India Labor Market White Paper

INDIA’S LABOR MARKET
Case
For
Temporary Staffing Reform
To reduce
Unemployment
A
White Paper
By
Teamlease Services
www.teamlease.com This white paper is a confidential document of

Teamlease Services prepared for private
circulation. No part should be reproduced
without permission and/or acknowledgement
Teamlease White Paper 1

Confidential – for private circulation
SUMMARY
• INDIA’S LABOR MARKET

o Labor force participation is a low 400 million of a 1 billion population
o Organized employment has been stagnant at 30 million for thirty years (22
million in public sector, 8 million in private sector)
o Unorganized employment is the bulk of the labor force (340 million)
o Given that 269 million people are below the poverty line, even the majority
of those employed can barely sustain themselves
o Given India’s employment elasticity (0.15) and ICOR (3.75), the 8 million
new jobs needed to freeze unemployment require an impossible annual
GDP growth rate of 13.6% and investments of $125 billion
• LABOR REFORM BACKGROUND

o Labor laws are a prisoner of a vocal minority of organized labor (mostly
not poor, middle-aged, men) against the majority (poor, low skilled,
women, self-employed, young and unemployed)
o Unorganized employment is exploding with its low productivity, investment
and lack of labor law enforcement
o Unemployment, at 30 million, is more than organized employment
o Jobless economic growth since 1990 has weakened grassroots social
and political support for economic reforms
• CASE FOR LABOR REFORM

o The coming unemployment explosion
o India’s labor environment
o Global trends in work
• CASE FOR TEMPORARY STAFFING

o Temp jobs form up to 10% of employment in some countries
o Ineffective public sector matching (of the 40 million people registered with
employment exchanges in 2004 only 100,030 got jobs)
o Globally 40% of temps find permanent jobs within one year
o The International Labor Organization reversed its fifty-year-old position
opposing temporary staffing in 1997 (Convention 181)
o Temporary staffing accounted for 50% of the reduction in US
unemployment and 11% of job creation in the EU in the 1990s
o A study of US firms found that earnings, margins and stock returns
improved with the increased use of temporary staffing
o Temping gives outsiders (women, young, old, lower skilled, lower
educated, poor, and unemployed, etc) access to labor markets.
• JOB POTENTIAL
o A survey finds that reform to the Indian Contract Labor Act could create
an additional 12 million temp jobs in five years.

India’s Labor Market
Population
1 billion
Labor Force
400-420 million
Agriculture 60%
Manufacturing 13%
Construction 5%
Services 24%
ELASTICITY
Agriculture 5% Agriculture 0
Manufacturing 26% Organized Employment Manufacturing 0.26
Construction 4% 30-50 million Construction 1
Services 59% Services 0.57
Overall 0.15
Low or no labor law enforcement

Agriculture, Construction, Unorganized Employment Low productivity
Retailing 340-360 million Low wages
Low Skills
Not literate 0.2%

Age 15-30 12.1%
Literate upto primary 1.2% Unemployed
Female 10%
Middle 3.3% 30-50 million
Men 7.2%
Graduate and above 8.8%
0.01% of employment relative to Temporary Staffing Largely Sales, Technology,

10% in some countries 0.08 million Admin, HR

India's
Labor Market
Policy Regulatory
Issues Issues
UNEMPLOYMENT
30 milion officially,more than organized employment Industrial Relations Framework
and growing rapidly
POVERTY REDUCTION
Given 269 million below the poverty line, even Wage determination Framework
employed barely sustain themselves
PUBLIC VS. PRIVATE SECTOR

The organized private sector is only 3% of Job Security provisions
employment
ORGANIZED VS. UNORGANIZED SECTOR

Small Organized (large scale) with low employment Working condition provisions
and large unorganized (small scale) with low capital
AGRI. VS. MANUFACTURING VS. SERVICES

Negative elasticity of agriculture and labor saving Mandatory Payroll Deductions
bias of manufacturing
OUTSIDER ACCESS
Bias against outsiders (poor, low skilled, women, Education and Skill development
and young) by insiders (not poor, middle-aged, men)
RURAL VS. URBAN SECTOR

Rural job growth 25% of urban and fallen more than Gender Issues
half since 1980
REGULATION VS. SUPERVISION

Reverse current over-regulation and Lack of ability to afford broad social security
under-supervision
CREATING VS. PRESERVING JOBS

Temporary vs. Permanent
Shift from employment to employability
COSTS/ ENFORCEABILITY
End legislating ahead of enforcement capacity and Demographics
payment capability
SKILL DEVELOPMENT
44% of labor force is illiterate and only 5% estimated Equity-Growth trade-off
to have vocational skills

Case for
Labor Reform
Coming Unemployment India's Global trends in

explosion Labor environment work
Low Employment Elasticity Changed Role of Changing worker

of GDP Government expectations
Unorganized employment Organizational and Supply

Demographics; growing youth
explosion chain deconstruction
End of public sector Internal & External

Intellectuallization
job machine Competition
Negative employment elasticity of Rising female workforce

Offshore markets/ FDI
agriculture participation
Labor saving bias of

Nature of job opportunities Internationalization
manufacturing
Inability to afford Effective & Incentivized

Flexible work structures
social security HR industry
Low Skill levels China's reform Role of Employer

Case for
Temporary Staffing
Public Policy Employer Employee

Perspective Perspective Perspective
Just in time labor; handling Keep in touch with the

Unemployment Reduction
fluctuating demand job market
Auditioning permanent Springboard to permanent

Outsider Access
candidates employment
Limited Permanent job Improved employability; skill

Improved Competitiveness
substitution development and experience
Liquidity provider; Better matching

Strategic Flexibility Lifestyle choice
of demand and supply
Differential pay for

Stepping Stone role Supplemental income
special skills
Economic Value and Matching expertise and

Employer Access
job creation Diversity Access
Handling planned and

Competitive economy Training
unplanned absences

Recommendations
for
Temporary Staffing Reform in India
Issue Consequence Recommendation
Increased outsourcing to the Amend Section 2(g), 7 of CLRA

unorganized sector
Definition of Principal
Recognize Contract Staffing
Employer Lower job creation Companies as the principal
employer
Contract rotation
Outlocation
Amend Section 10 of CLRA
Sham consulting Amend Sec 25B of IDA
Core, Perenial, industry, timing agreements
and location restrictions Allow contract/ temporary staffing
Barriers for first-time job seekers in all durations, functions and
and labor markets outsiders industries
Amend Sec 15 of MWA

Minimum wage rules Lack of part-time work
for part-time work options Allow pro-rata salary payments
under the Minimum Wages Act
Amend Section 7,12 of CLRA

Over-regulation and under-
Compliance philosophy &
supervision, enforcement Create national licensing for
decentrallization
consistency, transparency, costs contract staffing and move away
from contract-by-contract
Amend EPFO Act

ESI Act
High Mandatory Payroll Evasion, Unorganized job
Deductions creation, employee losses Only after 6 months, 18 months
for employees with salary greater
than Rs 6500 p.m.

Table of Contents
Page No.
1. Preface 11
2. The Case for Labor Reform

a. The coming unemployment explosion 14
b. India’s employment environment 15
c. Global trends in work 16
3. India’s Labor Market

a. Policy/ Regulatory Listing 18
b. Historical Perspective – Three eras 20
c. Key Issues 21
4. The Case for Temporary Staffing in India

a. Public policy perspective 24
b. Employers perspective 26
c. Employees perspective 27
5. The Temporary Staffing Industry

a. Background 29
b. Global markets 33
c. Geo-Historic evolution 37
d. Global regulation 38
e. Negative Perception vs. Reality 41
6. Results of Temporary Staffing Survey 42
7. Recommendations for Temporary Staffing Reform in India 45
8. Annexures
a. Indian Labor Market – Facts 52
b. Indian Labor Laws 60
c. Previous Indian Labor reform proposals 73
d. Labor Reform in China 79
e. Labor Reform in other Asian countries 97
f. Bibliography 111
g. About Teamlease 119

PREFACE
India’s economic reforms are on track and she has a new appointment to meet a heavily
delayed “tryst with destiny”. However, there is justifiable disappointment with the lack of
new job creation or shift from unorganized employment since reforms began in 1991.
Labor reforms are controversial but equating them with firing workers is wrong. The
much debated exit policy should be forgotten for now in the interest of moving forward;
increment al steps are better than no progress.
We need a “thought world” shift from employment to employability; from preserving jobs
to creating them and from giving fish to teaching how to fish. This white paper is our
attempt to create background for a debate on one of the many possible solutions to
unemployment; temporary staffing.
While a permanent, full-time job may still be the norm, labor markets are changing. The
job-for-life is being replaced with life-long learning, multi-skilling, and a working life with
multiple careers and flexible hours.
However, for a significant part of public opinion and policy makers, temporary staffing
still has the negative connotations of precarious employment. But there is another side of
the coin, namely the positive dimensions of flexibility; outsider access, lower
unemployment, greater employability, and increased labor mobility.
Current temporary staffing laws in India, as with broader labor legislation, favors a vocal
minority (largely not poor, middle-aged men in org anized labor) against the majority
(young, old, poor, lower skilled, women, unemployed, unorganized, and self-employed).
This is unfair and needs to change.
We make the case that temporary staffing companies address the flexibility needs of
workers and companies, and create jobs. In this way, staffing companies build stronger
societies.
India’s progress will not be worth the trip if we do not give a majority of our people the
strength and self- esteem that comes with a job. Let the journey begin.
The Team lease Team

CHAPTER 2: THE CASE FOR LABOR R EFORM
India’s economic reforms have produced results but the jobless growth of the 1990s
needs to change; the case for deeper labor reform can be built on three grounds:
Case for
Labor Reform
Coming Unemployment India's Global trends in

explosion Labor environment work
Low Employment Elasticity Changed Role of Changing worker

of GDP Government expectations
Unorganized employment Organizational and Supply

Demographics; growing youth
explosion chain deconstruction
End of public sector Internal & External

Intellectuallization
job machine Competition
Negative employment elasticity of Rising female workforce

Offshore markets/ FDI
agriculture participation
Labor saving bias of

Nature of job opportunities Internationalization
manufacturing
Inability to afford Effective & Incentivized

Flexible work structures
social security HR industry
Low Skill levels China's reform Role of Employer

The coming unemployment explosion
1. Low employment elasticity of GDP India’s labor force growth of 2% a

year needs 8 million new jobs just to keep unemployment frozen where it is. With an
employment elasticity of GDP of 0.15 and an Incremental Capital output Ratio
(ICOR) of 3.75, 8 million jobs need a sustained GDP growth of 13.6% and
investments of $125 billion. These numbers are practically impossible and we will not
have massive job creation unless we raise our employment elasticity of GDP.
2. Demographics; growing youth India is the only country in the world growing
younger and more than 60% of our unemployed are youth. Current labor laws are
biased against first -time job seekers and we will have a social catastrophe if the
youth are not channelized into productive and self-esteem creating employment.
3. End of public sector job machine Public sector employment forms the majority
of organized, formal employment. However, with an informal freeze or heavy slow
down on recruiting and a tight fiscal situation, this sector is shrinking. Reinforced by
privatization of PSUs, deregulation of government monopolies and overall
liberalization, this sector cannot drive job growth.
4. Negative employment elasticity of agriculture The employment elasticity of

GDP for agriculture is negative i.e. we could increase production by reducing the
number of people employed. This represents massive underemployment due to the
lack of alternative in rural areas and is not expected to change soon.
5. Labor saving bias of manufacturing The expectations of huge job

creation from manufacturing are at odds with the labor saving bias and capital
intensity of manufacturing of the last few years. For e.g. Bajaj Auto produced 2.4
million vehicles last year with 10,500 workers; in the early 90s they made 1 million
vehicles with 24,000 workers. Also Tata motors made 311,500 vehicles with 21,000
workers in 2004; in 1999 it made 129,400 vehicles with 35,000 workers.
6. Inability to afford social security There are no formal social security benefits
and India’s demographics and fiscal situation will not allow them in the future (even
paying 26% of the population below the poverty line a social security benefit equaling
50% of the per capital income would need 13% of GDP; close to total tax receipts).
The best and only viable social security is massive job creation.
7. Low skill Levels The percentage of the Indian labor force with skills/
vocational training is among the lowest in the world at 5.06%. Poor skills reduce
worker productivity and also makes them less likely to fit into the service/ knowledge
economy. More than 40% of the labor force is illiterate and only 5% are estimated to
have the vocational skills for credible employment.

India’s employment environment
1. Changed role of government India’s labor laws were written after independence
with the philosophy of state domination in business and legislation. The process
begun in 1990 of deregulation, privatization and liberalization has changed the
economic and financial landscape but the assumptions underlying the labor
regulatory regime have not been updated.
2. Unorganized employment explosion Unorganized employment is to be 93% of

workforce. The explosion of the unorganized sector is largely to avoid irrational labor
legislation but comes at the expense of benefits of the formal economy; credit
access, training, benefits, etc. From a public policy perspective, the formal sector is
more desirable because it offers better working conditions, improves employability,
pays taxes and has higher productivity.
3. Internal and External competition Indian industry grew up in a protected

environment but global competition and technological uncertainty have changed their
habitat. Companies must respond quickly when new products are launched, new
technologies are assimilated, new competitors emerge and old ones die, prices of
products fall, cost of input materials rise, interest rates and exchange rates fluctuate,
and so on. Companies need flexibility to handle all this change; the end of textile
quotas creates a unique need for labor flexibility for Indian companies.
4. Offshore Markets/ FDI India has become an offshore services hub and is showing
increased prowess as a manufacturing base. The globalization of supply chains and
increased foreign investment offers a unique opportunity for India but needs an
enabling environment of relevant and flexible labor regulations.
5. Nature of job opportunities India’s labor laws have been written for a time when
agriculture and manufacturing were the main sectors of the economy. Furthermore,
the off shoring revolution had not yet begun. A majority of new jobs in the next
decade will be entry-level jobs in service and manufacturing. This fits well with our
young population but current labor laws are stacked against first time job seekers.
6. Effective and incentivized HR industry An increase in HR firms has led to

improved demand and supply matching in India’s labor markets. Their efficiency will
only increase as global majors enter the country and raise competition. Temp staffing
companies are particularly economically incentivized to keep people at work since
any gap or delays in matching candidates and jobs represents losses.
7. China ’s reform China has modified its labor laws to create an exceptional
environment for investment and job creation. It is our biggest competitor for jobs
arising out of global FDI and the globalization of supply chains ; we need to worry
about our relative attractiveness which seems to have weakened. This is particularly
relevant in labor intensive industries like toys, textiles, machine tools and many more.

Global trends in work
1. Changing worker expectations A study by Spherion Corp identified what it

calls the “emergent workforce”, workers who need to feel more in control of their
careers and want an employer who rewards them based on performance, versus
“traditional” workers who believe that an employer is responsible for providing a clear
career path and in return deserves an employee’s long-term commitment. Emergent
workers are more concerned about opportunities for mentoring and growth and are
less focused on the traditional arrangements of job security, stability and tenure.
2. Organizational and supply chain deconstruction The traditional boundaries of

a company are being redefined by technology but the driving forces are strategy and
focus. Charles Handy talks about the “shamrock organization” where the core
structure of expertise consists of essential managers, technicians, and professionals
forming the nerve center of the organization. Embodied in this first leaf are the
organization’s culture, its knowledge and direction. The second leaf of the shamrock
comprises the non-essential work that may be farmed out to contractors. The third
leaf is the flexible workforce; temporary and part-time workers who can be called on
to meet fluctuating demands for labor.
3. Intellectualization Globally, regardless of labor force composition by age or

gender, the chance of finding a job rise with education. The underlying forces include
a decline for unskilled and semi-skilled labor driven by technological innovations that
greatly increase the productivity of skilled workers. Further, the transition to a service
economy demands higher socials skills and accelerates skill obsolescence.
4. Rising female workforce participation The huge entry of women into the
workforce, particularly married women with children is a major driver towards more
flexible labor markets. The huge participation dip by women when families were
formed (the children break) around age 30 is no longer significant. The labor force is
in transition from a uniform male breadwinner society towards a multiplicity of
household working arrangements.
5. Internationalization Labor markets are globalizing in two ways; labor mobility

(physical movement of people) and job mobility (offshore manufacturing and service
delivery). Given the demographics and cost structures of developed countries, this
may accelerate but specifics will depend upon politics and non-economic factors.
6. Flexible work structures Many work relationships are different from the
standard; a full time job (38-40 hours a week) with a permanent, open-ended
contract with an employer. New forms of labor demand and supply have emerged as
a consequence of the changing and more heterogeneous preferences of both
employers and employees. There is more frequent use of self- employment, part -time
work, limited duration contracts and temporary staffing.
7. Role of Employer Employers are no longer viewed as paternalistic providers

of lifetime employment and benefits. This has also led to the monetization of benefits
and a move to CTC (Cost-t o-Company) in compensation.

CHAPTER 3: INDIA’S LABOR MARKET
Population
1 billion
Labor Force
400-420 million
Agriculture 60%
Manufacturing 13%
Construction 5%
Services 24%
ELASTICITY
Agriculture 5% Agriculture 0
Manufacturing 26% Organized Employment Manufacturing 0.26
Construction 4% 30-50 million Construction 1
Services 59% Services 0.57
Overall 0.15
Low or no labor law enforcement

Agriculture, Construction, Unorganized Employment Low productivity
Retailing 340-360 million Low wages
Low Skills
Not literate 0.2%

Age 15-30 12.1%
Literate upto primary 1.2% Unemployed
Female 10%
Middle 3.3% 30-50 million
Men 7.2%
Graduate and above 8.8%
0.01% of employment relative to Temporary Staffing Largely Sales, Technology,

10% in some countries 0.08 million Admin, HR

India's
Labor Market
Policy Regulatory
Issues Issues
UNEMPLOYMENT
30 milion officially,more than organized employment Industrial Relations Framework
and growing rapidly
POVERTY REDUCTION
Given 269 million below the poverty line, even Wage determination Framework
employed barely sustain themselves
PUBLIC VS. PRIVATE SECTOR

The organized private sector is only 3% of Job Security provisions
employment
ORGANIZED VS. UNORGANIZED SECTOR

Small Organized (large scale) with low employment Working condition provisions
and large unorganized (small scale) with low capital
AGRI. VS. MANUFACTURING VS. SERVICES

Negative elasticity of agriculture and labor saving Mandatory Payroll Deductions
bias of manufacturing
OUTSIDER ACCESS
Bias against outsiders (poor, low skilled, women, Education and Skill development
and young) by insiders (not poor, middle-aged, men)
RURAL VS. URBAN SECTOR

Rural job growth 25% of urban and fallen more than Gender Issues
half since 1980
REGULATION VS. SUPERVISION

Reverse current over-regulation and Lack of ability to afford broad social security
under-supervision
CREATING VS. PRESERVING JOBS

Temporary vs. Permanent
Shift from employment to employability
COSTS/ ENFORCEABILITY
End legislating ahead of enforcement capacity and Demographics
payment capability
SKILL DEVELOPMENT
44% of labor force is illiterate and only 5% estimated Equity-Growth trade-off
to have vocational skills

HISTORICAL PERSPECTIVE
India’s labor markets have gone through three distinct phases:
THE COLONIAL ERA (BEFORE 1947) Government policy on industrial relations

under the British was one of laissez faire and selective intervention. The Bombay mills
labor association was formed in 1890 but the association did not organize workers as
trade unions and only petitioned the government on behalf of the workers. Gandhiji
founded his Textile labor association in Ahmedabad in 1917 and was active in trying to
settle labor disputes. The formation of the ILO in 1919 gave a boost to the idea of a
national organization and in 1920, the All India trade union congress was formed with
Lala Lajpat Rai as its first president. Later, a number of labor acts were initiated – the
Trade Union Disputes Act of 1929, the Government of India Act of 1935, and the
Bombay Trade Disputes Act of 1934. However, labor actions were localized and the
emphasis was on adjudication and settlement of disputes rather than promotion of sound
labor management relations or collective bargaining.
THE PLANNING ERA (1951-90) This period saw rapid growth of trade unions in the
context of the Nehruvian fascination with the Soviet model of heavy industry and inward
development. It was reinforced by an adoption of the British Labor party approach of
strong trade unionism combined with the welfare state concept as developed by, among
others, William Beveridge. The general labor mood was militant, geared to extracting a
larger share of the value added, under the overall political perception of the private
sector as exploitative of labor. Over the years, industrial relations got politicized and the
Indian National Trade Union Congress (INTUC) linked to the congress party, the All India
Trade Union Congress (AITUC), and Centre for Indian Trade Unions (CITU) with the
Communist movement.
During the 1980s, India had the dubious distinction of ranking first among developing
countries by losing 1900 workdays per 1000 non-agricultural employees; nearly three
times the second and third (Sri Lanka and Peru) with about 600. Also during this
“politicization” phase of the 1980s, organized labor managed to achieve growth of real
wages of 6.46% relative to unorganized growth of 1%. Thus reality was just the opposite
of the rhetoric for reducing income disparity and giving lower income greater increases.
The biggest weak ness of the model was low employment generation. The government
supported small industries through artificial constraints on larger businesses and ignored
demand; this production focused model created excess capacity and low growth.
THE LIBERALIZATION ERA (1991-DATE) The stagnation and bankruptcy of socialism

forced economic change; liberalization, deregulation, privatization and much else. But, in
line with global experience, labor reform has lagged other reform. This is particularly
dangerous because labor market constraints have held back job creation that creates
the broader social and political buy-in for reforms. In fact, labor reforms have become so
politically sensitive that there have been no changes to legislation or political rhetoric on
labor since reforms began.

KEY ISSUES
1. NEITHER EFFICIENCY NOR EQUITY India’s plethora of poor labor

legislation has led to an economy that is neither competitive nor a society that is
caring. We face the punishing combination of a globally uncompetitive labor
environment with no effective social safety nets.
2. LABOR MARKET INSIDERS VS. OUTSIDERS Labor legislation has been

hijacked by a vocal minority at the expense of 93% of the labor force. Labor market
insiders (mostly not poor, middle-aged, men) oppress outsiders (young, old, women,
poor, lower skilled, unemployed, temporary workers, etc).
3. TWO TIERING Over time, labor laws have become applicable to a small category
of enterprises in the “organized” sector. This creates a dualistic set-up in which the
organized sector remains limited in terms of aggregate employment and most
workers, who are largely unorganized, have no protection. This dualism is
characterized by a tiny organized (or large scale) sector with low employment, and a
huge unorganized (or small scale) sector, with low investment.
4. UNEMPLOYMENT/ JOBLESS GROWTH The number of unemployed is above

30 million or equal to organized employment. The Indian economy has responded
well to reforms but job creation has been a disappointment. With no explosion of
unorganized or organized job creation, unemployment is increasing and has led to a
lack of grassroots social or political support for reforms since 1991.
5. LEGISLATION AHEAD OF CAPACITY TO PAY AND CAPABILITY TO EXECUTE

Labor policies have been running ahead of implementation capacity and affordability.
For e.g. Minimum wages, ESI, EPS of PF, etc. Most East Asian countries did not
introduce extensive social welfare provisions in the early stages of their development
– thei r economies had not reached the point where they could handle the burden of
social welfare. We need a reality check in which legislation that is beyond
implementation capacity should be scrapped.
6. HIRE AND FIRE CAN WAIT There is a lot more to labor reform than firing
workers. In the interest of progress, the controversial exit policy should be left out of
any labor reform agenda for now. Any proposals presented as zero or hundred will
get zero and let’s make incremental steps; small progress is better than no progress.
7. SHIFT FROM EMPLOYMENT TO EMPLOYABILITY We need a policy shift from

employment to employability; teaching a person to fish rather than giving him fish. A
first step could be the creation of a Ministry of Employment by merging the Ministry of
HRD and Labor. Such a focus will also reverse the current labor law situation of over-
regulation and under-supervision.
8. TEMPORARY JOBS ARE BETTER THAN UNEMPLOYMENT Temporary

staffing is an integral part of the labor markets and global experience shows a strong
case from all three perspectives; public policy, employers and employees.

