Why some labour reforms may lead to slave-like conditions in workplaces

While the inflexible labour law regime has been criticised for leading to increasing contractualisation that hurts workers, won’t the new reforms do the same?

The plan by some states to usher in key labour law relaxations in the wake of the job crisis created by Covid-19 may hit a wall.
The plan by some states to usher in key labour law relaxations in the wake of the job crisis created by Covid-19 may hit a wall.
This has effectively revived the debate over the relevance of the labour laws.
This has effectively revived the debate over the relevance of the labour laws.

By Sitakanta Panda

The Covid pandemic and the consequent national lockdown have exacerbated the economic slowdown. As a result, both central and state governments are coming up with innovative economic policies to alleviate the economic misery across sectors. Some states have begun carrying out sweeping policy changes, for instance, in the labour market. The Uttar Pradesh government’s suspension of the labour laws for three years through an ordinance is a case in point. This has effectively revived the debate over the relevance of the labour laws.

In a bid to spur investments boosting employment, the Yogi Adityanath government has exempted industries in the state from all labour laws except Building and Other Construction Workers Act 1996, Section 5 of Payment of Wages Act 1936 (the right to receive timely wages), Workmen Compensation Act 1923 and Bonded Labour System (Abolition) Act 1976, Maternity Benefit Act of 1961, Equal Remuneration Act of 1976, Child Labour (Prohibition and Regulation) Act of 1986, etc. Since labour is part of the ‘concurrent list’, the ordinance is subject to the approval of the central government. The ‘Uttar Pradesh Temporary Exemption from Certain Labour Laws Ordinance, 2020’ which will apply to both the existing businesses and the new factories being set up in the state has proposed to suspend the important labour laws. It is worth mentioning here that Madhya Pradesh government is also reportedly mulling over policies exempting new manufacturing units from all, but some provisions, in the Factories Act, 1948 for the next 1,000 days. MP’s labour law changes will allow more factories to operate without following safety and health norms and give a free hand to new companies to “keep labourers in service as per their convenience”.

At the outset, this policy move of making defunct the laws of settling industrial disputes, occupational safety, health and working conditions of workers and those related to trade unions, contract workers and migrant workers will accentuate worker distress and place protection of worker rights at the mercy of industrialists. This is a clear violation of the norms, which may lead to slave-like conditions in workplaces.

Some economists advocating this abolition blame the maze of labour laws for the existence of a gigantic informal sector. They point out that most firms try to circumvent the labour laws by either hiring more contract labour or going for capital-intensive manufacturing. The increasing incidence of contract labour has been a salient feature of the post-liberalisation era. Critics of the current system opine that existing labour laws are restrictive and encourage exploitation.

The extant labour laws have benefitted the labour unions which comprise a small section of the organised sector labourers, government labour officials, and intermediary contractors. The laws are such that the firms require permissions for hiring, firing, closures, changing the job task of an employee, and insists on paying wages, overtime perks and bonuses far above market-clearing wage. However, over time, firms have benefitted by hiring contract labour. Wages/ salaries of contract workers are much less than permanent employees, and the former lack adequate job benefits and rights.

Critics are not entirely wrong. There is a plethora of restrictive labour regulations in India that define and regulate every aspect of the employer-employee relationship. The three well-known and most restrictive ones are the Industrial Employment (Standing Orders) Act (IESOA), the Industrial Disputes Act (IDA), and the Trade Union Act (TUA). As per the IESOA, firms employing 100 or more workers (50 or more in some states) are required to seek government permission for changing the job description in the labour contract. As per the IDA, firms employing 100 or more workers are required to seek government permission to retrench or lay-off any worker. Firms very rarely get government permission in this regard. TUA allows any seven employees in a company to form a labour union. As the unions have the right to strike and represent workers in legal disputes, they have been subject to political interference and mafia nexus.

States with flexible labour regulation show faster employment growth than others. An early study by Timothy Besley and Robin Burgess (2004) found restrictive labour laws to be detrimental to firm output and employment outcomes in states. A study by Rana Hasan, Poonam Gupta and Utsav Kumar (2009) showed output and employment growth in labour-intensive industries to be slower in states with more rigid labour laws vis-a-vis others. Sean Dougherty, Veronica Frisancho-Robles and Kala Krishna (2011) found that compared to other lacking flexible labour laws, states with easier labour laws have about 11%-14% higher firm-level productivity in labour-intensive industries, and in those facing unstable input demand. Another important study by Philippe Aghion, Robin Burgess, Stephen Redding, and Fabrizio Zilibotti (2008) showed that after dismantling of the license raj, during liberalisation, industries located in states with pro-employer labour market regulations grew more quickly than the pro-worker labour law states. Since pro-worker regulations are, on average, associated with weaker industrial performance, their study shows that dropping barriers to investment and entry via delicensing magnified the disadvantage of states with pro-worker institutions.

Now when the labour laws are abolished or frozen temporarily, there is a legitimate apprehension that firms used to paying much less wages and salaries to contract labour may still continue to hire more contract labour. Since there are no labour laws in effect, the workers will be left at the mercy of the employers.

Some basic labour-regulation defining standard, fixed tenure labour contracts and ensuring occupational safety and healthcare is a primary need to guarantee labour productivity. However, any argument for the abolition of all the laws and regulations that ensures occupational health and safety, protects worker rights and ensures a balance between employer and employees would be despicable and wicked. No regulation is certainly not better than a maze of bad laws. Laws can be reformed and revamped. If only the state governments could show the political willpower to reform the nuisance creating aspects in the existing labour laws, the present situation would not have occurred. At a time when unemployment rate has increased, and market wages have declined drastically, this call for abolition is unbecoming and unnecessary even if the ruse is to boost firm outcomes. Cure should not and must not be worse than the disease.

The author is Assistant professor, economics IIT, Bhilai. Views are personal

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