Industrial Labor Market, Wages and Employment, Since 1950

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INDUSTRIAL LABOR MARKET, WAGES AND EMPLOYMENT, SINCE 1950 India is a large agrarian economy; as of 1999-2000, 60 percent of its workforce was employed in agriculture, living in rural areas and producing about 25 percent of gross domestic product. In terms of institutional structure, the organized (formal) sector employed slightly less than 10 percent of the total workforce to produce 40 percent of net domestic output, moy originating in the industrial and services sectors; the rest were in the unorganized (informal) sector. The organized sector consists of public sector, private corporate enterprises and cooperatives, manufacturing firms registered under the Factories Act of 1948, or the Bidi Cigar Workers' Act of 1966, and recognized educational institutions. The public sector constitutes about 66 percent of organized employment.

Worker-population ratio in the economy has remained roughly stable, at around 40 percent; it is about 28 percent for women (with sizable underestimation). The participation of children in the workforce has steadily declined, though in absolute numbers it remains substantial, concentrated in selected labor-intensive industries, often producing goods for export.

About 30 percent of India's population is urban, residing mainly in the metropolitan cities. Rural-urban migration to the cities moderates urban wage growth, and also causes considerable open (as well as disguised) unemployment in the informal sector. The industrial sector's share in the workforce (mining, manufacturing, construction, and utilities) is around 18 percent, producing 27 percent of domestic output. Only about 20 percent of industrial employment is in the organized sector, much of it is in urban areas and is predominantly male.

Changes in Workforce Composition

After remaining roughly constant, at little over 70 percent, from 1950 to 1980, the share of India's workforce in agriculture declined to about 60 percent by 2000. In 1980 both China and India had roughly about the same proportion of workforce engaged in agriculture. Two decades later, while the agricultural share in China declined by 20 percentage points (the majority of whom found employment in manufacturing), the decline in India was only half as great, and the majority of that percentage went into services. In fact, there has been only a marginal rise in the share of manufacturing, while the construction sector has doubled its share, from around 2 percent to 4 percent of the total workforce, between 1983 and 2000.

In 1950 manufacturing employment was concentrated in four states: West Bengal, Maharashtra, Gujarat, and Kerala. Half a century later, Kerala's share has declined, while those of Maharashtra, Gujarat, and West Bengal have increased. Other states that have improved their share in the industrial sector are Karnataka, Andhra Pradesh, Madhya Pradesh, and Haryana.

Household manufacturing has declined in absolute as well as in relative terms, a trend consistent with modern economic growth. However, in contrast, employment has shifted away from the organized (registered or formal) into the unorganized (unregistered) sector. Within the organized sector, employment has shifted to smaller sized factories, as the average factory size has declined from over 140 workers per factory in 1950 to less than 60 in 1976. The trend has persisted in more recent years as well. Proportion of workers employed in factories with 500 or more workers has declined from 55 percent in 1980–1981 to 38 percent in 1997–1998.

Trends in Wages

From 1960 to 1980, real earnings per worker in registered manufacturing grew at about 1.5 percent per year, marginally higher than the growth rate of per capita income during this period. However, in the subsequent two decades (1981–2001) per capita income grew twice as fast as real earnings per worker at 3.6 percent per year. But product wage—nominal earnings deflated by producer prices—grew at a faster rate than real earnings, as a result of the effects of domestic terms of trade. All along, there has been a steady growth of casual and contract labor, and a decline in the share of "permanent" jobs, thus affecting the quality of employment. Despite the wage growth, unit labor cost declined from 1974 to 1998, as labor productivity grew much faster. Moreover, the wage-rental ratio—the ratio of wages to deflator for machinery—also declined during this period. Wage growth in India's public sector, a sizable part of which is industrial, has been consistently faster than that in organized manufacturing. This growth is in part explained by the compensation for higher education and skills required in heavy industry, and in part by the superior bargaining power of public sector employees.

As no official statistics on wages in the urban informal sector exist, wage trends in this sector cannot be directly assessed. It is reasonable to expect, however, that unorganized sector wages lie between those in the organized sector and those in agriculture, subject to education, skill, and experience. Agricultural wages have shown a steady rise since the 1980s; but wages in agriculture as in unorganized urban sector, tend to be too low to overcome poverty.

Labor Market Institutions

State intervention in industrial labor markets began during the colonial period with the introduction of several measures including the restriction of the length of the working day to eight hours, the establishment of a minimum wage, and the right to form trade unions apparently under pressure from British textile interests, who were losing markets to Indian firms. After independence, these efforts were strengthened and their scope widened. However, the scope and effectiveness of labor legislations vary across the states.

The Factories Act of 1948 is the cornerstone of labor regulation in manufacturing, and electricity and gas; the Shops and Establishments Act exists for the tertiary sector. Registration under the Factories Act is mandated for all factories employing ten or more workers using power, and twenty or more workers without using power on a regular basis. As the factory size increases in terms of employment, the act becomes more stringent with respect to benefits for workers.

