GLOBALISATION, LABOUR MARKET FLEXIBILITY AND EMPLOYMENT:

A MACRO VIEW

A.Venkateswarlu*

Globalisation (including liberalisation and privatisation) has made its dent on several aspects
and one of them is employment. In India, the labour market flexibility has been voiced from
the organised sector employers, with a view that labour laws increases unemployment. In
fact, the labour laws are applicable to organised sector workers, forming only 8 percent of
the total workers But it is shown that unions and protective labour legislations, are not
harmful to employment and income growth. Many other studies also showed in the
developed world that labour legislation is helpful to the increase in productivity as well.
Therefore labour legislations, which depend on ILO conventions, have to be made
applicable to both organised and unorganised sectors.As regards the impact of globalisation,
in India, in the organised sector there were retrenchments or retirements to the extent of 1.3
million workers, between 1995-96 and 2001, though its growth was good in the period
immediately after liberalisation, 1990-91 to 1995-96. Organised public sector and private
sector employments have been nearly stagnant or on the verge of slide down (Papola, 2007).
In India, nearly 92 percent of the workforce is in the unorganized sector and so the overall
employment growth depends on this sector only. Based on the NSS Reports, the growth
rates of overall employment for males, females and persons in both rural and urban areas,
have fallen down in the post reform period, 1993-94 to 1999-00 (compared with the period,
1983 to 1993-94). However, the growth rates have improved for the latest period, 1999-00 to
2004-05 for all those categories. But it is distressing to note that when the entire post-reform
period is considered, i.e., 1993-94 to 2004-05, the growth rates have declined both at the
national level and among the states (Bhalla, 2008).

I. INTRODUCTION

Globalisation has been the new economic policy, professing more liberalisation of
the economy, beyond the borders of nation-state at a particular phase, since early 1980s.
Historically, globalisation is not a new phenomenon. It began in 15th century, through
conquest and exploitation of Asia, Africa and Latin America. It is associated with
imperialism. Globalisation, in the past, was confined to selected geographical areas and
small populations (Petras and Polychroniu, 1997). In the past, it is related with the phase
of internationalization of capital, where nation-state has some independence in regard to
economic activities. But, at present the globalisation of capital has undermined the
control area of a nation-state (Prabhat Patnaik, 1993, 1995). Now, transnational
corporations (TNCs) have also to be recognized as constituent units, in addition to nation-
state (Kurien, 1993).

The important aspects of present globalisation are (i) liberalization, i.e., rolling
back of state intervention in economic activities; (ii) privatisation, i.e., public sector also
is to be governed by competition through marketisation; iii) globalization, i.e., export-
orientation and import liberalization. Thus, this neo-globalisation is a combination of
liberalisation, privatisation, and globalisation (LPG), though we call it simply
globalisation.
_________________________
* Associate Professor, Centre for Economic and Social Studies, Hyderabad. The author thanks his
teacher, Prof. G.K.Chadha for encouragement

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 This present globalization is dependent on the revolution in the technologies of
communications and transport, particularly in micro electronics and satellite-related
telecommunications (Bhorat and Lundall, 2004). Interestingly the latter technological
changes have started showing their impact since the early 1980s, by the time of
implementation of structural adjustment programme (SAP) in the developing world (due
to debt crisis) under the auspices of IMF and World Bank. Their impact have given an
impetus to liberalisation and globalisation since the fall of Berlin Wall (November 9,
1989), when the communist project seemed to have failed, marking the so called end of
history (Fukuyama, 1989), the first flattener of the ten flatteners of the Flat World
(Friedman, 2005).

Thus, globalisation project has made its dent on several economic aspects (apart
from other socio-political and cultural aspects). In this paper, we confine to one of the
economic aspects, viz. employment. The second section analyses foreign trade, its
necessity and theory; the third deals with foreign trade and its impact on employment;
the fourth examines the liberalization and privatization and its impact on employment;
the fifth takes up labour market flexibility, security and flexicurity; the sixth examines
the labour flexibility issues in India; and the seventh and eighth sections describe the
dimensions of employment at global and India levels respectively; and the last one
portrays conclusion.

II. FOREIGN TRADE - ITS NECESSITY AND THEORIES

1. Necessity of Foreign Trade under Capitalist Production

In mercantilism, the state’s intervention and export-orientation were stressed. But,

Adam Smith argued in favour of laissaiz faire, as he opposed mercantalist state
intervention, by 1776. With this the first phase of liberalisation was initiated. This
liberalism is associated with competitive markets as capitalism started developing.
Production (supply) and consumption (demand) were thought to be balanced by Smith’s
invisible hand and such balance was ensured as per Say’s law of markets. The capitalists
constantly revolutionised the instruments of production to increase production that
necessitated search for markets. Marx and Engels (1975, pp.37-39) say:

“Modern industry has established the world market… This market has
given an immense development to commerce, to navigation, to
communication by land….The need of a constantly expanding market for
its products chases the bourgeoisie over the entire surface of the globe. It
must nestle everywhere, settle everywhere, establish connexions
everywhere… The cheap prices of commodities are the heavy artillery
with which it batters down all Chinese walls.”

However, there is a theoretical question as regards realization of social product

(value) within the closed capitalist economy. Luxemberg expresses doubts and insists on
the necessity of the foreign markets, because the capitalist production takes place on an

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extended scale which compels the capitalist economy to open itself to foreign market.
(Emmanuel, 1984, p.169). Emmanuel says that the schema of extended reproduction of
Marx were adjusted by Lenin, in terms of predetermined rates of growth of the
organic composition of capital to show possibility of realization of social product. But,
depending on Marx, Lenin says:

“That is why Marx says that in examining the problem of realisation, the
foreign market, foreign trade ‘must be entirely discarded,’ for ‘the
involvement of foreign commerce in analysing the annually reproduced
value of products can only confuse without contributing any new element
of the problem, or of its solution’.” Lenin (1967, p.46-47).

However, Lenin was conscious of the tendency of capitalist overproduction and

its consequent search for the markets, thus leading to anarchy of production. In this
connection, Lenin describes the inherent tendency of capitalism to be after markets,
even beyond the borders of the domestic country, as follows:

“The need for a capitalist country to have a foreign market is not

determined at all by the laws of the realisation of the social product (and
of surplus-value in particular), but, firstly, by the fact that capitalism
makes its appearance only as a result of widely developed commodity
circulation, which transcends the limits of the state. It is therefore
impossible to conceive a capitalist nation without foreign trade, nor is
there any such nation. …… The capitalist enterprise, on the contrary,
inevitably out grows the bounds of the village community, the local
market, the region, and then the state. Since the isolation and seclusion of
the states have already been broken down by commodity circulation, the
natural trend of every capitalist industry brings it to the necessity of
seeking a foreign market” Lenin (1967, pp.65-67).

Though theoretical possibility is there, capitalist economy is bound to go in search

of foreign markets also, because inherent tendency of its overproduction, which becomes
difficult to be realized in the home market. In regard to economic development of Soviet
Russia in the aftermath of revolution of 1917, there was debate on primitive accumulation
and primitive socialist accumulation, which also formed basis for internal and external
terms of trade (Mitra, 1979; Dandekar, 1981).

2. Foreign Trade Theories

(i) Classical Theory of Trade

Adam Smith proposed absolute cost advantage theory, but Recordo propounded
comparative cost advantage theory which became most popular. In Recardo’s model, a
country, which is capable of producing one commodity at a relatively lower cost than
some other commodity, can specialise in the former commodity and export it while
importing the latter commodity. In this model, labour is the only major factor of

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production. This was criticised for its assumptions: (i) full employment, (ii) perfect and
free trade, (ii) factors of production are mobile internally and wholly immobile
internationally, (iii) it is concerned with two-commodities and two-countries, and (iv)
technological knowledge is unchanged.