CHAPTER 4: THE CASE FOR TEMPORARY STAFFING IN INDIA
Temporary staffing is an integral part of labor markets and a case for reform can be
made from three perspectives:
Case for
Temporary Staffing
Public Policy Employer Employee

Perspective Perspective Perspective
Just in time labor; handling Keep in touch with the

Unemployment Reduction
fluctuating demand job market
Auditioning permanent Springboard to permanent

Outsider Access
candidates employment
Limited Permanent job Improved employability; skill

Improved Competitiveness
substitution development and experience
Liquidity provider; Better matching

Strategic Flexibility Lifestyle choice
of demand and supply
Differential pay for

Stepping Stone role Supplemental income
special skills
Economic Value and Matching expertise and

Employer Access
job creation Diversity Access
Handling planned and

Competitive economy Training
unplanned absences

PUBLIC POLICY PERSPECTIVE
1. REDUCTION IN UNEMPLOYMENT Temporary staffing is an important

component of the job market and hires almost 10% of the labor force in some
countries.
A detailed study by Lawrence Katz of Harvard University and Alan Krueger at

Princeton University found that temporary staffing was responsible for 50% of the
reduction in unemployment in the US in the 1990s. The staffing industry increased
European Union employment by 0.1% and accounted for around 11% of total new
job creation in the late 1990s. An Economic Report of the US President says,
“Permanent declines in the unemployment rate may have been caused by, among
other things, the development of the temporary help industry”.
A symbolic and materially important recognition of role came with the passage of
Convention 181 by the International Labor organization in 1997. This convention
overturned a fifty year opposition to temporary staffing (Convention 96) and explicitly
noted “their constructive role in a well-functioning labor market”. Following the
convention, legal recognition for private employment agencies was formally granted
in Italy (1997), Japan (1999), and Greece (1999) while related regulations were
liberalized in Belgium (1997) and Netherlands (1998).
2. OUTSIDER ACCESS/ INCREASED LABOR FORCE PARTICIPATION Most

labor laws protect “insiders”; usually not poor, male, and middle-aged. Temporary
staffing companies are particularly effective in offering job access to traditionally
disadvantaged populations like students, retirees, mothers with young children,
unemployed, etc. who would traditionally opt out of the labor force.
They act a “portal” for these “outsiders” by providing them not only with short-term
job opportunities, but also with qualifying experience and training for longer-term
positions. A European study found that between 24 and 52% of first time agency
workers were outsiders.
The Employment Policy foundation says “Flexible work arrangements and schedules
encourage higher labor force participation by offering choices that fit the diverse
needs and preferences of potential employees”.
3. LIMITED SUBSTITUTION OF PERMANENT JOBS The service offering of temp

staffing companies complement internal flexibility solutions and does not replace
permanent jobs. Small and medium enterprises (SMEs) have an especially strong
need for labor flexibility and they account for the bulk of employment and innovation
in most economies.
A European study found that temporary workers are seldom a substitute for
permanent workers; companies would have hired permanent workers only for 14% of
work now done by agency workers, had these not been available. Internal solutions
for flexibility that do not increase employment would have been used if temps had not
been available.
4. BETTER DEMAND AND SUPPLY MATCHING Temp staffing companies act

as liquidity providers in labor markets. Their core competence is matching of demand

(jobs) with supply (people) increases the efficiency and speed of the job and
candidate search process.
A European study found that, on an average, the time between enrolment at a

staffing company and assignment at a company was 4 weeks. About 35% of agency
workers surveyed had been placed within a week while in Germany this was 54%.
Empirical evidence shows that the track record of temping firms is better at reducing
frictional unemployment (those unemployed between jobs) than public sector
initiatives like employment exchanges, etc.
5. STEPPING STONE TO FULL-TIME WORK The “bridge” to permanent

employment performs a valuable lubricant role in labor markets by allowing workers
to demonstrate their skills to prospective employers and to be tested and hired on
that basis. A global survey of temp workers finds that about 40% find a long-term job
within a yea r of starting temping.
6. ECONOMIC VALUE AND JOB CREATION Globally temp staffing

companies have more than $200 billion in revenues and employ close to half a
million corporate staff. On average temping companies create one permanent
corporate staff position for every 50 workers placed on assignment.
7. COMPETITIVE ECONOMY The US department of labor compares the “just-in-

time” concept of inventory control in manufacturing with the use of flexible staffing
arrangements to provide just-in-time labor and says “Employers that have flexibility in
adjusting labor requirements to meet product and service demands have a
competitive edge over those with less flexible human resources policies”.

EMPLOYER PERSPECTIVE
1. HANDLING FLUCTUATING AND UNCERTAIN DEMAND The ability of staffing

companies to provide “just-in-time” labor at a predictable cost offer companies an
economically viable option to handle peak loads and seasons. Temping also allows
companies to expand their manpower in the face of uncertain demand since
companies would be overly cautious if they could only hire full-time workers on a
permanent basis or had to incur excess costs for surplus staff during lean periods.
2. AUDITIONING PERMANENT CANDIDATES The practice of taking on temps as a

way to “audition” or take employees for a “test drive” is the fastest growing segment
of the staffing industry, reflecting the desire to observe candidates for a trial period
before deciding whether they are fit for the job. These “temp-to-hire” arrangements
may reflect a weakened confidence by employers in educational systems worldwide
to prepare young people for the workplace in terms of quality, attitude and skills.
3. IMPROVED COMPETITIVENESS Companies have a clear and growing need

for flexibility because product lifecycles are shortening, consumer demand is
changing at an ever-faster rate, and new technologies are causing seismic shifts in
the economic landscape. Plus globalization of labor markets presents unique
challenges to supply chain cost structures.
A study published in the Decision Sciences journal by economists Nandkumar Nayar

of Lehigh University and G. Lee Willinger of the University of Oklahoma compared
firms in a carefully constructed sample and found that earnings (before interest,
taxes, depreciation, and amort ization), gross margins and stock returns improved
after the increased use of contingent labor.
4. STRATEGIC FLEXIBILITY For SMEs and start -up companies in particular,

labor flexibility is critical. Relative to established companies, start-ups often face an
uncertain financial future and to hedge this uncertainty, they typically organize their
working practices in a flexible way. Start-ups use temporary workers to postpone
incurring the high sunk costs of employing permanent workers until their financial
situation becomes secure. Steven Behm, former Cisco VP of global alliances said in
the late 90s “We have 32,000 employees but only 17,000 of them work at Cisco.
5. DIFFERENTIAL PAY FOR SPECIAL SKILLS Temporary staffing companies allow

companies to recruit people with specialist skills or for short -term projects at
compensation rates that are higher but do not create internal inequity.
6. MATCHING EXPERTISE AND ACCESSING DIVERSITY Temporary staffing

companies are experts at matching demand (jobs) with supply (people). Their
experience, technology and liquidity position them better than in-house HR
departments for matching quality. Temporary staffing companies also allow
employers to access populations that have been traditionally disadvantaged in job
access. This i ncludes geographical, racial, gender and age diversity.
7. HANDLING ABSENCES Temporary staffing companies enable employers to

handle both voluntary and involuntary employee absences. In the absence of a
temping option, employers would suffer service discontinuities and productivity
breakdowns.

EMPLOYEE PERSPECTIVE
1. KEEP IN TOUCH WITH THE JOB MARKET A job is a job and temporary staffing
companies offer a very attractive alternative to unemployment. Temp jobs keep
people in touch with the job market and avoid resume gaps.
2. SPRINGBOARD TO PERMANENT EMPLOYMENT Almost 40% of temp

employees find permanent employment within a year. This “stepping stone” or bridge
function of temp staffing companies is an attractive option for job candidates.
3. IMPROVED EMPLOYABILITY Many temp staffing companies offer training, skill

development and experience that greatly increase the ongoing attractiveness of
candidates as employees. Temp staffing companies in the US are estimated to
spend about $800 million per year in offering training to candidates.
4. LIFESTYLE CHOICE Many people prefer the flexibility and independence

that temp jobs offer; a European survey found this in 33% of temp workers. It was
higher among women (40% vs. 28% for men). A growing number of temps are highly
paid and highly skilled technical, computer and health care workers who choose
temping because of the flexibility, independence, and in some cases higher pay.
Temping offers working conditions others cannot – the opportunity to try out different
employers, a large diversity of jobs, time flexibility and short-term assignments. An
American Staffing Association survey of temporary employees found that 43% said
time for family was an important factor in job decisions and 28% said temping gives
them flexibility to pursue other interests. An Employment policy foundation study
found that 81% of high-tech independent contractors did not want to become regular
employees.
5. SUPPLEMENTAL INCOME Many employees and candidates are attracted to

temp jobs by the supplemental income that they provide. This is particularly attractive
to student, retired people, specialists and professionals considering entrepreneurial
ventures.
6. EMPLOYER ACCESS Temp staffing companies are often able to offer work at
employers who may not be hiring directly or for permanent positions. Such
experiences improve resumes and expose candidates to a work environment that
may not be directly available. For example Microsoft reports that 30 -40% of the 9000
regular positions created in the last four years of the 1990s were filled by individuals
who at one time had worked for staffing companies.
7. TRAINING Temporary staffing companies globally offer a number of

classroom, electronic and other forms of specialized, vocational and other training. A
US government estimates puts this amount at over $700 million by US staffing
companies alone

CHAPTER 5: THE TEMPORARY STAFFING INDUSTRY
While economic cycles and labor costs influence the degree to which full employment
can be attained, the mechanics, structure and legislation of the labor market are also a
key variable in this battle.
The traditionally static view of jobs (permanent, full-time) and labor (middle-aged men) is
tired and a key factor in reducing unemployment in recent times has been increased
labor market flexibility. Flexibility is often associated with precarious working conditions
and a key challenge is balancing the increased need and desire for flexibility b ( oth by
workers and employers) with the basic human need for continuity and certainty.
The flexibility needs of workers and companies can be Quantitative (varying the amount
of work) and Qualitative (varying the content of work) or Internal (building on the
company’s own work force) or external (using outside sources of labor). For e.g.
Labor
Flexibility
Internal External
QUANTITATIVE QUALITATIVE QUANTITATIVE QUALITATIVE

Ÿ Over-time Ÿ Job rotation Ÿ Temporary Ÿ Outsourcing
Ÿ Shift work Ÿ Multi-skilling Staffing Ÿ Secondments
Ÿ Part-time Ÿ Vocational Ÿ Fixed Term
Ÿ Increase training Contracts
workforce Ÿ Re-skilling
Ÿ Decrease
workforce
Temporary staffing is the fastest growing form of flexible employment. The global staffing
industry has evolved from what once were several distinct kinds of businesses –
temporary help, permanent placement, contingency recruiting, retained search, contract
project staffing, outplacement, and professional employer organizations – to one industry
where these many sectors that have blended together.

WHAT IS TEMPORARY STAFFING?
Temporary staffing is a contractual labor market arrangement based on a three-party

relationship between the temping firm, client and employee:
Temp Firm Client

1
3
2 4
Associates
The Temp firm and Client sign a service level agreement (overlap 1), the Associate and
Temp firm have an employment relationship (overlap 2), and the Associate provides
services to the client (overlap 4).
Temporary workers are employed by staffing companies and sent to work on specific
projects or for specified periods of time with their clients (i.e. companies requiring
temporary staff). The worker may move from one client site to another depending on the
staffing company’s clients. The temporary staffing company is responsible for the salary
and benefits of the temporary workers, while the staffing company in turn receives
payment from the client.
The staffing company is the employer of record though some countries also assign some
responsibilities to clients for the temporary staff used. The staffing company assumes
responsibility for a) employee payroll, b) benefits, and c) all compliance. The clients are
often responsible for compliance with government regulations that are related to worksite
supervision and safety.
The relationship between the client/employer and the temporary company is captured in
a Client Service Agreement (CSA). The CSA establishes a three-party relationship
whereby the staffing company acts as the employer of the temporary employees who
work at the client's location. Under the CSA, the temporary company assumes
responsibility for personnel administration and compliance with most employment-related
governmental regulations, while the client retains the employees' services in its business
and remains the employer for various other purposes. The temporary company charges
a comprehensive service fee, which is invoiced concurrently with the processing of
payroll for the worksite employees of the client.

TEMPORARY STAFFING SEGMENTS
Historically, temporary staffing comprised four major segments; clerical/office, industrial,

medical and technical. But as temping has become more widely accepted as a strategic
component of work force composition the breadth of positions has expanded. Now in
addition to the four traditional segments, temporary help also encompasses
professional/specialty positions and information technology (IT) staffing. Within
professional/specialty, there are a number of sub-sectors including legal and accounting.
Some details on each segment:
Clerical/Office Staffing Services – Secretarial staff, executive assistants, word

processors, customer service representatives, data entry operators, telemarketers, other
general office staff and call center agents, including customer service, help desk/product
support, order takers, market surveyors, collection agents and telesales.
Industrial Staffing Services – Assembly work (such as mechanical assemblers, general

assemblers, solderers and electronic assemblers), factory work (including merchandise
packagers, machine operators and pricing and tagging personnel), warehouse work
(such as general laborers, stock clerks, material handlers, order pullers, forklift
operators, palletizers and shipping/receiving clerks), technical work (such as lab
technicians, quality-control technicians, bench technicians, test operators, electronic
technicians, inspectors, drafters, checkers, designers, expediters and buyers) and
general services (such as maintenance and repair personnel, janitors and food service
workers).
Medical Staffing Services Nurses, physicians, "allied health" professionals including

radiology and diagnostic imaging technicians, clinical laboratory technicians and
therapists. Also covers laboratory personnel, pharmaceutical contract research
personnel, etc.
Professional/ Specialty staffing services: Accounting professionals (auditors, controllers,

accountants, etc), finance professionals (analysts, etc), and legal professionals
(attorneys, legal secretaries, paralegals, etc.) Also includes scientists, and interim
executives
IT Staffing Services H ardware and software engineering, database design development,

application development, Internet/intranet site development, networking, software quality
assurance and technical support.

WHY DO COMPANIES AND INDIVIDUALS USE STAFFING COMPANIES?
The popular perception of staffing companies being used to reduce labor costs by
employers may be misplaced with primary motivation being flexibility. Individuals have a
more complex and varied reasons for choosing staffing company employment.
According to a survey the key factors in hiring temporary staff were:
Reasons why employers use temporary staff

Match peaks in demand 63%
Cover for holidays/sick leave 59%
Perform one-off tasks 39%
Cover for maternity leave 38%
Specialist skills 21%
Trial for permanent work 20%
Reduce wage costs 6%
Source: “Temporary S taffing Services Profile” study by UNCTAD/WTO in
December 1998, from the UNCTAD website
According to a survey, the key factors in choosing temporary employment were:
Reasons why people choose a temporary job

Could not find a permanent job 39%
Gain work experience 26%
Work between jobs 13%
Work for different employers 7%
Flexible schedule 6%
Be able to quite 5%
Work for a short period 4%
Source: Deloitte and Touche Survey, CIET(2000 )

GLOBAL MARKETS
The global staffing industry provides work to an estimated 7 million people every day and
has global revenues in excess of $200 billion. The global market remains concentrated
in the UK and North America which account for 60% of global sales. The inclusion of the
next four markets; Japan, France, Germany and Netherlands shows that six countries
account for over 90% of global sales.
However, the penetration rate (the share of persons in total employment working for a
private employment agency on any given day) of temporary staffing is very varied:
Penetration rate per country (%)

Share of Global Market 1998 1999 2000 2003
2003
Austria 0.7 0.7 0.8 0.8
Belgium 1% 1.6 1.7 1.8 2.0
Canada 1.7 1.8
Denmark 0.1 0.2 0.2 0.2
France 10% 2.5 2.1 2.4 2.4
Germany 3% 0.6 0.7 0.8 0.8
Ireland 0.5 0.6 0.6
Italy 0.0 0.2 0.7 0.7
Japan 10% 0.5 0.6 1.1
Netherlands 3% 4.5 4.5 4.0 3.3
Portugal 0.9 1.0 1.1 1.1
Spain 1% 0.7 0.8 0.9 0.9
Switzerland 0.8 0.8 0.8
UK 18% 3.2 3.3 3.8 3.8
USA 43% 2.2 2.4 1.7
TOTAL $ 200 billion

Source: CIETT (2000), Randstad (2003)
As the table shows, the largest staffing market is that of the US economy followed by
UK, France and Japan. The total share of European countries in worldwide staffing
turnover is 38%. The market in the US is highly fragmented with the top three players
players controlling only 12% of the revenues vs. Europe where the top three control upto
50% in some markets.
Many global staffing firms accelerat ed their international expansion between 1995 and
2000 and consequently reduced home market revenues e.g. Addecco (82% vs. 30%),
Manpower (43% vs. 31%), Randstad (65% vs. 42%), etc.

THE US STAFFING MARKET
Labor markets in the US are more flexible relative to other markets and have created a
highly competitive market for the staffing industry. There are many competitors, with no
single company having a highly dominant position. Key points
• The US temporary staffing industry has revenues of around $100 billion
• The U.S. Bureau of Labor Statistics (Department of Labor) says there were 2.85
million temporary workers as of January 2003 including those placed by staffing
agencies and those directly hired by employers.
• The industry is highly fragmented; it is estimated that about 90% of the estimated
11,000 temporary help firms are one-branch operations. But these firms generate
only 31.2% of the receipts and a similar percentage of the temporary help
sector’s payroll (Source; Staffing Industry Sourcebook 2002).
• Firms with more than 10 or more branches represented only 1.3%of the firms but
generated more than half of the sectors receipts (51.8%) and payroll (52.1%).
• The U.S. staffing industry has been growing at above 10% per year in the last
decade, while overall employment growth has been only around 2% and
economic growth has been only around 4%.
• Key players in the industry include Manpower Inc., Adecco, Kelly Services,
Gevity HR, Spherion, and Robert Half. There are around 10 staffing agencies
that have a turnover of $1 billion or more.
• Manpower Inc. employs more people than any other firm in the U.S.
• Specialty staffing is a high-growth and high -margin area and includes Legal
staffing, IT staffing, Nurse staffing, Accounting staffing, etc. Data on the size of
the specialty staffing market is sketchy but it is estimated to be around 25% of
the overall temporary staffing industry, or around $25 billion.
• The large staffing companies in the U.S. typically operate on a 15%-20% gross
margin, i.e., this is the ‘mark-up’ they charge up over the labor costs of the
temporary staff they provide. These companies spend approximately 10%-15%
on general, sales & administrative (GSA) expenses, including employee benefits
and sales & administrative expenses, and have net profit margins of only 0.5%-
1%.

THE EUROPEAN STAFFING MARKET
The use of temporary staffing in Europe is common to most countries, but the industry is
less developed than in the U.S. It is estimated to be about 38% of the global $200 billion
staffing industry. About 80% of the temporary workers in Europe were employed in 4
countries - the Netherlands, France, Germany and UK.
The following table lists the movement in the percentage of Temporary Employment (as
a % of total employment) for select countries over time:
1985 1990 1995 2000 2001 2002

Austria 6.0 7.9 8.1 7.4
Belgium 6.9 5.3 5.3 9.0 8.8 7.6
Canada 12.5
Denmark 12.3 10.8 12.1 10.2 9.4 8.9
France 4.7 10.5 12.3 15.0 14.9 14.1
Germany 10.0 10.5 10.4 12.7 12.4 12.0
Ireland 7.3 8.5 10.2 4.7 3.7 5.3
Italy 4.8 5.2 7.2 10.1 9.5 9.9
Netherlands 7.6 7.6 10.9 14.0 14.3 14.3
Portugal 18.3 10.0 20.4 20.3 21.8
Spain 29.8 35.0 32.1 31.6 31.2
Switzerland 13.2 11.7 11.6 12.3
UK 7.0 5.2 7.0 6.8 6.7 6.1
Source; OECD LMS 2001 (2002), Eurostat LFS (2002, 2003)
A good overview of available national statistics on agency work in the EU is collected by

Storrie and presented in the table on the next page. The relative size of the agency work
business is largest in the Netherlands and the United Kingdom, and most immature in
Denmark and until recently Italy.
Data s hows that in general agency work in Europe is most common in the manufacturing
sector. This also explains why women are mostly underrepresented among agency
workers (except for Scandinavian countries); they work predominantly in services
industries. Also clear is that agency workers are on average lowly educated and very
young (about 20-50% are below age 25). Overall Netherlands has the youngest
population of agency workers and UK has the oldest.
Except Greece, all European countries permit temporary staffing, though certain
countries have rules restricting the types of jobs or the durations for which temporary
staff may be employed. In March 2002 the European Union (EU) brought out a new set
of directives on the use of temporary staffing, which seeks to provide parity in pay and
working conditions to temporary staff on par with the full-time employees of the
employer. However, this is still under finalization.

