Professional Documents
Culture Documents
Case
For
Temporary Staffing Reform
To reduce
Unemployment
A
White Paper
By
Teamlease Services
• JOB POTENTIAL
o A survey finds that reform to the Indian Contract Labor Act could create
an additional 12 million temp jobs in five years.
Population
1 billion
Labor Force
400-420 million
Agriculture 60%
Manufacturing 13%
Construction 5%
Services 24%
ELASTICITY
Agriculture 5% Agriculture 0
Manufacturing 26% Organized Employment Manufacturing 0.26
Construction 4% 30-50 million Construction 1
Services 59% Services 0.57
Overall 0.15
Policy Regulatory
Issues Issues
UNEMPLOYMENT
30 milion officially,more than organized employment Industrial Relations Framework
and growing rapidly
POVERTY REDUCTION
Given 269 million below the poverty line, even Wage determination Framework
employed barely sustain themselves
OUTSIDER ACCESS
Bias against outsiders (poor, low skilled, women, Education and Skill development
and young) by insiders (not poor, middle-aged, men)
COSTS/ ENFORCEABILITY
End legislating ahead of enforcement capacity and Demographics
payment capability
SKILL DEVELOPMENT
44% of labor force is illiterate and only 5% estimated Equity-Growth trade-off
to have vocational skills
Outlocation
Amend Section 10 of CLRA
Sham consulting Amend Sec 25B of IDA
Core, Perenial, industry, timing agreements
and location restrictions Allow contract/ temporary staffing
Barriers for first-time job seekers in all durations, functions and
and labor markets outsiders industries
Page No.
1. Preface 11
8. Annexures
a. Indian Labor Market – Facts 52
b. Indian Labor Laws 60
c. Previous Indian Labor reform proposals 73
d. Labor Reform in China 79
e. Labor Reform in other Asian countries 97
f. Bibliography 111
g. About Teamlease 119
India’s economic reforms are on track and she has a new appointment to meet a heavily
delayed “tryst with destiny”. However, there is justifiable disappointment with the lack of
new job creation or shift from unorganized employment since reforms began in 1991.
Labor reforms are controversial but equating them with firing workers is wrong. The
much debated exit policy should be forgotten for now in the interest of moving forward;
increment al steps are better than no progress.
We need a “thought world” shift from employment to employability; from preserving jobs
to creating them and from giving fish to teaching how to fish. This white paper is our
attempt to create background for a debate on one of the many possible solutions to
unemployment; temporary staffing.
While a permanent, full-time job may still be the norm, labor markets are changing. The
job-for-life is being replaced with life-long learning, multi-skilling, and a working life with
multiple careers and flexible hours.
However, for a significant part of public opinion and policy makers, temporary staffing
still has the negative connotations of precarious employment. But there is another side of
the coin, namely the positive dimensions of flexibility; outsider access, lower
unemployment, greater employability, and increased labor mobility.
Current temporary staffing laws in India, as with broader labor legislation, favors a vocal
minority (largely not poor, middle-aged men in org anized labor) against the majority
(young, old, poor, lower skilled, women, unemployed, unorganized, and self-employed).
This is unfair and needs to change.
We make the case that temporary staffing companies address the flexibility needs of
workers and companies, and create jobs. In this way, staffing companies build stronger
societies.
India’s progress will not be worth the trip if we do not give a majority of our people the
strength and self- esteem that comes with a job. Let the journey begin.
India’s economic reforms have produced results but the jobless growth of the 1990s
needs to change; the case for deeper labor reform can be built on three grounds:
Case for
Labor Reform
2. Demographics; growing youth India is the only country in the world growing
younger and more than 60% of our unemployed are youth. Current labor laws are
biased against first -time job seekers and we will have a social catastrophe if the
youth are not channelized into productive and self-esteem creating employment.
3. End of public sector job machine Public sector employment forms the majority
of organized, formal employment. However, with an informal freeze or heavy slow
down on recruiting and a tight fiscal situation, this sector is shrinking. Reinforced by
privatization of PSUs, deregulation of government monopolies and overall
liberalization, this sector cannot drive job growth.
6. Inability to afford social security There are no formal social security benefits
and India’s demographics and fiscal situation will not allow them in the future (even
paying 26% of the population below the poverty line a social security benefit equaling
50% of the per capital income would need 13% of GDP; close to total tax receipts).
The best and only viable social security is massive job creation.
7. Low skill Levels The percentage of the Indian labor force with skills/
vocational training is among the lowest in the world at 5.06%. Poor skills reduce
worker productivity and also makes them less likely to fit into the service/ knowledge
economy. More than 40% of the labor force is illiterate and only 5% are estimated to
have the vocational skills for credible employment.
1. Changed role of government India’s labor laws were written after independence
with the philosophy of state domination in business and legislation. The process
begun in 1990 of deregulation, privatization and liberalization has changed the
economic and financial landscape but the assumptions underlying the labor
regulatory regime have not been updated.
4. Offshore Markets/ FDI India has become an offshore services hub and is showing
increased prowess as a manufacturing base. The globalization of supply chains and
increased foreign investment offers a unique opportunity for India but needs an
enabling environment of relevant and flexible labor regulations.
5. Nature of job opportunities India’s labor laws have been written for a time when
agriculture and manufacturing were the main sectors of the economy. Furthermore,
the off shoring revolution had not yet begun. A majority of new jobs in the next
decade will be entry-level jobs in service and manufacturing. This fits well with our
young population but current labor laws are stacked against first time job seekers.
7. China ’s reform China has modified its labor laws to create an exceptional
environment for investment and job creation. It is our biggest competitor for jobs
arising out of global FDI and the globalization of supply chains ; we need to worry
about our relative attractiveness which seems to have weakened. This is particularly
relevant in labor intensive industries like toys, textiles, machine tools and many more.
4. Rising female workforce participation The huge entry of women into the
workforce, particularly married women with children is a major driver towards more
flexible labor markets. The huge participation dip by women when families were
formed (the children break) around age 30 is no longer significant. The labor force is
in transition from a uniform male breadwinner society towards a multiplicity of
household working arrangements.
6. Flexible work structures Many work relationships are different from the
standard; a full time job (38-40 hours a week) with a permanent, open-ended
contract with an employer. New forms of labor demand and supply have emerged as
a consequence of the changing and more heterogeneous preferences of both
employers and employees. There is more frequent use of self- employment, part -time
work, limited duration contracts and temporary staffing.
Population
1 billion
Labor Force
400-420 million
Agriculture 60%
Manufacturing 13%
Construction 5%
Services 24%
ELASTICITY
Agriculture 5% Agriculture 0
Manufacturing 26% Organized Employment Manufacturing 0.26
Construction 4% 30-50 million Construction 1
Services 59% Services 0.57
Overall 0.15
Policy Regulatory
Issues Issues
UNEMPLOYMENT
30 milion officially,more than organized employment Industrial Relations Framework
and growing rapidly
POVERTY REDUCTION
Given 269 million below the poverty line, even Wage determination Framework
employed barely sustain themselves
OUTSIDER ACCESS
Bias against outsiders (poor, low skilled, women, Education and Skill development
and young) by insiders (not poor, middle-aged, men)
COSTS/ ENFORCEABILITY
End legislating ahead of enforcement capacity and Demographics
payment capability
SKILL DEVELOPMENT
44% of labor force is illiterate and only 5% estimated Equity-Growth trade-off
to have vocational skills
THE PLANNING ERA (1951-90) This period saw rapid growth of trade unions in the
context of the Nehruvian fascination with the Soviet model of heavy industry and inward
development. It was reinforced by an adoption of the British Labor party approach of
strong trade unionism combined with the welfare state concept as developed by, among
others, William Beveridge. The general labor mood was militant, geared to extracting a
larger share of the value added, under the overall political perception of the private
sector as exploitative of labor. Over the years, industrial relations got politicized and the
Indian National Trade Union Congress (INTUC) linked to the congress party, the All India
Trade Union Congress (AITUC), and Centre for Indian Trade Unions (CITU) with the
Communist movement.
During the 1980s, India had the dubious distinction of ranking first among developing
countries by losing 1900 workdays per 1000 non-agricultural employees; nearly three
times the second and third (Sri Lanka and Peru) with about 600. Also during this
“politicization” phase of the 1980s, organized labor managed to achieve growth of real
wages of 6.46% relative to unorganized growth of 1%. Thus reality was just the opposite
of the rhetoric for reducing income disparity and giving lower income greater increases.
The biggest weak ness of the model was low employment generation. The government
supported small industries through artificial constraints on larger businesses and ignored
demand; this production focused model created excess capacity and low growth.
3. TWO TIERING Over time, labor laws have become applicable to a small category
of enterprises in the “organized” sector. This creates a dualistic set-up in which the
organized sector remains limited in terms of aggregate employment and most
workers, who are largely unorganized, have no protection. This dualism is
characterized by a tiny organized (or large scale) sector with low employment, and a
huge unorganized (or small scale) sector, with low investment.
6. HIRE AND FIRE CAN WAIT There is a lot more to labor reform than firing
workers. In the interest of progress, the controversial exit policy should be left out of
any labor reform agenda for now. Any proposals presented as zero or hundred will
get zero and let’s make incremental steps; small progress is better than no progress.
Temporary staffing is an integral part of labor markets and a case for reform can be
made from three perspectives:
Case for
Temporary Staffing
A symbolic and materially important recognition of role came with the passage of
Convention 181 by the International Labor organization in 1997. This convention
overturned a fifty year opposition to temporary staffing (Convention 96) and explicitly
noted “their constructive role in a well-functioning labor market”. Following the
convention, legal recognition for private employment agencies was formally granted
in Italy (1997), Japan (1999), and Greece (1999) while related regulations were
liberalized in Belgium (1997) and Netherlands (1998).
They act a “portal” for these “outsiders” by providing them not only with short-term
job opportunities, but also with qualifying experience and training for longer-term
positions. A European study found that between 24 and 52% of first time agency
workers were outsiders.
The Employment Policy foundation says “Flexible work arrangements and schedules
encourage higher labor force participation by offering choices that fit the diverse
needs and preferences of potential employees”.
A European study found that temporary workers are seldom a substitute for
permanent workers; companies would have hired permanent workers only for 14% of
work now done by agency workers, had these not been available. Internal solutions
for flexibility that do not increase employment would have been used if temps had not
been available.
1. KEEP IN TOUCH WITH THE JOB MARKET A job is a job and temporary staffing
companies offer a very attractive alternative to unemployment. Temp jobs keep
people in touch with the job market and avoid resume gaps.
Temping offers working conditions others cannot – the opportunity to try out different
employers, a large diversity of jobs, time flexibility and short-term assignments. An
American Staffing Association survey of temporary employees found that 43% said
time for family was an important factor in job decisions and 28% said temping gives
them flexibility to pursue other interests. An Employment policy foundation study
found that 81% of high-tech independent contractors did not want to become regular
employees.
