People's Democracy

 ECONOMIC NOTES

 Labour Repression:

 Not A Good Economic Policy

Jayati Ghosh

THERE are too many straws in the wind for us to ignore. The recent Supreme Court judgement on the right of public employees to go on strike, the arbitrary decision of a Kolkata High Court judge to ban rallies on weekdays (which then was reversed); the Supreme Court’s reversal of its own previous judgement regarding the right to regular employment of contract workers employed for prolonged periods --- all these are indications of a much broader and more dangerous socio-economic process.

For some time now, it is evident that the stance of the central government --- in terms of the executive authority and policy makers --- has been anti-labour. It is now apparent that the same tendency is also increasingly prevalent among the judiciary, which has been delivering a series of judgements, which effectively operate to reduce the bargaining power and rights of workers.

LABOUR MARKET FLEXIBILITY

There is an underlying economic paradigm in all this, which essentially is the neo-liberal market-oriented framework. This argues that labour market “flexibility” is crucial for increasing investment and therefore employment, and also for ensuring external competitiveness in a difficult international environment. In this perception, legal protection afforded to workers, in the form of curbs on employers’ ability to hire and fire workers at will, minimum wages or granting freedom to engage in collective action such as the right to strike, all actually operate to reduce employment.

In addition, in India there is a further argument, which is frequently accepted even by well-meaning people with a concern for the poor. This relates to the argument that the dualism in the labour market in India means that there is a conflict between organised workers and those in the unorganised sector. It is often argued that the recognised trade unions ignore the problems of the workers in the informal sector; that protection given to organised workers actually allows or even militates against the improvement of conditions of unorganised workers, who are anyway much worse off. This perception then leads even some progressive people to accept that the “privileges” extended to organised sector workers can be withdrawn, since they are anyway so much better off than most other workers in the economy.

This argument is based on poor politics and even worse economics. The politics is wrong because in fact any struggle over workers rights necessarily affects all workers, even if this is not immediately evident to particular categories of workers. It is amply clear even from the Indian experience, that every attack on organised workers has also reduced the bargaining power of unorganised workers, that periods of repression of organised labour have also been periods when informal sector workers find themselves even more exploited.

The neo-liberal economic argument is that these rules which restrict hiring and firing put undue pressure on larger employers and prevent smaller firms from expanding even when the economics of their situation otherwise warrants it. This creates a dualistic set-up in which the organised or formal sector necessarily remains limited in terms of aggregate employment and most workers, who remain in the unorganised sector, are therefore denied the benefits of any protection at all.

The resulting dualism is characterised by an organised (or larger scale) sector, which has relatively low employment, and an unorganised (or smaller scale) sector, which has low investment. If aggregate economic activity is to break out of this dualism and marry the advantages of both sectors, the argument goes, it is necessary to get rid of the constraints put on large employers in the matter of labour relations. The purpose of various recent interventions --- the recommendations of the Second National Labour Commission, the recent Court judgement, the attempts to create more “flexible” and less protective labour legislation – is to supposedly get rid of these constraints on employers.

The belief is obviously that reducing such “rigidities” and curbing the power of organised labour will increase private investment, increase economic activity and improve productivity. All these in turn will improve external competitiveness, which is considered to be so important these days.

FLAWED APPROACH

The chief problem with this argument is that it completely ignores the major forces affecting investment, economic activity and therefore employment. It is now accepted across the world that aggregate investment does not respond to changes in the wage rate, but to broader macroeconomic conditions such as the level of demand, the amount of public investment, the expectation of external markets, and so on. Labour costs are never viewed in isolation, but only in relation to labour productivity, which in turn is affected not only by the level of well-being, skill and education of the workers themselves, but also by infrastructure conditions, the technology used in production, and so on. In such a context, greater “flexibility” in labour markets might simply mean the perpetuation of low wage-low productivity practices by employers, rather than more economic growth.

In the 1990s, advocates of labour repression started arguing that, while all this might be true for closed economies, in open economies things are different. Once international competition becomes important, it is impossible to ignore the need for labour flexibility, so globalisation means that the “old” more protective laws and structures for workers have to be dismantled.

But the experience of the Latin American economies over the past two decades serves to destroy that argument. Most countries in Latin America went in for drastic liberalisation of their economies after the debt crisis of the early 1980s. They also went in for policies and laws, which dramatically reduced the power of organised labour. The typical package of reduction of public investment, privatisation of state assets, reduced public services, and much lower bargaining power of workers, leading to low wage demands.

The result has been very different from the neo-liberal dream. In the past two decades, investment rates across most of Latin America have gone down. There has been de-industrialisation, with a decline in both output shares and absolute levels of employment in manufacturing. The production structure has shifted away from sectors with potential for productivity growth, back to the processing of raw materials and primary products. Labour productivity has stagnated. External competitiveness in this region has been based on low wages rather than increasing productivity, and so the region’s share of world exports has actually fallen.

This should serve as a cautionary example to our own policy makers, who appear to be intent on following this unfortunate example. Labour repression cannot be a route to sustained development.