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Labour laws that view employment as marriage without divorce must be changed
 
My biggest shock on landing in the US for business school in 1994 was their definition of poverty — a small house, a used car and no vacations. I wondered if one day India would be able to redefine poverty beyond hunger and shelter; this week’s raging controversy about poverty levels is a fulfillment of that hope. India is becoming impatient about recalibrating the definition of poverty
and wants to compare progress to what it should be rather that what it was. This wonderful shift of the policy battleground for hearts and minds is because of rising aspirations of what is fair. I’d like to make the case that: a) seekers of poverty reduction must pray to one god, jobs. Despite the crusade for a big state by the National Advisory Council, the battle against poverty is a battle for the massive creation of decent, non-farm, private sector jobs; and b) ignoring the regulatory cholesterol in our labour laws is sabotaging decent, non-farm job creation. 

The recent violence, arson and a lockout at Orient Craft — one of India’s biggest textile manufacturers — joined the many labour unrest incidents in Gurgaon over the last year: Munjal Showa, Honda, Maruti  etc. While each case has unique circumstances it is important that these disputes are not about minimum wages, a safe working environment, or social security. In any labour law
reform debate, these three conditions should be non-negotiable. But the flashpoint is the informalisation of work (90 per cent of employment) and the explosion of contract labour (30 per cent of employment but about 50 per cent of non-farm employment). The Gurgaon angst is not about jobs but decent jobs. Decent employment is the single most important factor in an economy; poverty,
nutrition, social unrest, consumer confidence and spending, income tax revenues, corporate profits, and a host of other variables depend on it.

But lately, some policy makers are developing a dangerous narrative: 1) labour laws don’t matter for job creation because they are a thorn in the flesh but not a dagger in the heart; 2) labour law reform has already happened because of the transmission losses between how the laws are written, interpreted, practised and enforced; 3) trade unions are Left parties are pro-labour; and 4)
corporate India will be the biggest gainer from labour reform; 5) our current labour law regime may not encourage job creation, but it does not have any costs. 

This narrative is wrong. India’s arthritic labour law regime has five toxic consequences — breeding informality, capital substitution of labour, sub-scale enterprises, politicisation of trade unions and corruption. India’s labour laws make employment contracts perpetual — the corporate equivalent of marriage without divorce. This means that once you hire somebody you can’t get rid of
them even if you can’t afford them, don’t need them or they don’t perform. How many of us would buy a house we can’t sell or sign a lease we can’t end? Employers respond to this asymmetric contract by exploding informality and contract employment.Recognising fixed term employment would greatly reduce the galloping informalisation that is breeding poor jobs. I work for one of India’s largest staffing companies and disagree with cynics who believe that labour law reform will destroy us because we are a child of regulatory arbitrage and companies will no longer hire contract workers. I am not suicidal; saner labour laws will reduce contract workers from 50 per cent of the workforce to 10 per cent but all of them will have minimum wages, provident funds and employees’ state insurances (ESI). The current 50 per cent contract employment of total employment ratio is
a child of three compelling services provided by informal contractors: a) if the employee asks for a permanent job I will break their legs; b) I will make the labour inspector go away; and c) gross salary is equal to net salary with no benefits. Labour laws also encourage the capital substitution and sub-scale enterprises. Employment in private sector manufacturing with more than 10
employees has stagnated for 20 years. Eighty per cent of our textile output comes from firms with less than 10 employees, while 85 per cent of China’s output comes from firms with more than 50 employees. Rana Hasan of the Asian Development Bank compared 19 manufacturing sectors and showed that capital stock per worker in India is consistently higher than in China. Trade union laws are dysfunctional; they allow roles for professional politicians whose political constituency agenda is unrelated to worker welfare. The criminalisation of politics and the politicisation of trade unions are a combustible cocktail; trade unions must stay worker unions. 

Finally, these laws breed corruption; one of India’s chief labour commissioners told me that he was trying to enforce the unenforceable. But penal provisions like jail for unenforceable laws mean huge “off balance sheet” settlements. High emotions and toxic myths around labour law reform mean that the traffic jam can only be resolved in two ways. One, by making labour a state subject — allow chief ministers to craft their own fertile soil for job creation. Just like states in the US that have implemented the right to work have higher manufacturing, Hasan finds that Indian states with higher labour flexibility have bigger firms and more labour intensive industries. Second, by separating the labour law reform agenda into plumbing (definitions, law mergers,
competition for EPFO and ESI, fixing the apprenticeship regime, rebooting employment exchanges etc.) and philosophy (permanent versus fixed term employment) and starting with plumbing. My parents retired to live in Kanpur. This shining citadel of India’s textile power is now an open air museum of tragedy with 5.5 million people, only 10 hours of power a day, and thousands of unemployed. Textile is one of the few labour intensive manufacturing sectors left in India. Converting Gurgaon to Kanpur is not the goal of outdated labour laws, but it can be the outcome, because without employers, there are no employees. 