Minimum wage legislation

India does not have a national minimum wage, or publicly funded universal unemployment insurance. As per the Minimum Wages Act of 1948, the state governments mostly set minimum wages. In some states, like Maharashtra, minimum wages are indexed to the cost of living. Many traditional industries have "Wage Boards," with members drawn from management, unions, and government that periodically determine wages for the industry or region as a whole.

Trade unions and collective bargaining

The Industrial Disputes Act of 1947 is the principal legislation intended to resolve workplace conflicts. The state can intervene in any dispute between employers and employees in the organized sector. Employers or employees are expected to inform the labor commissioner before declaring a lockout or going on strike. In all such disputes, the labor commissioner is, in principle, a party to the decisions. On the face of it, the mechanism is stringent; for instance, to retrench even a single worker, an employer must seek the permission of the state labor commissioner if the factory employs one hundred or more workers.

As in most developed economies in recent decades, union density in India has declined sharply, to about 25 percent among workers in organized manufacturing by 2000. Labor militancy, as measured by workdays lost due to strikes and lockouts, decreased dramatically during this period. Centralized industry- or region-wide collective bargaining mechanisms have given way to decentralized, company based, collective bargaining arrangements.

Public sector

Employment generation in the public sector was accepted as one of implicit objectives. Every ten years, the central government appoints a "pay commission" to determine wages for its employees, arriving at wages (and benefits), based not on the government's ability to pay, or on worker productivity, but on notions of "fair" wages. The pay commission awards tend to become benchmarks for wages in the rest of the public sector. Thus public sector employment generation and wage settlement have become significant determinants of the organized labor market.

Social security

This benefit is largely restricted to the organized sector. Public sector employees have either (indexed) defined benefit pensions or contributory provident fund programs with publicly set interest rates. Central government employees are entitled to health insurance for life, and organized workers have the Employees State Insurance Scheme (a social security plan) that provides health care financed by workers and employers while employed. Some state governments have social security and pension plans for workers belonging to specific industries in the unorganized sector.

Evidence on enforcement of labor laws

As in many developing economies, India's labor legislation tends to be aspirational, with limited effectiveness. Ambiguity in the legal system leaves considerable discretion to the administration and the courts that seem detrimental to the smooth functioning of the labor market. The Factories Act, for instance, is widely violated. In 1990, 58 percent of all manufacturing enterprises employing ten or more workers did not register under the act. The magnitude of underregistration is likely to have gone up further in the 1990s, when the enforcement of many legal provisions was relaxed.

As productive activities are decentralized and geographically dispersed in the unorganized sector, government has little ability to administer minimum wage laws effectively. Even where it is possible, enforcement is problematic, as most of the employment contracts are informal, and unverifiable in courts. Moreover, illiterate workers have little knowledge of their rights; even if they do, they are often too poor to seek redress from administration or courts. Not surprisingly, in factories employing up to one hundred workers, effective trade unions are uncommon, with some states and location excepted.

Development Strategy

Why has industry's share in the workforce remained modest in India compared to fast-growing Asian economies? India's development strategy is believed to have caused the dominance of large, capital-intensive factories that are inconsistent with the economy's resource endowments, compared to East Asia, where small factories dominate. India inherited a skewed distribution of factories for many historical and institutional reasons, including the British managing agency system, a lack of capital market institutions, and the absence of market-based interfirm relationships. Moreover, Indian data over-state large-sized factories in manufacturing, as the data on the size-distribution of factories include generation and distribution of electricity, which tends to be large sized.

Industrial labor in India forms a relatively small proportion of the total workforce; its share has witnessed a modest increase since the 1950s, compared to many rapidly industrializing Asian economies. Household manufacturing's share has declined, both in relative and absolute terms. However, contrary to much of the development experience, Indian industrial employment over the last few decades has diffused into small-sized factory and into nonfactory enterprises. Thus, it is the urban informal (unregistered) manufacturing sector's employment that has been growing.

Regionally, the industrial sector's employment percentage has declined in Kerala, while that in Maharashtra, Gujarat, West Bengal, Karnataka, Andhra Pradesh, and Haryana have increased. Similarly, the shares of urban and male employment probably have declined somewhat in favor of rural and female labor.

Real wages have risen half as fast as the growth in per capita income since the 1980s; the wage share, and wage-rental ratios have declined. Whether the rise in real wages represents compensation for education, skills, and experience or the growing power of organized labor is unclear.

Many believe that India's organized industrial labor market has grown very rigid, as employers must seek the state's permission to retrench even a single worker. Such rigidity is believed to be responsible for rapid wage growth and poor employment growth and increasing substitution of capital for labor. Evidence on the declining strength of unions, the informalization and casualization of the workforce, and the declining unit labor cost are, however, widely adduced to question the rigidity hypothesis.

R. Nagaraj

See alsoAgricultural Labor and Wages since 1950 ; Industrial Policy since 1956


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