Cross-country, there are different definitions of unorganised or informal. These terms are sometimes used synonymously and sometimes a distinction is drawn between them. That distinction is not terribly useful. Having said this, global research generally finds three developments. First, the higher the degree of formalisation in the labour force, the higher is the average level of earnings. Second, there is a gender dimension. Informality is usually a characteristic of the female workforce and discrimination manifests itself in the form of lower wages. Third, when thinking of informality, one musn?t always think of it in terms of workforce participation. There is also informality connected with business, a transition that we describe as our fourth transition.
Informality has costs, as well as benefits, and a decision by a poor person to stay informal is sometimes based on deliberate choice, highlighting transaction costs associated with becoming formal. However, the choice to stay informal is not always a conscious one.
In India, informality can be defined in one of three different ways. First, there is a definition in terms of exemptions from paying indirect taxes. Second, there is a definition in terms of small-scale industry, which again is defined in terms of threshold levels of investment in plant and machinery. Third, there is a definition in terms of labour laws. An enterprise is unorganised if it uses power and employs more than 10 people or does not use power and employs more than 20 people. The last definition is the one that is used most often and according to this, in 2004-05, 92.4% of employment was in the unorganised sector.
Labour markets in India are segmented. And 92.4% of the labour force in the unorganised sector has no labour rights worth the name. Protective legislation is absent, be it in the form of safety, minimum wages or social security. Simultaneously, through labour laws, rigidities are created in the labour market for the remaining 7.6%. There is an artificial disincentive against employing labour and despite India possessing a labour cost advantage, capital/intensity is inordinately high, particularly in manufacturing.
Reforms should break down the segmentation between organised and unorganised labour markets. This will permit better labour rights for those who are presently unorganised and flexible labour laws for those who are presently in the organised segment. The two markets will move closer together.
As of today, what do we know about wage workers in the non-agricultural sector? As per 2004-05 data, there are 52.9m wage workers in the unorganised sector (excluding agriculture). If one includes unorganised or informal sector workers within the organised sector, the number increases to 76.7 million. There is a Minimum Wages Act. But in urban areas, 50% of male workers and 87% of female workers get wages that are below these minimum wages. With 53% of workers in construction, followed by 19% in manufacturing, physical conditions of work are inhuman, there are occupational hazards, and deviations from stipulated hours of work, the duration of the working day and weekly holidays. Employment is organised through three informal channels?standing at the factory gate, family, caste and community-based networks and labour contractors. None of these is an efficient processor of information and when labour contractors are used, additional costs are paid to the contractors themselves. Plus, 90% of workers don?t possess written employment contracts at all. Much of this sounds like the England of the Industrial Revolution. The fact that the lives of these urban casual workers might be better than those of rural workers is neither here nor there.
The World Bank?s Doing Business indicators for 178 economies include one on employing workers. In employing workers, India has a global rank of 85, difficulty of hiring index of 0, rigidity of working hours index of 20, difficulty of firing index of 70, rigidity of employment index of 30, firing costs of 56 and non-wage labour cost figure of 56. India?s low relative scores are primarily associated with difficulties in firing. India also has higher non-wage labour costs and rigidity of employment index values. The point is that most cross-country surveys generally reduce the Indian analysis to the organised segment.
On the other hand, UN sources approach the issue from a core labour standards standpoint. UNDP?s Human Development Reports show that India?s female work participation rate is 42.5%. India is a de jure signatory to the seven human and labour rights instruments and has ratified conventions specific to elimination of forced and compulsory labour, and discrimination in employment and occupation. Per se, ratification doesn?t solve the problem of implementation, but it does signify some political will.
