New labour codes target job growth, but skill gap may limit impact
Economic growth has not reduced the precarious nature of employment in India. Yet, policy discussions tend to focus on job creation and less on job quality. Can the new codification of labour laws address the twin issue of quantity and quality of jobs?
Between 2012 and 2023, employment growth in the manufacturing sector averaged at 2%, and at 3% for the services sector. Meanwhile, agriculture’s share in total employment fell from 48% to 44% over this decade, putting immense pressure on the non-farm sectors to absorb surplus labour.
Paradoxically, the non-farm sector became, and continues to be, less reliant on labour – the labour intensity of non-farm production has declined while its contribution to the economy has risen. This divergence raises questions not just about the inclusiveness of India’s growth story but also its potential to absorb labour.
In contrast to the trend in the non-farm sector, within the formal manufacturing sector, the contribution of labour to output has increased, primarily due to the increase in the number of contract workers in the last two decades – blurring the boundaries between formal and informal employment. Between 2000 and 2016, contract jobs grew at more than double the rate of regular jobs. While these contract workers are technically a part of the formal economy, they lack social security and long-term benefits.
Firms have favoured this arrangement for its flexibility in hiring and its ability to circumvent stringent dismissal norms. The 2018 India Wage Report found that over 71% of wage workers in formal enterprises lacked written contracts or social security coverage. Annual Survey of Industries (ASI) data shows that more than half of workers in formal manufacturing are informally employed. As a result, the shift to a structure where formality exists ‘on paper’ but informality prevails ‘in substance’ has deepened precarity in employment.
On the one hand, the new labour codes attempt to address the concern of insecure employment conditions through ensuring minimum wages, mandating formal appointment letters and basic social security. It has also brought in reforms for fixed-term employment, such as removing minimum years of service requirements for gratuity.
The Occupational Safety, Health and Working Conditions Code 2020 sets clear standards for a safe working environment, such as capping work hours to 8 hrs a day and mandating overtime pay at twice the normal rate. These reforms will potentially reduce the precarity of work.
On the other hand, labour laws have been simplified to streamline compliance and improve ease of doing business to expand job opportunities through higher private investments and easier firing practices. The industrial relations code allows firms with up to 300 workers to go ahead with layoffs, retrenchment and closure without government permission. These measures aim to reduce the regulatory burden on firms and increase incentives to hire labour.
Will these reforms raise the quantity and quality of work at the same time? The policy challenge is to encourage a transition from short-term, insecure contracts to stable, productive employment without increasing compliance cost for firms due to excessive regulatory rigidity.
At the same time, reversing the trend of rising capital intensity of production technology requires improving the quality of labour to further reduce the cost of hiring labour relative to mechanisation. Without a skilled labour force, with high productivity, the industry may continue to replace relatively more costly labour with machinery in the production process, reducing potential employment gains from these labour reforms.
Using simulation exercises, NCAER’s paper released this month, ‘India’s Employment Prospects: Pathways to Jobs’, suggests that strong inter-sectoral linkages of labour-intensive manufacturing and services sectors can have a multiplicative effect on employment creation in the aggregate economy by 2030. Also, increasing the share of skilled workforce through investment in formal skilling could lead to more than 13% increase in employment in the labour-intensive sectors by 2030.
Thus, a multipronged policy overhaul is essential to unlock the potential of both job growth and quality of work. While the new labour codes can stimulate increase in private investments in labour-intensive sectors, without reforms in the country’s skilling ecosystem to increase labour productivity, growth in jobs may be stymied and remain precarious.
Comprehensive labour reforms that simultaneously aim at improving the quantity and the quality of its workforce are required to move the country up the value chain. The new labour codes should be the first step in an agile and dynamic policy framework that focuses on creating a future-ready workforce.
Afridi is professor of economics,Indian Statistical Institute, Delhi, and Rangan is assistant professor, School of Management, Mahindra University
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
