Time to rewrite labour laws

Employers need flexibility in lay-offs, while unemployment insurance will protect workers

Almost no one would have foreseen a situation in which the finance minister would be advising companies to enforce pay cuts as an alternative to downsizing. But that is what Pranab Mukherjee did at the Indian Labour Conference last week, in recognition of the fact that both pay cuts and job losses are now widespread in the current downturn. Underlying such a pronouncement must be the realisation that the country’s labour laws are not doing what politicians have assumed they would: protect employees from losing their jobs. Retrenchment and lay-offs are allowed, of course, but are not easy. And shutting down units that employ more than 100 people is harder still, because it requires state government permission (usually denied). Yet, the widely reported numbers on job losses in recent months vary from half a million to many multiples of that number. The Conference took note of these trends, and has called for a review of the laws as well as the introduction of an unemployment insurance scheme—something that this newspaper has advocated for many months.

The point to recognise is that the market will find ways around unrealistic laws—rendering them ineffective if not counter-productive. There is the widespread practice of splitting enterprises into multiple units in order to stay out of the purview of specific laws, and of hiring people on fixed-period contracts—which denies job security to workers. Both workers and trade unions have implicitly recognised the unanswerability of business logic, as there is little protest over people losing jobs when employers can no longer afford to pay their wages. And, as the Labour Conference seems to have acknowledged, there is little or no protection available to the 90 per cent of people who work in the unorganised or informal sector (units employing fewer than 10 workers). In short, the current downturn will have done a power of good if it forces the political class to shed unrealistic positions and recognise that India’s labour laws need thorough rewriting.

Such rewriting should be done so as to be fair to both employers and employees. Hence, the requirement that units employing more than 100 people need state government clearance before shutting down should be amended, and the floor taken up to 1,000 people—as was proposed in a Budget speech by Yashwant Sinha early in this decade. Those getting retrenched should be given at least three months’ pay plus their other dues, so that employers pay a price for getting rid of an employee and such a decision is not taken lightly. Perhaps the ‘last in, first out’ principle should also be invoked when it comes to lay-offs or retrenchment, as a way also of discouraging frequent job-hopping, which had become a virulent virus in the boom years. Finally, the introduction of a contributory, self-sustaining unemployment insurance scheme for all categories of workers will offer some social security in the bad times. Taken together, these changes will give employers the flexibility that they have been looking for, and employees the downside protection that they need.