Towards reform of the labour market


back to issue

LABOUR law reform has been placed high on the agenda of reforms proposed by the present Indian government. The reforms proposed in labour law relate to simplification and harmonization of the laws, incentivization of compliance, reform of inspection systems and new legislative interventions for facilitating the growth and diversification of manufacturing, particularly for small and medium enterprises.

The debate on labour law reforms dates back at least three decades. The key issue under discussion is the rigidity induced in the labour market by law. Labour market rigidity, it has been argued, segments the labour market (organized/unorganized, formal/informal), distorts investment patterns, constricts employment growth and promotes industrial conflict. Much of this rigidity is put down to the excessive protection afforded to workers by the law, most prominently in the requirements for governmental permission for retrenchment, layoffs and closure of industries employing 100 or more workers (Chapter VB of Industrial Disputes Act, 1947) and excessive interference by labour inspectors under various provisions of factory and labour laws. Given the present government’s avowed aim of making India a manufacturing hub (Make in India) and to encourage manufacturing as the lead sector for employment generation, labour law reforms and the removal of labour market rigidity have acquired urgency.

While many of the proposed reforms have their roots in earlier government policy, the present government is contemplating comprehensive deregulatory measures, which will require an overhaul of the labour law system, to improve the ease of doing business in India. There is indeed substantial consensus about the need for reforming several aspects of the labour law – namely rationalizing and harmonizing of labour law and toning up of enforcement. However, there are at least three major areas of contention where there is need for deeper deliberation among stakeholders. The first relates to the causal connection between the regulatory framework (labour laws) and the wider labour market which is supposed to run primarily from the former to the latter. It is in this perspective that deregulation and lowering of the protective provisions in labour laws have acquired primacy over other factors that perhaps require equal if not more attention.

The second relates to the balancing and calibrating of deregulation measures (which pertain more to the employers’ decision to invest and the overall ease of doing business) with the avowed aim of protecting the vast majority of unprotected workers. More often than not, it has been seen as a zero-sum game wherein only by lowering the employment and social protection of formal employment can any protection be extended to the unprotected informal workers. The third area of contention lies in the opposition and mutual exclusion posited between quantity and quality of employment. An overemphasis on the quality of employment (the effect of protective labour laws) is supposed to run counter to the goal of expansion of total employment in the economy, which is an urgent need.


In the first place it is important to recognize that the mutual opposition between the qualitative and quantitative aspects of employment may well be a false one. It is possible to delineate a strategy of employment expansion driven by an enhanced quality of employment. The ILO strategy of decent work-driven employment is a pre-eminent example of such a strategy. Extending protection to the hitherto unprotected in the form of social security, income protection and active labour market policies can have a strong impact on raising aggregate demand and stimulating investments and employment. Further, it must be recognized that the relation between the regulatory framework and the labour market is not direct, nor is the causal connection unidirectional. At the least one must make a strong case for differentiating between the de jure and de facto impact of labour laws on the labour market. Empirical studies which have taken into account the level of enforcement of the strict protective provisions of labour law have found little or no impact of these laws on investment, firm expansion or the share of formal employment.1

By recognizing the relative independence of both the regulatory framework and the labour market, it is possible to understand that not all the rigidities and consequent segmentation in the labour market arise from labour laws. At the same time it is crucial for labour laws to be made flexible to accommodate underlying changes in the labour market. If aspects of the labour law system are to be deregulated in order to reduce segmentation, their fuller benefit can only accrue if the deregulation is accompanied by simultaneous ‘re-regulation’ of relevant features of the labour market. This essay highlights some of these issues by focusing on features of the labour market that require what I have termed here, following recent research on labour market regulation, ‘re-regulation’.2


It may be useful to frame the issues at hand by referring to the key characteristics of the contemporary labour market which have a strong bearing on the proposed labour law reforms. First, the long anticipated structural transformation of the labour market, i.e. the movement of employment from the low-productivity primary sector has gained pace in recent years. From around 70% in early 1980s, the share of employment in agriculture declined to 60% in 1999-2000 and further to 49% in 2011-12. Most striking is that for the first time since the recording of data on employment, the absolute number employed in agriculture has fallen; between 2004 and 2011-12, nearly 35 million persons moved away from the sector.


