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May 13, 20205 min read

The Case Against Labour Law ‘Reforms’

15 arguments against the current spate of labour law ‘reforms’. 




1) While there is a case to be made for rationalizing labour laws and instituting reforms, any change in policy must be based on evidence and consultation with all stakeholders and legislative procedures. The ideal way to frame this debate is not capital versus labour but: ‘What is the best way forward for sustainable growth and optimum industrial relations?’ A summary dissolution of existing laws is the worst way to go about systemic reforms. 


2) Another fallout of hurried decision making is the short duration of the policy change – most states have suspended / diluted labour laws for a limited period of time. This leads to an uncertain policy environment that has traditionally been associated with discouraging investment and growth. In order to attract serious long-term capital investment, states need to provide predictability, stability, and consistency of policy. 

3) It has been argued that relaxed labour laws will encourage formalization. There is a two-pronged issue with this argument –  (i) Why would owners be incentivized to formalize workers when they are uncertain about whether or not these changes will last?  (ii) If most of the protections associated with formalization are stripped away, so are the advantages of formalization. 

4) Arguing that laws made for the protection of workers discourage growth, investment, and formalization because they encourage rent-seeking and corruption is a little like saying we should not have criminal laws because the police force that enforces them is prone to corruption and bias. Doing away with protection substantially or altogether instead of focusing on building capacity and innovating mechanisms for compliance, implementation, and enforcement is throwing out the baby with the bathwater. 

5) Suspension of labour laws will deprive workers in the formal economy of guaranteed minimum wages and wage rates will decline. This is supported by two pieces of existing evidence –  (i) Growth of wage rate had been sharply declining even before COVID-19 hit and  (ii) there is a wide gap between the wages of formal workers and informal workers, irrespective of gender and in both rural and urban settings, suggesting that the minimum wage protection offered by law was effective. Falling wages will further depress the demand in the economy and is likely to have a spiral effect on businesses. 

6) The principal reason to be cautious against the dilution of protection for workers is that they are not at arm’s length (the arm’s length principle in contract law is the condition that two parties are on an equal footing) with business owners. In other words, they do not have the same bargaining power as owners. For eg. almost all states that have taken to changing labour laws in the last two weeks, have increased the number of permissible hours of work per week from 48 hours to 72 hours. Gujarat and Uttar Pradesh have gone further by stating that no overtime wages are payable for extra hours of work. If an individual worker was not able to cope, they would not have the option to refuse extra hours for fear of being fired. 

7) The bargaining powers of workers are further weakened by a criminal justice system that is inaccessible and oftentimes corrupt. From registering a complaint to affording lawyers and accessing justice through courts – redressal is a near impossible dream for daily wage workers.

8) It has been argued that if firms were allowed to hire and fire on will, it would improve the ease of doing business. Examples from other countries that have performed well economically are cited to support this argument. In itself, the argument might have merit but in a country where no unemployment benefits or universal basic income is made available by the welfare state, workers are at great risk if firms are allowed to fire at will. If these changes were complemented by unemployment benefits and reskilling programs, they might be more defensible.

9) Health and safety standards in factories in India are poor. Evidence suggests that owing to the higher overhead repairing costs, Indian employers pay more attention to corrective maintenance (that is, replacement of machinery when the complete breakdown occurs) relative to preventive maintenance where scheduled maintenance of machines and equipment is undertaken at regular intervals to avoid breakdowns. This increases chances of industrial accidents and related fatalities. Existing laws have fallen short when it comes to enforcing safety regulations because the state lacks capacity. Despite the increasing manufacturing and mining activities, regulatory authorities ensuring occupational safety have been limited to 1,400 safety officers, 1,154 factory inspectors, and 27 medical inspectors for the central sphere across states. Evidence shows that self-regulation does not work when it comes to ensuring safety standards because employers tend to prioritise maximising their profits over workers’ safety. The ongoing approach towards labour laws is only likely to create more of a moral hazard.

10) The Employees Provident Funds and Miscellaneous Provisions Act, 1952, and the Payment of Gratuity Act, 1972, are important laws that provide social security cover for the workers, something that the bulk of white collar workers take for granted. Both the state and employers are at fault for failing to register workers and failing to ensure that they get the intended social security cover. However, if the laws are scraped even the basis for social security cover for labourers is lost.

11) A popular argument against labour regulation is that it has led to large scale informalization of the economy. In other words, employers are reluctant to hire registered employees because they want to evade labour laws. However, there isn’t clear evidence to support this claim. In fact, the International Labour Organisation in its Report on Decent Work and Informal Economy has noted that labour regulations are only one of the many determinants in an informalization of the workforce. Changes in patterns of production, advances in information and communication technology, as well as global competition have also catalysed the growing informalization of work. 


12) The Working Group of Experts of the Commission on the Legal Empowerment of the Poor set up by the United Nations Development Programme found scant conclusive evidence of a causal relationship between rigid labour market regulatory frameworks and informality. Indeed, several countries which are part of the European-led Organisation for Economic Cooperation and Development and have significantly more flexible labour regulation, have also witnessed massive informalization of work in the last three decades.


13) Complete deregulation has the potential of leading to large scale labour unrest, which in turn, is bound to detrimentally impact investor sentiments.


14) There is little evidence to support that revoking and diluting labour laws alone is enough to spur business activity. World Bank surveys, for example, state that labour laws are only the fifth biggest problem that businesses face. Relatedly, there is some evidence to show that relaxation of labour laws has not led to increased employment. Strengthening rule of law, enforcement of contracts, policy certainty, reforming land laws, better governance, improvement in infrastructure, access to credit, and investment in human capital are just some other examples of policy areas that need attention.

15) An alternative measure to support businesses right now could have been to give them wage subsidies. The government could have, as many governments have done across the world, partnered with the industry and allocated 3% or 5% of the GDP towards sharing the wage burden and ensuring the health of the labourers. This could have helped spur economic activity without leaving workers, particularly vulnerable at this point in time, subject to further exploitation. 




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