Labour Market Regulations and Economic Outcomes: Some Capital Lessons and Minor Messages

1. Labour Market Regulations and Economic Outcomes: Some Capital Lessons and Minor Messages Praveen Jha, Sakti Goldar and Swayamsiddha Panda Jawaharlal Nehru University

2. Introduction • Two Distinct and Contending Perspectives: • The ‘Distortionists’ - • Strong advocacy for labour market flexibility • Labour institutions disrupt free market functioning, pose hindrance to growth and employment (Burki and Perry, 1997; Blanchard and Wolfers, 2000; Heckman et al, 2004; etc.). • Regulations cause impediments to labour market adjustments to economic changes • Redistribute ‘rents’ from capital to labour, reducing profitability, dampening investment (Cesar and Chong, 2003)

3. The ‘Institutionalists’ - • Institutions have a wide range of positive effects on economic outcomes (Baker et al, 2003, 2004, 2006; Freeman 1993; Howell 2006; etc.) • Fulfill important redistributive roles • Provides insurance against adverse outcomes to vulnerable categories of workers (Standing and Tokman, 1991) • Significant for Keynesian reasons- Boost effective demand • Enhancement of labour productivity through training or technical innovations (Freeman, 1993) • Ameliorate moral hazard issues

4. Cross-country Evidences • Presumed Support for the ‘Distortionists’ Persuasion: • Botero et al (2003) • Cesar and Chong (2003) • Nickell (1997) • Elmeskov, Martin, Scarpetta (1998) • Belot and van ours (2002) • Bassanini and Duval (2006)

5. Studies examining interactions between macroeconomic shocks and different institutions: • Blanchard and Wolfers (2000) • Fitoussi et al (2000) • Bertola et al (2001) • Nickell et al (2002), etc. • Key conclusion of these studies – “ In the presence of adverse macroeconomic shocks, protective labour market institutions contribute to higher unemployment”.

6. Some Cautionary Remarks • In most of these cross-country analyses, results often depend upon the proxy used in econometric exercises and the sample of countries considered • Variables such as union strength, unemployment benefit levels etc., are difficult to quantify and capture • Wide variability of institutions across countries raises issues of comparable robust measures • Several researchers consider cross- country aggregate data as ‘weak’ to draw reliable conclusions (Freeman, 2005)

7. Empirical “Support” for the Institutionalists • Baker, Glyn, Howell and Schmitt (2004) • Card and Kruger (1995) • Kucera and Sarna (2004) • Buchele and Christiansen (1992, 1995, 1999), etc.

8. Evidence on India • Main focus of literature has been the Industrial Disputes Act (Chapter V-B) and the Contract Labour Act • Some Major Studies exploring the so called adverse effects of the Industrial Disputes Act (1976 and 1982 amendments of Chapter V-B) : • Fallon and Lucas (1993) • Besley and Burgess (2004) • Sanyal and Menon (2005) • Aghion et al (2006) • Ahsan and Pages (2006)

9. The Besley-Burgess Study (2004) • State-level amendments to the IDA classified as pr-worker, neutral and pro-employer and respective scores of +1, 0 and -1 assigned • Assigned scores cumulated over time to arrive at a ‘regulatory measure’ for each state every year • Such a measure is then used to explain economic performances with respect to the organised manufacturing sector

10. Major Conclusions of the Besley- Burgess Study: • Pro-worker legislations have contributed to the lowering of investment and employment in the organised manufacturing sector • Have led to existence and growth of a large informal sector • Net impact has been in terms of deterring productivity and constraining growth

11. Raising Some Critical Issues • Relating to the Besley-Burgess Study: • Classifying a state as pro-worker or pro-employer on the basis of a single amendment can be misleading • Problem of assigning scores when multiple amendments take place in a single year • Fails in identifying specific components of labour laws impacting particular economic outcomes • Measuring rigidities directly from legal statutes could be misleading; translation of laws into outcomes involves a complex intermediation process • Questionable results related to classification and econometric estimation as pointed out by Bhattacharjea (2006)

