Changes in the Labor Market Since India’s Economic Reforms

Woong Lee, Young Chul Song, Choongjea Cho and Yoonjung Choi

The momentum of the unexpected economic reform triggered by an external force led the Indian government to apply for the IMF bailout program, following the exhaustion of its foreign reserves at the end of 1991. India’s economic reform is an important example for the Korean economy because of its similarities to Korea’s 1997 foreign reserve crisis. The two countries have both experienced reform led by an IMF bailout.

This report examines changes in the Indian labor market since the economic reforms of 1991. Analyzed here is the direction toward which the labor market moved, as the economic reform has proceeded, with particular focus on the labor market change pre-and-post reform. For the distinction by period, four phases are defined as follows: the period of economic reform by external factors after the 1991 reform, the period of economic reform that reflected domestic demand, the period of booming economy and then the period after the global financial crisis. In industrial relation analysis, the time period under discussion is simply divided into two by 1991 economic reform as the divider because there has not been much change in labor market institutions, including industrial relations, compared to other sectors.

First, Chapter 1 highlights that this study covers a wide range of information regarding the labor market in detail and also attempts to estimate the aggregate matching function for India for the first time.

In Chapter 2, major contents of the reform by sector are organized in different phases after economic reform as follows: ① a period of general reform driven by external factors after adopting IMF stabilization policy (end of 1991 to 1997), ② gradual reform period reflecting the demands of various firms and industries (1998 to 2002), ③ high-growth period (2003 to 2008) and ④ the phase following the global economic recession (after 2009).

The achievements about economic growth, trade, investment and foreign exchange reserves after economic reform are then analyzed, mainly concentrated on the outstanding growth after the 2000s. Although the economy as a whole was impacted significantly by the global recession, the economic reform of the 1990s has turned potential negatives into positive achievements in each sector as India entered the 2000s.

Chapter 2 introduces the future tasks with respect to India’s economic reform. India has been successful in the reform of many sectors although challenges still remain in terms of improving the transparency of the economy and politics as demand for better infrastructure, consistent government policies, a less rigid labor market and the large gap between wage and labor productivity still await resolution.

Chapter 3 investigates several leading indicators of the Indian labor market after the economic reform in 1991 such as labor force participation rate, employment rate, unemployment rate, employment structure and wages.

Firstly, figures for labor force participation rate have appeared to show only minimal changes since the economic reform, though it begins to decline by the mid-2000s. The downward trend of youth population was steadily seen and has become clearer especially since the mid-2000s. The ratio of women in the labor force had quite increased but started to decline after 2005.

Even though the employment rate seemed to have experiences no major change after the economic reform, it tends to decline due to the global recession from 2010. This is attributed to the declining employment rate of the younger population in particular.

The unemployment rate of India has constantly decreased since the reform of 1991, except in 2005, and reached its lowest point since 1998 in 2010 due to the global recession. In the case of the unemployment rate, however, only the labor force population is considered so when the non-labor force such as those who gave up looking for jobs and students are included, the real number of the unemployed are not accurately reflected despite evident signs of a weakened labor market. This issue has been appearing also in the recent unemployment trend of India. Particularly in 2010, when the global economic crisis brought a recession to India’s shores, the unemployment rate actually declined. The unemployment rate of the younger population appeared higher as a proportion to the total employment rate, especially among urban youth and the unemployment rate of women was found to be higher than that of men.

Looking at the employment structure since the economic reforms of 1991, the employment rate in rural area showed a downward trend while the employment rate in manufacturing and services shows an upward trend. This most likely attributes to the enhancement of the Indian economy rather than economic reform. On the other hand, the economic reform may well explain the fact that employment in the public sector has experienced a significant decrease since the economic reform.

As employment elasticity, which measures the growth of employment caused by a unit of economic growth, is analyzed, India appears to have a low level of job creation in contrast to its rapid economic growth from the 2000s. Although the employment elasticity increased with the economic growth after 2000, only the elasticities in agriculture and mining appeared over 1 but the elasticities in services and manufacturing still stayed at 0.12 and 0.24 respectively. As opposed to the high growth of India, this is mainly due to the inability to create jobs in manufacturing and services, sectors that generated a significant portion of the growth. In addition, it also carries negative implications for job creation, meaning that the Indian economy has grown with focus on services rather than labor-concentrated manufacturing, and that India’s labor-related laws and institutions are not flexible. In addition, the wage inflation that exceeds the growth rate is another challenge that Indian economy faces at the moment.

