The anti-labour mindset

Written by Bibek Debroy

Employment and unemployment figures still come from the 68th round of the NSS (National Sample Survey), that is, 2011-12. The NSS has different ways of defining and measuring employment and workforce — usual status, current daily status and current weekly status. It doesn’t matter which is used. Two conclusions are obvious. First, especially among women, work participation rates are low — for instance, World Bank data show an Indian female work participation rate of 27, compared to 64 in China; and, second, not only does low growth mean low employment generation, but even when growth picks up, jobs don’t seem to be created. For instance, one can compare the employment elasticity of growth between 1999-2000 and 2004-05 with a decline in that elasticity thereafter. While growth is necessary to create jobs, growth alone will presumably not solve the problem.

Why is the employment elasticity of growth low, subject to the qualification that this also depends on the composition of growth? A standard answer has been labour laws, especially in the organised sector. Both expressions, “labour laws” and the “unorganised sector”, should be used with caution. There are 50-plus Union-level statutes that directly have something to do with labour. There are also many state-level rules.

A standard definition of “organised” is the application of the Factories Act. But there aren’t two neat binary worlds of organised and unorganised. Some of those 50-plus labour laws also apply to the unorganised sector, and there are informal contracts within the organised sector. With that Factories Act definition, the Economic Survey tells us employment in the organised sector (in 2012) is 29.6 million, 12 million private and the rest public. There is an entirely valid argument that labour laws in the organised sector are rigid, thereby stimulating artificial capital intensity. By this statement, one usually means statutes on industrial relations — the Industrial Disputes Act (IDA), the Contract Labour Act and the Trade Unions Act — though it can also mean compliance costs associated with the so-called inspector raj, which is pertinent too for other statutes and occasionally applies to the unorganised sector.

Assuming labour and capital can be substituted, in relative price comparisons between labour and capital, this increases costs of labour, interpreted as more than narrow wage costs. What has happened to that cost of labour post-1991? I mean the absolute cost, not the relative one. Sure, there are occasional complaints about upward wage pressures, lack of skills and labour shortages (reflected in higher wages). But I suspect these are still sector-specific and region-specific complaints.

 

Still, compliance costs associated with labour laws should also have declined. Several states have simpler procedures now and the implementation  of labour laws is mostly a state subject. The Union government has introduced elements like self-certification and the unification of forms. Within the IDA, permissions are more readily available. When were labour laws tightened? If you are obsessed with the IDA, you will probably pick 1976 (when Chapter V-B was introduced), or 1982-84 (when the threshold of Chapter V-B was changed).

Nineteen seventy six or 1982-84 certainly introduced rigidities. and those rigidities need relaxing. But has that rigidity become worse post-1991? Not necessarily. A capital/ labour choice is based on relative costs of inputs, not just absolute costs of labour. With the old GDP series, high growth years were roughly between 2003-04 and 2007-09. One explanation for high growth is the reduced cost of capital, however defined — import duties, external commercial borrowings, domestic costs of debt and equity. Thus, the absolute cost of capital declined, reduced the relative cost of capital, pushed up the relative cost of labour and drove further capital intensity. However, there is a more interesting question. Do labour laws alone distort resource allocation?

Consider policies on capital. The budget papers have a revenue foregone statement. In 2014-15, aggregate tax exemptions, divided into various categories, amounted to Rs 4,86,452 crore. There are direct tax exemption components for the corporate sector and unincorporated enterprises. If you scrutinise these, you will find several for the use of capital. There are instances from indirect tax exemptions too. What else is stuff like accelerated depreciation? Can you think of a single incentive linked to the use of labour? Other than tax exemptions being undesirable on other counts, this too distorts choice across inputs.

I can also throw in incentives, not necessarily fiscal, on the use of land. Why should we be surprised at low employment elasticity? Take the definition of MSME (micro, small and medium enterprises). Whether manufacturing or services, this is completely based on investments, that is, capital. It has nothing to do with labour or employment. While the growth theory has evolved and often has human capital built into it, the popular discourse is often based on Harrod-Domar. If the investment rate is 32 per cent and the Icor (incremental capital/ output ratio) is 5, you will get a growth rate of 6.4 per cent and so on. How many times have you seen a discussion that says what the growth rate will be if the female work participation rate increases? Or alternatively, what it will be if mortality and morbidity indicators, or skill indicators, improve? I wonder if this occurs because the roots of the discourse originate in countries that possess a different set of relative factor endowments. It is a plausible proposition.

But my limited point is that, in discussing the low employment elasticity of growth, let us not look only at labour market policies. A factor input choice, to the extent inputs are substitutable, is a function of relative prices. Policies that distort costs on inputs and thereby distort resource allocation and input choices are undesirable. Just as they are undesirable for labour, they are undesirable for capital and land too. But oddly enough, the capital distortion argument is not articulated as much as the labour distortion one. If incentives are to be used, let us encourage the use of the input India is relatively better endowed with, not the one India is relatively scarce in.

(The writer is member, Niti Aayog. Views are personal.)