Myth
of Chinese Labour Flexibility
Prof. K.R. Shyam Sundar
14 November 2014
India is a land of myths. Industrial relations is no exception to this
rule. The arguments in the name of supporting the chorus for labour law and
governance reforms if carefully reviewed would show that there are several myths
doing round. Employers have been
complaining that labour laws and the labour market governance system in India
designed as they were during the command economy regime are tough and even
outdated and they impose rigidities on the working of the labour market
processes. In consonance with the
globalization thinking, they often cite that countries like China are doing
well and attracting foreign investment primarily
due to its flexible labour market regime and further that India is not
exporting as much as Bangladesh in the garment sector and so on.
Researchers and employers reciting Chinese labour
flexibility as a means of attracting more foreign investment are talking about history
as they refer to the transition of Chinese labour market system from a rigid
command economy to a market economy that took place till the 1990s. In the 2000s, the Chinese social and labour
policy did almost a “U” turn to promote social harmony which meant reordering of
the social and employment relations in such a manner to correct the “historical
wrongs” which provoked tremendous amount of social and labour unrest. This policy correction is often missed out by
the lobbying groups.
During the command economy regime in China
employment and wages were administratively determined which meant little or no
freedom for the management to hire and fire of workers and structuring the
reward for work. Thus, instead of the
labour market the government agencies performed the labour allocative and
pricing functions; in that sense ‘labour market’ was absent during the command
economy regime. China
started taking decisive measures to shift from its command economy regime to
the market economy since the late 1970s. Through the introduction of labour contract
system by which the workers worked for a fixed duration with no guarantee of
re-employment at the end of the contract tenure, the ‘iron rice bowl’ system of
the command economy regime was smashed.
The Labour Law (1994) defined labour contracts (i.e.
agreements that establish labour relationship and specify rights, interests and
obligations of both the parties) and gave them the legal status, detailed their
contents, specified conditions for termination of workers among others. The Law
was more about termination than of engagement.
In the pre-reform period firing workers was virtually ruled out. But during
the post-reform period employers enjoyed the right to dismiss and discipline
the workers. Employers terminating the
services of workers were expected to give 30 days’ notice and pay one month’s severance
benefits. Through various regulations
the government introduced tremendous amount of flexibility in both open and
special economic zones during the 1980s and the 1990s. The labour dispatch system of employment
provided further numerical flexibility. The retrenchment of workers in the
state-owned-enterprises (SOEs) was aggressively pursued in the 1990s.
But overdose of labour flexibility, the aggressive reform
of the state-owned-enterprises and resultant unemployment of a grand magnitude,
the failure of re-habilitation of affected workers and exploitative labour
market practices like poor labour contracting (including a preponderance of
non-written contracts in the labour market), abusive working conditions led to
tremendous escalation of social and industrial unrest in China in the late
1990s and the early 2000s. These led to a
search for systems of governance and laws to ensure “social harmony”. The years 2007-2008 (the years of Social
Legislation) witnessed discussion and passage of Labour Contract Law (LCL), The Law on Mediation and Arbitration of
Labor Disputes (LMA) and other laws.
The LCL among others sought
to toughen up the clauses to ensure labour rights. It provided for ensuring even the basic
labour right of a written labour contract for workers, introduced wired-ranging
severance payments (though with a cap), restricted the frequency of renewal of
fixed-term employment to two and so on. The
law provided for compulsory permanency after two cycles of fixed-term
contracts, non-provision of written contracts within a year of engagement of
workers and toughened up the severance payment system. The LCL was clearly an
attempt to take two steps away from
the flexible labour market regime thanks to the undesirable labour market and
social consequences that stemmed from the earlier flexible regime. However, thanks to global crisis unemployment
erupted again in the post-2008 period and the government sought to provide some
semblance of labour flexibility and took measures to cool the heated labour
relations environment.
It may be mentioned
here that in terms of the employment protection legislation (EPL) score following
the methodology of OECD, China now
(post-2008) is more rigid than several countries like France, Spain, Germany in
the conventionally labour rigidity continent of Europe. In terms of World Bank scoring, India enjoys
more flexibility in hiring than China and less flexibility in terms of firing
primarily due to the prior permission clause.
However, the severance pay in China for redundancy dismissal with 10
years of service is 43.3 weeks of pay while it is 21.4 weeks of pay in India
according to Doing Business data base for 2014 of the World Bank. Sri Lanka our neighbor also has a more
generous severance pay system in place.
It may be noted here that severance pay in India is one of the lowest in
the so-called rigid countries in the world which aspect is often missed out in
the debate. Then, there is always a
trade-off between employment and income and social security.
The LMA liberalized the
procedures for filing of complaints, disputes and so on by the workers. The LMA is often accused for escalating the
number of industrial disputes, though recession impacted workers adversely as
much as it did business. The struggles
for labour rights including the freedom of association have intensified in the
last few years indicating that notwithstanding some significant changes in the
labour law regime, labour rights are yet a far cry in China though slowing down
of growth rates might reflect the labour pains as well. The social dialogue system is yet to take
roots in China while we have a highly institutionalized system in place, though
not ideally functional.
The upshot of this
brief recount is that China paid a heavy price for its overly flexible and
de-regulatory regime followed in the 1980s and the 1990s and took
labour-rights-protective-steps in the 2000s.
Still the labour struggles are on to the extent we know from free agency
reporting. It may be mentioned in
passing that unlike in India industrial relations and social dialogue have not
evolved in China and political democracy does not exist therein. So citing China as is even though fashionable
is not advisable and the Second National Commission on Labour after its visit
to China dismissed such submissions by the employers.
Note: This is published in e-social sciences, November 2014, Public Policy