COUNTRY EXTENT (1999) AGE WOMEN SECTOR
AND GROWTH
Austria 24,277 (0.7%) 16% 51% Industry and
Quadrupled Construction
since 1992
Belgium 62,661 (1.65%) Average 30 41% 65% industry and
Doubled since <25, 46% construction
1992
Denmark 18,639 (0.9%) 70% 23% industry and
Five fold rise construction, 27%
since 1992 healthcare
France 623,000 (2.7%) Average 29 30% 58% industry and
Rapid growth <25, 28% construction
Finland 15,000 (0.6%) Average 32 78% Mainly services, 22%
From 11,000 in <25, 19% clerical work
1996
Germany 243,000 (0.7%) Average 32 22% 50% industry and
1992
Italy 31,000 (1.5%) Average 30 38% 63% industry and
Very rapid <25, 40% construction
recent growth
Ireland 9,000 (2.3%) N/A 80% industry and
Moderate recent construction
growth
Luxembourg 6,065 (2.3%) 25% 53% industry and
Doubled since construction
1992
Netherlands 305,000,(4.0%) Average 27 49% 33% industry and
1992
Portugal 45,000 (1.0%) Average n/a 40% 43% industry and
1995
Spain 109,000 (0.8%) Average 27 43% 40% industry and
Five fold rise <25, 51% construction
since 1995
Sweden 32,000 (0.8%) Average n/a 60% 12% industry and
Rapid growth <30, 45% construction
UK 557,000 (2.1%) Average 32 47% 26% industry and
LFS:254,000 <25, 31% construction
(0.9%) 29% finance
Source: Storrie (2002)

GEO-HISTORIC EVOLUTION
LOCALIZED NATIONAL GLOBAL

GROWTH ROLLOUTS TENDENCIES
Industry Limited- clerical and Still limited – but Broadening; penetrating
Structure light industrial, growth in some more segments of the
some generalist specialist niches economy and developing
agencies long-term relationships
Market Fragmented Fragmented, some Intensified consolidation,
Characteristics consolidation possible oligopolies in
through takeovers alongside fragmentation,
and mergers early evidence of market
power of global firms
Regulatory Weak Uneven emerging Increasing liberalization,
Framework of national US/UK labor market
regulatory model finding favor
frameworks globally and World
Bank/IMF push reforms
Functions Temporary filling of Temporary filling of Temporary vacancy
supplied vacancies vacancies together filling, growing range of
with basic recruitment functions,
recruitment some provision of HR
functions functions, evidence of
complete process
Geographical North America Western Europe Latin and South
frontiers America, Asia
Segment Clerical Light industrial IT, Accountants,
frontiers healthcare, senior
management
Scale of Independent vs. Independent vs. Independent vs. national
competition Independent firms National firms vs. global firms
Business Model Local branch National branch/ Global branch/ franchise
network franchise route network and internet
service delivery
Terms of Local contracts Local contracts Growth in national, multi-
Competition and multi-site site agreements, slow
agreements emergence of global
agreements
Formal Weak and un- Weak but getting Contested – overlapping
representation coordinated stronger national and
of Industry supranational institutions
Representation Temporary staffing Flexible staffing Labor solutions
Source: Ward (2002)

GLOBAL REGULATION
Globally there has been a generalized, albeit uneven, movement towards a more liberal,
decentralized and individualized pattern of regulation over recent decades. The
privileged normative and institutional status of the “standard” job – relatively secure, full -
time, regulated by an open-ended contract of employment, often unionized and well-paid
– has been eroded, sometimes dramatically, just as the numerical weight of jobs has
declined. The flip side of these developments has been the sustained growth of “non-
standard”, flexible and contingent jobs many of which are part-time or temporary.
Social-welfare and employment policies, along with labor and industrial relations laws,
have been extensively redesigned, both to accommodate and facilitate these
developments. The primary objective has been to encourage labor markets to behave
more like “real’ markets, to strengthen the play of competitive pressures, to erode rigid
social protections and to de-collectivize employment relationships.
In this changing regulatory environment, temporary work, once the very definition of
undesirable or marginal work, has come to the front. With the benefit of liberalizing
employment regulation, the temporary staffing business has enjoyed explosive growth in
many countries, though invariably from a small base. The pattern of regulatory reforms
across most industrial nations and many developing countries has been favorable; which
means the industry is operating in the context of a “positive” regulatory environment for
the first time in its history.
The extent to which a market is “attractive” depends upon the particular configuration of
state regulation, prevailing wage conditions, industrial and occupational mix, and the
in/formalization of employment relations. What is crucial is the quantitative and
qualitative nature of each markets development.
A symbolic and materially important recognition of role came with the passage of
Convention 181 by the International Labor organization in 1997. This convention
overturned a fifty-year opposition to temporary staffing (Convention 96) and explicitly
noted “their constructive role in a well-functioning labor market”. Following the
convention, legal recognition for private employment agencies was formally granted in
Italy (1997), Japan (1999), and Greece (1999) while related regulations were liberalized
in Belgium (1997) and Netherlands (1998).

Overall Index of employment regulation
de/regulation (0=non-existent or weak, 2= strict)
(1989-1999)
Working Temp Job Minimum Aggregate
Time Work Protection Wage Index
regulation regulation regulation laws
USA Liberal, 0 0 0 0 0
established
UK Liberal, 0 0 0 0 0
established
Ireland Liberal,
established
Netherlands Liberal, de- 1 0 1 1 3
regulating
Sweden Liberal, de- 0 0 0 0 1
regulating
Finland Moderately 0 1 0 0 0
liberal, de -
regulating
Norway Moderately 0 0 1 0 0
liberal, de -
regulating
Denmark Moderately 0 0 0 0 0
liberal, de -
regulating
Belgium Moderately 0 1 1 1 3
Liberal,
mostly static
Portugal Moderately 1 1 1 1 4
Liberal, de-
regulating
Luxembourg Moderately
Liberal, static
France Moderately 1 1 1 2 5
Restrictive,
regulating
Italy Restrictive, 1 2 2 2 7
de-regulating
Austria Restrictive,
static
Spain Highly 2 1 2 2 7
restrictive, de-
regulating
Germany Highly 2 2 2 1 7
restrictive, de-
regulating
Greece Highly
restrictive
Source: Peck, Theodore and Ward (2004); derived from CIET and Randstad

TEMPORARY STAFING LAWS IN THE US
• Temporary staff is ent itled to at least the minimum wage, $5.15 per hour, or the
higher state minimum wage, and to 1½ times the regular hourly rate for all hours
worked above 40 hours per week.
• Temporary workers on construction projects may be entitled to the “prevailing
wage.”
• “Living wage” laws in some states may cover temps/day laborers working under
contracts or for public agencies.
• The company must pay the temporary staff at least the rate that was agreed
upon at the start of the assignment.
• The company cannot pay a temporary staff less than other temps doing the same
work on the basis of gender, age, disability, race, religion, or national origin.
• The company cannot fire a temporary staff for engaging in concerted activity with
others to improve your working conditions (hence temporary staff often try to
make demands with at least one other person).
• A company cannot discriminate in assignments based on gender, age, disability,
race, religion, or national origin.
• A company cannot fire a temporary staff based on gender, age, disability, race,
religion, or national origin.
• Some states have a cap on the amount that a company can charge a worker for
transportation to the worksite, and some states like Georgia prohibit
transportation fees entirely.
• The Occupational Safety & Health Act covers most private employees.
Employees of private temporary/day labor firms who work for public agencies are
covered. In addition, at least half the states have laws that cover public sector
workers.
• Temporary workers and day laborers are covered by workers’ compensation.
They are also covered by state disability insurance in states that provide it.
• Eligibility for unemployment insurance varies by state. In over 20 states,
temporary employees are covered only if they report to the company at the
completion of a job and take almost any job the company offers. Part-time
workers are also often denied coverage.
• Temps, day laborers and independent contractors may be eligible for federal
earned Income Tax Credits and state credits where they exist. To claim the EITC,
the temporary staff must be work authorized with a valid Social Security number.
• The Family and Medical Leave Act (FMLA) provides up to 12 weeks of unpaid
leave to employees who have worked for an employer for at least 12 months and
for 1,250 hours within the past year. To be covered, the employer must have at
least 50 employees within a 75-mile radius.
• Low-wage workers may also be eligible for food stamps, Medicaid, subsidized
childcare, and Temporary Assistance for Needy Families (TANF).

NEGATIVE PERCEPTION VERSUS REALITY
A well-developed staffing industry offers an organized and transparent work

arrangement that enhances employment opportunities for workers. However, temp
staffing is still associated with a number of negative attributes and ti is important to
surface and confront this issue. The negative perceptions around temporary staffing are
rooted in four basic areas:
LOW EMPLOYMENT SECURITY Although the industry will continue to be

characterized by workers who change assignments frequently, staffing companies can
offer their workers income security over the longer-term by providing them with a
continuous stream of assignments. Since staffing companies manage a portfolio of
employment opportunities with multiple employers, they are in an excellent position to
provide security of employment to their own workers.
LOW LEVEL OF TRAINING Some academic research points out that while
formal training is low overall for workers, temp workers receive less formal training than
permanent workers. This observation may undervalue the importance of staffing
companies in career development. Temping provides many unemployed workers with a
social link to the job markets. Furthermore, temp workers acquire a diverse set of work
experiences, which adds to their overall career development and employability.
Given the short time that workers stay with temp jobs, such on-the-job learning may be
more useful than formal training. Plus staffing companies are starting to offer innovative
training (e-learning, webinars, etc) to increase their competitiveness; this was estimated
at over $700 million for the US market alone.
DIFFERENTIAL WAGE LEVELS It is very difficult to compare wage levels

among different populations of workers. There are often valid reasons why wages differ,
such as differences in qualifications, seniority, experience, and job content. Comparing
the wages of highly diverse populations is even more problematic. Pay differences
among companies within a sector can be significant, and are sometimes larger than pay
differences between permanent and temporary workers.
In establishing wage levels, two forms of equality need to be balanced carefully; the
equality between two temporary workers working in different sectors or companies and
the equality between an agency worker and a permanent employee at a client company.
However, the over-riding principle should be that it is the agencies that are employers of
agency workers, and, like other employers, have the right to determine the wages of
their work ers.
LACK OF BENEFIT CONTINUITY Benefits are based on the outdated assumption that
workers remain in their jobs for long periods of time. This assumption is no longer valid,
even for so-called permanent workers. As a result workers who change jobs frequently,
return to education, or take leave of absence can lose some of their gratuity, pension,
and health benefits. A more important trend is the move to CTC (Cost-to-Company)
where most benefits are monetized into wages. This removes the traditional
disadvantages of temp workers.

CHAPTER 6: TEMPORARY STAFFING SURVEY
This white paper was born out of discussions with decision makers in corporate India on
the current penetration of temping; it’s potential and required reform
1) OBJECTIVE
We conducted an in-depth survey of 75 companies in various cities in India with a

twofold objective:
• Estimate the potential job creation potential with temporary staffing reform
• Highlight the specific areas and issues for reform
2) APPROACH AND METHODOLOGY
Symbolic of the regulatory regime, most respondents agreed to participate in our survey
on the condition of anonymity. Consequently, we publish only the aggregate results of
the survey, and not individual responses from specific companies.
Our attempt was to understand at a macro level the problems that companies face due
to our existing labor laws around temporary staffing. We were more interested in
understanding the key issues, broad trends and estimating potential and less interested
in conducting statistical analysis by surveying hundreds of companies. This has helped
us uncover subtle qualitative issues, and added to the richness of the feedback we
received from respondents. However, some professionals may believe our sample size
and techniques may not be statistically significant.
3) SAMPLE SIZE
Our survey covered 75 companies in various cities in India, with the following break-up:
§ Manufacturing 45%, Services 55%

§ Indian owned 40%, Multinational 60%
4) FINDINGS
• Quantitative; Presented in the two tables on the next page

• Qualitative: Presented in the form of recommendations for staffing reform in
the next section

QUANTITATIVE FINDINGS
a) Survey responses overwhelmingly indicate that Indian managers and companies

believe that the Contract Labor Act does not serve its purpose.
The Contract Labor Act does not help employers or employees

Agree 74%
Do not agree 26%
100%
Source: TeamLease survey.
2) Survey responses indicate that companies would substantially increase their usage of
temporary staffing in their overall labor force
Demand for temporary staffing with reform

YEAR Millions % of workforce
2008 10.5 2.6%
2010 13.7 4%
Source: TeamLease survey.
Given the number of assumptions (labor force growth, employment elasticity, GDP
growth) and the nature of our survey, we estimate that the number of temporary jobs
could be between 10-12 million within five years.

CHAPTER 7: RECOMMENDATIONS FOR TEMPORARY STAFING REFORM IN INDIA
Temporary staffing in India has traditionally, in line with global experience, faced large
legislative restrictions on its growth and penetration. If the potential of this sector is to be
fully realized, the approach towards its regulation needs to be focused on tomorrow’s
labor market challenges rather than yesterday’s problems. Regulations should aim at
promoting the development of well functioning staffing companies and ensuring proper
protection for workers.
The debate around staffing companies needs to be less ideological and more oriented
towards two main considerations; economic efficiency and social cohesion, which are
not contradictory. The issues in India:
Issue Consequence Recommendation
Increased outsourcing to the Amend Section 2(g), 7 of CLRA

unorganized sector
Definition of Principal
Recognize Contract Staffing
Employer Lower job creation Companies as the principal
employer
Contract rotation
Outlocation
Amend Section 10 of CLRA
Sham consulting Amend Sec 25B of IDA
Core, Perenial, industry, timing agreements
and location restrictions Allow contract/ temporary staffing
Barriers for first-time job seekers in all durations, functions and
and labor markets outsiders industries
Amend Sec 15 of MWA

Minimum wage rules Lack of part-time work
for part-time work options Allow pro-rata salary payments
under the Minimum Wages Act
Amend Section 7,12 of CLRA

Over-regulation and under-
Compliance philosophy &
supervision, enforcement Create national licensing for
decentrallization
consistency, transparency, costs contract staffing and move away
from contract-by-contract
Amend EPFO Act

ESI Act
High Mandatory Payroll Evasion, Unorganized job
Deductions creation, employee losses Only after 6 months, 18 months
for employees with salary greater
than Rs 6500 p.m.

ISSUE 1 DEFINITION OF PRINCIPAL EMPLOYER
Section 2(G), 7 of Contract Labor Regulation Act (CLRA)
BACKGROUND
• The CLRA defines the “Principal Employer” of a Temporary employee as the entity
who is using the services of that employee rather than the temporary staffing
company.
• The Principal Employer status entails a number of responsibilities such as salary
payment, coverage of such employees for PF/ESIC, payment of minimum wages,
service conditions.
• The CLRA currently also requires every Principal employer to register with Labor
authorities and obtain a certificate based on which a temporary staffing firm is able to
provide services
CONS EQUENCE
• Blurred accountability with dual employer responsibility

• Lower usage of temporary staffing; higher unemployment
• Higher outsourcing to the unorganized sector
• Higher out location to the unorganized sector
• Sham consulting agreements
• Barriers to first time-job seekers and labor market outsiders
RECOMMENDATION
• Designate the temporary staffing company as the “Principal employer” under Section
2(g)
• Insert a new clause in Section 2 (g) which lays out responsibilities of workplace
safety for clients of temporary staffing companies
• Delete Section 7 which currently requires “Principal Employers ” i.e. clients of
temporary staffing companies to get registered under the CLRA.
• Amend Chapter V (sections 16-20) laying out responsibilities of workplace safety and
health as only responsibilities for clients of temporary staffing companies
• Delete Section 21 which lays out certain responsibilities on disbursement wages to
temp staff on the Principal employer

ISSUE 2 CORE, PERENNIAL, INDUSTRY, LOCATION AND TIMING
RESTRICTIONS
Section 10 of Contract Labor Regulation Act (CLRA)
Section 25B of Industrial Disputes Act (IDA)
BACKGROUND
• The CLRA currently provides for prohibition of Contract Labor by State or Central
Government as applicable if a) the process/operation/work performed by Contract
Labor is core to the industry/trade/business/manufacture of the Client Company, b)
the process is of perennial Nature. For e.g. some State Governments have notified
Canteens in factories to be core and perennial.
• Central Government CLRA notifications also restricts temporary staffing in certain
process and companies like
o Telephone operators by International Airports Authority of India;
o Fire fighting, Typists, accountants, Data/Computer Operators by ONGC
o Cleaning work in catering in the Railways/Railcars
• There is no clear definition of core and perennial work and the interpretation is left to
the local level leading to high inconsistencies.
• Labor authorities assume that that once a prohibition order is notified, the contract
employees become employees of the client.
• No clear definition of temp worker
• Any employee who has worked more than 240 days in a year is assumed to have
served one year of continuous service under Section 25 B of Industrial Disputes Act.
Contracts longer than this carry the potential for a permanency claim with the
Principal Employer. States have different rules e.g. Maharashtra has 90 days.
• The Perennial and core work clause implies that the permanency case is stronger if
the work is done on the premises of the Principal Employer.
CONSEQUENCE
• Companies enter into sham agreements to disguise contract labor in what can be
considered as core/perennial activity.
• Direct contracts that disguise contract employees as service providers/ retainers
• Sham consulting agreements and companies front-ending
• Lump sum payments instead of salary
• Contract Rotation; roll-over of many short term contracts
RECOMMENDATION
• Delete the current provisions of Section 10 and replace with an explicit recognition of
contract staffing in all activities, industries , locations and durations.
• Amend 25B to revoke powers of Labor authorities under Industrial Disputes Act to
grant permanency to contract employees

ISSUE 3 COMPLIANCE PHILOSOPHY AND DECENTRALIZATION
Section 7, 12 of Contract Labor Regulation Act (CLRA)
BACKGROUND
• Current compliance is cumbersome and targets the wrong party

o Every client needs to register as a Principal Employer
o Every contract with a client of the temporary staffing firm needs a license at a
state/local level.
o Any changes to the numbers in a license need re-approval
o All the records and registers have to be maintained by the client of the
temporary staffing firm.
CONSEQUENCE
• Over-regulation and under -supervision; very low compliance levels

• Lack of consistency in interpretation and enforcement of laws across cities, states
and nationally
• Lack of transparency encourages evasion and corruption
• Encourages a fragmentation of the market into small, individual and local firms who
do not service more than few companies in a locality and do not invest in systems,
reputation and scale
• Ineffective high administrative and compliance costs that are ultimately born by
temporary staffing employees and employers
RECOMMENDATION
• Shift compliance responsibility to Temporary Staffing company

• Replace requirement for a license for every contract or amendment with clients by
temporary staffing firms with detailed monthly submissions from staffing firms and
impose strict and large penalties for defaults.
• Amend Section 12 and the relevant rules to provide for a nation wide registration
(rather than state or local) for the Contract Staffing Companies
• Require national temporary staffing companies to qualify for certain minimum
standards such as:
o Minimum Net Worth of Rs. Two Crore
o Should be a limited company with offices in all the metros or representing
every region in which they want to provide services
o Board of directors should have 50% independent directors of repute
o Provide employee information help desks on salary and benefits via phone,
email and post.
o Should employ 1 direct employ ee for every 150 contract staff
o Should possess Information Technology infrastructure of minimum
requirement to service employees across the country.

ISSUE 4 MINIMUM WAGE RULES FOR PART-TIME WORK
Section 15 of the Minimum Wages Act (MWA)
BACKGROUND
• Section 15 of the Minimum Wages Act demands minimum wages notified for a
day be paid even if an employee works only for the part of a day.
• As a corollary, it is also interpreted that Minimum Wages notified for a month to
be paid even if an employee works only for a part of the month.
CONSEQUENCE
• Lower job opportunities due to the hesitation in using part-time workers in

seasonal businesses like BPO, Retail, IT, etc.
• Biased against outsiders like freshers, students, women etc willing to work part
time due to other family, academic or professional commitments.
• Lower avenues for supplemental income by working additional hours
• Lower competitiveness of part-time labor due to increased costs
RECOMMENDATION
• Amend Section 15 of the Minimum Wages Act, to allow the pro-rata payment of
Minimum Wages notified based on a) the hours worked in a day, and b) the days
worked in a month.

ISSUE 5 HIGH MANDATORY PAYROLL DEDUCTIONS
Employees Provident Fund Act
Employees State Insurance Act
BACKGROUND
• The EPF Act was amended in 1992 to include temporary/ contract labor from the day
of employment rather than 60 days of employment
• The ESI Act requires coverage of all employees from the date of employment
• The total mandatory deductions from gross salary at above 40% are among the
highest in the world and greatly reduce cash in hand for employees.
• Most white collar temporary workers are not big users of ESI and have alternative
saving mechanisms
CONSEQUENCE
• Higher incidence of structuring temporary contracts as consulting

• Large scale evasion of PF & ESI
• Sham consulting agreements
RECOMMENDATION
• Make ESI and PF applicable for temporary employees only after 6 months of
employment with a temporary staffing firm
• Exempt all temporary employees who have a salary of more than Rs 6500 per month
from PF/ESI for 18 months
• Explicitly provide for centralized compliance for ESI/PF for all employers with more
than 100 employees

ANNEXURES
Annexure A India’s Labor Market - Facts
Annexure B India’s Labor Laws
Annexure C Past Indian Labor reform prop osals
Annexure D Labor Reform in China
Annexure E Labor Reform in other Asian countries
Annexure F Bibliography
Annexure G About Teamlease

ANNEXURE A – INDIA’S LABOR LAWS - FACTS
1. RISING UNEMPLOYMENT/ JOBLESS GROWTH As seen from Figure 1.1,

India’s workforce includes around 40% of its 1 billion population. Of these, 397 million
persons are employed (UPSS measure), which means 2.2% of the workforce are
unemployed. The unemployment according to the CDS measure is much higher, at 7.3%
of the workforce.
Figure 1.1: Population, labor force & employment data

Sector Employment (Million) Growth rate (% p.a.)
1983 1988 1994 1999-00 1983-94 1994-
2000
Total Population 718.21 790 895.05 1004.1 2.12 1.93
Total Labor Force 308.64 -- 381.94 406.05 2.05 1.03
Total Employment 302.75 324.29 374.45 397 2.04 0.98
(UPSS)
Source: Report of the Task Force on Employment Opportunities, Planning Commission,
Government of India, July 2001
Note: Throughout this White Paper, we generally use the Current Daily Status (CDS)
measure of unemployment, which based on the reported employment position of the
surveyed individuals on each day of the week. CDS is generally considered the most
useful measure of unemployment, compared to other indicators like Usual Principal
Status (UPS), Usual Principal and Subsidiary Status (UPSS), and Current Weekly
Status (CWS) that tend to understate the extent of unemployment. For example, a
person who was unemployed on the date of the survey, but was employed for most
of the preceding yea r, would be classified as unemployed under the CDS measure
and employed under the UPS measure.
As seen in Figure 1.2 below, unemployment has risen quite sharply to 7.3% in 2000,
reflecting ‘jobless growth’.
Fig 1.2: Unemployment rate

All-India unemployment rate (CDS) (as % of workforce)
10 8.28
l yment(%)
8.18
7.32
8
6.09 6.03
6
Unempo
4
2
0
1977-78 1983 1987-88 1993-94 1999-00
Source: Report of the Task Force on Employment Opportunities (Montek

Singh Ahluwalia Committee), Planning Commission, July 2001

Of particular concern is the decline in employment growth compared to labor force
growth. As seen in Figure 1.3 below, the number of jobs has grown at only 0.98% in the
latter half of the 1990s, while the labor force is growing at 1.03% per year.
Unemployment would have been far higher today if there had not been a fall in the
growth of the labor force, from 2.94% in the mid 1970s to just 1.03% in the late 1990s.
Fig 1.3: Growth of Population, Labour Force and

Employment
3 2.732.94
2.43
2.5 2.17
Rate of growth (%)
2.27 2.29
2.19 2.14
2.04 2.1
2 1.93
1.541.74
1.5
0.98
1 1.03
0.5
0
1972-73 to 1977-78 to 1983 to 1987-88 to 1993-94 to
1977-78 1983 1987-88 1993-94 1999-2000
Employment
Population Source: Report of the Task Force on Employment Opportunities (Montek Singh Ahluwalia
Labour Force Committee), Planning Commission, July 2001
Figure 1.4 below shows the Labor Force Participation Rate (LFPR) rates for various age
groups. As expected, LFPR is substantially lower for the younger age groups and senior
citizens.
Fig 1.4: Labour force participation rates

(across various age groups)
951 980 986 980 974
1000 939
811
755
800
LBPR (per 1000)
600 542
366 402
400 289 285 269 264
214 245 208
191
147 121
200 94
5 32 7
0
+
4
-14
-19
-24
-29
-34
-39
-44
-49
-59
60
-5
50
Urban Male
10
15
20
25
30
35
40
45
55
Urban Female
Urban Male (total) Source: Report of the Task Force on Employment Opportunities (Montek Singh
Urban Female (total) Ahluwalia Committee), Planning Commission, July 2001

2. DECLINING EMPLOYMENT ELASTICITY According to the Planning
Commission of the Government of India, employment elasticity of the Indian economy is
currently around 0.15, which means that a 1% growth in GDP results in only 0.15%
growth in jobs.
Figure 1.5 below reveals interesting patterns in employment elasticity in the Indian
economy in recent decades:
i. Employment elasticity has been declining continuously for the last several decades
ii. It is zero for agriculture due to overstaffing and marginal work, reflecting the lack of
alternative employment opportunities in rural areas
iii. It has declined sharply in manufacturing and electricity, implying that productivity is
increasing (i.e., 1% increase in manufacturing output requires only 0.26% more
workers)
iv. It is as high as 1.00 for the construction industry, reflecting the low productivity in this
sector (i.e., 1% increase in output requires 1% more workers, unlike the economy as
a whole where 1% increase in output requires only 0.15% more workers)
Figure 1.5: Elasticity of Employment to GDP

