Breaking Down the Recent Labour Law Amendments from the Lens of Development Economics

More than 90% of India’s labour-force is employed in the informal sector, with limited social security benefits. This informalisation of labour-force does more harm than good and has serious repercussions on a nation’s growth patterns. Two basic policy interventions to improve existing labour conditions in developing countries are:

a) increasing the rate of economic growth, and b) improving the regulation of labour markets. 

Covid-19 is already holding back the economic growth, which leaves us with the latter alternative of improving regulations governing the labour market, i.e. labour law reforms. This article aims to address why and how the recently announced labour law amendments, in times of persistently high unemployment are clear indications of how the Indian government has failed its working-class population. 

This is a two-part series of articles (part I and part II), where the aforementioned topic is discussed in light of Development Economics and Macroeconomics respectively. 

Consequent Impacts on Labour Productivity

Returning to the case in point, some states have increased the shift duration from 8 hours to 12 hours. Increasing the effective working time may cause individual workers to produce smaller quantities of output per hour, due to fatigue, reduced employee motivation and a higher risk of mistakes. Economic theory posits that the marginal revenue product of labour (MRP_L) is the additional revenue earned by a firm by employing an extra unit of labour, holding all other inputs constant. Mathematically, 

MRP_L = MR X MP_L,

where,

MR is marginal revenue i.e. revenue gained by producing an additional unit of output, MP_L is the marginal product of labour i.e. change in the total product that results from employing an additional unit of labour. In theory, any variable that affects MP_L (or MR) will directly affect MRP_L.

Going by the above-explained theory, this lower productivity (a fall in MP_L) as a result of increased work hours will directly affect the additional revenues (MRP_L) of a firm, thereby working against the government’s intent to create an enabling environment for businesses to grow and expand. Taken together, this explains why increasing working hours will not lead to an expected increase in output, as envisioned by the respective state governments. Rather, this perceived fall in labour productivity, coupled with existing labour market rigidities and already low minimum wages (< Rs.300 per day) would further add to the nuances of persisting inequality and poverty. 

Reverse Migration Adding to the Dismay

In 2011, 455,787,621 people (~37.6% of the total population) migrated from their place of residence to elsewhere including 45,013,404 (~9.8% of the total population) who migrated in search of work/employment or for business. Furthermore, the ongoing reverse migration will create an excess supply of workers in the recipient states that will repopulate the agricultural sector. This will aggravate the problem of disguised unemployment in the farming sector, leading to further stagnation. Some of these migrants might go for a job-hunt in the industries, construction or transport sector which may make wages highly competitive and sticky upward, thus making the situation even worse.

Continued Plight of MGNREGA Implementation

Furthermore, wage arrears, delayed, rejected, diverted or blocked payments, seasonal employment coupled with implementation issues portray how the labour-class is exploited at the hands of the central government. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) wages have either fallen behind the minimum wages or have remained constant in real terms (nominal wages increase to match the increase in price levels) for some time. The Centre has announced to disburse Rs 40000 Crores, but a part of this will either go into paying outstanding liabilities for materials or will become a part of failed budgeted forecasting, i.e. fiscal marksmanship. All these persistent problems showcase how some states have done too little to uplift the standard of living for the poorer sections of our society.

Migrant: A Factor of Production or a Mere ‘Commodity’?

Added to this is the problem of squeezed consumption demand for non-essentials, continued credit crunch, and low investment uptake. This is certainly one of the greatest economic and humanitarian crises in the rural landscape, where impoverished migrant workers were stranded to walk back 1000 kilometres to their homes, while the upper-class citizens were repatriated from the foreign nations in special evacuation flights; where migrants were charged for train tickets, while the travel expenses of richer citizens were billed to the government. These scenarios portray how capitalism has eaten away our human rights and has rightfully shown us that workers are a mere ‘commodity’.

Part II of this article throws light on this topic with a special focus on inflation, employment and monetary policy implications.