This massive movement away from agriculture, apart from posing a serious challenge in terms of absorbing an increasing number in the non-agricultural sector, is also reflective of the deep-rooted agrarian crisis, stagnant productivity and declining profitability in agriculture. The crisis of livelihood in agriculture has very little to do with the existing labour laws and requires to be addressed by a stronger public employment policy. The Mahatma Gandhi National Rural Employment Guarantee Act, one of the most recent regulations, has improved wage levels and reduced distress migration. To improve the labour market outcomes of the vast majority of rural workers, it may be more important to conceive state intervention in the form of enrichment of the skill content of the public employment programmes.

Another pertinent issue is the persistent dualism of the labour market between the organized and unorganized sectors (based on enterprise size, the organized being defined as consisting of firms and establishments which have more than 10 workers) and between formal and informal work (based on regularity of employment and access to social security). This has been a matter of concern, particularly since the 1990s. In India, an overwhelming proportion of workers are employed in the unorganized sector, with nearly 83% in 2011-12, albeit with a declining trend during the last decade (see table).

Total Workers in India by Organized/Unorganized Sector and Formal/Informal Workers: 1999-2000 and 2011-12 (in millions)































Source: Compiled from Unit Level Data of the National Sample Survey Office, Employment and Unemployment Surveys, 1999-2000 and 2011-2012.

While the total employment in the organized sector has grown from 38.89 million in 1999-2000 to 81.6 million in 2011-12, the informal jobs within the organized sector increased from 15.95 million to 47.20 million during the same period. This indicates that an overwhelming majority of the new jobs generated in the organized sector in the last decade are informal in nature so that at present informal jobs constitute 58% of the organized sector employment. This trend is clearly reflected in organized manufacturing where there has been a sharp increase in temporary and contractual jobs, which increased from 7.6% in the 1970s to 13.2% in 1995-96 to 33.9% in 2010-11.


The growing trend of informalization is reinforcing the duality and disparity between organized and unorganized sectors and between formal and informal employment. The process of structural transformation in the economy (moving people from low-productive to high-productive employment) is hindered by this growing disparity and inequality. Labour reforms must aim to contribute to the reduction of this disparity by reversing the process of informalization and by encouraging formalization of informal employment. It has been argued by some that the dualism has been caused by labour laws themselves, but perhaps it is more accurate to say that the formal/informal division coincides with segments of the labour market where labour law applies. If labour laws don’t by themselves cause segmentation, the answer to the persistent dualism lies in extending the application of a reformed labour law to all segments of the labour market. Deregulation (reducing government intervention) will not lead to the reduction of dualism and may in fact aggravate it further.


A third worrying feature of the labour market is the low level of labour force participation rates (LFPR), particularly among women. While male LFPR has stagnated at 55% for the last three decades, overall female LFPR has declined in recent years. Plenty of debate and discussion has occurred about the declining female LFPR, but what is most striking is the stark gender disparity among the most productive age groups. The latest data of the Labour Bureau shows that while the participation rate for males in the most productive age group (18-29 years) in 2014 is 70.1, it is at an abysmally low figure of 29.4 for females.

The gravity of the issue gets underlined when we look at the figures relating to unemployment. The unemployment rate among women in the age cohort of 18-29 years is at a staggering 26.6% in urban areas and 15.3% in rural areas! These trends clearly point to the persistence of significant gender gaps in the Indian labour market. There is a very strong need to increase the participation of women in the labour market, not only to ensure better use of the available productive potential and hence raise growth prospects, but also as a significant anti-poverty tool. Policy measures such as flexible working time, better maternity and paternal leave arrangements, stricter safety and security norms at the workplace, and customized counselling and job placement services for women could pave the way for more women joining the labour force.

