Wage Disadvantage of Contract Workers in Indian Manufacturing Sector.

AuthorSundar, K.R. Shyam


Two types of labor market information have dominated both media coverage and academic debate on public policy, viz. proliferation of non-standard employment and rising wage and income inequalities. A standard employment is one which is open ended, full-time, with a direct relationship between employer and employee. A job is considered "non-standard" if its features differ from those of standard employment. On the other hand, inequalities especially concerning economic (wealth, income and wage) between several cohorts have dominated the attention of analysts. Both generate tremendous social and economic concern as they pose serious challenges for social and political cohesion and have significant costs for economic growth (The Hindu, 2017; Chakravarty, 2016; Ramaswamy, 2008). It is significant to note that the ILO has chosen to report on wage inequalities at the workplace in its Wage Report for 2016-17. According to this report, in India, the highest-paid top 10 per cent of income groups receive almost 43 per cent of total wages paid to all employees, whereas, the lowest-paid bottom 50 per cent of income groups receive only 17 per cent of total wages paid to all employees (see ILO 2016, Table 2:42, xvii). Moreover, the report also observes the following three important dimensions of growing wage inequalities in India: 1) the upper tail of wage distribution is highly concentrated in the hands of 1 per cent highest-paid income groups; 2) women workers earn 33 times less than the male workers; and 3) the persistence of wage inequality within the enterprise and industrial sector is driving total wage inequality (ILO 2016). The Wage Report on India by ILO attributes employment of flexi-category workers like contract labor as responsible for declining wage share in industries (ILO, 2018).

Different bases of inequities could be identified such as gender, skill-based, social and religious identities which have received some attention in the literature on inequities and discrimination (e.g. Karan, 2008; Ramaswamy, 2008; Madeshwaran & Attewell, 2007). Much of the analyses on wage inequality have used the National Sample Survey Organization's (NSSO) data and brought out wage inequalities by sector, gender, status (regular and casual) and space (rural-urban) (e.g. Karan, 2008; Das, 2012). However, wage inequalities between the classes of workers within the organized manufacturing sector have not been studied. In the organized manufacturing sector two portals of employment at the firm level have come to prevail, i.e. directly-employed workers and workers employed through intermediaries. The latter category comprises the contract labor employment, i.e. workers supplied by labor supply contractors to the user enterprise (or the primary employer as is generally known in India). In the post-liberalization period the incidence of contract labor employment has risen significantly for various reasons.

We submit that we need to study wage inequalities between permanent and contract workers for several reasons. Two reasons are primary, viz. contract workers are becoming more numerous as years roll by and several severe industrial disputes even involving violence (e.g. Maruti Suzuki dispute and violence in 2012, Hero Honda in 2005, Toyoto Kirloskar strike in 2001-02) have occurred on the issues concerning employment of contract workers (AIOE, undated; Shyam Sundar, 2010; 2015a). The labor regulation debate in India has attributed the rise in the incidence of flexible labor in general and contract labor in particular to rigidities inherent in labor laws and differential labor regulation regimes (flexible and rigid) have been used as explanatory factors for promoting adverse labor market outcomes in India. This article examines the trends in and size of rising wage inequality between the two categories of workforce in the organized manufacturing sector in general and also across different labor regulation regimes.

Contract Labor &Industrial Relations System (IRS)

The Central Government enacted the Contract Labor (Regulation and Abolition) Act (the Contract Labor Act) in 1970. The Act seeks to regulate the employment of contract labor in certain establishments and to provide for its abolition in certain circumstances. It applies to establishments employing 20 or more contract workers and to contractors employing 20 or more workers. The appropriate government can decide on "prohibition" of employment of contract labor by not only considering the conditions of work and benefits for the contract labor in that establishment but also on other criteria: whether (a) the process or work is incidental or necessary for the industry, (b) it is of perennial nature, (c) if it is done ordinarily by regular workers, and (d) it is sufficient to employ considerable number of full-time workers (Section 10 of the Act). The principal employers (user establishments) should register their establishments and the contractors should obtain license to be eligible to execute work through contract labor. The contractor should pay wages to their workers on time and in the presence of the representatives of the principal employer. The liability in these matters ultimately falls on the principal employer.

Article 38(2) of the Constitution provides that:" The State shall, in particular, strive to minimize the inequalities in income, and endeavor to eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations." The Rules framed by the Central Government in furtherance of the act put in place two important conditions for renewal of license by the contractors, viz. the rate of wages paid to the workers should not be less than that determined by the appropriate government under the Minimum Wages Act, 1948 and the wage rates and terms of employment such as holidays, hours of work and so on should be the same as applicable to the workers directly employed by the principal employer (Central Rule 25(iv) and (v/a)).

The most contentious provisions of the Contract Labor Act concern two aspects: abolition of contract labor system and the consequences thereon (whether the contract labour should be absorbed in the rolls of the principal employer or not as regular workers) and equal pay for equal work. Both have bearing on the wage inequalities that we discuss in this paper. Regularization of contract workers upon abolition which the current judicial position has not endorsed save in some conditions (e.g. sham contracts) could boost erstwhile contract workers' wages. On the other hand, the principle of "equal pay for equal work", if enacted as a law, could enhance contract workers' wages. These issues have been points of contention between the employers and the trade unions (Shyam Sundar, 2011).

The Central Government in a bid to promote both economic growth and employment numbers has, under tremendous pressures from neo-liberal supporters (e.g. Majumdar, 2016; Debroy 2005) and industry federations (e.g. FICCI-AIOE, 2005; Team Lease, 2005), has sought to ensure "Ease of Doing Business" climate by providing for flexibility for employers. Apart from the measures proposed to be executed by the Central Government (Gopalakrishnan, 2016; Shyam Sundar, 2015b; 2018, for a good summary of them) state governments like Rajasthan, Madhya Pradesh and recently Maharashtra have liberalized the Contract Labor Act by raising the threshold for application of the law from 20 workers to 50 workers and thereby removing many primary employers and contractors out of the purview of the said law (Shyam Sundar, 2018 for details). It is expected that several other states would follow the suit and even the Central Government may enact the same at the national level. Further a host of complimentary flexibility measures are being attempted or have been implemented by both the Central Government and the state governments. It is in these contexts of rising flexible labor markets even in the so-called formal sector we need to review the wage inequities between contract workers and directly-employed workers.

Contract Workers in the Organized Factory Sector

Before we investigate the wage differentials between the directly employed workers and the contract workers, we should note some caveats with regard to the statistics released by the Annual Survey Industries (ASI) which we use in the paper. Firstly, the directly employed workers comprise permanent workers on the one hand and flexi-category workers like temporary workers, trainee workers (non-statutory), casual workers, fixed-term workers. Hence, directly employed workers cannot be equated with permanent workers. The umbrella flexi-category workers' share in the total directly employed workers could be significant as the firms have been noted for aggressively pursuing both internal and external numerical flexibility (Deshapande, Deshpande & Standing, 1998; 2004; Shrouti & Nandkumar, 1995; Shyam Sundar, 2011). So the exercise of comparing wages in this paper of directly employed and contract workers cannot be seen as wage inequity exercise between permanent and contract workers. Table 1 shows that the compound average rate of growth (CARG) of directly employed workers lagged much behind those of contract workers during the post-reform period. The absolute number of directly employed workers followed a downward trend from...

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