(ii) Modern Theory of Trade

Heckscher-Ohlin (H-O) trade theory is the modern one. H-O theorem states that
some countries have much capital and other have much labour and so the countries that
are rich in capital will export capital-intensive goods and the countries that have much
labour will export capital labour-intensive goods. It is said that Heckscher-Ohlin (H-O)
trade theory operates with Stolper-Samuelson theory of factor-price equalisation. It is
claimed as superior to Recordian theory, as it takes two-factors into account and makes
international differences in factor endowments the crucial and sole factor determining
comparative advantage. Moreover, whereas Recordian theory attributes to international
differences in production functions the explanation of comparative advantage, the H-O
theory explicitly postulates the international identity of production functions. It is also
acclaimed that H-O theory makes international trade as a special case of interregional
and inter-local trade. However, it is also criticized for its assumptions. As H-O theory is
based on the assumption of a homogeneous production function which does not hold in
the real world leads to multiple equilibria. Also it is criticized for its unrealistic
assumptions of perfect competition and full employment.

(iii) Role of Political Domination and Strategic Interests on Trade

(a) The history shows that international trade is not always mutually beneficial,
as it could be imposed by the political and military domination. This was proved in
colonial exploitation. Utsa Patnaik (1996) subjected Recordo’s comparative advantage
theory. She portrays the factual account how Britain succeeded through a combination of
naval bullying and diplomacy in wresting from Portugal the highly lucrative slave trade
for supplying slaves to the Spanish empire in South America from Potuguese West
Africa, while making Portugal to accept for the exchange of their wine for cloth of
England. This compulsive trade between Portugal and Britain was portrayed as
‘comparative advange’ by Ricardo. Thus, the competition is never fair and free. Similarly
colonial exploitation in the period from eighteenth century to the middle of the twentieth
centuries was a reality. Thereafter also some dominant forms of exploitation have
prevailed, as 132 countries of the Third World were the colonies of the North, not very
long ago (Tandon and Krishnan, 1997).

Trade between two unequal partners may result in exploitation of the weaker by
the stronger. In this context, it may be noted that the Secretary of Defence, Richard
Cheney, reported to the President in 1993 that the African nations were to be stabilised,
not to have any disruption in the production and distribution of strategically important
resources. African nations produce 90 and 100 percent of the four minerals - platinum,
manganese, chromium and cobalt - which are vital to US industry (Wilson, 1994).
Further, World Bank study observed: “Terms of trade of the exports of the LDCs have

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been falling since early 1980s, and for the non-oil commodities, had fallen by 45 percent,
in real terms, between 1984 and 1994.” The index of real commodity prices fell by half
between 1980 and 1993. As per Lewis T. Preston, President of World Bank (
Dasgupta,1997):

“Today the real price of many non-oil commodities are the lowest they have been since
1945; in many cases prices are so low that they do not cover production costs. For 1993,
the transfer in purchasing power from the developing to the developed countries due to
the fall in non-oil commodity prices between 1980 and 1993, was about $100 billion –
more than double the net aid flows to developing countries in 1993.”

(b) Further, trade also depends on the strategic and military interests.
The South East Asian countries, Japan, South Korea and Taiwan were provided
market access to the goods produced by them in the Western world (mainly
USA), as they allowed military bases of the USA. Even now, military bases of
the order 40,000 each are placed in Japan, South Korea and Taiwan.

III. FOREIGN TRADE AND ITS IMPACT ON EMPLOYMENT

1. Exports and their Impact on Employment

As per H-O theory, increased trade should lead to increased employment of

abundant labour in the labour surplus economies thereby generating more employment
and income. However, the impact of trade on employment is country specific and sector-
sepcific and so the prediction of the HO theorem either has not been fulfilled or partially
fulfilled (Bhalla, 2008). Such trade may create more employment in manufactures but it
does not apply to capital intensive primary products (Lall, 2002). Reddy (2006) says that
trade liberalization is likely to raise the real rate of return to the factor of production that
is relatively abundant in poor countries – labour - and lower the rate of return to the
factor of production that is relatively scarce in poor countries – capital. As per Hoeven
and Lübker (2006), the developing countries, with their relative abundance in unskilled
labour, would gain from trading in products produced with unskilled labour. Further, the
position of unskilled labour in the labour market would improve vis-à-vis other factors of
production, leading to a reduction in the skills premium. As per Rama (2003), in relative
terms, skilled labour is the abundant factor in the industrial world and unskilled labor
the abundant factor in the developing world. Therefore economic integration could
increase inequality within industrial countries, while reducing inequality within
developing economies.

The increase in direct export of goods and services can create new employment
opportunities. The goods and services, which are found to be exportable as a
consequence of opening up of the economy, may ensure the new employment. Indirect
employment may also be generated from the exporting goods sector as well as service
providing sectors: (i) The export goods sector creates demand for the raw materials in
minerals and agricultural and or non-agricultural inputs. (ii) Export service sector brings
in new employment in provision of skills, training and technical education (including
computer related aspects) and managerial education. The most important danger is that
the prices of exportables go down due to glut in the international market and become less

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competitive when all the developing countries export similar goods, as happened for
agricultural commodities (Utsa Patnaik, 1996).

2. Imports and their Impact on Employment

The import of goods and services in the import-competing industries leads to

deindustrialization with consequent reduction of employment in such sectors. In the non-
tradable sector, there is a possibility of getting imports, due to liberalization and this can
adversely affect the employment in such sectors. This is possible particularly when the
goods so far reserved for SSI sector are de-reserved, as happened in India after 2000 in
the aftermath of WTO regime. Another danger possible with opening up is the capture
of demand for the goods and services not produced domestically and thus it preempts
the domestic production of such goods and services and consequent cutting of potential
demand for labour in such sectors. This latter demand becomes possible due to (i)
changes in tastes and preferences of the domestic consumers, (ii) availability of variety
of goods at relatively cheap prices from abroad, (iii) demonstration effect from exposure
to the outside world from the media sources, and (iv) rising incomes of certain sections
of the society. We have witnessed this type of demand for several consumer durables,
TVs, cars, refrigerators and so on.

However one positive impact on employment can be witnessed if the increase in

the import of capital goods and raw materials, used in export-oriented industries, leads to
more exports, as such exportables are import-intensive; and thus this is a gain for the
employment.

IV. LIBERALISATION AND PRIVATISATION: IMPACT ON EMPLOYMENT

The liberalization leads to deregulation and decontrol of certain sectors of the

economy and privatization of pubic sector, on the one hand and liberalization of the
financial sector, on the other, so that baking and insurance are open for the private sectors
and stock market operations are extended with introduction of a variety of instruments.
The idea of such liberalization of the economy is to improve competitiveness and
efficiency in these fields.

1. Financial Sector and Employment

The financial sector has been subjected to internal and external liberalization. The
internal liberalisation makes the credit access easy for (i) consumers and (ii)
industrialists and the businessmen. The credit to the former generates demand for a wide
range of goods (non-durable and durables). All such sectors create ample employment.
Most important categories are housing sector and transport vehicles (including two-
wheelers). The demand for housing leads to create employment in the manufacture of
steel and cement and also to indirect employment in the construction of buildings and
structures. The credit to industrialists and the businessmen induces to supply a variety of
goods (non-durable and durables) through establishing industries and businesses; and this
in consequence creates employment.

