Sunday, June 07, 2015

Who needs labour reforms?

There is a continuous clamour in India for labour "reforms" which, shorn of euphemism, is really about the employer's right to hire and fire workers. Without this, proponents of such "reforms" say, you can't expect manufacturing to take off in India. How valid is this contention? A paper in EPW explores this question and comes up with answers that will confound advocates of labour "reforms":
  • When we argue against onerous regulations that govern labour markets, the first question to ask is whether the labour market needs regulation at all- why not leave it to market forces? Well, the question is answered even in the developed markets where there are regulations governing the minimum and even the maximum number of working hours per week (as in parts of Europe). Nobody seriously believes that the labour market should be a "free" market. - just as nobody believes that credit should be left to the "free" market.
  • How stringent are dismissal laws in India?  The authors show, using an index, that France's laws are more stringent- and that hasn't stopped the French from prospering over the past century. More significantly, China  made its labour laws more stringent in 2007- and are comparable now to those in India (although there might be special zones that are exempt from the operation of these laws).  
  • The authors also note that the literature on employment protection laws shows that such laws are seen to be correlated with increases in productivity. Why would this happen? Because giving workers a measure of protection encourages them to invest in firm-specific skills. 
  •  Dismissal laws, along with a greater voice for workers at work and collective bargaining for wages, are seen to lead to more egalitarian outcomes. I would add: it's important that workers perceive the system as fair if we are to have a measure of industrial harmony. You can't have hire-and-fire for workers when promoter-management faces no consequences for bad decisions by being ousted from management. It cannot be that losses lead to workers being sacked while management stays put.
  •  It's true that Gujarat has experimented with a measure of deregulation in labour laws. However, it would be incorrect to say that it is this factor that is responsible for Gujarat's success in industry. Gujarat has a number of other favourable factors- a tradition of entrepreneurship and ports, to name only two. Moreover, Maharashtra has matched Gujarat's industrial record without labour law deregulation.


Anonymous said...

Spot on Prof! .. Most of them treat labour unions as nuisance without accepting the right of collective bargaining. of course we have extreme cases as that in Kerala.

All the corporates want is to have always the upper hand in everything. Infact it is more necessary to ensure that labour unions exist because of movement towards more automation and robotics which is leading human skill sets are being lost because of reduction manual labour.

- Deeps

T T Ram Mohan said...

Deeps, I agree - unions should be regarded as integral to society. I would not oppose automation, however. I would argue that we need retraining and safety nets to go hand in hand with automation.