Labour Market in India

R Nagaraj, Indira Gandhi Institute of Development Research, and Princeton University

Email: nagaraj@igidr.ac.in

Labour market size

Consists of 430 million workers in 2004-05, growing 2% annually, with a stable workerpopulation ratio (40%). Low level of open unemployment (3.1%) high level of disguised unemployment, mostly in rural areas and in agriculture. Low level of womens participation in workforce. Child labours share in workforce declining, but in absolute numbers still quite large.
March 28, 2007 Oecd presentation 2

Labour market structure

Labour market consists of 3 sectors. Rural workers constitute about 60% of the workforce. Organised sector employing 8% of workforce, and declining producing 40% of GDP. Urban informal sector the growing sector represents the residual.
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Employment growth
Structural transformation agriculture's share declining from 62% in 1993-94, to 54% in 2004-05. Low or negative employment elasticity. Employment is shifting towards services, not industry. Between 1997-04, 1.8 million (6.4%) jobs lost in organised sector including 1.2 million (18%) in manufacturing.
March 28, 2007 Oecd presentation 4

Wages
Agricultural Wages have since 1980s Yet lower than minimum wages. Casualisation of employment contracts in all sectors. Decline in self employment. Wages still low to overcome absolute poverty.
March 28, 2007 Oecd presentation 5

What are the major concerns?

Deteriorating employment scene, despite acceleration in output growth since 1980 need for massive employment generation effort, especially in rural areas. Deceleration in agriculture since 1990 (Figure 1). Agrarian distress suicides, extremism Labour market rigidity.
Cannot hire and fire.
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Labour legislations
Mostly deal with the organised sector. Extent of protection and benefits increase size of firm or factory. Minimum wages practically ineffective; no national minimum wage; no social security. Job-security law in organised sector reportedly makes it impossible to lay-off and retrench workers.
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Rigid labour market?

Small and declining organised sector workers with high and growing wages with job security amid an ocean of unorganised, and competitive labour market. So what? Leads to labour market rigidity:
substitution of capital for labour, reducing economic growth, hurting labour intensive exports.
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Policy implications
Dismantle state intervention in labour market pay and perks to be market driven; wage bargaining to be decentralised. Repeal job-security laws and contract labour act. National minimum wage. Social security.
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Inflexible labour market ?

No nominal or real wage rigidity. in unit labour cost (Figure 2).
True in public sector too (Figure 3).

No evidence of adverse effects of job security law. Secular in union strength. More lockouts than strikes (Figure 4). in wage-rental ratio (Figure 5).
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What does the evidence tell?

There exists functional flexibility, which the unions are prepared to negotiate. Job-security law does not have much bite.
18% of organised industrial workers lost jobs.

Does it mean everything is fine? No, I do not think so. Need for rationalisation of laws.
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Employment concern
Declining employment elasticity. Related to it declining agricultural growth, and agrarian distress. Poor rural infrastructure Employment guarantee scheme.

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In sum
Reformists believe lack of flexibility in industrial labour market is holding up industrial out and export growth. Evidence does not seem to support such a proposition. But it does not mean that the labour market is working fine far from it. Need to move towards income security, more rational labour laws, and greater shop floor democracy.
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In sum
Perhaps the bigger concern is agricultural deceleration, agrarian distress, and inadequate rural employment growth. Employment guarantee scheme hold promise, but faces political and bureaucratic resistance. These two alternatives perspectives hold divergent visions of India.
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Figure 1: Growth in Agriculture output, 1980-05

3.8
Per cent per year

3.6 2.7 3 2.2 2 1

3.6 3.6

3.2 2.3 1.2

2.9 2 1.1

1.3

1.3

All Crops 1981-90

Foodgrains 1991-05

Nonfoodgrains

Cereals

Rice

Wheat

1991-00

Crops

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Figure 2: Unit labour Cost in Registered Manufacturing

140 120 100
Index

80 60 40 20 0
19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00

Year ending Unit labour cost

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Figure 3: Unit labour cost in public sector Excluding electricity 0.6

Ratio

0.4 0.2 0 80 82 84 86 88 90 92 94 96 Fiscal year ending Unit labour cost

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Figure 4: Mandays Lost by Disputes

60000 50000 40000 30000 20000 10000 0
1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97

Strikes

Lockout

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Figure 5: Wage-rental ratio

120 100 80

Index

60
40 20 0

Year ending

Wage-rental ratio

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