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January 02, 2011




Page: 28/38

Home > 2011 Issues > January 02, 2011

Economy Watch

Labour reforms yes, but what about employment?

By Dr Bharat Jhunjhunwala

The problem of unemployment is not solved by programs such as the Employment Guarantee Scheme. On such schemes Prof Phelps says: "Although such programmes have been substantial in Europe and the US, the working poor remain as marginalized as ever. Indeed, social spending has worsened the problem, because it reduces work incentives and thus creates a culture of dependency and alienation from the commercial economy, undermining labor force participation, employability, and employee loyalty."

A survey of small and medium industries undertaken by the Confedera-tion of Indian Industries has indicated that obsolete labour laws are the second most important factor after infrastructure which is obstructing their growth. The Prime Minister has also said that absence of labour reforms is leading to low rate of employment generation. Many industries like sugar and tourism are seasonal in nature. They have to pay compensation for the lean months to the workers due to labour laws. Wages of workers are fixed at high levels. It is difficult to dismiss an inefficient worker. These provisions lead to higher cost of employing labour. The industrialist's response is to use more machines and less labour. This is the reason that number of workers employed in the organised sectors has declined from 282 lacs in 1997 to 264 lacs in 2005. This is despite the economy showing high rate of growth.

This mutual contradiction between economic growth and employment is actually rooted in the very process of development. Economic growth means more availability of capital which, in turn, means lower cost of capital. The interest rates are low in developed countries for this reason. The price of loan declines with increased availability of capital just as price of potato in the market declines with increased number of trucks coming in. The wages of workers, on the other hand, increase along with economic growth. The daily wage of an unskilled worker in the US today is about Rs 4,000 per day against Rs 200 in India. The logical consequence of low price of capital and high price of labour is that industrialists prefer to use more machines and less labour. This leads to loss of employment. Mostly, the unskilled workers lose the jobs. Installation of automatic machines leads to increased demand for skilled workers in running and maintaining them while number of unskilled workers required is less. Thus, we see IIT graduates getting high pay packets while the poor people take up arms in the leadership of the Naxalites.

The worker is doubly hit. First he loses his jobs to the machines. Next, he is hapless against the big factory. Previously, for example, there used to be large number of small factories making jaggery in the villages. A worker could move from one jaggery factory to another. Now there is one sugar factory in an area covering 50 kilometers. It is not so easy to switch jobs. This helplessness of the workers is used by industrialists to exploit them by paying meager wages and insisting on long work hours. Therefore, the Government has made Trade Union and other laws. Workers are able to organise themselves and face the industrialists with their collective power backed by Government's protection. Workers have thus got facilities like Provident Fund, DA, uniforms, canteens, etc. At the same time, however, industrialists have started using more machines and many unemployed are being deprived of jobs that could be generated.

We can see two contradictory effects of labour laws. These are a boon for the three crore workers in the organised sectors. They are getting many benefits. But they are harmful for the large number of unemployed people. Softening of labour laws, therefore, will deprive the organised workers of the facilities enjoyed by them presently while this will be beneficial for the unemployed since they will get some jobs. On the other hand, leaving the labour laws unchanged will be beneficial for the organised workers and harmful for the unorganised workers. We are caught between the devil and the deep blue sea. We have to find our way between them.

The Prime Minister wants to allow businesses to hire and fire at will, remove their fear of employing large numbers and, he feels, they will generate more employment then. But this is not necessary. Nobel Laureate Professor Edmund Phelps says: "The limitation of this approach, however, is that a free market for labour will neither eradicate unemployment nor transform marginal, low-end workers into high-productivity, high-wage employees... Market forces alone are unlikely to solve the unprecedented levels of labour-market exclusion." Very small number of jobs may be created because businesses may find even such low wages to be prohibitively high compared to the capital that is available even cheaper.

The problem of unemployment is not solved by programs such as the Employment Guarantee Scheme either. On such schemes Prof Phelps says: "Although such programmes have been substantial in Europe and the US, the working poor remain as marginalised as ever. Indeed, social spending has worsened the problem, because it reduces work incentives and thus creates a culture of dependency and alienation from the commercial economy, undermining labour force participation, employability, and employee loyalty. What is needed is higher employment and pay through higher demand for the least productive workers." The Employment Guarantee Scheme creates a sense of helplessness and dependence among the workers. It reduces their ability in seeking employment or self-employment. Thus these schemes push the unemployed deeper into the pit of helplessness and defeat. It may appear that the government is providing relief to the unemployed but actually it is debilitating them from seeking productive employment and locking them into long-term poverty.

The alternative, according to Prof Phelps, is like this: "The best remedy is a subsidy for low-wage employment, paid to employers for every full-time low-wage worker they hire... With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid out as direct or indirect labour compensation. People could benefit from the subsidy only by engaging in productive work." That is precisely what Gandhi had said in Young India of October 13, 1921: "I must refuse to insult the naked by giving them clothes they do not need, instead of giving them work which they sorely need." Dr Manmohan Singh should listen to Prof Phelps and Mahatma Gandhi. They should devise schemes that create demand for workers.

The Prime Minister is right in asserting that absence of labour reforms is leading to low rate of employment generation. But he is not telling the whole story. Labour reforms will also cause the organised workers to lose their present facilities. Yet labour reforms are needed for employment generation. The way forward is to first institute an employment subsidy programme as suggested by Prof Phelps. For example, the Employees' contribution to Provident Fund of low-wage workers can be provided wholly by the Government. Alternatively, a subsidy of Rs 500 per month can be paid for every worker employed. These measures will help generate employment. Labour reforms may be made after these subsidies are in place. The organised workers who are presently getting many benefits will lose some of the facilities but this will be more than made up by the large generation of employment.




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