#25: Labour Laws Redux
Enhancing worker’s prosperity through labour law reforms
In March 2024, two reports raised issues about employment in India. The India Employment Report 2024 (ILO) highlighted challenges related to youth employment. In a similar vein, the Women, Business and The Law 2024 report (World Bank) was not specific to India, but it showed that India ranks poorly (120/190) in legal discrimination against women in the workplace.
The government responded to the ILO report by showing that its methodology is not robust. Other statistics indicate an increase in the number of jobs. Regardless of these reports, there is consensus that India needs to create more formal sector jobs. To this end, the government has undertaken multiple schemes (here, here) to encourage job creation. However, the success of these schemes may be hampered by labour laws that work at odds with the objectives of protecting workers.
India’s labour laws hurt both workers in general and women specifically. For women, labour laws attempt to protect them from jobs. However, this protection actually stifles women’s work opportunities, keeping women poor. Similarly, general labour laws try to protect workers by mandating high (and inflexible) standards. However, the result of these high standards may be that the jobs are not created in the first place.
Over the last year, employment issues have been a focus of Prosperiti’s research. This article is a recap of how laws in India may be hurting workers generally and women specifically.
Dangerous paternalism 14 June 2023: Across Indian states, women cannot work in 31 industries ranging from lock making to the manufacture of bangles. These laws were made to protect women from dangerous jobs that can pose a risk to their health and life. However, these restrictions have only had the opposite effect on women’s welfare. When women are denied entry into high-paying manufacturing jobs, they remain stuck in low-paying agricultural jobs. Research suggests that manufacturing sector jobs pay 50% more than agricultural sector jobs on average. This increase may help women move upwards in the wealth quintile distribution which may increase their life expectancy by 2 years.
The rules of the game matter 18 October 2023: Punjab and Haryana started with very similar initial conditions. However, today, the states have diverged, and Haryana is much more prosperous than Punjab. What explains this divergence? Besides investment in infrastructure, education, and health, economic freedom is critical.
Haryana’s per-capita income was 6% lower than Punjab in 1980. By 2001, Haryana had caught up with Punjab, and in 2022, Haryana’s per-capita income was 49% higher than Punjab. Haryana’s success cannot be attributed to the initial conditions or government spending on health and education alone. A key difference maker may be the economic freedom to employ women at night granted to IT/ITES establishments, hotel establishments and export-oriented establishments in Haryana in 2003. In contrast, Punjab granted this freedom only in 2014. Additionally, Haryana has also made it easier to employ women at night since businesses can even employ one woman at night. In Punjab, businesses cannot do this since the law requires a minimum of 5 women to be present during the night shift. This may have given industries a headstart in Haryana, the dividends of which are a higher economic growth rate.
When exemptions become the rule 09 August 2023: Workers cannot work in cinemas, cafes, or clubs in most parts of the country at night due to restrictions placed on businesses. For example, Punjab has placed 15 restrictions on businesses that undermine business activity. These restrictions range from limits on working hours, standardised opening and closing times, prohibitions on women working at night, and fixed holidays for workers. These restrictions curtail economic activity as evidenced by the lack of vibrant nightlife in Indian cities. Several state governments know that this harms businesses, and as a result, governments regularly grant exemptions to specific businesses. However, the exemptions are granted arbitrarily and are biased towards higher-paying jobs.
In many states exemptions are not granted based on any principles, instead specific shops and establishments can apply and the exemption is discretionary. In other states, the exemptions come with many conditions like pickup and drop services, security guards, cameras, etc. if women are to be employed at night. This makes it infeasible for smaller businesses to employ women at night. This approach helps only a few establishments and many low-revenue earning economic establishments are left out which especially hurts low-earning income individuals.
