The Decline of labour: Myth of ‘Rigidity’ in India’s Labour Market

SATYAKI ROYISID, New Delhi

National Seminar on “ Globalisation, Labour market and Employment Relations in India”

9-10 July, 2012Mumbai

Flexibilisation Debate• Flexibility: lowering cost of hire and fire: separation

benefits are potential hiring costs• Net result: lower employment rates during upswing and

higher rates during recession• Types of flexibility (S,2002): numerical: increased

external worker; functional: job structure, work tasks; wage flexibility: fixed to flexible, monetisation

• Globalisation: addition of labour supply without proportional addition in capital: bargaining strength

• Globalisation: Logics of competition; logic of employment-protection; logic of industrial peace: hegemony of capital by dismantling legal rights: Share of IW within FS: 42 (99/00); 46.6 (04/05); 51.1 (09/10)

The Macro-perspective• Lower real wage induce profit-max firms to produce more through

greater emp till MPL equals real wage; abolition of institutional rigidities: rising emp without accelerating inflation

• Keynes’s intervention in case of temporary departure from Say’s world of full employment

• The assumptions of the marketist approach: a) reduction in NW keeps demand unchanged; b) MPC=1 implying no gap between increment of income and that of consumption; c) DL in response to NW is not inelastic

• Wage restraint would depress both unit cost and Consumption demand, alternative I or Ex (B&M,1990). Inflation as an implicit shift.

• More the share of profit incomes the less responsive would be CD wrt income; Change in the composition of output: higher income elasticities of demand and lesser employment elasticity

Share of compensation to employees and operating surplus(all sectors, NAS)

Share of Compensation to employees by industry categories (NAS)

Share of operating surplus by industry categories (NAS)

Share of Compensation to employees in manufacturing (NAS)

Share of Compensation to employees in services (NAS)

Highlights (NAS)

• Decline in CE: 37.4 to 34.1 (D-3.1pp); Decline MI: 51.4 to 45.4 (D-6pp)and rise in the share of OS: 10.4 to 18.7 (D-8.3); sharper rise since 1993

• Sharp fall in CE: TSC: 80.3 (80/81) to 37.3 (09/10); M &Q: 75.3 (80/81) to 37.4 (09/10)

• Sharp rise in OS: M&Q: 21.1 (80/81) to 34.4 (99/00); FIRB: 13.5 (80/81) to 26.4 (09/10)

• Share of CE increased: EGW, THR, CSPS• Within Manu CE declined in registered and marginal rise in UR• Within services CE declined sharply in railways,

communications and banking and insurance and transport by other means ; increased relatively more in hotel and restaurants and other services.

Salaries & wages to income ratio by industry groups (Prs)

Profit to income ratio by industry groups (Prs)

Factor shares in GVA (all ASI)

Share of material, fuel and labour cost in gross output (ASI)

GVA per worker at constant prices (ASI)

Growth of real wages in ASI

Average wage and labour productivity

GVA to fixed capital ratio ASI

Capital intensity (Productive capital (d) to number of workers) ASI

Growth in capital intensity and labour productivity

Unit labour cost using GVA at constant prices ASI

Highlights (ASI)

• Share of Profit as % of GVA: 19.3 (79/80) to 37.3 (03/04)• Share of Wages as % of GVA: 27.9 to 12.3• Share of rent was relatively high (>2%) in 95/96-01/02 but

came down to 1.7• Share of interest increased since 79/80 reached a peak 28.4

(91/92) and then declined• Share of wages declined consistently, may be the slope was

higher since late 1980s• Share of profit outstripped the share of wages only when the

share of interest declined

Highlights (ASI)

• In the manufacturing material cost as % of GVO hovered around 60% throughout

• Fuel cost declined since mid-80s to 7.1% in 03/04• Labour cost in output was 8% (73/74) came down to 2.4%

(03/04)• Real wages increased over the years but growth in RW show a

declining trend• The gap between average wage and labour productivity

increased sharply• Capital intensity increased faster than the growth of LP.• Unit labour cost declined by 58%: labour lost more than half

for producing the same output

Some concluding remarks

• Assumed symmetry of inputs: price is a function of ULC (NW/LP) and UCC (Pr/CP)

• D-S framework doesn’t say that wage reflects productivity: rise in productivity and its impact on supply of labour.

• Wage-productivity (A,1982): determination of ‘fair wage’: social norm: perceived value, notion of ‘gift exchange’: when actual wage < fair wage: effort < normal effort.

• Workers attain firm specific skills: economic rent through rise in MVPL: demanding higher share does not reduce profit or employment

• Flexibilisation is a political project: shifting responsibility of maintaining RAL from individual capital to the state: non-capital shares the responsibility as well.