Themes > Features

11.11.2002

Regulating Labour Markets for More Employment

The Second National Labour Commission has released is report at a time when inadequate productive employment generation is clearly one of the most pressing problems in the economy. The composition and terms of reference of he Commission have already excited much controversy, and there are suggestions that the membership of the Commission has been heavily skewed in favour of those who are members or supporters of a particular rightwing social formation. For this reason, a number of trade unions and other progressive organisations who would normally be involved in the process, had chosen to boycott the work of the Commission. Nevertheless, since the Government is likely to take on board the recommendations of the Commission, it is necessary to take the report very seriously.
 
Te Commission has also recognised that patterns of employment in general over the recent past brings to light some disturbing tendencies. These may be briefly summarised as follows:
 
Overall employment growth has decelerated substantially. It is estimated to have grown at around 1.01 per cent per annum in the 1990s compared to 1.55 per cent per annum in the 1980s.
 
Open unemployment emerged as a major problem, even as disguised unemployment continued to be significant. The number of unemployed in 1997 more than the number employed in organized sector.
 
The levels of protection to workers in the economy have been miniscule. Only around 7 to 8 per cent of the workforce in the organised sector is protected while 92 to 93 per cent is in the unorganised sector, is unprotected and vulnerable.
 
There is a trend in growth of casual labour in the total workforce during all these years. The proportion of self-employed has come down from 59 per cent in 1977-78 to 53 per cent in 1999-2000. But the number of casual workers has gone up substantially from 27 per cent to more than 33 per cent.
 
Employment is not growing in the organised sector.The quality of the workforce continues to be a problem, in terms of skill development and education. 44 percent of the labour force in 1999-2000 was illiterate. Only 5 per cent of the work force was estimated to have the vocational skills required in the productive sectors.
 
The other important data to be gleaned from the NSS Surveys relates to the changing employment elasticities of sectoral output growth over the recent period. Chart 1 presents these at the aggregative all-India level by major productive sectors. It is evident that there has been a substantial decline in employment elasticity of output growth in almost all the major productive sectors except for transport and finance related activities.

      
 
In agriculture, the employment elasticity has dropped to near zero, while it has turned negative for mining, utilities and social and community services. In most other sectors, including manufacturing, it has declined. The latter two reflect the impact of Pay Commission recommendations, which increased public sector wages and restricted additional employment in the public sector over this period.
 
The deceleration in organised sector employment is indicated in Chart 2. This was one of the more disturbing features of the 1990s, especially given that industrial output increased manifold and the service sector in which much of the organised employment was based, was the most dynamic element in national income growth. Chart 3 shows the diasaggregation of organised sector employment by gender. Women's employment grew from its very low base, but male employment in this sector more or less stagnated.

     

       

Despite this, organised sector employment expansion slow down considerably compared to the earlier decade, and barely increased at all for male workers. This was due to the collapse in public sector employment, a process that was in turn greatly welcomed by economic liberalisers who saw in this downsizing tendency a reflection of greater "efficiency". While public sector employment fell especially in the latter part of the decade, private organised sector employment continued to increase, albeit very slowly. But this increase was not really enough to compensate for the decline in public employment.
 
Indeed, by the end of the decade the organised sector accounted for only 8.3 per cent of total employment. For the private sector as a whole, it accounted for only 2.5 per cent of total employment. This of course creates a significant problem for labour policy, because the traditional forms of regulation affecting workers' conditions typically can be effectively applied only to workers in the organised sector. The dominance of the unorganised workforce means that a labour policy regime needs to be worked out bearing in mind this crucial consideration.
 
Chart 4 shows that the growth of organised employment in manufacturing was pitifully slow over this period, amounting to an average annual rate of only 0.87 per cent between 1993 and 2000. This is compared to a growth rate of employment of 2.95 per cent in the unorganised sector. This in turn meant that the share of organised sector in total manufacturing employment decreased even over these seven years, from 18.3 per cent to 16.5 per cent.

     
 
While the low and falling proportion of the organised sector in total private employment also questions the assumption that excessive regulation has restricted employers in Indian manufacturing activity in the aggregate, it does suggest that employers have been less likely to increase workforces in the organised sector.
 
This is the basic concern that the Second National Labour Commission has sought to address. It is in this particular context that the argument (which, as mentioned above, tends to have wider resonance) is made that investment has been constrained, and employment growth has been insufficient, because of rigidities in the labour markets that adversely affect employers' sentiments particularly as regards organised sector activities.
 
