Protect workers, not jobs
It is time to reorient labour laws to abide by the principle of ‘protect the worker, not the jobs’
This past year, an estimated 75,000 jobs were lost in the telecom sector due to financial stress in companies, and industry consolidation leading to redundancies. Another 50,000 jobs may have been lost in the information technology sector, as the industry faces new challenges due to Artificial Intelligence and H-1B visa woes. These are but two examples of formal sector job losses. According to the BSE-CMIE (Centre for Monitoring Indian Economy) survey, the estimated job losses due to the impact of demonetisation could be anywhere between three million and 12 million, in the subsequent two or three quarters that followed the disruptive announcement in November 2016.
While these jobs losses may not be permanent, most of these are likely to be in the informal sector. Much of India’s workforce is in the informal sector. Which means that workers do not have a written contract, nor retirement or health insurance benefits. They also lack security of tenure. India’s challenge is to create 10-15 million jobs per year as new aspirants attain working age. In addition to this number are the workers seeking to escape the trap of low productivity jobs in agriculture. Of course, the actual number of new jobs that need to be created every year could be lower, due to falling labour force participation, especially among women. This latter fact itself is a cause for worry, but we won’t dwell upon it here.
Among the topmost priorities of the Narendra Modi government is to ensure rapid job creation. Not only do we need sustained creation of new jobs, but also of good quality, that are ready to meet future needs and with higher productivity and wages. All of this should preferably happen in the formal sector. Else the spectre of jobless and restless youth could spell social instability and much worse. Political analysts believe that joblessness among youth has been one of the factors behind the recent caste- and quota-based agitations. This challenge requires a multi-pronged, multi-disciplinary approach that can address different circumstances in different sectors and regions of the country (as an aside, it can be mentioned that there are officially about two million vacancies waiting to be filled at all levels of government, including, in the judiciary, the armed forces and law enforcement. Surely, filling them up would be a good start?).
Labour is constitutionally on the state list, so reform will come largely from states’ initiatives. As for sectors, the four most labour-intensive sectors are agriculture, including agro-processing, textiles, especially garment making, construction and tourism. Two years ago, the Central government announced a special package for the textile sector, with an employment subsidy. The Centre agreed to pick up the provident fund (PF) contribution of the employer, to incentivize hiring of workers. That initiative largely failed, because most of employment creation happens in the informal (non-PF category) sector in apparel making. This basic problem should have been anticipated. But building on that, other states have announced employment-linked subsidies, not just in apparel, but other sectors as well. Jharkhand has the most generous package, and Odisha and Punjab are not far behind. The incentives also include land allocation to set up worker colonies or dormitories, so that they can be within walking or small commuting distance of their workplace. If successful, these state-level initiatives can be replicated elsewhere too.
The Centre’s own Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) provides 100 days of employment to one member of every rural household, without the attendant liability of having to make those workers “permanent” employees of the government. In that sense MGNREGA is actually a proxy for unemployment insurance. Indeed, MGNREGA work can cover all kinds of jobs, including road construction, forestry, small irrigation projects or horticulture. This is the principle of protecting the worker, not the jobs. An example can be cited from Germany in the post-2008 crisis period. Fearing massive job losses, the federal government offered private companies a salary subsidy to retain workers. The German government figured it would be less costly to provide a wage subsidy and retain workers rather than having a large number of unemployed collecting the dole. It worked. This too is an example of protecting the worker, not jobs.
Thus, the big policy reform needed in India for job creation is around reforming labour laws. These laws are supposed to exist to protect workers. But de facto they have ended up protecting jobs, not workers as a class. The various inflexible labour laws have created a barrier between formal and contract workers, leading to sometimes ugly incidents such as the violence in Manesar in July 2012. This implicit caste divide is damaging the worker morale. There is a wide gap in pay and benefits between formal and informal sector employees in the same organization. But more importantly, labour laws have ended up discouraging the hiring of new formal sector workers. Casualization and contract workers have become the norm, leading to low productivity, low wages, insecure tenure and no benefits.
It is time to reorient labour laws to abide by the principle of “protect the worker, not the jobs”. Since the Modi government enjoys immense political capital, it is time to bite the labour reforms bullet. As suggested by many others, this can be done by grandfathering all the existing formal sector employees, who will continue to be under the old laws, so as to reduce their opposition to reforms. All new entrants would be under new labour laws, which will hopefully lead to large-scale job creation.
Ajit Ranade is chief economist at Aditya Birla Group.
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