Breaking Down the Recent Labour Law Amendments from the Lens of Macroeconomics

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

Once the nationwide lockdown is eased, initial supply chain disruptions might impart cost push inflation while on the other hand, lack of demand (except for the essentials) due to lost income would force the aggregate price level to stay low. Amidst this demand-supply tussle, for a few months starting now, inflation is expected to remain low due to: low demand, economic inactivity, expectation of average monsoon and weakened oil prices; but is likely to pick up later with: easing of lockdown norms, hopeful flattening of the COVID curve as states develop resilience and improved supply side movements. An appropriate policy in the face of this yet uncertain scenario would be to provide immediate liquidity to the businesses, ease supply chain bottlenecks and simplify procedures of getting approvals to conduct business, so that the businesses’ cash flows are maintained, there are fewer job losses and fresh investments are encouraged respectively. Further, the government should try and create gainful employment opportunities for the people by integrating supply chains locally as is their emphasis for ‘vocal for local’. This coupled with the right mix of fiscal and monetary policy should then ensure inflation in a benign territory. Apparently, what’s happening on the massive informal side of our economy is disturbing.

Helpless Workers to Bite the Bullet

A few days ago, a number of state governments made drastic changes in the application of labour laws with the intention of incentivizing economic activity. While the draconian changes to labour laws would hamper productivity (as discussed in part I of the series), they would also suppress the bargaining power of workers thus limiting increases in money wages (if any, owing to unionized bargaining power). Moreover, amidst this less secure and uncertain economic scenario, it’s plausible that workers would be less inclined to take a risk by seeking larger wage increases. That means what states are doing is exploiting the ‘helpless’ labourer.

How They Violate an Appropriate Incomes and Wages Policy respectively?

An appropriate ‘incomes’ policy calls for limiting increases in money wages to gains in productivity to control inflationary tendencies arising on account of money wage growth excess over productivity growth. Also, enforcement of a fair ‘wage policy’ defined by the International Labour Organisation  (ILO) as: “A legislation or government action calculated to affect the level or structure of wages, or both for the purpose of attaining specific objectives of social and economic policy”, has been a struggle in India’s largely unorganized sector. For above reasons, the government’s recent decision to amend labour laws appear to be artificially disturbing inflation trajectory as it suppresses money wage increases (which would anyway be of corrective nature in response to heightened unemployment levels) and nowhere aims to increase efficiency of workers, reduce costs and maximize profits. Rather they are irrational, inhumane, may work in favour of the riches thereby further widening the income gap and thus be strictly condemned. According to Clark Kerr, “Improving worker efficiency and performance, encouraging the acquisition of skills and providing an incentive for labor mobility should be the real purpose of a wage policy in a developing economy.” So, clearly the idea should be to make labour laws simplified and flexible but not do away with most of them altogether.

Implications for Monetary Policy

To add to it, persistent slow growth in wages might also create problems for the RBI (Reserve Bank of India) as it can contribute to an extended period of inflation below target which won’t be desirable at a time when the central bank is trying to revive it using slew of repo rate cuts and other measures. This is so because for given aggregate demand in an economy, the actual character of inflationary process, including the time-rate of inflation and its structural composition, is affected greatly by a number of institutional factors (here being labour reforms) relating to the manner in which wages and prices are set and changed. (Monetary Economics, Suraj B. Gupta)

Conclusion Lastly, I would like to quote a recommendation in the Article IV Consultation document of the International Monetary Fund (IMF) released in December 2019. The report presents two scenarios for future economic growth of India of which the second scenario needs a relevant mention here. It recommends a package of reforms to boost inclusive growth which will spur productivity and employment. Of the three pillars of reform, third one is: reform of the markets to enhance labour market flexibility, formalising the economy, improving employment opportunities, enhancing competition and reducing the scope for corruption. Although this report couldn’t see the light of COVID days but still makes relevant remarks and necessitates immediate action in the reformative direction by the Indian government.