6. EMPLOYER ACCESS Temp staffing companies are often able to offer work at
employers who may not be hiring directly or for permanent positions. Such
experiences improve resumes and expose candidates to a work environment that
may not be directly available. For example Microsoft reports that 30 -40% of the 9000
regular positions created in the last four years of the 1990s were filled by individuals
who at one time had worked for staffing companies.
While economic cycles and labor costs influence the degree to which full employment
can be attained, the mechanics, structure and legislation of the labor market are also a
key variable in this battle.
The traditionally static view of jobs (permanent, full-time) and labor (middle-aged men) is
tired and a key factor in reducing unemployment in recent times has been increased
labor market flexibility. Flexibility is often associated with precarious working conditions
and a key challenge is balancing the increased need and desire for flexibility b ( oth by
workers and employers) with the basic human need for continuity and certainty.
The flexibility needs of workers and companies can be Quantitative (varying the amount
of work) and Qualitative (varying the content of work) or Internal (building on the
company’s own work force) or external (using outside sources of labor). For e.g.
Labor
Flexibility
Internal External
Temporary staffing is the fastest growing form of flexible employment. The global staffing
industry has evolved from what once were several distinct kinds of businesses –
temporary help, permanent placement, contingency recruiting, retained search, contract
project staffing, outplacement, and professional employer organizations – to one industry
where these many sectors that have blended together.
Associates
The Temp firm and Client sign a service level agreement (overlap 1), the Associate and
Temp firm have an employment relationship (overlap 2), and the Associate provides
services to the client (overlap 4).
Temporary workers are employed by staffing companies and sent to work on specific
projects or for specified periods of time with their clients (i.e. companies requiring
temporary staff). The worker may move from one client site to another depending on the
staffing company’s clients. The temporary staffing company is responsible for the salary
and benefits of the temporary workers, while the staffing company in turn receives
payment from the client.
The staffing company is the employer of record though some countries also assign some
responsibilities to clients for the temporary staff used. The staffing company assumes
responsibility for a) employee payroll, b) benefits, and c) all compliance. The clients are
often responsible for compliance with government regulations that are related to worksite
supervision and safety.
The relationship between the client/employer and the temporary company is captured in
a Client Service Agreement (CSA). The CSA establishes a three-party relationship
whereby the staffing company acts as the employer of the temporary employees who
work at the client's location. Under the CSA, the temporary company assumes
responsibility for personnel administration and compliance with most employment-related
governmental regulations, while the client retains the employees' services in its business
and remains the employer for various other purposes. The temporary company charges
a comprehensive service fee, which is invoiced concurrently with the processing of
payroll for the worksite employees of the client.
The popular perception of staffing companies being used to reduce labor costs by
employers may be misplaced with primary motivation being flexibility. Individuals have a
more complex and varied reasons for choosing staffing company employment.
The global staffing industry provides work to an estimated 7 million people every day and
has global revenues in excess of $200 billion. The global market remains concentrated
in the UK and North America which account for 60% of global sales. The inclusion of the
next four markets; Japan, France, Germany and Netherlands shows that six countries
account for over 90% of global sales.
However, the penetration rate (the share of persons in total employment working for a
private employment agency on any given day) of temporary staffing is very varied:
As the table shows, the largest staffing market is that of the US economy followed by
UK, France and Japan. The total share of European countries in worldwide staffing
turnover is 38%. The market in the US is highly fragmented with the top three players
players controlling only 12% of the revenues vs. Europe where the top three control upto
50% in some markets.
Many global staffing firms accelerat ed their international expansion between 1995 and
2000 and consequently reduced home market revenues e.g. Addecco (82% vs. 30%),
Manpower (43% vs. 31%), Randstad (65% vs. 42%), etc.
Labor markets in the US are more flexible relative to other markets and have created a
highly competitive market for the staffing industry. There are many competitors, with no
single company having a highly dominant position. Key points
• The U.S. Bureau of Labor Statistics (Department of Labor) says there were 2.85
million temporary workers as of January 2003 including those placed by staffing
agencies and those directly hired by employers.
• The industry is highly fragmented; it is estimated that about 90% of the estimated
11,000 temporary help firms are one-branch operations. But these firms generate
only 31.2% of the receipts and a similar percentage of the temporary help
sector’s payroll (Source; Staffing Industry Sourcebook 2002).
• Firms with more than 10 or more branches represented only 1.3%of the firms but
generated more than half of the sectors receipts (51.8%) and payroll (52.1%).
• The U.S. staffing industry has been growing at above 10% per year in the last
decade, while overall employment growth has been only around 2% and
economic growth has been only around 4%.
• Key players in the industry include Manpower Inc., Adecco, Kelly Services,
Gevity HR, Spherion, and Robert Half. There are around 10 staffing agencies
that have a turnover of $1 billion or more.
• Manpower Inc. employs more people than any other firm in the U.S.
• Specialty staffing is a high-growth and high -margin area and includes Legal
staffing, IT staffing, Nurse staffing, Accounting staffing, etc. Data on the size of
the specialty staffing market is sketchy but it is estimated to be around 25% of
the overall temporary staffing industry, or around $25 billion.
• The large staffing companies in the U.S. typically operate on a 15%-20% gross
margin, i.e., this is the ‘mark-up’ they charge up over the labor costs of the
temporary staff they provide. These companies spend approximately 10%-15%
on general, sales & administrative (GSA) expenses, including employee benefits
and sales & administrative expenses, and have net profit margins of only 0.5%-
1%.
The use of temporary staffing in Europe is common to most countries, but the industry is
less developed than in the U.S. It is estimated to be about 38% of the global $200 billion
staffing industry. About 80% of the temporary workers in Europe were employed in 4
countries - the Netherlands, France, Germany and UK.
The following table lists the movement in the percentage of Temporary Employment (as
a % of total employment) for select countries over time:
Data s hows that in general agency work in Europe is most common in the manufacturing
sector. This also explains why women are mostly underrepresented among agency
workers (except for Scandinavian countries); they work predominantly in services
industries. Also clear is that agency workers are on average lowly educated and very
young (about 20-50% are below age 25). Overall Netherlands has the youngest
population of agency workers and UK has the oldest.
Except Greece, all European countries permit temporary staffing, though certain
countries have rules restricting the types of jobs or the durations for which temporary
staff may be employed. In March 2002 the European Union (EU) brought out a new set
of directives on the use of temporary staffing, which seeks to provide parity in pay and
working conditions to temporary staff on par with the full-time employees of the
employer. However, this is still under finalization.
Globally there has been a generalized, albeit uneven, movement towards a more liberal,
decentralized and individualized pattern of regulation over recent decades. The
privileged normative and institutional status of the “standard” job – relatively secure, full -
time, regulated by an open-ended contract of employment, often unionized and well-paid
– has been eroded, sometimes dramatically, just as the numerical weight of jobs has
declined. The flip side of these developments has been the sustained growth of “non-
standard”, flexible and contingent jobs many of which are part-time or temporary.
Social-welfare and employment policies, along with labor and industrial relations laws,
have been extensively redesigned, both to accommodate and facilitate these
developments. The primary objective has been to encourage labor markets to behave
more like “real’ markets, to strengthen the play of competitive pressures, to erode rigid
social protections and to de-collectivize employment relationships.
In this changing regulatory environment, temporary work, once the very definition of
undesirable or marginal work, has come to the front. With the benefit of liberalizing
employment regulation, the temporary staffing business has enjoyed explosive growth in
many countries, though invariably from a small base. The pattern of regulatory reforms
across most industrial nations and many developing countries has been favorable; which
means the industry is operating in the context of a “positive” regulatory environment for
the first time in its history.
The extent to which a market is “attractive” depends upon the particular configuration of
state regulation, prevailing wage conditions, industrial and occupational mix, and the
in/formalization of employment relations. What is crucial is the quantitative and
qualitative nature of each markets development.
A symbolic and materially important recognition of role came with the passage of
Convention 181 by the International Labor organization in 1997. This convention
overturned a fifty-year opposition to temporary staffing (Convention 96) and explicitly
noted “their constructive role in a well-functioning labor market”. Following the
convention, legal recognition for private employment agencies was formally granted in
Italy (1997), Japan (1999), and Greece (1999) while related regulations were liberalized
in Belgium (1997) and Netherlands (1998).
• Temporary staff is ent itled to at least the minimum wage, $5.15 per hour, or the
higher state minimum wage, and to 1½ times the regular hourly rate for all hours
worked above 40 hours per week.
• Temporary workers on construction projects may be entitled to the “prevailing
wage.”
• “Living wage” laws in some states may cover temps/day laborers working under
contracts or for public agencies.
• The company must pay the temporary staff at least the rate that was agreed
upon at the start of the assignment.
• The company cannot pay a temporary staff less than other temps doing the same
work on the basis of gender, age, disability, race, religion, or national origin.
• The company cannot fire a temporary staff for engaging in concerted activity with
others to improve your working conditions (hence temporary staff often try to
make demands with at least one other person).
• A company cannot discriminate in assignments based on gender, age, disability,
race, religion, or national origin.
• A company cannot fire a temporary staff based on gender, age, disability, race,
religion, or national origin.
• Some states have a cap on the amount that a company can charge a worker for
transportation to the worksite, and some states like Georgia prohibit
transportation fees entirely.
• The Occupational Safety & Health Act covers most private employees.
Employees of private temporary/day labor firms who work for public agencies are
covered. In addition, at least half the states have laws that cover public sector
workers.
• Temporary workers and day laborers are covered by workers’ compensation.
They are also covered by state disability insurance in states that provide it.
• Eligibility for unemployment insurance varies by state. In over 20 states,
temporary employees are covered only if they report to the company at the
completion of a job and take almost any job the company offers. Part-time
workers are also often denied coverage.
• Temps, day laborers and independent contractors may be eligible for federal
earned Income Tax Credits and state credits where they exist. To claim the EITC,
the temporary staff must be work authorized with a valid Social Security number.
• The Family and Medical Leave Act (FMLA) provides up to 12 weeks of unpaid
leave to employees who have worked for an employer for at least 12 months and
for 1,250 hours within the past year. To be covered, the employer must have at
least 50 employees within a 75-mile radius.
• Low-wage workers may also be eligible for food stamps, Medicaid, subsidized
childcare, and Temporary Assistance for Needy Families (TANF).
LOW LEVEL OF TRAINING Some academic research points out that while
formal training is low overall for workers, temp workers receive less formal training than
permanent workers. This observation may undervalue the importance of staffing
companies in career development. Temping provides many unemployed workers with a
social link to the job markets. Furthermore, temp workers acquire a diverse set of work
experiences, which adds to their overall career development and employability.