Chapter 4 summarizes the labor market structure and institutions. This chapter then examines changes in India’s industrial relations by dividing the period into ‘before 1991 economic reform’ and ‘after 1991 economic reform.’ Then the industrial relations of Korean firms operating in India are listed and analyzed.

It is generally said that India’s labor market institutions have rarely saw any change since the start of the economic reform. The organized (formal) sector of which regular employees take up the major share accounts for less than 10 percent of all employees and since pro-employee labor laws only apply to them, consequently, the firms hire more and more irregular employees such as contractual and temporary employees. Furthermore the rapid decline of employment in the public sector since 1991, which used to represent three-fourths of the organized sector, could also be another factor that contributed to the growth without employment. During the same period, the private sector employment showed increasing trends in various aspects but it was not enough to compensate for the employment decline of public sector.

The power of employees and labor unions of India seem to move as the employment rate changes. At times of increasing employment, the number of labor unions, labor disputes and dispute participants increase and at time of decreasing employment, the number appears to decrease. Since the 1991 economic reform, the status of labor and labor union displayed a weakening trend. Especially the BJP government, with its pro-business character, ceased to create new employment in the public sector and began restructuring by voluntary retirement so employment fell and thus the influence of labor unions and laborers declined. In the 2000s, as a consequence of the increase in employment led by the private sector, the number of unions and laborers rapidly increased but the number of labor disputes decreased, leading to stable shape of industrial relations.

Weakening of labor unions could be the result of the special circumstances of India. Labor unions in India had been first organized primarily for political purposes. In the major union's case, it is affiliated with political parties especially if it is at the state level, it is nearly impossible for labor unions to form coalitions and led to segmentation of labor unions. This implies that first, the mutual solidarity among labor unions is weak and second, the weak labor unions are unable to support the increasing number of union members. Moreover the Indian government has weakened the power of labor unions by implementing pro-business policies and institutions. For example, the labor union law that was revised in 2001 had made it difficult to register a new labor union.

Strong response from firms was another contribution to the weakening of labor unions. The number of strikes by laborers has started to diminish recently but the number of lockouts is not decreasing accordingly. We could add to this the situation where strikes declined rapidly after the reform in the 1990s and that labor unions have a fear of employers imposing lockouts. Firms also have implemented a variety of institutions namely voluntary retirement, incentive systems, contractual employees and outsourcing.

New policies and institutions were implemented in many sectors after the economic reform in 1991, but there were still no significant changes in the labor market system. As for revision of policies and relevant law, labor happens tho be the sector where the least progress has been made. The main reason was that while the status of laborers and labor unions continued to weaken, it remained difficult for politicians to establish policies that displease laborers, who are also voters.

The Indian government has been trying to implement pro-business policies and institutions since the 1991 economic reform by such means as increasing labor market flexibility and improving the transparency of labor unions. All of these have not been fulfilled so far and as a matter of fact, revision of relevant laws was not made.

Korean firms operating in India have experienced amicable labor relations. Most Korean firms are operated without labor unions. Nevertheless, there certainly exist potential factors that can provoke labor disputes. Disputes may soon arise from demand for wage increases and large proportion of irregular employees. High rate of employee turnover is also pointed as one of the biggest troubles.

Chapter 5 approaches the economic reform from the perspective of trade liberalization and deregulation. This chapter provides extensive literature reviews on the influence of economic reform in the Indian labor market. Next, this chapter performed empirical analysis on aggregate matching function, a widely used macro-labor tool in economics, focusing particularly on the relationship between trade liberalization and new hires.

This study performed an empirical analysis of the impact that India’s trade liberalization on the process of job matching (the relationship between job search and new hires). The results of this research do not differ from the results of the past research (e.g., Hasan et al. 2012). In other words, we may infer that the impact of trade liberalization can vary by region, industry and type of profession since the relationship between trade liberalization and new hires appears negative with no statistical significance when the whole country is considered. On the other hand, from the analysis by period, it is shown that new job creation tended to decline when trade liberalization was slowed due to the industries’ demand. This implies the high probability that the gradual opening to protect domestic firms will actually lead to a decrease in new job creation and thus increase in unemployment.
Chapter 6 provides implications through previous chapters, labor market conditions, labor-related institutions, industrial relations, and empirical analysis of this research.

