Labour Market Regulations and Economic Outcomes: Some Capital Lessons and

Minor Messages

Praveen Jha, Sakti Goldar and Swayamsiddha Panda

Jawaharlal Nehru University

IntroductionTwo Distinct and Contending Perspectives:1.The ‘Distortionists’ - Strong advocacy for labour market flexibility Labour institutions disrupt free market

functioning, pose hindrance to growth and employment (Burki and Perry, 1997; Blanchard and Wolfers, 2000; Heckman et al, 2004; etc.).

Regulations cause impediments to labour market adjustments to economic changes

Redistribute ‘rents’ from capital to labour, reducing profitability, dampening investment (Cesar and Chong, 2003)

2. The ‘Institutionalists’ - Institutions have a wide range of positive effects

on economic outcomes (Baker et al, 2003, 2004, 2006; Freeman 1993; Howell 2006; etc.)

Fulfill important redistributive roles Provides insurance against adverse outcomes to

vulnerable categories of workers (Standing and Tokman, 1991)

Significant for Keynesian reasons- Boost effective demand

Enhancement of labour productivity through training or technical innovations (Freeman, 1993)

Ameliorate moral hazard issues

Cross-country EvidencesPresumed Support for the

‘Distortionists’ Persuasion:Botero et al (2003)Cesar and Chong (2003)Nickell (1997)Elmeskov, Martin, Scarpetta (1998)Belot and van ours (2002)Bassanini and Duval (2006)

Studies examining interactions between macroeconomic shocks and different institutions:

Blanchard and Wolfers (2000)Fitoussi et al (2000)Bertola et al (2001)Nickell et al (2002), etc.Key conclusion of these studies –“ In the presence of adverse macroeconomic

shocks, protective labour market institutions contribute to higher unemployment”.

Some Cautionary RemarksIn most of these cross-country analyses, results

often depend upon the proxy used in econometric exercises and the sample of countries considered

Variables such as union strength, unemployment benefit levels etc., are difficult to quantify and capture

Wide variability of institutions across countries raises issues of comparable robust measures

Several researchers consider cross- country aggregate data as ‘weak’ to draw reliable conclusions (Freeman, 2005)

Empirical “Support” for the Institutionalists

Baker, Glyn, Howell and Schmitt (2004)Card and Kruger (1995)Kucera and Sarna (2004)Buchele and Christiansen (1992, 1995, 1999),

etc.

Evidence on IndiaMain focus of literature has been the Industrial

Disputes Act (Chapter V-B) and the Contract Labour Act

Some Major Studies exploring the so called adverse effects of the Industrial Disputes Act (1976 and 1982 amendments of Chapter V-B) :

Fallon and Lucas (1993)Besley and Burgess (2004)Sanyal and Menon (2005)Aghion et al (2006)Ahsan and Pages (2006)

The Besley-Burgess Study (2004)State-level amendments to the IDA classified

as pr-worker, neutral and pro-employer and respective scores of +1, 0 and -1 assigned

Assigned scores cumulated over time to arrive at a ‘regulatory measure’ for each state every year

Such a measure is then used to explain economic performances with respect to the organised manufacturing sector

Major Conclusions of the Besley- Burgess Study:

Pro-worker legislations have contributed to the lowering of investment and employment in the organised manufacturing sector

Have led to existence and growth of a large informal sector

Net impact has been in terms of deterring productivity and constraining growth

Raising Some Critical IssuesRelating to the Besley-Burgess Study:Classifying a state as pro-worker or pro-employer on

the basis of a single amendment can be misleadingProblem of assigning scores when multiple

amendments take place in a single year Fails in identifying specific components of labour

laws impacting particular economic outcomesMeasuring rigidities directly from legal statutes

could be misleading; translation of laws into outcomes involves a complex intermediation process

Questionable results related to classification and econometric estimation as pointed out by Bhattacharjea (2006)

Major Problems with such Empirical StudiesFraught with methodological and technical

difficultiesStudies using the Besley-Burgess index carry over

the errors of the original studyResults refuted by subsequent studies (Bhalotra,

1998; Goldar, 2002; Hasan et al, 2003; Deshpande et al, 2004; Anant et al, 2005; Sharma, 2006; etc.)

Contradictory pictures emerge depending upon the index used: World Bank Investment Climate Survey (2003) ranked Gujarat and Maharashtra as the ‘best’ states; both states classified as having ‘inflexible’ labour markets as per the Besley-Burgess study

Increasing Flexibility and Casualisation

A field based study of about 1,300 manufacturing firms across nine industry groups by Deshpande et al (2004)

Key Findings of the study:1.Both the unionised and non-unionised firms

increased capital intensity over the period considered

2.Only half the firms reportedly were paying the statutory minimum wage

3.Firms increasingly resorted to greater use of non-permanent workers

Increasing casualisation of the workforce highlighted by several other studies (Sen et al, 2006; Indian Labour Market Report 2008; Guha, 2009; etc)

