Union Wage Effects on Contract Labor.

Date01 October 2023
AuthorSarkar, Santanu


The '90s economic liberalization in India led to a significant rise in contract workers in the labor force (Legge, 2020; Valverde, 2009; Shire, Rottweiler, Schonauer & Kalleberg, 2000). Rapid contractualization of work in the post-liberalization era was not solely because the employers circumvented the draconian employment protection laws (EPL) that allegedly impeded economic development and employment generation in the pre-liberalization era. Numerous other factors contributed to labor market flexibility. For instance, if regular workers were receiving a wage premium even during the post-liberalization period because of their high bargaining power, employers were far more likely to get tempted to hire cheaper contract workers to seek labor arbitrage. So, one of the factors that might well have begotten labor flexibility is the prevailing high bargaining power of regular workers, especially in sectors such as manufacturing where union density was relatively high. And, not to our surprise, such a factor has most often lost our sight.

Therefore, in this paper, an attempt is made to explain the complex relationship between wages of regular and contract workers in helping predict the employer's ability to hire more labor on contractual terms during the post-reform period in India. It was the time when the earnings of regular workers in general remained significantly higher than contract workers because unionised regular workers had greater bargaining power than their contractual counterparts. After the Indian government announced economic reforms in 1991, if the demand for regular workers to a change in the wage rate had turned elastic, and other factors of production were easily substituted (Hicks, 1932; Hoffman, 2009), we want to know if the employers, especially in a fairly unionized sector such as manufacturing were able to control the elasticity of the demand for substitution of regular labor. And, if the employers were able to control, it is important to find whether they were able to do so mostly by hiring contract workers by altering the wage differentials between regular and contract workers apart from skirting the EPL. In this paper, we build a simple framework to explain how employers during the post-liberalization period in a reasonably unionzed manufacturing sector were able to contractualize work by controlling the elasticity of the demand for substitution of regular labor concerning all other inputs to production.

Reforms have brought about the flexibility of labor as a production unit through labor efficiency and labor arbitrage (Brodsky, 1994). As a result, the share of contract workers in the workforce has grown by approximately 55 per cent between 1990 and 2022. Contract workers who were 40 per cent of total employment in 1990 grew to 66 per cent in 2022 (Chaurey, 2014). While cost benefits, the lesser compliance burden, ease of administration, hiring flexibility, lesser cost of firing, and tailoring labor supply to market demand are the common advantages of contractualization of work that employers benefited from, the ease of separation by flexibility was appreciated by employers more often than other benefits. Contractualization of work is the most striking market response given that India unlike other countries has hitherto not altered its EPL until the reforms proposed in the form of labor codes (Djankov & Ramalho, 2009; Sarkar, 2019a; 2021; Sarkar & Liu, 2019 in the context of a growing Asian economy such as Taiwan). As a result, even unionized sectors were able to engage contract workers in large numbers (Goldar & Aggarwal, 2012). If rising total factor productivity (1) viz., the ratio of aggregate output to aggregate input delivered by employment growth was one of the reasons, reducing firing costs was another important reason behind increasing hiring of contract workers (Bertrand, Hsieh &Tsivanidis, 2021). This took place, especially with rising FDI in the labor-intensive sectors such as manufacturing (Sarkar & Lai, 2009) since productivity increased with a decline in wages (Lai & Sarkar, 2011; 2017). As the incentive system embraced by liberalization instituted competitiveness, the import market has grown competitive and establishments reallocated labor with a reasonably priced contractual workforce (Chakraborty, Singh & Soundarajan, 2021; Sarkar & Chakraborty, 2021).

