Comments on: The right time for labour market reform is now

By: My $ 0.02

My $ 0.02 — Fri, 05 May 2006 21:18:41 +0000

Kudos on another very well written article. The case for labor reforms when economy is doing well is valid.

However, one needs to be sure that the circumstances are right to reform labor laws.

Between the two main types of resources, capital and labor, the former is more fluid / flexible than the latter. Its difficult to re-skill people or migrate them to other geography as compared to selling the factory and investing somewhere else. When there is too much of a flexibility difference between the two resources, there exist risks of system failure.

The same case applies between domestic capital and FII. In case of crisis FII flies away in no time leaving the financial markets in shambles (S E Asia in late 90’s).

So to stave off these crises one has to ensure that skin of all parties (capital investor and labor) is in the game.

The fluidity logic also explains why IT / ITES industry does not have labor unions. The labor here can very well move across firms (even industries) and are secure. In this scenario the labor doesnt care even an iota more than the capital about market risk. If this situation prevails in all industries concept of labor union will be redundant.

Two questions emerge: [1] whether labor in all industries in India today enjoys the same flexibility as it does in IT / ITES?

[2] What will bring this flexibility?

Only fast growth in all industries will bring this labor flexibility. Then only labor reforms will be successful. It is analogus to making Capital Account convertibile only when the growth is robust and coffers are overflowing.

Irrespective of presence of left parties in govt., labor laws will either be reformed or become redundant (more probably the latter) when labor across the industries will enjoy the same flexibility as capital does. Without this condition even if govt. tries to reform, it might face a situation like France and will have to rollback.

By: dhulis

dhulis — Thu, 04 May 2006 07:57:27 +0000

I think the rationale for having labour reforms linked to productivity is a good idea. However, it is only one part of a solution, which should also include social aspects such as security, corporate governance that is fair and trustworthy.

By: Naveen

Naveen — Tue, 02 May 2006 19:11:19 +0000

I have been skimming through the contents of your blog. Your questions and insights in the functioning of markets definitely makes good reading. Keep it up with more personal accounts!

By: ila

ila — Tue, 02 May 2006 09:08:18 +0000

I wonder if anyone has asked the leftists how they define capital risk ?
Chances are they would prefer to beleive it doesnt exist because for them, if you have capital, it is you bounden duty to hand it over to the state in any form.

And the only way this govt will be able to arm twist the left is to keep publiscising the Rs. 4000 odd crore worth of assets built up by the LDF in Kerala. This was reported in the Eco Times during mid 2005.

By: Swapnil

Swapnil — Tue, 02 May 2006 07:01:57 +0000

I don’t think there is a case for labour reforms in India if you look at the EFFORT vs. VALUE equation. The government will end up spending a lot of time and energy on any meaningful labour reform and get very little in return. The industry has learned to work around the rigid labour laws (yes! this does push employment into the informal sector).

A recent ADB book “Labor Markets in Asia: Issues and Perspectives” argues that labor market policies are not the main explanation for the increase in unemployment and underemployment across Asia. The book says that each percentage-point of economic growth creates fewer jobs today than a decade earlier. A one percent increase in GDP is not creating as many jobs as it used to create earlier!! This shows an increase in productivity despite rigid labour laws.

The same book suggests higher public investments in rural infrastructure to achieve higher employment and growth. I would tend to agree with this. The Indian government for e.g. should look at implementing a program to provide reliable and quality power supply to every village in the country. Successful implementation of such a program will help the industry and workforce much more than labour reforms.

The biggest bottleneck today for India is infrastructure whether it is roads, railways, airports or power. It makes more sense for the government to focus on creating infrastructure than waste time and energy on labour reforms.

It does not matter if a job is created on Hindustan Lever’s payroll or on some contract firm’s payroll as long as the job is created!!

By: dexter

dexter — Tue, 02 May 2006 04:03:14 +0000

“My experience with the vastly different labour environment in both India and the US has driven home a very important lesson - a business exists to make money for its investors, not to provide employment. And that is, paradoxically, the best way to generate employment.”
Interesting!
Wasnt the primary purpose of unions to collectively bargain for employees? Throughout the article you are assuming that the management is ALWAYS free and fair. they would always do the best of things for their employees even while letting them go. I wonder how much of this is really applicable to indian business which has mainly been family driven and open to the whims and fancies of people running it.

Its true that the unions because of their vested interests has actually reduced productivity, but if it wasnt for them , then their would be no control over the management. Can a poor person really fight it out with an organization, a system in a country like india which has a poor legal system?? Also employability is a big issue.For someone higher up there, its easy to find a new job. But for ppl who have low skills, its almost as losing their entire life. thats why Companies like the TATA group try to help their employees in finding jobs after being laid off.

And yes , a company is there to create shareholder value , but its also answerable to its employees to an extent. Push the shareholder value funda to the max and you will find cases like Enron and worldcom.

By: Eric Bradfield

Eric Bradfield — Mon, 01 May 2006 20:33:52 +0000

I just discovered your blog, it provides an interesting perspective on things in India even though I am located in the US.

Labor market flexibility is crucial to improving economic productivity in India and especially contintental Europe. The US has a lot of room for improvement too despite having weak unions.