Three types of regulation are seen as especially constraining for employers in the Indian context: first, fairly stringent rules relating to firing workers and also for closing down enterprises, along with requirements of reasonable compensation for retrenchment; second, laws governing the use of temporary or casual labour which enforce permanence of contract after a specified time of employment; third, minimum wage legislation which raises the cost of hiring workers.
 
The Labour Commission has sought to deal with these issues, while suggesting desirable conditions of work and pay for unorganised labour in general. In the process, while its intentions are clearly progressive, it has ended up making recommendations that will hit organised labour even as they are not likely to improve the conditions of the vast majority of other workers in the country.

Labour Market Policies in India
It is a common misconception among academics and policy makers, that social realities can be altered by legislative fiat. The relationship between laws and social change is complex, multi-directional, many layered and frequently contradictory. But it is always shaped more definitively by political economy and social configurations than by imposition from above, however well intentioned and analytically convincing such imposition may be.
 
It is also the case that the formulation and implementation of laws themselves are hugely affected by social pressures of various sorts.  Throughout history and across countries, the recognition and granting of workers' rights have not occurred because of the benign intentions of governments, but because workers and other social movements have struggled and fought for such rights. That is also why, even when such rights are "officially" accepted at both national and international levels, they can be systematically denied to large numbers of citizens because of the prevailing political and material realities.
 
The rather chaotic regime of labour laws that currently operates in India reflects these tendencies very clearly. On the one hand, the laws are mostly commendable in their declared intentions and acceptance of fundamental rights of workers. However, they are hardly implemented in any meaningful way for most workers in the country, and are generally honoured only in the breach. On the other hand, the laws themselves were legislated at different times in response to particular pressures and with varying motivation, which makes them sometimes sit uneasily together.
 
These tendencies are so marked that the Report of the Second National Commission on Labour is quite severe upon them: "It can be said that our labour laws have not flowed from any vision of a harmonious and just social order that takes into account the needs of an efficient and non-exploitative society, or a vision of the rights, duties and responsibilities of the different social partners to themselves, to each other, and to the totality of the community. They have been criticised as being ad hoc, complicated, mutually inconsistent, if not contradictory, lacking in uniformity of definitions and riddled with clauses that have become outdated and anachronistic, in view of the changes that have taken place after they were introduced many years ago." (Report of Second National Commission for Labour, Chapter 1, page 12.)
 
Going by the statute books alone, workers in India are heavily protected and their rights are quite thoroughly recognised. Thus, the Fundamental Rights enshrined in the Constitution of India include: Right to Equality (Article 14- 18); Right to Freedom (Article 19-22); and Right against Exploitation (Article 23-24).
 
In addition, there are the Directive Principles of State Policy enshrined in the Constitution, which also are supposed to provide major guidelines for state action. These include: the State should aim to secure a Social Order for the promotion of welfare of people (Article 28); Principles of the Policies to be followed by the States (Article 39 which includes the issues relating to equal pay and child labour); Equal Justice and Free Legal Aid (Article 39A); Right to Work; to Education and to public assistance in cases of unemployment, old age, sickness, disablement and undeserved want (Article 41); Provision of Just and Humane Conditions of Work and Maternity Relief (Article 43); Living Wage etc. for workers (Article 43); Participation of Workers in the Management of Industry (Article 43A).
 
The Directive Principles are not justiceable in a court of law, but they are supposed to indicate the general direction of the policies of the State. For example, the Directive Principles of State Policy in the Constitution have specifically referred to ‘living wages' in Article 43, which is as follows: "The State shall endeavour to secure, by suitable legislation or economic organisation or in any other way, to all workers, agricultural, industrial or otherwise, work, a living wage, conditions of work, ensuring a decent standard of life and full enjoyment of leisure and social and cultural opportunities and, in particular, the State shall endeavour to promote cottage industry on an individual or cooperative basis in rural areas".
 
Clearly, the stated intentions of the Constitution, and therefore of the legal system which it underlies, are inclined to recognised, uphold and protect the rights of workers as far as possible. The actual implementation, is of course another matter.
 
The ILO declaration on Fundamental Principles and Rights at Work, adopted by the International Labour Conference in June 1998, declares inter alia that all Member States whether they have ratified the relevant conventions or not have an obligation to respect, to promote and to realise the principles concerning the fundamental rights which are the subject of those conventions, namely: (a) freedom of association and the effective recognition of the right to collective bargaining (b) the elimination of all forms of forced or compulsory labour; (c) the effective abolition of child labour; and (d) the elimination of discrimination in respect of employment and occupation.
 