Sector Employment Elasticity
1977 to 83 1983 to ‘94 1994 to 2000
1.Agriculture 0.45 0.50 0.00
2.Mining & Quarrying 0.80 0.69 0.00
3.Manufacturing 0.67 0.33 0.26
4.Electricity 0.73 0.52 0.00
5.Construction 1.00 1.00 1.00
6.Wholesale & Retail Trade 0.78 0.63 0.55
7. Transport, Storage & Construction 1.00 0.49 0.69
8. Finance, Real Estate, Insurance &
Business Services 1.00 0.92 0.73
9. Community, Social and Personal
Services 0.83 0.50 0.07
All Sectors 0.53 0.41 0.15
(Source: Report of the Task Force on Employment Opportunities, Planning
Commission, Government of India, July 2001)

3. SECTORAL SKEW As seen from Figure 1.6 below, the bulk of
employment (237 million out of the total of 397 million, or 60%) is in the agricultural
sector, while industry (69 million, or 17%) and services (90 million, or 23%) account for a
much smaller chunk of employment.
Employment in agriculture has been falling by 0.34% in the late 1990s, and this is barely
offset by the growth in employment in industry and services. In addition, the agriculture
sector offers poor prospects for employment:
i. Agricultural production is heavily dependent upon the monsoon rains, and has grown
at barely 2% per year, which is not sufficient to substantially improve income levels
or generate additional employment
ii. Chronic under-employment means that tens of millions of agricultural workers have
low productivity and wages. Employment in agriculture has been falling over the
years, and marginal workers are compelled to migrate to cities in search of jobs
iii. Employment elasticity in agriculture is negative, i.e., agricultural production can be

increased further with even fewer agricultural workers
Figure 1.6: Growth of Employment by Sectors (UPSS)

Industry Employed workers (1999-00) Growth (1994-00)
(Million) (%)
1983 1993-94 1999-00 1983-94 1994-00
Agriculture 207.23 242.46 237.56 1.51 -0.34
Mining & Quarrying 1.76 2.70 2.27 4.16 -2.85
Manufacturing 34.03 42.50 48.01 2.14 2.05
Electricity, Gas & Water 0.85 1.35 1.28 4.50 -0.88
Supply
Construction 6.78 11.68 17.62 5.32 7.09
Trade 19.22 27.78 37.32 3.57 5.04
Transport, Storage & 7.39 10.33 14.69 3.24 6.04
Communication
Financial Services 1.70 3.52 5.05 7.18 6.20
Community Social & 23.80 32.13 33.20 2.90 0.55
Personal Services
Total Employment 302.76 374.45 397.00 2.04 0.98
Source: Report of the Task Force on Employment Opportunities, Planning
Commission, Government of India, July 2001

4. LOW SKILL LEVELS As seen from Figure 1.7 below, the proportion of youth in
India who have skill levels is only 5%, among the lowest in the world. This reflects the
shamefully low levels of literacy among our workforce, as well as the lack of adequate
infrastructure for imparting vocational training.
Figure 1.7: Proportion of those vocationally trained among the youth

Country % of youth in the workforce who have vocational training
India 5.06
Botswana 22.42
Colombia 28.06
Mauritius 36.08
Mexico 27.58
Australia 64.11
Canada 78.11
France 68.57
Germany 75.33
Israel 81.23
Italy 43.88
Japan 80.39
Korea Republic 95.86
New Zealand 63.03
Russian Federation 86.89
Singapore 66.24
United Kingdom 68.46
Source: Report of the Task Force on Employment Opportunities, Planning
Commission, Government of India, July 2001
Poor skill levels among the workforce reduce workers’ productivity. This adversely
affects workers’ welfare in several ways:
i. It reduces workers’ income levels and hence their standard of living
ii. It reduces the total basket of goods and services produced by the economy, reducing
the standard of living, and
iii. In the context of globalization, it reduces the competitive advantage of the economy
and makes companies uncompetitive

5. LOW PROPORTION OF SALARIED/ RISING SELF-EMPLOYMENT Only 14% of
the workforce in India is salaried with some measure of stability in their earnings. The
proportion of salaried employees is much higher in urban areas at around 40%, and
lower in rural areas at around 7% of the workforce.
The low proportion of salaried employees implies huge self-employment; according to

the Planning Commission this was 53% of the workforce in 1999-2000. This includes
high income professionals like doctors, lawyers and consultants, as well as farmers and
craftsmen struggling to make a living.
There are clear differences in the proportion of self- employment in rural and urban
areas. It was as high as 56% in rural areas, reflecting the classification of farmers as
self-employed, while it was only 42% in urban areas.
This pattern is also reflected in the Global Entrepreneurship Monitor but sadly the
primary reason is the lack of alternative opportunities of forced entrepreneurship.
The share of self-employment has declined from 58.9% in 1977-78 to 52.9% in 1999-
2000. Almost all of this has happened in the rural areas, where the proportion of farmers
cultivating their own land has fallen due to fragmentation of land holdings. As seen in
Figure 1.8 below, the proportion of self-employment is higher in rural areas, especially in
sectors like (1) Manufacturing, mining, electricity, gas and water supply, construction;
and (2) Trade, transport, financial, ownership of dwellings, community, social and
personal services.
Figure 1.8: Proportion of self-employment by industry: 1999-2000 (%)

Industry Rural Urban Combined
Agriculture 57.9 57.2 57.7
Manufacturing, mining, electricity, gas and
water supply, construction 45.4 33.8 40.3
Trade, transport, financial, ownership of
dwellings, community, social and personal
services 52.9 44.6 48.2
All industries 55.9 42.1 52.9

6. UNEMPLOYMENT
(a) According to education: Contrary to what one may expect unemployment sharply
rises with the level of education. As seen from Figure 1.9 below, while the
unemployment rate (UPSS) for the overall population was 2.2% in 1999-00, it was as
low as 0.2% for illiterate persons, 1.2% for persons with primary school education,
3.3% for those with middle school education, and as high as 7.1% for persons with
secondary education and above.
Figure 1.9: Unemployment by level of education

(% Of labor force)
Education level Unemployment Rate
1987-88 1993-94 1999-00
Not Literate 1.1 0.2 0.2
Literate upto primary 1.9 0.9 1.2
Middle 5.3 3.4 3.3
Secondary 8.7 6.2 5.5
Higher Secondary 8.7 7.8 7.8
Secondary + Higher Secondary 7.1 - -
Graduate & Above 9.9 9.3 8.8
Educated (Secondary & Above) 9.0 7.7 7.1
All 2.7 1.9 2.2
(b) According to age: The unemployment rate is significantly higher in the younger age
groups. For example, during 1999-2000 the unemployment rate for the 15-29 years
age group was 12.1%, against 7.3% for the whole population. This seems to reflect
two factors: (1) the number of new jobs created in the economy is less than the
number of youngsters entering the workforce, and (2) new entrants into the labor
force may be more likely to wait (compared to older workers) until they find a job
which matches their aspirations.
(c) According to gender: Female unemployment in urban areas was 9.8% compared
with 7.2% for their male counterparts. To some extent, this reflects the lower skill
level of women entering the workforce, and the barriers that women face in achieving
appropriate employment. Clearly, female unemployment will increase as more
women enter the workforce in the decades to come.

7. ORGANIZED VS. UNORGANIZED The organized sector reflects institutions
employing more than 10 people. The organized sector provides better working
conditions, improves employability, complies with labor laws and pays taxes; therefore it
is more desirable. Figure 1.10 shows the relative shares:
Figure 1.10: Organized versus unorganized employment

Sector Employment (Million) Growth rate (%
p.a.)
1983 1988 1994 1999-00 1983-94 1994-2000
Total Employment (UPSS) 302.75 324.29 374.45 397 2.04 0.98
Organized Sector 24.01 25.71 27.37 28.11 1.2 0.53
Employment
-Public Sector 16.46 18.32 19.44 19.41 1.52 -0.03
-Private Sector 7.55 7.39 7.93 8.7 0.45 1.87
Source: Report of the Task Force on Employment Opportunities, Planning Commission,
Government of India, July 2001
Key issues evident are a) low level and declining share and growth rate of organized
employment, and b) the private sector is mostly unorganized. The industry skew is also
interesting:
Figure 1.11: Organized sector jobs in employment by industry

Industry Employment (million) Share of Organized
Sector (%)
1993-94 1999-2000 1993-94 1999-00
Total Organized Total Organized
Agriculture 242.46 1.48 237.56 1.39 0.61 0.58
Mining & Quarrying 2.70 1.09 2.27 1.01 40.37 44.49
Manufacturing 42.50 6.40 48.01 6.75 15.05 14.06
Electricity 1.35 0.97 1.28 1.00 71.85 78.13
Construction 11.68 1.23 17.62 1.18 10.53 6.70
Wholesale & Retail Trade 27.78 0.45 37.32 0.49 1.62 1.31
Transport, Storage &
Communication 10.33 3.11 14.69 3.15 30.11 21.44
Financial Services 3.52 1.53 5.05 1.65 43.46 32.67
Community, Social &
Personal Services 32.13 10.93 33.20 11.49 34.02 34.61
All Sectors 374.45 27.18 397.00 28.11 7.26 7.08
.

ANNEXURE B – INDIA’ S LABOR LAWS
Contract Labor (Regulation and Abolition) Act 1970
Objective:
§ To regulate the employment of contract labor in certain cases and to abolish it in
certain other cases
To whom does it apply?

§ To every establishment employing twenty or more workmen as contract labor,
and every contractor who employs such contract laborers
Key provisions:
§ Central and state governments may constitute Advisory Contract Labor Boards to
advise the governments on the administration of this Act
§ Every establishment employing contract labor must register with the
Central/State Labor Commissioners in each of the location they employ labor
§ Every Contractor must obtain a license from the Central/State Labor
Commissioner for each establishment in each location they provide labor.
§ The government may prohibit the use of contract labor in certain types of
jobs/occupations
§ Where more than 100 contract laborers are employed, the contractor must
provide canteens, rest rooms and other amenities to workers.
§ Principal employer must nominate a representative to certify that the contractor
has paid wages. In case of default by contractor, the principal employer is liable.
§ Principal employer and contractor must maintain registers showing details of
contract laborers employed
Key clauses:
7. Registration of certain establishments. - (1) Every principal employer of an

establishment may make an application to the registering officer in the prescribed
manner for registration of the establishment:
9. Effect of non-registration. - No principal employer of an establishment shall - (a) in the

case of an establishment which has not been registered, (b) in the case of an
establishment the registration in respect of which has been revoked employ contract
labor in the establishment.
10. Prohibition of employment of contract labor. - (1) the appropriate Government may
prohibit the employment of contract labor in any process, operation or other work in any
establishment.
12. Licensing of contractors. - (1) no contractor shall undertake or execute any work
through contract labor except under and in accordance with a license issued in that
behalf by the licensing officer.

16. Canteens. - (1) The appropriate Government may make rules requiring that in every
establishment - (a) to which this Act applies, (b) wherein work requiring employment of
contract labor is likely to continue for such period as may be prescribed, and (c) wherein
contract labor numbering one hundred or more is ordinarily employed by a contractor,
one or more canteens shall be provided and maintained by the contractor for the use of
such contract labor.
17. Rest-rooms. - (1) In every place wherein contract labor is required to halt at night in
connection with the work of an establishment ---- there shall be provided and maintained
by the contractor for the use of the contract labor such number of rest-rooms or such
other suitable alternative accommodation within such time as may be prescribed.
20. Liability of principal employer in certain cases. - (1) If any amenity required to be
provided under section 16, section 17, section 18 or section 19 for the benefit of the
contract labor employed in an establishment is not provided by the contractor within the
time prescribed therefore, such amenity shall be provided by the principal employer
within such time as may be prescribed.
21. Responsibility for payment of wages. –

(1) A contractor shall be responsible for payment of wages to each worker employed by
him as contract labor and such wages shall be paid before the expiry of such period as
may be prescribed.
(2) Every principal employer shall nominate a representative to be present at the time of
disbursement of wages by the contractor and it shall be the duty of such representative
to certify the amounts paid as wages in such manner as may be prescribed.
(3) It shall be the duty of the contractor to ensure the disbursement of wages in the
presence of the authorized representative of the principal employer.
(4) In case the contractor fails to make payment of wages within the prescribed period or
makes short payment, then the principal employer shall be liable to make payment of
wages in full or the unpaid balance due, as the case may be, to the contract labor
employed by the contractor and recover the amount so paid from the contractor either by
deduction from any amount payable to the contractor under any contract or as a debt
payable by the contractor.
23. Contravention of provisions - Whoever contravenes any provision of this Act --- shall
be punishable with imprisonment for a term, which may extend to three months, or with
fine, which may extend to one thousand rupees, or with both ---.
28. Inspecting staff. - (2) --- an inspector may --- (a) enter --- any premises or place
where contract labor is employed, for the purpose of examining any register or record or
notices required to be kept or exhibited by or under this Act ---; (b) examine any person
whom he finds in any such premises ---; (c) require any person giving out work and any
workman, to give any information, ---; (d) seize or take copies of such register, record of
wages or notices or portions thereof ---; and (e) exercise such other powers as may be
prescribed.
29. Registers and other records to be maintained. - (1) Every principal employer and
every contractor shall maintain such registers and records giving particulars of contract
labor employed, the nature of work performed by the contract labor, the rates of wages
paid to the contract labor and such other particulars in such form as may be prescribed.

Payment of Wages Act 1936
Objective:
§ Regulate the payment of wages, in order to prevent employers from making
deductions from workers’ wages or delay in payment of wages

§ Any factory
§ Any industrial or other establishment
§ Any other establishment which the Government may specify by notification in the
Official Gazette
Key provisions:
§ Job categories for which the act is applicable
§ Defines payable wages and its components
§ Prescribes the day of the month before which wages must be paid
§ Prohibits the employer from making deductions from the person’s wages except
those permitted by the Act
§ Prescribes the registers to be maintained
§ Gives power to the Inspector of Factories to inquire, inspect, supervise and seize
documents relating to payment of wages
§ The government can order the employer to refund the deductions made from the
wages, and pay compensation
§ Prescribes penalties for not complying with the act
§ Employer to display in the establishment a notice containing an abstract of the
provisions and rules under this Act
Key clauses:
3. Responsibility for payment of wages

Every employer shall be responsible for the payment to persons employed by him of all
wages required to be paid under this Act
5. Time of payment of wages

(1) The wages of every person employed upon or in-
(a) Any railway, factory or industrial or other establishment upon or in which less than
one thousand persons are employed, shall be paid before the expiry of the seventh day,
(b) Any other railway, factory or industrial or other establishment, shall be paid before the
expiry of the tenth day
7. Deduc tions, which may be made from wages

(1) The wages of an employed person shall be paid to him without deductions of any
kind except those authorised by or under this Act.
13A. Maintenance of registers and records

(1) Every employer shall maintain such registers and records giving such particulars of
persons employed by him, the work performed by them, the wages paid to them, the

deductions made from their wages, the receipts given by them and such other particulars
and in such form as may be prescribed.
15. Claims arising out of deductions from wages or delay in payment of wages and
penalty for malicious or vexatious claims
(1) The State Government may, by notification in the Official Gazette, appoint a presiding
officer of any Labour Court or Industrial Tribunal ----- to be the authority to hear and
decide for any specified area all claims arising out of deductions from the wages, or
delay in payment of the wages, of persons employed or paid in that area, including all
matters, incidental to such claims
(3) When --- (any deduction has been made from the wages of an employed person, or
any payment of wages has been delayed) --- the authority shall hear the applicant and
the employer --- and --- may direct the refund to the employed person of the amount
deducted, or the payment of the delayed wages, together with the payment of such
compensation as the authority may think fit ---.
17A. Conditional attachment of property of employer or other person responsible for

payment of wages
(1) Where --- the Court --- is satisfied that the employer --- is likely to evade payment of
any amount that may be directed to be paid under section 15 or section 17, the authority
or the court --- may direct the attachment of so much of the property of the employer or
other person responsible for the payment of wages as is -- sufficient to satisfy the
amount which may be payable under the direction.
20. Penalty for offences under the Act

(3) Whoever being required under this Act to maintain any records or registers or to
furnish any information or return-
(a) fails to maintain such register or record shall, for each such offence, be punishable
with fine which shall not be less than two hundred rupees but which may extend to one
thousand rupees

Minimum Wages Act 1948
Objective :
§ Fixing the minimum rates of wages for certain job categories

§ Any person who employs one or more employees in certain job categories for
which the minimum rates of wages have been fixed under this Act
Key provisions:
§ The minimum wages for certain job categories
§ The job categories for which such minimum wages are applicable
§ The composition of the wages, including basic wages and cost of living
adjustments
§ Procedure for fixing and revising minimum wages
§ Establishes the Central Advisory Board and various committees to advise the
government
§ Part-1 and Part -2 of the Schedule lists the job categories for which minimum
wages are applicable
Key clauses:
3. Fixing of minimum rates of wages

(1) The appropriate government shall, in the manner hereinafter provided, -
(a) Fix the minimum rates of wages payable to employees employed in an employment
specified in Part I or Part II of the Schedule and in an employment added to either Part
by notification under section 27
(b) Review at such intervals as it may think fit, such intervals not exceeding five years,
the minimum rates of wages so fixed and revise the minimum rates, if necessary
12. Payment of minimum rates of wages

(1) Where in respect of any scheduled employment a notification under section 5 is in
force, the employer shall pay to every employee engaged in a scheduled employment
under him wages at a rate not less than the minimum rate of wages fixed by such
notification for that class of employees in that employment without any deductions
except as may be authorised within such time and subject to such conditions as may be
prescribed.

Payment of Bonus Act 1965
Objective:
§ Payment of bonus to persons employed in certain establishments

§ Every factory
§ Every other establishment in which 20 or more persons are employed
§ Any establishment employing more than 10 persons, as specified by the
appropriate government by notification in the Official Gazette
Key provisions:
§ ‘Establishments’ include departments, undertakings and branches
§ Method for calculating the bonus payable, based on the gross profits,
depreciation, tax, etc.
§ Minimum bonus payable, regardless of whether the establishment is profitable or
not
§ Maximum wages upto which employees are entitled to bonus
Key clauses:
8. Eligibility for bonus

Every employee shall be entitled to be paid by his employer in an accounting year,
bonus, in accordance with the provisions of this Act, provided he has worked in the
establishment for not less than thirty working days in that year.
10. Payment of minimum bonus

Subject to the other provisions of this Act, every employer shall be bound to pay to every
employee in respect of the accounting year commencing on any day in the year 1979
and in respect of every subsequent accounting year, a minimum bonus which shall be
8.33 per cent of the salary or wages earned by the employee during the accounting year
or one hundred rupees, whichever is higher, whether or not the employer has any
allocable surplus in the accounting year
12. Calculation of bonus with respect to certain employees

Where the salary or wages of an employee exceeds two thousand and five hundred
rupees per mensem, the bonus payable to such employee under section 10 or, as the
case may be, under section 11, shall be calculated as if his salary or wages were two
thousand and five hundred rupees per mensem.

Workmen’s Compensation Act 1923
Objective:
§ To provide suitable compensation to workers injured in industrial accidents

§ Any body of persons whether incorporated or not and --- the person with whom
the workman has entered into a contract of service or apprenticeship
Key provisions:
§ Specifies the dependents who are entitled to compensation
§ Employer is liable to pay compensation to workman in case of accident
§ Employer is not liable if the workman is under the influence of drink or drugs, or
shows willful disobedience to safety rules
§ Specifies the amount of compensation payable to the workman in case of
accident
§ Procedure for notice in case of accident, claim against employer, and payment of
compensation
§ Workman’s compensation will be the first charge on assets transferred by
employer
§ Employer to file returns showing number of injuries, compensation paid, etc.
§ Contracts where the workman relinquishes his right of compensation are invalid
§ State Government may appoint a Commissioner for Workmen's Compensation
§ The Commissioner shall have the powers of a Civil Court for taking evidence,
enforcing the attendance of witnesses, and compelling the production of
documents and material objects
§ Part-1 of Schedule-1 gives the list of injuries deemed to result in Permanent Total
Disablement and Permanent Partial Disablement
§ Gives the list of job categories for which the Act is applicable
§ Gives the list of occupational diseases for which the Act is applicable
Key clauses:
3. Employer's liability for compensation

(1) If personal injury is caused to a workman by accident arising out of and in the course
of his employment his employer shall be liable to pay compensation in accordance with
the provisions of this Chapter
16. Returns as to compensation

The --- Government may by notification in the Official Gazette direct that every person
employing workmen --- shall send --- a correct return specifying the number of injuries ---
and the amount of such compensation together with such other particulars --- as the ---
Government may direct.
18A. Penalties (1) Whoever -

(a) fails to maintain a notice-book, which he is required to maintain --- shall be
punishable with fine, which may extend to five thousand rupees.

The Child Labor (Prohibition and Regulation) Act, 1986
Objective:
§ Prohibit the engagement of children in certain employments and to regulate the
conditions of their work in certain other employments.

§ All establishments and workshops
Key provisions:
§ Prohibits the employment of children, i.e. those below 15 years, in the 5
occupations mentioned in Part A of the Schedule, or in any workshop carrying on
any of the 11 processes mentioned in Part B of the Schedule
§ Regulates the conditions of work of children in employments where they are not
prohibited from working
§ Does not prohibit the employment of children in occupations “carried on by the
occupier with the aid of his family or to any school --- receiving recognition from
Government”
§ Sets up a Child Labour Technical Advisory Committee to advise the government
§ Establishments should send notice to the Inspector containing details of the child
labour they employ
§ Penalties for employing children in violation of the provisions of the Act
Key clauses:
3. Prohibition of employment of children in certain occupations and processes. - No child

shall be employed or permitted to work in any of the occupations set forth in Part A of the
Schedule or in any workshop wherein any of the processes set forth in Part B of the
Schedule is carried on
7. Hours and period of work - (1) No child shall be required or permitted to work in any
establishment in excess of such number of hours as may prescribed for such
establishment or class of establishments.

