Flexibility of Indian Labour Market

3e_wood_wideweb__470×3042.jpgIndia is a very young country. The data on demographics suggest that majority of the Indian population is under the age of 25. Also, about 140 million people will be joining the workforce in the next decade. The numbers sound very encouraging, painting the picture of an economy where growth is going to be the norm for the coming years.

While the most important issue taken with this consideration, is obviously job growth.
Much hyped is the growth in IT and BPO sectors across televisions and magazines, which in absolute terms is going to be only 1 million or maybe 2 million. With the current labour force of 400 million only 7% are employed in the formal sector. Characteristic of the Indian labour market is the informal sector that makes up for the rest 93% of the job opportunities.

The discrepancy in the estimated growth of labour force and the growth of jobs is evident. It is an issue that has been talked about at various levels, resulting in numerous methods that could check it. Lesser popularized and equally important are the issues of labour market flexibility, that have a similar bearing on the equity and efficiency of an economy.

Robert M Solow identified the attributes of an inflexible labour market to be as follows.
“A labour market is inflexible if the level of unemployment- insurance benefits is too high or their duration is too long, or if there are many restrictions on the freedom of employers to fire and to hire, or if the permissible hours of work are too tightly regulated, or if excessive generous compensation for overtime work is mandated, or if trade unions have too much power to protect incumbent workers against competition and to control the follow of work at the site of production, or perhaps if statutory health and safety regulations are too stringent”
In India, labour unions and laws that bind the labour movement create such inflexibility. The unions manage to set the wage above the market rate of wage, which in turn reduce the capacity of firm to hire workers, causing unemployment. The increased cost of production also crowds out investment, resulting in welfare loss. In trying to protect the interest of workers in the firm, such rigidity set by the union affects interest of those who are unemployed.
As is apparent, post globalization, the capital movement has been more flexible than labour. The labour flow is restricted not just between countries, but within the same country as well. Flexibility in this market can be achieved by removal or reduction of legislation that protects the labour market.
The million-dollar question is- Will such flexibility be desirable?? Liberal economists would argue that such a free movement of labour would ensure competitive market equilibrium. The free market for labour will entail better efficiency and productivity. State intervention will create distortions in the market and will deviate the equilibrium from the best possible outcome.

Critics of de-regulation argue that if the firms in a free labour market compete on the basis of lower wage, then there is no incentive for them to work on innovation of technology or increasing productivity. Only when the path to competition on the basis of low wages and bad working conditions is barred by providing a floor of labour standards, the firms can become enterprising and invest in technological and organizational innovation, which, in turn, leads to better wages and working conditions. Also, an absence of rules and regulations, when hiring workers may lead to deplorable working conditions for the workers.

The current policy on labour flexibility needs a redesign as it has invited criticism from the employer and the workers. Since labour cannot be treated like a commodity that is exchanged for production, with tribulations like job security, minimum wage, social security, trade union right etc to be taken care of for purpose of development. Also too much restriction on its movement may cause unemployment. International experience suggests a middle path constructed keeping in view the dynamics of the domestic market, should be followed.