For a long time now, labor has been the whipping boy for the advocates of reform in India. It is held that if you can get rid of some antiquated legislation and bring the trade unions into line, foreign investors will rush in to set up shop. The reality of what needs to be done is rather different, says Wharton legal studies and business ethics professor Janice Bellace in this opinion piece.

Articles about the need for labor reform in India usually descend into sweeping statements highlighting poorly-thought-out legislation with the author then concluding that India needs to do away with most labor laws in order to attract investment. Such thinking confuses the problem (inappropriate legislation combined with bad administration made worse by corruption) with the solution (appropriate legislation, combined with efficient and honest administration).

An example of this type of simplistic commentary is one found on the BBC website written in 2005 by Kaushik Basu, an academic from Cornell who is currently chief economist of the World Bank. Let me quote from his article:

“The body of legislation that shapes the industrial and labor environment in India is huge…. [It is] a crisscrossing network of chaotic, strangulating, overlapping and often contradictory laws that are crying out for overhaul. [The Industrial Disputes Act of 1947] was enacted a few months before India’s independence and guides the hiring and firing rules of the industrial sector. It is a good example of a well-meaning policy that is founded on antiquated economics and a handsome misunderstanding of the way markets function.”

Labor Laws: Content, Not Number

The “network of chaotic laws” is easy to criticize. But the number of statutes is not particularly relevant. What is relevant is the logic and order of the laws. I favor fewer, more comprehensive statutes because they tend to set down guiding principles and are easier to understand. Also, a well-drafted comprehensive statute avoids the problem of piecemeal legislation, which often leads to inconsistencies, gaps and contradictions.

Another benefit of a comprehensive statute is that it tends to force the legislators to take a broad view of what they want to achieve. With piecemeal legislation, the lawmakers often focus in detail on one problem without giving thought to the big picture.

The best-performing economies in the world (for example, Norway, Switzerland and Singapore) have a considerable body of labor law. Some of the fastest-growing economies over the past two decades (China, for instance) also have a substantial body of labor law. This demonstrates that it is not the number of statutes that is relevant, but their content.

“The ‘network of chaotic laws’ is easy to criticize. But the number of statutes is not particularly relevant. What is relevant is the logic and order of the laws.”

The second major criticism of Indian labor law is that it is antiquated. But how long ago a statute was written is not very important. Key pieces of American labor legislation date to the 1930s. The relevant question is whether the statute is still timely and appropriate. Here, a caveat must be given: The best-designed legislation can be undermined by stultifying bureaucracy. This type of bureaucracy tends to be a feature of a country’s civil service and affects the administration of all regulations (not just labor laws).

Challenges at Independence

There are former British colonies such as Singapore that became independent, took British laws and adapted them to the circumstances of a newly-independent country. Some British laws India adopted were designed for a highly-industrialized country, which Britain was in 1947, but India was not. And some British laws were laws the British used only in the colonies (to control a population). In 1947, India needed to confront a situation where only a minority of the people worked in factories. Most workers had no employer — they were in the informal economy. The attitude of some of India’s early governments regarding obligations that should be placed on employers has proved problematic, in particular those that viewed the employer as some sort of social welfare agency that doles out payments to workers, for instance when workers are being made redundant.

Labor laws need to be aligned with a country’s level of economic development, and India’s often were not. Economic development was the key imperative for India. In 1950, India needed to confront the challenge of upgrading its labor force (e.g., by instituting universal primary education). And it needed to create the infrastructure (roads, railways, electricity) that would attract investment.

Prime Minister Narendra Modi has taken the position that India must be transparent and efficient. He is correct. Poor infrastructure, crony capitalism and corruption have likely done more to dissuade investment than labor laws. With regard to labor law, what Modi needs to do is eliminate outdated legislation with up-to-date legislation where appropriate, and to streamline compliance and enforcement procedures. Most importantly, Modi should commit the government of India to “decent work” (an International Labor Organization term that includes opportunity, security, adequate remuneration and freedom of association). If a government does that, it must articulate a vision of how legislation will support economic initiatives that will be investor-friendly while, at the same time, providing working people with safe, fair and reasonable working conditions in a democratic society.

“Labor laws need to be aligned with a country’s level of economic development, and India’s often were not.”

Upgrading the labor force (including women) is of paramount importance. This is outside the scope of labor law, but it is matter for government policy as a foundational step in universal primary education.

