Institutionalist versus distortionist views of labor market reforms: An investigation into the post-liberalized manufacturing sector in India/Vision institucionalista versus distorsionista de las reformas del mercado laboral: una investigation del sector manufacturero post-liberalizado en la India.
| Autor | Bhandari, Anup Kumar |
| Cargo | Article |
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Introduction
India's manufacturing sector witnessed an accelerated growth since 1980, largely due to the lowering of government controls, increase in public infrastructure and a higher inflow of private investment in the sector (Anderson Business Consulting, 2003). By 2011-12, the country had nearly 1.76 lakh operational factories employing 13.4 million people, producing output worth nearly rupees 58 thousand billion in current prices (Government of India, 2012). At the same time, however, the manufacturing value added as a percentage of GDP was consistently lower than the corresponding global average (see Table 1). This moderate growth has been a characteristic feature of her manufacturing sector ever since independence, with its contribution hovering around 15% of the GDP throughout. If the sector realizes its full potential, this contribution could go up as high as 25 to 30% in another decade (Dhawan, Swaroop, & Zainulbhai, 2012).
While this estimate is impressive for the country as a whole, there is considerable disparity in this regard across her states. Only five states namely Tamil Nadu, Maharashtra, (the undivided) Andhra Pradesh, Gujarat, and Uttar Pradesh accounted for 59.4% of factories, 55.3% of employment and 50.9% of net value added in 2010. Presence of some of the India's best manufacturing hubs (1) in these states corroborates the above fact (Business Today, 2008). However, there exists considerable variation even among these states in various aspects. For instance, Maharashtra's net state domestic product (NSDP) was more than double the NSDP of (any of) the other four States in 2011; Uttar Pradesh is twice as populous as the others, and the literacy rate of these five states ranges between 67 to 82% (according to the latest Census of India, 2011). Needless to say, Indian states also differ considerably in the natures of the various amendments of Industrial Disputes Act as is done by the various State Governments from time to time. Besley and Burgess (2004) investigate whether the industrial relations climate in Indian states has affected the pattern of manufacturing growth during the period 1958-1992. They show that states which amended the Industrial Disputes Act in a pro-worker direction experienced lowered output, employment, investment, and productivity in registered manufacturing. In contrast, output in unregistered manufacturing increased. Regulating in a pro-worker direction was also associated with increases in urban poverty, which suggests that attempts to redress the balance of power between capital and labor can end up hurting the poor.
The objective of the present study is to extend the study of Besley and Burgess (2004) to evaluate the impact of labor regulation and various other factors on employment in the registered manufacturing sector in fourteen large Indian States. While the existing studies have focused on the first four decades since independence, we confine ourselves for the post-1980 era on account of the fact that although the process of liberalization of the Indian economy, in general and her industrial sector, in particular gathered momentum in 1991, it actually started in the early 1980s, under the Prime Ministerial regimes of Late Indira Gandhi and Late Rajiv Gandhi (DeLong, 2003). In other words, we consider the post-liberalization period in a broader sense. We hope to check the impact of labor regulation on employment in the semi-liberalized Indian economy since she is still in the process of liberalization and complete liberalization of her various sectors is yet to be reached.
The central piece of legislation under consideration here is the Industrial Disputes Act, 1947 pertaining to matters in the joint jurisdiction of the States and the Central Government (2). By defining legitimate circumstances under which an employee may be retrenched, the Act hinders smooth functioning of the labor market. This intervention is of significance, as it worsens the ability of manufacturing units to effectively respond to market changes by reducing workers on their rolls. India's GDP growth touches as low as 3.24% in 2012-13 (according to the provisional figure for 2012-13 released by Central Statistical Organization (CSO)). A key recommendation, among many other significant policy changes being suggested to boost the growth, is to loosen the grip on the labor market by amending the Industrial Disputes Act. Pro-employer amendments may be helpful ensuring the manufacturing units to find it easier to fire employees, if market conditions desire so. This smoothening of the hiring and firing process is hoped to give a fillip to the stagnating growth of registered manufacturing sector. It is imperative that the effect of labor regulation on employment needs careful study in this context.
