Changing the ways that India’s benefits regimes are funded would be the most impactful way to reform the country’s labour market. It is not changing the law to make it easier for companies to hire and fire employees.When people think of labour law reform in India they tend to think of the laws around hiring and firing; specifically, reforming Chapter 5B of the Industrial Disputes Act.But there are many other reforms possible:
- collapsing the 44 central labour laws into five clusters;
- fixing our dysfunctional benefits regime;
- making trade unions more representative.
- making compliance for employers frictionless;
Even more painfully, most of the employer contribution to EPFO now goes to the bankrupt Employee Pension Scheme (EPS) whose $8billion hole is being balanced by reducing benefits. Furthermore, the Employees’ State Insurance (ESI) has India’s worst health insurance claims ratio, paying only 49% of contributions as benefits. It is also sitting on $5billion of idle financial investments.
I would propose the following reforms, which would create three choices for employees in how their salary is paid:
- Choice 1; Paying or Not Paying the 12% EPFO employee contribution
The 12% employee contribution is an unaffordable salary deferment by low wage employees who have no savings. Employees should be allowed to opt out of this contribution at joining, pay this into their individual National Pension Scheme (NPS) or continue the status quo by paying to EPFO.
- Choice 2; Paying the 12% employer contribution to EPFO or NPS
Currently most of the employer contribution to EPFO goes to the Employee Pension Scheme (EPS). Employees must be allowed to choose between EPS or diverting their entire employer contribution to their individual National Pension scheme individual account.
- Choice 3; Paying health premiums to ESI or an Insurance company
Employees should have the option to pay their monthly health insurance premium to ESI or buy a policy from any IRDA-regulated health insurance company.
It is well known that India’s labour laws have negative consequences. The country suffers from poor productivity, poor working, conditions lower taxes and a large number of small, informal firms. Indeed manufacturing comprises just 12% of employment and 85% of manufacturing comes from firms with less than 50 employees.
Nevertheless, the country has finally begun to fix this regulatory cholesterol that has been holding back formal job creation. In the last year the new government has already amended the apprentices act, revamped the labour inspector regime, given employers and employees unique numbers, and is moving to online compliance. Most importantly the central government now allows state governments to diverge their labour laws from the national norm. This means Rajasthan’s reform lead is now being followed by seven other states.
But changing the rules of the benefit system would be the most impactful reform that the government could now undertake.
Manish Sabharwal is Chairman, Teamlease Services, based In Bangalore
Jesus Felipe  is an Advisor in the economics and research department at the Asian Development Bank.
Aashish Mehta  is an Associate Professor of Global and International studies at UC-Santa Barbara.
Changyong Rhee  is a Director in the Asia and Pacific Department at the International Monetary Fund.
In a recently released working paper , we have analyzed data on manufacturing employment and output levels from developing and developed countries. We show that historical manufacturing employment levels are much better predictors of subsequent prosperity than historical manufacturing output levels. Unfortunately, we also find that late industrializers are likely to face significant difficulty achieving high manufacturing employment shares, even if they are successful in spurring high levels of manufacturing activity. Therefore, while manufacturing jobs are key, it will be difficult for today’s late industrializers to replicate past success with development through manufacturing job creation.
A long tradition in development economics treats manufacturing as special. Some of the development benefits the sector provides rely on large and growing numbers of manufacturing jobs, not just rising levels of manufacturing output. Labor productivity in manufacturing converges rapidly towards international norms. This gives aggregate productivity a bigger boost; the larger the share of the workforce that is in manufacturing, the greater the boost. The more rapid the manufacturing employment growth, the faster workers move out of low-productivity, low-wage agriculture and traditional services.
Unfortunately, cross-country analysis of the connections between manufacturing employment and levels of development has been restricted to OECD countries. This matters because many developing country governments have large programs to stimulate manufacturing activity, on the understanding that jobs and higher incomes will follow. Ambitious job targets are announced – such as 100 million new manufacturing jobs by 2022 in India. These are typically justified with reference to the experiences of earlier industrializers, like Korea and Taiwan. Public budgets, land and labor regulations, and even education policy are being modified to pursue these manufacturing jobs. We can see why developing countries want these manufacturing jobs: our data show that a country’s peak manufacturing employment share between 1970 and 2010 rather than is its peak manufacturing output share, is a much better predictor of its average per capita GDP in 2005-2010. Controlling for peak manufacturing employment shares and the date that manufacturing activity peaked, peak output shares are insignificant predictors of subsequent prosperity. This suggests that manufacturing output matters for prosperity only insofar as it comes with jobs. Moreover, we show that every country that is rich today, by any reasonable standard, had more than an 18-20% manufacturing employment share sometime since 1970.
It is important to note that industrial activity typically grows with income in poorer countries, peaks, and then falls with income and wages in richer (deindustrializing) countries. There are two reasons we think that manufacturing employment-led development is becoming more challenging.