Given the short time that workers stay with temp jobs, such on-the-job learning may be
more useful than formal training. Plus staffing companies are starting to offer innovative
training (e-learning, webinars, etc) to increase their competitiveness; this was estimated
at over $700 million for the US market alone.
In establishing wage levels, two forms of equality need to be balanced carefully; the
equality between two temporary workers working in different sectors or companies and
the equality between an agency worker and a permanent employee at a client company.
However, the over-riding principle should be that it is the agencies that are employers of
agency workers, and, like other employers, have the right to determine the wages of
their work ers.
LACK OF BENEFIT CONTINUITY Benefits are based on the outdated assumption that
workers remain in their jobs for long periods of time. This assumption is no longer valid,
even for so-called permanent workers. As a result workers who change jobs frequently,
return to education, or take leave of absence can lose some of their gratuity, pension,
and health benefits. A more important trend is the move to CTC (Cost-to-Company)
where most benefits are monetized into wages. This removes the traditional
disadvantages of temp workers.
This white paper was born out of discussions with decision makers in corporate India on
the current penetration of temping; it’s potential and required reform
1) OBJECTIVE
• Estimate the potential job creation potential with temporary staffing reform
• Highlight the specific areas and issues for reform
Symbolic of the regulatory regime, most respondents agreed to participate in our survey
on the condition of anonymity. Consequently, we publish only the aggregate results of
the survey, and not individual responses from specific companies.
Our attempt was to understand at a macro level the problems that companies face due
to our existing labor laws around temporary staffing. We were more interested in
understanding the key issues, broad trends and estimating potential and less interested
in conducting statistical analysis by surveying hundreds of companies. This has helped
us uncover subtle qualitative issues, and added to the richness of the feedback we
received from respondents. However, some professionals may believe our sample size
and techniques may not be statistically significant.
3) SAMPLE SIZE
Our survey covered 75 companies in various cities in India, with the following break-up:
4) FINDINGS
2) Survey responses indicate that companies would substantially increase their usage of
temporary staffing in their overall labor force
Given the number of assumptions (labor force growth, employment elasticity, GDP
growth) and the nature of our survey, we estimate that the number of temporary jobs
could be between 10-12 million within five years.
Temporary staffing in India has traditionally, in line with global experience, faced large
legislative restrictions on its growth and penetration. If the potential of this sector is to be
fully realized, the approach towards its regulation needs to be focused on tomorrow’s
labor market challenges rather than yesterday’s problems. Regulations should aim at
promoting the development of well functioning staffing companies and ensuring proper
protection for workers.
The debate around staffing companies needs to be less ideological and more oriented
towards two main considerations; economic efficiency and social cohesion, which are
not contradictory. The issues in India:
Outlocation
Amend Section 10 of CLRA
Sham consulting Amend Sec 25B of IDA
Core, Perenial, industry, timing agreements
and location restrictions Allow contract/ temporary staffing
Barriers for first-time job seekers in all durations, functions and
and labor markets outsiders industries
BACKGROUND
• The CLRA defines the “Principal Employer” of a Temporary employee as the entity
who is using the services of that employee rather than the temporary staffing
company.
• The Principal Employer status entails a number of responsibilities such as salary
payment, coverage of such employees for PF/ESIC, payment of minimum wages,
service conditions.
• The CLRA currently also requires every Principal employer to register with Labor
authorities and obtain a certificate based on which a temporary staffing firm is able to
provide services
CONS EQUENCE
RECOMMENDATION
• Designate the temporary staffing company as the “Principal employer” under Section
2(g)
• Insert a new clause in Section 2 (g) which lays out responsibilities of workplace
safety for clients of temporary staffing companies
• Delete Section 7 which currently requires “Principal Employers ” i.e. clients of
temporary staffing companies to get registered under the CLRA.
• Amend Chapter V (sections 16-20) laying out responsibilities of workplace safety and
health as only responsibilities for clients of temporary staffing companies
• Delete Section 21 which lays out certain responsibilities on disbursement wages to
temp staff on the Principal employer
BACKGROUND
• The CLRA currently provides for prohibition of Contract Labor by State or Central
Government as applicable if a) the process/operation/work performed by Contract
Labor is core to the industry/trade/business/manufacture of the Client Company, b)
the process is of perennial Nature. For e.g. some State Governments have notified
Canteens in factories to be core and perennial.
• Central Government CLRA notifications also restricts temporary staffing in certain
process and companies like
o Telephone operators by International Airports Authority of India;
o Fire fighting, Typists, accountants, Data/Computer Operators by ONGC
o Cleaning work in catering in the Railways/Railcars
• There is no clear definition of core and perennial work and the interpretation is left to
the local level leading to high inconsistencies.
• Labor authorities assume that that once a prohibition order is notified, the contract
employees become employees of the client.
• No clear definition of temp worker
• Any employee who has worked more than 240 days in a year is assumed to have
served one year of continuous service under Section 25 B of Industrial Disputes Act.
Contracts longer than this carry the potential for a permanency claim with the
Principal Employer. States have different rules e.g. Maharashtra has 90 days.
• The Perennial and core work clause implies that the permanency case is stronger if
the work is done on the premises of the Principal Employer.
CONSEQUENCE
• Companies enter into sham agreements to disguise contract labor in what can be
considered as core/perennial activity.
• Direct contracts that disguise contract employees as service providers/ retainers
• Lower usage of temporary staffing; higher unemployment
• Higher outsourcing to the unorganized sector
• Higher out location to the unorganized sector
• Sham consulting agreements and companies front-ending
• Barriers to first time-job seekers and labor market outsiders
• Lump sum payments instead of salary
• Contract Rotation; roll-over of many short term contracts
RECOMMENDATION
• Delete the current provisions of Section 10 and replace with an explicit recognition of
contract staffing in all activities, industries , locations and durations.
• Amend 25B to revoke powers of Labor authorities under Industrial Disputes Act to
grant permanency to contract employees
BACKGROUND
CONSEQUENCE
RECOMMENDATION
BACKGROUND
• Section 15 of the Minimum Wages Act demands minimum wages notified for a
day be paid even if an employee works only for the part of a day.
• As a corollary, it is also interpreted that Minimum Wages notified for a month to
be paid even if an employee works only for a part of the month.
CONSEQUENCE
RECOMMENDATION
• Amend Section 15 of the Minimum Wages Act, to allow the pro-rata payment of
Minimum Wages notified based on a) the hours worked in a day, and b) the days
worked in a month.
BACKGROUND
• The EPF Act was amended in 1992 to include temporary/ contract labor from the day
of employment rather than 60 days of employment
• The ESI Act requires coverage of all employees from the date of employment
• The total mandatory deductions from gross salary at above 40% are among the
highest in the world and greatly reduce cash in hand for employees.
• Most white collar temporary workers are not big users of ESI and have alternative
saving mechanisms
CONSEQUENCE
RECOMMENDATION
• Make ESI and PF applicable for temporary employees only after 6 months of
employment with a temporary staffing firm
• Exempt all temporary employees who have a salary of more than Rs 6500 per month
from PF/ESI for 18 months
• Explicitly provide for centralized compliance for ESI/PF for all employers with more
than 100 employees
Annexure F Bibliography
Note: Throughout this White Paper, we generally use the Current Daily Status (CDS)
measure of unemployment, which based on the reported employment position of the
surveyed individuals on each day of the week. CDS is generally considered the most
useful measure of unemployment, compared to other indicators like Usual Principal
Status (UPS), Usual Principal and Subsidiary Status (UPSS), and Current Weekly
Status (CWS) that tend to understate the extent of unemployment. For example, a
person who was unemployed on the date of the survey, but was employed for most
of the preceding yea r, would be classified as unemployed under the CDS measure
and employed under the UPS measure.
As seen in Figure 1.2 below, unemployment has risen quite sharply to 7.3% in 2000,
reflecting ‘jobless growth’.
8.18
7.32
8
6.09 6.03
6
Unempo
4
2
0
1977-78 1983 1987-88 1993-94 1999-00
2.27 2.29
2.19 2.14
2.04 2.1
2 1.93
1.541.74
1.5
0.98
1 1.03
0.5
0
1972-73 to 1977-78 to 1983 to 1987-88 to 1993-94 to
1977-78 1983 1987-88 1993-94 1999-2000
Employment
Population Source: Report of the Task Force on Employment Opportunities (Montek Singh Ahluwalia
Labour Force Committee), Planning Commission, July 2001
Figure 1.4 below shows the Labor Force Participation Rate (LFPR) rates for various age
groups. As expected, LFPR is substantially lower for the younger age groups and senior
citizens.
600 542
366 402
400 289 285 269 264
214 245 208
191
147 121
200 94
5 32 7
0
+
4
-14
-19
-24
-29
-34
-39
-44
-49
-59
60
-5
50
Urban Male
10
15
20
25
30
35
40
45
55
Urban Female
Urban Male (total) Source: Report of the Task Force on Employment Opportunities (Montek Singh
Urban Female (total) Ahluwalia Committee), Planning Commission, July 2001
Figure 1.5 below reveals interesting patterns in employment elasticity in the Indian
economy in recent decades:
i. Employment elasticity has been declining continuously for the last several decades
ii. It is zero for agriculture due to overstaffing and marginal work, reflecting the lack of
alternative employment opportunities in rural areas
iii. It has declined sharply in manufacturing and electricity, implying that productivity is
increasing (i.e., 1% increase in manufacturing output requires only 0.26% more
workers)
iv. It is as high as 1.00 for the construction industry, reflecting the low productivity in this
sector (i.e., 1% increase in output requires 1% more workers, unlike the economy as
a whole where 1% increase in output requires only 0.15% more workers)
Employment in agriculture has been falling by 0.34% in the late 1990s, and this is barely
offset by the growth in employment in industry and services. In addition, the agriculture
sector offers poor prospects for employment:
i. Agricultural production is heavily dependent upon the monsoon rains, and has grown
at barely 2% per year, which is not sufficient to substantially improve income levels
or generate additional employment
ii. Chronic under-employment means that tens of millions of agricultural workers have
low productivity and wages. Employment in agriculture has been falling over the
years, and marginal workers are compelled to migrate to cities in search of jobs
Poor skill levels among the workforce reduce workers’ productivity. This adversely
affects workers’ welfare in several ways:
ii. It reduces the total basket of goods and services produced by the economy, reducing
the standard of living, and
iii. In the context of globalization, it reduces the competitive advantage of the economy
and makes companies uncompetitive
There are clear differences in the proportion of self- employment in rural and urban
areas. It was as high as 56% in rural areas, reflecting the classification of farmers as
self-employed, while it was only 42% in urban areas.
This pattern is also reflected in the Global Entrepreneurship Monitor but sadly the
primary reason is the lack of alternative opportunities of forced entrepreneurship.