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 The external liberalisation of finance makes a way to get finance from abroad in
two channels: (i) foreign direct investment (FDI) and (ii) portfolio investment. The DFI,
which is meant for production, can increase employment (as well as income) in two
cases: first when it substitutes a good that would otherwise have been imported, i.e.,
when it contributes to domestic import-substitution, and secondly, when it is exported.
FDI is more beneficial if the investment is in the 100 percent export-oriented industries.
But if DFI would buy up public enterprises or even buy up private enterprises controlled
by the domestic capitalists, this does not per se contribute to the growth of the economy
and employment. Rather sometimes, the technological upgradation would cut down the
employment. If DFI enterprises are set up to meet the domestic market, no net higher
employment will be there because they substitute the production of already-existing
firms, as the latter may dissipate or decimate in competition with DFI companies (Prabhat
Patnaik, 1993).

Portfolio investment however is hot money, which flows in today and flows out
tomorrow. It is very precarious investment in the stock markets. It cannot increase
employment. But it may bring in adverse effect on the overall domestic economy. As the
prime lending rates are quite low in the developed countries, the foreign institutional
investors (FIIs) take the advantage of the stock market operations in the developing
world. Further, such flight of capital inside the country may bring in the
appreciation/depreciation of the domestic currency due to over supply/demand. Speed of
movement of exchange currency has increased recently. When the world GDP was of the
order of $25 trillion per annum in 1993, foreign currency turn over in the international
market was rising fast with $1.3 trillion a day. The ratio of foreign exchange to the
volume of world trade in goods and services jumped from 10:1 in 1983 to 60:1 in 1993.
This type of transactions became easy because of development of the satellite and
computer-based communications network called the Society for Worldwide International
Financial Telecommunications–SWIFT (Tulpule, 1996). George Soros, the successful
Hedge Fund Manager, has been insisting on the government regulation in the
international financial markets, basing on his theory of reflexivity (Soros, 2008). It is
from this perspective only Bhagawati (2004), Krugman (2007) and some other
economists support only free trade in goods and services but oppose unbridled
liberalization of financial markets.

To maintain a stable exchange rate, Central Bank involves in holding foreign

exchange reserves, just as in India sometimes. This entails a burden on the economy in
the form of interest losses. If they are used for importing goods and services, the
domestic employment may be reduced in the short run. Recently, Ashok Kherka
(Economic Times, August 23, 2008) estimated that nearly $6.0 - $9.0 billion per annum
are the losses at current reserves in India. In this connection Prabhat Patnaik (2004) says:

“Foreign exchange reserves with the Central Bank typically earn very little
interest (no more than 1 or 2 percent for instance in the case of India); on
the other hand, the finace capital which flows into the country earns rates
of return (including capital gains) which are quite hefty (which after all is
the reason for its flowing in). The country in other words is borrowing

7
 from abroad at high rates and using the funds to earn low rates, which is
indefensible. On the other hand the usual avenues, which one can think
of, for the using up of such reserves are either not available or are
positively harmful (or both) in the context of the pursuit of neo-liberal
policies. … The existence of foreign exchange reserves can … be used to
using short-term domestic consumption of imported goods.”

2. Privatisation and Employment

The privatisation of public sector industries, banks and insurance leads to

competition and improved efficiency; which can lead to pruning the size of labour,
thereby reducing the employment due to VRS and sale of the companies to domestic and
foreign private capitalists or companies. This is clearly a negative impact. But there is
also positive impact in some of the sectors, though the employment is somewhat urban
oriented. Further, decontrol and deregulation of the internal economy also has both
positive and negative impacts on employment, just as happened in India by removal of
license-permit raj. There is positive impact when the bureaucracy gets streamlined. For
ex. The privatisation of telecommunication sector improves the efficiency and
employment in that sector. Also it has increased employment in several ways (including
the public sector telecommunications). For ex. in the telecommunication sector, mobile
phone services, TV channels and internet. A number TV channels provides employment
to the anchors, actors, correspondents and news readers. Telephone booths and internet
cafes. Further, print media services are flourishing. But these sectors are highly capital
intensive and less labour absorbing.

V. LABOUR FLEXIBILITY, SECURITY AND FLEXICURITY

1. Labour Markets

A “labour market” is the place where labor services are bought and sold. The term
“labor” is equated to the term “work”, not only manual work but also knowledge work.
Labor markets are defined in overlapping ways - by geography, occupation or skill level.
Labor markets always have two sides: labor demand and labor supply (Fields, 2007). By
this definition, the labour market consists not only of wage and salaries employment but
also self-employment (Fields, 2005). According to the ILO Thesaurus, the labour market
is ‘system consisting of employers as buyers and workers as sellers, the purpose of which
is to match job vacancies with job applicants and to set wages.’ This definition precludes
its strict application to developing economies which are characterized by unpaid family
work and self-employment.

2. Labour Market Flexibility and Regulation

The labour flexibility is opposed to labour regulation (government legislation).

The labour market regulation favours the workers with the employment security (job
security), along with social security in terms of minimum wages, retrenchment benefits,
retirement benefits and better working conditions. Workers’ security is enhanced through

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collective bargaining and social dialogue. There are two opposite views on the labour
market regulation. The distortionist view opposes the labour market regulation whereas
the institutionalist view favours the regulation.

(i) Distortionist View against Labour Market Regulation

Distortionists (i.e. most neo-classical labour economists) argue that minimum

wage and employment security regulations discourage hiring and favour insiders with
good jobs against outsiders with bad jobs or no jobs at all. Thus, internal labour markets
get strengthened, by reducing new employment and so increase unemployment in the
economy. The employment security regulations make it more difficult and costly to
dismiss unsatisfactory workers, and more difficult to increase labour productivity and
restrain or reduce labour cost per unit of output. It increases the incentive to adopt
capital-intensive techniques. All kinds of labour market regulations encourage employers
to bypass them (i) by depending on informal labour - casual or temporary workers, and
(ii) by putting out work to women and children in households (Godfrey, 2003).

According to the “distortionist” view, labour market regulations are major

obstacles to growth and employment mainly because regulations in the labour market
prevent wages to equal their marginal product in equilibrium, which leads to
unemployment of labour. Further, regulations may create redistribute economic ‘rents’
from capital to labour (e.g. collective bargaining schemes, and expansionary fiscal
programmes to fund public employment etc.), reducing profitability of the investors.
Consequently, this may discourage investment and, hence, dampen the prospects of
economic growth (Jha and Golder, 2008).

(i) Institutionalist View favours Labour Market Regulation

Institutionalists take the opposite view. They support minimum wages, basing on
the 'efficiency wage' argument, that employment can increase as there is a positive
relationship between wages and productivity, in which case the demand for labour may
increase in response to a wage increase. Further, they would argue that employment
security regulations may yield increases in productivity by: improving workers'
commitment to the enterprise and thus raising work motivation and productivity (with an
effect similar to that of the efficiency wage); reducing labour turnover and thus
increasing on-the-job learning; encouraging workers to accept productivity-raising
rationalization and modernization measures, as well as occupational and work-
environment changes; inducing greater acceptance of disciplinary measures; and
encouraging managers to find ways of increasing efficiency and competitiveness other
than laying off workers (Godfrey, 2003).

The “institutionalist” perspective favours labour regulations, because they: (i)

redistribute incomes in favour of labour, while providing necessary insurance from
adverse market outcomes, (ii) expand growth as well as employment for Keynesian
reasons (i.e. for boosting economic demand), and (iii) create desirable pressures on the

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employers to focus on the enhancement of their labour productivity whether it is through
training or technical innovations (Jha and Golder, 2008).

