Are Labour Laws Really Rigid?

Are Labour Laws Really Rigid?

ccording to estimates there are over 50 central labour laws and 200 state labour laws. To describe each and every labour law is beyond the scope of article, but we will see their broad impacts on industry and existing debate surrounding rigidity in labour laws. 
According to Indian constitution labour falls under the concurrent list meaning that both centre and states are able to enact laws in this area whereas the residual powers fall with centre.

Recently the executive announced four bills in parliament which are yet to be executed namely the code on wages 2019, occupational safety, health and working condition code 2019, industrial relations code 2019, code on social security 2019. The objective behind the codes is to subsume complex labour laws in order to make it employer friendly and to give a good playground to investments. Meanwhile some of the states had also made some changes (Uttar Pradesh, Madhya Pradesh, Gujarat, Rajasthan, Odisha, Punjab). However, the boldest of one has been announced by Uttar Pradesh as it has suspended almost all labour laws including the minimum wages act in the state for next 3 years.

But questions which deserves our attention is does making labour laws more flexible will help in attaining in more investment and in return more growth? Do the provisions of Indian labour laws stack the deck disproportionately against employers? 

No talk of labour laws will be complete without section V-B of Industrial Dispute Act. First introduced in 1976 this chapter practically makes it impossible for an industrial establishment with 100 or more workers to lay off or retrench even if it is unprofitable. Initially it applied to only 300 workers but a 1982 amendment reduced the threshold from 300 to 100 workers. The domestic and foreign investor argue that Indian labour laws provide high degree of protection and security to labour since closure of an unviable unit and retrenchment of workers requires prior permission of state govt. Other thing to be noted is that such section demotivates the employer to hire more than 100 workers since it does not require any sanction from state government. 

As the above chart shows organized sector is employing more of non-contractual labour (informal workers). It should be noted that organized and unorganized sectors are two different sectors. According to National Commission for Enterprises in the Unorganized Sector (NCEUS), unorganized sector comprises all unincorporated private enterprises owned by individuals and households engaged in sales and purchase of goods and services. It defined informal workers as those working in informal sector or households excluding regular workers with social security, and workers in formal sector without any employment and social security benefits. (Achin Chakraborty, 2016, pp. 53).  What the evidence shows is that the organized sector is showing greater reliance on informal workers, casual and contract workers (informalization of economy). It is obvious that labour market reforms will in the end give an impetus to more informalization of the economy. Given the fact that manufacturing employs 13% of total workforce and contribute to 16% to GDP and that informal workers usually have wages lower compared to formal workers this could indeed create a demand problem as can be seen in the present coronavirus context. Reforming labour laws which could also be termed as supply side reforms cannot solve the problem of growth unless and until there is demand side reform in order to boost demand. The growing informalization only compounds this gap. 

So, the question arises what factors are not letting India leverage its comparative advantage in labour-intensive manufacturing if not labour laws? 

One argument is that more of hire and fire policy leads to high degree of attrition which hampers on productivity. In the economic literature “efficiency wage hypothesis” implies that workers productivity is a function of wages i.e., higher wages (above the market clearing wage) translates into more productivity for workers. Another argument is too much labour market reforms will not solve manufacturing growth issues if there are no structural educational reforms which will make workers more skill enhanced. 

According to Pranab Bardhan, labour market may be more flexible in china than in India but one should not exaggerate the difference job security regulations. The Chinese govt until that late 1990s tightly restricted the workers dismissal. Enterprises were not allowed to dismiss more than 1 % of employees each year. Also, during 1996-2001 a significant fraction of Chinese unemployed workers had access to public subsidies and unemployment benefits. Even if we argue that labour laws should not be as protective as they are but its accepted in all quarters that there should be some sort of mechanism of income support during job loss.

The COVID-19 crisis has exposed the plight of migrant labourers who walked millions on foot without any food and transport and got killed in the process. Changing of labour laws to force workers to work for 12 hours is like bringing back the bonded labour system that was abolished by Indira Gandhi during her tenure. This paradigm of deregulation of labour laws marks a shift towards the early colonial era in which the state refrained from regulating the work hours in the context that labour-capitalist relation is a private matter (bipartite relation) unlike the previous era of tripartite relation (state-employer-employee).  When mahatma Gandhi drafted a petition to safeguard the rights of Indians before he started his satyagraha in South Africa, he did so by first consulting the labourers and had famously said they had the right to exercise their brains as anyone else.

The quote which very aptly summarizes today’s situation: “Is it possible that our best intentions for labour are not actually met by laws that sound progressive on paper but end up hurting every worker they are meant to protect” (Prime Minister Manmohan Singh during his speech to trade unions, 23 November 2010).


  1. Achin Chakraborty (2015). Reforming Labour markets in states: Revisiting the Futility Thesis. Economic and Political Weekly. May 16.
  2. Bhagwati and Panagariya (2012). “A Multitude of labour laws and their reforms in India’s Tryst with Destiny. Collins business. Noida.Ch.8.
  3. Pranab Bardhan (2010). Awakening Giants, Feet of clay: Assessing the economic rise of China and India, Oxford University Press, Ch.2.
This essay bagged second place in the EconEssay competition organized by team Economiga. For more details click here{alertInfo}
Author bio (Guest Author)

Piyush Kumar Meena is a student of M.A Economics at Department of Economics, Delhi School of Economics (DSE), University of Delhi. His areas of interest include Economics, Politics and social issues.


This is the official profile of team economiga. The posts under this profile may be multi-authored posts or guest author posts.


Post a comment
Previous Post Next Post