- Labor productivity has risen faster in manufacturing than in the wider economy. Higher levels of manufacturing output are now compatible with lower levels of manufacturing employment. Figure 1 confirms this, showing that peak manufacturing employment shares have fallen over time. Peak output shares have not.Figure 1: Manufacturing Employment Shares Have Declined, Output Shares Have Not
- Manufacturing activity is now more apt to leave for other countries as labor costs rise. Therefore deindustrialization kicks in at lower income levels. Moreover, this premature deindustrialization is more apparent in employment than in output data. Output can be sustained in the face of rising labor costs by replacing workers with machinery. (Arvind Subramaniam and Amrit Amirapu show similar trends  in industrial (manufacturing plus mining, utilities and construction) employment using repeated cross-sections of countries.)
Countries still industrialize and then deindustrialize as they become richer. However, industrial employment shares for today’s late industrializers such as China, India and Bangladesh are all below 16%, and on today’s trends seem unlikely to rise much further. Moreover, the per capita income levels at which deindustrialization kicks in have fallen from $34,000 in 1970 to around $9,000 in 2010.
These results urge a balanced approach to industrialization. They confirm that industrialization matters – when it brings jobs; but they also confirm that this is less and less likely to happen. Governments must not neglect manufacturing. Nor can they rely as heavily on it as they once did.
Rebecca Holmes is a Research Fellow in the Social Protection Program at the ODI
The general trend in poverty reduction over the last decade for many countries in South Asia has been a positive one. However, look a little closer and for particular groups of the poor there has been little opportunity to move out of poverty. In many contexts, there is a strong correlation between poverty and being excluded from the economy and society because of gender, caste, ethnicity or religion.
Socio-economic norms fuel gender discrimination, where women are less mobile and therefore unable to migrate to find work. They are also responsible for domestic chores limiting economic opportunities, they receive lower pay than men and are less likely to own assets and less likely to participate in community decision-making. Take for example, women in the Chars – a remote area in northern Bangladesh. Facing multiple dimensions of exclusion on the basis of their gender and geographical remoteness, these women live in an area which has been historically politically and economically marginalized, resulting in few economic opportunities and highly seasonal work.
In our recent ODI research  we examined the extent to which social protection and labor market programs can tackle social exclusion in south Asia. Specifically, we examined the asset transfer program called the Chars Livelihoods Program  (CLP). We can draw three important lessons from the program, which tell us how best to support poor, socially excluded households in the labor market.
The first lesson is perhaps the simplest. Interventions must be designed and implemented appropriately to respond to specific needs. A clear example of this can be seen in the CLP example in Bangladesh. In recognition of both the sociocultural and the economic barriers that women face in generating income and accessing and owning productive assets, CLP transfers a large-value asset – such as a cow. This is culturally appropriate for women to generate an income from as it can be done from their homestead.
The second lesson is that access to complementary services and programs is necessary. Ensuring labor market participation for the socially excluded requires more than just income opportunities. The CLP program in Bangladesh demonstrates that an integrated approach has been key to its success. This approach not only supports women through direct asset transfers, but it also provides training opportunities to strengthen their skills and knowledge, as well as providing opportunities for creating social networks both within the community and more broadly. Indeed, our research shows that CLP has had a positive impact on women’s livelihood diversification and ability to generate an income from agricultural-related activities. However, we also find that there are limitations to what one program can achieve. Tackling wider issues of exclusion and marginalization is necessary to enable greater (and more equal) labor market participation. Focusing on improving women’s skills alone is insufficient to enable them to take advantage of economic opportunities.
Another key lesson to emerge from our research is the importance of supporting the empowerment, agency and voice of the socially excluded. A strong body of literature exists which demonstrates the correlation between empowerment and economic productivity. While the programs across our case studies in south Asia sought to improve the income generating opportunities for marginalized women, none of them explicitly sought to challenge the imbalance of power structures which cause and perpetuate exclusion and discrimination in the labor market. No significant changes were evident in women’s decision-making power, or making demands to program or government officials. However, there were some positive indications that indirectly programs can build women’s confidence in interacting with community members or local government officials as a result of increased income or contact with program implementers or the government through program channels (see below).
Changes in respondent’s self-perceived confidence levels in interacting with community members and officials after receiving CLP benefits
(% of beneficiaries)
In India, the formal sector accounts for only 6% of the total labor force of nearly 500 million. This means that the bulk of labor participation is in the informal sector, trapped in a vicious cycle of low skills, low wages, and low productivity. If these individuals are to have a fair chance at not only upping their job skills, perhaps through vocational training, but also leveraging these gains on social and emerging technological fronts to escape their cycle of poverty, they must have basic functional literacy (not just nominal “literacy”). However, the vast majority of these individuals do not. The encouraging news is that there are numerous efforts under way to dramatically turn this situation around — including a successful program of using subtitles for Bollywood movies (see “Better Late than Never” in Education and Skills 2.0: New Targets and Innovative Approaches, 2014).
Photo credit: Still from Jodhaa Akbar with Same Language Subtitling, Copyright Disney UTV.
