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Structural Changes in India’s labour markets

  • IntroductIon

    • India is midway through its demographic dividend – a period of time when demography gives economic growth a boost by expanding the working-age share of the population
    • To exploit this dividend and meet the growing aspirations of those entering the labour force, India’s economy needs to create enough “good jobs” – jobs that are safe and pay well, and encourage firms and workers to improve skills and productivity.
    • between 1989 and 20101. Two things are notable. First, informal firms account for most employment growth and nearly all the increase in the number of establishments since 19892
    • Second, trends seem somewhat different after 2000: informal sector establishment counts flatten and employment actually falls, while formal sector employment picks up. This might be related to the increasing use of contract labour
  • “regulatory cholesterol” and the rIse of contract labour fIrms

    • medium-sized formal sector manufacturing firms reported labour regulations to be a significant barrier to growth, and specifically “dismissal norms under the Industrial Disputes Act”4 and “the cumbersome nature of compliance with labour regulations in general”
  • contract labour

    • The slow pace of labour reform has encouraged firms to resort to other strategies to negotiate “regulatory cholesterol”
    • popular strategy is to hire contract workers, which has two key benefits:
    • the firm essentially subcontracts the work of following regulations and “managing” inspectors to the contract labour firm.
    • Second, because contract workers are the employees of the contractor and are not considered workmen in the firm, the firm stays small enough to be exempt from some labour law.
    • Contract labour use has grown throughout the world over the last few decades, and India is no exception.
  • competItIve federalIsm

    • With private investment lagging (see chapter 1), states are under pressure to be seen as attractive destinations for investments that will create jobs and boost economic growth.
    • Several states, such as Rajasthan, have responded by amending their labour laws with the goal of attracting large employers and high growth industries to their state, and other states like Gujarat and Maharashtra are considering steps in this direction.
    • Moreover, the benefits of the entry of a large manufacturing company to a state can go beyond scale, depending on the kind of products they manufacture. Recent economic research argues that “what you export matters”, because exporting develops a country’s local know-how and supply chain networks, bringing it closer to the global frontier for the exported good12.
    •  what a country manufactures today matters not just because it affects employment and growth today, but also because it shapes the set of products a country can profitably produce tomorrow.
    • There may be a possibility of competitive federalism becoming “too competitive”,
  • relocatIon

    • Apparel is an industry in which India should be performing well. It is labourintensive, with 30 per cent of costs from wages.
      • Only 2-3 per cent of costs are due to capital-intensive inputs like power
    • And yet India is ceding market share in the global apparel industry to countries like Bangladesh  and Vietnam
    •  that productivity could be substantially improved by reallocating capital from less-productive to more-productive firms.
    • Formal sector apparel firms are about 15 times more productive than their informal sector counterparts
    • Yet Figure 9 shows that India’s apparel sector is dominated by 13 The labour productivity of formal sector apparel firms is about R430,000 per worker compared to the informal apparel sector’s R28,800 per worker. informal firms: approximately 2.0 million establishments employing about 3.3 million workers (average size 1.5 workers), dwarfing the formal apparel sector’s 2800 firms which employ 330,000 workers (average size 118 workers).
    • apparel firms now make up the largest share of establishments in the informal sector.
    • some formal sector apparel manufacturers are adopting—relocating in second- and third-tier towns and cities
    • This business model of moving factories to workers has a number of commercial and social advantages—it involves spreading economic development to underdeveloped
    • areas, reduces spatial mismatch in the labour market and can improve competitiveness by raising firms’ access to lower cost labour
    • The apparel industry typically employs many female workers: for instance about 70 per cent of the employees of India’s largest apparel exporter are women.
    • apparel manufacturers locating in rural areas can help address the low rates of female labour force participation that prevent India from achieving its full economic potential.
    • Most explanations of low labour force participation in India focus on supplyside factors like cultural norms that frown on women working outside the home
    •  Less attention has been given to demand-side explanations, which essentially emphasise that a key determinant of female labour force participation (LFP) is the availability of suitable jobs
    •  It is a striking fact that the areas in India that have seen the greatest decline in female labour force participation in the last decade are those villages that have rapidly urbanised and are now part of towns and small cities.
    • Farming jobs in these areas are no longer available, but women-friendly service sector jobs are yet to take their place.
    • female LFP can be expected to depend on the availability of ‘suitable jobs’, which are flexible and located close to home
    •  recent research suggests that more than half of the decline in female LFPR is explained by a deficit of suitable jobs at the local level.
    • India’s GDP would grow by an additional 1.4 per cent every year if women were to participate as much as men in the economy
    • In addition to higher economic growth, gainful work by women—and especially paid employment—is correlated with a host of positive outcomes, including more agency at the household level and in society more broadly, and greater investments in children’s health and education18
  • the centre’s role In creatIng “good Jobs”—ensurIng Worker centrIc labour regulatIon
    •  First, there is a significant wedge between gross and takehome pay for lower earners—45 per cent if one counts employer contributions and deductions from employees’ pay.
    • Second, the equivalent wedge is much smaller for higher earners—only 5 per cent owing both to fewer mandatory employer contributions and fewer mandatory deductions from gross pay.
    • Of course, higher earners may still voluntarily contribute from their own take-home salaries to, say, the EPF—but lower earners have no such choice.
  • conclusIon
    • India’s most pressing labour market challenge going forward will be to generate a large number of good jobs.
    • Two obstacles to formal sector job creation are regulation-induced taxes on formal workers and spatial mismatch between workers and jobs