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 worker-
population 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 2

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.

March 28, 2007 Oecd presentation 3

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.
March 28, 2007 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.

March 28, 2007 Oecd presentation 5

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.
March 28, 2007 Oecd presentation 6
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.
March 28, 2007 Oecd presentation 7
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.

March 28, 2007 Oecd presentation 8

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.
March 28, 2007 Oecd presentation 9
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).
March 28, 2007 Oecd presentation 10
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.

March 28, 2007 Oecd presentation 11

Employment concern
• Declining employment elasticity.
• Related to it declining agricultural growth,
and agrarian distress.
• Poor rural infrastructure
• Employment guarantee scheme.

March 28, 2007 Oecd presentation 12

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.

March 28, 2007 Oecd presentation 13

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.
March 28, 2007 Oecd presentation 14
 Figure 1: Growth in Agriculture output, 1980-05
3.8
3.6 3.6 3.6
3.2
2.9 3
2.7
2.3
Per cent per year

2.2
2 2 2

1.2 1.3 1.3

1.1 1

All Crops Foodgrains Non- Cereals Rice Wheat

foodgrains
1981-90 1991-00 1991-05 Crops

March 28, 2007 Oecd presentation 15

 Figure 2: Unit labour Cost in Registered Manufacturing

140
120
100
80
Index

60
40
20
0

Year ending

Unit labour cost

March 28, 2007 Oecd presentation 16

 Figure 3: Unit labour cost in public sector
Excluding electricity

0.6
0.4
Ratio

0.2
0
80 82 84 86 88 90 92 94 96
Fiscal year ending

Unit labour cost

March 28, 2007 Oecd presentation 17

 Figure 4: Mandays Los t by Dis putes

60000
50000
40000
30000
20000
10000
0
1984-85

1988-89

1992-93
1982-83

1986-87

1990-91

1994-95

1996-97
Strikes Lockout

March 28, 2007 Oecd presentation 18

 Figure 5: Wage-rental ratio

120

100

80
Index

60

40

20

0
81

85

87

89

91

93

95

97

99
83

01
20
Year ending

Wage-rental ratio

March 28, 2007 Oecd presentation 19