The share of self-employment has declined from 58.9% in 1977-78 to 52.9% in 1999-
2000. Almost all of this has happened in the rural areas, where the proportion of farmers
cultivating their own land has fallen due to fragmentation of land holdings. As seen in
Figure 1.8 below, the proportion of self-employment is higher in rural areas, especially in
sectors like (1) Manufacturing, mining, electricity, gas and water supply, construction;
and (2) Trade, transport, financial, ownership of dwellings, community, social and
personal services.
(a) According to education: Contrary to what one may expect unemployment sharply
rises with the level of education. As seen from Figure 1.9 below, while the
unemployment rate (UPSS) for the overall population was 2.2% in 1999-00, it was as
low as 0.2% for illiterate persons, 1.2% for persons with primary school education,
3.3% for those with middle school education, and as high as 7.1% for persons with
secondary education and above.
(b) According to age: The unemployment rate is significantly higher in the younger age
groups. For example, during 1999-2000 the unemployment rate for the 15-29 years
age group was 12.1%, against 7.3% for the whole population. This seems to reflect
two factors: (1) the number of new jobs created in the economy is less than the
number of youngsters entering the workforce, and (2) new entrants into the labor
force may be more likely to wait (compared to older workers) until they find a job
which matches their aspirations.
(c) According to gender: Female unemployment in urban areas was 9.8% compared
with 7.2% for their male counterparts. To some extent, this reflects the lower skill
level of women entering the workforce, and the barriers that women face in achieving
appropriate employment. Clearly, female unemployment will increase as more
women enter the workforce in the decades to come.
Key issues evident are a) low level and declining share and growth rate of organized
employment, and b) the private sector is mostly unorganized. The industry skew is also
interesting:
Objective:
§ To regulate the employment of contract labor in certain cases and to abolish it in
certain other cases
Key provisions:
§ Central and state governments may constitute Advisory Contract Labor Boards to
advise the governments on the administration of this Act
§ Every establishment employing contract labor must register with the
Central/State Labor Commissioners in each of the location they employ labor
§ Every Contractor must obtain a license from the Central/State Labor
Commissioner for each establishment in each location they provide labor.
§ The government may prohibit the use of contract labor in certain types of
jobs/occupations
§ Where more than 100 contract laborers are employed, the contractor must
provide canteens, rest rooms and other amenities to workers.
§ Principal employer must nominate a representative to certify that the contractor
has paid wages. In case of default by contractor, the principal employer is liable.
§ Principal employer and contractor must maintain registers showing details of
contract laborers employed
Key clauses:
10. Prohibition of employment of contract labor. - (1) the appropriate Government may
prohibit the employment of contract labor in any process, operation or other work in any
establishment.
12. Licensing of contractors. - (1) no contractor shall undertake or execute any work
through contract labor except under and in accordance with a license issued in that
behalf by the licensing officer.
17. Rest-rooms. - (1) In every place wherein contract labor is required to halt at night in
connection with the work of an establishment ---- there shall be provided and maintained
by the contractor for the use of the contract labor such number of rest-rooms or such
other suitable alternative accommodation within such time as may be prescribed.
20. Liability of principal employer in certain cases. - (1) If any amenity required to be
provided under section 16, section 17, section 18 or section 19 for the benefit of the
contract labor employed in an establishment is not provided by the contractor within the
time prescribed therefore, such amenity shall be provided by the principal employer
within such time as may be prescribed.
23. Contravention of provisions - Whoever contravenes any provision of this Act --- shall
be punishable with imprisonment for a term, which may extend to three months, or with
fine, which may extend to one thousand rupees, or with both ---.
28. Inspecting staff. - (2) --- an inspector may --- (a) enter --- any premises or place
where contract labor is employed, for the purpose of examining any register or record or
notices required to be kept or exhibited by or under this Act ---; (b) examine any person
whom he finds in any such premises ---; (c) require any person giving out work and any
workman, to give any information, ---; (d) seize or take copies of such register, record of
wages or notices or portions thereof ---; and (e) exercise such other powers as may be
prescribed.
29. Registers and other records to be maintained. - (1) Every principal employer and
every contractor shall maintain such registers and records giving particulars of contract
labor employed, the nature of work performed by the contract labor, the rates of wages
paid to the contract labor and such other particulars in such form as may be prescribed.
Objective:
§ Regulate the payment of wages, in order to prevent employers from making
deductions from workers’ wages or delay in payment of wages
Key provisions:
§ Job categories for which the act is applicable
§ Defines payable wages and its components
§ Prescribes the day of the month before which wages must be paid
§ Prohibits the employer from making deductions from the person’s wages except
those permitted by the Act
§ Prescribes the registers to be maintained
§ Gives power to the Inspector of Factories to inquire, inspect, supervise and seize
documents relating to payment of wages
§ The government can order the employer to refund the deductions made from the
wages, and pay compensation
§ Prescribes penalties for not complying with the act
§ Employer to display in the establishment a notice containing an abstract of the
provisions and rules under this Act
Key clauses:
15. Claims arising out of deductions from wages or delay in payment of wages and
penalty for malicious or vexatious claims
(1) The State Government may, by notification in the Official Gazette, appoint a presiding
officer of any Labour Court or Industrial Tribunal ----- to be the authority to hear and
decide for any specified area all claims arising out of deductions from the wages, or
delay in payment of the wages, of persons employed or paid in that area, including all
matters, incidental to such claims
(3) When --- (any deduction has been made from the wages of an employed person, or
any payment of wages has been delayed) --- the authority shall hear the applicant and
the employer --- and --- may direct the refund to the employed person of the amount
deducted, or the payment of the delayed wages, together with the payment of such
compensation as the authority may think fit ---.
Objective :
§ Fixing the minimum rates of wages for certain job categories
Key provisions:
§ The minimum wages for certain job categories
§ The job categories for which such minimum wages are applicable
§ The composition of the wages, including basic wages and cost of living
adjustments
§ Procedure for fixing and revising minimum wages
§ Establishes the Central Advisory Board and various committees to advise the
government
§ Part-1 and Part -2 of the Schedule lists the job categories for which minimum
wages are applicable
Key clauses:
Objective:
§ Payment of bonus to persons employed in certain establishments
Key provisions:
§ ‘Establishments’ include departments, undertakings and branches
§ Method for calculating the bonus payable, based on the gross profits,
depreciation, tax, etc.
§ Minimum bonus payable, regardless of whether the establishment is profitable or
not
§ Maximum wages upto which employees are entitled to bonus
Key clauses:
Objective:
§ To provide suitable compensation to workers injured in industrial accidents
Key provisions:
§ Specifies the dependents who are entitled to compensation
§ Employer is liable to pay compensation to workman in case of accident
§ Employer is not liable if the workman is under the influence of drink or drugs, or
shows willful disobedience to safety rules
§ Specifies the amount of compensation payable to the workman in case of
accident
§ Procedure for notice in case of accident, claim against employer, and payment of
compensation
§ Workman’s compensation will be the first charge on assets transferred by
employer
§ Employer to file returns showing number of injuries, compensation paid, etc.
§ Contracts where the workman relinquishes his right of compensation are invalid
§ State Government may appoint a Commissioner for Workmen's Compensation
§ The Commissioner shall have the powers of a Civil Court for taking evidence,
enforcing the attendance of witnesses, and compelling the production of
documents and material objects
§ Part-1 of Schedule-1 gives the list of injuries deemed to result in Permanent Total
Disablement and Permanent Partial Disablement
§ Gives the list of job categories for which the Act is applicable
§ Gives the list of occupational diseases for which the Act is applicable
Key clauses:
Objective:
§ Prohibit the engagement of children in certain employments and to regulate the
conditions of their work in certain other employments.
Key provisions:
§ Prohibits the employment of children, i.e. those below 15 years, in the 5
occupations mentioned in Part A of the Schedule, or in any workshop carrying on
any of the 11 processes mentioned in Part B of the Schedule
§ Regulates the conditions of work of children in employments where they are not
prohibited from working
§ Does not prohibit the employment of children in occupations “carried on by the
occupier with the aid of his family or to any school --- receiving recognition from
Government”
§ Sets up a Child Labour Technical Advisory Committee to advise the government
§ Establishments should send notice to the Inspector containing details of the child
labour they employ
§ Penalties for employing children in violation of the provisions of the Act
Key clauses:
7. Hours and period of work - (1) No child shall be required or permitted to work in any
establishment in excess of such number of hours as may prescribed for such
establishment or class of establishments.
Objective:
§ Make provision for the investigation and settlement of industrial disputes
Key provisions:
§ Chapter 1 deals with preliminary issues and definitions
o The Act covers all “industrial disputes", which are defined in section 2 (k)
as “any dispute or difference between employers and employers, or
between employers and workmen, or between workmen and workmen,
which is connected with the employment or non-employment or the terms
of employment or with the conditions of labour, of any person”. Section 2A
is also applicable “where any employer discharges, dismisses, retrenches
or otherwise terminates the services of an individual workman”
o The Act protects all workmen, defined in section 2 (s) as “any person
(including an apprentice) employed in any industry to do any manual,
unskilled, skilled, technical, operational, clerical or supervisory work for
hire or reward, whether the terms of employment be express or implied”.
The persons excluded under the Act are (i) armed forces personnel, (ii)
police officers, (iii) managerial or administrative personnel, and (iv)
supervisory personnel drawing wages exceeding Rs. 1,600 per month or
exercising functions of a managerial nature.
§ Chapter 2 specifies the various labour authorities under this Act.
o All industrial establishments employing 100 or more workmen must have
a Works Committee consisting of representatives of employers and
workmen, of which at least half should be workers’ representatives
o The central government has the power to appoint various authorities,
including Conciliation Officer, Board of Conciliation, Court of Inquiry,
Labour Court, Industrial Tribunal, and National Industrial Tribunal.
o It is the duty of the Board to endeavour to bring about a settlement of the
same and for this purpose the Board shall investigate the dispute and
may do all such things as it thinks fit for the purpose of inducing the
parties to come to a fair and amicable settlement of the dispute
§ Chapter 3 deals with the reference of disputes to boards, courts or tribunals
o An industrial dispute may be referred to boards, courts or tribunals either
by the government, or by the parties to the dispute
o Where an industrial dispute has been referred to a board, court or
tribunal, the government may prohibit any strike or lock-out in connection
with such dispute
§ Chapter 4 deals with the procedure, powers and duties of the various labour
authorities
Key clauses:
11A. Powers of Labour Court Tribunal, and National Tribunal to give appropriate relief in
case of discharge or dismissal of workmen
Where an industrial dispute relating to the discharge or dismissal of a workman has been
referred ---for adjudication and --- the Labour Court, Tribunal or National Tribunal --- is
satisfied that the order of discharge or dismissal was not justified, it may, by its award,
set aside the order of discharge or dismissal and direct reinstatement of the workman ---
or give such other relief to the workman including the award of any lesser punishment in
lieu of discharge or dismissal ---
25K Application of chapter 5B - (1) The provisions of this Chapter shall apply to an
industrial establishment --- in which not less than 100 workmen were employed on an
average ---.