(No) Room to grow 20 September 2023: India’s laws mandate high space per worker in factories, with specified areas for workers. These laws may make India’s factories uncompetitive and may be harming workers. Factory floors lose a significant proportion of the floor area to activities not related to manufacturing due to requirements set under the Factories Act. Under the current regulations, a worker is supposed to have 3.38 sqm of space which is greater than India’s competitors such as Singapore (2.875 sqm) and Malaysia (2.65 sqm). Factories also lose a significant proportion of floor space to facilities such as canteen, restrooms, etc. As an illustration, it was shown that a 501-workers textile factory in Uttar Pradesh can lose 32% of its floor space. An additional 233 workers could have been employed on this additional floor space. The Indian manufacturing sector requires laws to maximise the floor space area which can be dedicated to productive activities. Liberalising these provisions can help job seekers since manufacturers will gain the ability to absorb more labour.
Double or Nothing 23 August 2023: Workers may be getting harmed, instead of gaining, through the legally mandated overtime wages in India. Under the overtime wages provision, workers are compensated at double the normal wage rate by employers for overtime work. In theory, workers would have been able to increase their earnings due to this provision. However, in reality, workers may lose job opportunities as a result of this provision. Industries may become unprofitable given that the cost of hiring labour doubles. For example, trade services can witness a decline of up to 35% in profits. This makes Indian industries uncompetitive at the global level.
The Indian industries may not be able to keep up with international competition and firms within those industries are incentivised to shut down rather than continue operations at a loss. The risk of shut-down ultimately hurts workers due to the lowering of job opportunities. India’s competitors (China and Vietnam) have not set overtime premium wage rates as high as India. Some developed countries (Germany and Sweden) do not mandate an overtime premium wage rate. Instead, the laws in these countries encourage employers and employees to negotiate overtime wage rates through mutual negotiations. This approach allows workers the freedom to increase their earnings based on prevalent market conditions without diminishing the competitiveness of local industries.
Lower the bar, increase the earnings 04 October 2023: Workers lose out on the opportunity to increase their earnings due to India’s rigid working hour limits. The law mandates daily regular working hour limits, weekly regular working hour limits, maximum time a worker is allowed inside a factory, maximum number of hours after which a worker must take a break, and maximum overtime hours a worker may work. All these limits often come into conflict with each other and ultimately act as a hindrance towards increased earnings.
An example of this limitation is the maximum number of overtime hours that a worker can work in a quarter. In India, the maximum number of overtime hours lie in the range of 75 to 144 hours per quarter. In contrast, countries such as Malaysia, Singapore, and Austria have set the maximum number of overtime hours per quarter at 312, 216, and 240 hours respectively. Workers cannot increase their earnings even if they want to due to a lower limit on the maximum number of overtime hours in India. The opportunity cost to the worker of not being allowed to even work for the full 54 hours is Rs. 19,448 per year.
70-hour work-week 13 December 2023: The restrictions on economic freedom to work beyond regular working hours limit a small group of middle-income workers from working towards economic prosperity. High-earning workers such as doctors, lawyers, and government officials are usually exempted from laws that limit their working hours. For example, about 24% of police personnel in India work for more than 16 hours a day (96 hours a week), on average, and 44% work more than 12 hours (72 hours a week).
Most factory workers are also not limited by working hour restrictions. Approximately 75% of Indian factories employ less than 10 workers. In such factories, the provisions of the Factories Act do not apply. As a result, a large section of the Indian workforce remains outside the purview of the law and therefore works for more than 48 hours a week. Research found that 12% of informal workers in India work more than 60 hours per week, while 55% of such workers work more than 48 hours a week (OECD, 2019). De facto, the working hour restrictions limit only 6% (1,08,26,082) of Indian workers from working longer hours.
Navigating India’s minimum wage maze 27 December 2023: It is widely believed that minimum wage laws are required to protect workers from exploitation. However, it is not clear if workers have benefited from the minimum wage legislation in India because the Indian minimum wage is characterised by low compliance and high complexity.
There are over 1,500 minimum wages across India; states set minimum wages based on the skill level of workers and the industry the workers are employed in. But even as they do this hyper-engineering, something as simple as skill premium is lost in translation.