Thus, distortionists think that there is conflict between (i) improving wages and
other conditions of work and (ii) increasing employment. They believe that assuring high
wages and labour standards for some can harm others. Institutionalists find no necessary
conflict between these two sets of objectives.

3. Labour Market Flexibility: Contradictory Perceptions

With globalisation, after more opening of the economies, developed countries

began to insist on imposing the implementation of international labour standards on the
developing countries, so that latter may not have competitive edge in their exports. A
dichotomous situation arises between the demand of domestic industrial capitalist
employers for more labour flexibility; and the demand of the developed country
capitalist employers for more labour regulation (i.e., labour standards).

(i) Developing Country Perception

The labour flexibility is understood mainly as numerical flexibility. The usual

neo-liberal argument is that labour markets must become more "flexible" to solve the
problem of unemployment. This is done by weakening unions, reducing (or abolishing)
the welfare state, and so on. The "free market" capitalist (or neo-classical or neo-liberal)
argument is that unemployment is caused by workers’ real wage being higher than the
market clearing level. The argument is that by increasing flexibility, making the labour
market more "perfect", the so-called "natural" rate of unemployment will drop.

High labour market flexibility usually entails low security for workers. While in
advanced economies flexibility is supposed to facilitate the creation of more jobs and
economic growth and is therefore sought; in developing countries the labour market is in
some sense already quite flexible, because the labour laws cover only a minority of the
workers called formal sector employment and even the so called labour legislations
confine to be on papers (De Gobbi, 2007; Vandenbrg, 2008).

The market flexibility as applicable to the product market may not work in the
case of labour market, because labourers are humans and labour market is a social
institution. Thus, excess supply of labour may not result in reducing wages, because of
the class position of the workers’ associations, that prevent wages from falling.
Therefore,

“The forced introduction of labour market flexibility, and the overcoming

of the labour market’s ‘social institution’ character, will, far from
overcoming unemployment, worsen the problem, even while imparting
greater instability into the functioning of the system. It would only
succeed in increasing the degree of monopoly (to use Keleckian
terminology), shift income distribution from wages to profits” (Prabhat
Patnaik, 2006).

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 In fact, such inequality of incomes has been well portrayed in both developed and
developing countries by Paul Krugman, who is the latest Nobel Laureate in Economics,
Krugman (2007).

(ii) Developed Country Perception

In globalisation era, with the intensification of free trade and reduction of tariff
and quota restrictions, the developed countries at a disadvantage look for ways to restrict
trade by imposing non-tariff barriers such as labour standards in developing countries..
But labour standards are opposite to labour flexibility. The developed countries argue for
the harmonisation of labour standards to eliminate the so called “unfair economic
advantage” of countries with low standards. In contradistinction to this, in developing
countries, the domestic and foreign capitalist employers demand for the labour
flexibility reforms for achieving the competitive edge for their exportables, particularly
in the aftermath of WTO regime (Badri Narayanan, 2005).

But the developed countries insist on the ILO labour standards (including social
security measures) to be implemented in the developing countries, so that the goods and
services produced there will not be cheaper enough to be imported into developed
countries, so that de-industrialisation will not occur in the former. Steingart (2008) in
his recent LSE lecture accounts for this reasoning and consequence as follows:

With globalisation, 1500 million workers of the Asian countries can compete
with the 500 million workers of the developed countries (Canada, Australia, USA, Great
Britain and the rest of Western Europe). The competition is because of outsourcing, in-
sourcing and offshoring mechanisms in developing countries. Thus, the workers of the
latter countries will not regain their employment opportunities, due to inflation of
workers from the former countries. In a decade, it is the labour of 4 times that of the
available in the latter countries. The goods imported from them (ex. China and India)
become cheaper because the labour in the former countries have no proper social
security measures (of welfare state). An example, in the car production of Ford car,
British Leyland, where $1.6 thousand per car are being incurred for health insurance,
unemployment allowance, welfare state provisions together in the USA and other
developed countries. So the workers of the developed countries argue that the imported
durable consumer goods such as washing machines and other goods are to be marked dot
points in red (not following Kyoto protocall) and green.

Some developed countries also advocate extra-national intervention to adopt

international labour standards. This has led some developed countries to consider
legislation and other actions in their own countries which could curb child labour in
developing nations. For example, the so-called “Harkin's bill”, which has been debated
extensively in the US Congress, that seeks to disallow the import into the US of goods
that have been produced by child labour. The trouble with such extra-national
interventions is that these can come to be misused by lobbies and protectionists
representing narrow, sectarian interests (Basu,1999).

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4. Labour Market ‘Flexicurity’

Flexicurity is a term coined in the late 1990s to characterise specific aspects of

labour market governance. The first part of the term refers to the flexibility of employers
to adjust the workforce based on their needs as determined by market fluctuations. While
de-regulation may increase flexibility for employers it tends to reduce security for
workers. Flexicurity focuses the analysis on how the needs of employers and workers
might be balanced through a judicious combination of various employment policies.
Flexicurity model is a combination of employment security and labour market security.
Employment security is defined as the security of remaining with an employer. Labour
market security includes a moderate level of employment security along with support for
making employment transitions (Vandenberg, 2008).

In developed countries, the elements of flexicurity are grouped into three main
components: employment protection legislation (EPL); passive labour market policies
(PLMP) and active labour market policies (ALMP). The elements of these are provided
in Table-1.

Some say employment protection legislation (EPL) has both costs and benefits for
both players and to the society. The costs of EPL are: create dualism in the labour market
(protected and unprotected), increases the chances of long duration unemployment, and
lock protected workers into poor jobs as mobility is restricted, with no new recruitment
and absence of dynamism in the labour market, leading to lower wages (as a trade-off to
job security). The benefits are: (a) long-term contracts, (b) enable investments in
technology and workers, (c) force employers to be careful in choosing workers (d)
prompt workers to accept technological changes (if jobs are secure), (e) win workers’
loyalty, trust and commitment, all these translating into higher productivity (Shyam
Sundar, 2005)

However, the notion of "flexicurity", as a good balance between flexibility in the

labour market and a reasonable level of employment security for workers, has then been
extended to countries which are moving from planned economies to market-based ones
and whose labour markets are somehow more similar to those of advanced economies
than the labour markets of developing countries (De Gobbi, 2007).

For many developing countries, flexicurity becomes problematic

operationalisation, because of the five characteristics of labour markets and their
governance: (1) The passive labour policy, unemployment insurance, often does not
exist or if it does exist it may cover only a small portion of the workforce, (2) A large
portion of the labour force works in the informal economy, including smallholder
farming, (3) The informal economy tends to be characterized by a very large number of
very small productive units, comprising of ‘own-account workers’, (4) Due to the three
characteristics, trade-offs between various policies cannot be worked out, and (5) Social
dialogue is often weak in developing countries (Vandenberg, 2008).

In the developing economies, therefore a first step towards a higher level of

security can be the correct observation of international labour standards and fundamental

12
principles and rights at work (of ILO conventions). In these countries, very often
workers are not aware of their own rights and do not exercise them, as they are
unorganised. The legal means may not be of much help to the workers. But, some
economic-oriented measures, for instance, could enhance security levels for all workers,
formal and informal regardless of their being unionized (De Gobbi, 2007).