India’s labor laws have not been substantially altered since their adoption in the late
1940s. Besides relatively minor modifications, the only two significant developments in
India’s labor laws in recent decades have been:
§ Amendments in 1976 which inserted Chapter V-B to the Industrial Disputes Act,
requiring government permission for large companies to retrench workers,
making it virtually impossible for even sick companies to close down and retrench
workers
§ Judgments by the supreme court and various high courts that have substantially
extended various laws, covering categories of ‘industries’, ‘workmen’ and forms
of ‘retrenchment’ that were probably never contemplated by the lawmakers
While the body of laws has changed so little, the business environment has changed
rapidly, especially since economic reforms were initiated in 1991. There have been
numerous proposals for reforming labor laws to make them more responsive to changing
business conditions, but the government has largely ignored such proposals.
We discuss below the key findings and recommendations of three such bodies set up by
the government, which have argued for liberalizing our labor laws:
This committee, set up by the Planning Commission in January 1999, was called the
‘Task Force on Employment Opportunities’ and was chaired by Planning Commission
member Montek Singh Ahluwalia. Its mandate was “t o examine the existing employment
and unemployment situation in the country and to suggest strategies for employment
generation for achieving the target of providing employment opportunities to 10 crore
people over the next ten years, i.e. one crore on average per year”. The committee
submitted its report in July 2001.
The committee noted with concern the worsening employment scenario in the country in
recent years: (1) the rate of unemployment has increased, (2) employment creation has
slowed, and (3) employment elasticity has reduced drastically.
According to the committee, the central challenge was to promote economic growth and
thereby encourage employment generation. To quote from page 4 of the committee’s
report, “A central message of our report is that the aggregate employment problem in the
country cannot be solved except through a process of accelerated growth which would
create additional demand for labor and also provide the increase in labor productivity
needed to achieve the much needed improvement in employment quality”.
The committee was blunt in asserting that restrictive labor laws have been primarily
responsible for the increasing unemployment in the country. To quote from page 12,
“Our assessment is that the existing labor laws, and in particular the way they have been
administered and implemented, have this unintended effect of discouraging employers
from investing and expanding in labor intensive areas. This has made us uncompetitive
in these areas in export markets denying us the possibility of large expansion in
organized sector employment. It has also made our producers uncompetitive vis-à-vis
imports in an environment where the economy is increasingly becoming more open, a
trend which is unavoidable and should be continued”.
The committee has recommended several changes to be made in India’s labor laws. The
objective is to create a labor environment that allows companies to operate freely, so
that GDP growth and employment generation are facilitated. The committee has
essentially put forward four basic propositions:
The committee recognized that while the case for reforming labor laws was compelling,
this would face substantial opposition and therefore needs to be addressed tactfully. To
quote from page 12 again, “Reform of labor laws is a particularly sensitive issue and
there is understandable reluctance to proceed with reforms which may appear ‘anti-
While the committee had major recommendations, we list below the recommendation
which will have radical effect on temping is listed below:
§ Allow all peripheral activities to be freely outsourced from specialized firms, even
if it means employees of the specialized firms provide the services on the
premises of the outsourcing units
§ Define minimum responsibilities of the outsourcing employer for health and safety
of the workers employed on his/her premises
§ Extend appropriate labor regulation to these outsourcing contractors
This committee was set up by the Planning Commission in September 2001, and was
formally called the ‘Special Group on Targeting Ten Million Employment Opportunities
per year over the Tenth Plan Period’. Its chairman was Dr. S. P. Gupta, member of the
Planning Commission, and Chairman of the Tenth Plan Steering Committee on Labor
and Employment. The terms of reference of the committee was: (1) To suggest
strategies and programmes in the Tenth Plan for creating gainful employment
opportunities for 10 million people a year; and (2) To look into sectoral issues and
policies having a bearing on employment generation, and to recommend sectoral
programmes for creation of employment opportunities. The committee submitted its
report in May 2002.
The committee starts by examining the employment data, and concludes that we are
likely to face rising unemployment. “All these Reports bring out a common message that
if the experiences of the late nineties are extrapolated i.e., repeated in future, then India
is going to face increasingly higher incidence of unemployment, with an ever-increasing
gap between the demand for jobs and supply of job opportunities” (page 3 of the
committee’s report).
(a) The key to India’s unemployment problem is more legislation. Since majority
of the workforce are employed in the unorganized sector, and employment
growth in the organized sector is stagnating, such legislation has to be
focused on improving the job quality in the unorganized sector. To quote from
page 6 of the committee’s report, “To sum up, the employment strategy for
future, to meet the Plan’s employment goals is to encourage the use of labor
intensive and capital saving technology, in general and to rejuvenate the
growth of the unorganized sector in particular, which at present contributes
92% to the country’s employment and enjoys more than 7 times labor
intensity per unit of production, as compared to the organized sector.
However, the unorganized sector needs to be made more productive to
sustain itself against the domestic and international competition by proper
choice of programmes and policies compatible with India’s economic reforms
and the WTO rules”.
(b) The committee feels that employment generation can be maximized by
developing the unorganized sectors of the economy, such as: (1) agriculture,
especially social forestry, animal husbandry, fishing, horticulture and related
areas, (2) small and medium industries and construction, and (3) services
such as tourism, information technology, financial sector, education and
health.
(c) To promote growth in these unorganized sectors, the committee has
suggested an innovative grassroots-based approach. To quote from page 13
of the report, “In many instances, these proposed changes in policies and
programmes would not entail any significant additional finance. They would
ask for involvement of grassroots enterprise, skills, institutions and often even
indigenous technology. This should be further supported by creation of an
enabling environment by removing all legislative hurdles and bureaucratic
interference”.
The Second National Commission on Labor (NCL) was set up by the Ministry of Labor of
the Government of India on 15 October 1999 in order to undertake a comprehensive
review of labor laws in India and to suggest specific areas of reform. The NCL was
chaired by Ravindra Varma, and had representatives from the government, unions and
employers’ associations. Its mandate was to (1) suggest rationalization of existing laws
relating to labor in the organized sector; and (2) suggest an Umbrella Legislation for
ensuring a minimum level of protection to the workers in the unorganized sector.
After a comprehensive review of the labor scenario and detailed discussions with
representatives of unions and employers, the National Commission on Labor has
concluded that the current system of labor laws is excessively restrictive, and that it
needs to be liberalized given the changed business environment in India after 1991.
While the NCL has submitted a massive report that runs into 1,468 pages, its key
recommendations on labor reforms are contained in its Chapter VI that deals with
‘Review of Laws’. Essentially, the NCL has recommended the following key changes to
be made in India’s labor laws:
§ Consolidation of all cent ral labor laws into one ‘Labor Management Relations
Law’
§ Simplified law for the unorganized sector, i.e., enterprises employing 19 or fewer
employees
§ All employees to be covered by a social security
§ Strikes to be banned in socially essential services like water supply, medical
services, etc.
§ Employer must be free to close down or retrench workers, with compensation for
workers
§ Prior government permission not necessary for lay off and retrenchment,
provided workers get notice and compensation
§ Resolve labor disputes through arbitration, not adjudication or government
intervention
§ Labor Relations Commissions to be set up at State, Central and National levels,
headed by a sitting or retired High Court judge
§ Contract labor permitted for temporary and seasonal work, but not for core
production or services activities, and for maximum 2 year contracts
§ Restrict unions in terms of minimum 10% votes, ‘check off’ system for negotiating
agent, calling strikes, etc.
To understand what lessons India could learn from China’s experiments with reform, the
NCL visited China and had discussions with government and labor officials. NCL noted
that “China has made spectacular progress in globalization and the post-globalization
scenario, as compared to the tardy progress that India has made” (page 215, clause
4.210 of the NCL report). NCL also studied the labor laws in China and noted that these
provide substantial freedom to companies in managing their labor. For example, NCL
studied the ‘Shanghai Municipal Regulations of Labor and Personnel Management in
Foreign Invested Enterprises’ in detail, and noted the following provisions in this law: (1)
Given below are the specific recommendations made by the Second National
Commission on Labor with a bearing on the Temping industry, along with the clause
number in their report:
§ 6.109, Contract labor shall not be engaged for core production/services activities.
However, for sporadic seasonal demand, the employer may engage temporary
labor for core production/service activity. Off-loading perennial non-core services
like canteen, watch & ward, cleaning, etc. will be permitted with the condition
that: (1) perennial core services should not be transferred to other agencies or
establishments; (2) where such services are being performed by employees on
the payrolls of the enterprises, no transfer to other agencies should be done
without consulting the bargaining agents; (3) where the transfer of such services
do not involve any employee, the management will be free to entrust the service
to outside agencies. The contract labor will be remunerated at the rate of a
regular worker engaged in the same organization doing work of a comparable
nature, or if such worker does not exist in the organization, at the lowest salary of
a worker in a comparable grade, i.e. unskilled, semi-skilled or skilled. The
principal employer will also ensure that the prescribed social security and other
benefits are extended to the contract worker.
§ 6.110, No worker should be kept continuously as a casual or temporary worker
against a permanent job for more than 2 years.
India has important lessons to learn from China particularly since both were very similar
in the 1950s –size, population, poverty, illiteracy, cultural heritage, colonial legacy, and
socialist ambitions. However, their paths diverged in the 1970s, when China undertook a
series of bold, far-reaching and decisive economic reforms that established private
enterprise and foreign capital as the essential pillars of the economy. Sadly, India took
giant leaps in the backward direction. China has achieved rapid growth and rising
income levels, and its prosperous coastal cities resemble those in Europe and North
America, while India has been a spectacular under-achiever where 70% of the
population still depend upon monsoon rains for sustenance cultivation.
According to our research, there are three fundamental distinctions between the
economic systems in China and India:
(1) Emphasis on growth: The Deng Xiaoping government, which came to power in
China in 1978, placed economic growth as the top priority for the nation. The
government acted decisively to create laws and institutions that promote growth,
and implemented a series of bold steps including legal status for private
companies, incentives for foreign investment, delegated powers to local
governments to attract investments, and membership of the World Trade
Organization (WTO). Unlike the previous decades where Chairman Mao’s
writings represented the ultimate gospel, modern China is driven by Deng
Xiaoping’s mantra that “it is glorious to be rich”. Sadly, Indian politics still
revolves around self- destructive themes, and virtually all the growth has taken
place in sectors like IT that have enjoyed what some gratefully call the “benign
neglect” of the Indian government.
