Labour Market in India R Nagaraj, Indira Gandhi Institute of Development Research, and Princeton University

March 28, 2007Oecd presentation2 Labour market size Consists of 430 million workers in , 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, 2007Oecd presentation3 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, 2007Oecd presentation4 Employment growth Structural transformation – agriculture's share declining from 62% in , to 54% in Low or negative employment elasticity. Employment is shifting towards services, not industry. Between , 1.8 million (6.4%) jobs lost in organised sector including 1.2 million (18%) in manufacturing.

March 28, 2007Oecd presentation5 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, 2007Oecd presentation6 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).Figure 1 Agrarian distress – suicides, extremism Labour market rigidity. –Cannot hire and fire.

March 28, 2007Oecd presentation7 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, 2007Oecd presentation8 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, 2007Oecd presentation9 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, 2007Oecd presentation10 Inflexible labour market ? No nominal or real wage rigidity. ↓ in unit labour cost (Figure 2).Figure 2 –True in public sector too (Figure 3).Figure 3 No evidence of adverse effects of job security law. Secular ↓ in union strength. More lockouts than strikes (Figure 4).Figure 4 ↓ in wage-rental ratio (Figure 5).Figure 5

March 28, 2007Oecd presentation11 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, 2007Oecd presentation12 Employment concern Declining employment elasticity. Related to it declining agricultural growth, and agrarian distress. Poor rural infrastructure Employment guarantee scheme.

March 28, 2007Oecd presentation13 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, 2007Oecd presentation14 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, 2007Oecd presentation15

March 28, 2007Oecd presentation16

March 28, 2007Oecd presentation17

March 28, 2007Oecd presentation18

March 28, 2007Oecd presentation19 Figure 5: Wage-rental ratio Year ending Index Wage-rental ratio