Table 1: Components of Flexicurity System

S.No. Components Specific Measures Nature of Labour Market Security
I. Employment Protection Legislation (EPL)
1 Notice period Notice given by employers to workers, trade Time to make transition to
unions and/or government prior to new employment
retrenchment
2 Retrenchment Need for approval (‘administrative Employment security when approval
authorisation authorization’) from government for denied; when granted provides time to
retrenchment organize transition to new employment.
3 Non-regular Protection for part-time, casual, fixed-term Employment and benefits security
employment and contract labour
4 Wrongful Protection against wrongful dismissal (for Employment security
dismissal reasons other than negligent or lax conduct
(gender, pregnancy, race, colour, religion,
trade union membership, etc.)
5 Maternity, Provides income support and/or right to Employment security, also
parental leave return to work after an absence for birth and considered a social right
post-natal care
II. Passive Labour Market Policy (PLMP)
1 Unemployment Monthly monetary payment to those Short-term income/transition security
insurance temporarily out of work, funded by
contributions.
2 Severance Pay Payment provided by employers in a lump Short-term income security
(Gratuity Pay) sum at the end of employment based on
years of service
3 Early retirement Lump sum or monthly payments provided by Income security
employer prior to normal retirement
III. Active Labour Market Policy (ALMP)
1 Job search Job search assistance through the public Transition to new employment
employment service (i.e. job centres),
including job and career counseling
2 Skills training Training or re-training to increase Transition to new employment
employability
3 Self-employment Promotion of self-employment through Transition to newly (self) created
business management training, mentoring, employment
credit access, tax breaks, etc.
4 Wage subsidies Wage subsidies to encourage hiring of Transition to new created employment
unemployed (or employment security)
Source: Vandenberg (2008)

VI. LABOUR FLEXIBILITY ISSUES IN INDIA

It is argued that more than 100 developing countries have reformed their labour
laws in response to competitiveness in the era of globalisation, but India remains among a
select few countries with a rigid system of labour protection (Sharma, 2006). But in
India, the protective labour laws are mainly applicable to organized sector workers, that
forms only 8-9 percent of the total workforce. The remaining wokforce, working in
agriculture mainly in rural areas and in non-agriculture of both rural and urban areas, is
the informal (unorganised) sector employment. India has the highest informal market

13
employment among the eight largest countries in developing world, 1990s-2000s, as in
Table-2.
Table-2: Changes in Informal Market Employment , 1990s-2000s
Country Period Informal Share (%)
China 1990 to 2005 51.0 - 52.8
India 1993/4 to 2004/5 92.7 - 94.1
Indonesia 1990 to 2003 28.2 - 28.2
Brazil Urban 1990 to 2003 40.6 - 44.6
Pakistan Urban 1997/8 to 2001/2 64.6 - 66.5
Nigeria Urban 1970s to 1990 50.0 - 65.0
Mexico 1991 to 1998 61.2 - 63.6
Philippines 1999 to 2003 78.0 - 81.0
Source: Freeman (2007)

Several economists, industry associations and mainstream media believe that

there has been inflexibility in the labour market, which is believed to have increased the
labour costs for enterprises and caused deceleration in employment growth in India
(particularly in the organised industrial sector). But, social security for labour, of a
limited kind, is enjoyed by only 8 to 9 per cent of the workforce of organized sector.
Thus, some argue that over-protection of a small section of workers is not only ostensibly
inimical to the growth of employment, but also goes against social justice as more and
more workers are faced with deplorable working conditions (Sharma, 2006). Only in
some aspects and some sectors, labour protection laws adversely affect the employers.
For that sake, absolute labour flexibility is being insisted on by the employers in India.
This demand of the employers has arisen, due to new international economic order after
the fall of the socialism in USSR and East Europe and aftermath of adoption of LPG
more or less all over the globe.

If we look at the contemporary discourses on labour laws in India, it is almost

never the case that one hears the employers in the informal sector complaining about any
‘rigidity’ in labour market. The problem with more than 90 percent of India’s labour
market is that of inadequate laws in the de jure sense and almost a picture of lawlessness
in the de facto sense (Jha and Golder, 2008). The government in India also began to think
in favour of the employers, as is reflected in The Economic Survey 2005-06: (i) Indian
Labour Laws are highly protective of labour, (ii) labour markets are relatively inflexible,
(iii) these laws apply only to the organised sector, and (iv) consequently, these laws have
restricted labour mobility, have led to capital-intensive methods in the organised sector
and adversely affected the sector’s long-run demand for labour (Sharma, 2006).

Trade unions and certain economists claim that labour cannot be treated like any
other commodity, and measures like minimum wages, job security, separation benefits,
social security, trade union rights, etc., are socially and politically necessary even for
sustaining the process of globalisation, as they increase labour productivity.

1. Employers’ Reform Agenda

The most controversial issue is employment protection law in India is Schedule

VB of the ID Act against which the employers point out. Changes in the Industrial
Disputes Act, 1976 made it necessary for enterprises employing 300 or more workers to

14
seek government permission to effect lay-offs, retrenchments and closures, and later in
1982, these provisions were made applicable to establishments employing 100 or more
workers. It has been argued that due to these rigid provisions, the employers were highly
reluctant to increase the number of employees, because they were unable to reduce their
workforce (Sharma, 2006, Shyam Sundar, 2005).

Employers argue that there should be change in the employment law

(Employment (Standing Orders) Act] and the judicial process (emphasising the principles
of natural justice) which have made difficult removal of even ‘bad’ workers. Employers
claim that the provision of items 10 and 11 of the fourth schedule relating to section 9A
of the ID Act can delay or obstruct all worthwhile change in technology, workload,
manning, shiftwork, etc. Employers claim that firms should have the freedom to contract
out operations and employ contract labour; thus remove the prohibitive aspect of the
Contract Labour (Prohibition and Regulation) Act, 1970. Their other demands are:
permission to include in the standing orders flexi-categories of labour, linking pay and
bonus with productivity, delinkage of dearness allowance with consumer price index,
relaxation of labour laws in export processing zones, permission to employ women in
night shift, and so on (Shyam Sundar, 2005).

2. Recommendations of SNCL

The Second National Labour Commission actually declares that the following
rights of workers have been recognized as inalienable and must, therefore, accrue to
every worker under any system of labour laws and labour policy. These are: (i) right to
work, (ii) right against discrimination, (iii) prohibition of child labour, (iv) just and
humane conditions of work, (v) right to social security, (vi) protection of wages, (vii)
right to redress at of grievances, (viii) right to organize and form trade unions, (ix) right
to collective bargaining, and (x) right to participation in management. The Commission
recommends on the part of wages: (a) minimum wage payable to anyone in
employment, in whatever occupation, should be such as would satisfy the needs of the
worker and his family; (b) every employer must in addition pay each worker one month’s
wage as bonus, before an appropriate festival; and (c) there should be a national
minimum wage that the Central Government may notify (Jayati Ghosh, 2004).

The commission tried to maintain balance between providing flexibility to

employers and providing safety net cushions to workers to lessen the pain of adjustments,
in the context of globalisation of the economy and rapid technological progress.

For employers, it recommended to restore the original threshold limit (1976

amendment), under schele VB of the ID Act, for the need to get prior approval from the
government for closure, i e, it requires firms employing 300 or more workers need to get
prior permission from the government for closure; i.e., a case of limited flexibility.
Further, it recommended use of contract labour for conduct of non-core activities and for
sporadic and seasonal demands it is permissible even for core activities. Though
Yashwant Sinha, the then finance minister, in his budget speech in 2001 suggested the
applicability of Chapter VB only to those units employing more than 1,000 workers, the

15
Second National Commission on Labour (SNCL) in its report in 2002 recommended to
restrict to 300 only (Shyam Sundar, 2005).

