People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 46

November 24,2002

For Part I Click Here

Regulating Labour Markets For More Employment - II

 Jayati Ghosh

 THE existing set of labour laws should be broadly grouped into four or five groups of laws pertaining to (i) industrial relations, (ii) wages and other remuneration, (iii) social security, (iv) safety and (v) welfare and working conditions.  The laws that are currently most contentious are those relating to industrial relations (specifically, the conditions of hiring and firing) and to wages. In each of these, once again, there is a plethora of legislation, at both the central government level and in various state governments. The basic central laws relating to the subject are the Industrial Disputes Act 1947, the Trade Unions Act 1926 and the Industrial Employment (Standing Orders) Act, 1946.


 The Second Labour Commission Report examined the issue of changes in industrial relations in some detail. Some of its conclusions are so significant that they are worth quoting in full:

“A review of industrial relations in the pre-reform decade (1981-90) reveals that as against 402.1 million man-days lost during the decade (1981-90) i.e. in the pre-reform period, the number of man days lost declined to 210 million during 1991 to 2000 - i.e. the post-reform period. But more man-days have been lost in lockouts than in strikes. .. A large number of workers have lost their jobs as a result of VRS, retrenchment and closures both in the organised and the unorganised sector. The exact number is not available. According to our information, no data on this subject has been compiled by any state government. ... We have received a large number of complaints on VR schemes. We have also been told of elements of indirect compulsion, pressure tactics, innovative forms of mental harassment, compelling employees to resign by seeking to terminate them, and in some cases, physical torture and threats of violence against themselves or dependents.

  We shall make a few other general observations on matters that have come before us about the industrial relations scenario.

1) It is increasingly noticed that trade unions do not normally give a call for strike because they are afraid that a strike may lead to the closure of the unit.

2) Service sector workers feel they have become outsiders and are becoming increasingly disinterested in trade union activities.

3) There is a trend to resolve major disputes through negotiations at bipartite level. The nature of disputes or demands is changing.

4) The attitude of the government, especially of the central government, towards workers and employers seems to have undergone a change. Now, permissions for closure or retrenchment are more easily granted.

5) The Conciliation Machinery is more eager to consider problems of employers and today consider issues like increase in productivity, cost reduction, financial difficulties of the employer, competition, market fluctuations, etc.

6) Recovery proceedings against employers who could not pay heavy dues of workers are not being seriously pursued by the industrial relations machinery, if the financial position of the employer is very bad.

7) The labour adjudication machinery is more willing to entertain the concerns of industry.”

  All of these observations point to a shift in the relative bargaining power in industrial relations, away from workers, to employers. Yet it is worth noting that despite this, the aggregate employment experience has been dismal and deteriorating. It is because the overall employment generation in the system is getting even more unsatisfactory than it has been in the past, that demands are being made for further legal changes that will affect the conditions of hiring and firing of the small group of relatively protected workers employed in organised industry and services.

It is being argued that these laws, which restrict employers’ rights to dismiss workers at will and stipulate some degree of permanency of employment, act as a major drag on the profitability of the organised sector and on its ability to compete with more flexible labour relations elsewhere. In this perception, a shift towards a more universal contract-based system of labour relations, with no assumptions of permanency of employment, is required to ensure economic progress based on private enterprise within the current context.


 There are two important issues to note here. The first is that such a shift towards employment based on specified time-based contracts conflicts with the more general requirement that society must ensure adequate livelihood opportunities (or decent work) to all those who are willing to work. If it is to be possible at all, it requires not only a socially accepted consensus on the new perception of employment, but social institutions that can maintain such a system.

Such a system in turn would entail the provision of facilities that would result in constant upgrading of employability through training in a wide spectrum of multiple skills, setting up system of social security that includes unemployment insurance and provisions for medical facilities, and so on. To ensure workers’ rights, it would also be necessary to ensure that there would be both individual workers’ contracts and collective contracts with the workers unions.

It is immediately apparent that this essentially requires the substantial underwriting of a large part of basic labour costs by the state, which is possible only in a very different macroeconomic set up with a much more interventionist government with higher rates of public resource mobilisation and public expenditure.

The second, and possibly even more important, point to note is that in the ultimate analysis, labour laws are perhaps far less significant as factors in affecting private investment, than more standard macroeconomic variables and profitability indicators. Thus, the condition and cost of physical infrastructure, the efficiency of workers as determined by social infrastructure, and the policies which determine access to credit for fixed and working capital as well as other forms of access to capital, all play more important roles in determining overall investment and its allocation across sectors.

Even the Second National Labour Commission Report appears to be aware of this. The Report makes the point that “ the Commission is of the view that changes in labour laws are only one of the issues involved, and that these have to be visualised and effected in a broader perspective of infrastructural facilities, social security, and government policies. We, therefore, suggest that these changes be accompanied by a well defined social security packet that will benefit all workers, be they in the ‘organised’ or ‘unorganised’ sector and should also cover those in the administrative, managerial and other categories which have been excluded from the purview of the term worker. In evolving such a social security system, it is necessary to provide for both protective and promotional measures, the latter being particularly relevant for the workers in the unorganised sector.”