Whether one acknowledges it explicitly or not, there is a tension or trade-off between ensuring labour market flexibility and ensuring protection of what may be called core labour standards. Within the organised segment, labour market reforms can be clubbed under a few heads. First, there are old and dysfunctional laws that must be eliminated, like. anachronistic sections in the Factories Act and the Shops and Establishments Act. They may have been appropriate when they were first enacted, but times have changed. Even otherwise, it?s moot whether employer-employee kind of relationships relevant to the Industrial Revolution, which is the model from which these labour statutes derive, are appropriate to India. Second, there are areas where legislation is missing. For instance, most of the unorganised sector is outside the purview of protective labour laws and where such laws exist, they are not enforced. Under the present government, an attempt has been made to introduce social security legislation for the unorganised sector, though implementation remains questionable. Third, there is a need for unification and harmonisation. The first extant labour statute was the Fatal Accidents Act, enacted in 1855. Over a period of time, concepts and definitions have changed. So has the case law, contributing to further confusion. For example, there is lack of unanimity about definitions of wages, workman, employee, factory, industry, adolescent, child and even contract labour.
Fourth, there is need for reducing unnecessary State intervention and over-legislation and this often occurs through administrative law. Instances are rules under the Factories Act or the Shops and Establishment Act, or even for wage-related statutes like the Payment of Wages Act. Inspector raj and consequent corruption is an inevitable outcome of administrative law that is non-transparent, made worse by the fact that reporting norms often still do not accept electronic submission. Rules under the Factories Act, framed in 1948, provide for whitewashing of factories.
Distemper won?t do. Earthen pots filled with water are required. Water coolers won?t suffice. Red-painted buckets filled with sand are required. Fire extinguishers won?t do.
Fifth, there is the question of procedural law. If procedural law is inefficient, no matter how good substantive law is, the legal system will lack credibility. This does not make the redressal mechanism credible. In more general vein, transaction costs associated with obeying the law must be brought down, so that people do not have an incentive to operate in a quasi-legal or illegal framework. One can also mention laws connected with industrial relations, such as the Industrial Disputes Act. There has been a failure to un-bundle the labour market reform agenda in several senses.
A quote from Economic Survey is indicative of Indian perceptions about labour markets and labour market reform in China: ?Indian labour market is characterised by a sharp dichotomy. A large number of establishments in the unorganised sector remain outside any regulation, while the organised sector has been regulated fairly stringently. It can be reasonably argued that the organised sector has provided too much of job-security for too long, while the unorganised sector has provided too little to too many. Various studies indicate that Indian labour laws are highly protective of labour, and labour markets are relatively inflexible. These laws apply only to the organised sector. Consequently, these laws have restricted labour mobility, have led to capital intensive methods in the organised sector and adversely affected the sector?s long-run demand for labour. Labour being a subject in the concurrent list, evidence suggests that States that have enacted more pro-worker regulations have lost out on industrial production in general. Perhaps there are lessons to be learnt from China.With a history of extreme employment security, it has drastically reformed labour relations and created a labour market in which workers are highly mobile. Although there have been mass layoffs and open unemployment, high rates of industrial growth helped their redeployment. Workers seem to have benefited from wage growth, additional job creation and new opportunities for self employment.
The importance of the organised sector is low across all of India. The political economy of handling resistance to change is one thing. But at least on the organised labour market, one understands what the policy-induced distortions are. In the unorganised sector, since labour laws don?t apply or aren?t enforced, there remains the question of why India hasn?t been able to reap the benefit of a labour cost advantage, unlike China. The answer probably lies in lack of physical infrastructure and absence of human capital skills.
An ILO study found that between 50 and 75% of non-agricultural employment in the developing world is informal. This includes both self-employment in informal (small and unregistered) enterprises and wage employment in informal jobs (without labour contracts, worker benefits and protection). Subject to data problems, 83% of India?s non-agricultural employment was estimated by ILO to be informal. Self-employment makes up 52% of non-agricultural informal employment. Of course, there are different categories within the informal employment continuum and workers employed on casual basis will be better placed than workers to whom manufacturing work is out-sourced, but inferiorly placed compared to workers who have a more regular status.
Cross-country, there is a correlation between the size of the informal economy and poverty. The challenge for developmental policy is integrating the informal sector into the formal economy. But this cannot be done by fiat and mandated legislation. Such legislation will invariably not be enforced.
?Bibek Debroy is a noted economist and Laveesh Bhandari is head of the economics research firm Indicus Analytics