The institutions of labor market in India have not experienced much change since the economic reform of 1991. The main reason is that state governments possess strong authority regarding labor law-related matters. The pro-worker labor laws are limited only to regular employees and revisions of labor laws for enhancing market flexibility has been delayed or has not proceeded due to political reasons. This type of rigidity in the organized sector has produced a large number of irregular employees and has resulted in economic growth without increase in employment in India during the booming 2000s.

The pro-worker character of labor institutions only apply to regular employees, which firms attempt to balance by hiring irregular employees as contractual and temporary employees. Therefore it is a task of the Indian government to secure the flexibility of regular labor.

From a broader perspective, however, India’s growth without growth of employment is largely attributed to the declining employment in the public sector since the economic reforms began. Besides, the trend of increasing employment in the private sector is very clear, therefore the interpretation of India’s growth without growth of employment should not be exaggerated. The job-mismatch for highly educated workers of India could apply to the current situation of Korea as well. Thus, both governments should prepare systematic and long-term solutions to balance the workers with high-degree education.

The status of labor unions in India became progressively weaker since the 1991 economic reform. The fundamental structure of society takes away from the power of labor unions, since Indian labor unions carry strong political colors and are unable to ally with each other due to their affiliations with political parties, especially labor unions at national level. In addition, since the beginning of the 21st century, Indian government has helped the employers’ side by implementing the systems that make registration of new labor unions difficult. Moreover, because most of the Korean firms in India are operating without labor unions, we may predict that fortunately, Indian labor unions will not become a barrier to the entry of Korean firms to the Indian market.

However, there clearly remain factors with potential to cause labor disputes in India. First, labor disputes may arise during wage negotiations because continued inflation is leading to high demands for wage increase whereas the level of labor productivity stays low. Second, Korean firms in India have a large proportion of irregular employees and this may provoke labor disputes regarding hiring and firing of irregular employees. Third, problems could arise because the process of forcing retirement in the case of regular employees might become tumultuous. Fourth, the turnover rate of regular employees in India is very high thus trouble may occur from the lack of skilled employment. Fifth, in contrast with the continued weakening of labor unions’ status in India, labor disputes, especially in foreign firms about particular issues, are associated with a high level of violence. Korean firms in India should also be aware that there might be other factors in addition to the ones above, hence full attention should be made to establish amicable industrial/labor relations.

The gap between wage increase and labor productivity is also an important factor in the investment climate for Korean firms in India. They should pay more attention to this problem and formulate an adequate solution. To do so, Korean firms are required to either establish or facilitate the educational programs within the firm and prepare long-term solutions by cooperating among themselves and with the Korean Chamber of Commerce in India.

In particular, one of the most troublesome features of India’s changing investment environment is labor management. Therefore, the Korean government should provide assistance through supporting policies. A possible plan of support by the Korean government could be the establishment of a system for sharing of databases among Korean firms in the local market. Additionally it can also strengthen the role of KOTRA’s local branch or the Korean Chamber of Commerce in India to expand its support to include labor relations as well as labor management.

India’s economic reform, which began in earnest during the early 1990s, has transformed the labor market into one that aims to improve workers' living standards. This is well reflected in the previous literature, especially after the 2000s. According to earlier studies, the economic reform, which triggered trade liberalization in India, achieved decreases in poverty and wage increases. With respect to unemployment, victims and beneficiaries may coexist by different type of profession or industry but overall, economic reforms had little effect on unemployment in India. In sum, trade liberalization may contribute to the living standards of workers because it has only a limited impact on unemployment while lowering poverty as well as increasing wages.

According to the empirical results by the matching function analysis with the use of monthly data from 1988 to 2012, the relationship between trade liberalization and new employment appears negative with no statistical significance, a conclusion similar to previous works about the effect of trade liberalization on unemployment. However, when the period of 1998 to 2002, marked by limited trade liberalization from the demands of India’s domestic firms, is applied, new job creation rather diminished in response to trade liberalization. This implies that gradual opening of markets to protect domestic firms can cause a shrinkage in new hires and thus an increase in unemployment. The result suggests much regarding conditions of continuing globalization.

Since the impact of liberalization on unemployment is limited in India, expansion of trade works positively to ameliorate the labor market environment. Therefore, the Indian government should constantly carry forward the promotion of trade liberalization. Regarding this, Korea and India are required to cooperate actively in connection with the negotiation for the CEPA upgrade and accelerate the mutual opening for trade expansion together.