For workers, the commission recommended that (i) the firm should clear all dues
to workers before effecting retrenchment or closure; (ii) the government has to closely
scrutinise employers’ actions – for example, assess whether the employer effected
retrenchment in the relevant period before closure to scale down the workers’ strength to
less than 300 to avoid the obligation to take government’s permission; and (iii) workers
need to be paid a higher compensation, so that there can be differential rates of
compensation, lower rate of compensation in case of sick firms and higher one for
healthy firms ((Shyam Sundar, 2005).

3. Trade Union Perceptions

The current provisions providing for obtaining permission to lay off, retrench or
closure should be retained. There should not be ordinarily any retrenchment due to
introduction of automation, computerisation and modernisation. However, if surplus
exists on account of these factors surplus workers should be redeployed by the same firm
without affecting the existing service conditions. More importantly, if unavoidable
surplus labour exists after exhausting all the above processes then the surplus workers
could be retrenched by giving higher compensation. Layoff compensation should be 50
per cent of wages and allowances for the first month, 75 per cent for the second month
and full salary subsequently. Finally, in the case of closures, workers’ claims should be
settled first. In India there is no ‘right to work’ and no general unemployment assistance;
in such a situation it is not practicable to “give a blank cheque to the employers –
government or private, to operate exit policy.” Freedom to use contract labour would
eventually result in sacking of regular workers and use of contract labour. The principle
of ‘equal pay for equal work’ should be applied ((Shyam Sundar, 2005).

4. SEZs and Labour Laws

SNCL has opposed the view that labour laws should not be applied to Special
Economic Zones (SEZ). But in India, so far more than 250 SEZs have been approved, of
which 56 are in AP only. If Labour laws are not applicable to SEZs, there is a greater
possibility for the workers to suffer from adverse working conditions, leading to a type
of wage slavery (Sawant, 2007). As per SEZ Act many changes in the existing laws of
India are made particularly under section-50 of SEZ Act. Accordingly, in Andhra
Pradesh, Karnataka, Maharastra, Madhya Pradesh, and Uttar Pradesh, the Development
Commissioner has been delegated to amend many Acts relating to labour undermining
the authority of the Labour Commissioners of the respective states (Singhvi, 2006).

5. Suggestions for Improving Labour Security with Flexibility

Labour market institutions have to exist to offer social protection to workers and
maintain social peace. But it is neither desirable nor feasible to eliminate the rigidities in
a wholesale manner, as per Solow. The two warring labour market actors make noises

16
for reforms suiting their sectional interests. The law should provide flexibility and yet
extend security, a kind of ‘flexicurity.’ The objectives of regulatory exercises should be
to: (a) facilitate the growth of the enterprise and make it sustainable in the competitive
environment; (b) promote employment; (c) offer sufficient protection to workers; and (d)
ensure social peace (Shyam Sundar, 2005). Simplification and rationalization of the
existing labour regulations; and unification and harmonization of labour laws must be
taken up on a priority basis. Further, improving the infrastructure and processes for the
enforcement and implementation of labour laws. A core of labour standards can certainly
be envisioned for the country as a whole in both organized and unorganized sectors (Jha
and Golder, 2008).

Laws like the Minimum Wages Act, the Equal Remuneration Act, the Contract
Labour Act, the Industrial Disputes Act and so on apply to workers in both the organized
and the unorganized sector, as per ILO conventions. However, the sheer practical
difficulties and high costs associated with implementation and enforcement of such legal
provisions ensures that most workers do not benefit from them for favouring employers.
Thus implementation and enforcement are to be strictly practised (Jayati Ghosh, 2004).

6. Labour Union Activism - Not for Adverse Impact on Employment

If the unions are highly active, some times there may be adverse impact on the
employment and growth the economy, particularly when the economy is on the
development path. In this respect a case of Kerala of late 1980s and early 1990s may be
mentioned as an example (Kannan, 1998).

The labour unions which are active in Kerala led to non-adoption of technological
upgradation in the small-scale industrial economy of the state. The labour union activism
caused the disincentives for the establishment of new industrial firms, on the one hand;
and the transfer of the existing firms to the neighbouring states particularly Tamil Nadu,
on the toher hand. It had happened in the industries of the textile, and garments and also
the cashewnut production to the neighbouring state Tamil Naadu to locate in
Coibatore?Tirpur and so on.

Thus Kerala was thought to be a labour problem state, which led to the
dicouragement of the entry of private capital. Further, in the existing industries began to
involve in more casual/ informal sector operations, thereby cutting regular employment.
As a consequence, the youth, who wanted more regular employment, started migrating to
other states(six other states of India) and abroad (Gulf countries.). Migration to Gulf has
been providing remittance income to the people in the state; and this has created demand
for more services in the economy of the state.

VII. EMPLOYMENT LEVELS GLOBAL SCENARIO

In the globalisation era, the developed countries mostly formulate international

agreements to work in their favour, through supra-national institutions. The most obvious
is the asymmetry between the freedom of movement of capital, especially financial

17
capital on one hand, and the restrictions placed on the other, on the movement of
especially unskilled labour from developing countries. Despite vast improvements in
travel and communications technology, available estimates suggest that labour migration
as a proportion of the total world population has been lower in the current phase, 1973-
98, compared to the earlier phase of globalization, 1870-1913. The theory of “factor-
price equalization” and the more recent “convergence hypothesis” are being professed
to make believe that factor price equalisation and growth catching-up are possible in the
developing countries on par with the developed ones (Bhaduri, 2005).

The developing countries have now begun raising the issue of labour mobility
(paralleling the rich country demand for mobility of capital) and the easing of
immigration laws in the rich countries to allow poor country labour export as a
countervailing measure, in view of the stress of equal treatment status for the inflow of
investment from the developed into the developing countries on the basis of TRIMS
(Trade Related Investment Measures) under WTO regime (Dasgupta, 1997). Until the
First World War, governments operated relatively few restrictions on immigration In the
period covering a century 1815-1915, which includes the first phase of globalisation.
Around 60 million people left Europe for the Americas, Oceania, and South and East of
Africa. About 12 million Chinese and 6 million Japanese emigrated to East and South
Asia. An estimated 10 million migrated from Russia to Central and Asia and Siberia.
A 1 million went from Southern Europe to North Africa. 1.5 million left India for South
East Asia and South and West Africa (Wolf, 2004, p.116).

The growth rates of GDP and merchandise exports were high in the periods 1950-
73 and 1973-98; the GDP growth rates being 2.93 and 1.33 percent per annum and
merchandise exports being 7.88 and 5.07 respectively. These growth rates were quite less
(0.90 percent) for both in the period 1913-50. This period (1913-50) experienced two
word wars and one great depression and this was the worst period for growth in standards
of living of 130 years, 1870-2000 (Wolf, 205, p.106). The low growth rates period 1913-
50 was attributed as collectivist era by Lorenzo Bernaldo de Quirós (2004), due to two
socialist revolutions (Russia and China).

The period, 1950-73, is the Keynesian era which is related with the high
employment objective, whereas the period, 1973-98, is Monetarist era related with the
price stability objective, especially favoured by the financial markets. At least partly as a
result of this policy regime, the world economy slowed down visibly almost in all regions
in the latter period of 1973-98, compared to the period 1950-73 (Bhaduri, 2005). This
happened despite rapid increases in the trade of goods and services, from a ratio of export
to world GDP at 5.5 per cent in 1950 to 17.2 per cent in 1998 (Wolf, 2004, p.110).
Though the later period is generally treated as liberal phase of globalisation era, the
growth rates have come down.

Now we have a bird’s eye view of the impact of labour protection measures,
based on conclusions of a few studies.

