Regulations in the labour market are so widely talked about; there is an array of perspectives and theories about how flexible a labour market should be, in order to make industries work in harmony with the growth process. High rate of growth that India experienced pre-2008 global crisis was not accompanied by the same rate of growth in employment. One reason stated was the stagnation of growth in the manufacturing sector coupled with inflexible labour markets.
Labour laws in India are under the purview of the Concurrent List that gives power to both central and state governments to make laws. There are around 52 central laws and 150 state laws making a sum of approximately 200 laws which makes it so tedious and tiring for the firms to comply with them. Compounding the confusion created by this multitude of laws is the fact that they are not entirely consistent with one another; leading a wit to remark that you cannot implement Indian labour laws 100 percent without violating 20 percent of them.
In this context, Besley and Burgess conducted a cross-state analysis on possible impacts that a rigid labour market (taking IDA 1947 to study) can have on the productivity of worker as well the productivity of the firm. They learned that states with pro-worker labour laws were left behind in race by the states with pro-employer laws. Bolstering their findings is a study by Aghion et al., where they have, in particular, examined the delicensing reforms of 1991. The fundamental finding is that output rose more in favour of pro-employer states than it did in favour of pro-worker states in light of the equivalent delicensing change.
It is imperative to take note that not all experts concur that India’s labour laws have made for a rigid labour market. Specifically, a counter-argument to the perspectives above is that the rigid nature actuating regulations have been either disregarded (Nagaraj 2002), or bypassed through the expanded use of transitory or provisional work (Ramaswamy 2003). It is additionally verbalized that not only are the rigid labour laws abaft the slow growth of the manufacturing sector, there are other factors like impotent financial markets and poor infrastructure that contribute to it.
Before deciding upon the degree of flexibility in labour markets one should examine both sides of the coin. Talking about being flexible has its concerns regarding lower productivity, rising inequality, greater job insecurity, stress, and lack of training, that could climb in when labour markets are flexible. Having said that, these concerns should not be the sole factor for rejecting flexibility. As said, every coin has two sides, flexibility too has its merits. A more flexible labour market can encourage firms to become efficient and competitive; it can also be a guiding factor to improve trade, help increase labour market participation rates, and lower rates of structural unemployment. It can also be a stabilizer during economic breakdowns. Though it looks easy at first glance to decide the magnitude of flexibility, digging deeper into it can prove to be harder than it seemed.
Likewise, there’s a lot of debate surrounding this issue among economists and policy makers. No perfect solution could be found out. But there is one common stop for all economists no matter whether they are in favour of labour market rigidity or not, it is that all of them stand in support of reforms. Those reforms that benefit both the employer and the employee equally and those which can with no bias lead to the betterment of the economy, those that can bring efficiency and higher productivity of workers as well as firms.
This article has been written by Guru Lakshmi Tarigoppula, BA(H) Economics student from Shri Ram College of Commerce.