How to be a tiger: Seize historic opportunity for labour reform: We must leap forward, not back

A key feature of China, South Korea, Taiwan, Singapore and Hong Kong during their decades of miracle level growth was their high level of labour market flexibility. Once these economies opened to global markets, their enterprises could take full advantage of this flexibility, grow larger, produce at lower costs and rapidly expand the exports of labour intensive products such as apparel, footwear, furniture and other light manufactures.

In the process, they also created jobs for masses that paid decent and rising wages. The end result was elimination of abject poverty within a matter of two to three decades.

Though India too has opened its economy following the launch of economic reforms in 1991, inflexible labour markets have proved a serious hurdle to the emergence of large enterprises in labour intensive sectors. As a result, the economy has been slow to create well-paid jobs for the masses. Successful sectors such as information technology, pharmaceuticals, machinery, auto and petroleum refining have been capital- or skilled-labour intensive.

This has been just as PC Mahalanobis, the architect of India’s Second Five Year Plan, had predicted. Writing as early as 1969, Mahalanobis noted that India’s labour laws were “probably the most highly protective of labour interests, in the narrowest sense, in the whole world”. He went on to state, “In India … the present form of protection of organised labour, which constitutes, including their families, about 5 or 6% of the whole population, would operate as an obstacle to growth.”

The Periodic Labour Force Survey, conducted in 2017-18, shows how prophetic Mahalanobis had been. According to it, 44% of workers in India remain in agriculture and another 42% in tiny enterprises employing less than 20 workers each. Informality and low productivity employment reign supreme.

Against this background, the decision to replace the existing labour laws by four codes on wages, social security, industrial relations and worker safety offers a historic opportunity to make our labour markets employment friendly. But this will require reforming rather than just consolidating the laws into four codes.

For example, consider the draft wage code. Going by media reports, it largely brings together the existing multiple wage related laws into a single document without fundamentally reorienting them to make them employment friendly. To the extent that the draft code does tweak the existing laws, it promises to add to rather than subtract from the current informality in jobs.

The code proposes higher minimum wages for higher levels of skills. Almost no other nation follows this practice. The ethical argument for a minimum wage is that all workers should be able to afford a minimum acceptable standard of living as per prevailing social norms. This standard cannot vary according to skill level.

Beyond a minimum acceptable level, wages must be free to adjust according to market forces. Escalating minimum wages with skill levels shortchange this process and retard the growth of enterprises. They also nudge the latter towards more capital intensive technologies and capital intensive sectors, thereby undermining job creation.

According to media reports, the draft wage code also proposes a national minimum wage. It is not clear whether such a minimum wage will be based on the costs of living in metro cities like Delhi and Mumbai, or those in remote corners of Bihar and Odisha. If the former, the few formal enterprises that currently exist in labour intensive sectors such as apparel and footwear would be wiped out.

Enterprises in these sectors operate on paper-thin profit margins and minimum wages reflecting the cost of living in metro cities would pose an existential threat to them. On the other hand, basing the nationwide minimum wage on the cost of living in remote corners of Bihar and Odisha would attract the ire of organised labour and opprobrium from international agencies such as the International Labour Organization.

A single national minimum wage thus lacks a rationale. It is no accident that few well-functioning countries follow this practice. On the other hand, if the minimum wage is to vary depending on the cost of living in different geographies, state governments are the competent entities to set it. They are in a better position to define the minimum acceptable living standards within their state borders. Therefore, the task should be left to them, as is the practice in most countries.

The proposed draft wage code also provides for the central government to set the minimum wage in sectors such as railways and mines. It is difficult to see the rationale behind this provision. Once the state government has determined the minimum wage in a given region, according to prevailing social norms, it should apply regardless of the identity of the employer. Why should socially acceptable minimum living standard for an apparel worker be higher or lower than that for a railway or mine worker?

Of greatest importance in promoting good jobs are labour laws relating to industrial relations. But so far there has been no discussion of the contents of this code in the public policy space. It will be a travesty if such an important code reaches the Cabinet and thence to the parliamentary floor in a form that leaves rigidities of the existing laws untouched or, worse yet, strengthens them.