18
1. Impact of Labour Protection Measures

In a series of studies coming from the International Labour Organisation, it is

shown that the trade union activities and the provision of the minimum wage have not
had adverse impact on growth, trade competitiveness, employment etc. Based on the
information for 162 countries, it is shown that stronger trade union rights do not
generally hinder trade competitiveness, including trade of labour intensive goods; further,
the study offers a stronger conclusion that the countries with stronger trade union rights
tend to do comparatively better in several respects such as aggregate trade flows, total
manufacturing exports etc. Further, the fact that deregulation of the labour market, even
in most of the advanced capitalist countries, has not been able to contain high
unemployment even after years of implementation, ought to increase scepticism about
deregulation and its supposed benefits (Jha and Golder, 2008).

Storm and Naastepad (2007) has taken eight indicators as measures of labour
market regulation: (i) the employment protection legislation index, (ii) the percentage of
the non-agricultural workforce, (iii) union density, (iv) collective bargaining coverage (v)
the unemployment benefits index, (vi) the extent of coordination in wage bargaining, (vii)
the replacement ratio (unemployment benefits /average earnings), and (viii) the total
labour tax rate. Based on OECD countries data, the study made a cross-country
regression analysis and confirms that excessive labour regulation is not the major cause
of slow labour productivity growth. Their results have been stable even in the two
periods prior to 1997 and for the complete period (1984-2002). From the study, it has
been clear that deregulation and flexibilisation of OECD labour markets may lead to a
deteriorated productivity performance, because it fails to effectuate the contribution that
workers can make to the process of organisational and technological innovation which
raises labour productivity.

Kopsos (2005) consider data of 160 countries and finds no evidence regarding a
link between employment rigidity (employment protection) and the job intensity of
growth. This may mean that employment protection policies do not have a broad impact
on economies’ job creation potential, but it could also be due to a lack of enforcement of
employment protection legislation.

2. Employment Elasticity and Employment Growth

Along with the slowing down of the growth rates in most countries, the rate of job
creation has also slowed down in varying degrees in the Monetarist era (1973-98)
compared with the Keynesian era (1950-73). A summary statistic capturing this trend is
the output elasticity of employment, particularly in manufacturing. In a comparison of the
two decades of 1970s and 1980s, this elasticity for the manufacturing sector declined
from 0.54 to 0.39 in East Asia, from -0.07 to -0.08 in OECD, from -0.07 to -0.43 in Latin
America, and most remarkably from 4.72 to 0.86 in Sub-Saharan Africa (Bhaduri, 2005).

It is from this perspective that we consider the findings on the pattern of

employment elasticities and employment growth rates from Kapsos (2005) for 160

19
countries. He has considered three periods 1991-95 (I) , 1995-99 (II) and 1999-03 (III).
If period-I is the immediate post liberalization phase, period-III may be treated as
somewhat ripened liberalization phase, while period-II is an intermediate phase.

At the global level, the GDP growth increases from 2.90 percent in period-I to
3.60 percent in period-II and then reaches 3.50 percent in period III. The corresponding
employment elasticities are 0.33, 0.38 and 0.30. Similarly growth rate of employment is
high in the intermediate phase(II) with 1.37 percent and the labour productivity growth is
also higher in second phase (II) being 2.23 percent. Thus, at global level, intermediate
phase is good in its performance. The decline in the employment intensity of growth in
the period from 1999 to 2003 is most likely a reflection of poor employment performance
following the global economic slowdown that took shape in 2001.

In terms of broad global trends among demographic groups, given expectations in

labour force growth, youth employment elasticities are low in all the three periods.
Another significant trend in the global labour market is evidenced by higher female
employment elasticities in each of the three time periods than the corresponding
elasticities for men. This result appears to indicate a “catching up” in terms of women’s
labour force participation relative to men’s.

The cross-country findings are: (i) There is positive relationship between labour
supply and the employment intensity of growth. (ii) There is a positive relationship
between economies’ share in services and their employment elasticities. (iii) Measures of
globalization and export orientation showed no strong correlation with employment
intensity, except in the case of women, i.e., among women, greater export-orientation
may lead to a higher employment intensity of growth.

VIII. EMPLOYMENT LEVELS IN INDIA

There are two types of studies on employment in India to asses the impact of
economic reform process on employment: (i) the studies based on NSS Reports and (ii)
studies bases on organized sector employment.

1. NSS Report based Studies

An exhaustive study has been by Chadha and Sahu (2002). This deals with
different types of employment, both in rural and urban areas. The period 1983-93 is
treated as pre-reform period and the period 1993-2000 as post-reform period. It shows
decline in the employment growth rates between the periods and lends support to the
thesis of a negative fallout of economic reforms:

“The overall rate of growth of employment for rural workers declined

from 1.75 per cent per annum during 1983/1993-94 to a low of 0.66 per
cent per annum during the post-reform years; for rural males, it declined
from 1.94 per cent to 0.94 per cent, and for rural females it declined from
1.41 per cent to low of 0.15 per cent. All this is hardly a reflection of an

20
 employment-friendly scenario. A varying degree of decline was witnessed
for urban areas also; from 3.22 per cent to 2.61 per cent for urban males,
from 3.44 per cent to 0.94 per cent for females, and from 3.27 percent to
2.27 percent for urban persons.”

It is observed that the rate of open unemployment in rural India has not gone up
during the post-reform period, as there is no decline in the lobour force being converted
into workforce. But, there are no clear signals for the rural workers to shift to non-
agricultural avenues, showing their incapability of gaining access to these jobs, because
of the low level of their human capital index. Another important feature in rural India is
that there is increasing casualisation of the rural workers as (i) the incidence of self-
employment has been consistently on the decline and (ii) regular salaried jobs have been
also on the decline. This casualisation process has been observed among most of the
states in India.

There are studies which extended the period to 2004-05 (up to the latest NSS
Report). We refer to a few important studies among others: Chandrasekhar and Ghosh
(2006, 2006a), Bhalla (2008) and Dev (2008).

Chandrasekhar and Ghosh (2006) have observed that the employment growth
rates increased between 1999-00 and 2004-05 and labour force rates also improved in this
period. They note that around half of the workforce in India currently does not work for a
direct employer and it leads to lack of decent work conditions due to self-exploitation. In
the study (2006a), the authors point out that (i) in regular work rural female, urban male
and urban female workers real wages have declined, and (ii) real wages of regular women
workers declined for every category of education level.

Bhalla (2008) also find that the employment growth rates under UPSS (usual
principal and subsidiary status) record increases at the overall employment, non-
agricultural employment and employment of non-manufacturing workers between 1999-
00 and 2004-05. It is true across all the major sectors except in trade. It also notes that
among almost all the states the employment growth accelerate between 1999-00 and
2004-05, as against the deceleration between 1993-94 and 1999-00. Another distressing
point is that if we compare entire post-reform period 1993-94 to 2004-05 with the pre-
reform period (1983 to1993-94), the employment growth rates have declined both at the
national level and among states. As against decrease in the self employment for the
period 1993-94 to 1999-00, as observed by Chadha and Sahu (2002); it is noted that
there has been increase in the number of self-employed regular workers.

Dev (2008) notes that work participation rates for UPSS workers have increased
between 1999-00 and 2004-05 with increase of 1.5 and 2.8 percentage points for rural
males and females respectively; and 3.1 and 2.7 percentage points for the urban male and
female workers. The increase in the WPR for females may be due to their engagement in
the short duration work, where females are preferred over the males in both rural and
urban areas. It points out that though the child labour ratios are lower for urban areas,
they are higher in rural areas; for the age group 10-14, under UPSS, the ratio for rural

21
boys declines from 14.0 percent to 6.8 percent between 1993-94 an 2004-05 and similarly
for rural girls it goes down from 14.1 to 7.4 percent in the same period. It also highlights
the problem of working poor.

