Politics over labor: Whose interests do the labor regulations represent?
There has been a lot of discussion about employment creation, labor protection and labor rights that has come to forefront with increased mobility of capital. Several commentators have often commented how the increased mobility of capital has resulted in the relatively less mobile labor to be more exposed and vulnerable. They believe that as nations compete to attract investments they tend to make labor laws weaker and thus begins a race to bottom.
Unfortunately, they do not support their claim with any evidence so to say. Keeping this in mind, I thought it may be a good idea to examine how politics over labor is done and how it impacts the interests of different people who participate in the labor market.
It is obvious that labor regulations that guarantee a minimum pay ensure that the wage rate remains at least that level for the formal sector employees. This minimum pay is calculated in accordance with the bare minimum level of income that is required to sustain a particular level of consumption. However, if this minimum pay is above the wage rate that the market would command due to the interaction of labor demand and labor supply, then this may result to comparatively less of labor being employer; or greater informalization of labor.
So, while the minimum pay may be advantageous for those currently employed, the minimum pay may actually go against the interests of those unemployed as they may find it hard to get a job and even if they do, it is more intuitive to assume that it would be in the informal sector. This occurs as there’s a mismatch between the quantity of labor demanded and quantity of labor supplied at the minimum wage rate so there’d be a glut of quantity of labor supplied at this wage rate; and this glut would lead to competition among workers to find employment and many may be willing to take an informal job rather than stay unemployed due to lack of livelihood opportunities.
This, thus implies that a minimum wage rate may often be a worst policy measure to deploy as it has two theoretical implications: a) it is distortionary for the labor market and b) this distortion leads to greater informalization of the employees. Thus, the minimum wage legislation in developing nations like India may be enacted upon to protect the interest of workers, however it may protect the interest of formal sector workers to some extent, but this protection comes at a cost which the deprived workers face who are yet to be in the formal labor market. So, while a minimum wage may be a populist measure that most workers may actually support, irrespective of their status of employment, in practice it systematically harms the already deprived section of the population thereby raising the question of effectiveness of such an intervention and whose interest does it represent after all.
The second aspect is something that has been talked about ever since the 1980s. It is to do with the Industrial Disputes Act (1947) and the two amendments that made it impossible for firms to shut down if it had more than 300 and later 100 employees respectively. We need to consider the impacts that such a law would have on the labor market. By making it difficult for firms to shut down or cut back on employment, firms may be extra cautious in hiring as it would be difficult for them to cut down on their employment. Further, a firm can always resort to increasing production by switching to more capital-intensive techniques rather than labor intensive ones. For a country where labor is more widely abundant as a factor of production, a trend of capital intensive production being witnessed can largely be attributed to such ill thought laws. With labor being abundant and capital being more widely used, this significantly impacts the employment generation capability across sectors in India. While there is robust job growth being witnessed currently in India, however, this job growth could be seriously amplified if it is assisted with some serious labor reforms.
Moving back to IDA and the two amendments, we must reiterate that though such an intervention ensures that those who have employment have some form of security as far as their job is concerned but for those who are unemployed may find it hard to get employed due to the rigidity in the market. This obsession in India to play politics over labor is dangerous as it ensures that there is rigidity within the labor market and this rigidity has a real cost associated with it in terms of employment lost as firms are less likely to hire when it is harder to fire.
No, I am not saying that we should make it easier for firms to fire its employees, but if the labor market is flexible, then those who are fired or quit a job may also find it easier to find alternative employment elsewhere. Flexibility in the market always means that there is competition among both, hirers and labor which would induce an outcome that may be better than artificially keeping the market rigid.
In a nation like India with huge section of population within the working group age, such regulations are not effective and tend to have a higher disadvantage or costs associated with them for the very people who it aims to protect. Hence, I truly wonder whose rights do these politicians represent when they oppose labor reforms and advocate for labor regulations that make the market more rigid.
It is about time that we look at the interests of the workforce in general and create a flexible, dynamic and vibrant labor market which promotes the interests of working population rather than those who are already employed. As far as labor laws are concerned, Rajasthan seems to be the best amongst Indian states, however a lot more needs to be done to ensure that our job creation is accelerated. Labor reforms are indeed the need of the hour and the politicians who oppose them need to leave their politics aside and do something that is good for the country. Any attempt to halt the reforms in existing labor laws would be an attempt to harm the interest of the workforce so we as citizens need to be aware of these nuances and ask ourselves who is representing our interests and who is pretending to represent our interest but is actually harming it in a significant manner.
Karan Bhasin is a graduate in Economics and is associated with Public Policy Research Centre, a New Delhi based Think-Tank. Views Personal. He tweets @karanbhasin95