Labour Market Regulations and
Economic Outcomes: Some Capital
Lessons and Minor Messages
Praveen Jha, Sakti Goldar and Swayamsiddha Panda
Jawaharlal Nehru University
Introduction
 Two Distinct and Contending Perspectives:
1. The ‘Distortionists’ 



Strong advocacy for labour market flexibility
Labour institutions disrupt free market functioning, pose
hindrance to growth and employment (Burki and Perry,
1997; Blanchard and Wolfers, 2000; Heckman et al, 2004;
etc.).
Regulations cause impediments to labour market
adjustments to economic changes
Redistribute ‘rents’ from capital to labour, reducing
profitability, dampening investment (Cesar and Chong,
2003)
2. The ‘Institutionalists’ 





Institutions have a wide range of positive effects on
economic outcomes (Baker et al, 2003, 2004, 2006;
Freeman 1993; Howell 2006; etc.)
Fulfill important redistributive roles
Provides insurance against adverse outcomes to
vulnerable categories of workers (Standing and Tokman,
1991)
Significant for Keynesian reasons- Boost effective
demand
Enhancement of labour productivity through training or
technical innovations (Freeman, 1993)
Ameliorate moral hazard issues
Cross-country Evidences
 Presumed Support for the ‘Distortionists’
Persuasion:
 Botero et al (2003)
 Cesar and Chong (2003)
 Nickell (1997)
 Elmeskov, Martin, Scarpetta (1998)
 Belot and van ours (2002)
 Bassanini and Duval (2006)
 Studies examining interactions between
macroeconomic shocks and different institutions:
 Blanchard and Wolfers (2000)
 Fitoussi et al (2000)
 Bertola et al (2001)
 Nickell et al (2002), etc.
 Key conclusion of these studies –
“ In the presence of adverse macroeconomic shocks,
protective labour market institutions contribute to
higher unemployment”.
Some Cautionary Remarks
 In most of these cross-country analyses, results often
depend upon the proxy used in econometric exercises
and the sample of countries considered
 Variables such as union strength, unemployment
benefit levels etc., are difficult to quantify and capture
 Wide variability of institutions across countries raises
issues of comparable robust measures
 Several researchers consider cross- country aggregate
data as ‘weak’ to draw reliable conclusions (Freeman,
2005)
Empirical “Support” for the
Institutionalists
 Baker, Glyn, Howell and Schmitt (2004)
 Card and Kruger (1995)
 Kucera and Sarna (2004)
 Buchele and Christiansen (1992, 1995, 1999), etc.
Evidence on India
 Main focus of literature has been the Industrial Disputes
Act (Chapter V-B) and the Contract Labour Act
 Some Major Studies exploring the so called adverse effects
of the Industrial Disputes Act (1976 and 1982 amendments
of Chapter V-B) :
 Fallon and Lucas (1993)
 Besley and Burgess (2004)
 Sanyal and Menon (2005)
 Aghion et al (2006)
 Ahsan and Pages (2006)
The Besley-Burgess Study (2004)
 State-level amendments to the IDA classified as pr-
worker, neutral and pro-employer and respective
scores of +1, 0 and -1 assigned
 Assigned scores cumulated over time to arrive at a
‘regulatory measure’ for each state every year
 Such a measure is then used to explain economic
performances with respect to the organised
manufacturing sector
 Major Conclusions of the Besley- Burgess
Study:
 Pro-worker legislations have contributed to the
lowering of investment and employment in the
organised manufacturing sector
 Have led to existence and growth of a large informal
sector
 Net impact has been in terms of deterring productivity
and constraining growth
Raising Some Critical Issues
 Relating to the Besley-Burgess Study:
 Classifying a state as pro-worker or pro-employer on the
basis of a single amendment can be misleading
 Problem of assigning scores when multiple amendments
take place in a single year
 Fails in identifying specific components of labour laws
impacting particular economic outcomes
 Measuring rigidities directly from legal statutes could be
misleading; translation of laws into outcomes involves a
complex intermediation process
 Questionable results related to classification and
econometric estimation as pointed out by Bhattacharjea
(2006)
Major Problems with such Empirical Studies
 Fraught with methodological and technical difficulties
 Studies using the Besley-Burgess index carry over the
errors of the original study
 Results refuted by subsequent studies (Bhalotra, 1998;
Goldar, 2002; Hasan et al, 2003; Deshpande et al, 2004;
Anant et al, 2005; Sharma, 2006; etc.)
 Contradictory pictures emerge depending upon the
index used: World Bank Investment Climate Survey
(2003) ranked Gujarat and Maharashtra as the ‘best’
states; both states classified as having ‘inflexible’
labour markets as per the Besley-Burgess study
Increasing Flexibility and
Casualisation
 A field based study of about 1,300 manufacturing firms
across nine industry groups by Deshpande et al (2004)
 Key Findings of the study:
1. Both the unionised and non-unionised firms increased
capital intensity over the period considered
2. Only half the firms reportedly were paying the statutory
minimum wage
3. Firms increasingly resorted to greater use of nonpermanent workers
 Increasing casualisation of the workforce highlighted by
several other studies (Sen et al, 2006; Indian Labour
Market Report 2008; Guha, 2009; etc)
Organised Manufacturing Sector: Key
Empirical Findings
 Looking at the percentage distribution of total
employment distribution in the size classes, the above
100 size has increased much more than below 100
despite IDA Chapter V-B threshold of 100 (1982
amendment)
