Explained: What do the changes in labor law mean?

At first glance, these changes are taking place to encourage economic activity in the respective states.

As the economy struggles with closure and thousands of companies and workers look to an uncertain future, last week some state governments decided to make significant changes in the application of labor laws. The most significant changes were announced by three states governed by BJP – UP, MP, and Gujarat – but several other states, ruled by Congress (Rajasthan and Punjab), as well as Odisha governed by BJD, also made some changes, albeit to a lesser extent. . . UP, the most populous state, has made the boldest changes since it summarily suspended the application of almost all labor laws in the state for the next three years.

At first glance, these changes are taking place to encourage economic activity in the respective states. Legal issues aside: work falls on the concurrent List and there are many laws enacted by the Center that a state cannot ignore; The key question is: Are these the pending labor market reforms that economists used to do? Are we talking, or is the suspension of labor laws a retrograde and timely step that critics have shown it to be?

What are Indian labor laws?

Estimates vary, but there are more than 200 state laws and about 50 central laws. And yet, there is no established definition of “labor laws” in the country. Generally speaking, they can be divided into four categories. Table 1 provides categorization, with examples.

The main objectives of the Factory Law, for example, are to guarantee security measures in factory facilities and promote the health and well-being of workers. The Law of Stores and Commercial Establishments, on the other hand, aims to regulate working hours, pay, overtime, weekly rest days with pay, other holidays with pay, annual vacations, employment of children and youth, and employment. of women.

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The Minimum Wages Law covers more workers than any other labor law. The most controversial labor law, however, is the Industrial Disputes Act of 1947, in terms of terms of service such as dismissal, reduction and closure of industrial companies and strikes and lockouts.

Why is labor law often criticized?

Indian labor laws are often characterized as “inflexible”. In other words, it has been argued that, thanks to burdensome legal requirements, companies (those that employ more than 100 workers) hesitate to hire new workers because firing them requires government approval. As Figure 4 shows, even the organized sector is employing more and more workers without formal contracts. This, in turn, continues the argument, has limited business growth on the one hand, and has provided unfair treatment to workers on the other.

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

Essentially, if India had fewer and easier to follow labor laws, companies could expand and contract depending on market conditions, and the resulting formalization, today 90% of India’s workers are part of the economy. Informal, it would help workers since they would get better wages and social security benefits.

Is that what states like UP propose?

In fact, no. UP, for example, has summarily suspended almost all labor laws, including the Minimum Wages Act.

ICRIER’s Radhicka Kapoor characterized this as “creating an environment conducive to exploitation”. This is because, far from being a reform, which essentially means an improvement in the status quo, the elimination of all labor laws will not only deprive work of its basic rights, but will also reduce wages. For example, preventing a company from laying off all existing employees and hiring them again at lower wages, he noted.

In that regard, from the workers’ perspective, the government has completely shifted from asking companies not to fire workers and paying full wages at the start of the blockade, to stripping workers of their bargaining power now.

Furthermore, far from pressing for further formalization of the workforce, this movement will turn existing formal workers at once into informal workers, since they would not obtain any social security.

Why will wages fall?

On the one hand, as figure 3 shows, even before the Covid-19 crisis, thanks to the slowdown in the economy, wage growth had moderated. Furthermore, there has always been a large gap between formal and informal wage rates. For example, a woman working as an informal worker in rural India earns only 20% of what a man earns in a formal urban setting.

If all labor laws are removed, most jobs will become informal and dramatically lower the wage rate. And there is no way for any worker to seek claims redress, said Amarjeet Kaur, AITUC Secretary General.

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Would these changes not boost employment and stimulate economic growth?

Theoretically, it is possible to generate more employment in a market with fewer labor regulations. However, as the experience of states that have relaxed labor laws in the past suggests, dismantling worker protection laws has failed to attract investment and increase employment, without causing any increase in worker exploitation or deterioration of working conditions.

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

First, there is already too much unused capacity. Companies are cutting wages by up to 40% and making job cuts. General demand has fallen. He asked, which company will hire more employees at this time.

Kaur said that if the intention was to ensure more people had jobs, then states should not have increased the length of the shift from 8 to 12 hours. Instead, they should have allowed two 8-hour shifts each, he said, so that more people can get a job.

Both Srivastava and Kapoor said this move and the resulting drop in wages will further depress overall demand in the economy, thereby undermining the recovery process. “The timing is wrong,” said Kapoor. “We are moving in the exact opposite direction,” Srivastava said.

Could the government have done more?

Srivastava said that instead of creating exploitative conditions for workers, the government should, like most governments worldwide (Figure 5), partner with industry and allocate 3% or 5% of GDP to share the wage burden and ensuring the health of workers “because if Covid hits them, the whole country would collapse.”

Furthermore, beyond labor regulations, companies face many other obstacles, such as a shortage of skilled labor and weak enforcement of contracts, etc.

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