Industrial and Employment Relations Shyam: September 2008

Broadening of the Debate on Regulation

There are important economic (market failure), historical (colonial background) and social (unequal power structure), moral (protection to vulnerable groups and decent jobs) reasons to justify “social regulation” of labour market and IRS. In fact, leaving things to the market may produce socially sub-optimal outcomes such as long working hours, less than minimum wage. Markets may be imperfect and this may lead to outcomes, which are both unfair and inefficient. These necessitate institutional intervention, usually by the government; regulation may also be exercised by formal non-governmental agencies such as trade unions, or informal institutions such as social customs. Employers in their pursuit of the goal of maximization of profits may act in a manner (longer working hours, unsafe working conditions, lower wages) which may not promote efficiency. Regulations seeking to curtail abuses of employers may in fact increase the efficiency and productivity of work. Interventions are stronger where the employer abuses are greater. The most important contribution of regulation is in the “psychological” sphere; workers “feel secure” that there are agencies to ensure safe and decent conditions of work and work is something that they could look forward to doing. Labour regulation performs four vital functions, viz. to protect workers and prevent exploitation by employers, regulate employers’ decisions and actions affecting labour, provide a set of rights to and obligations on workers and their associations, and create ‘rules’ to govern the interaction between the two parties in the labour market. Institutions and processes are created to achieve these objectives and in the process the exercise is often overdone, owing to misplaced or over-enthusiasm. Over-regulation prevails as a result. It is said to be associated with bad outcomes. It (a) introduces rigidities, (b) restricts the freedom of employers, (c) hurts competitiveness of firms, (d) affects productivity, (e) inflates cost of operations, (f) takes away precious time and resources of employers, (g) results in delays, high cost of operations, and corruption and (h) increases transaction costs. The insights from the regulation literature may be further stressed here. Two major labour market outcomes of excessive regulation are (a) reduction of employment generation in the formal sector and creation of huge informal sector, and (b) under or un-employment of vulnerable groups of the labour forcer such as women, youth, coloured and backward class or even withdrawal from labour force by them. It is argued that greater regulation leads to loss of welfare of the persons who are intended to be protected. For example, it is pointed out that the rigid employment laws are strongly associated with higher female unemployment. Secondly, entrepreneurs in order to escape from the ‘regulation net’ employ less workers; this may often result in inefficient firm size. Also, these small units lie beyond the purview of regulation and become a part of the vast informal sector. Naturally workers in these informal units lose legal cover, work for lower than competitive wages, carry no social security and so on. On the other hand, government loses revenue as these units typically do not come under the radar of tax agencies. Thus, it is loss for all actors. It may be well nigh impossible to create enforcement machinery adequately equipped with resources to implement the complex and numerous laws; this is true of especially of poor and large-sized countries. This invariably results in inefficient implementation of laws. Hence the statute books may read tough, but owing to poor and even discriminatory implementation, the system in reality may not be all that rigid. The laws then lose their utility and may even become counter-productive. Some of the developing countries which were under colonial rule have inherited a highly regulatory system, typical of the colonial administration. The system becomes over-regulated after securing political independence with more regulations added to the existing ones. Laws in an over-regulated system are wide ranging, over-lapping and complex and some even outdated. Regulatory systems often suffer from the inevitable disease of corruption. Regulatory power can be a weapon in the hands of government officers to extract “rents”, both material and non-material (like respect, tolerance of their dominance, red carpet welcome by employers during inspection visits and so on). Corruption takes place because of the absence of a system of checks and balances. The irony is that both employers and trade unions complain about corruption.

