The Labour Conundrum

The condition of labourers in India is often used to drive home the image of the exploitative corporate. There is, of course, a modicum of truth to this generalisation. Private enterprise does respond only to profit, and therefore the condition of labour would not be their primary concern. However, what is also undeniable is the ability of private enterprise to stir growth in the economy and hence drive people out of poverty - either directly through employment or through increase in government tax revenue that can then be spent on provision of basic services. Therefore, the question becomes - under what conditions is private incentive incompatible with social good? This will guide us to the answer.

There are nuances, and we must be cognisant of these nuances before making policy recommendations. I am not an expert in this field, and therefore do not claim to have the definitive answer. However, there are a few observations I have that I believe might be useful to put out in the public domain. I worked with a lot of data while working on McKinsey's 'India's Path from Poverty to Empowerment' report. While this wasn't directly a part of my workstream, Chapter 2 of the report is a great summary of what might be wrong with India's economy, and does talk a lot about labour.

My opinion on this question of labour, however, was shaped by the time I spent at a factory in rural Gujarat. Every day over seven months, I interacted with a cross section of employees at this factory and understood the dynamic of unemployment. Two things were most clear - one, that both the contract labourers and the factory wanted to convert contract labourers into permanent employees; and secondly, labour laws designed to 'protect' labour were, in fact, doing them the most harm. Let me elucidate on both.

Contract labour markets are extremely chaotic and unreliable. To understand this, one should literally imagine a truck leaving the factory in the morning, stopping by in the nearby villages and picking up labourers to work at the factory for the next eight hours. The reality is somewhat more nuanced, but not drastically different. Workers are paid day-by-day, and therefore have no long-term contracts and basic employee protection. They can be barred from work at the whim of the corporate. There is bare minimum protection against accidents at work. That is the nature of such contract employment that is seem to be the most exploitative of employment opportunities. On the other end, corporates are not very happy with this set-up either. Something as trivial as a marriage in the village or rains can cause massive productivity losses in the factory. The worker cannot be trained to improve productivity, since there is no guarantee that he will turn up the next day. Factory owners would prefer to have a greater commitment from the worker but usually isn't able to receive it.

What is the villain in the story? The very same labour laws that were once meant to protect labour. The cost of employment for the factory owner increases dramatically at certain numbers. For example, above 100 employees, the cost of firing employees increases substantially and factories are therefore loathe to increase the number of (permanent) employees unless the benefits are high too. Therefore, Indian manufacturing displays the phenomenon of the 'missing middle' wherein workers are employed either in small - scale enterprises or really large ones; and there is a large number of workers who are in contract employment. For example, employees in large scale enterprises (greater than 200 employees) are 8 times as productive and earn 4.5 times as much as workers in small scale enterprises (less than 49 workers). The following exhibit from the McKinsey report is enlightening:

Labour laws can also easily become a way for corrupt bureaucrats to extract 'quasi - rents' from corporates. Transparent and secular labour laws can dramatically improve employment generation in a state. For example, the share of the organised sector in overall employment is 21 to 22 percent in 'labour-friendly' states such as Gujarat, Karnataka and Maharashtra, as compared to an all - India average of 14 percent. Organised sector workers get many of the benefits that one would believe that workers should have. Moreover, one can see that the relatively less 'pro-employer' states such as Bihar, Assam and West Bengal are also the laggards in economic growth.

In a country at India's stage of development, where there is massive disguised unemployment in agriculture that is waiting to be released, labour protection is extremely important. However, in trying to protect the labour that is already employed, we might fall prey to the typical 'insider-outsider bargaining problem,' where protecting the already employed might harm the interests of those who could be potentially employed. A thorough re-look at labour laws is required if India wants to pull its citizens out of poverty quicker.