We need labour reform of the right kind

The declining growth of GDP to 6.5 per cent this year will make it difficult for the finance minister to balance his budget next month. Citizens are much more worried about insufficient jobs and slow growth of incomes to balance their own budgets.

The Gujarat elections were another wake-up call for the Government, following many earlier warnings around the country that India’s growth model needs reform. Even youth from privileged communities in Gujarat, one of India’s most economically progressive States, were up in arms demanding better jobs.

Faster growth of jobs must be the principal objective of whatever economic reforms the Indian government undertakes now. For this, some economists are urging the Government to bite the bullet in 2018 and make bold labour market reforms.

They make four assertions. One, the labour market is not functioning. Two, unless employers have the right to fire, they will not hire more workers. Three, the thrust of government’s policies must be to protect workers’ incomes and not to protect jobs which should disappear when industries change.

And, four, unions, who care only for their own highly paid workers, are the obstacles to labour market reforms, the aim of which must be to benefit workers who are not union members. Let us examine these assertions.

What’s a good market?

The overarching purpose of a good market must be to enable citizens to obtain what they need at least cost, and without destroying the capacity of suppliers to continue to fulfil their needs. That is what good markets for commodities do, such as markets for agricultural produce, minerals, land, and finance. Clearly the Indian labour market is not working when many young people, who need jobs most, cannot find them. There is a supply-side problem from the citizens’ perspective: not enough jobs are being created.

The argument that more jobs are not being created because employers cannot fire their employees is a specious one, as employers are hiring more workers whenever they need them. They hire them as contract workers or casual workers, and not regular workers whom they would have to pay more.

Indeed, a major weakness of the Indian economy, according to some of the same economists, is the ‘informalisation’ of the economy with large numbers of workers who have little job security and earn less too. Moreover, since contract and casual workers can be easily fired, the inability to fire the workers they hire cannot be the constraint on employers growing their enterprises.

Employers say the market is not functioning, and they are not able to create more jobs because there are not enough skilled people to hire.

The labour market is unlike markets for other commodities, in which suppliers and buyers only buy and sell stuff from each other. In the labour market, employers, who are the buyers of labour, also have a critical role to play in developing an adequate supply of skilled labour. Human beings hone new skills on the job.

Changing technologies

When technologies change more rapidly, as they are now doing, and employers must change their processes, they must provide workers opportunities to learn the new skills necessary. Off-line training institutions cannot keep up. Their trainees do not have the skills needed, employers say, and the market becomes swamped with trained yet unemployed people — a problem that is growing in India. Thus, their own lack of commitment to retain and invest in people, and demands for even more freedoms to fire, is a fix that backfires on employers themselves in the long run.

What Indian unions are demanding are the rights of workers for decent treatment, fair wages, and adequate social security to take care of their families when employers let them go because of economic exigencies. These are demands for fair treatment of any human being who is expected by another to do some work. Unions are making these demands for contract workers, informal sector workers, and even domestic workers. In other words, on behalf of workers who are not their union members.

Farmers too, who are not anyone’s employees, are demanding better prices for their produce and financial safety nets. The expansion of the social safety net in India, to cover a variety of occupations and enterprises, will have to be the principal thrust of ‘labour market’ reforms. Indeed, it is no longer politically feasible to give employers more freedoms to retrench workers before strengthening the social safety nets beneath them.

Archaic laws

India’s labour laws are archaic, too many, often contradictory, and badly administered. They must be reformed. Even the unions are demanding reforms. The government is simplifying and consolidating the laws into a few codes. The reformed laws must suit emergent conditions. They must provide more flexibility to employers. Above all, they must ensure fair treatment of workers, and provide a wider social safety net.

Reforms must be made with consensus amongst workers and their unions, and employers and their associations. Trust between workers and employers must be increased. The sometime slow process to achieve consensus must not be short-circuited.

Making ‘bold’ labour reforms, either at the Centre or in the States, to give employers more freedoms to fire workers, may please financial markets for a while, as Thatcher’s reforms did in the UK. However, it will weaken the already fraying social compact in India between the elite and workers, as happened in the UK, and in the US too with a similar disrespect for the demands of workers and their unions. Whereas India must strengthen the social compact and build a strong industrial base democratically, like Germany and Japan did, with consensus amongst unions and employers.

The writer was a member of the Planning Commission. Via The Billion Press

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