleration in casual wages and a real decline in regular wages. Not only is the period characterized by worsening wage inequalities among workers, but it also saw intensification of dualism in the labour market among organized and unorganized sector workers.
While the evidence on labour laws being an impediment to employment creation may be weak, there are compelling arguments to reform labour laws. This is particularly true with regard to multiplicity of regulating agencies, multiplicity of laws and better implementation mechanisms. However, the issue at hand is whether the focus of reform should be restricted to easing of hiring and firing policies in the organized sector, which employs less than 10% of the workforce, or should be targeted at ensuring social security and other benefits to the remaining 90% of the workers in the informal sector. The progress on this front is not only slow, but has hardly caught the attention of policymakers.
The case of the pending legislation on social security for workers in the unorganized sector is a perfect example of the apathy of the political class to the needs of workers in the informal sector.
Unfortunately, these trends were seen during a period when India was among the world’s fastest growing economies.
Himanshu is assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi. Farm Truths looks at issues in agriculture and runs on alternate Wednesdays.
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First Published: Tue, May 12 2009. 09 42 PM IST