Unorganized employment in India is a growing issue, but it should be seen as a symptom rather than the core problem. The root cause lies in India’s outdated and inefficient labour laws, which even a former Chief Labour Commissioner referred to as “an impossible enforcement of the unenforceable.”
The Problem with Unorganized Employment
No one favours unorganized employment. The government disapproves because it leads to a lack of tax and social security contributions. Workers in unorganized sectors dislike it because it doesn’t enhance their employability, and unorganized employers face high employee turnover as they struggle to compete with organized sectors. Even organized businesses dislike dealing with unreliable and unscalable unorganized vendors. Yet, 93% of India’s workforce remains in the unorganized sector. Why?
What Causes Unorganized Employment?
Economist Mancur Olson provides insight into this issue. He explained how small, vocal interest groups can hijack the agenda in a democracy, prioritizing their own gains over the broader good. This idea, known as “distributional coalitions,” suggests that these groups perpetuate a system that benefits them at the expense of the majority. India’s labour laws are one such system, where a small group of “insiders” in the labour market impose costs on the unorganized majority.
To shift more of the workforce into organized employment, we must address why so many entrepreneurs favour the unorganized sector. While some may be exploiting the system, evidence shows that many opt for unorganized employment simply to avoid the cumbersome regulations associated with organized labour. Policymakers need to understand that the issue is not about attracting businesses to organized employment but rather addressing the factors pushing them toward unorganized alternatives. This requires a reassessment of laws governing social security, benefits, and employment contracts.
Why Shifting to Organized Employment is Important
Critics argue that corporate India has little incentive to push for labour reforms since existing laws are more of an inconvenience than a major obstacle. However, the true victims of these outdated laws are those on the outside of the labour market, such as the less skilled, less educated, women, and people from small towns. These groups are forced into unorganized employment, where they are left vulnerable. The solution, however, does not lie in extreme measures like China’s labour laws, which heavily favour employers. As the saying goes, “The dose makes the poison”—and in this case, labour laws, meant to protect workers, are actually harming those they are supposed to help.
The Way Forward: Reimagining India’s Labour Market
India’s labour market is undergoing several important transitions: from agriculture to non-agricultural work, from rural to urban living, from unorganized to organized employment, and from self-employment to stable wage jobs. However, these shifts are hindered by challenges in matching job seekers with employers, addressing skill gaps, and preparing workers for available opportunities. The key lies in fostering innovation in employment, employability, training, and collaboration between the public and private sectors. But these efforts will be futile unless we drastically reform the regulatory hurdles in education, skills development, and labour laws, as all three are interconnected.
By embracing labour law reform, India can eliminate the barriers that are holding back its workforce and provide opportunities for millions to join the organized sector. This will not only boost the economy but also address the growing crisis of unorganized employment, described by former Peruvian President Alan García as the “slavery of the 21st century.” The future of India’s labour market depends on clearing the regulatory hurdles that are fueling this national crisis.
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