The World Bank has just brought out a volume (OUP) titled India?s Employment Challenge, Creating Jobs, Helping Workers. Indian labour markets are segmented; they are segmented geographically. For example, the supply of labour is in some parts and the demand in others. Earlier, this matching was sought to be done through industrial licensing. While its effectiveness was doubtful, industrial licensing no longer exists for the private sector and the public sector no longer expands. Consequently, there is a need to perform the matching exercise and this is inefficiently done.

Labour markets are also segmented across formal/informal and organised/unorganised sectors. The National Commission for Enterprises in the Unorganised Sector (NCEUS) had a pronounced leftward slant and is generally remembered for pushing social security for unorganised sector workers and deciding that 77% of India is BPL.

However, it did great statistical work in pinning down expressions like informal and unorganised, particularly in a 2008 report on definitional and statistical issues concerning the informal economy. Unfortunately, these reports weren?t disseminated enough. Consequently, there is no reference in World Bank?s volume to NCEUS and its work.

The standard definition of unorganised, therefore, derives from the following: An enterprise is in the organised sector if it is covered by the Factories Act. Accordingly, the Economic Survey 2009-10 tells us that employment in the organised sector in March 2007 was 27.3 million, 9.3 million in the private sector and 18.0 million in the public sector.

The reform objective is to break down segmentation, which is highlighted in the Bank document. Within rural, we need to move away from farm employment. Within farm employment, we need to move away from foodgrains. We need to move away from subsistence-level self-employment to more remunerative wage employment. We need to move away from informal wage employment (where labour standards are non-existent or not enforced) to formal wage employment (where we have created high wage islands today). Labour markets need to become more flexible.

Why aren?t labour markets more flexible? A large part of the answer lies in labour market regulations and these can be divided into those that are wage-related, safety-related, social security-related and industrial-relations related. Too often, the focus is on industrial relations, particularly the Industrial Disputes Act (IDA) of 1947 and IDA should be changed. Although there are other offensive sections of IDA, people too often focus on Chapter V-B, the sections that cover lay-offs, retrenchment and closure. How much of a deterrent is this? While there are some state-level variations, Chapter V-B generally covers establishments that employ 100 or more workers. Note that this is about workers. It doesn?t include employees (managerial category). If one sits down with the Annual Survey of Industries data, one finds that only 2.16% of registered enterprises are actually in its ambit, not the 8% that is commonly cited.

Consequently, for existing enterprises, IDA is probably not as much of a deterrent as is commonly made out to be. In any event, existing enterprises have found ways to circumvent Chapter V-B. It is a deterrent for enterprises that propose to enter, including foreign ones. And yes, we should change it. But as the abortive attempt under the NDA government proved, this isn?t going to be easy. We will reform Chapter V-B, probably only if one of two things happens. First, labour moves to the state list in the Seventh Schedule, so that states that wish to reform can go ahead and do so. In any case, the binding constraint in Chapter V-B is about obtaining permission from governments and some state governments, post-1991, have been more forthcoming in granting such permissions. Second, we unbundle the lay-off, retrenchment and closure provisions.

Politically, lay-offs are possibly more palatable than closures. There are other labour laws, including rules and regulations (rather than statutes) and the inspector raj that encourage artificially high capital intensity and force enterprises to remain informal. (Indirect taxes and other non-labour regulations also have a role.) For instance, most employment creation in the private sector, post-1991, has been of the outsourced variety. We should pick on these rather than Chapter V-B of IDA.

The World Bank report states, ?Of the 413 million prime-aged persons in the Indian labour force in 2004-05, the overwhelming majority, about 90%, are employed in low productivity informal sector jobs.? True, and there are informal jobs (on contracts) in the ostensibly formal sector too. The 2008 NCEUS report states that 92% of the workforce is in informal employment, while 86% of the workforce is employed in the informal sector. So there is a difference between informal enterprises and the informal nature of employment. In any analysis, an additional problem is data. Large sample NSS data still date to 2004-05. Oddly, most of the Bank figures are from NSS 1999-2000 and one reason for that is the Bank relies on earlier work done by K Sundaram and Suresh Tendulkar. While propositions don?t change, 2004-05 would have been better.

The author is a noted economist