Labour Market Flexibility

8 Pages 1976 Words

Introduction

Few would deny today that the economic reforms (i.e., stabilization and structural adjustment policies), currently being implemented in many developing countries including India, have social costs. But many would argue that a large part of the social costs are attributable not to the economic reforms per se but to the labour market rigidities existing in most developing countries. It follows that minimizing social costs of stabilization and structural adjustment policies require reforms designed to increase labour market flexibility.

These arguments define the back-drop to the analysis presented in this report. The analysis begins with a theoretical probe into the reasons why social costs arise in the course of stabilization and structural adjustment and the extent to which labour market reforms can help minimize these costs in the specific context of India. Three major issues of labour policy -- wage policy, employment security and labour redundancy -- are then empirically investigated. The ideas for reforms, proposed in the report, emerge from these investigations.

Economic Reforms and the Labour Market

The economic reforms give rise to social costs for a number of reasons. First, stabilization policies are contractionary in nature and usually lead to a sharp slow down in economic growth. This has the effect of worsening employment conditions. Second, stabilization polices often lead to decline in domestic saving and investment rates. Where this happens, the contractionary effect persists in the medium term and the employment conditions continue to worsen. Third, structural adjustment, especially in today's context of globalization, calls for rapid changes in the composition of output and in techniques of production, particularly in the modern, organized segment of the economy. This leads to labour redundancy in the short run and very slow growth of employment in the medium term. In some cases, as in India, a ...