Scrapping of Labor Laws Won’t Solve India’s Unemployment Problem

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With the ongoing lockdown since March 24th, amidst the Covid-19 pandemic, India’s economy is seeing a deep slump for the upcoming years. To tackle this, certain Labor Law relaxation amendments were released in certain states. Most states cleared an ordinance exempting businesses from the purview of most labor law provisions for the next three years. 

The Uttar Pradesh Cabinet has invoked an ordinance exempting all factories engaged in manufacturing processes from most of the labor laws for three years, subject to the fulfillment of certain conditions. Laws governing minimum wage, unionization, contract labor, health and working conditions, dispute settlement, pensions won’t be applicable. Madhya Pradesh government has also relaxed the labor laws so that the provisions of the acts such as those related to industrial dispute resolution, strikes and lockouts, and trade unions, will not apply. The Gujarat, Himachal Pradesh, Rajasthan, Haryana, Uttar Pradesh, Goa, Assam and Uttarakhand governments have also passed notifications to increase maximum weekly work hours from 48 hours to 72 hours and daily work hours from 9 hours to 12 hours for certain factories using this provision.

The decision of various state governments to relax some of the labor laws aims at generating employment, attract investments, and increase the overall output growth. However, these legal measures taken by the state governments to relax the labor laws violate labor rights and are based on a misguided understanding of the linkages between labor laws and outcomes including employment generation and output growth based on three reasons.

First, India is a founding member of the International Labor Organization (ILO) and has ratified several conventions to protect and promote the interest and well-being of the workers. The Directive Principles of State policy also mentions that states should provide just and human conditions of work by suitable legislations. As per the report of the National Commission for Enterprises in the Unorganized Sector (NCEUS), 2007, there is a vast majority of labor laws related to the conditions of work and social security which apply to the workers in the organized sector whereas very few laws apply to the workers in the unorganized sector. The unorganized sector consists of those enterprises which use power and employ less than 10 people or don’t use power and employ less than 20 people. Nearly 80 percent of the workers are engaged in the unorganized sectorThe unorganized economy accounts for an overwhelming proportion of the poor and vulnerable population. The NCEUS (2007) reports that the implementation status of the labor laws in the unorganized sector is very poor. The main reasons for the poor implementation include the small size of the enforcement machinery to the vast and dispersed workforce and inadequate participation of the representatives of the unorganized sector in ensuring the effective implementation of labor laws. Even within the organized sector, there is increasing informalisation since 2000 as firms are replacing regular workers by contract workers.

Given the limited coverage and poor implementation of labor laws in the unorganized sector and increasing informalisation within the organized sector as well, the decision to scrap various labor laws violates labor rights and worsens the already poor outcomes of the labor market in terms of providing quality employment.

Second, the argument of labor laws being too rigid has also been applied to explain the small size of the organized sector in the Indian economy in terms of contribution to employment. The understanding has been that firms prefer to remain small in size to avoid entering the organized sector whereas firms that are already in the organized sector prefer to hire fewer workers as the coverage of labor laws increases with the size of workers. 

However, labor laws cannot explain the small size of the organized sector in the Indian economy. To understand the small size of the organized sector and large and dispersed unorganized sector, we need to look into the industrial policy of India. 

The second five-year plan (1956-61) of India, popularly known as the Nehru-Mahalanobis plan was the key document to guide the process of industrialization in independent India. Following the plan, the focus before the reforms started in the 1980s, was on disproportionate public investment in capital and technology-intensive sectors as compared to investments in the consumption goods sector. However, the employment-generating potential of the capital goods sector has been very limited. To address the problem of unemployment in the economy, consumption goods were produced in small-scale industries with labor-intensive technologies. A large number of products were reserved to be produced under small-scale industries only and the production was subsidized. Thus, there were perverse incentives to remain small. The result was a mushrooming of tiny units which employ 2-9 workers and besides own-account workers. Thus, the small size of the organized sector is an outcome of certain policy decisions and it cannot be understood simply in terms of labor laws.

Third, the scrapping of the labor laws in various states is governed by the understanding that labor laws in India are too rigid and relaxation of labor laws would lead to an increase in employment generation and overall output growth. This has been a standard neo-liberal proposition. However, other studies argue that employment generation has weak linkages with the degree of labor market flexibility, and weak and flexible labor laws will result in undesirable outcomes such as underpayment, over-time work, and unhealthy working conditions. Employment generation hinges upon a key set of variables including aggregate demand, social and physical infrastructure. The understanding that labor laws in India are too rigid has also been applied in speculating about the increasing replacement of labor by capital in factories. While it is true that firms are increasingly replacing labor by capital, the rigidities in labor laws are not the sole factor for adopting capital-intensive technologies. It would depend as well upon factors such as the degree of liberalization of the financial market, import tariffs on capital goods, which influence the cost of capital, nature of capital intensity of domestic demand. Therefore, there is no concrete evidence to suggest that rigidity of labor laws force the adoption of capital-intensive technologies and thus, limits employment generation or that relaxation of labor laws will lead to increased employment opportunities. 

The labor laws in India have been considered as very rigid and an impediment in the generation of quality job opportunities in the economy. However, we cannot put all the blame on labor laws given that the coverage and implementation of labor laws are very limited and poor in India and employment generation and output growth in an economy hinges upon a key set of variable including the nature of industrial policy and social and physical infrastructure. Amidst the current pandemic, as the vast majority of the workforce is forced to return to their homes and widespread unemployment in the economy leads to the collapse of the income, the labor laws could have been strengthened to ensure wages and job-security to a large segment of the workforce. In such a situation, the decision of various State governments to scrap labor laws only points to the apathy of the governments towards the working class.

Sapna Goel & Reza Ehsan are PhD scholars in Economics Department at the South Asian University, New Delhi.