The Government of India ratified Convention 122 on Employment and Social Policy in 1998. Article 1 of the Convention lays down that:
 
(1) With a view to stimulating economic growth and development, raising levels of living, meeting manpower requirements, and overcoming unemployment and underemployment, each Member shall declare and pursue, as a major goal an active policy designed to promote full, productive and freely chosen employment.
 
(2) The said policy shall aim at ensuring that: (a) there is work for all who are available for and seeking work, (b) such work is as productive as possible (c) There is freedom of choice of the employment and the fullest possible opportunity for each worker to qualify for, and to use skill and the endowments in a job for which he is well suited, irrespective of race, colour, sex, religion, political opinion, national extraction or social origin.
 
On the basis of such commitments, the Second National Labour Commission actually declares that the following rights of workers have been recognised as inalienable and must, therefore, accrue to every worker under any system of labour laws and labour policy. These are:
(a) Right to work of one's choice
(b) Right against discrimination
(c) Prohibition of child labour
(d) Just and humane conditions of work
(e) Right to social security
(f) Protection of wages including right to guaranteed wages
(g) Right to redress at of grievances
(h) Right to organise and form trade unions
(i) Right to collective bargaining, and
(j) Right to participation in management.
 
While these add up to a formidable array of rights accepted by the Indian Constitution for workers, the problem is that they are rarely achieved or enforced. This is one of the most common – and most effective – criticisms of labour legislation in India, that it is applied only very selectively, does not cover most workers, and thereby ends up penalising those employers who employ relatively larger numbers of workers and thereby fall under the legal and administrative net.
 
In fact, it is not the case the various provisions are actually applicable only to workers in the formal sector. Laws like the Minimum Wages Act, the Equal Remuneration Act, the Contract Labour Act and so on apply to workers in both the organised and the unorganised sector; even the Industrial Disputes Act applies to large sectors of unorganised labour. However, the sheer practical difficulties and high costs associated with implementation and enforcement of such legal provisions ensures that most workers do not benefit from them. Further, the fact that informal or unorganised activities are growing in terms of total employment, and that in any case a substantial part of unpaid household work is still not even recognised as employment, means that the problem of enforcement of such provisions is becoming more rather than less difficult.
 
Nevertheless, there are sectors of the economy – notably formal activities in industry and services – where labour laws are enforced. It is precisely with regard to this segment, that the current debate on labour legislation is centred. Currently, there is no uniformity of pattern in the employment limits prescribed by various labour laws. They range from covering establishments employing 5 persons as in the Motor Transport Workers Act and Inter-state Migrant Workers Act to 10, 20 or 100 as in the Factories Act, Building and other Construction Workers Act, Payment of Bonus Act, Contract Labour (Regulation and Abolition) Act, Industrial Employment (Standing Orders Act). There is even a history of wage limits being prescribed in laws like EPF Act, ESI Act, Payment of Bonus Act etc.
 
The existing set of labour laws should be broadly grouped into four or five groups of laws pertaining to (i) industrial relations, (ii) wages and other remuneration, (iii) social security, (iv) safety and (v) welfare and working conditions.  The laws that are currently most contentious are those relating to industrial relations (specifically, the conditions of hiring and firing) and to wages. In each of these, once again, there is a plethora of legislation, at both the Central Government level and in various State Governments. The basic central laws relating to the subject are the Industrial Disputes Act 1947, the Trade Unions Act 1926 and the Industrial Employment (Standing Orders) Act, 1946.
 
The Second Labour Commission Report examined the issue of changes in industrial relations in some detail. Some of its conclusions are so significant that they are worth quoting in full:
 
"A review of industrial relations in the pre-reform decade (1981-90) reveals that as against 402.1 million man-days lost during the decade (1981-90) i.e. in the pre-reform period, the number of man days lost declined to 210 million during 1991 to 2000 - i.e. the post-reform period. But more man-days have been lost in lockouts than in strikes. .. A large number of workers have lost their jobs as a result of VRS, retrenchment and closures both in the organised and the unorganised sector. The exact number is not available. According to our information, no data on this subject has been compiled by any State Government. .. We have received a large number of complaints on VR schemes. We have also been told of elements of indirect compulsion, pressure tactics, innovative forms of mental harassment, compelling employees to resign by seeking to terminate them, and in some cases, physical torture and threats of violence against themselves or dependents.
 
