In Pursuit of Labour Market Flexibility: The Case of India


Since the beginning of economic reforms period, Indian economy is gearing its arms in a bid to promote both economic and employment growth. The growth strategy adopted by the state has come under tremendous pressures from neo-liberal perspectives which sought to ensure “Ease of Doing Business” climate by providing for flexibility for employers.  In order to lessen the burden on the employer, flexible labour laws has been advocated so that it could reduce the fixed employment adjustment cost, and thus it would allow enough flexibility to fiddle with the production activities, as well as to manage the labour demand according to the prevailing market condition. While doing so, two implicit economic rationales have been assumed by the policy makers. Firstly, it is believed that allowing flexibility to firm’s could accelerate higher employability and would stimulate labour demand, and thereby it will increase aggregate employment through reducing adjustments at the margins. Secondly, the improved level of aggregate employment would then correspond to better wages to those employed, and would likely to reduce the overall employment and wage inequality through eliminating rigidity in the labour market. Apart from the flexibility measures proposed to be executed by the central government, the state governments like Rajasthan, Madhya Pradesh and recently the Maharashtra government has liberalized the Contract Labour Act by raising the threshold for application of the law from 20 workers to 50 workers and thereby removing a good many primary employers and contractors out of the purview of the said law.  It is expected that several other states would follow the suit and even the central government may enact the same at the national level.  Further, a host of complimentary flexibility measures are being attempted or have been implemented by both the central government and the state.  It is in these contexts of rising flexible labour markets even in the so-called formal sector are causing severe wage inequities between contract workers and regular workers which need to be reviewed.

News reports, press anecdotes and serious research articles concerning Asia in general and India, in particular, have identified severe wealth, income and wage inequalities that cause tremendous social and economic concern as they pose a serious challenge for social and political cohesion and having significant costs for economic growth. According to The Global Wage Report 2016-17 by ILO, in India, the highest-paid top 10 percent of income groups receive almost 43 per cent of total wages paid to all employees; whereas, the lowest-paid bottom 50 per cent income groups receives only 17 per cent of total wages paid to all employees. Moreover, the report observes the following three important dimensions of growing wage inequalities in India- 1) the upper tail of wage distribution is highly concentrated in the hands of 1 per cent highest-paid income groups, who enjoys more than 33 times share of total wages than the bottom 10 per cent lowest-paid income groups; 2) Women workers earns 33 times less than the male workers; and finally, 3) the persistence of wage inequality within the enterprise and industrial sector is driving the total wage inequality. It is evident that the large sections of the workforce have not been able to reap the dividends of high growth of Indian economy and have been excluded from the developmental outcomes. Different bases of inequities could be identified such as gender, skill-based, social and religious identities and so on which have received some attention in the inequities and discrimination literature. But in the post-liberalization period an important flexi-type worker category has been intensified greatly in terms of its numbers and width of operation and to in some cases staggering limits, i.e. contract labour employment which very significantly cuts across all labour markets and social markers such as gender, caste, religion, immigrant and so on.  The inequality of income between these workers and their regular counterparts have largely skewed and exacerbated since last two decades. It is estimated that the contract workers in the organized manufacturing sector earns 55 to 63 per cent less wages than their regular counterparts.

The cost of flexibility:

Principal employers employ contract labour for three reasons, viz. easy dispensability subject to market conditions, relatively cheaper workforce, and low monitoring costs.  Of the three, easy dispensability has not been a major virtue because in most of the tasks the principal employers either legally or illegally employ contract labour and hence the contract workers are continued in same tasks almost in same firms for longer tenure and the principal employers often participate in the monitoring of contract labour thanks to the interface of work done by the so-called contract workers and the regular workers.  It appears that despite the transactional and commission cost inherent in employing workers through a third party, lower labour cost seems to be the real advantage for the principal employers. Cost arbitrage is the biggest incentive for rising and big employment of contract labour and it makes eminent economic sense. This reasoning is further confirmed by the fact that contract workers are least likely to be organized and their terms of employment hence are least likely subject to collective negotiations, though there have been signs of some activity on these fronts.