The debate on labour regulation in India has its own specificities which we will discuss here. Employers in India, foreign investors, global financial agencies and others have tirelessly pointed out that in India labour market is rigid and industrial relations system is not sound and called for reform in both. The basic argument of employers could be summarized here. Labour laws designed during the protectionist and command regime are not relevant for the current competitive and open economic context. In the current economic context of intense global competition employers require freedom to make changes in the price, use and quantity of labour and in quality and quantity of associated inputs such as machinery; labour laws and trade unions restrict the freedom of employers. Laws and trade unions make it extremely difficult for the employers to discharge workers when changes in business make it imperative; as a result labour becomes effectively a “fixed” factor. This discourages the employers recruit workers when the going is good. Hence protection of existing jobs affects creation of ‘future’ jobs. The rigidities inherent in the regulated markets affect the competitiveness of firms, which needless to point out, has assumed importance in modern times. Legal protection has enhanced the bargaining power of labour unions and has resulted in labour militancy and exercise of restrictive practices. The regulations of the labour market and IRS have resulted in inefficient outcomes such as highly protected, complacent, and inefficient workforce, labour militancy, use of restrictive practices, over staffing, and deteriorating discipline. Rigid labour markets and unionized IRS discourage foreign capital inflow. As product market has been liberalized in India, labour market and the IRS should also be deregulated. Employers’ principal grievances are against restrictive provisions in the Industrial Disputes Act (ID Act), Contract Labour (Regulation and Abolition) Act, 1970 (Contract Act), Industrial Employment (Standing Orders) Act, 1946 (IESO Act), and the Minimum Wages Act. Chapter V B of the ID Act require employers to obtain prior permission from the government before effecting lay-off and retrenchment of workers and closure of even unviable firms; this is seen to impede restructuring initiatives of employers. The IESO Act requires the employers to follow prescribed procedures before dismissing even undisciplined workers. Laws and trade union have made dismissal of workers very difficult. Section 9-A of the same law require issue of notice of change of working conditions; this has disenabled the firms to introduce suitable changes in technology, workload, shift work and composition of workforce to enhance competitiveness of them. The ID Act empowers the government to intervene in industrial disputes and this is argued to weaken the growth of collective bargaining. Competition requires the firms to concentrate on “core” competencies and outsource “non-core” operations such as canteen, security, and gardening. Employers want freedom to engage freely contract labour in non-core areas and depending upon market conditions even in core activities. This has affected the firms’ ability to discharge export commitments. Employers call for removal of “prohibition” clause from the Contract Act; they do not mind “regulation” provisions relating to contract labour system. The Minimum Wages Act raises the level of wages above the market-clearing wages and hence becomes a burden on the firms, especially the small and medium establishments. Higher the minimum wages, higher would be the “bargained” wage, the “floor” being higher for bargain. All these introduce “rigidities” and raise the cost of labour adjustment. As a result, employers look for labour-saving technologies. The cost of regulation then is low employment generation or even decline in employment. The business logic ironically then is “give freedom to adjust labour price and quantity, only then more jobs would be generated”. Labour regulation is blamed not only for poor employment growth, but also lower foreign investments, poor industrial growth. The empirical work by Besley and Burgess concluded that pro-worker legislation was associated with lower levels of industrial growth, investment, productivity and employment; in addition, they found the pro-labour regulation in fact did not serve the cause of poor, it increased urban poverty. The oft-cited study by Fallon and Lucas also showed that restrictive industrial relations law caused employment to be less than it would have been in its absence. It is also pointed out that regulation offers protection only to a small proportion (seven percent) of workforce and leaves out a vast majority of workers in the informal sector (93 percent). But both have been criticized by labour researchers.

The debate on labour regulation often revolves around employment laws. Labour regulation is obviously more than restrictions on employment and termination of workers. It is also about other issues like multiplicity and complexity of labour laws, provision of incentives to some industries and so on. There are presently more than 55 central labour laws and more than 100 state labour laws. There are differing definitions of the same variable like child labour, wages, worker etc. Employers demand some meaningful merger and consolidation of labour laws and adoption of common legal definitions. Many provisions are out-dated and restrictive; some are even absurd.

