Labor restrictions: Breaking six decades of deadlock
Initiatives to push the dynamics in the labour market to force regulatory practices to adapt to evolving economic and socio-political structures.

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Workers assemble fans in a factory in Varanasi Benares, India.

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  • @hemalshah_7: Labor regulations should be designed to adapt to evolving economic and socio-political structures

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  • @hemalshah_7 proposes realistic labor market reforms in India to break six decades of deadlock

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  • India's labor laws should account for those in favor of status quo and others who favour immediate reform

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India suffers from one of the most rigid labour markets in the world. The 1991 reforms liberalised the economy to some extent, but labour regulation continues to remain archaic, restrictive, and convoluted. As a result, while growth rate quadrupled, the rate of good quality jobs has remained stagnant. The costs imposed by labour regulation force businesses to remain in the informal sector, where regulation is lax or absent and social protection programmes are limited. As a result, 93 percent of the Indian workforce derives their livelihoods from the informal sector — making economic modernisation, and in turn, generation of good-quality livelihoods, a distant goal.

A quick look at growth versus employment post-1991 brings out the inconsistent relationship between the two: As growth rates increased from around 3.5 percent to 6 percent between 1991-2000, employment growth fell from 2 percent to 1 percent in the same period. The situation improved in 2000-2005 when India’s growth rate averaged 7 percent, and employment went up by 1.6 percent. But as a U-turn, in 2005-2010 when growth averaged higher at 8 percent, employment dropped by 5.4 percent, as per World Bank figures.

The rate of good jobs creation has also suffered, as per data from CRISIL. For instance, in 2005-10 compared to 2000-05, the number of casual (informal) jobs rose substantially, from 8.6 to 21.9 million. But regular jobs dropped from 18.6 million to 5.7 million. However, the self-employed took the biggest hit with a drop of 25 percent in 2005-10 compared to 2000-05. In short, 92.7 million jobs of better quality were added in 2000-05, compared to the 2.2 million increase in 2005-10, mostly composed of casual jobs. This, of course, saw the continuing enlargement of the informal sector to 93 percent today.

On the other hand, formalisation – and larger firms – is associated with higher productivity, innovation, and competition for exports. But of course, most Indian businesses cannot avail of this opportunity owing to disincentives of moving to the formal sector. However, formalisation is not desirable until labour laws are relaxed, statutory costs decline, and service quality of social security organisations is improved.

Analysts and policymakers have debated the challenge of inflexible markets in India for decades. Recommendations often proposed drastic measures that have met with staunch resistance from parties whose interests are vested in an inflexible labour market — including employees, trade unions, and the labour ministry. However, in the face of challenges such as falling growth rates, rising fiscal and current account deficits, and a stagnant or declining manufacturing sector, less sensitive labour market reforms merit urgent consideration. A workable set of initiatives in the following three areas — by accounting for those in favour of status quo and others who favour immediate reform — could result in better outcomes.

Read the full article here. This piece is a part of the research report, ‘Towards greater labour market flexibility: Issues & Options’ for the Takshashila Scholars Programme.

Hemal Shah recently completed this report, while a scholar at the Takshashila Institution. She is now a research assistant at the American Enterprise Institute in Washington, DC.

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