(2) Pragmatism : China experienced stagnation and poverty in the 1960s and 1970s
during the ‘Great Leap Forward’ and the ‘Cultural Revolution’, which inflicted
hardship and misery on millions in the name of ideology. Subsequent
governments have been careful to avoid these mistakes, and have acted with
exemplary pragmatism. For example, China has (1) encouraged trade and
investment from Taiwan which it still considers a break -away province, (2) set up
‘Special Economic Zones’ giving foreign companies almost total freedom, (3)
reclaimed Hong Kong from British rule while giving it autonomy under the ‘1
nation, 2 systems’ framework, and (4) privatized or closed thousands of state-
owned enterprises while retai ning a few large ones. Such pragmatism springs
from the top in China. As Deng Xiaoping put it, “it does not matter whether the
cat is black or white, so long as it catches the mice”. Such pragmatism is rare in
the Indian political economy, mostly preoccupied by rhetoric rather than action.
(3) Labor flexibility: Labor laws in China offer significant flexibility to companies to
hire and fire employees without excessive restrictions. Surprisingly, Communist
China is closer to ‘capitalist’ states like U.S. and Britain in this regard, compared
to even ‘welfare states’ like France and Germany. China has realized that
economic growth and job creation are ultimately more important for workers’
welfare than anti-business legislation.
Nearly 25 years after the onset of economic reforms in China, its macro-economic
environment is characterized by rapid GDP growth, rising income levels, huge foreign
investments, and booming exports. The Figure 3.1 below captures some of the key
economic indicators in China, and presents comparable figures from India to place them
in perspective:
Traditionally, the Communist system in China guaranteed jobs for its people and
provided housing and other amenities. China’s employment philosophy was
characterized by the ‘one low, three high’ principle, which stood for low salary for
workers, high level of benefits for workers, high employment rate, and high level of
government subsidies. Even though job security was assured, income levels and
standard of living were very poor under this ‘iron rice bowl’ system.
Workers received their benefits from their employers (e.g. state-owned enterprises), and
not directly from the government. Under this system, the people of a locality were made
members of the ‘danwei’, or work unit system, in which each person was tied to a
specific organization which provided work as well as benefits like employment, housing,
education and medical care. College students would be allotted to a danwei upon
graduation, and had no choice regarding the type or location of jobs, and were often tied
to their danwei for the rest of their lives.
Economic reforms
China began its economic reforms in 1978, after three decades of communism under
Mao Zedong, and the rise to power of Deng Xiaoping. China’s reforms were slow and
tentative at first, and gathered pace in the early 1990s after the economic boom in the
coastal provinces demonstrated the success of reforms.
§ Phase 1, 1978–83: The Third Plenum of the Chinese Communist Party’s 11th
Central Committee in December 1978 adopted economic modernization and
growth as the paramount concern of the Communist Party, and emphasized
economic development and individualistic incentives, which encouraged the
growth of the private sector. However, in this phase the private sector developed
without explicit legal recognition and support, and was intended to play a
marginal role to supplement the state sector and fill the gaps in the economy.
Private firms were limited to individual businesses (‘getihu’ or sole proprietary
concerns), and contract farming was introduced in the rural areas. The
development of the private sector involved a typical ad-hoc sequence: (1)
unpublicized experimentation by entrepreneurs who started new ventures with
the support of local officials, (2) general ‘in principle’ approval for such
enterprises from the regional government, (3) ratification and specific regulations
by the government after the reform has become well established.
§ Phase 3, 1993 to the Present: This phase was triggered by Deng Xiaoping’s
famous tour in September 1992 to the prosperous Southern provinces that had
benefited from economic reforms and foreign investment. This later prompted
Deng Xiaoping to make his famous comment that “it is glorious to be rich”,
reflecting the changing economic philosophy of the government. In 1992, the
Fourteenth Party Congress of the Chinese Communist Party declared its new
goal of creating a ‘socialist market economy’. This was followed in 1993 by the
government’s ‘grand strategy’ of transition to a market economy, with an
emphasis on a rule-based system, building of market supporting institutions, and
reform of state-owned enterprises (‘gaizhi’). Subsequent reforms included (1)
liberalisation of foreign investment norms, (2) closure and privatization of state-
owned enterprises, (3) restructuring of the bureaucracy, (4) large-scale
retrenchment of employees from the government and state-owned enterprises,
(5) reforms in banking, agriculture, taxes, exchange rate, and other areas, and
(6) amendment to remove the right to strike from the Chinese constitution. The
Fifteenth Party Congress in September 1997 recognized private enterprise as an
important component of the economy. In March 1999, another milestone was
achieved as private ownership was incorporated into the Constitution.
Until the late 1970s, SOEs were the dominant force in the Chinese economy. Because
the private sector was initially viewed as a supplement to the state sector, China did not
restructure its SOEs in the 1970s and 1980s.
In 1995, China declared a bold policy to restructure SOEs, with the slogan ‘zhuada
fangxiao’, meaning ‘keep the large ones and let the smaller ones go’. The government
proposed to retain only around 1,000 large enterprises owned by the central
government, while all the other SOEs were to be privatized, closed down, or restructured
(through mergers, acquisitions, leasing, or sale to employee-owned cooperatives). SOEs
owned by local governments were targeted for reform (as opposed to larger SOEs
owned by the central government) because they were performing badly, and created a
larger drain on the budgets of the local governments. For example, in 1997 the 500
largest state-owned firms accounted for 37% of all assets held by all state-owned firms,
and contributed 46% of tax revenues collected from all state-owned firms and 63% of
their total profits. While 24% of SOEs owned by the central government were making
losses in 1995, 72% owned by local governments were loss making.
The process of SOE reform in China has been quick as well as dramatic. More than 81%
of the 63,490 small-sized SOEs (i.e., more than 50,000) had been privatized, sold or
restructured by 2000. In 2000 around 2,800 bankruptcy and merger proposals among
SOEs were approved, and 1,504 of these implemented, with a total write-off of RMB 81
billion (Rs. 45,300 crores). The vast majority of companies and workers in China are now
in the private sector, and this has totally changed China’s economic landscape. While
SOEs accounted for 77% of industrial output in 1978, by 1998 its share had shrunk to
just 31%.
§ Dual -track approach: Initially, the private sector was expected to complement
the state sector and was tolerated in areas where state enterprises did not exist,
such as agriculture, services, and light industry. This protected state-owned
enterprises and bureaucrats from competition, and reduced opposition to
reforms, enabling reformers to avoid ideological debates, as well as to highlight
successful reforms to encourage further reforms.
§ Start with agriculture: Agriculture was the starting point for reforms in China,
which also reduced political and bureaucratic opposition since the bureaucrats
had little vested interests in poor rural areas. The success of these agricultural
reforms created powerful forces that supported further reforms – e.g. the extra
income from agriculture was channeled into the industries in rural areas and
fueled a boom among ‘town and village enterprises’ (TVE, or the non-state
industrial sector), which created pressure for the reform of the overall state
sector.
Employment
China has a population of 1,300 million, and its labor force is around 724 million. While
economic growth has been rapid, China also faces massive unemployment. While
employment data in China is somewhat unreliable, various estimates place China’s
unemployment rate between 3% and 10%. Some estimates from leading agencies are
shown below:
§ Official statistics suggest that at mid-2001 the unemployment rate in urban areas
was around 3.2%, or 6.6% if workers laid off from state-owned enterprises are
included.
§ According to statistics from the Information Center under the Ministry of Labor,
registered unemployment stood at 3.1% in 1997 and 1998.
Unemployment is much higher in the interior regions of China, where the problem has
even led to workers’ riots. Economic stagnation and closure of state-owned enterprises
in the rural areas have left around 150 million people out of work. Millions of these
unemployed people are expected to migrate to the cities in the coming years, putting
Social security
Since China’s market reforms of 1978, the responsibility for workers’ benefits has
gradually shifted from the government to the workers themselves. This is mainly due to
the severe funds shortages faced by the government. For example, the pension system
in China has a deficit of over $10 billion, and is technically bankrupt. As a result, some
pension fund payments have been delayed, and at least 100 million eligible pensioners
never receive payments. The situation is expected to grow more serious in the coming
years, with the number of retirees growing at twice the rate of new workers entering the
workforce.
In response, the Chinese government has shifted the responsibility for social security to
the workers, by introducing two major changes:
§ Social security has been partially privatized, such that the worker receives health
and other benefits from private insurance companies, and not from the
government. The worker and the employer pay a certain share of salary towards
purchasing insurance policies from private insurance companies. The insurance
company pays the worker a pension, medical benefits and unemployment
benefits in accordance to the premium that has been paid by the worker. Thus
workers who have worked for longer periods, who have made larger premium
contributions to the insurance company, receive larger benefits compared to
workers who have worked for shorter durations.
The measures relating to such social security benefits are contained in China’s Labor
Law of 1995, which read as follows:
§ Section 70 of China’s Labor Law of 1995 states that: “The State shall develop
social insurance undertakings, establish a social insurance system, and set up
social insurance funds so that laborers may receive assistance and
compensations under such circumstances as old age, illness, work -related injury,
unemployment and child bearing”.
§ Section 73: “Laborers shall, in accordance with the law, enjoy social insurance
benefits under the following circ umstances: (1) retirement; (2) illness or injury; (3)
disability caused by work-related injury or occupational disease; (4)
unemployment; and (5) child bearing”.
Training
China’s educational system stagnated during the years of the Cultural Revolution (1966-
1976), when all schools and colleges were closed to prevent “anti-revolutionary
activities” by intellectuals, and millions of teachers and educated people were sent to
prison or labor camps. This was a sad period in Chinese history when a whole
generation lost the opportunity to learn, work and live a normal life. Schools and colleges
began to operate normally only after 1978, when China undertook major economic
reforms.
While the government has invested large sums of money in building the educational
infrastructure, China still has poor levels of education and training, especially in terms of
the proportion of population having a college degree or technical training. For example,
according to the Chinese census of 2000, the percentage of the population with
university education rose steeply from 1.42% in 1990 to 3.61% in 2000, or a rise of
154%. However, according to the Chinese government, even by 1995 only 10% of
individuals entering the workforce had a university education. In 1999, only 11% of the
Chinese population had enrolled for college degrees, compared to 48% in Japan and
51% in the US. Not surprisingly, China faces a severe shortage of qualified local
candidates for managerial and technical positions, especially in the coastal regions
where large job opportunities have been created.
Income levels
The Chinese government specifies the minimum salary that all workers in China must be
paid. Currently, the minimum salary is RMB 450 (i.e., $55 or Rs. 2,585) per month. This
implies an annual minim um salary of $660 (Rs. 31,000) per year. However, China’s per
capita income is only around $860 per year, which means that a majority of casual
laborers and self- employed workers receive less than the minimum legal salary.
The government has specified that the maximum duration of work must not exceed 176
hours per month. The minimum hourly wage in China is thus $0.33, or Rs. 16 per hour.
Where workers are employed beyond 176 hours per month, Chinese law requires
employers to pay overtime pay at two times the minimum wage.