12. Major Problems with such Empirical Studies • Fraught with methodological and technical difficulties • Studies using the Besley-Burgess index carry over the errors of the original study • Results refuted by subsequent studies (Bhalotra, 1998; Goldar, 2002; Hasan et al, 2003; Deshpande et al, 2004; Anant et al, 2005; Sharma, 2006; etc.) • Contradictory pictures emerge depending upon the index used: World Bank Investment Climate Survey (2003) ranked Gujarat and Maharashtra as the ‘best’ states; both states classified as having ‘inflexible’ labour markets as per the Besley-Burgess study

13. Increasing Flexibility and Casualisation • A field based study of about 1,300 manufacturing firms across nine industry groups by Deshpande et al (2004) • Key Findings of the study: • Both the unionised and non-unionised firms increased capital intensity over the period considered • Only half the firms reportedly were paying the statutory minimum wage • Firms increasingly resorted to greater use of non-permanent workers • Increasing casualisation of the workforce highlighted by several other studies (Sen et al, 2006; Indian Labour Market Report 2008; Guha, 2009; etc)

14. Organised Manufacturing Sector: Key Empirical Findings • Looking at the percentage distribution of total employment distribution in the size classes, the above 100 size has increased much more than below 100 despite IDA Chapter V-B threshold of 100 (1982 amendment)

15. Distribution by Size of Employment Source: Computed from ASI data summary results, CSO, Various issues

16. Wage and Productivity Trends Source: Computed from ASI data summary results, CSO, Various issues

17. Wage and Productivity: Growth Rates Source: Computed from ASI data summary results, CSO, Various issues Growth in average real wages have lagged behind average productivity, the wage-productivity gap has increased

18. Average Wage and Salary Trends Average salary in real terms has gradually surpassed average real wages, and the gap has shown a marked increase in recent years

19. Unit Labour Cost Unit labour costs have been declining over the years, reflecting a relative shift in income distribution from labour to capital and other factors of production

20. Wage –Rental Ratio Wage-rental ratio has steadily declined, suggesting a relative cheapening of labour vis-à-vis capital

21. Wage and Profit Shares: Trends Wage share in value added has come down remarkably while profit share in value added has registered a sharp increase in recent years

22. Increasing Contractualisation Source: Computed from ASI data summary results, CSO, Various issues

23. Contract Workers as a proportion of Total Workers (in percent) Contract workers as a percentage of total workers in organised manufacturing has increased greatly, belittling the rigidity argument

24. Percentage Distribution of Strikes and Lockouts in Total Disputes Share of Strikes in total industrial disputes has come down, while that of lockouts has shored up, indicating general weakening of power of workers vis-à-vis the employers

25. Percentage of Mandays Lost in Disputes Share of workdays lost due to lockouts has been higher than that for strikes since the nineties, signaling shift in power equations in favour of employers

26. Some Capital Lessons • Consideration of the empirical evidence of India’s industrial landscape reveals that the claims of the distortionists are exaggerated • Need to look at a whole range of other critical variables for understanding economic outcomes; little basis to blame labour regulations for poor outcomes • Inevitable outcome of neo-liberalism, based on ‘beggar thyself’ and ‘beggar thy neighbour’ policies, in a bid to attract global capital • Labour has lost out to capital across the globe • Capital interested in unhindered control of labour so as to reap both absolute and relative surplus value

27. Certain Minor Messages • Indeed certain labour institutions need to be revisited but suggestions of dissolution of the institutional framework akin to “throwing out the baby with the bath water” • Labour laws in India have evolved in a knee-jerk and ad-hoc manner; the context in which many of them had evolved have witnessed a sea change • Need for unification, harmonisation and rationalisation of labour laws • Provision of minimum conditions of work and social security to the workers outside the purview of labour regulations