Industrial Disputes Act 1947
Objective:
§ Make provision for the investigation and settlement of industrial disputes

§ All industries, where "industry" is broadly defined in section 2 (j) as any business,
trade, undertaking, manufacture or calling of employers and includes any calling,
service, employment, handicraft, or industrial occupation or a vocation of
workmen
Key provisions:
§ Chapter 1 deals with preliminary issues and definitions
o The Act covers all “industrial disputes", which are defined in section 2 (k)
as “any dispute or difference between employers and employers, or
between employers and workmen, or between workmen and workmen,
which is connected with the employment or non-employment or the terms
of employment or with the conditions of labour, of any person”. Section 2A
is also applicable “where any employer discharges, dismisses, retrenches
or otherwise terminates the services of an individual workman”
o The Act protects all workmen, defined in section 2 (s) as “any person
(including an apprentice) employed in any industry to do any manual,
unskilled, skilled, technical, operational, clerical or supervisory work for
hire or reward, whether the terms of employment be express or implied”.
The persons excluded under the Act are (i) armed forces personnel, (ii)
police officers, (iii) managerial or administrative personnel, and (iv)
supervisory personnel drawing wages exceeding Rs. 1,600 per month or
exercising functions of a managerial nature.
§ Chapter 2 specifies the various labour authorities under this Act.
o All industrial establishments employing 100 or more workmen must have
a Works Committee consisting of representatives of employers and
workmen, of which at least half should be workers’ representatives
o The central government has the power to appoint various authorities,
including Conciliation Officer, Board of Conciliation, Court of Inquiry,
Labour Court, Industrial Tribunal, and National Industrial Tribunal.
o It is the duty of the Board to endeavour to bring about a settlement of the
same and for this purpose the Board shall investigate the dispute and
may do all such things as it thinks fit for the purpose of inducing the
parties to come to a fair and amicable settlement of the dispute
§ Chapter 3 deals with the reference of disputes to boards, courts or tribunals
o An industrial dispute may be referred to boards, courts or tribunals either
by the government, or by the parties to the dispute
o Where an industrial dispute has been referred to a board, court or
tribunal, the government may prohibit any strike or lock-out in connection
with such dispute
§ Chapter 4 deals with the procedure, powers and duties of the various labour
authorities

o Every board, court and tribunal shall have the powers of a Civil Court in
respect of enforcing the attendance of any person; examining him on
oath; compelling the production of documents; issuing commissions for
the examination of witnesses; in respect of such other matters as may be
prescribed.
o The report of a board, court or tribunal shall be published within 30 days
of receipt by the government and its award shall be enforceable 30 days
after the date of publication
§ Chapter 5, which deals with strikes and lock-outs, is the most controversial part
of the Act, and perhaps of all labour laws in India
o Prohibition of strikes and lockouts in a public utility service, unless the
person or employer gives notice within 2-6 weeks before the strike/lockout
§ Chapter 5A deals with lay -off and retrenchment
o Right of workmen laid-off for compensation
o Conditions precedent to retrenchment of workmen
o Compensation to workmen in case of closing down of undertakings
§ Chapter 5B deals with special provisions relating to lay -off, retrenchment and
closure in large establishments employing more than 100 workers
o Prohibition of lay-off without the prior permission of the government
o Conditions precedent to retrenchment of workmen
o Procedure for closing down an undertaking
§ Chapter 6 specifies penalties for violations of the Act
o Penalty for illegal strikes and Lockouts
o Penalty for giving financial aid to illegal strikes and Lockouts
§ Chapter 7 deals with miscellaneous provisions
o All directors and managers are liable if an offence is committed by a
company
o Employer cannot change the workers’ conditions of service during
pendency of proceedings before boards, courts and tribunals
o Procedure for recovery of money from the employer to the worker
o Unions cannot penalize persons refusing to take part in an illegal strike
§ Second Schedule: matters within the jurisdiction of labour courts:
o 1. The legality of an employer’s order under the standing orders; 2. The
application and interpretation of standing orders; 3. Dismissal of workmen
including reinstatement of workmen wrongfully dismissed; 4. Withdrawal
of any customary concession; 5. Illegality of a strike or lock-out
§ Third Schedule: matters within the jurisdiction of industrial tribunals:
o 1. Wages, including the period and mode of payment; 2. Compensatory
and other allowances; 3. Hours of work and rest intervals; 4. Leave with
wages and holidays; 5. Bonus, profit sharing, provident fund and gratuity;
6. Shift working otherwise than in accordance with standing orders; 7.
Classification by grades; 8. Rules of discipline; 9. Rationalisation; 10.
Retrenchment of workmen and closure of establishment
§ Fourth Schedule: Conditions of service for change of which notice is to be given:
o 1. Wages, including the period and mode of payment; 2. Employer’s
contribution to any provident fund or pension fund; 3. Compensatory and
other allowances; 4. Hours of work and rest intervals; 5. Leave with
wages and holidays; 6. Starting, alteration or discontinuance of shift

working otherwise than in accordance with standing orders; 7.
Classification by grades; 8. Withdrawal of any customary concession or
privilege or change in usage. 9. Introduction of new rules of discipline, or
alteration of existing rules, except as provided in standing orders;
10.Rationalisation, standardization or improvement of plant or technique
which is likely to lead to retrenchment of workmen; 11. Any increase or
reduction in the number of persons employed in any occupation or
process or department or shift, not occasioned by circumstances over
which the employer has no control
Key clauses:
9A. Notice of change

No employer, who proposes to effect any change in the conditions of service applicable
to any workman in respect of any matter specified in the Fourth Schedule, shall effect
such change,-
(a) without giving to the workmen likely to be affected by such change a notice in the
prescribed manner of the nature of the change proposed to be effected; or
(b) within twenty-one days of giving such notice
10. Reference of disputes to Boards, courts or Tribunals

(1) Where the appropriate government is of opinion that any industrial dispute exists or is
apprehended, it may at any time, by order in writing-
(a) refer the dispute to a Board for promoting a settlement thereof
(2) Where the parties to an industrial dispute apply in the prescribed manner, --- the
appropriate government --- shall make the reference accordingly.
11A. Powers of Labour Court Tribunal, and National Tribunal to give appropriate relief in
case of discharge or dismissal of workmen
Where an industrial dispute relating to the discharge or dismissal of a workman has been
referred ---for adjudication and --- the Labour Court, Tribunal or National Tribunal --- is
satisfied that the order of discharge or dismissal was not justified, it may, by its award,
set aside the order of discharge or dismissal and direct reinstatement of the workman ---
or give such other relief to the workman including the award of any lesser punishment in
lieu of discharge or dismissal ---
23. General prohibition of strikes and Lockouts

No workman who is employed in any industrial establishment shall go on strike in breach
of contract and no employer of any such workman shall declare a lock-out-
(a) during the pendency of conciliation proceedings before a Board and seven days after
the conclusion of such proceedings;
(b) during the pendency of proceedings before a Labour Court, Tribunal or National
Tribunal and two months after the conclusion of such proceedings;
(b) during the pendency of arbitration proceedings before an arbitrator and two months
after the conclusion of such proceedings; or
(c) during any period in which a settlement or award is in operation, in respect of any of
the matters covered by the settlement or award.
25C. Right of workmen laid-off for compensation

Whenever a workman --- is laid-off, --- he shall be paid --- compensation which shall be
equal to fifty per cent of the total of the basic wages and dearness allowance that would
have been payable to him had he not been so laid-off
(According to sub-clause (a) of clause (1) of section 25A, this applies to “industrial
establishments in which less than fifty workmen on an average per working day have
been employed in the preceding calendar month”.)
25FFF. Compensation to workmen in case of closing down of undertakings

(1) Where an undertaking is closed down for any reason whatsoever, every workman ---
shall --- be entitled to notice and compensation in accordance with the provisions of
section 25F, as if the workman had been retrenched
25K Application of chapter 5B - (1) The provisions of this Chapter shall apply to an
industrial establishment --- in which not less than 100 workmen were employed on an
average ---.
25M Prohibition of lay -off

(1) No workman (other than a badli workman or a casual workman) whose name is
borne on the muster-rolls of an industrial establishment to which this Chapter applies
shall be laid-off by his employer except with the prior permission of the appropriate
Government or such authority as may be specified by that Government by notification in
the Official Gazette (hereinafter in this section referred to as the specified authority),
obtained on an application made in this behalf unless such lay-off is due to shortage of
power or to natural calamity, and in the case of a mine, such lay -off is due also to fire,
flood, excess of inflammable gas or explosion.
(4) Where an application for permission under sub-section (1) or sub-section (3) has
been made the appropriate Government or the specified authority, after making such
enquiry as it thinks fit and after giving a reasonable opportunity of being heard to the
employer, the workmen concerned and the persons interested in such lay-off, may,
having regard to the genuineness and adequacy of the reasons for such lay -off, the
interests of the workmen and all other relevant factors, by order and for reasons to be
recorded in writing, grant or refuse to grant such permission and a copy of such order
shall be communicated to the employer and the workmen.
(8) Where no application for permission under sub-section (1) is made, or where no
application for permission under sub-section (3) is made within the period specified
therein, or where the permission for any lay -off has been refused, such lay-off shall be
deemed to be illegal from the date on which the workmen had been laid-off and the
workmen shall be entitled to all the benefits under any law for the time being in force as if
they had not been laid-off.
(9) Notwithstanding anything contained in the foregoing provisions of this section, the
appropriate Government may, if it is satisfied that owing to such exceptional
circumstances as accident in the establishment or death of the employer or the like, it is
necessary so to do, by order, direct that the provisions of sub-section (1), or, as the case
may be, sub -section (3) shall not apply in relation to such establishment for such period
as may be specified in the order.
25N Conditions precedent to retrenchment of workmen

(1) No workman employed in any industrial establishment to which this Chapter applies,
who has been in continuous service for not less than one year under an employer shall
be retrenched by that employer until, -

(a) the workman has been given three months' notice in writing indicating the reasons for
retrenchment and the period of notice has expired, or the workman has been paid in lieu
of such notice, wages for the period of the notice; and
(b) the prior permission of the appropriate Government or such authority as may be
specified by that Government by notification in the Official Gazette (hereafter in this
section referred to as the specified authority) has been obtained on an application made
in this behalf.
25-O Procedure for closing down an undertaking

(1) An employer who intends to close down an undertaking of an industrial establishment
to which this Chapter applies shall, in the prescribed manner, apply, for prior permission
at least ninety days before the date on which the intended closure is to become effective,
to the appropriate Government, stating clearly the reasons for the intended closure of the
undertaking and a copy of such application shall also be served simultaneously on the
representatives of the workmen in the prescribed manner
32. Offence by companies, etc.

Where a person committing an offence under this Act is a company, --- every director,
manager, secretary, agent or other officer or person concerned with the management
thereof shall, unless he proves that the offence was committed without his knowledge or
consent, be deemed to be guilty of such offence.

ANNEXURE C – PAST INDIAN LABOR REFORM PROPOSALS
India’s labor laws have not been substantially altered since their adoption in the late
1940s. Besides relatively minor modifications, the only two significant developments in
India’s labor laws in recent decades have been:
§ Amendments in 1976 which inserted Chapter V-B to the Industrial Disputes Act,
requiring government permission for large companies to retrench workers,
making it virtually impossible for even sick companies to close down and retrench
workers
§ Judgments by the supreme court and various high courts that have substantially
extended various laws, covering categories of ‘industries’, ‘workmen’ and forms
of ‘retrenchment’ that were probably never contemplated by the lawmakers
While the body of laws has changed so little, the business environment has changed
rapidly, especially since economic reforms were initiated in 1991. There have been
numerous proposals for reforming labor laws to make them more responsive to changing
business conditions, but the government has largely ignored such proposals.
We discuss below the key findings and recommendations of three such bodies set up by
the government, which have argued for liberalizing our labor laws:
• Montek Singh Ahluwalia committee

• S. P. Gupta committee
• Second National Commission on Labor
1. Montek Singh Ahluwalia committee
This committee, set up by the Planning Commission in January 1999, was called the
‘Task Force on Employment Opportunities’ and was chaired by Planning Commission
member Montek Singh Ahluwalia. Its mandate was “t o examine the existing employment
and unemployment situation in the country and to suggest strategies for employment
generation for achieving the target of providing employment opportunities to 10 crore
people over the next ten years, i.e. one crore on average per year”. The committee
submitted its report in July 2001.
The committee noted with concern the worsening employment scenario in the country in
recent years: (1) the rate of unemployment has increased, (2) employment creation has
slowed, and (3) employment elasticity has reduced drastically.
According to the committee, the central challenge was to promote economic growth and
thereby encourage employment generation. To quote from page 4 of the committee’s
report, “A central message of our report is that the aggregate employment problem in the
country cannot be solved except through a process of accelerated growth which would
create additional demand for labor and also provide the increase in labor productivity
needed to achieve the much needed improvement in employment quality”.

The committee called for dramatic steps to be taken to prevent a rise in unemployment,
and warned that even the relatively high GDP growth rates achieved in recent years
were not sufficient to avoid worsening unemployment. To quote from page 5 of the
report, “Our growth simulations suggest that continuation of 6.5% GDP growth is not
likely to bring about a significant improvement in the employment situation. The
employment elasticities we have used imply that 6.5% GDP growth will only generate
additional employment of 5.9 million per year, leading to a continuing worsening in the
rate of unemployment”.
To create sufficient number of jobs, it is necessary to increase GDP substantially, and to

achieve this, the committee suggest ed the following macro-economic policy measures:
§ Higher rates of investment

§ Improvements in efficiency
§ Improvements in infrastructure
§ Reform of the financial system
§ Credit for the informal sector
§ Sector-specific policies (in areas like agriculture, food processing, etc.)
The committee was blunt in asserting that restrictive labor laws have been primarily
responsible for the increasing unemployment in the country. To quote from page 12,
“Our assessment is that the existing labor laws, and in particular the way they have been
administered and implemented, have this unintended effect of discouraging employers
from investing and expanding in labor intensive areas. This has made us uncompetitive
in these areas in export markets denying us the possibility of large expansion in
organized sector employment. It has also made our producers uncompetitive vis-à-vis
imports in an environment where the economy is increasingly becoming more open, a
trend which is unavoidable and should be continued”.
The committee has recommended several changes to be made in India’s labor laws. The
objective is to create a labor environment that allows companies to operate freely, so
that GDP growth and employment generation are facilitated. The committee has
essentially put forward four basic propositions:
§ Unemployment can only be reduced by boosting GDP growth and facilitating

employment generation
§ The existing system of labor laws in India impose unreasonable restrictions on
companies, thereby hurting GDP growth and leading to higher unemployment
§ Labor reforms are necessary in order to boost GDP and thereby reduce
unemployment
§ Labor reform should include two key elements, (1) freedom for companies to
terminate and retrench workers, and (2) allowing companies to hire workers on
temporary employment contracts
The committee recognized that while the case for reforming labor laws was compelling,
this would face substantial opposition and therefore needs to be addressed tactfully. To
quote from page 12 again, “Reform of labor laws is a particularly sensitive issue and
there is understandable reluctance to proceed with reforms which may appear ‘anti-

labor’. For this reason it is necessary to bring about a better appreciation of the negative
effects of existing labor laws on total employment in the economy and the potential
benefits to labor of introducing greater flexibility”.
While the committee had major recommendations, we list below the recommendation
which will have radical effect on temping is listed below:
Industrial Disputes Act
§ The provisions relating to retrenchment should not apply in cases of termination

due to non-renewal of a fixed term employment contract. Currently, courts have
interpreted non-renewal of a fixed term employment contract as ‘termination’,
though this is contrary to the intention of the contracting parties and the intent of
the legislature while framing the law.
§ Short -term employment contracts should be introduced under which contract
workers can be discharged at the end of the contract period without scope for
dispute.
§ Scrap section 9a, which provides that job content and area and nature of work of
an employee cannot be changed without giving 21 days notice to the employees
(applicable for companies with more than 100 workers).
The Contract Labor (Regulation and Abolition) Act
§ Allow all peripheral activities to be freely outsourced from specialized firms, even
if it means employees of the specialized firms provide the services on the
premises of the outsourcing units
§ Define minimum responsibilities of the outsourcing employer for health and safety
of the workers employed on his/her premises
§ Extend appropriate labor regulation to these outsourcing contractors

2. S P Gupta committee
This committee was set up by the Planning Commission in September 2001, and was
formally called the ‘Special Group on Targeting Ten Million Employment Opportunities
per year over the Tenth Plan Period’. Its chairman was Dr. S. P. Gupta, member of the
Planning Commission, and Chairman of the Tenth Plan Steering Committee on Labor
and Employment. The terms of reference of the committee was: (1) To suggest
strategies and programmes in the Tenth Plan for creating gainful employment
opportunities for 10 million people a year; and (2) To look into sectoral issues and
policies having a bearing on employment generation, and to recommend sectoral
programmes for creation of employment opportunities. The committee submitted its
report in May 2002.
The committee starts by examining the employment data, and concludes that we are
likely to face rising unemployment. “All these Reports bring out a common message that
if the experiences of the late nineties are extrapolated i.e., repeated in future, then India
is going to face increasingly higher incidence of unemployment, with an ever-increasing
gap between the demand for jobs and supply of job opportunities” (page 3 of the
committee’s report).
The committee makes three recommendations to reduce unemployment:
(a) The key to India’s unemployment problem is more legislation. Since majority
of the workforce are employed in the unorganized sector, and employment
growth in the organized sector is stagnating, such legislation has to be
focused on improving the job quality in the unorganized sector. To quote from
page 6 of the committee’s report, “To sum up, the employment strategy for
future, to meet the Plan’s employment goals is to encourage the use of labor
intensive and capital saving technology, in general and to rejuvenate the
growth of the unorganized sector in particular, which at present contributes
92% to the country’s employment and enjoys more than 7 times labor
intensity per unit of production, as compared to the organized sector.
However, the unorganized sector needs to be made more productive to
sustain itself against the domestic and international competition by proper
choice of programmes and policies compatible with India’s economic reforms
and the WTO rules”.
(b) The committee feels that employment generation can be maximized by
developing the unorganized sectors of the economy, such as: (1) agriculture,
especially social forestry, animal husbandry, fishing, horticulture and related
areas, (2) small and medium industries and construction, and (3) services
such as tourism, information technology, financial sector, education and
health.
(c) To promote growth in these unorganized sectors, the committee has
suggested an innovative grassroots-based approach. To quote from page 13
of the report, “In many instances, these proposed changes in policies and
programmes would not entail any significant additional finance. They would
ask for involvement of grassroots enterprise, skills, institutions and often even
indigenous technology. This should be further supported by creation of an
enabling environment by removing all legislative hurdles and bureaucratic
interference”.

3. Second National Commission on Labor
The Second National Commission on Labor (NCL) was set up by the Ministry of Labor of
the Government of India on 15 October 1999 in order to undertake a comprehensive
review of labor laws in India and to suggest specific areas of reform. The NCL was
chaired by Ravindra Varma, and had representatives from the government, unions and
employers’ associations. Its mandate was to (1) suggest rationalization of existing laws
relating to labor in the organized sector; and (2) suggest an Umbrella Legislation for
ensuring a minimum level of protection to the workers in the unorganized sector.
After a comprehensive review of the labor scenario and detailed discussions with
representatives of unions and employers, the National Commission on Labor has
concluded that the current system of labor laws is excessively restrictive, and that it
needs to be liberalized given the changed business environment in India after 1991.
While the NCL has submitted a massive report that runs into 1,468 pages, its key
recommendations on labor reforms are contained in its Chapter VI that deals with
‘Review of Laws’. Essentially, the NCL has recommended the following key changes to
be made in India’s labor laws:
§ Consolidation of all cent ral labor laws into one ‘Labor Management Relations
Law’
§ Simplified law for the unorganized sector, i.e., enterprises employing 19 or fewer
employees
§ All employees to be covered by a social security
§ Strikes to be banned in socially essential services like water supply, medical
services, etc.
§ Employer must be free to close down or retrench workers, with compensation for
workers
§ Prior government permission not necessary for lay off and retrenchment,
provided workers get notice and compensation
§ Resolve labor disputes through arbitration, not adjudication or government
intervention
§ Labor Relations Commissions to be set up at State, Central and National levels,
headed by a sitting or retired High Court judge
§ Contract labor permitted for temporary and seasonal work, but not for core
production or services activities, and for maximum 2 year contracts
§ Restrict unions in terms of minimum 10% votes, ‘check off’ system for negotiating
agent, calling strikes, etc.
To understand what lessons India could learn from China’s experiments with reform, the
NCL visited China and had discussions with government and labor officials. NCL noted
that “China has made spectacular progress in globalization and the post-globalization
scenario, as compared to the tardy progress that India has made” (page 215, clause
4.210 of the NCL report). NCL also studied the labor laws in China and noted that these
provide substantial freedom to companies in managing their labor. For example, NCL
studied the ‘Shanghai Municipal Regulations of Labor and Personnel Management in
Foreign Invested Enterprises’ in detail, and noted the following provisions in this law: (1)

companies can terminate employees with compensation (under circumstances such as
indiscipline, sickness, negligence, incompetence), (2) the labor contract is automatically
dissolved when the employee is charged with a criminal suit or when the employer firm is
dissolved, (3) for dismissed employees, the employer must pay compensation of 1
month’s salary per completed year of work, (4) strikes are neither permitted nor banned,
and instead the law defines four other mechanisms available to workers to redress their
grievances.
Given below are the specific recommendations made by the Second National
Commission on Labor with a bearing on the Temping industry, along with the clause
number in their report:
§ 6.109, Contract labor shall not be engaged for core production/services activities.
However, for sporadic seasonal demand, the employer may engage temporary
labor for core production/service activity. Off-loading perennial non-core services
like canteen, watch & ward, cleaning, etc. will be permitted with the condition
that: (1) perennial core services should not be transferred to other agencies or
establishments; (2) where such services are being performed by employees on
the payrolls of the enterprises, no transfer to other agencies should be done
without consulting the bargaining agents; (3) where the transfer of such services
do not involve any employee, the management will be free to entrust the service
to outside agencies. The contract labor will be remunerated at the rate of a
regular worker engaged in the same organization doing work of a comparable
nature, or if such worker does not exist in the organization, at the lowest salary of
a worker in a comparable grade, i.e. unskilled, semi-skilled or skilled. The
principal employer will also ensure that the prescribed social security and other
benefits are extended to the contract worker.
§ 6.110, No worker should be kept continuously as a casual or temporary worker
against a permanent job for more than 2 years.

ANNEXURE 3 – LABOR REFORM IN CHINA
India has important lessons to learn from China particularly since both were very similar
in the 1950s –size, population, poverty, illiteracy, cultural heritage, colonial legacy, and
socialist ambitions. However, their paths diverged in the 1970s, when China undertook a
series of bold, far-reaching and decisive economic reforms that established private
enterprise and foreign capital as the essential pillars of the economy. Sadly, India took
giant leaps in the backward direction. China has achieved rapid growth and rising
income levels, and its prosperous coastal cities resemble those in Europe and North
America, while India has been a spectacular under-achiever where 70% of the
population still depend upon monsoon rains for sustenance cultivation.
According to our research, there are three fundamental distinctions between the
economic systems in China and India:
(1) Emphasis on growth: The Deng Xiaoping government, which came to power in
China in 1978, placed economic growth as the top priority for the nation. The
government acted decisively to create laws and institutions that promote growth,
and implemented a series of bold steps including legal status for private
companies, incentives for foreign investment, delegated powers to local
governments to attract investments, and membership of the World Trade
Organization (WTO). Unlike the previous decades where Chairman Mao’s
writings represented the ultimate gospel, modern China is driven by Deng
Xiaoping’s mantra that “it is glorious to be rich”. Sadly, Indian politics still
revolves around self- destructive themes, and virtually all the growth has taken
place in sectors like IT that have enjoyed what some gratefully call the “benign
neglect” of the Indian government.
(2) Pragmatism : China experienced stagnation and poverty in the 1960s and 1970s
during the ‘Great Leap Forward’ and the ‘Cultural Revolution’, which inflicted
hardship and misery on millions in the name of ideology. Subsequent
governments have been careful to avoid these mistakes, and have acted with
exemplary pragmatism. For example, China has (1) encouraged trade and
investment from Taiwan which it still considers a break -away province, (2) set up
‘Special Economic Zones’ giving foreign companies almost total freedom, (3)
reclaimed Hong Kong from British rule while giving it autonomy under the ‘1
nation, 2 systems’ framework, and (4) privatized or closed thousands of state-
owned enterprises while retai ning a few large ones. Such pragmatism springs
from the top in China. As Deng Xiaoping put it, “it does not matter whether the
cat is black or white, so long as it catches the mice”. Such pragmatism is rare in
the Indian political economy, mostly preoccupied by rhetoric rather than action.
(3) Labor flexibility: Labor laws in China offer significant flexibility to companies to
hire and fire employees without excessive restrictions. Surprisingly, Communist
China is closer to ‘capitalist’ states like U.S. and Britain in this regard, compared
to even ‘welfare states’ like France and Germany. China has realized that
economic growth and job creation are ultimately more important for workers’
welfare than anti-business legislation.

