Defined: What labour law adjustments by states imply

At first glance, these changes are brought about to create incentives for economic activity in the respective states.

With the economy grappling with the blockade and thousands of businesses and workers staring at an uncertain future, some state governments decided to do so last week significant changes in the application of labor laws. The main changes were announced by three BJP-ruled states – UP, MP, and Gujarat – but some other states ruled by Congress (Rajasthan and Punjab) as well as BJD-ruled Odisha made some changes, albeit to a lesser extent. UP, the most populous state, has made the boldest changes as it has unceremoniously suspended the application of almost all labor laws in the state for the next three years.

At first glance, these changes are brought about to create incentives for economic activity in the respective states. Legal issues aside – work is on the concurrent list and there are many central laws that a state cannot simply brush aside – the key question is, are these the long-awaited labor market reforms that economists used to make? talk about it, or is the labor law repeal an outdated and retrograde step that critics have recognized?

What are Indian labor laws?

Estimates vary, but there are over 200 state laws and nearly 50 central laws. And yet there is no fixed definition of “labor laws” in the country. By and large, they can be broken down into four categories. Figure 1 contains the categorization with examples.

The main objectives of the Factory Act are, for example, to ensure safety measures on the factory premises and to promote the health and well-being of workers. The Law on Shops and Commercial Establishments, on the other hand, regulates working hours, pay, overtime, the weekly day off, other paid public holidays, annual leave, the employment of children and young people and the employment of women.

The minimum wage law covers more workers than any other labor law. The most controversial labor law, however, is the Labor Disputes Act of 1947, which covers conditions of use such as layoffs, cuts and closings of industrial companies, and strikes and lockouts.

Why are labor laws often criticized?

Indian labor laws are often referred to as “inflexible”. In other words, it has been argued that strict legal requirements prevent companies (employing more than 100 workers) from hiring new workers as they require government approval to be fired. As Figure 4 shows, the organized sector is also increasingly employing workers without formal contracts. This in turn restricted the growth of the company on the one hand and offered the employees a rough deal on the other.

Others have also pointed out that there are too many laws out there, often unnecessarily complicated and not effectively implemented. This laid the foundation for corruption and the search for pensions.

If India had fewer and easier-to-follow labor laws, businesses could expand and shrink depending on market conditions, and the resulting formalization – currently 90% of Indian workers are part of the informal economy – would help workers as they would receive better salaries and social security benefits .

Is that what states like UP are proposing?

In fact no. UP, for example, unceremoniously suspended almost all labor laws, including the Minimum Wage Act.

ICRIER’s Radhicka Kapoor described this as “creating an environment for exploitation”. That’s because the repeal of all labor laws is far from being a reform that essentially means improving the status quo, not only depriving labor of its basic rights, but also lowering wages. For example, what prevents a company from laying off all existing employees and hiring them back at lower wages, she emphasized.

With this in mind, from the workers ‘point of view, the government has completely changed its position by telling companies not to lay off workers and paying full salaries when the lockdown begins, and has now removed workers’ bargaining power.

Far from pushing for more formalization of the workforce, this move will suddenly turn existing formal workers into informal workers, as they would not receive social security.

Why will wages fall?

On the one hand, as Figure 3 shows, wage growth had already weakened before the Covid 19 crisis thanks to the economic slowdown. In addition, there has always been a large gap between formal and informal wage rates. For example, a woman who works as a casual laborer in rural India earns only 20% of the earnings of a man in an urban formal setting.

If all labor laws are removed, most employment will effectively become informal and lower the wage rate sharply. And there is no way for a worker to even file a complaint, said Amarjeet Kaur, General Secretary of AITUC.

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Wouldn’t these changes boost employment and stimulate economic growth?

In theory, it is possible to create more jobs in a market with fewer labor regulations. However, as the experience of states that have relaxed labor laws in the past, the dismantling of labor protection laws has not attracted investment and increased employment without increasing worker exploitation or deterioration in working conditions.

Ravi Srivastava, director of the Center for Employment Studies at the Institute for Human Development, said employment will not increase for several reasons.

First, there is already too much unused capacity. Companies save up to 40% on salaries and take jobs off. Overall demand has fallen. Which company will hire more employees now? He asked.

Kaur said if the intent was to provide work to more people, states should not have increased the shift length from 8 hours to 12 hours. Instead, they should have allowed two shifts of 8 hours each to allow more people to get jobs.

Both Srivastava and Kapoor said this move, and the resulting drop in wages, will continue to depress aggregate demand in the economy, thereby affecting the recovery process. “The timing is all wrong,” said Kapoor. “We are moving in exactly the opposite direction,” said Srivastava.

Could the government have done anything else?

Srivastava said that instead of creating exploitative conditions for workers, the government – like most governments around the world (Figure 5) – would have to work with industry and allocate 3% or 5% of GDP for wage burden sharing and wage allocation aim to ensure the health of workers, “because if Covid hits them, the whole country will be sunk”.

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In addition to labor regulations, companies also face many other hurdles such as skills shortages and poor enforcement of contracts, etc.