The writer is chairman, Teamlease Services

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Uttar Pradesh is an economic wasteland in a job emergency. Akhilesh Yadav is young, he fought a good fight, but has to live up to high expectations. This combustible cocktail has predictable consequences; quick announcements of badly designed schemes committing huge government spending. His poll speech—“If Mayawati can spend crores on stones and statues, why can’t we give unemployment allowance to jobless youth”—has led to a proposal to pay R1,000 every month to every unemployed youth in UP till the age of 35. This unemployment dole is poetry rooted in noble intentions, but no Indian state has the plumbing to execute on this promise without huge waste, fraud and corruption. UP is not an exception; the number of unemployed youth registered with employment exchanges exploded from a few lakhs on January 1, to 15 lakh on March 15 and 25 lakh today. Even providing for ineligible registrations currently piling at the 55 employment exchanges, this dole will end up costing over R2,000 crore per year
not counting the costs of administration.
 
Only a fool will deny that the situation of unemployed youth in UP is not tragic, but is an unemployment dole the only alternative? I’d like to make the case that Akhilesh is better off taking an ecosystem perspective; creating demand, and fixing problems of matching (connecting demand to supply), mismatch problems (repairing supply for demand) and pipeline (preparing supply for demand). The demand side is creating a fertile habitat for job creation; infrastructure, law and order, and low corruption. The mismatch problem involves expanding vocational training capacities which is closely connected with employers and leads to jobs. The pipeline problem involves fixing schools and increasing the employability of higher education. UP’s school system is in chaos, with highly paid government teachers not showing up for work. Enabling performance management for government teachers—creating a fear of falling and hope of rising—is the first priority. The second priority in schools is bilingual instruction because English is like Windows—an operating system that creates 300% higher employment outcomes. UP’s higher education system has expanded impressively—Mayawati added an engineering capacity of over 2 lakh but 1 lakh of those seats are empty because of learning and employment outcome concerns—but the focus now needs to shift to quality, access and employability.

People argue that the unemployment dole is an emergency response—talking about the long-term interventions is like talking about weight loss to a patient in the ICU. Years of goofy governance in UP will take time to reverse but there is low-hanging fruit that does not involve using employment exchanges as centres of dole but opportunity and capability creation. This involves converting employment exchanges into career centres that offer counselling, assessment, training, apprenticeships and jobs. Counselling is important because most job seekers are flying blind with no role models or source of information about jobs and what employers want. Assessments are important to judge the opening balance of job seekers; their strengths, weaknesses, aptitudes and much else. Training capabilities are important because unemployability is a bigger problem than unemployment. Apprenticeships are important because “learning by doing” and “learning while earning” are wonderful vehicles for skill development, but India has only 3 lakh apprentices (much smaller Germany and Japan have 6 and 10 million, respectively). Finally, job matching is important; Peter Diamond got the Nobel prize in economics for his work on search costs in labour markets. Employment exchanges need to become credible clearing houses for labour markets for job seekers and employers. This transformation will shift their current
ineffective binary outcomes—nationally the 1,200 employment exchanges had 3 lakh jobs last year—to outcomes that will tie together employment, employability and education.

Employment exchange reform has been on the agenda for many years after the finance minister announced PPPs in his budget three years ago. But like most government transformations, this project is suffering from a traffic jam at the intersection of the central and state governments. The central government believes that modernising employment exchanges is about technology. State governments have given up on employment exchanges and many of them are starving them or shutting them down. Both are wrong. The central government is wrong because fixing employment exchanges requires a lot more than technology; it needs a service mentality, performance management, strong employer linkages and a deep understanding of vocational training. The state governments are wrong because job seekers need a physically accessible lighthouse for career services information and delivery.

The proposed unemployment dole will cost UP over R2,000 crore per year. But there is an alternative of spending R4 crore per employment exchange per year in converting them to career centres in public private partnerships. This R200 crore per year would be spent on carefully drafted contracts that would judge outcomes on a composite basket of counselling, assessment, training, apprenticeships and jobs. These career centres would not only establish state-wide and national linkages—in the short run we can’t take jobs to people but need to take people to jobs—but become important infrastructure in UP’s labour market transformation. Instead of giving the people of UP fish, Akhilesh has the chance to give them a fishing rod and teach them how to fish.


The author is chairman, Teamlease Services