Background
Nearly 25 years after the onset of economic reforms in China, its macro-economic
environment is characterized by rapid GDP growth, rising income levels, huge foreign
investments, and booming exports. The Figure 3.1 below captures some of the key
economic indicators in China, and presents comparable figures from India to place them
in perspective:
Figure 3.1: Economic indicators: China versus India

CHINA INDIA
GDP $ billion 1,120 480
Population Million 1,300 1,030
Area Billion square km 9.6 3.3
Per capita income $ p.a. 860 465
GDP growth (1990-2000) % 10 6
FDI (in 2001) $ Billion 46.8 2.3
Exports $ Billion 249 43
Source: compiled by TeamLease from various sources
Traditionally, the Communist system in China guaranteed jobs for its people and
provided housing and other amenities. China’s employment philosophy was
characterized by the ‘one low, three high’ principle, which stood for low salary for
workers, high level of benefits for workers, high employment rate, and high level of
government subsidies. Even though job security was assured, income levels and
standard of living were very poor under this ‘iron rice bowl’ system.
Workers received their benefits from their employers (e.g. state-owned enterprises), and
not directly from the government. Under this system, the people of a locality were made
members of the ‘danwei’, or work unit system, in which each person was tied to a
specific organization which provided work as well as benefits like employment, housing,
education and medical care. College students would be allotted to a danwei upon
graduation, and had no choice regarding the type or location of jobs, and were often tied
to their danwei for the rest of their lives.
Economic reforms
China began its economic reforms in 1978, after three decades of communism under
Mao Zedong, and the rise to power of Deng Xiaoping. China’s reforms were slow and
tentative at first, and gathered pace in the early 1990s after the economic boom in the
coastal provinces demonstrated the success of reforms.

Three stages in the reform process
§ Phase 1, 1978–83: The Third Plenum of the Chinese Communist Party’s 11th
Central Committee in December 1978 adopted economic modernization and
growth as the paramount concern of the Communist Party, and emphasized
economic development and individualistic incentives, which encouraged the
growth of the private sector. However, in this phase the private sector developed
without explicit legal recognition and support, and was intended to play a
marginal role to supplement the state sector and fill the gaps in the economy.
Private firms were limited to individual businesses (‘getihu’ or sole proprietary
concerns), and contract farming was introduced in the rural areas. The
development of the private sector involved a typical ad-hoc sequence: (1)
unpublicized experimentation by entrepreneurs who started new ventures with
the support of local officials, (2) general ‘in principle’ approval for such
enterprises from the regional government, (3) ratification and specific regulations
by the government after the reform has become well established.
§ Phase 2, 1984–92: This phase is characterized by ‘siying qiye’ firms (privately

run enterprises, employing more than 8 people) as distinct from the smaller
‘getihu’. In October 1984, the Communist Party issued ‘Decisions about
Economic System Reform’, which tried to reform every aspect of the economy,
including support for town and village enterprises (TVE) in the rural areas, and
reform of state-owned enterprises (SOE). This phase also saw de-facto
privatization of state-owned and collective-owned enterprises that were leased to
private entrepreneurs who paid a fixed rent. Firms could also obtain a license by
paying an administration fee to a collective unit or local government, creating so-
called ‘red hat firms’ that were actually private owners who put on a hat of
collective ownership to evade legal restrictions and harassment.
§ Phase 3, 1993 to the Present: This phase was triggered by Deng Xiaoping’s
famous tour in September 1992 to the prosperous Southern provinces that had
benefited from economic reforms and foreign investment. This later prompted
Deng Xiaoping to make his famous comment that “it is glorious to be rich”,
reflecting the changing economic philosophy of the government. In 1992, the
Fourteenth Party Congress of the Chinese Communist Party declared its new
goal of creating a ‘socialist market economy’. This was followed in 1993 by the
government’s ‘grand strategy’ of transition to a market economy, with an
emphasis on a rule-based system, building of market supporting institutions, and
reform of state-owned enterprises (‘gaizhi’). Subsequent reforms included (1)
liberalisation of foreign investment norms, (2) closure and privatization of state-
owned enterprises, (3) restructuring of the bureaucracy, (4) large-scale
retrenchment of employees from the government and state-owned enterprises,
(5) reforms in banking, agriculture, taxes, exchange rate, and other areas, and
(6) amendment to remove the right to strike from the Chinese constitution. The
Fifteenth Party Congress in September 1997 recognized private enterprise as an
important component of the economy. In March 1999, another milestone was
achieved as private ownership was incorporated into the Constitution.

Privatisation of state-owned enterprises
Until the late 1970s, SOEs were the dominant force in the Chinese economy. Because
the private sector was initially viewed as a supplement to the state sector, China did not
restructure its SOEs in the 1970s and 1980s.
In 1995, China declared a bold policy to restructure SOEs, with the slogan ‘zhuada
fangxiao’, meaning ‘keep the large ones and let the smaller ones go’. The government
proposed to retain only around 1,000 large enterprises owned by the central
government, while all the other SOEs were to be privatized, closed down, or restructured
(through mergers, acquisitions, leasing, or sale to employee-owned cooperatives). SOEs
owned by local governments were targeted for reform (as opposed to larger SOEs
owned by the central government) because they were performing badly, and created a
larger drain on the budgets of the local governments. For example, in 1997 the 500
largest state-owned firms accounted for 37% of all assets held by all state-owned firms,
and contributed 46% of tax revenues collected from all state-owned firms and 63% of
their total profits. While 24% of SOEs owned by the central government were making
losses in 1995, 72% owned by local governments were loss making.
The process of SOE reform in China has been quick as well as dramatic. More than 81%
of the 63,490 small-sized SOEs (i.e., more than 50,000) had been privatized, sold or
restructured by 2000. In 2000 around 2,800 bankruptcy and merger proposals among
SOEs were approved, and 1,504 of these implemented, with a total write-off of RMB 81
billion (Rs. 45,300 crores). The vast majority of companies and workers in China are now
in the private sector, and this has totally changed China’s economic landscape. While
SOEs accounted for 77% of industrial output in 1978, by 1998 its share had shrunk to
just 31%.
Key Features of Reforms
§ Experimentation under uncertainty: Private business was permitted in the late

1970s in order to tackle economic stagnation and rising unemployment. It has
evolved through cycles of unpublicized experimentation, followed by general ‘in
principle’ approval, then by ratification and specific regulations.
§ Dual -track approach: Initially, the private sector was expected to complement
the state sector and was tolerated in areas where state enterprises did not exist,
such as agriculture, services, and light industry. This protected state-owned
enterprises and bureaucrats from competition, and reduced opposition to
reforms, enabling reformers to avoid ideological debates, as well as to highlight
successful reforms to encourage further reforms.
§ Decentralization: Local governments have a high degree of autonomy, and the

fiscal contracting system rewards local governments for promoting economic
development in their areas. This system, called ‘eating from separate kitchens’,
replaced the previous centralized system, and allowed the local governments to
experiment with various reforms without disrupting the organization as a whole.
§ Reforming the bureaucracy: The government mandatorily retired the

‘revolutionary veterans’ in the bureaucracy, launched administrative and fiscal

decentralization, and allowed bureaucrats to quit the bureaucracy and join
businesses. These reforms have forced the bureaucracy to support economic
development and promote the private sector.
§ Start with agriculture: Agriculture was the starting point for reforms in China,
which also reduced political and bureaucratic opposition since the bureaucrats
had little vested interests in poor rural areas. The success of these agricultural
reforms created powerful forces that supported further reforms – e.g. the extra
income from agriculture was channeled into the industries in rural areas and
fueled a boom among ‘town and village enterprises’ (TVE, or the non-state
industrial sector), which created pressure for the reform of the overall state
sector.
Employment
China has a population of 1,300 million, and its labor force is around 724 million. While
economic growth has been rapid, China also faces massive unemployment. While
employment data in China is somewhat unreliable, various estimates place China’s
unemployment rate between 3% and 10%. Some estimates from leading agencies are
shown below:
§ According to official estimates, out of China’s workforce of 724 million, 26 million

are unemployed, and the unemployment rate is 3.5%.
§ Official statistics suggest that at mid-2001 the unemployment rate in urban areas
was around 3.2%, or 6.6% if workers laid off from state-owned enterprises are
included.
§ According to the ‘Green Paper on Population and Labor’ published by the

Chinese Academy of Social Sciences in 2002, the unemployment rate is 7%,
though the official rate is just under 4%.
§ According to statistics from the Information Center under the Ministry of Labor,
registered unemployment stood at 3.1% in 1997 and 1998.
§ According to the Development Research Center of China’s State Council,

unemployment was around 10% percent since the mid 1990s, and as high as 13-
15% in 1997 and 1998.
Unemployment in China is expected to rise dramatically in the years to come. China’s

workforce is increasing by 13 million per year, and around 7 million workers are laid off
every year from state-owned enterprises being closed down, while only around 11 million
new jobs are being created every year. Based on these, the unemployment rate for the
next decade is predicted to exceed 10%.
Unemployment is much higher in the interior regions of China, where the problem has
even led to workers’ riots. Economic stagnation and closure of state-owned enterprises
in the rural areas have left around 150 million people out of work. Millions of these
unemployed people are expected to migrate to the cities in the coming years, putting

pressure on the infrastructure in the over-populated cities. According to certain sources,
there are 24 million unemployed people in China, 70 million are migrants from the rural
areas to cities, 42 million are poor farmers, and around 12 million are ‘xiagang’ workers
made redundant in privatized state-owned enterprises. In spite of the tight restrictions on
demonstrations and political activity, China has witnessed several workers’ riots in recent
years, most of them led by the jobless ‘xiagang’ workers.
Social security
Since China’s market reforms of 1978, the responsibility for workers’ benefits has
gradually shifted from the government to the workers themselves. This is mainly due to
the severe funds shortages faced by the government. For example, the pension system
in China has a deficit of over $10 billion, and is technically bankrupt. As a result, some
pension fund payments have been delayed, and at least 100 million eligible pensioners
never receive payments. The situation is expected to grow more serious in the coming
years, with the number of retirees growing at twice the rate of new workers entering the
workforce.
In response, the Chinese government has shifted the responsibility for social security to
the workers, by introducing two major changes:
§ It has moved away from so-called “defined benefit” schemes to “defined

contribution” schemes. Previously, workers used to get certain guaranteed
benefits from the government, e.g. pensions were fixed as a percentage to the
last drawn salary. Now the benefits received by workers are based upon the
contributions made by the worker and his employer towards a social security
fund, and the government has no liability. By shifting to a “defined contribution”
scheme, the government has wriggled out of its huge liabilities in paying
pensions and other benefits to workers.
§ Social security has been partially privatized, such that the worker receives health
and other benefits from private insurance companies, and not from the
government. The worker and the employer pay a certain share of salary towards
purchasing insurance policies from private insurance companies. The insurance
company pays the worker a pension, medical benefits and unemployment
benefits in accordance to the premium that has been paid by the worker. Thus
workers who have worked for longer periods, who have made larger premium
contributions to the insurance company, receive larger benefits compared to
workers who have worked for shorter durations.
The measures relating to such social security benefits are contained in China’s Labor
Law of 1995, which read as follows:
§ Section 70 of China’s Labor Law of 1995 states that: “The State shall develop
social insurance undertakings, establish a social insurance system, and set up
social insurance funds so that laborers may receive assistance and
compensations under such circumstances as old age, illness, work -related injury,
unemployment and child bearing”.

§ Section 72: “The sources of social insurance funds shall be determined
according to the categories of insurance, and an overall pooling of insurance
funds from the society shall be introduced step by step. The employing unit and
laborers must participate in social insurance and pay social insurance premiums
in accordance with the law”.
§ Section 73: “Laborers shall, in accordance with the law, enjoy social insurance
benefits under the following circ umstances: (1) retirement; (2) illness or injury; (3)
disability caused by work-related injury or occupational disease; (4)
unemployment; and (5) child bearing”.
Training
China’s educational system stagnated during the years of the Cultural Revolution (1966-
1976), when all schools and colleges were closed to prevent “anti-revolutionary
activities” by intellectuals, and millions of teachers and educated people were sent to
prison or labor camps. This was a sad period in Chinese history when a whole
generation lost the opportunity to learn, work and live a normal life. Schools and colleges
began to operate normally only after 1978, when China undertook major economic
reforms.
While the government has invested large sums of money in building the educational
infrastructure, China still has poor levels of education and training, especially in terms of
the proportion of population having a college degree or technical training. For example,
according to the Chinese census of 2000, the percentage of the population with
university education rose steeply from 1.42% in 1990 to 3.61% in 2000, or a rise of
154%. However, according to the Chinese government, even by 1995 only 10% of
individuals entering the workforce had a university education. In 1999, only 11% of the
Chinese population had enrolled for college degrees, compared to 48% in Japan and
51% in the US. Not surprisingly, China faces a severe shortage of qualified local
candidates for managerial and technical positions, especially in the coastal regions
where large job opportunities have been created.
Income levels
The Chinese government specifies the minimum salary that all workers in China must be
paid. Currently, the minimum salary is RMB 450 (i.e., $55 or Rs. 2,585) per month. This
implies an annual minim um salary of $660 (Rs. 31,000) per year. However, China’s per
capita income is only around $860 per year, which means that a majority of casual
laborers and self- employed workers receive less than the minimum legal salary.
The government has specified that the maximum duration of work must not exceed 176
hours per month. The minimum hourly wage in China is thus $0.33, or Rs. 16 per hour.
Where workers are employed beyond 176 hours per month, Chinese law requires
employers to pay overtime pay at two times the minimum wage.
Workers in China’s state-run factories typically are paid around $150 (Rs. 7,500) per
month. Apart from pay, they also receive medical, retirement and unemployment
insurance.

While workers in some ‘sweatshops’ in the coastal regions receive poor pay and working
conditions, studies indicate that most workers in these regions receive attractive pay and
benefits. A survey by the Beijing Youth Post in April 2002 found that pay levels in the
coastal regions are the highest in China:
Figure 3.2: Booming salary levels in China’s coastal regions

City 2001 Average Annual Salary Increase from
RMB US$ Rupees 2000, %
Guangzhou 22,772 $2,751 129,297 15.70%
Shanghai 21,781 $2,632 123,704 17.50%
Beijing 19,155 $2,314 108,758 17.20%
Tianjin 14,308 $1,729 81,263 n/a
Chongqing 9,523 $1,151 54,097 n/a
Urban average 6,860 $829 38,963 8.50%
Rural average 2,366 $286 13,442 4.20%
Source: Various websites referring to survey by Beijing Youth Post newspaper
dated 1 April 2002 (Rupee salary calculated at Rs. 47 per $)
The pay is even more attractive for professionals in the major cities of China, where
there are lots of vacancies for engineers, accountants, lawyers and other professionals
and few candidates. For example, the average pay for professionals with 5 years
experience is $15,000 (Rs. 7,50,000) per year.
There are also large differences in the pay offered by private and state-owned firms. For
example, according to a survey conducted by the Guangzhou Association for Labor
Administration in 2001, general managers in foreign-invested companies in Guangzhou
province earned around $48,072 (Rs. 2,400,000 per year) annually, while their
counterparts in SOEs earned only around $14,000 (Rs. 700,000 per year).
During 1998-2000, income levels of households in the top decile grew by 9.3% per year,
compared to only 1.2% for the bottom decile. In the urban areas, income levels in the top
decile grew at 9.7% per year compared to just 2.7% in the bottom decile.
There is a severe shortage of qualified local candidates for managerial and technical
positions in China, especially in the booming coastal regions. This has led to poaching of
personnel from other companies; sharp rises in salaries (e.g. salaries often double within
a few years); and increased job -hopping among employees (e.g. average retention for
good English-speaking candidates is only 1-2 years). There will continue to be a severe
shortage of local managers in China, and it is estimated that there will be at least 8 good
jobs for every trained local Chinese mid- to senior-level manager for the next 2 decades.
Faced with labor shortages, especially in new and hi-tech industries, China has attracted
large numbers of expatriates from North America and Europe. Typical salaries for
expatriates were around $300,000 (Rs. 15,000,000) per year, including living expenses,
hardship allowances, education allowances, and annual bonuses.

Labor laws
Termination
China has liberal laws allowing companies to terminate and layoff workers without
excessive restrictions. These provisions are contained in China’s 1995 Labor Law, which
lays out the rules regarding termination:
§ Section 25 of China’s Labor Law of 1995 allows companies to terminate

employees on disciplinary grounds, without having to pay any compensation to
the worker. This provision is applicable where the worker:
o Is proved to be “not up to the requirements for recruitment during the
probation period”
o “Seriously violates labor disciplines or the rules and regulations of the
employing unit”
o Causes “gre at losses to the employing unit due to serious dereliction of
duty or engagement in malpractice for selfish ends”, or
o Is “investigated for criminal responsibilities in accordance with the law”
§ Section 26 allows companies to terminate employees with 30 days’ notice and

upon payment of compensation (one month’s pay), in these circumstances:
o “Where a laborer is unable to take up his original work or any new work
arranged by the employing unit after the completion of his medical
treatment for illness or injury not suffered at work”
o “When a laborer is unqualified for his work and remains unqualified even
after receiving a training or an adjustment to any other work post”
o “No agreement on modification of the labor contract can be reached
through consultation by the parties involved when the objective conditions
taken as the basis for the conclusion of the contract have greatly changed
so that the original labor contract can no longer be carried out”
§ Section 27 allows termination of employees when the company is facing serious

problems, provided workers are given 30 days notice and have been paid
compensation (one month’s pay). The provision reads as follows:
o “During the period of statutory consolidation when the employing unit
comes to the brink of bankruptcy or runs into difficulties in production and
management, and if reduction of its personnel becomes really necessary,
the unit may make such reduction after it has explained the situation to
the trade union or all of its staff and workers 30 days in advance, solicited
opinions from them and reported to the labor administrative department”.
o “Where the employing unit is to recruit personnel six months after the
personnel reduction effected according to the stipulations of this section,
the reduced personnel shall have the priority to be re-employed”.
It is surprising that Communist China has liberal laws that allow companies to hire and
fire workers without excessive restrictions, while India has rules that make it virtually
impossible for companies to terminate workers, even when the company is sick and
unviable, or when the worker is guilty of indiscipline and violence. In this respect,
Communist China is closer to ‘capitalist’ states like U.S. and Britain than even to ‘welfare

states’ like France and Germany. Sadly, while China has succeeded in attracting large
foreign investments, creating millions of high -paying jobs and boosting its exports, Indian
business is constrained by outdated laws that destroy companies’ ability to operate
freely and compete in global markets.
Trade unions
China’s unique combination of a market economy within a communist state poses

peculiar challenges for its trade unions. On paper, Chinese unions appear very powerful.
For example, all unions are required to be affiliated to the All China Federation of Trade
Unions (ACTFU), which is controlled by the government. The ACFTU is the apex body of
31 provincial-level trade unions and 900,000 grass roots trade unions, and has 103
million members. All Chinese workers are automatically members of trade unions in their
workplaces, and it is mandatory for employers to pay fees equal to 2% of wages to
support local trade unions.
However, in reality the unions in China are relatively powerless, for these reasons:
§ The right of workers to strike has been removed from the Chinese constitution,
and does not seem to be supported by labor laws. This was commented upon by
the National Commission on Labor, the tri-partite body set up by the government
of India to suggest labor reforms, which visited China to study Chinese labor laws
in detail. In page 207 (clause 4.166) of their report, the National Commission on
Labor notes that the ‘Shanghai Municipal Regulations of Labor and Personnel
Management in Foreign Invested Enterprises’ do not mention strikes at all.
Instead, it defines four other mechanisms available to workers to redress their
grievances, (1) mutual talks, (2) approach the ‘Mediation Centre’ required in
every enterprise, (3) arbitration by the government, and (4) adjudication by the
courts. Clearly, the Chinese government has taken great care to ensure that
labor laws do not restrict companies from operating freely, especially foreign
invested enterprises which are seen as the engine behind the economic miracle
in China’s coastal provinces.
§ Unions are controlled by the Chinese Communist Party, and union officials are
part of the government machinery. Workers have to accept the decisions of the
Chinese government, which has ultimate responsibility for workers’ welfare. They
cannot agitate for their rights and benefits on their own, even when they face
widespread layoffs, closure of state-owned enterprises, lack of social security,
etc.
§ State-owned enterprises (SOEs) are controlled by Communist party, which also

controls all the unions in China. This gives rise to a peculiar situation: if there is a
dispute between unions and management in a state-owned enterprise, the
Chinese government sits on both sides of the negotiating table. Therefore, unions
have no power to confront managements of state-owned enterprises.
§ Labor disputes are resolved through discussions with between employers and
labor ministry officials rather than negotiations with unions. Unions have no real
powers to undertake collective bargaining.