2. Organised Sector Employment and Labour Flexibility

In India, the labour flexibility argument has been voiced from the employers’
perspective only mainly from the organized sector. As has been seen in section-6, the VB
of ID Act became the villain. The study of Fallon and Lucas of 1991, about the jobless
growth of the organized sector (-0.3 percent for 1979-87), came out with a conclusion
that in India, the employment in organised manufacturing failed to increase by 17.5
percent, due to the presence of job security regulation (VB of ID Act). Then onwards
studies came in India to test their hypothesis.

Kannan (1994) applied the concept of dynamic efficiency over the 18 industry
groups for two periods (i) 1973-74 to 1985-86 and (ii) 1980-81 to 1985-86, from the data
of Annual Survey of India; and arrived at the conclusion that the presence of modern
labour institutions such as unions and labour legislation is not incompatible with the
objectives and growth and distribution. Some other economists, Papola, Nagaraj and
Bhalotra offered alternative hypotheses: (i) As per Papola, there was faster growth of
industries with low employment intensity and slower growth of industries with high
employment intensity, and (ii) Nagaraj and Bhalotra attributed to increase in mandays
per worker.

Papola also argues that slowdown in employment in the 1980s was due to decline
in employment in food production industries and cotton textiles, which were closed due
to sickness and rationalization to overcome obsolescence. Sharma (2006) says that there
was improvement in the growth of employment in organized manufacturing during the
first half of 1990s. At the aggregate level, the growth rate of employment was 1.6 per
cent per annum during the period 1972-73 to 1989-90, which increased to around 3 per
cent per annum in the period 1990-91 to 1997-98. The employment elasticity also showed
an increase 0.33 in the period 1990-91 to 1997-98 as against 0.26 in the period 1972-73
to 1989-90. Thus, the “protective” labour legislations cannot become the cause of
employment deceleration in 1980s.

Nagaraj (2004) also points out that in the period between 1990-91 and 1995-96 ,
the organized sector grew, but only later there were job losses. Between 1995-96 and
2001-02, 1.3 million employees (13 per cent of workforce) lost their jobs. Thus,
employment in 2001-02 is roughly same as it was eight years earlier. It is mostly workers
who have lost over 1.1 million jobs (15 per cent). But employment of supervisors
increased more or less steadily, though they too experienced job losses. Between 1980-
81 and 2000-01, employment of workers increased by 4.3 per cent (0.24 million), while
that of supervisors rose up by 39 per cent (0.55 million). On a trend basis, however, the
annual growth rates are 0.9 per cent and 2.2 per cent for workers and supervisors
respectively. The job losses are widespread across industries and states. Of 15 major

22
industry groups, 11 representing about 80 per cent of the workforce, witnessed a fall in
employment during 1996-01.

The public sector enterprises were subjected to restructuring by the mid 1990s.
Retrenchments were initiated by the voluntary retirement scheme (VRS) of the public
sector enterprises but subsequently the private sector followed suit, as enforcement of
labour laws was relaxed. Until the mid-1990s, job losses did not show up in the
aggregate, due to considerable job creation owing to the boom in industrial output and
employment (Sharma, 2006).

As per Papopla (2007), the public sector employment expanded rapidly over the
years, as shown in Table-3. Its expansion was particularly rapid during 1970–90, due to
many takeovers and nationalizations. Employment in public sector enterprises was
around 0.7 million in 1969 and increased to 2.2 million by 1989–90. Public sector
employment is, of course, dominated by services, which accounted for over 50 per cent
(9.6 million out of a total of 18.6 million) in 2003. Transport, contributing another 15 per
cent, is second in importance; and finance, with a share of 7.5 per cent, is third.
Manufacturing is a close fourth with 7 per cent of employment. It may be noted that
manufacturing used to be a much larger segment of the public sector, contributing over
twice as many jobs (1.5 million) than finance (0.75 million) in 1981. Since then finance
has seen a continuous rise in employment, reaching 1.38 million in 2003 while
manufacturing after reaching a peak of 1.85 million in 1991 has seen continuous decline:
it employed only 1.26 million workers in 2003.

Table 3. Employment in the organized sector

(million persons as on 31 March)
Public Private
Year Total
sector sector

1981 15.48 6.50 22.00

1990 18.77 7.58 26.35
1997 19.56 8.75 28.17
2001 19.14 8.65 27.79
2003 18.58 8.42 27.00
Source: Papola (2007)

IX. CONCLUSION

Globalisation (including liberalisation and privatisation) has made its dent on

several aspects and one of them is employment. Globalisation imposes opening up of
the economy for trade first and then for capital flows. It has been initiated from the
developed countries’ perception, as the hidden agenda is to exploit the developing
country markets. But developing countries are not allowed to export their skilled and
unskilled labour to the developed countries, in lieu of their allowing capital flows and
goods. Further, when globalisation is under process, the developing country employers
demand for labour flexibility in their countries to produce goods and services at cheaper
labour costs to compete in the developed world. But the developed country employers
insist on the extension of international labour standards as prescribed by the ILO

23
conventions, so that the developing country employers, by paying social security benefits,
cannot compete with developed country markets.

In India, the labour market flexibility has been voiced from the organised sector
employers. Here the share of organized sector employment is only 7-8 percent and to this
segment only labour legislations are mainly applicable. Employers claim that labour
protection legislation (as of Schedule VB of ID Act), which makes to seek the
government permission to retrench or layoff the workers or close the firm or company,
increases unemployment. Thus, it is rigidity and so this is to be removed. Further
minimum wages and other social security legislations should be scrapped. Though Fallon
and Lucas study of 1991 came up with the conclusion that labour protection measures can
create unemployment, many studies later condemned its results. Kannan (1994) showed
that modern labour institutions, unions and protective labour legislations, are not harmful
to employment and income growth. Many other studies also showed in the developed
world that labour legislation is helpful to the increase in productivity as well.

The claim for labour flexibility is to provide “numerical flexibility” to the

employers, without providing job security and social security to the workers in the
developing world. It may be better to provide security to workers, while extending
controlled flexibility to the employers, i.e., flexicurity, as is being practised in the
European countries after 1999, with job security, passive labour market policies, and
active labour market policies.

As regards the impact of globalisation, in India, in the organised sector there were
retrenchments or retirements to the extent of 1.3 million workers, between 1995-96 and
2001, though its growth was good in the period immediately after liberalisation, 1990-91
to 1995-96. Organised public sector and private sector employments have been nearly
stagnant or on the verge of slide down (Papola, 2007).

In India, nearly 92 percent of the workforce is in the unorganised sector and so

the overall employment growth depends on this sector only. Based on the NSS Reports,
the growth rates of overall employment for males, females and persons in both rural and
urban areas, have fallen down in the post reform period, 1993-94 to 1999-00 (compared
with the period, 1983 to 1993-94). However, the growth rates have improved for the
latest period, 1999-00 to 2004-05 for all those categories. But it is distressing to note that
when the entire post-reform period is considered, i.e., 1993-94 to 2004-05, the growth
rates have declined both at the national level and among the states (Bhalla, 2008).

The labour legislations, which depend on ILO conventions, have to be made

applicable to both organised and unorganised sectors. As the Second National
Commission on Labour (SNCL) upholds ten types of rights to the workers in general
(including minimum wages), the existing labour legislations have to be enforced to the
advantage of unorganised sector workers. At the same time, the Bill on social security
for the unorganised sector has to be passed in the parliament.

24
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This was presented at 50th Annual Conference of the Indian Society of Labour
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