T C A Srinivasa-Raghavan: What's there to reform in labour laws?

OKONOMOS

There is no single solution to the core issue of how to balance the particular with the general in labour law.

Street smart economists, including the prime minister, love to use euphemisms. In the context of labour market reform and what it means in terms of distress, it is easy to understand why.

Indeed, if you value justice, equity and fairness, there is practically nothing in the Indian law that requires reform "" except the currently non-existent right of the employer to sack workers when the need arises, or hire-and-fire.

The core issue in labour law reform, however, is different but not unique. It is a fairly general problem. But because of its political aspects, it looms larger for labour.

This general problem consists of the need for the law to balance the particular with the general. Thus, while an employer must have the unfettered right to sack a useless worker, that right cannot be unfettered when it comes to large scale, "downsizing" or "rightsizing".

Nor is the problem unique to India. As a recent paper* Jan Rutkowski shows, it is common to all countries that have an excess supply of labour accompanied by democracy.

Rutkowski has studied the "transition" economies of Europe (former Eastern Bloc) and CIS (that is, the former USSR). But he may just as well have studied India. There is practically no difference.

"In the European transition economies the lack of jobs has led to persistent open unemployment. In the Commonwealth of Independent States (CIS) it has led to hidden unemployment (underemployment and low productivity employment)." Substitute Bihar and UP for Central Asia and West, and South India for the European part, and you get the picture.

He further adds that "underemployment in the CIS is a mirror image of unemployment in the European transition economies..." indicating "delayed enterprise restructuring, the maintenance of unsustainable jobs in uncompetitive firms, and the existence of a large informal sector as an employer of last resort."

So what has been the consequence? "Sharp increase in earnings differentials and the attendant increase in the incidence of low-paid jobs, by the polarisation of regional labour market conditions, and finally by the growth of the informal sector offering casual, low-productivity jobs."

Not just that. Self employment is a major source of employment in the low-income CIS, accounting for 50 percent of total employment. We find the same thing in India.

The better educated not only get the jobs, they also get far better salaries. That is obvious enough. But who employs them at higher salaries?

"The increase in the premia to high skills and education... has been driven by the private sector, which rewards high educational qualifications better than does the public sector."

The key point, I believe, is that the informal sector has grown across all transition economies. Since this is what is happening in India, too, it is worth emphasizing.

Rutkowski says that the informal sector in the European part is smaller than in the CIS. It seems people and firms in the former go "informal" to evade high taxes and avoid regulations.

But in the CIS economies "the informal sector is largely an employer of last resort providing subsistence income." India once again. Another similarity is that small firms prefer to stay in the informal sector to avoid corruption and extortion.

There is, however, one crucial difference. Unlike in India, there, male unemployment rate is higher than female.

There are many reasons for this. One is that restructuring reduced the demand for manual, less skilled labour "" superior technology displaces labour, especially in heavy industry, which employs men predominantly.

But the service sector, which has been expanding there just as it has in India, needs better skills. This, says Rutkowski, "benefits women more as...women tend to be better educated than men." Needless to add, more hard-working as well.

So what message does all this hold for labour market reform? Simply this: there is no easy way out "" which is why Jiang Xemin also was forced to postpone PSE restructuring in China to 2010.

If China finds it hard to be brutal, what chance do we have?

*Labour market Developments During Economic Transition WPS 3984 www.worldbank.org.