Since the beginning of economic reforms period, Indian economy is gearing its arms in a bid to promote both economic and employment growth. The growth strategy adopted by the state has come under tremendous pressures from neo-liberal perspectives which sought to ensure “Ease of Doing Business” climate by providing for flexibility for employers. ‘In order to lessen the burden on the employer, flexible labour laws have been advocated to reduce fixed employment adjustment costs, and thus allowing enough flexibility to fiddle with production activities; as well as manage labour demand according to prevailing market conditions.’
While doing so, two implicit economic rationales have been assumed by policy makers. Firstly, it is believed that allowing flexibility to firms could accelerate higher employability and would stimulate labour demand, thereby increasing aggregate employment through reducing adjustments at the margins. Secondly, the improved level of aggregate employment would then correspond to better wages to those employed, and is likely to reduce the overall employment and wage inequalities by eliminating rigidity in the labour market.
Apart from the flexibility measures proposed to be executed by the central government, governments in states such as Rajasthan, Madhya Pradesh and recently Maharashtra have liberalized the Contract Labour Act by raising the threshold for application of the law from 20 workers to 50 workers; thereby removing a good many primary employers and contractors out of the purview of the said law. It is expected that several other states would follow suit and even the central government may enact the same at the national level. Furthermore, a host of complimentary flexibility measures are being attempted or have been implemented by both the central government and the state. It is in these contexts of rising flexible labour markets even the so-called formal sectors are experiencing severe wage inequities between contract workers and regular workers which needs to be reviewed.
News reports, press anecdotes and serious research articles concerning Asia in general and India in particular have identified severe wealth, income and wage inequalities that cause tremendous social and economic concern as they pose a serious challenge for social and political cohesion and have significant costs for economic growth.
“According to The Global Wage Report 2016-17 by ILO; in India, the highest-paid top 10 per cent of income groups receive almost 43 per cent of total wages paid to all employees; whereas, the lowest-paid bottom 50 per cent income groups receives only 17 per cent of total wages paid to all employees.”
Moreover, the report observes the following three important dimensions of growing wage inequalities in India- 1) the upper tail of wage distribution is highly concentrated in the hands of 1 per cent highest-paid income groups, who enjoy more than 33 times share of total wages than the bottom 10 per cent lowest-paid income groups; 2) Women workers earn 33 times less than male workers; and finally, 3) the persistence of wage inequality within the enterprise and industrial sector is driving the total wage inequality.
It is evident that large sections of the workforce have not been able to reap the dividends of high growth of Indian economy and have been excluded from developmental outcomes. Different bases of inequities could be identified such as gender, skill-based, social and religious identities which have received some attention in the inequities and discrimination literature. But in the post-liberalization period, an important flexi-type worker category has intensified greatly in terms of its numbers and width of operations and in some cases to staggering limits, i.e. contract labour employment which very significantly cuts across all labour markets and social markers such as gender, caste, religion, immigrants etc. The inequality of income between these workers and their regular counterparts have become largely skewed and even exacerbated in the last two decades. It is estimated that contract workers in the organized manufacturing sector earn 55 to 63 per cent lesser wages than their regular counter parts.
The Cost of Flexibility:
Principal employers employ contract labour for three reasons, viz. easy dispensability subject to market conditions, relatively cheaper workforce, and low monitoring costs. Of the three, easy dispensability has not been a major virtue because in most of the tasks the principal employers either legally or illegally employ contract labour and hence the contract workers continue in same tasks almost in same firms for longer tenure and the principal employers often participate in the monitoring of contract labour owing to the interface of work done by the so-called contract workers and the regular workers. It appears that despite the transactional and commission costs inherent in employing workers through a third party, lower labour cost seems to be the real advantage for the principal employers. Cost arbitrage is the biggest incentive for growing employment of contract labour and it makes sound economic sense. This reasoning is further confirmed by the fact that contract workers are least likely to be organized and their terms of employment are less susceptible to be subjected to collective negotiations, though there have been signs of some activity on these fronts.
There is other side to this argument which posits that wages of contract workers in the formal sector will be better off than that prevalent in the informal job in the informal sector due to state regulations like minimum wages and some union effects. Moreover, if the contract workers are more likely to be strike-substitutes during a longer industrial conflict and they perform more skilled work (to be effective strike-breakers) or even unskilled work, then it pays the firm to pay slightly higher wages to the contract workers than otherwise for retaining and pampering them. But these arguments fail on two grounds, viz. some studies show that minimum wages are generally violated in informal enterprises and informal sector of formal economy such as the garments industry; further it may not be economically rational for profit-maximizing employers to pay higher than minimum wages to train workers for an eventual conflict possibility which in these times of withering away of strikes; and there could be and there is evidence of rising solidarity between regular and contract workers to break employers’ tactics.
Way Forward
Contrary to the Indian flexibility model, the Danish “flexicurity” model has achieved outstanding labour market performance. The model is best characterised by a triangle. It combines flexible hiring and firing with a generous social safety net and an extensive system of activation policies. By adopting labour policies which are dynamic in nature, the Indian states actually do better in order to protect the interest of their workers. The center is gearing its arms with the proposed Labour Code on Wages Bill 2015 drafted by the Ministry of Labour and Employment in March 2015, in an attempt to reconcile 44 different labour laws into four main codes to promote flexible labour markets as well as to improve India’s global ranking in the Ease of Doing Business. In doing so, the center is playing a key role, by carving out a space for state governments to ensure smooth execution of those proposed labour codes and wane out enforcement mechanisms. As it is evident that the rising share of contract workers is the future of Indian labour market, the fate of these workers will rest upon the mercy of Indian states who are mulling out market led reforms in order to attract global capital. Hence, it can be argued in the pursuit of achieving flexibility, the state is actually hurting the interest of workers especially, the contract workers who are nonetheless thriving force of Global Indian economy.
Author Information:
Dr. Rahul Sapkal “Currently, an Assistant Professor of Economics and Law at Maharashtra National Law University, Mumbai and an external consultant with UNICEF India and ICRIER, New Delhi. He holds a PhD in Law and Economics with European Doctorate Program in Law and Economics from the University of Hamburg (Germany), Erasmus Rotterdam University (The Netherlands) and University of Bologna (Italy).”