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There is other side to this argument which posits that wages of contract workers in the formal sector will be better off than that prevalent in the informal job in the informal sector thanks to state regulations like minimum wages and some union effects.  Further, if the contract workers are more likely to be strike-substitutes during a longer industrial conflict and they perform more probably skill work (to be effective strike-breakers) or even unskilled work, then it pays the firm to pay slightly higher wages to the contract workers than otherwise for retaining and pampering them.  But these arguments fall on two grounds, viz. some studies show that minimum wages are generally violated in informal enterprises and informal sector of formal economy like garment industry; further it may not be economically rational for a profit-maximizing employers to pay higher than minimum wages to train workers for an eventual conflict possibility which in these times of withering away of strikes; and there could be and there is evidence of rising solidarity between regular and contract workers to break employers’ tactics. 

Way forward:

On contrary to Indian the flexibility model, the Danish “flexicurity” model has achieved outstanding labour market performance. The model is best characterized by a triangle. It combines flexible hiring and firing with a generous social safety net and an extensive system of activation policies. The Danish model has resulted in low (long-term) unemployment rates and the high job flows have led to high perceived job security (Eurobarometer 2010). Unlike the Indian industrial relations that make the effective collective bargaining less fructified. The Danish experiences have allowed the full swing flexibility with moderate level of active labour market intervention using the triangular stakeholder approach.

The employment protection constitutes the first corner of the triangle. For firms in Denmark, it is relatively easy to shed employees. Not only notice periods and severance payments are limited, also procedural inconveniences are limited. The employment protection legislation index of the OECD for regular contracts is only 1.5.  The underlying reason for the low employment protection can be found in the economic structure. Of old, there are many small firms for which it is burdensome and costly to have strict employment protection.

The social safety net forms the second corner of the triangle. The safety net consists of unemployment insurance and social assistance. Unemployment insurance is voluntary and half of Danish workers participate in one of these insurance funds. The unemployment insurance funds are subsidised and on the margin fully when unemployment increases (unless at very low levels).

Activation policies accomplish the third corner of the triangle. The high unemployment benefit reduces search incentives. A high level of activation is, therefore, essential to combat moral hazard and maintain search incentives. Especially young unemployed workers receive an activation offer quickly; within three months after becoming unemployed. An important characteristic of the Danish activation policy is that the activation increases with the duration in unemployment. There is also interdependence with the social safety net. Before the unemployment benefit ends, the activation is intensified in terms of fulltime activation.

By adopting the labour policies which are dynamic in nature, the Indian state actually do better in order to protect the interest of workers.

The centre is gearing its arms with the proposed Labour Code on Wages Bill 2015 drafted by the Ministry of Labour and Employment in March 2015, in an attempt to reconcile 44 different labour laws into four main codes to promote flexible labour markets as well as to improve India’s global ranking in the Ease of Doing Business. In doing so, the centre is playing a key role, by carving out a space for state governments to ensuring a smooth execution of those proposed labour code and waning out the enforcement mechanism. As it is evident that the rising share of contract workers is the future of Indian labour markets and the fate of this workers will be rest upon the mercy of Indian states who are mulling out the market led reform in order to attract the global capital. Hence, it can be argued in the pursuit of achieving flexibility, the state is actually hurting the interest of workers especially, the contract workers who are nonetheless thriving force of Global Indian economy.

Dr. Rahul Suresh Sapkal holds PhD degree in Law and Economics with European Doctorate Program in Law and Economics at University of Hamburg (Germany), Erasmus Rotterdam University (The Netherlands) and University of Bologna(Italy). Presently, Dr. Sapkal teaches Economics and, Law & Economics, at Maharashtra National Law University Mumbai.


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