Skilled workers do not earn much more in minimum wages than unskilled workers. For example, in Gujarat’s oil mills industry, an unskilled worker is entitled to a minimum wage of Rs. 12,298 and a skilled worker is entitled to a minimum wage of Rs. 12,870. The premium on skill acquisition is only 5%. In some states, minimum wages differ across industries as well for unskilled workers. For example, in Tamil Nadu’s garment industry, an unskilled worker is entitled to a minimum wage of Rs. 10,131. In contrast, in Tamil Nadu’s plastic industry, an unskilled worker is entitled to a minimum wage of Rs. 14,323. It is difficult to justify the differential treatment of unskilled workers based on the industry they are employed in. Due to inter-industry variation, there may be a risk of labour market distortion if unskilled labour can move from one industry to another with relative ease.
UnSkilling India 10 January 2024: India’s apprentice population remains low despite repeated efforts by the Indian government to boost apprenticeships. The percentage of the Indian population engaged in formal apprenticeship stands at 0.01%. In contrast, the same number is 1% and 2.7% in Australia and Germany respectively. The low apprenticeship may be due to provisions laid down in the Apprentices Act.
The Apprentices Act forces employers to pay on criteria not relevant to the industry. For example, 5th standard pass apprentices are entitled to Rs. 5,000 while graduate apprentices are entitled to Rs. 9,000 irrespective of their productivity, skill or experience. Therefore, the law may discourage the hiring of apprentices. This stipend is higher than what is paid to Chartered Accountant trainees (Rs. 2,000).
Old wine in a new bottle 06 March 2024: Gig workers have attracted the attention of governments for social welfare schemes. Rajasthan recently passed a law to extend social welfare to gig workers. This law was touted as novel and progressive. Is this so?
The gig worker protection law is similar to other sector-specific labour welfare laws, and the working of those laws does not inspire confidence. In the past, similar labour welfare laws have targeted sector-specific workers such as construction workers, cine workers, mine workers, etc. The outcomes of these schemes show the ineffectiveness of improving welfare through legislation. For example, Delhi’s scheme for construction workers spent only 5% of its earnings on welfare activities but a substantial amount on its own administration. Similar underperformance was observed in boards for bidi and cine workers. In some cases, workers would have been better off if they had personally purchased insurance from the private sector rather than depend on legislated boards for their welfare.
Illusion of Social Security 03 April 2024: India’s social welfare schemes for the organised sector also do not inspire confidence. An example of a scheme that needs review is the Employees State Insurance Corporation which is supposed to provide insurance and healthcare services to workers. However, ESIC fares poorly when compared with alternatives available in the private financial market. The ESIC spent only 56.82% of its revenue in the past decade. During the same period, private insurance providers on average spent 78.89% of their premium on claim settlement. Similarly, ESIC fares poorly on another metric– bed occupancy. ESIC hospitals had an average bed occupancy of 57% while private hospitals had a bed occupancy of 63%.
Government schemes have tried to address poor performance by outsourcing services to the private sector. Between 2008 and 2013, ESIC’s total expenditure increased by 3x, but expenditure on outsourced services increased by 58x. Workers may be better off if they receive medical services directly from private hospitals instead of routing the money through ESIC and incurring the administrative costs of ESIC.
Focus on Labour reforms to boost the economy
Labour-related challenges have always been a subject of policy discussion. To satisfy the growing demand for high-paying jobs by the youth, governments on the state level have tried to boost sectors with high employability potential. For example, Telangana has identified 18 focus sectors including MSMEs and start-ups to boost productivity and increase job opportunities. However, at the same time, labour laws are probably working in the opposite direction by harming workers. India needs to rethink its legal framework to achieve prosperity.
References
International Labour Organisation & Institute for Human Development. (2024). India Employment Report 2024: Youth education, employment and skills [Report].
OECD. (2019). Society at a Glance: Asia/Pacific 2019.
The Apprentices Act (1961).
The Factories Act (1948).
World Bank. (2024). Women, Business And The Law.
Suyog Dandekar and Shubho Roy are researchers at Prosperiti.