Workers in China’s state-run factories typically are paid around $150 (Rs. 7,500) per
month. Apart from pay, they also receive medical, retirement and unemployment
insurance.
The pay is even more attractive for professionals in the major cities of China, where
there are lots of vacancies for engineers, accountants, lawyers and other professionals
and few candidates. For example, the average pay for professionals with 5 years
experience is $15,000 (Rs. 7,50,000) per year.
There are also large differences in the pay offered by private and state-owned firms. For
example, according to a survey conducted by the Guangzhou Association for Labor
Administration in 2001, general managers in foreign-invested companies in Guangzhou
province earned around $48,072 (Rs. 2,400,000 per year) annually, while their
counterparts in SOEs earned only around $14,000 (Rs. 700,000 per year).
During 1998-2000, income levels of households in the top decile grew by 9.3% per year,
compared to only 1.2% for the bottom decile. In the urban areas, income levels in the top
decile grew at 9.7% per year compared to just 2.7% in the bottom decile.
There is a severe shortage of qualified local candidates for managerial and technical
positions in China, especially in the booming coastal regions. This has led to poaching of
personnel from other companies; sharp rises in salaries (e.g. salaries often double within
a few years); and increased job -hopping among employees (e.g. average retention for
good English-speaking candidates is only 1-2 years). There will continue to be a severe
shortage of local managers in China, and it is estimated that there will be at least 8 good
jobs for every trained local Chinese mid- to senior-level manager for the next 2 decades.
Faced with labor shortages, especially in new and hi-tech industries, China has attracted
large numbers of expatriates from North America and Europe. Typical salaries for
expatriates were around $300,000 (Rs. 15,000,000) per year, including living expenses,
hardship allowances, education allowances, and annual bonuses.
Termination
China has liberal laws allowing companies to terminate and layoff workers without
excessive restrictions. These provisions are contained in China’s 1995 Labor Law, which
lays out the rules regarding termination:
It is surprising that Communist China has liberal laws that allow companies to hire and
fire workers without excessive restrictions, while India has rules that make it virtually
impossible for companies to terminate workers, even when the company is sick and
unviable, or when the worker is guilty of indiscipline and violence. In this respect,
Communist China is closer to ‘capitalist’ states like U.S. and Britain than even to ‘welfare
Trade unions
However, in reality the unions in China are relatively powerless, for these reasons:
§ The right of workers to strike has been removed from the Chinese constitution,
and does not seem to be supported by labor laws. This was commented upon by
the National Commission on Labor, the tri-partite body set up by the government
of India to suggest labor reforms, which visited China to study Chinese labor laws
in detail. In page 207 (clause 4.166) of their report, the National Commission on
Labor notes that the ‘Shanghai Municipal Regulations of Labor and Personnel
Management in Foreign Invested Enterprises’ do not mention strikes at all.
Instead, it defines four other mechanisms available to workers to redress their
grievances, (1) mutual talks, (2) approach the ‘Mediation Centre’ required in
every enterprise, (3) arbitration by the government, and (4) adjudication by the
courts. Clearly, the Chinese government has taken great care to ensure that
labor laws do not restrict companies from operating freely, especially foreign
invested enterprises which are seen as the engine behind the economic miracle
in China’s coastal provinces.
§ Unions are controlled by the Chinese Communist Party, and union officials are
part of the government machinery. Workers have to accept the decisions of the
Chinese government, which has ultimate responsibility for workers’ welfare. They
cannot agitate for their rights and benefits on their own, even when they face
widespread layoffs, closure of state-owned enterprises, lack of social security,
etc.
§ Labor disputes are resolved through discussions with between employers and
labor ministry officials rather than negotiations with unions. Unions have no real
powers to undertake collective bargaining.
It is ironical that workers in the socialist people’s democratic dictatorship of China have
less protection than their counterparts in the capitalist economies of the West. Moreover,
the massive migrations of jobless peasants suggests that workers prefer the superior job
opportunities, wages and standard of living in the “capitalist” coastal regions than the
“iron rice bowl” in the interior regions.
Other provisions
China’s Labor Law of 1995 contains two provisions that are absent in India’s labor laws:
(1) prohibition of child labor, and (2) standard format for an employment contract.
§ Section 15 of China’s Labor Law of 1995 prohibits child labor. It says that “No
employing units shall be allowed to recruit juveniles under the age of 16”. This is
in contrast to The Child Labor (Prohibition And Regulation) Act of 1986 in India,
which does not prohibit child labor – it merely prohibits the use of child labor in
certain hazardous occupations, and in fact specifies the conditions of under
which child labor can be used in other occupations.
In 1979, the Chinese government created the Foreign Enterprises Services Company
(FESCO) to make it easy for foreign companies to recruit staff and comply with labor
laws, while also ensuring that workers’ rights are protected. Technically, Chinese
workers are employed by FESCO which “rents” them to the foreign company; hence all
labor laws are applicable to FESCO and not to the foreign company. FESCO
recommends qualified candidates to the foreign company, provides workers the benefits
guaranteed by the government, helps the foreign company comply with employment
FESCO offers Chinese employees: (1) salary as agreed to by the foreign company, (2)
medical reimbursement of 70-100% of medical expenses beyond a threshold amount per
year (RMB 300, or Rs. 1,700), (3) unemployment insurance, (4) salary for part-time staff
at a rate equal to two-thirds of the full-time rate, though no benefits are provided to part-
time employees. However, this dual employment structure – with FESCO as the nominal
employer and foreign companies as the de facto employer – can also cause problems.
Since they employees are “leased” to foreign companies, they have less control over
salaries, productivity, promotion, and termination. In addition, FESCO also charges a
large fee for its services.
Immigration reforms
Due to the shortage of skilled labor in coastal regions, the Chinese government has
changed immigration laws to attract overseas professionals. Long term or permanent
residency status will be granted to overseas professionals involved with expertise in
information technology, biotechnology, new materials and manufacturing technology, as
well as aviation and aerospace technology. The new immigration law will apply to
overseas Chinese, Chinese returnees, as well as expatriates.
New regulations have also been introduced to make it easier for foreign headhunting
firms to gradually enter the Chinese job market. Since October 2002, foreign
headhunting firms have been officially allowed to form joint ventures with local recruiters
to do business in China.
Impact of reforms
The economic reforms in China, and in particular the labor reforms, have created a huge
and widening gulf between the prosperous coastal provinces where private companies
and foreign investment have been encouraged, and the interior regions where inefficient
and loss-making state-owned enterprises are facing stagnation or closures.
In the coastal areas, export-oriented units have created vast employment opportunities
for millions in industries like toys, electronics, light manufacturing, chemicals, and so on.
These companies pay much higher wages than state-owned enterprises, and offer better
working conditions as well.
The large employment opportunities created in the coastal regions has created a severe
manpower shortage in the SEZs in coastal China. This has led to poaching of candidates
from other companies, rapid rise in salaries and increasing employee turnover.
As found in the survey by the Beijing Youth Post newspaper, the average annual
salaries for workers in the coastal areas was more than three times the average salaries
in the interior areas. Salaries in the most developed areas like Guangzhou and Shanghai
were almost ten times higher.
The success of reforms in China has disproved the conventional wisdom that avast and
populous country like China should not follow the export-oriented market -reforms
followed by Korea, Taiwan, Singapore and other East Asian countries.
While the situation is positive in the coastal areas where private companies and foreign
investment is encouraged, the situation is bleak in the interior provinces where there are
few private firms, and where large losses incurred by the inefficient state-owned
enterprises are forcing the government to close down or privatize these units and
retrench their workers.
It is ironical that labor laws in Communist China offer substantial freedom to companies
to hire and fire employees, similar to ‘capitalist’ states like U.S. and Britain. This is a
reflection to the pragmatic leadership of Chinese government, which has realized that
economic growth and job creation are ultimately more important for workers’ welfare
than populist anti-business measures aimed at ‘protecting’ workers.
We believe that China’s experiences hold important lessons for India’s reforms, as we
start from a similar state of backwardness and face similar challenges. The Figure 3.3
below summarizes the key differences between labor scenario in India and China:
To understand what lessons India could learn from China’s experiments with reform, the
2 nd National Commission of Labor set up by the government of India visited China and
had discussions with government and labor officials. The NCL noted that “China has
made spectacular progress in globalization and the post-globalization scenario, as
compared to the tardy progress that India has made” (page 215, clause 4.210 of the
NCL report). Regarding China’s system of labor laws, NCL studied the local laws
applicable in Shanghai, contained in the ‘Shanghai Municipal Regulations of Labor and
Personnel Management in Foreign Invested Enterprises’. NCL noted that these laws
provided substantial freedom to companies in managing their labor. We give below the
detailed provisions in Shanghai’s labor law as quoted in the NCL report:
Article 13 & 14 & 18 of Shanghai’s labor laws prescribe the conditions under which an
employee can be terminated. According to Article 13, “the foreign invested enterprise
may dissolve the labor c ontract and fire its employees upon one of the following
circumstances (page 202, clause 4.148 of the NCL report):
Article 14 of Shanghai’s labor laws says that “the labor contract is automatically
dissolved upon one of the following circumstances: (1) When the employee is charged
with a criminal suit, enforced to labor reform or sentenced to prison; (2) When the foreign
invested enterprise is dissolved or terminated” (page 203, clause 4.149 of the NCL
report).
Article 18 of Shanghai’s labor laws says that a Chinese employee dismissed by a foreign
invested enterprise shall get economic compensation from the enterprise in the light of
the employee’s service length in the enterprise. Those whose service length is less than
one year shall get economic compensation equivalent to their half a month’s actual
salary; those whose service length is more than one year shall get economic
compensation equivalent to their one month’s actual salary for each working year, but
the maximum shall not exceed twelve months’ actual salary” (page 203, clause 4.150 of
the NC L report).
Even though the NCL found the Chinese reforms to be very successful, it did not want to
follow the Chinese model of labor law in India for two reasons. (1) The NCL felt that “it is
not true to say that the employer in China is completely free to set up and close
enterprises or to hire and fire at will”, and that “it will be erroneous to think that ‘flexible’
labor laws are the main reason for China’s progress” (page 215). (2) The NCL felt that
the environment in India is fundamentally different from what in China, and hence we
cannot blindly adopt China’s laws (page 209 of the NCL report).
SINGAPORE
Singapore’s experiments with industrial relations are unique in several ways: (1) it
follows a successful tripartite approach towards managing labor issues, (2) it places
emphasis on training and skill development in order to transform the country into a post-
industrial economy, (3) it highlights the unique problems of an democratic system where
the government has extensive powers and political freedom is restricted.
Background
Singapore’s labor system is built around a tri-partite system that encourages workers,
employers and the government to work together to solve common problems. It was in
1972 that the tripartite National Wages Council (NWC) was established to help build
labor-management relations through negotiations and consensus. This tri-partite policy is
to some extent based on Singapore’s peculiar system of one-party democracy and
government control over the dominant union. However, this pragmatic approach has
been successful in devising solutions to several of Singapore’s labor problems.
