Home / News / India /  ‘Labour reform will create jobs, but wage premium will get hit’

The recent labour reforms will help in job creation, but they will not be decent jobs, instead the wage premium will be a victim, says K.R. Shyam Sundar, a labour economist and professor at XLRI-Xavier School of Management. In an interview, Sundar said while labour reforms will attract investments and aid industrial growth, it should not be seen as a panacea for all problems. He argued that the new reforms have given employers the unilateral power to determine terms and conditions of service, and this will hamper wage growth. Poor income growth hampers poverty alleviation, he said. However, Sundar lauded the expansion of social security and universalization of formal employment contract among regular wage earners. Edited excerpts:

The labour codes have made provision for universalization of formal employment contract. What will this change?

It now requires employer to offer a formal written employment contract or appointment letter detailing the terms of contract. It will have three benefits: employment identity, assertion by workers of rights under the law, and provide clarity on the terms and condition of employment. It also reflects legislative poverty of the last 70 years, wherein a very basic requirement was not provided for. The NDA (National Democratic Alliance) government has made provision for it now, at least for regular wage workers. That way, it’s historic. In 2012-13, a little over 50% did not have formal written employment contract, and the 2017-18 official data shows, 71.1% of the regular-wage, salaried workers in the non-agriculture wage space, did not have written formal employment contracts.

But there are issues here: the occupational safety and health code (OSH Code) does not provide for a cure if an employer does not offer a formal written contract. There is no corresponding penalty for violating firms on this. They should have been in Industrial Relation Code instead of OSH code, so that the grievance redressal committee could have addressed even if there was no trade union.

There is a clear articulation of intention to universalize social security, but do you see an execution plan? Where is the fund and defined goal?

Overall, the social security code is a positive one, but I find a few issues in it. The existing thresholds for EPF (employees’ provident fund) and ESI (employees’ state insurance) have been retained, but by altering the definition of factories and increasing the threshold of workers from 10 to 20 and, in some cases, 20 to 40, it won’t expand social security cover in existing organized sector. The positive, however, is that it seeks to include informal workers and inter-state migrants, platform workers, etc. What the government needs now is give clarity whether this covers agriculture wage workers (not talking about farmers), beedi workers and domestic workers. This code, also, does not talk about registration and provision of a portable social security card.

The issue is of formal identity cards, wherein all workers must be given a unique labour market identity number, and it should be mentioned in the worker’s identity card, along with the company identity number.

The registration of such cards for all workers should be done by the Centre, and states should do the delegated responsibility, else social security card by one state may not be acceptable by another. Link them with Aadhaar, bank account, PDS (public distribution system), etc., with workers’ other details for a labour market citizenship card.

But voluntary contribution-led social protection for informal workers suffers from multiplicity, and has failed to achieve result, isn’t it?

Voluntary contribution schemes must be rationalized, and provided for with legislative backing, not through executive orders. Social security has two components – social protection and social insurance. While one is contributory, the other is tax and state-financed. Government must make the contributory protection very transparent and defined, which will incentivise people to contribute.

The platform and gig economy in India is still nascent and the players there are saying, the government’s move on social security will burden them financially. What is your view?

Yes, these companies are young and what they are saying makes economic sense, too. There is something called social security credits. In the first three or five years, the government can give social security credit, which will be notional, and can be recovered once the time frame is over and companies mature. While gig and platform workers can contribute, enterprises below a certain capital limit can be given a notional credit and recovered after the incubation period.

While the codes are expected to boost ease of doing business, will it increase employment generation and offer decent jobs and wages?

There is a trade-off between employment security and wage security. A classic argument is employment security comes with low wage. Labour reforms by allowing hire and fire threshold, reduces trade union conflict and create jobs, but will impact wage. Because, the employer now will enjoy unilateral power to determine terms and conditions of service in establishments deploying less than 300 employees. Because the standing order does not apply to them.

This extension of threshold will have three consequences: a) unionization will be tough as most workers will be either contracts or fixed-term employment, b) in the absence of standing order, there won’t be homogenous working condition or working terms within the same organization, and c) adherence of minimum wage.

While minimum wage shall empower low-paid workers, but for others it reduces actual wage, which is premium wage.

In the absence of a standing order, premium wage command will suffer.

But will jobs be created due to a better business environment?

Yes, it will create more jobs, but poor quality jobs. Low wage, contractual work and fixed-term work will prevail and, wage premium will be a victim. The unilateral power to determine terms and conditions of employment by employers will impact wage bargaining irrespective of employees’ efficiency. Income stagnation and low wage hamper poverty alleviation.

The ease of doing business moves will attract investment, there will be growth in firms, but workers may not benefit proportionately. You will gradually see more automation and substitution of workers with machines, which is not a best case for a labour-surplus and barely middle-income economy like India.

As per law, in a work space, either employees or employer cannot act arbitrarily. The increase of from 100 to 300 in the standing order provision means it will remove 90% of the factories from its purview, and disempower 40% of factory workers. Government data tells us that more than 90% factories employ less than 10 workers

So the argument is by allowing flexibility in standing order, firing limit, compliance reduction, the codes shall help firms not to remain dwarfs. Thus, create value for the economy and jobs. Is it not?

Government’s justification of hire and fire and diluting standing order from 100 to 300 is that small enterprises which are on the margin of 80-plus workers, must grow and laws are restricting that due to its 100 threshold. In 2017-18, at least 71.31% of factories in Andhra Pradesh deployed less than 20 people, in Jharkhand it was 53%, in Odisha it was 63.5% and in Telangana 67%.

I am talking about them because they are new growth centres. Let’s take the percentage of factories deploying between 20 and 99 workers. In Andhra it is 5.4%, Assam 17%, Gujarat 11.42%, Madhya Pradesh 12%, Maharashtra 15.62%, Rajasthan 11.66% and Tamil Nadu 12%. So, how do one believe that only labour reforms and flexibility in hiring and firing will help them grow and create more jobs.

Are we moving towards making labour market a freelancers’ market because of over-promotion of fixed-term and contract employments?

Fixed-term employment is not bad, but it has to be defined in terms of tenure and minimum threshold, let’s say, for three months minimum to let’s say two years. Also, can there be a cap on renewals. Else, it will become not seasonal, but regular in nature. It defeats the purpose. While the bigger companies will go for it, smaller firms will opt more for contract workers and control their employee cost, including avoidance of gratuity.

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