We shall make a few other general observations on matters that have come before us about the industrial relations scenario.
 
1) It is increasingly noticed that trade unions do not normally give a call for strike because they are afraid that a strike may lead to the closure of the unit.
 
2) Service sector workers feel they have become outsiders and are becoming increasingly disinterested in trade union activities.
 
3) There is a trend to resolve major disputes through negotiations at bipartite level. The nature of disputes or demands is changing.
 
4) The attitude of the Government, especially of the Central Government, towards workers and employers seems to have undergone a change. Now, permissions for closure or retrenchment are more easily granted.
 
5) The Conciliation Machinery is more eager to consider problems of employers and today consider issues like increase in productivity, cost reduction, financial difficulties of the employer, competition, market fluctuations, etc.
 
6) Recovery proceedings against employers who could not pay heavy dues of workers are not being seriously pursued by the industrial relations machinery, if the financial position of the employer is very bad.
 
7) The labour adjudication machinery is more willing to entertain the concerns of industry."
 
All of these observations point to a shift in the relative bargaining power in industrial relations, away from workers, to employers. Yet it is worth noting that despite this, the aggregate employment experience has been dismal and deteriorating. It is because the overall employment generation in the system is getting even more unsatisfactory than it has been in the past, that demands are being made for further legal changes that will affect the conditions of hiring and firing of the small group of relatively protected workers employed in organised industry and services.
 
It is being argued that these laws, which restrict employers' rights to dismiss workers at will and stipulate some degree of permanency of employment, act as a major drag on the profitability of the organised sector and on its ability to compete with more flexible labour relations elsewhere. In this perception, a shift towards a more universal contract-based system of labour relations, with no assumptions of permanency of employment, is required to ensure economic progress based on private enterprise within the current context.
 
There are two important issues to note here. The first is that such a shift towards employment based on specified time-based contracts conflicts with the more general requirement that society must ensure adequate livelihood opportunities (or decent work) to all those who are willing to work. If it is to be possible at all, it requires not only a socially accepted consensus on the new perception of employment, but social institutions that can maintain such a system.
 
Such a system in turn would entail the provision of facilities that would result in constant upgrading of employability through training in a wide spectrum of multiple skills, setting up system of social security that includes unemployment insurance and provisions for medical facilities, and so on. To ensure workers' rights, it would also be necessary to ensure that there would be both individual workers' contracts and collective contracts with the workers unions.
 
It is immediately apparent that this essentially requires the substantial underwriting of a large part of basic labour costs by the state, which is possible only in a very different macroeconomic set up with a much more interventionist government with higher rates of public resource mobilisation and public expenditure.
 
The second, and possibly even more important, point to note is that in the ultimate analysis, labour laws are perhaps far less significant as factors in affecting private investment, than more standard macroeconomic variables and profitability indicators. Thus, the condition and cost of physical infrastructure, the efficiency of workers as determined by social infrastructure, and the policies which determine access to credit for fixed and working capital as well as other forms of access to capital, all play more important roles in determining overall investment and its allocation across sectors.
 
Even the Second National Labour Commission Report appears to be aware of this. The Report makes the point that " the Commission is of the view that changes in labour laws are only one of the issues involved, and that these have to be visualised and effected in a broader perspective of infrastructural facilities, social security, and Government policies. We, therefore, suggest that these changes be accompanied by a well defined social security packet that will benefit all workers, be they in the ‘organised' or ‘unorganised' sector and should also cover those in the administrative, managerial and other categories which have been excluded from the purview of the term worker. In evolving such a social security system, it is necessary to provide for both protective and promotional measures, the latter being particularly relevant for the workers in the unorganised sector."
 
The problem, of course, is that the social security system for al workers, proposed by the Commission, while highly attractive and desirable, is completely unworkable within the present fiscal framework, an indeed would be a hard thing for any relatively poor developing country to begin to attempt for all of its workers. In the absence of clear mechanisms defining how such schemes are to be financed, they are likely to remain Utopian ideas. And when they are combined, as the Commission does, with attempts to further undo the rights granted and protection afforded to the small group of organised workers, the result may not be either the improvement of employment conditions or the spread of a viable social security system for all workers, but rather an effect quite the opposite of what is intended: that is, a further worsening of conditions facing all workers in the economy.
 