Again, it is not only about laws, it is also about the law enforcement system and the problems surrounding it. Employers point out that License-Raj was lifted more than a decade ago in India but Inspector-Raj is still continuing. They complain that labour inspection system has proved to be “harassment” to them and they need to be freed from it. They point out that (a) the inspectors possess enormous power – some inspectors can imprison the employers, seal the establishment or stop the operations of it and (b) too many inspectors visit the factories too many times (FICCI ??). They also complain that the legal and official data collection system requires them to adopt a lot of procedures like filing of periodical returns, posting of abstracts of laws or selected provisions of laws, maintenance of multiple registers (in physical and not in electronic form) and so on. These result in waste of precious time and energy and badly need simplification. Labour reform thus would achieve following objectives: (a) enhance competitiveness of firms, (b) reduce labour and transaction costs, (c) increase exports, (d) attract foreign capital, (e) generate jobs, and (f) ensure better compliance of laws.

Labour regulations broadly cover laws, institutions, customs and norms and the actions of workers and employers that govern and regulate the conduct of the ‘actors’ in the labour market such as the employers, workers, unions etc. and the IRS and the methods of determination of and the contents of ‘rules’ of employment relationship. It is not just about the legal provisions that restrain employers’ freedom in the labour market, as is often assumed in some quantitative studies and exercises – these seek to code the formal law in different systems. It is well known that labour regulation system as typified by labour laws may read tough but it may not represent rigidities for several reasons. The enforcement may be weak owing to several reasons like inadequate resources and corruption. Informal economy is another factor affecting the efficacy of the both coverage of law and its enforcement. The labour regulation literature especially the quantitative studies either neglect the enforcement questions or implicitly assume homogeneity of law enforcement over time and across systems.

Employers in their pursuit of the goal of maximization of profits may act in a manner (longer working hours, unsafe working conditions, lower wages) which may not promote efficiency. Regulations seeking to curtail abuses of employers may in fact increase the efficiency and productivity of work. Labour regulation seeks to (a) rectify the basic power asymmetry inherent in employer-worker relations, (b) prevent opportunistic behaviour by employers, (c) to correct deviant behaviour of workers and ensure industrial discipline and commitment, (d) to provide social protection, (e) provide a set of rights to and obligations on workers and their associations and employers, and (f) create ‘rules’ to govern the interaction between the two parties in the labour market.

See:
Shyam Sundar, K.R. (2005, a), “Labour flexibility debate in India: a comprehensive review and suggestions”, Economic and Political Weekly, May 28-June 4, pp.2274-85.

Shyam Sundar, K.R. (2005), “Role of state in industrial relations: from corporatist to neo-liberal?”, Indian Journal of Labour Economics, Vol.48, No.4, pp.917-37.

Shyam Sundar, K.R. (2007, a) Impact of Labour Regulations on Industrial Development and Employment: A Study of Maharashtra, Series No.06, Labour Regulation in Industry, ISID, New Delhi.

Shyam Sundar, K.R. (2007, b), Labour inspection in India: Issues and challenges, Sponsored by Social Dialogue Department, ILO, Geneva.

Shyam Sundarm K.R. (2008, a) “Trade unions in India: From politics of fragmentation to politics of expansion and integration?” in Benson, John and Zhu, Y. (eds.), Trade Unions in Asia, Routledge.

Shyam Sundar, K.R. (2008, b), Current State of Industrial Relations in Maharashtra, Report Submitted to the ILO-SRO Regional Office, New Delhi.

Shyam Sundar, K.R. (2008, c), Current State of Industrial Relations in Tamil Nadu, Report Submitted to the ILO-SRO Regional Office, New Delhi.

Shyam Sundar, K.R. and Venkata Ratnam, C.S. (2007), Labour reforms in China and India: reform aggression (China) versus reform allergy (India)!”, Indian Journal of Labour Economics, Vol.50, No.3.

Industrial and Employment Relations Shyam

Tuesday, September 9, 2008

From Labour Flexibility to Labour Regulation: Broadening of Agenda

Monday, September 8, 2008

Labour regulation debate in India

Sunday, September 7, 2008

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