Distribution by Size of Employment
Distribution of Employment
Growth Rate - CAGR
Percent
Percent per Annum
1973-74 1980-81 1990-91 1997-98 2002-03 1973-80 1980-90 1990-97 1997-2002
0-49
14.4
13.8
17.5
16.8
20.5
3.5%
3.0%
2.2%
-0.5%
50-99
8.2
9.0
10.8
13.1
11.7
5.5%
2.4%
5.7%
-6.5%
100-199
9.4
9.2
10.7
12.9
12.8
3.8%
2.1%
5.6%
-4.5%
200-499
13.1
12.1
13.5
19.0
17.2
2.9%
1.7%
8.0%
-6.3%
500-999
11.6
9.7
12.0
13.6
12.2
1.5%
2.7%
4.7%
-6.5%
1000-1999
12.8
13.7
10.1
9.4
8.4
5.2%
-2.5%
1.8%
-6.7%
2000-4999
16.7
15.9
9.5
10.0
8.3
3.4%
-4.5%
3.7%
-8.0%
5000+
13.8
16.7
15.9
5.2
9.0
6.9%
0.1%
-12.5%
7.0%
Total
100.0
100.0
100.0
100.0
100.0
4.1%
0.6%
2.8%
-4.4%
Source: Computed from ASI data summary results, CSO, Various issues
Wage and Productivity Trends
3.50
Real Average Wage and Real NVA per Worker
3.00
2.50
2.00
1.50
1.00
0.50
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
0.00
Real Wage Per Worker
Real NVA per Worker
Source: Computed from ASI data summary results, CSO, Various issues
Wage and Productivity: Growth Rates
All India
Year
Compound Annual Growth Rates (in percent per annum)
G.R. of Real Wage Per Worker
G.R of Real NVA Per Worker
1980-81 to 1990-91
3.1%
8.0%
1990-91 to 1997-98
0.6%
5.7%
1997-98 to 2007-08
-1.1%
6.9%
Source: Computed from ASI data summary results, CSO, Various issues
Growth in average real wages have lagged behind average productivity, the wageproductivity gap has increased
Average Wage and Salary Trends
0.70
Real Average Wage and Salary
0.60
0.50
0.40
0.30
0.20
0.10
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
0.00
Real Wage per Worker(in Lakhs)
Real Average Salary (in Lakhs)
Average salary in real terms has gradually surpassed average real wages, and the
gap has shown a marked increase in recent years
Unit Labour Cost
0.60
0.50
0.40
0.30
0.20
0.10
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
0.00
India
Unit labour costs have been declining over the years, reflecting a relative shift
in income distribution from labour to capital and other factors of production
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
Wage –Rental Ratio
35.00
30.00
25.00
20.00
15.00
10.00
5.00
0.00
Wage Rental Ratio
Wage-rental ratio has steadily declined, suggesting a relative cheapening of
labour vis-à-vis capital
Wage and Profit Shares: Trends
0.70
Share of Wages and Profits in Net Value Added
0.60
0.50
0.40
0.30
0.20
0.10
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
0.00
Wages by NVA
Profits by NVA
Wage share in value added has come down remarkably while profit share in
value added has registered a sharp increase in recent years
Increasing Contractualisation
All India
Year
Workers Directly
Employed
Workers Employed
through Contractors
Total
Workers
1998-1999
5377193
987272
6364464
15.51%
1999-2000
5041339
1239320
6280659
19.73%
2000-2001
4882143
1253095
6135238
20.42%
2001-2002
4660496
1297351
5957848
21.78%
2002-2003
4739339
1422155
6161493
23.08%
2003-2004
4591237
1495671
6086908
24.57%
2004-2005
4851233
1748065
6599298
26.49%
2005-2006
5099750
2036347
7136097
28.54%
2006-2007
5516703
2363832
7880536
30.00%
2007-2008
5659750
2538360
8198110
30.96%
2008-2009
5977328
2799417
8776745
31.90%
2009-2010
6153723
3004079
9157802
32.80%
Source: Computed from ASI data summary results, CSO, Various issues
Ratio of Contract Workers to
Total Workers (in %)
Contract Workers as a proportion of
Total Workers (in percent)
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
Ratio of Contract Workers to Total Workers (in %)
Contract workers as a percentage of total workers in organised manufacturing
has increased greatly, belittling the rigidity argument
Percentage Distribution of Strikes and Lockouts in
Total Disputes
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
Strikes %
2006
2005
2004
2001
2000
1999
1998
1997
1996
1995
1992
1991
1990
1989
1988
0.0%
Lockouts %
Share of Strikes in total industrial disputes has come down, while that of
lockouts has shored up, indicating general weakening of power of workers visà-vis the employers
Percentage of Mandays Lost in Disputes
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
% of Mandays lost due to Strikes
2006
2005
2004
2001
2000
1999
1998
1997
1996
1995
1992
1991
1990
1989
1988
0.0%
% of Mandays lost due to Lockouts
Share of workdays lost due to lockouts has been higher than that for strikes
since the nineties, signaling shift in power equations in favour of employers
Some Capital Lessons
 Consideration of the empirical evidence of India’s




industrial landscape reveals that the claims of the
distortionists are exaggerated
Need to look at a whole range of other critical variables for
understanding economic outcomes; little basis to blame
labour regulations for poor outcomes
Inevitable outcome of neo-liberalism, based on ‘beggar
thyself’ and ‘beggar thy neighbour’ policies, in a bid to
attract global capital
Labour has lost out to capital across the globe
Capital interested in unhindered control of labour so as to
reap both absolute and relative surplus value
Certain Minor Messages
 Indeed certain labour institutions need to be revisited but
suggestions of dissolution of the institutional framework
akin to “throwing out the baby with the bath water”
 Labour laws in India have evolved in a knee-jerk and adhoc manner; the context in which many of them had
evolved have witnessed a sea change
 Need for unification, harmonisation and rationalisation of
labour laws
 Provision of minimum conditions of work and social
security to the workers outside the purview of labour
regulations