§ China has strict controls on freedom of speech and association, which restrict the
ability of unions to function freely. Chinese laws prohibit all anti-government
protests and demonstrations, and prescribe severe punishment for such
“subversive” and “treasonable” activities. China’s government has suppressed
“independent” unions that are not controlled by the Communist party, and has
often jailed union leaders. For example, in May 2003 the government arrested
two union leaders for organizing demonstrations in the north-eastern city of
Liaoyang, where millions have lost their jobs due to closure of state-owned
enterprises, and charged them with “subversion of state power” and for having
contact with “hostile elements and foreign media”, serious crimes that carry the
death penalty.
It is ironical that workers in the socialist people’s democratic dictatorship of China have
less protection than their counterparts in the capitalist economies of the West. Moreover,
the massive migrations of jobless peasants suggests that workers prefer the superior job
opportunities, wages and standard of living in the “capitalist” coastal regions than the
“iron rice bowl” in the interior regions.
Other provisions
China’s Labor Law of 1995 contains two provisions that are absent in India’s labor laws:
(1) prohibition of child labor, and (2) standard format for an employment contract.
§ Section 15 of China’s Labor Law of 1995 prohibits child labor. It says that “No
employing units shall be allowed to recruit juveniles under the age of 16”. This is
in contrast to The Child Labor (Prohibition And Regulation) Act of 1986 in India,
which does not prohibit child labor – it merely prohibits the use of child labor in
certain hazardous occupations, and in fact specifies the conditions of under
which child labor can be used in other occupations.
§ Section 19 prescribes the format for an employment contract. It says that an

employment contract must “be concluded in written form and contain the
following clauses: (1) term of labor contract; (2) contracts of work; (3) labor
protection and working conditions; (4) labor remuneration; (5) labor disciplines;
(6) conditions for the termination of a labor contract; and (7) responsibility for the
violation of a labor contract”. There is no such parallel in India’s labor laws, where
employers and employees are free to frame contracts according to their
preferences. This is fortunate since contract terms are best left for the parties to
freely contract, and specifying the format of such contracts amounts to
unnecessary micro-management.
Employment by foreign companies
In 1979, the Chinese government created the Foreign Enterprises Services Company
(FESCO) to make it easy for foreign companies to recruit staff and comply with labor
laws, while also ensuring that workers’ rights are protected. Technically, Chinese
workers are employed by FESCO which “rents” them to the foreign company; hence all
labor laws are applicable to FESCO and not to the foreign company. FESCO
recommends qualified candidates to the foreign company, provides workers the benefits
guaranteed by the government, helps the foreign company comply with employment

formalities (e.g. residence permits, passport applications), and helps settle labor
disputes. In return, FESCO charges recurring fees of around 30% of the employee’s
compensation, in addition to a one-time recruitment fee.
FESCO offers Chinese employees: (1) salary as agreed to by the foreign company, (2)
medical reimbursement of 70-100% of medical expenses beyond a threshold amount per
year (RMB 300, or Rs. 1,700), (3) unemployment insurance, (4) salary for part-time staff
at a rate equal to two-thirds of the full-time rate, though no benefits are provided to part-
time employees. However, this dual employment structure – with FESCO as the nominal
employer and foreign companies as the de facto employer – can also cause problems.
Since they employees are “leased” to foreign companies, they have less control over
salaries, productivity, promotion, and termination. In addition, FESCO also charges a
large fee for its services.
Immigration reforms
Due to the shortage of skilled labor in coastal regions, the Chinese government has
changed immigration laws to attract overseas professionals. Long term or permanent
residency status will be granted to overseas professionals involved with expertise in
information technology, biotechnology, new materials and manufacturing technology, as
well as aviation and aerospace technology. The new immigration law will apply to
overseas Chinese, Chinese returnees, as well as expatriates.
New regulations have also been introduced to make it easier for foreign headhunting
firms to gradually enter the Chinese job market. Since October 2002, foreign
headhunting firms have been officially allowed to form joint ventures with local recruiters
to do business in China.
Impact of reforms
The economic reforms in China, and in particular the labor reforms, have created a huge
and widening gulf between the prosperous coastal provinces where private companies
and foreign investment have been encouraged, and the interior regions where inefficient
and loss-making state-owned enterprises are facing stagnation or closures.
In the coastal areas, export-oriented units have created vast employment opportunities
for millions in industries like toys, electronics, light manufacturing, chemicals, and so on.
These companies pay much higher wages than state-owned enterprises, and offer better
working conditions as well.
The large employment opportunities created in the coastal regions has created a severe
manpower shortage in the SEZs in coastal China. This has led to poaching of candidates
from other companies, rapid rise in salaries and increasing employee turnover.
As found in the survey by the Beijing Youth Post newspaper, the average annual
salaries for workers in the coastal areas was more than three times the average salaries
in the interior areas. Salaries in the most developed areas like Guangzhou and Shanghai
were almost ten times higher.

The employment opportunities in the coastal areas have attracted numerous expatriates
from the U.S., U.K., and other Western countries, in addition to large numbers of
overseas Chinese from countries like Malaysia, Indonesia, Taiwan, and so on.
The success of reforms in China has disproved the conventional wisdom that avast and
populous country like China should not follow the export-oriented market -reforms
followed by Korea, Taiwan, Singapore and other East Asian countries.
While the situation is positive in the coastal areas where private companies and foreign
investment is encouraged, the situation is bleak in the interior provinces where there are
few private firms, and where large losses incurred by the inefficient state-owned
enterprises are forcing the government to close down or privatize these units and
retrench their workers.
Contrary to official statistics, estimates suggest that unemployment in the interior

provinces have reached alarming proportions, with as many as 150 million out of work.
It is ironical that labor laws in Communist China offer substantial freedom to companies
to hire and fire employees, similar to ‘capitalist’ states like U.S. and Britain. This is a
reflection to the pragmatic leadership of Chinese government, which has realized that
economic growth and job creation are ultimately more important for workers’ welfare
than populist anti-business measures aimed at ‘protecting’ workers.

Lessons for India
We believe that China’s experiences hold important lessons for India’s reforms, as we
start from a similar state of backwardness and face similar challenges. The Figure 3.3
below summarizes the key differences between labor scenario in India and China:
Figure 3.3: Labor reforms: China versus India

CHINA INDIA
Economic indicators
Population 1,300 million 1,030 million
Area 9.6 billion square km 3.3 billion square km
GDP $ 1,120 million $ 480 million
Per capita income $ 860 per year $ 465
Exports $ 249 billion $ 43 billion
Foreign direct $ 46.8 billion $ 2.3 billion
investment (in 2001)
Fex reserves $ 365 billion $ 85 billion
Employment
Size of work force 724 million 406 million
Labor force 56% 39%
participation rate
Unemployment 3.5% to 10% (estimates vary) 7.32%
Likely future Above 10% Above 10%
unemployment rate
Legal minimum wage $ 55 (Rs. 2,585) per month $ 41 (Rs. 1, 937) per month
Economic reforms
Economic philosophy After a series of reforms since Half-hearted reforms were
1978, the 14 th Party Congress of initiated in 1991 during a fiscal
the Chinese Communist Party in crisis, under pressure from IMF
1992 declared the goal of creating and World Bank. Even today,
a “socialist market economy” by politicians oppose reforms to
actively encouraging private exploit vote banks.
companies and foreign investment
Key events Deng Xiaoping’s tour to the The 1970s, when the
Southern provinces in 1992, government (1) took over textile
where he saw the benefits of mills and banks, (2) drove away
economic reforms and foreign Coke and IBM, (3) amended the
investment constitution to remove the
fundamental right to property,
and (4) amended the Industrial
Disputes Act
Guiding mantra “It is glorious to be rich”, says “Garibi hatao”, which resulted in
Deng Xiaoping, supreme head of reckless populism, fiscal
irresponsibility, and anti-

the Communist state of China business laws
Entry of foreign Strong focus on attracting foreign Reluctance to take foreign
companies investment. Central, regional and investment; seen as “neo
local governments competeto colonialism”. FDI in India is just
offer incentives for FDI 5% of what China receives.
Special Economic Started since 1979, SEZs in China Lots of talk but no action, as
Zones have been hugely successful in ministries argue over who
attracting foreign companies with should have jurisdiction and
liberal rules what rules should apply.
Privatization of public Around 50,000 state-owned units Very few units have been
sector units have been sold, leased or closed. privatized, that too after intense
The “zhuada fangxiao” policy opposition and controversy.
seeks to retain only 1,000 large Ministers and bureaucrats fight
state-owned enterprises and to prevent privatization of units
privatize all the others attached to their ministry.
Reforming the Push for reforms from the top of Bureaucrats oppose reforms in
bureaucracy the Communist Party, and the order to maximize perks and
bureaucracy has no option but to patronage, and are not
support reforms accountable.
Workers’ rights
Freedom of expression Strictly controlled. Anti- Constitutionally guaranteed
and association government protests and
demonstrations are banned
Independent unions Banned. All unions have to be Permitted. Any 7 persons can
affiliated to the government-run All create a union
China Federation of Trade Unions,
and are government controlled
Freedom of unions Independent union leaders are Permitted.
routinely jailed, and could face the
death penalty for “subversion”
Right to strike Limited. The right to strike was Permitted.
removed from the constitution
Ability to redress Minimal. Unions are controlled by Permitted. Unions are most
workers’ grievances the government, which also runs powerful in public sector
state-owned enterprises. companies.
Termination of workers
Termination for Section 25 of China’s labor Law of Difficult, since the employer has
disciplinary reasons 1995 allows termination of to follow cumbersome
employees for disciplinary procedures, and labor courts
reasons, without compensation. usually order reinstatement
Termination when Section 26 of China’s labor Law of Difficult, since it can be treated
worker is sick and 1995 allows companies to as an “industrial dispute”, and
unable to work terminate employees with 30 days’ labor courts can order
notice and compensation. reinstatement
Termination when Section 26 of China’s labor Law of Difficult, since it can be treated
worker is unqualified to 1995 allows companies to as an “industrial dispute”, and
perform the work terminate employees with 30 days’ labor courts can order

notice and compensation. reinstatement
Termination when work Section 26 of China’s labor Law of Difficult, since it can be treated
conditions have 1995 allows companies to as an “industrial dispute”, and
changed and there is terminate employees with 30 days’ labor courts can order
union deadlock notice and compensation. reinstatement
Retrenchment due to Section 27 of China’s labor Law of Section-25 of Industrial Disputes
sickness or economic 1995 employee termination with Act makes it impossible for a
viability 30 days’ notice and compensation company with over 300
if it “runs into difficulties in employees, even if it is sick and
production and management” unviable
Social security
Philosophy towards “Defined contribution” scheme. “Defined benefit” scheme under
social security Workers pay premiums to private which benefits are guaranteed
insurance companies and receive by the government.
various benefits from them.
Pensions Workers pay premiums to Government and PSU
insurance companies and receive employees get fixed pensions
pensions based on their guaranteed by the government,
contributions. The government regardless of their contributions
assumes no liability. to the pension fund.
Medical benefits Workers pay health insurance Workers get health benefits from
premiums and receive medical ESI hospitals and
coverage based on their reimbursement of medical
premiums. The government expenses, regardless of their
assumes no liability. contributions to the fund.
Unemployment Workers pay insurance premiums Virtually absent, though some
benefits and receive unemployment state governments offer nominal
insurance benefits based on their benefits (e.g. Rs. 100 per
premiums. The government month)
assumes no liability.
Other issues
Use of child labor Section 15 of China’s labor Law of The Child Labor (Prohibition And
1995 bans employment of children Regulation) Act of 1986 does
below 16 years not prohibit child labor. The Act
prohibits it only in certain
hazardous occupations, and
specifies conditions where it can
be used in other occupations.
Employment contract Section 19 of China’s labor Law of No such provision. Companies
1995 specifies the format of an and employees are free to frame
employment contract. their contracts.
Source: Compiled by TeamLease from various sources

What the 2nd National Commission on Labor says about China
To understand what lessons India could learn from China’s experiments with reform, the
2 nd National Commission of Labor set up by the government of India visited China and
had discussions with government and labor officials. The NCL noted that “China has
made spectacular progress in globalization and the post-globalization scenario, as
compared to the tardy progress that India has made” (page 215, clause 4.210 of the
NCL report). Regarding China’s system of labor laws, NCL studied the local laws
applicable in Shanghai, contained in the ‘Shanghai Municipal Regulations of Labor and
Personnel Management in Foreign Invested Enterprises’. NCL noted that these laws
provided substantial freedom to companies in managing their labor. We give below the
detailed provisions in Shanghai’s labor law as quoted in the NCL report:
Article 13 & 14 & 18 of Shanghai’s labor laws prescribe the conditions under which an
employee can be terminated. According to Article 13, “the foreign invested enterprise
may dissolve the labor c ontract and fire its employees upon one of the following
circumstances (page 202, clause 4.148 of the NCL report):
1. When the employee is proved unqualified during the probation period;

2. When the employee, due to sickness or non-working related injury, is unable either to
continue the work or to take other posts reassigned by the enterprise after a
designated medical care period;
3. When the employee is in serious violation of labor disciplines or of relevant
regulations of the enterprise;
4. When the employee seriously neglects his/her duty or is engaged in malpractice for
self ends, thus causing huge losses of the enterprise’s interests;
5. When the employee is incompetent for doing the job and after training or change of
the post, is yet incompetent for doing it;
6. When the particular circumstances under which the labor contract is concluded
undergoes great changes so that the labor contract can no longer be implemented,
and the concerned parties cannot reach an agreement to change the contents of the
labor contract;
7. When there are other particular terms defined in the labor contract.”
Article 14 of Shanghai’s labor laws says that “the labor contract is automatically
dissolved upon one of the following circumstances: (1) When the employee is charged
with a criminal suit, enforced to labor reform or sentenced to prison; (2) When the foreign
invested enterprise is dissolved or terminated” (page 203, clause 4.149 of the NCL
report).
Article 18 of Shanghai’s labor laws says that a Chinese employee dismissed by a foreign
invested enterprise shall get economic compensation from the enterprise in the light of
the employee’s service length in the enterprise. Those whose service length is less than
one year shall get economic compensation equivalent to their half a month’s actual
salary; those whose service length is more than one year shall get economic
compensation equivalent to their one month’s actual salary for each working year, but
the maximum shall not exceed twelve months’ actual salary” (page 203, clause 4.150 of
the NC L report).

The NCL notes that labor laws in Shanghai do not mention strikes at all, and strikes are
neither permitted nor banned. Instead, the law defines four other mechanisms available
to workers to redress their grievances, (1) mutual talks, (2) approach the ‘Mediation
Centre’ required in every enterprise, (3) arbitration by the government, and (4)
adjudication by the courts (page 207, clause 4.166 of the NCL report).
Even though the NCL found the Chinese reforms to be very successful, it did not want to
follow the Chinese model of labor law in India for two reasons. (1) The NCL felt that “it is
not true to say that the employer in China is completely free to set up and close
enterprises or to hire and fire at will”, and that “it will be erroneous to think that ‘flexible’
labor laws are the main reason for China’s progress” (page 215). (2) The NCL felt that
the environment in India is fundamentally different from what in China, and hence we
cannot blindly adopt China’s laws (page 209 of the NCL report).

ANNEXURE 4 – LABOR REFORM IN OTHER ASIAN COUNTRIES
SINGAPORE
Singapore’s experiments with industrial relations are unique in several ways: (1) it
follows a successful tripartite approach towards managing labor issues, (2) it places
emphasis on training and skill development in order to transform the country into a post-
industrial economy, (3) it highlights the unique problems of an democratic system where
the government has extensive powers and political freedom is restricted.
Background
Singapore’s labor system is built around a tri-partite system that encourages workers,
employers and the government to work together to solve common problems. It was in
1972 that the tripartite National Wages Council (NWC) was established to help build
labor-management relations through negotiations and consensus. This tri-partite policy is
to some extent based on Singapore’s peculiar system of one-party democracy and
government control over the dominant union. However, this pragmatic approach has
been successful in devising solutions to several of Singapore’s labor problems.
The tri-partite system has its roots in the circumstances surrounding Singapore’s birth as
a nation in 1965, when it faced political and economic turmoil after separating from
Malaysia. With the GDP shrinking, unemployment rising, and the nation’s survival at
stake, the government, employers and unions were forced to abandon adversarial
positions and adopt more cooperative labor-management relations. By the end of the
1970s, Singapore had attracted large foreign investments, increased its GDP and per
capita income, achieved full employment, and improved the standard of living. Singapore
faced serious challenges due to its limited geographical area, limited population and
natural resources, and competition from neighbors who could offer cheaper labor costs.
However, it was able to achieve a harmonious industrial environment that helped
businesses to grow, and helped workers raise their income levels and standard of living
to western levels.
Singapore government has also been active in developing the skill base of the
workforce. This policy was begun in the late 1970s when the government made a
visionary decision that fundamentally impacted the economic fortunes of Singapore. The
government decided to encourage capital-intensive, high-skilled, high-technology
industries instead of the labor -intensive, low-skilled industries that were more common in
East Asia. In 1979, the government set up a Skills Development Fund to facilitate
workers’ training, and imposed a payroll tax on companies requiring them to contribute to
this fund. Companies were encouraged to invest in training their workers, and received
subsidies from the Skills Development Fund to offset the cost of worker training for
approved courses.
The Singapore Labor Foundation (SLF) was set up in 1977 by an Act of Parliament to
improve the welfare of union members. Funded by union members, SLF provides
financial assistance to families of workers who suffer disability, illness or death, as well
as free disability and life insurance for all union members under a group insurance
scheme.

Singapore’s social security system is built around the Central Provident Fund, which was
established in 1955. In addition, the government also has schemes to provide workers
with affordable housing, health, and education.
Singapore has a population of 4 million and a work force of 2 million.
Labor reforms
Singapore does not fit the classic case of labor ‘reform’, where a country starts with a
dysfunctional labor system and achieves favorable outcomes by making appropriate
changes. Instead, Singapore is a successful example of a country that has achieved
rapid growth, high income levels and standard of living by consciously following a labor-
management relationship that helps businesses grow while providing benefits and
support for workers.
This is best seen in Singapore’s tri-partite system and its focus on workers’ skill
development, which have been successful in devising solutions to several of Singapore’s
labor problems. This was especially evident during the two recent recessions where
cooperation between unions, employers and the government helped to minimize
unemployment and mitigate the impact of recession:
§ Recession of 1985: The government set up a tripartite Economic Committee,

which recommended several measures to address the problems faced, by
companies and employees. These include: (1) wage restraint in the immediate
term, (2) reform of the long-established seniority -based wage system to a more
flexible system for longer-term competitiveness, (3) addressing the longer-term
constraint of limited human resources, e.g. by increasing female labor force
participation, encouraging employment of older workers, and extending the
retirement age beyond 55 years. A tripartite Wage Reform Sub-committee looked
into the issues of wage cuts, and accepted a 15% cut in the employers’ CPF
contributions (against the usual level of 25%). As the economy improved,
employers restored workers’ wages, and full employment was achieved. Unions
and management also worked out a flexible wage system with variable bonus
payments that were closely matched to company and industry performance,
which provided workers with a minimum of 1 month and upto 5-9 months bonus
each year.
§ East Asi an crisis of 1997-98: The government set up a tripartite Committee on

Singapore’s Competitiveness which recommended (1) cost-cutting measures in
the short term, including cut in wages and other business costs, and (2) longer
term measures to build economic capacity through skills upgrading, expanding
trade with growing economies, and economic restructuring. In November 1998,
the tripartite National Wages Council recommended four steps to address the
problem. These were: (1) 5-8% cut in workers’ wages, (2) 10% cut in employers’
CPF contributions, (3) moderate wage cuts for lower-income employees and
deeper cut for executives, and (4) employers, unions and workers to continue to
work together to strengthen Singapore’s competitiveness, preserve jobs and
enhance employability. To provide assistance to retrenched workers, a tripartite
panel was created, which created a Retrenchment Advisory Programme and an

Employment Assistance Programme, and set up early consultation between
employers and trade unions on anticipated retrenchments in order to explore
alternatives such as redeployment, reduced working hours or retraining. If lay-off
was unavoidable, unions negotiated retrenchment benefits to help workers
seeking re-employment, and sought employers’ assistance in counseling and
helping retrenched workers take up retraining or find alternative employment as
quickly as possible. The Skills Redevelopment Programme (SRP) was expanded
into a national programme to improve the re-employability of retrenched workers
by provi ding them with nationally certified skills in industries with job vacancies,
and government funding was increased from 80% to 100% subsidy on
employers’ training costs and from 70% to 85% of absentee payroll costs for
workers aged 40 years and over. A Skills Development Centre was set up in
January 1999 to improve training opportunities, and in May 1999, the government
committed additional funding for retraining workers. To help retrenched
employees pay for their children’s textbooks and other expenses, unions raised
money and received a matching grant from the government.
§ Focus on skill development: Faced with globalization and technological

uncertainty in the 1990s, the government and unions recognized that job security
would come only from upgrading the skills levels of the workforce through
training, so that businesses and workers could respond to changes in the
business environment. In 1996, the government initiated a Skills Re-development
Programme (SRP) to help workers remain employable throughout their life, by
providing nationally certified skill training and upgrading. This was seen as
particularly vital for older, less-skilled workers who were more at risk of
redundancy. Employers were given several incentives to send their workers for
training, including (1) reimbursement of 80% of the cost of training, (2)
reimbursement of 70% of absentee payroll costs up to a ceiling (S$4.20 per
hour), (3) training programmes tailored to meet the needs of particular industries.
In addition, to help workers who were not sent for training by their employers, an
Education and Training Fund (ETF) was set up in May 1998 under which (1)
workers were given 85% of the training costs, and (2) the government agreed to
provide funding of S$3 for every S$1 raised by the unions.
§ National manpower strategy: Singapore plans to develop into a knowledge-

based economy where its strategic competitive advantage will come not from its
infrastructure or industries, but from the knowledge, skills and creativity of its
people. To achieve this, in April 1998, the former Ministry of Labor was
restructured, and Ministry of Manpower was created to look into all issues
relating to manpower planning, development and management. In consultation
with all bodies, the Ministry created a national blueprint for manpower
development, which focuses on lifelong learning for lifelong employability and
redefining tripartite partnerships among all stakeholders.
§ Vision and pragmatism : At an inaugural manpower summit in September 1999,

then Singapore’s Deputy Prime Minister Lee Hsien Loong (now Prime Minster)
said “Singapore must have flexible and responsive labor markets to attract MNCs
who operate in fast-changing environment. But we also want to have strong
unions who are partners in economic progress, and strengthen the stability and
flexibility of our economy. Unions will moderate the shortcomings and extremes
of the free market. But they must understand the needs of knowledge workers,

and the way the knowledge economy works. They have to adapt themselves to
the knowledge economy, just as employers have to adjust to unions playing new
roles. This is not just a union problem, but an issue which unions, employers and
the government will have to tackle together.”
JAPAN
Japan presents a clear case study of an economy mired in prolonged recession due to
its failure to undertake tough reforms. It is widely believed that Japan’s unique work
environment was responsible for the rapid growth in the post World War decades, which
led Japanese companies to dominate several industries, including electronics,
automobiles, shipbuilding, financial services, and so on. However, the Japanese
economy has been facing severe recession since the 1990s, with the ‘bursting of the
bubble’ leading to fall in GDP, rising unemployment, declining prices and rising
bankruptcies. For political reasons, the Japanese government has been unable to
undertake tough reform measures, with the result that the recession has been prolonged
for more than a decade and shows no sign of recovery.
Background
The Japanese economy has three distinct sectors, with widely varying dynamics. The
first is the organized sector, consisting of large and efficient multinational companies
which offer life-long employment to its employees. Secondly, the large unorganized
sector consisting of small and often inefficient suppliers and sub-contractors who offer
lower salaries and do not offer life-long employment. The third consists of the certain
protected sectors of the economy, such as retail and agriculture, where firms are
inefficient and uncompetitive, and yet are politically very powerful.
The large organized sector is globally competitive, and yet operates under a rigid labor
environment. These companies offer life-long employment to workers, pay salaries
link ed to seniority rather than merit, and do not layoff or retrench workers. Yet, these
companies are able to operate efficiently because they use the ‘internal labor market’
within the company, rather than the external labor market, in order to achieve
employment adjustment. These companies achieve a high degree of flexibility for the
workforce by moving workers to different jobs within the company, training and relocating
workers, and cutting back on recruitment in lean times, rather than using layoffs and
retrenchment. Employees have no reluctance in being relocated within the company,
since (1) pay is based on the employee’s seniority, and not the job function or
department, and (2) Japanese companies emphasize multi-skilling through in-house
training programmes, which makes it easy for workers to adapt to their new work
environments. The desire to avoid retrenchment is also related to the dominant role
played by the company in the employee’s life and identity. Since Japanese companies
recruit people only at the entry level, retrenchment can mean a loss of livelihood and
identity to the employee.
The labor-management relationship is dominated by the bi-partite relationship between

Rengo, Japan’s association of trade unions, and Nikkeiren, the employers' organization.
The two bodies have traditionally worked in close cooperation, ensuring that Japan’s
industrial environment is largely peaceful. For example, during the recession, Rengo and
Nikkeiren worked closely to create a joint ‘One Million Job Creation Plan’ in 1998.