As per Betcherman (2015), Panagariya, Bosworth and Desai (2008), Ahsan and Pages (2009), Hasan, Mitra and Ramaswamy (2007), and Sofi and Sharma (2015), the draconian labor laws that allegedly created rigidities in India's labor market were somewhat circumvented by employers during the post-liberalization period with their increased use of contract workers. At the same time, Sarkar (2019) and Balasubramanian, and Sarkar (2023) noticed the biased judicial interpretations of EPL (2) to have served employers' interests, thus helping establishments to withhold normal growth in the elasticity of demand for the substitution of regular labor. According to John Hicks, "elasticity of substitution is a measure of the ease with which the varying factor can be substituted for other" (1932: 117). Conversely, because EPLs were skirted or the Indian judiciary refused to make liberal interpretations of these laws, labor cost was no longer a large portion of the total cost and price elasticity of product demand was also not high as it should have been with economic reforms. Resultantly, the elasticity of demand for the substitution of regular labor has not grown. Still, what remains unknown is how far the elasticity of regular labor substitution expedited the contractualization of work and what caused the inelasticity.

Labor Flexibility

EPL in India was often blamed for slowing down the growth of employment by deterring investment (Sofi & Sharma, 2015; Dougherty, Robles & Krishna, 2011; Bhattacharjea, 2009). Moves by the protectionist regime in the pre-liberalization era that epitomise a prominent agenda of the then socialist government in India and its alertness to the rising ideology of liberalism in western democracies encompassed enforcing a large number of EPLs to offer protections to workers including the contractual who were only three per cent of the workforce at the time when these laws were enacted. Alongside there were the growth of information technology (IT) and IT-enabled services sectors among others from the service industry where employers succeeded in keeping unions at bay (Sarkar, 2008b; 2009; Sarkar & Charlwood, 2014). Among others, the Industrial Disputes Act of 1947 was enacted to offer rights to workers to protect themselves from exploitation by seeking judicial recourse and calling strikes to maintain bargaining power (Sarkar, 2017). Labor market rigidity was raised by these laws which besides generating hurdles for employers to terminate workers also protected workers by regulating maximum hours and minimum wages (Dougherty, Robles & Krishna, 2011; Bhattacharjea, 2009; Djankov & Ramalho, 2009; Deakin and Haldar, 2015). Besides, a steady union density in the pre-liberalisation era helped in maintaining a higher rate of wages (Sarkar and Chakraborty, 2021; Kumar & Mishra, 2008). The labor market witnessed elasticity of demand for the substitution of regular labor because of the substitution possibilities in response to changes in factor prices.

As economic liberalization impelled the rising demand for labor flexibility, one of the noticeable outcomes was labor market deregulation. This weakened trade unions and collective bargaining institutions. However, when liberalization started promoting the import of inputs, the elasticity of demand for substitution of regular labor should have grown especially if there was stringent enforcement of EPL. As a result, the wage elasticity of the constant-output labor demand should have increased the elasticity of demand for substitution of regular labor concerning labor's output share (Hamermesh & Grant, 1979; Slaughter, 2001; Hasan, Mitra & Ramaswamy, 2007: 469; Hamermesh, 1986). However, Hasan, Mitra & Ramaswamy (2007) and Dutt (2003) noticed mostly labor-demand inelasticity during this period. We presume that one of the possible reasons could be the failure of EPL to prevent employers from replacing their regular workforce with cheaper contract workers. However, a long tradition of views of informalization of labor leading to a less-advantaged sector of a dualistic or segmented labor market (Kalleberg, 2000; Balasubramanian & Sarkar, 2020) is contested by those who do not believe that trade liberalisation has increased the use of contract workers in India. To them, market-clearing wages had not necessarily forced workers to queue for jobs while subsisting in an informal sector where they suffered from an absence of statutory benefits, irregular work conditions and lower wages (Saha & Sen, 2016).

So, in the post-liberalization era, if EPLs were circumvented, the elasticity of demand for the substitution of regular labor should not have increased. Rather, the lack of effect of stringent regulations is likely to have created opportunities for employers to reduce costs by making industry-level output independent of demand conditions, especially in imperfect competition.

Contractualization of Work

Import liberalization exposed the domestic firms in India to global competition. This in turn affected firms, especially ones in labor-intensive sectors including the public sector undertakings (PSU) (Goldar & Kumari, 2003). Liberalization increased competition by abolishing controls on restrictive trade practices and de-reservation of sectors hitherto earmarked for labor-intensive industries. There was a transition in labor politics as the economy shifted from manufacturing to services...

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