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
 F igure 1: G row th in A gric ulture output, 1980-05
3 .8
3 .6 3 .63 .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

A ll Cro p s Foo d g r ain s No n - Ce r ea ls Ric e W heat

f o od gr a in s
1 9 8 1 -9 0 1 9 9 1- 0 0 1 9 9 1 -0 5 Cro p s

March 28, 2007 Oecd presentation 15

 Figure 2: Unit labour Cost in Regis tered M anufac turing

140
120
100
80
Index

60
40
20
0

86

88

92

94
74

76

78

80

82

84

90

96

98

00
19

19

19

19

19

19
19

19

19

19

19

19

19

20
Y ear ending

Unit labour c ost

March 28, 2007 Oecd presentation 16

 F igure 3: Unit labour c os t in public s ec tor
E x c luding elec tric ity

0.6
0.4
Ratio

0.2
0
80 82 84 86 88 90 92 94 96
F is c al y ear ending

Unit labour c os t

March 28, 2007 Oecd presentation 17

 F igure 4: Mandays Lost by Disputes

60000
50000
40000
30000
20000
10000
0
1982-83

1984-85

1990-91

1994-95

1996-97
1986-87

1988-89

1992-93

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