Wage bargaining in Japan is associated with the ‘spring labor offensive’ where
decentralized negotiations between individual companies and company-based unions
are conducted in the spring season every year. There are no industry-wide or nation-
wide wage negotiations as in certain European countries, but in effect the wage hikes
are uniform within a particular industry and even across industries. Wage increases
during the spring labor offensive are moderate, and are based on productivity gains,
reflecting a social consensus and working as an information-disseminating mechanism
for all industrial sectors.
Labor laws
Japan’s labor laws allow companies a great degree of freedom in they way they operate,
and companies generally have few legal restrictions in the way they manage their
workforce. Generally, Japan’s labor laws deal with basic working conditions and social
security benefits, and leave most aspects of employee-employer relations to be decided
by bi- partite discussions. For example, Japan does not have laws to restrict a company’s
right to terminate or retrench workers. In practice, however, companies rarely do so for
cultural reasons, as well as due to pressure from unions.
In the decades immediately after World War II, Japan’s labor laws were designed to
provide companies the freedom to grow and become globally competitive. Since the late
1980s, when Japan enjoyed unprecedented economic success, the emphasis has
turned to providing social security and quality of life for workers, as opposed to focusing
on economic growth per se.
The following are the key provisions of Japan’s labor laws:
§ Retrenchment: While there is no legal restriction on retrenchment, pressure from

unions and social factors prevent companies from retrenching staff. For example,
the 1950s and 1960s saw protracted labor disputes caused by dismissals, which
caused enormous hardship to companies and workers. The unions lost most of
these big disputes, but companies also incurred enormous expenses, and this
led to a tacit understanding between labor and management to avoid lay-offs as
far as possible.
§ Benefits: All workers in Japan are entitled to the following benefits from the
government: (i) employment insurance and accident compensation schemes; (ii)
health insurance schemes; (iii) pension programmes; (iv) nursing care for the
aged, and (v) compulsory schooling up to the age of 15. The Child-Care Leave
Law in 1990 and the amended Child-Care Leave/Nursing Care Leave Law in
1997 gives workers the option of either one year’s leave without pay for either
working parent of a newborn baby, or shorter working hours.
§ Women’s rights: Japan’s New Constitution of 1945 stipulates equal rights

between men and women. The Labor Standards Law expressly prohibits
discrimination against women at work and the New Civil Code stipulates equal
rights of inheritance between men and women. In 1986, the ‘Equal Employment
Opportunities Law’ was enacted, prohibiting discrimination by gender in

education, training, retirement and lay-off. In 1997, the Law was amended to also
ban discrimination on recruitment, hiring, posting and promotion.
§ Working hours: Japan has an ageing population with a low birth rate, and its
average life expectancy is among the highest in the world. A shrinking workforce
and rising prosperity prompted the government in the late 1980s to take steps to
improve the living standards of workers (as opposed to focusing on growth and
competitiveness). With amendments to the Labor Standards Law in 1987,
effective April 1988, mandatory working hours were reduced to 40 hours per
week from the previous 48 hours. While average working hours for manufacturing
workers was 2,189 hours in 1988, more than in any country in Europe or the US,
this was reduced to 1,975 hours in 1995, comparable to the levels in the US and
UK, and 1,879 hours in 1998, less than those in several Western countries.
§ Temporary contracts: Since the late 1980s, the Japanese government has
permitted companies to recruit workers on temporary employment contracts, and
has progressively liberalized the rules that regulate temporary employment.
Previously, under the Personnel Dispatching Law (now amended), temporary
workers were prevented in certain defined job categories, such as industrial
workers, marketing, and retailing, and companies could not switch temporary
workers to permanent jobs. Before the amendment, this law prevented
companies from: (1) interviewing temporary workers sent by a temporary staffing
provider, (2) confirming whether temporary workers want to continue working,
until immediately before their contracts ended, and (3) conducting tests to
determine which positions the temporary workers will be assigned to. However,
these provisions have now been scrapped, and Japanese companies have
substantial freedom to employ temporary workers.
Employment
Unlike in the US, income inequalities and wage discrepancies are relatively minimal in
Japan. However, there is greater wage disparity between big companies (organized
sector) and smaller businesses (unorganized s ector). As the recent recession has hit
smaller enterprises harder than big companies, these wage discrepancies have
widened. Wage disparities between men and women are also wide, with women earning
only 63% of the average wages for men.
According to the Ministry of Labor, the ratio of unionized labor to the total workforce is
shrinking. The proportion was only 22% in 1998, compared to 56% in 1949.
In spite of stagnation in the 1990s, the jobless rate was only 4.3% in 1999, which is
relatively low by global standards but very high by Japanese standards. The most
seriously affected sectors are construction and civil engineering, employing 6 million
workers, which have been badly hit by the real estate crash and subsequent drop in new
investments.
Labor reforms
Reforms in Japan have been primarily focused on macro-economic measures to mitigate

the effect of the prolonged recession since the 1990s. The Japanese government has

generally been criticized for not undertaking serious reforms in its economy or lab or
system, in contrast to East Asian countries like Taiwan and Korea which quickly
undertook reforms to overcome the crisis of 1997. Due to political compulsions and
vested interests, Japan has been reluctant to undertake bold measures that could
jeopardiz e vocal sections of the economy. For example, in June 1997 Japan passed a
half-hearted Financial Systems Law, which did not sufficiently address the core issues of
non-performing bank, loans, and postponed the inevitable bouts of restructuring and
retrenchment.
One key labor reform that has been implemented is the legal recognition for temporary
employment contracts. Since the late 1980s, the Japanese government has permitted
companies to recruit workers on temporary employment contracts, in spite of opposition
from trade unions. While previously the Personnel Dispatching Law restricted the use of
temporary workers, this was amended in 1986 to permit temporary staffing firms to
operate with approval from the Labor Ministry. In 1999, the deregulation of the
Temporary Dispatching Law removed restrictions on the type of jobs for which temporary
staff agencies were allowed to provide workers. In 2000, the temporary-to-hire program
also permitted temporary workers to be hired as permanent employees if deemed
suitable, overturning the previous Personnel Dispatching Law, and allowed companies to
evaluate a temporary employee's potential and let workers decide if they want to work for
that firm.
Apart from this, few labor laws in Japan have been changed in recent years. The
ongoing recession has triggered several important changes in employer-employee
relations, but these have been negotiated through bi- partite discussions, and not
implemented through legislation.
Impact of reforms
§ Temporary workers: After temporary work was legalized in the 1980s, the
proportion of people employed on a temporary or part -time basis has increased,
from nearly 10% in 1980 to around 20% in 1995.
§ Rising retrenchment: The proportion of companies resorting to retrenchment

has been rising steadily since the 1990s, but it is much lower than the
corresponding figures during previous crises. In 1998, the proportion of
companies resorting to retrenchment was 38%, far lower than the 71% recorded
during the oil crisis in the mid 1970s and the 40% during the exchange rate crisis
in the mid 1980s. This reflects a consensus to avoid retrenchment and other
tough reform measures during the current recession. However, while the
Japanese economy was able to quickly overcome the previous crises in the
1970s and 1980s due to such restructuring, there is no end in sigh to the current
recession.
§ Flexible wage structure: Breaking the traditional practice of annual performance

bonuses based on seniority, Japanese companies have recently introduced
performance-based pay, especially for managerial staff and certain blue-collar
workers. Unions have been forced to accept performance-based pay systems,
but have received the assurance that transparency will be maintained in grating
performance-based pay.

§ ‘Loanin g’ and labor mobility: Since the mid-1980s, there has been a sharp rise
in the practice of loaning, which involves transfer of employees to other jobs
within the same company or to its subsidiaries or affiliates for a certain period of
time, typically 3 years. This is another example of how the internal labor market
has expanded into include all the companies within a group. Unions have
accepted loaning provided that the affected workers consent and that their
working conditions at the host company are not unfavorable.
SOUTH KOREA
Like India and other developing countries in Asia and Africa, South Korea also followed
an ‘import substitution policy’ in the 1950s and 1960s to protect domestic companies
through tariffs and licensing. However, Korea dumped this policy in the mid 1960s and
replaced it with a policy of ‘state-led capitalism’ and aggressive export promotion, which
has helped achieve dramatic increase in GDP and standard of living. Since then, the
Korean government has placed primary emphasis on achieving growth by developing
exports and building companies that are globally competitive. The government has also
tightly curtailed the power of unions in order to avoid obstacles to growth.
This ‘development first and distribution later’ policy, followed by the often authoritarian
governments in Korea, takes the view that workers’ welfare is better served by boosting
economic growth and creating jobs, rather than undertaking pro-worker measures that
eventually cause harm by retarding growth. This policy was loosened to some extent in
the late 1980s with the inset of democratic reforms in South Korea, but was re-
introduced during the East Asian crisis in the late 1990s.
Background
The ‘state-led capitalism’ practiced in South Korea until the late 1990s gave emphasis to
strategic industries and large conglomerates (chaebols) which enjoyed tremendous
benefits from the government, including cheap loans, tax exemptions, tariff rebates and
protection from foreign competition. This helped promote rapid economic growth, boost
exports, and improve income levels, with the result that chaebols employed around half
of all industrial workers in Korea during the early 1990s. However, this system was also
inefficient and vulnerable, as demonstrated during the Asian crisis of the late 1990s.
Korean unions are notorious for their militancy, which some believe is triggered by
political repression, frustrated upward mobility, and relative income disparity – though
economic growth since the 1960s has reduced absolute poverty.
In recent decades, Korea has undergone two basic changes in its economic
environment: (1) economic liberalization from 1988 to 1993, and (2) globalization since
1994. However, the economy faced its biggest challenge during the Asian crisis of the
late 1990s, when GDP shrank, unemployment worsened, inflation went up, and many
firms faced bankruptcy. The unemployment rate in South Korea rose from 3.1% in
December 1997 to 6.5% in March 1998, and was over 10% if under-employment (i.e. 17
hours or less per week) was considered, which was the highest level for 40 years in
Korea.

Labor laws
Since the 1960s when Korea’s industrial revolution began, the government has
considered unions as an impediment to economic growth. Like with many other East
Asian count ries, authoritarian labor control was a basic feature of Korea’s economic
development, especially in the 1970s when the country experienced rapid
industrialization. This has led to widespread anti-labor feelings in society, and policies
that curtail the power of unions. For example, new unions have to get a certificate of
registration from the Ministry’s Labor Office, which could be withdrawn if the unions were
involved in severe disputes or violent strikes. Unions also had to report on their activities
and submit their annual budget to the Ministry. Labor laws limited union activity and
blocked the intervention of unions in labor disputes and collective bargaining.
Massive and violent strikes in 1987, called the “Ulsan Typhoon”, led the Korean
government to introduce democratic reforms and improve workers’ rights, including
removal of authoritarian controls, and allowing unions to negotiate with government and
employers. The process of easing labor laws was very slow, and took several years. For
example, it was only in 1998 that worker representatives were invited to tripartite
negotiations, while new labor laws allowing teachers and public sector employees to
organize came into force only in 1999.
Employment
Korea has enjoyed strong economic performance until the Asian crisis of the late 1990s.
The economy grew rapidly, and GDP growth was between 5% to 15%. Unemployment
was low and life-long employment was assured – in 1997, just prior to the crisis,
employment was only 3.1%.
However, with the onset of the crisis in late 1997, unemployment rose to 6.5% in March
1998. Income inequality also worsened, with the percentage of people living below the
poverty line rising from 3% in late 1997 to 7.5 % in late 1998, and the Geni coefficient
rising from 24.49 to 28.19.
The proportion of organized workers in Korea has been around 20%. It reached a peak
of 23% per cent in 1989 due to pro-worker reforms, and fell to below 15% in the late
1990s due to the recession.
Labor reforms
Faced with the crisis of the late 1990s, the Kim Dae Jung government in Korea
introduced an IMF-inspired austerity policy. This included: (1) better balance between
large and medium -sized firms (i.e., break -up of chaebols), (2) more equity (i.e., more
share of income to workers), (3) more reliance on market forces (deregulation and
structural adjustment), and (4) reform of financial institutions (e.g. cut in lending to
chaebols).
This period also saw fundamental changes in labor laws:

§ In February 1998, companies were allowed to retrench staff, while previously life-
long employment was virtually guaranteed
§ Temporary employment contracts for short and medium-term work was legalized
§ From 1998, the pay structure was formally severed from ranking according to the
formal (pre-existing) ladder of sequential promotions. While previously older
employees were higher paid, it was now possible for younger employees to be
higher paid than their seniors.
These changes had a dramatic impact on the employment system. While companies
used these reforms to undertake radical restructuring in order to survive, for workers it
meant reduced job security and the end of life-long employment. For example, in 1999
Samsung reduced its workforce by nearly 30% through spin-offs and early retirement
schemes. A survey conducted by the Labor Ministry in 1999 showed that more
companies were implementing performance-based pay (instead of guaranteed annual
pay hikes). While the proportion was only 4% in 1997, it had risen to 18% in 1999 and
another 30% were preparing to introduce performance-based pay. Faced with the reality
of economic crisis, unions were forced to adopt a passive stance amidst these changes.
To manage the reforms process, the Korean government announced the creation of
public works schemes and the expansion of the Employment Insurance programme. In
January 1998, the government created a tripartite committee, which reached
agreements on these issues:
§ Government and employers will construct nation-wide organizations and prepare

a policy package to combat unemployment
§ All parties represented on the tripartite committee will help improve job security
by introducing work -sharing
§ All parties will strive to minimize lay -offs and to support firms in financial trouble
§ All parties will do their best to eliminate unfair labor practices and establish
monitoring
§ The policy -making process will be open to labor unions. Unions will participate in
making and implementing important policies affecting wage-earners' standard of
living
§ All parties have rights and duties in restructuring conglomerates
§ The reform of public enterprises will reflect labor-manager agreements
§ The teachers' union will receive official recognition
§ All parties will strive to improve worker participation in management
§ Labor laws will promote industrial dem ocracy
Impact of labor reforms
Partially as a result of reforms undertaken in 1998, Korea achieved economic recovery

by early 2000. For example, the unemployment rate, which was 6.5% in March 1998, fell
below 5% in late 1999. As temporary employment contracts were legalized in Korea, the
number of temporary and part -time workers rose by 15 %, from 6 million in 1989 to 6.9
million in 1999.
The wage gap between occupational categories has widened – while white-collar
workers earned 1.52 times more than blue-collar workers did in 1995, it was 1.57 times

in 1996, 1.63 Times in 1998 and 1.7 times in 1999. However, since Korea does not have
a strong social security system, only 7% of the unemployed received unemployment
insurance benefits even in the recession.
MALAYSIA
Background
Like most East Asian countries, Malaysia has followed an export oriented development
strategy that has succeeded in attracting large foreign investment, boosting exports,
creating jobs and improving the standard of living. Malaysia’s industrial transformation
and rapid economic growth has been particularly impressive since the reforms
undertaken after 1987. Following Prime Minister Mahathir’s Vision 2020 pronouncement,
these reforms aimed at achieving developed country status by the year 2020.
Like Korea, Malaysia has followed pro-growth policies that helped companies (especially
MNCs) grow, even where it means alienating unions and small businesses. Malaysia’s
development strategy has often been called ‘techno-nationalist’. It involves the use of
foreign investments for upgrading technology while promoting domestic companies and
supporting ‘affirmative action’ for the Malay population.
Labor laws
Like Korea, Malaysia has sought to implement labor laws that curtail the power of unions
in order to permit companies to expand without excessive hindrances and create more
jobs. The government has frequently cracked down on union strikes and demonstrations.
For example, it has jailed labor leaders involved in strikes, limited union rights, and
promoted in-house unions that adopt a less antagonistic approach towards
management.
The government has also sought to reduce excessive wage increases that prevent
companies from being globally competitive. The Industrial Relations Act of 1967 has put
a freeze on wage hikes by making wage negotiations through collective bargains valid
for three years. In 1987 the finance minister called for voluntary wage freezes for three
years, and threatened that else the government would implement a required freeze.
Further, legislation in 1989 eliminated bonuses, overtime, EPF, and holiday pay from the
negotiations and sought to reduce holiday and overtime pay.
In the early 1990s the government implemented a New Development Policy that was
intended to: (1) increase the labor supply, (2) boost the level of skills in the local work
force, (3) advance the level of technology in both foreign and domestic firms, and (4)
increase the amount of local content in foreign-owned export manufacturing.
To help the economy shift from labor-intensive to capital- and knowledge-intensive

industries, the government created the Human Resource Development Corporation
which established a human resource development fund to facilitate firm-level training.
Firms meeting certain thres holds are levied 1% of their employee’s salaries, and these
funds are deposited in firm-specific accounts, which are made available to use for
government -approved training programmes. The training reform programme has been
very successful, and by 1997 more than half a million workers had received such

training. Several ministries developed comprehensive vocational and industrial training
systems, with their own physical infrastructure, curricula, and teaching staff. In addition,
several government departments, committees, and units are involved in promoting,
planning, and supervising the education and training effort.
The government introduced tax incentives to encourage both R&D and education and
training. Tax exemptions were provided for companies that met more stringent
requirements for technology content and sharing. These included capital investment per
employee of at least RM 55,000; R&D expenditures of 1% of sales within 3 years of
starting operations; and 7% of employees with certificates or diplomas in technical fields.
Certain high technology companies received 10-year tax holidays, greater access to
foreign skilled labor, and full access to foreign exchange accounts in local banks.
Impact
Malaysia has been able to position itself as an attractive global destination for
manufacturing, and has attracted large amounts of FDI, especially in the electronics
sector. This has created many jobs and improve d the standard of living in the 1980s.
Between 1987 and 1991 wages in the electronics industry rose 12% for unskilled labor
and 20% for skilled labor. Within the manufacturing sector as a whole wages rose 6% in
1991, 10% in 1992, and 15% in 1993. By 1993, the economy enjoyed full employment,
and began to experience labor shortages and rising wages. Faced with labor shortages,
the economy witnessed a huge increase in female workers, especially in the electronics
industry, and entry of over 2 million foreign by 1996.
SRI LANKA
Sri Lanka’s labor law framework is broadly similar to that of India, since both countries
have inherited laws framed by the British. The key categories of labor laws are:
1. Terms and conditions of employment

a. The Shop and Office Employees (Regulation of employment &
remuneration) Act
b. Wages Board Ordinance
2. Social security
a. Employees provident Fund
b. Employees Trust Fund
c. Payment of Gratuity Act
3. Industrial safety
a. Factories Ordinance
b. Workmen’s Compensation Ordinance
4. Industrial relations
a. Industrial Disputes Act
b. Termination of Employment (Special provisions) Act
c. Trade Union Ordinance
5. Employment of women and children
a. Employment of Women, Young Persons and Children Act

b. Maternity Benefits Ordinance
The Industrial Disputes Act in 1950 is the basic law regulating the labor-employer
relationship, and it addresses industrial disputes, termination of services of employees,
collective bargaining, labor arbitration, and various Labor Tribunals / Industrial Courts.
However, public sector employees are not covered under the Industrial Disputes Act,
and they are governed through the Establishment Code, a set of rules adopted by the
Cabinet of Ministers.
The Sri Lankan government has undertaken a process of liberalizing its system of labor
law. Key steps adopted include the following:
§ Removal of restrictions on employers for overtime hours permitted on female

workers and the need to obtain consent of workers to perform over time
§ Amendments to the Termination (Special Provisions) Act which permits free hire
and fire policy, and payment of compensation on a fixed formula based on the
years of service of eac h employee
§ Amendments to the Industrial Disputes Act introducing a “4:2:1 Formula” to

conclude all unfair termination of service applications before Labor Tribunals
within four months, Arbitration processes within two months and involuntary
termination of service applications within one month.

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Association, February 2001

ANNEXURE 6 – ABOUT TEAMLEASE
Teamlease is India’s largest staffing solutions company. We are a liquidity provider in

labor markets. We enable the better matching of demand and supply by connecting the
people, to the right company, at the right time.
We currently have over 12,000 associates in over 225 locations across the country for
over 125 clients. Clients, associates and candidates are serviced through our network of
offices , web and phone support.
SERVICES
Teamlease has a range of temp and perm solutions for companies and individuals. Our
primary services include temporary staffing, payrolling and permanent recruitment.
These are supplemented by strong vertical practices for ITES, Retail, Telecom and
Financial Services that understand their industries deeply and offer special solutions.
TECHNOLOGY
Our proprietary web based Teamlease Temp Network (TLnet) is hosted at
www.teamlease.com. TLnet has three components; CLCS (Associate Life Cycle
System), CLCS (Candidate Life Cycle System) and our Intranet.
RESEARCH
As a market leader, Teamlease has a responsibility and self-interest in dispelling the
faulty conception of temporary staffing with precarious employment. Our research efforts
include a bi-annual Teamlease Gallup Employment Outlook, annual Teamlease Temp
Salary Primer and the annual Teamlease Staffing White Paper.
WHY CHOOSE TEAMLEASE AS A PARTNER?

• Strong track record
• Pan India presence
• Single window for staffing; temp and perm
• Vertical domain knowledge
• Large validated talent pool
• Guaranteed turn -around time
• Standardized processes
• Comprehensive Web Interface; TLnet
• Associate self-service suite (email, web, IVRS)
CONTACTS
The contact details for Teamlease are available on the back cover.
Detailed information is available at www.teamlease.com and emails sent to

info@teamlease.com will be replied within 24 working hours.


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INDIA’S LABOR MARKET

www.teamlease.com This white paper is a confidential document of

Teamlease White Paper 1

• INDIA’S LABOR MARKET

• LABOR REFORM BACKGROUND

• CASE FOR LABOR REFORM

• CASE FOR TEMPORARY STAFFING

Teamlease White Paper 2

Low or no labor law enforcement

Not literate 0.2%

0.01% of employment relative to Temporary Staffing Largely Sales, Technology,

Teamlease White Paper 3

PUBLIC VS. PRIVATE SECTOR

ORGANIZED VS. UNORGANIZED SECTOR

AGRI. VS. MANUFACTURING VS. SERVICES

RURAL VS. URBAN SECTOR

REGULATION VS. SUPERVISION

CREATING VS. PRESERVING JOBS

Teamlease White Paper 4

Coming Unemployment India's Global trends in

Low Employment Elasticity Changed Role of Changing worker

Unorganized employment Organizational and Supply

End of public sector Internal & External

Negative employment elasticity of Rising female workforce

Labor saving bias of

Inability to afford Effective & Incentivized

Low Skill levels China's reform Role of Employer

Teamlease White Paper 5

Public Policy Employer Employee

Just in time labor; handling Keep in touch with the

Auditioning permanent Springboard to permanent

Limited Permanent job Improved employability; skill

Liquidity provider; Better matching

Differential pay for

Economic Value and Matching expertise and

Handling planned and

Teamlease White Paper 6

Issue Consequence Recommendation

Increased outsourcing to the Amend Section 2(g), 7 of CLRA

Amend Sec 15 of MWA

Amend Section 7,12 of CLRA

Amend EPFO Act

Teamlease White Paper 7

2. The Case for Labor Reform

3. India’s Labor Market

4. The Case for Temporary Staffing in India

5. The Temporary Staffing Industry

6. Results of Temporary Staffing Survey 42

7. Recommendations for Temporary Staffing Reform in India 45

Teamlease White Paper 8

The Team lease Team

Teamlease White Paper 9

Coming Unemployment India's Global trends in

Low Employment Elasticity Changed Role of Changing worker

Unorganized employment Organizational and Supply

End of public sector Internal & External

Negative employment elasticity of Rising female workforce

Labor saving bias of

Inability to afford Effective & Incentivized

Low Skill levels China's reform Role of Employer

Teamlease White Paper 10

1. Low employment elasticity of GDP India’s labor force growth of 2% a

4. Negative employment elasticity of agriculture The employment elasticity of