Labour reforms must include both state and market voices

The process of economic reforms began in India after 1991. In pursuit of economic reforms, successive governments since then have restructured commodity markets, financial markets and foreign trade regime. However, till recently, most of the governments that have assumed power at the Centre have neglected restructuring of labour market.

Different governments have neglected it because unlike other markets, labour market is a social institution. This is because the wages of workers and employment are not exactly like prices of commodities and their quantities. These are in fact the premise on which people evaluate themselves, think about their social position and judge whether they are appropriately rewarded and getting a fair share out of society's prosperity. Therefore, labour market reforms amount to playing with the human sentiments.

The restructuring of labour market is confronted by an intellectual divide amongst scholars, policy makers and members of the civil society and trade unions. One section of the intellectual divide is against labour market reforms, whereas the other strongly advocates for the necessity of labour market reforms. Both the camps have a well-articulated strand of thought and they drag the debate towards theoretical argument on appropriateness of state intervention versus market-led solutions.

In the context of labour market reforms, the policy makers should make an attempt to identify conditions when both might work together to minimise the social cost of reforming labour market. Therefore, an attempt has been made to know how much space should be given to regulations and how much role should be given to the market forces.

To arrive at an optimal mix of state and market, we are dividing labour market regulations into two broad segments: (a) a segment consisting of regulations which affect the price of labour, for example minimum wage regulations and regulations about provident fund and employee insurance, (b) a segment consisting of regulations which affect the costs of labour adjustment. In this segment, we are including costs of hiring and firing of workers and regulations regarding plant closure.

The consensus on economic thinking that emerged after the Great Depression of 1930s and post-World War II period of reconstruction and development was that markets fail. The acceptance of market failure motivated policy makers to impose a regime of regulations on the labour market, which empowered working classes with a range of rights. These rights included:

1. employment and labour market security by providing security against lay-offs and retrenchment and making them difficult and costly through Industrial Dispute Act;
2.  income security by legislating the Minimum Wage Act;
3.  conditions for profit sharing under Payment of Bonus Act, and
4.  work security by fixing hours of work, health and safety norms and working conditions at workplace through Factories Act.

The protagonists of labour market reforms argue that these legislations have kept supply side as hostage, because these legislations have made labour market so rigid that it cannot respond to market conditions. They suggested for removal of supply side constraints to make the labour market flexible.

Price-specific legislations are those legislations which influence the price of labour and thus affect labour costs. These legislations, in the context of Indian labour market, are the Minimum Wage Act, Payment of Bonus Act, Payment of Gratuity Act and Employee Insurance Scheme. Legislations that influence the adjustment process of manpower at the time of market fluctuations are ones which affect detachment costs like Payment of Pension Act and Payment of Gratuity Act. Provisions in these acts increase the costs of lay-off and retrenchment.

Apart from these costs, Industrial Dispute Act imposes additional costs on enterprises at the time of lay-offs and retrenchment. To avoid such costs, enterprises do not give the status of workers as guaranteed under regulations to sizeable section of the workforce to minimize non-wage labour costs and to have additional advantage of firing these workers at will without incurring firing costs.

Both sets of regulations have different labour market implications. Despite the existence of legislations that influence the price of labour, the relative price of labour is quite low in India in comparison to price of labour in the developed market economies. Therefore, these legislations do not have an adverse effect on the investments.

On the contrary, it has been observed that labour market regulations which affect the process of adjustment and cost of adjustment of manpower impose serious constraints on employment generation in the organised sector. It shifts the pressure of employment creation towards unorganised sector, where wages are low, working conditions are bad and workers work for longer hours.

Therefore, it is suggested that labour market reforms should provide opportunity to the enterprises to adjust their manpower in response to labour market fluctuations, and adoption of new technologies with reasonable costs.

Vijay K Seth is Professor, Strategy and General Management at the International Management Institute, New Delhi and Ritu Chhikara is Assistant Professor, ITM University