Labour Law Suspension: Hit The Workers When They Are Down

Following the piece of age-old wisdom—often attributed to Niccolò Machiavelli—about not letting a crisis go waste, some state governments in India are busy suspending and diluting labour law protections of workers when the coronavirus crisis and the sudden lockdown that came in its wake are devastating the livelihoods of hundreds of millions of poor workers.

Governments in Uttar Pradesh and Madhya Pradesh are allowing sweeping exemptions from labour laws, including the Industrial Disputes Act and the Factory Act. Echoing the actions of these and a few other state governments, employers’ associations are approaching the central government with requests to allow the increase of worker shifts from 8 to 12 hours a day, and the central labour ministry has been receptive.

This, of course, violates an International Labour Organization convention which India had ratified a hundred years back. Except for the Punjab government, other states (for example, Gujarat) have not promised higher overtime wage rates for the extra hours. Besides, very few people pay attention to the fact that longer hours put women workers to great disadvantage, both for their domestic chores and travel safety.

The official justification for such actions has been to encourage investment and employment. For more than a year it has been obvious to most un-blinkered economists that the industrial slowdown is largely due to a slump in demand, and this has now been reinforced by the staggering losses of income during the world’s harshest lockdown.

This is comparable to the effects of other recent gifts to business the government has tried. In September 2019, the Finance Minister announced a large reduction in the corporate tax rate, thereby in one stroke slashing government revenues by about Rs 1.5 lakh crore. That happens to be almost double the amount she announced in the form of new programs for the hundreds of millions of the poor in her first relief package after the lockdown in March. This large gift to the corporate sector did little to relieve the demand problem afflicting investment.

There is significant literature in Indian labour economics on the adverse effects of labour laws. In this, I have, however, never found any convincing demonstration that labour laws—particularly those restricting labour retrenchment in firms above a stipulated size—even when they have been a constraint, they have actually been a binding constraint. My own explorations into the matter with disaggregated firm-level data have left me skeptical. In recent years Rajasthan and then 6 or 7 other states have relaxed the stipulated size mentioned above and raised it to firms with more than 300 employees. I have yet to see any rigorous study of this showing a large effect in increasing employment, controlling for other factors. In any case, in recent years in the Indian manufacturing sector, contract labourers (who do not enjoy the job security or social benefits of regular workers) constitute on average at least about one-third of total workers, thereby providing a great deal of labour flexibility, which much of the labour law controversy was about.

Going The Wrong Way

It is interesting that while Indian states are trying to suspend labour protection and make it easier for employers to sack workers, many other countries are trying to minimise lay-offs in this period of crisis by giving wage subsidy to employers to induce them to keep the workers on the payroll. These programs are an effort to reduce displacement, distress, and loss of worker morale, and at the time of economic recovery less friction and de-skilling. The wage subsidies are quite substantial in Europe, Canada, Australia, and New Zealand. It is also being attempted in some developing countries like Argentina, Bangladesh, Botswana, China, Malaysia, Philippines, South Africa, Thailand, and Turkey. The United States among developed countries and India among developing countries are conspicuous exceptions.

In the continuing sordid saga of callousness and brutality with the millions of suddenly unemployed migrant workers over the last six weeks since lockdown, an interesting fact to note is that employers who mostly had stopped paying them over this period, thus causing widespread hunger and homelessness, have lobbied with state governments to stop sending them back to their villages so that they remain available when the industries restart.

Balanced Reform

I am actually in favour of a thorough overhaul. The current labour laws, tangled and outdated as they are, serve the long-term interests of neither the employers nor the workers. At the beginning of this century, the Second National Commission of Labour made a whole set of sensible recommendations for such an overhaul, but they remain largely unimplemented. I would support abolishing the firm size limit on labour retrenchment altogether, provided there is a provision for adequate unemployment benefits, both for regular and contract workers, and there is something like a state-provided universal basic income supplement as a fall-back option for everybody.

For far too long businesses in India, with some notable exceptions, have considered labour as a necessary but troublesome cog in the production machine, and the focus is to squeeze the maximum out of it with minimum pay and benefits while brandishing the threat of job insecurity. Organised labour, often under politicised partisan leadership from outside, has played that adversarial game. It is in the long-term interests of both sides to see at the ground level that labour-friendly practices can actually enhance long-term productivity and profitability. If cooperation can replace mutual suspicion and labour representatives can be trusted to participate in corporate governance—as is the practice, say, in Germany and a few other European countries—labour organisations can play a responsible role in achieving mutually beneficial goals. Taking the cover of the pandemic to unilaterally whittle down labour protections is going the opposite way, to distrust, and labour unrest.

Pranab Bardhan is Professor of Graduate School at the Department of Economics at the University of California, Berkeley.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.