The problem, of course, is that the social security system for all workers, proposed by the Commission, while highly attractive and desirable, is completely unworkable within the present fiscal framework, and indeed would be a hard thing for any relatively poor developing country to begin to attempt for all of its workers. In the absence of clear mechanisms defining how such schemes are to be financed, they are likely to remain Utopian ideas. And when they are combined, as the Commission does, with attempts to further undo the rights granted and protection afforded to the small group of organised workers, the result may not be either the improvement of employment conditions or the spread of a viable social security system for all workers, but rather an effect quite the opposite of what is intended: that is, a further worsening of conditions facing all workers in the economy.

Thus, the Commission recommends “the enactment of a special law for small scale units. We have come to the conclusion that the reasonable threshold limit will be 19 workers. Any establishment with workers above that number cannot be regarded as small. The composite law suggested by us for small enterprises has provisions for registration of establishments, (provisions pertaining to) securing safety, health and welfare of the workers, hours of work, leave, payment of wages, payment of bonus, compensation in case of lay off, retrenchment and closure, resolution of individual and collective disputes of workers, etc. The law … also has provisions pertaining to social security.”


 With respect to retrenchment and closure, the Commission is in favour of granting greater freedom to enterprises, given the current circumstances of global competition and that fact that governmental delays usually mean de facto closure or retrenchment without any compensation to workers. So the Commission believes that prior official permission should not be necessary in respect of layoff and retrenchment in an establishment of any employment size. However, it wants this done in a way that would “pay adequate compensation, offer outsourced jobs to retrenched workers or their cooperatives, if any enterprise decides to close down, give workers or trade unions a chance to take up the management of the enterprise before the decision to close down is given effect to, underwrite facilities for medical treatment, education of children, etc and provide for a third party or judicial review of the decision, without affecting the right of the management to decide what economic efficiency demands.”

How all this is to be achieved and monitored, is a question that is not really dealt with adequately in the Report. Of course, the Commission does suggest that “Every employer will have to ensure, before a worker is retrenched or the establishment is closed, irrespective of the employment size of the establishment, that all dues to the workers, be it arrears of wages earned, compensation amount to be paid for retrenchment or closure as indicated in the next paragraph, or any other amount due to the worker, are first settled as a precondition to retrenchment or closure.”

The Commission also specifies that “contract labour shall not be engaged for core production/services activities. However, for sporadic seasonal demand, the employer may engage temporary labour for core production/service activity.” Once again, the issue of monitoring is a crucial one.


But the most crucial monitoring and implementation issues arise with respect to the wage and labour standards that are necessary. About wages, the Commission recommends that:

·        Minimum wage payable to anyone in employment, in whatever occupation, should be such as would satisfy the needs of the worker and his family (consisting in all of 3 consumption units) arrived at on the Need Based formula of the 15th Indian Labour Conference supplemented by the recommendations made in the judgment of the Supreme Court in the Raptakos Brett & Co case.

·        Every employer must in addition pay each worker one month’s wage as bonus, before an appropriate festival.

·        There should be a national minimum wage that the central government may notify. This minimum must be revised from time to time. It should, in addition, have a component of dearness allowance to be declared half-yearly linked to the consumer price index and the minimum wage may be revised once in five years. This will be a wage below which no one who is employed anywhere, in whatever occupation, can be paid.

·        Where wages are fixed purely on piece rate basis the employer should pay at least 75 per cent of the notified time rate wages to the piece rated worker if the employer is not able to provide him with work. Fixation of piece rate wages must be so done as to enable a diligent worker to earn after 8 hours work what would be the time rated daily rate.

 All this is supposed to apply to all employers, in whatever sector, and all workers, whether rural or urban, in whichever activity they are employed! Of course these are no doubt praise worthy and desirable outcomes, but the implications of actually implementing this are mind-boggling, and next to impossible in the foreseeable future. In fact, what they would amount to is even greater difficulty of finding such employment for most workers.


 It is all worth noting that higher wages are usually not “granted” by legislation of the benevolence of employers, they are won by the struggles of workers. And such struggles become difficult, if not impossible, when workers do not have a minimum security of tenure. In the context of excess labour supply, employers can simply react to attempts to organise for better wages and working conditions (even along the lines proposed by the Labour Commission) by firing such workers. Security against unwarranted dismissal, which is a minimum requirement for labour mobilisation, is effectively denied by these proposals. Therefore they will make it far more difficult even for unorganised sector workers to insist on their basic rights, including a living wage.

For unorganised workers, in addition, the Commission feels that it would be “logical and wise to enact an umbrella type of law for the unorganised sector which would guarantee a minimum of protection and welfare to all workers in the unorganised sector, and would leave it open to the government to bring in special laws for different employments or sub-sectors if experience indicates the need for it.” But the real problem, that of ensuring that such laws are actually implemented and that the incentives within the economy are such as to ensure that the laws are functional, has not been systematically addressed.

This means that the only part of the Labour Commission’s proposals that are likely to get genuinely implemented are those relating to easier conditions of hiring and firing in the organised sector. While the condition of the bulk of workers is not likely to improve in consequence of this, those of workers in the organised sector may actually deteriorate as a result. And this in turn will affect the bargaining position of all workers in the country.

For Part I Click Here