Thus, the Commission recommends "the enactment of a special law for small scale units. We have come to the conclusion that the reasonable threshold limit will be 19 workers. Any establishment with workers above that number cannot be regarded as small. The composite law suggested by us for small enterprises has provisions for registration of establishments, (provisions pertaining to) securing safety, health and welfare of the workers, hours of work, leave, payment of wages, payment of bonus, compensation in case of lay off, retrenchment and closure, resolution of individual and collective disputes of workers, etc. The law … also has provisions pertaining to social security."
 
With respect to retrenchment and closure, the Commission is in favour of granting greater freedom to enterprises, given the current circumstances of global competition and that fact that governmental delays usually mean de facto closure or retrenchment without any compensation to workers. So the Commission believes that prior official permission should not be not necessary in respect of layoff and retrenchment in an establishment of any employment size. However, it wants this done in a way that would "pay adequate compensation, offer outsourced jobs to retrenched workers or their cooperatives, if any enterprise decides to close down give workers or Trade Unions a chance to take up the management of the enterprise before the decision to close is given effect to: underwrite facilities for medical treatment, education of children, etc. and provide for a third party or judicial review of the decision, without affecting the right of the management to decide what economic efficiency demands."
 
How all this is to be achieved and monitored, is a question that is not really dealt with adequately in the Report. Of course, the Commission does suggest that "Every employer will have to ensure, before a worker is retrenched or the establishment is closed, irrespective of the employment size of the establishment, that all dues to the workers, be it arrears of wages earned, compensation amount to be paid for retrenchment or closure as indicated in the next paragraph, or any other amount due to the worker, are first settled as a precondition to retrenchment or closure."
 
The Commission also specifies that "contract labour shall not be engaged for core production/services activities. However, for sporadic seasonal demand, the employer may engage temporary labour for core production/service activity." Once again, the issue of monitoring is a crucial one.
 
But the most crucial monitoring and implementation issues arise with respect to the wage and labour standards that are necessary. About wages, the Commission recommends that:
 
Minimum wage payable to anyone in employment, in whatever occupation, should be such as would satisfy the needs of the worker and his family (consisting in all of 3 consumption units) arrived at on the Need Based formula of the 15th Indian Labour Conference supplemented by the recommendations made in the Judgment of the Supreme Court in the Raptakos Brett & Co case.
 
Every employer must in addition pay each worker one month's wage as bonus, before an appropriate festival.
 
There should be a national minimum wage that the Central Government may notify. This minimum must be revised from time to time. It should, in addition, have a component of dearness allowance to be declared six monthly linked to the consumer price index and the minimum wage may be revised once in five years. This will be a wage below which no one who is employed anywhere, in whatever occupation, can be paid.
 
Where wages are fixed purely on piece rate basis the employer should pay at least 75 per cent of the notified time rate wages to the piece rated worker if the employer is not able to provide him with work. Fixation of piece rate wages must be so done as to enable a diligent worker to earn after 8 hours work what would be the time rated daily rate.
 
All this is supposed to apply to all employers, in whatever sector, and all workers, whether rural or urban, in whichever activity they are employed! Of course these are no doubt praise worthy and desirable outcomes, but the implications of actually implementing this are mind-boggling, and next to impossible in the foreseeable future. In fact, what they would amount to is even greater difficulty of finding such employment for most workers.
 
It is all worth noting that higher wages are usually not "granted" by legislation of the benevolence of employers, they are won by the struggles of workers. And such struggles become difficult if not impossible when workers do not have a minimum security of tenure. In the context of excess labour supply, employers can simply react to attempts to organise for better wages and working conditions (even along the lines proposed by the Labour Commission) by firing such workers. Security against unwarranted dismissal, which is a minimum requirement for labour mobilisation, is effectively denied by these proposals. Therefore they will make it fare more difficult even for unorganised sector workers to insist on their basic rights, including a living wage.
 
For unorganised workers, in addition, the Commission feels that it would be "logical and wise to enact an umbrella type of law for the unorganised sector which would guarantee a minimum of protection and welfare to all workers in the unorganised sector, and would leave it open to the Government to bring in special laws for different employments or sub-sectors if experience indicates the need for it." But the real problem, that of ensuring that such laws are actually implemented and that the incentives within the economy are such as to ensure that the laws are functional, has not been systematically addressed.
 
This means that the only part of the Labour Commission's proposals that are likely to get genuinely implemented are those relating to easier conditions of hiring and firing in the organised sector. While the condition of the bulk of workers is not likely to improve in consequence of this, those of workers in the organised sector may actually deteriorate as a result. And this in turn will affect the bargaining position of all workers in the country.