Organised Manufacturing Sector: Key Empirical Findings

Looking at the percentage distribution of total employment distribution in the size classes, the above 100 size has increased much more than below 100 despite IDA Chapter V-B threshold of 100 (1982 amendment)

Distribution by Size of EmploymentDistribution of Employment Growth Rate - CAGR

Percent Percent per Annum

  1973-74 1980-81 1990-91 1997-98 2002-03 1973-80 1980-90 1990-97 1997-2002

0-49 14.4 13.8 17.5 16.8 20.5 3.5% 3.0% 2.2% -0.5%

50-99 8.2 9.0 10.8 13.1 11.7 5.5% 2.4% 5.7% -6.5%

100-199 9.4 9.2 10.7 12.9 12.8 3.8% 2.1% 5.6% -4.5%

200-499 13.1 12.1 13.5 19.0 17.2 2.9% 1.7% 8.0% -6.3%

500-999 11.6 9.7 12.0 13.6 12.2 1.5% 2.7% 4.7% -6.5%

1000-1999 12.8 13.7 10.1 9.4 8.4 5.2% -2.5% 1.8% -6.7%

2000-4999 16.7 15.9 9.5 10.0 8.3 3.4% -4.5% 3.7% -8.0%

5000+ 13.8 16.7 15.9 5.2 9.0 6.9% 0.1% -12.5% 7.0%

Total 100.0 100.0 100.0 100.0 100.0 4.1% 0.6% 2.8% -4.4%

Source: Computed from ASI data summary results, CSO, Various issues

Wage and Productivity Trends

Source: Computed from ASI data summary results, CSO, Various issues

Wage and Productivity: Growth RatesAll India

YearCompound Annual Growth Rates (in percent per annum)

G.R. of Real Wage Per Worker G.R of Real NVA Per Worker

1980-81 to 1990-91 3.1% 8.0%

1990-91 to 1997-98 0.6% 5.7%

1997-98 to 2007-08 -1.1% 6.9%

Source: Computed from ASI data summary results, CSO, Various issues

Growth in average real wages have lagged behind average productivity, the wage-productivity gap has increased

Average Wage and Salary Trends

Average salary in real terms has gradually surpassed average real wages, and the gap has shown a marked increase in recent years

Unit Labour Cost

Unit labour costs have been declining over the years, reflecting a relative shift in income distribution from labour to capital and other factors of production

Wage –Rental Ratio

Wage-rental ratio has steadily declined, suggesting a relative cheapening of labour vis-à-vis capital

Wage and Profit Shares: Trends

Wage share in value added has come down remarkably while profit share in value added has registered a sharp increase in recent years

Increasing ContractualisationAll India

YearWorkers Directly

EmployedWorkers Employed

through ContractorsTotal Workers

Ratio of Contract Workers to Total Workers (in %)

1998-1999 5377193 987272 6364464 15.51%

1999-2000 5041339 1239320 6280659 19.73%

2000-2001 4882143 1253095 6135238 20.42%

2001-2002 4660496 1297351 5957848 21.78%

2002-2003 4739339 1422155 6161493 23.08%

2003-2004 4591237 1495671 6086908 24.57%

2004-2005 4851233 1748065 6599298 26.49%

2005-2006 5099750 2036347 7136097 28.54%

2006-2007 5516703 2363832 7880536 30.00%

2007-2008 5659750 2538360 8198110 30.96%

2008-2009 5977328 2799417 8776745 31.90%

2009-2010 6153723 3004079 9157802 32.80%

Source: Computed from ASI data summary results, CSO, Various issues

Contract Workers as a proportion of Total Workers (in percent)

Contract workers as a percentage of total workers in organised manufacturing has increased greatly, belittling the rigidity argument

Percentage Distribution of Strikes and Lockouts in Total Disputes

Share of Strikes in total industrial disputes has come down, while that of lockouts has shored up, indicating general weakening of

power of workers vis-à-vis the employers

Percentage of Mandays Lost in Disputes

Share of workdays lost due to lockouts has been higher than that for strikes since the nineties, signaling shift in power equations in

favour of employers

Some Capital LessonsConsideration of the empirical evidence of India’s

industrial landscape reveals that the claims of the distortionists are exaggerated

Need to look at a whole range of other critical variables for understanding economic outcomes; little basis to blame labour regulations for poor outcomes

Inevitable outcome of neo-liberalism, based on ‘beggar thyself’ and ‘beggar thy neighbour’ policies, in a bid to attract global capital

Labour has lost out to capital across the globeCapital interested in unhindered control of labour so

as to reap both absolute and relative surplus value

Certain Minor MessagesIndeed certain labour institutions need to be

revisited but suggestions of dissolution of the institutional framework akin to “throwing out the baby with the bath water”

Labour laws in India have evolved in a knee-jerk and ad-hoc manner; the context in which many of them had evolved have witnessed a sea change

Need for unification, harmonisation and rationalisation of labour laws

Provision of minimum conditions of work and social security to the workers outside the purview of labour regulations