In considering how to build a new corpus of labor law, a government should seek to cover the following areas in statutory law:

1. Safety and health at work and fair labor standards. Examples are maximum length of the workday, rest periods, safety measures and restrictions on child labor.

2. Unfair Dismissals. This should be broken down according to the two different types of dismissal:

a. Dismissal of an individual for cause (e.g., poor performance, excessive absenteeism).

b. Dismissal for reasons of redundancy (the worker or workers are not needed because there is lack of work for them to do).

Firing Workers

Too many articles say that it has to be easier “to fire” workers without making a distinction between the two types of dismissal. Why would any government want to make it easier for employers to fire employees who are doing their jobs (unless the government wants to go back to the 19th century concept of master-servant relationship)? In most countries, there is legislation that says that an employer must have good cause to dismiss an employee. The most common employer response is that the employee was dismissed for poor performance (bad workmanship, coming to work drunk), attendance reasons (frequent absenteeism or tardiness) or conduct (getting into fights, arguments). Countries differ on how such dismissals are adjudicated. Obviously it is preferable to opt for fast, cheap dispute resolution mechanisms such as arbitration or industrial tribunals. What must be avoided is pushing this sort of dispute into the courts because that typically leads to slow and expensive dispute resolution, which is bad for both the employee and the employer.

With the second type of dismissal — for reason of redundancy — some countries have opted to legislate this situation because of political reasons. They want to placate the workers who will be made redundant; those workers are voters and can influence others. This is bad economics (and not “antiquated economics,” as Kaushik Basu says). It was always bad economics. An employer wants to produce goods (or services) to sell. If there are customers, the employers will want workers. Thus, there is no reason to suspect employers of “bad motives” if the employer makes some workers redundant. It makes no sense to require employers to obtain approval from the ministry or a court before workers can be made redundant.

What does make sense in a redundancy situation is to require notice of termination due to redundancy. This gives workers some time to figure out what their next step is. It also gives the local government some time to devise the means for assisting those newly laid off. The government should have an unemployment compensation fund that will serve as a modest financial cushion for those workers who will see their weekly pay cut off.

Other Legislation

The government should also seek to cover:

3. Collective labor relations and dispute resolution (strikes, mediation, arbitration). Disputes between labor and capital are a feature of all industrialized societies. The object of legislation should be to require negotiation and mediation with the aim of minimizing the number of disputes that result in strikes.

“… how long ago a statute was written is not very important. The relevant question is whether the statute is still timely and appropriate.”

4. Social safety net: Unemployment compensation, workers’ compensation (for injury), maternity pay. The provision of a social safety net is a feature of most countries once they become middle income. The policy choice for the government is how to fund it, and where to set the exact level of benefit so as to provide some support, but not discourage people from getting back into employment. In some countries, this is funded out of general taxation; in others, there is some form of cost sharing (the government, the individual and the employer all contribute to the fund on some stipulated basis).

5. Non-discrimination in employment. It is a basic human right not to be discriminated in employment. Labor law, however, cannot eliminate discrimination when discrimination against a group is rampant in society. The challenge is to create conditions in society that encourage equality.

Labor inspection — the subject of Modi’s recent installment of reforms — is not really a separate law. Every statute (not just labor laws) must have some form of enforcement. In the labor area, one does not want to write legislation that uses the courts as the main vehicle for enforcement. An example would be safety legislation. As a government, you do not want factory fires to occur. Fines may not be a sufficient deterrent and the families of workers who died in a factory fire hardly want a damage award, let alone to have to wait years to receive it. Therefore, a government usually wants employers to follow safe practice voluntarily. The real possibility of bad practice being detected is known to encourage employers to adhere to safe practice. Thus, effective labor inspection is very important.

Virtually every country has inspectors. The problem in India is two-fold. First, the number of labor inspectors is so low that most workplaces will never see an inspector. Second, because of this, those workplaces that are the subject of inspection suspect they are being harassed. They may well be, as corruption is widespread in India. But this is not a reason to abolish labor inspectors; it is a reason to establish an adequately-funded labor inspectorate, with trained inspectors, to establish a basis for selecting sites to inspect, and to root out corruption (such as inspectors taking bribes.) Here, it should be noted that some types of unlawful behavior are very difficult to detect; e.g., child labor. Once child labor is banned, it tends to go “underground.” Considering India’s dismal record regarding child labor, it is extremely important that the labor inspectorate be strengthened.