Labour Market in India
R Nagaraj,
Indira Gandhi Institute of
Development Research,
and
Princeton University
Email: nagaraj@igidr.ac.in
Labour market size
• Consists of 430 million workers in 2004-05,
growing 2% annually, with a stable workerpopulation ratio (40%).
• Low level of open unemployment (3.1%) – high
level of disguised unemployment, mostly in rural
areas and in agriculture.
• Low level of women’s participation in workforce.
• Child labour’s share in workforce declining, but
in absolute numbers still quite large.
March 28, 2007
Oecd presentation
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Labour market structure
• Labour market consists of 3 sectors.
• Rural workers constitute about 60% of the
workforce.
• Organised sector employing 8% of
workforce, and declining – producing 40%
of GDP.
• Urban informal sector – the growing sector
– represents the residual.
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Oecd presentation
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Employment growth
• Structural transformation – agriculture's
share declining from 62% in 1993-94, to
54% in 2004-05.
• Low or negative employment elasticity.
• Employment is shifting towards services,
not industry.
• Between 1997-04, 1.8 million (6.4%) jobs
lost in organised sector including 1.2
million (18%) in manufacturing.
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Oecd presentation
4
Wages
• Agricultural Wages have ↑ since 1980s
• Yet lower than minimum wages.
• Casualisation of employment contracts in
all sectors.
• Decline in self employment.
• Wages still low to overcome absolute
poverty.
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Oecd presentation
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What are the major concerns?
• Deteriorating employment scene, despite
acceleration in output growth since 1980 –
need for massive employment generation
effort, especially in rural areas.
• Deceleration in agriculture since 1990
(Figure 1).
• Agrarian distress – suicides, extremism
• Labour market rigidity.
– Cannot hire and fire.
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Oecd presentation
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Labour legislations
• Mostly deal with the organised sector.
Extent of protection and benefits increase
size of firm or factory.
• Minimum wages practically ineffective; no
national minimum wage; no social security.
• Job-security law in organised sector
reportedly makes it “impossible” to lay-off
and retrench workers.
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Oecd presentation
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Rigid labour market?
• Small and declining organised sector workers
with high and growing wages with job security –
amid an ocean of unorganised, and competitive
labour market.
• So what?
Leads to labour market rigidity:
– substitution of capital for labour,
– reducing economic growth,
– hurting labour intensive exports.
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Oecd presentation
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Policy implications
• Dismantle state intervention in labour
market – pay and perks to be market
driven; wage bargaining to be
decentralised.
• Repeal job-security laws and contract
labour act.
• National minimum wage.
• Social security.
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Oecd presentation
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Inflexible labour market ?
• No nominal or real wage rigidity.
• ↓ in unit labour cost (Figure 2).
– True in public sector too (Figure 3).
• No evidence of adverse effects of job
security law.
• Secular ↓ in union strength.
• More lockouts than strikes (Figure 4).
• ↓ in wage-rental ratio (Figure 5).
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Oecd presentation
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What does the evidence tell?
• There exists functional flexibility, which the
unions are prepared to negotiate.
• Job-security law does not have much bite.
– 18% of organised industrial workers lost jobs.
• Does it mean everything is fine? No, I do
not think so.
• Need for rationalisation of laws.
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Oecd presentation
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Employment concern
• Declining employment elasticity.
• Related to it declining agricultural growth,
and agrarian distress.
• Poor rural infrastructure
• Employment guarantee scheme.
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Oecd presentation
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In sum
• Reformists believe lack of flexibility in industrial
labour market is holding up industrial out and
export growth.
• Evidence does not seem to support such a
proposition.
• But it does not mean that the labour market is
working fine – far from it.
• Need to move towards income security, more
rational labour laws, and greater shop floor
democracy.
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Oecd presentation
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In sum
• Perhaps the bigger concern is agricultural
deceleration, agrarian distress, and
inadequate rural employment growth.
• Employment guarantee scheme hold
promise, but faces political and
bureaucratic resistance.
• These two alternatives perspectives hold
divergent visions of India.
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Oecd presentation
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Figure 1: Growth in Agriculture output, 1980-05
Per cent per year
3.8
3.2
2.9
2.3
2.2
2
1.1
All Crops
Foodgrains
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1991-00
1991-05
3.6 3.6
3
2.7
1.2
1981-90
3.6
1.3
2
1.3
Nonfoodgrains
Cereals
2
1
Rice
Wheat
Crops
Oecd presentation
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Figure 2: Unit labour Cost in Registered Manufacturing
140
Index
120
100
80
60
40
20
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
0
Year ending
Unit labour cost
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Figure 3: Unit labour cost in public sector
Excluding electricity
Ratio
0.6
0.4
0.2
0
80 82 84 86 88 90 92 94 96
Fiscal year ending
Unit labour cost
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Oecd presentation
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Figure 4: Mandays Lost by Disputes
60000
50000
40000
30000
20000
10000
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Oecd presentation
1996-97
1994-95
1992-93
Strikes
1990-91
1988-89
1986-87
1984-85
1982-83
0
Lockout
18
Figure 5: Wage-rental ratio
120
Index
100
80
60
40
20
0
Year ending
Wage-rental ratio
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Oecd presentation
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