Thursday, September 24, 2020

Labour laws and the Red Queen effect

The Parliament has passed three labour codes, including the Code on Industrial Relations 2020 that will allow firms with less than 300 employees to retrench them more easily, raising the limit from earlier 100. These companies will no longer be required to frame standing orders for their employees.
A standing order is a legally binding collective employment contract and holds significance as it contains key work-related terms and conditions and is meant to prevent arbitrary dismissal of employees... Under the present law, companies hiring at least 100 workers need to frame what is known as a “standing order”, which has to be placed on a notice board at or near the entrance of the unit and disseminated to all the workers, specifying the conditions of work and the retrenchment norms. The government has proposed to increase this threshold to 300. The standing order states the classification of workers in an establishment, manner of informing workers about their legal rights, such as work hours, holidays, wage rates, etc, and conditions for terminating their employment. It also spells the grievance mechanism for workers. “The standing order acts as a collective rights document stating the most important terms and conditions in a standardized manner for workers. According to a Supreme Court judgment, these are statutory in nature and overrides even the individual contracts between employers and employees in that particular unit,” labour economist and XLRI professor K.R. Shyam Sundar said. Sundar said the standing order deters companies from dismissing workers arbitrarily as there are instances where the courts have reinstated workers who have moved court basis the standing order.  
This is a good example of how a legislation, while an essential starting point, is unlikely, by itself to realise the desired objective. In fact, in the absence of other dynamics, the legislation can actually worsen the situation.  

A good description of the challenge comes from a recent book by Daron Acemoglu and James Robinson (also this presentation) which explains the emergence and sustenance of of liberal democracy through the metaphor of Red Queen effect from Lewis Carroll's Through the Looking Glass where the Red Queen tells Alice that she has to keep running just to stay still. They describe how liberal democracies are a result of  long and constant struggles and co-operation between state and society along a narrow corridor where neither allows the other to gain dominance. 

Labour standards anywhere are similarly a race and struggle between labour and capital, intermediated by the state and society. If labour law reforms have to become successful and lead to productivity enhancement and job creation, the race has to be balanced. The balance of power between capital and labour has to be maintained along a narrow corridor, and it's the state's responsibility to create the enabling conditions. These enabling conditions are not just about creating new laws, which are essential to start any reform, but more importantly also about facilitating the conditions for labour to be able to demand their rights and capital follow the spirit of any reform and concede the basic rights of labour. It is also for the society (and public debates that lead to social narratives) to create the conditions/container that do not allow one party to become too powerful and force the bargain on the other.

In case of India's labour legislation, an equilibrium had emerged through several struggles between labour and capital whereby, in case of firms with less than 100 workers, the latter largely adhered to the spirit of the law while exercising the letter of law while retrenching workers. The state and society, in different ways, contributed to the emergence of this balance. The same balance is now required to be established between capital and labour in those firms which would have acquired the freedom to retrench workers. It requires struggles and negotiations between capital and labour.

In a system and at a time where capital invariably has, for a variety of reasons, the upper hand in negotiations with labour, the playing field is heavily tilted against labour. Sample the indiscriminate manner in which several states have proposed complete scrapping of labour regulations for a few years to attract investments. Also, how mainstream media and opinion makers constantly paint labour regulations as responsible for India's manufacturing laggardness.

Therefore, when the state and society too end up supporting capital in the struggle between capital and labour, the outcome is most likely to be beneficial neither for capital nor labour, much less the economy and society. In fact, such reforms could then end up creating more damage than business as usual.

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