Note: Subtitle in image reads “In the folds of these moments.”
How Literate is Literate?
Although independent India’s literacy rate rose from 18% in the first national census (1951) to 74% in the most recent round (2011), an astonishing 50-60% of the so-called “literates” cannot read the day’s newspaper headline, or a Grade 2 level text, in their own language. That is not to say that they are fully illiterate either, because most of them can identify at least a few letters and are, therefore, best thought of as, “early-literate” but functionally illiterate. How high is functional illiteracy? Based on my research (with Tathagata Bandyopadhyay; see Can India’s ‘literates’ read?, 2011) and ASER’s findings year after year about the poor state of reading achievement in Grade 5, I estimate that around 400 million “literate” Indians are actually functionally illiterate. This is in addition to the 273 million who are officially illiterate.
India’s “ability to read a newspaper headline rate,” if there were such a measure, would hover in the 30-37% range. No government would like its galloping literacy rate to be punctured with a statement like this. But if a government does not acknowledge the reality of its nation’s literacy quality, it is unlikely to do much about it. A big problem is that the literacy rate in many countries, like India, is simply measured by asking individuals to self-report for all household members if they are “literate” or “illiterate.” Even a slight variation on the question, like “Can you read a newspaper?” would give an accurate measure of functional literacy. We have found that people’s response to this question is highly correlated to tests that measure an ability to read any simple text functionally. People report accurately because the question is specific and, in their perception, easily subject to verification. One could even replace “newspaper” with “bus board” or “letter” as proxies for functional literacy.
While governments do focus on the challenge of getting illiterates off the starting block, they are swift to label this achievement as “literacy” because all the incentives revolve around getting the literacy rate up. From the government’s perspective, the functional literacy rate is best left unmeasured lest the problem surface officially. The state, therefore, gets off the hook of having to also plan for the more arduous and longer transition of early-literates to functional literacy.
Improving Literacy, Bollywood-style
How does one transition 400 million early-literates in India to functional literacy? The essence of a solution lies in creating conditions that allow for at least a few minutes of easy reading engagement, every day and throughout life. This is possible if reading itself becomes an integral part of something people do every day, like, watching television. In India, 750 million people watch, on average, two hours of TV every day. Bollywood-style films and film-based content is a dominant genre in a large number of Indian languages. What if we subtitled the lyrics of all existing film songs on TV — in the same language? Word for word, what you hear is what you read. This was a question we first posed in 1996, calling our approach “Same Language Subtitling” (SLS). It causes automatic and inescapable reading engagement among early-readers (and readers alike) whenever they happen to watch film songs with SLS. Anyone with some letter familiarity cannot but try to read along, as confirmed by a body of eye-tracking research. Viewers like to read along to songs for its Karaoke-like experience and to know the song lyrics.
Since 2006, SLS has been implemented on 10 weekly half-hour song-based TV programs, in as many languages, currently delivering reading practice to 200 million weak-reading TV viewers in India. As we have slowly scaled up, we have done rigorous testing to ensure that SLS is working, and we now have strong evidence that it is a proven solution on the scale that is required. The Indian Institute of Management, Ahmedabad (IIM-A) and the Nielsen-ORG Center for Social Research studied the effects of SLS in 3,179 households during 2002-2007, demonstrating that exposure to 30 minutes of SLS per week increased the functional literacy rate from 25% to 56% among students with at least five years of schooling (see PlanetRead for the latest studies). Plus, the cost is minuscule. For example, with a viewership of 20 million, one U.S. dollar can give 30 minutes of daily reading practice for about 1,000 people per year.
IIM-A and PlanetRead are now on course to deliver regular reading practice to all the 750 million TV viewers in India at present, and growing rapidly. More than half the viewers are also weak-readers. The goal is to implement SLS on all songs on TV in India, in all languages, through national policy. The strategy is to scale up in India first and let that speak as a model for expansion to other countries, especially in South Asia and Sub-Saharan Africa, on popularly watched song-based programming, in the local language. The latest update in this narrative is that the Broadcasting Corporation of India (Prasar Bharati), the national TV network (Doordarshan), and the Planning Commission have supported, in principle, the scaling up of SLS nationally.
In India and many other countries, the problem of low quality of literacy is real, if under-researched, and seldom acknowledged officially. Yet we feel strongly that the SLS solution is proven and cost-effective. So what is holding back broadcast policy in India and other low literacy nations from considering SLS seriously? What is holding back private networks with a genuine interest in doing “well” (ratings do go up) by doing “good?” These questions are not easily answered. But at its core, policy-making generally lacks the risk-taking ability required to advance social innovation in a time-bound manner. On the other hand, private networks may need to do much more to bring — what might sometimes be a peripheral interest in doing good — to a place where doing well and doing good are inseparable.
A range of high level experts will offer their views on issues of key job challenges by writing blogs. The suggested categories for blogs are:
Existing blog posts can be viewed at: Jobs Knowledge….