Perhaps a feature of the labour market most relevant to the wider labour reform process is the abysmally low skill base of India’s labour force. If one primary aim of labour reforms is to push up the share of manufacturing employment in total employment from the current level of 12% to 25% in the next decade, the existence of a skilled labour force is crucial to the achievement of this goal. The skill base of the workforce measured by vocational training (formal or informal) continues to be one of the lowest in the world, with only 2% receiving formal and 8% informal vocational training. Comparable data of countries like China, South Korea and Germany ranges from 50 to 75%. This shows the enormity of the challenge as also the futility of focusing on deregulatory measures alone to provide a solution to the problem.


Another critical issue in the context of skill development in India relates to the structure of the skill pyramid. In the last three decades there has been far more emphasis given to the higher end of the skill pyramid in the country, resulting in an unusually top-heavy skill pyramid with a relatively narrow base. Thus, for example, amongst those with formal vocational training 45% are holders of diplomas or higher degrees and only 55% have certificate level training. The widening of the skill base is of utmost importance for any proposed labour market reform package. In addition, it is imperative to address the massive gender gap in the skill base: while 9% of male workers have some type of formal or informal skill training only 3% of women workers have any training whatsoever.

The recently enacted Apprentice (Amended) 1961 Act (December 2014) is the first concrete legislative measure taken to expand skilling and on-the-job training. The older apprenticeship scheme was plagued by non-utilization of designated seats for apprentices (nearly 30% vacancies). In the first place, the new act expands the definition of trades under which the apprentices can be trained by giving flexibility to the employers to start training in new trades. It also expands the eligibility for apprenticeship beyond those with technical qualification and training to include those from non-technical streams. Additionally, it allows apprenticeship schemes to be operated in service sector establishments (like IT enabled services).


The act also explicitly recognizes the right of small and medium enterprises employing more than six workers to engage apprentices. It provides flexibility to the employers to determine their policy for recruiting apprentices and regularizing them or not as per their requirement. It also incentivizes the medium and small enterprises to engage apprentices by providing for a government subvention of 50% towards the stipend of the apprentices. The stipends themselves have been fixed at a maximum of 70% of the wages of a semi-skilled worker. The penalties for contravention of the act have been substantially reduced (from imprisonment to nominal fines) and inspections under the act have been substantially rationalized.

All in all, the aim of this legislative initiative is towards further deregulation and incentivization of employers to skill workers. However, there were fears expressed by some legislators in the Parliament that while employers were further empowered and allowed flexibility there was not enough protection provided to apprentices. If the main problem of the older apprentice system was the massive non-utilization of apprentice seats (mainly in the lower certification levels), it was not only because the employer initiatives were stifled and apprentices were overprotected. Now having extended the apprenticeship schemes to even small industries, the government must provide adequate protection to apprentices without which another level of informality may arise within the informal sector.


In conclusion it is useful to point out that the debate on labour reforms needs to be deepened and extended further. It must not be reduced to an issue of ‘deregulation’ alone. First, we need to consider the appropriate weightage to be assigned to labour regulations amongst the whole gamut of factors that supposedly deter investment and curb employment. Second, we must bear in mind to what extent labour market rigidity can be ascribed solely to labour laws. Finally, to what extent are the stringent and protective labour laws reflected in implementation and enforcement on the ground? The last issue is particularly important given the marked structural changes, such as the informalization of the organized sector, that have occurred without important changes in law.

It is the main contention of this paper that there are evident gaps between the labour market and the regulatory apparatus (including labour laws) which need serious attention. Here it is proposed that reforms aimed only at tweaking labour law may not have the desired effect if we do not account for the disconnect between labour law and labour market and if such reforms are not accompanied by a calibrated policy of ‘re-regulation’ of some key features of the labour market and ‘protection’ for the hitherto unprotected workers. Thus, reform of labour law must be placed within the wider reform of the labour market.


* The views expressed are personal.


1. Sonja Fagernas, ‘Labour Law, Judicial Efficiency and Informal Employment in India’, Journal of Empirical Legal Studies 7(2), 2010, pp: 282-321.

2. Simon Deakin, Addressing Labour Market Segmentation: The Role of Labour Law. Working Paper No. 52, Governance and Tripartism Department, ILO, Geneva, 2013.