Labor markets are usually regulated at various levels and to the extent of various degrees as well in almost every country across the globe. Such intervention in its smooth functioning affects the instantaneous adjustment of the supply and demand for labor in an economy. Modern welfare states use to offer job protection to the workers, especially to those at the lower end of the pyramid. Effect of these constraints on growth, employment, and other macroeconomic variables has been a topic of intense theoretical and empirical debate.
Theoretical arguments take mainly two divergent stands, namely the distortionist and the institutionalist views (Jha & Golder, 2008). Proponents of the earlier view opine that any labor regulation would affect the smooth functioning and instantaneous adjustment mechanism of the labor market, thereby lowering rates of job creation and raise unemployment. Regulations are also likely to hinder the entire economy to perform smoothly, resulting in lower levels of growth and productivity and higher level of poverty. Ironically, therefore, labor market rigidities through various regulatory measures designed to protect the poor eventually end up hurting them (Besley & Burgess, 2004). Rather, free market ensures market to respond faster to any contemporaneous change in demand for and supply of labor by quickly reallocating them elsewhere. The process, therefore, is more likely to benefit labor by paying at least its marginal productivity without making them jobless. Actually, the neo-classical push to deregulate labor market emerged strongly during the 1980s when much of the developed world was reeling under the pressure of high unemployment. Evidence from the Organization of Economic Cooperation and Development (OECD) countries suggested that tighter regulations were a cause of concerns at that point of time. It was argued that to achieve full employment, workers must accept lower wages, stingier unemployment benefits and less secure jobs (Howell, 2005). However, the evidence for this orthodoxy is at best mixed, says Richard Freeman in his Foreword to the book. However, although such proposition is widely accepted, it is not unanimously appreciated (Nickell, Nunziata, & Ochel, 2005). The latter view opines that, in fact, there is a growing empirical literature that suggests otherwise (Oswald, 1997). They advocate that the labor market regulations and trade unions' bargaining power play an important role in protecting not only the vulnerable sections of the society, but benefit the economy as a whole as well. For instance, labor regulations might end up boosting productivity by making job-training mandatory, which has an obvious favorable bearing on overall growth and prosperity of a country.
Several cross-country studies lend credence to both pro- and anti-regulation arguments. In other words, empirical evidence across the world is equivocal in nature. Let us, first of all, review some important studies in favor of the anti-regulation arguments. A precursor to these studies is the influential OECD Jobs Study (OECD, 1994). In this connection we would also like to mention some of its significant policy recommendations, which include complete or partial elimination of minimum wages, shifting from (direct) labor income tax to (indirect) consumption tax, easing restrictions on employee layoffs, reforms to unemployment benefits, etc. These seem to be supported by empirical evidence from both the developing as well as the developed countries across the globe. Botero, Djankov, La Porta, L6pez-de-Silanes and Shleifer (2004) examine the regulation of labor markets through employment, collective relations, and social security laws in 85 countries. The study extensively collates data on the legal frameworks prevail in these countries and creates indices to measure the strength of regulation. Their findings suggest that political power of the left is associated with more stringent labor regulations and more generous social security systems, and that socialist, French and Scandinavian legal origin countries have sharply higher levels of labor regulation than that in other common law countries. They conclude that increasing regulation of labor can lead to a larger unofficial economy, lower labor force participation and higher unemployment, especially among the youths. Using data panel on 76 countries during 1970 through 2000, Calderon and Chong (2005) also show that stricter labor laws adversely affect the growth of both industrial and developing countries. Institutionally fixed minimum wages and trade union activities are two important factors to adversely affecting growth and its slowing down is due to sluggish wage adjustments and reallocation of labor arisen therefrom. Heckman and Pages (2004) studied the impact of labor regulation on employment and growth in the Latin American countries. The study concludes that labor market interventions by the State affect the youth, marginal workers and unskilled workers the most. While social security benefits (unemployment benefits in this case) reduce employment, job security regulations affect the distribution of employment. In...
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