The tri-partite system has its roots in the circumstances surrounding Singapore’s birth as
a nation in 1965, when it faced political and economic turmoil after separating from
Malaysia. With the GDP shrinking, unemployment rising, and the nation’s survival at
stake, the government, employers and unions were forced to abandon adversarial
positions and adopt more cooperative labor-management relations. By the end of the
1970s, Singapore had attracted large foreign investments, increased its GDP and per
capita income, achieved full employment, and improved the standard of living. Singapore
faced serious challenges due to its limited geographical area, limited population and
natural resources, and competition from neighbors who could offer cheaper labor costs.
However, it was able to achieve a harmonious industrial environment that helped
businesses to grow, and helped workers raise their income levels and standard of living
to western levels.
Singapore government has also been active in developing the skill base of the
workforce. This policy was begun in the late 1970s when the government made a
visionary decision that fundamentally impacted the economic fortunes of Singapore. The
government decided to encourage capital-intensive, high-skilled, high-technology
industries instead of the labor -intensive, low-skilled industries that were more common in
East Asia. In 1979, the government set up a Skills Development Fund to facilitate
workers’ training, and imposed a payroll tax on companies requiring them to contribute to
this fund. Companies were encouraged to invest in training their workers, and received
subsidies from the Skills Development Fund to offset the cost of worker training for
approved courses.
The Singapore Labor Foundation (SLF) was set up in 1977 by an Act of Parliament to
improve the welfare of union members. Funded by union members, SLF provides
financial assistance to families of workers who suffer disability, illness or death, as well
as free disability and life insurance for all union members under a group insurance
scheme.
Labor reforms
Singapore does not fit the classic case of labor ‘reform’, where a country starts with a
dysfunctional labor system and achieves favorable outcomes by making appropriate
changes. Instead, Singapore is a successful example of a country that has achieved
rapid growth, high income levels and standard of living by consciously following a labor-
management relationship that helps businesses grow while providing benefits and
support for workers.
This is best seen in Singapore’s tri-partite system and its focus on workers’ skill
development, which have been successful in devising solutions to several of Singapore’s
labor problems. This was especially evident during the two recent recessions where
cooperation between unions, employers and the government helped to minimize
unemployment and mitigate the impact of recession:
JAPAN
Japan presents a clear case study of an economy mired in prolonged recession due to
its failure to undertake tough reforms. It is widely believed that Japan’s unique work
environment was responsible for the rapid growth in the post World War decades, which
led Japanese companies to dominate several industries, including electronics,
automobiles, shipbuilding, financial services, and so on. However, the Japanese
economy has been facing severe recession since the 1990s, with the ‘bursting of the
bubble’ leading to fall in GDP, rising unemployment, declining prices and rising
bankruptcies. For political reasons, the Japanese government has been unable to
undertake tough reform measures, with the result that the recession has been prolonged
for more than a decade and shows no sign of recovery.
Background
The Japanese economy has three distinct sectors, with widely varying dynamics. The
first is the organized sector, consisting of large and efficient multinational companies
which offer life-long employment to its employees. Secondly, the large unorganized
sector consisting of small and often inefficient suppliers and sub-contractors who offer
lower salaries and do not offer life-long employment. The third consists of the certain
protected sectors of the economy, such as retail and agriculture, where firms are
inefficient and uncompetitive, and yet are politically very powerful.
The large organized sector is globally competitive, and yet operates under a rigid labor
environment. These companies offer life-long employment to workers, pay salaries
link ed to seniority rather than merit, and do not layoff or retrench workers. Yet, these
companies are able to operate efficiently because they use the ‘internal labor market’
within the company, rather than the external labor market, in order to achieve
employment adjustment. These companies achieve a high degree of flexibility for the
workforce by moving workers to different jobs within the company, training and relocating
workers, and cutting back on recruitment in lean times, rather than using layoffs and
retrenchment. Employees have no reluctance in being relocated within the company,
since (1) pay is based on the employee’s seniority, and not the job function or
department, and (2) Japanese companies emphasize multi-skilling through in-house
training programmes, which makes it easy for workers to adapt to their new work
environments. The desire to avoid retrenchment is also related to the dominant role
played by the company in the employee’s life and identity. Since Japanese companies
recruit people only at the entry level, retrenchment can mean a loss of livelihood and
identity to the employee.
Labor laws
Japan’s labor laws allow companies a great degree of freedom in they way they operate,
and companies generally have few legal restrictions in the way they manage their
workforce. Generally, Japan’s labor laws deal with basic working conditions and social
security benefits, and leave most aspects of employee-employer relations to be decided
by bi- partite discussions. For example, Japan does not have laws to restrict a company’s
right to terminate or retrench workers. In practice, however, companies rarely do so for
cultural reasons, as well as due to pressure from unions.
In the decades immediately after World War II, Japan’s labor laws were designed to
provide companies the freedom to grow and become globally competitive. Since the late
1980s, when Japan enjoyed unprecedented economic success, the emphasis has
turned to providing social security and quality of life for workers, as opposed to focusing
on economic growth per se.
§ Benefits: All workers in Japan are entitled to the following benefits from the
government: (i) employment insurance and accident compensation schemes; (ii)
health insurance schemes; (iii) pension programmes; (iv) nursing care for the
aged, and (v) compulsory schooling up to the age of 15. The Child-Care Leave
Law in 1990 and the amended Child-Care Leave/Nursing Care Leave Law in
1997 gives workers the option of either one year’s leave without pay for either
working parent of a newborn baby, or shorter working hours.
§ Working hours: Japan has an ageing population with a low birth rate, and its
average life expectancy is among the highest in the world. A shrinking workforce
and rising prosperity prompted the government in the late 1980s to take steps to
improve the living standards of workers (as opposed to focusing on growth and
competitiveness). With amendments to the Labor Standards Law in 1987,
effective April 1988, mandatory working hours were reduced to 40 hours per
week from the previous 48 hours. While average working hours for manufacturing
workers was 2,189 hours in 1988, more than in any country in Europe or the US,
this was reduced to 1,975 hours in 1995, comparable to the levels in the US and
UK, and 1,879 hours in 1998, less than those in several Western countries.
§ Temporary contracts: Since the late 1980s, the Japanese government has
permitted companies to recruit workers on temporary employment contracts, and
has progressively liberalized the rules that regulate temporary employment.
Previously, under the Personnel Dispatching Law (now amended), temporary
workers were prevented in certain defined job categories, such as industrial
workers, marketing, and retailing, and companies could not switch temporary
workers to permanent jobs. Before the amendment, this law prevented
companies from: (1) interviewing temporary workers sent by a temporary staffing
provider, (2) confirming whether temporary workers want to continue working,
until immediately before their contracts ended, and (3) conducting tests to
determine which positions the temporary workers will be assigned to. However,
these provisions have now been scrapped, and Japanese companies have
substantial freedom to employ temporary workers.
Employment
Unlike in the US, income inequalities and wage discrepancies are relatively minimal in
Japan. However, there is greater wage disparity between big companies (organized
sector) and smaller businesses (unorganized s ector). As the recent recession has hit
smaller enterprises harder than big companies, these wage discrepancies have
widened. Wage disparities between men and women are also wide, with women earning
only 63% of the average wages for men.
According to the Ministry of Labor, the ratio of unionized labor to the total workforce is
shrinking. The proportion was only 22% in 1998, compared to 56% in 1949.
In spite of stagnation in the 1990s, the jobless rate was only 4.3% in 1999, which is
relatively low by global standards but very high by Japanese standards. The most
seriously affected sectors are construction and civil engineering, employing 6 million
workers, which have been badly hit by the real estate crash and subsequent drop in new
investments.
Labor reforms
One key labor reform that has been implemented is the legal recognition for temporary
employment contracts. Since the late 1980s, the Japanese government has permitted
companies to recruit workers on temporary employment contracts, in spite of opposition
from trade unions. While previously the Personnel Dispatching Law restricted the use of
temporary workers, this was amended in 1986 to permit temporary staffing firms to
operate with approval from the Labor Ministry. In 1999, the deregulation of the
Temporary Dispatching Law removed restrictions on the type of jobs for which temporary
staff agencies were allowed to provide workers. In 2000, the temporary-to-hire program
also permitted temporary workers to be hired as permanent employees if deemed
suitable, overturning the previous Personnel Dispatching Law, and allowed companies to
evaluate a temporary employee's potential and let workers decide if they want to work for
that firm.
Apart from this, few labor laws in Japan have been changed in recent years. The
ongoing recession has triggered several important changes in employer-employee
relations, but these have been negotiated through bi- partite discussions, and not
implemented through legislation.
Impact of reforms
§ Temporary workers: After temporary work was legalized in the 1980s, the
proportion of people employed on a temporary or part -time basis has increased,
from nearly 10% in 1980 to around 20% in 1995.
SOUTH KOREA
Like India and other developing countries in Asia and Africa, South Korea also followed
an ‘import substitution policy’ in the 1950s and 1960s to protect domestic companies
through tariffs and licensing. However, Korea dumped this policy in the mid 1960s and
replaced it with a policy of ‘state-led capitalism’ and aggressive export promotion, which
has helped achieve dramatic increase in GDP and standard of living. Since then, the
Korean government has placed primary emphasis on achieving growth by developing
exports and building companies that are globally competitive. The government has also
tightly curtailed the power of unions in order to avoid obstacles to growth.
This ‘development first and distribution later’ policy, followed by the often authoritarian
governments in Korea, takes the view that workers’ welfare is better served by boosting
economic growth and creating jobs, rather than undertaking pro-worker measures that
eventually cause harm by retarding growth. This policy was loosened to some extent in
the late 1980s with the inset of democratic reforms in South Korea, but was re-
introduced during the East Asian crisis in the late 1990s.
Background
The ‘state-led capitalism’ practiced in South Korea until the late 1990s gave emphasis to
strategic industries and large conglomerates (chaebols) which enjoyed tremendous
benefits from the government, including cheap loans, tax exemptions, tariff rebates and
protection from foreign competition. This helped promote rapid economic growth, boost
exports, and improve income levels, with the result that chaebols employed around half
of all industrial workers in Korea during the early 1990s. However, this system was also
inefficient and vulnerable, as demonstrated during the Asian crisis of the late 1990s.
Korean unions are notorious for their militancy, which some believe is triggered by
political repression, frustrated upward mobility, and relative income disparity – though
economic growth since the 1960s has reduced absolute poverty.
In recent decades, Korea has undergone two basic changes in its economic
environment: (1) economic liberalization from 1988 to 1993, and (2) globalization since
1994. However, the economy faced its biggest challenge during the Asian crisis of the
late 1990s, when GDP shrank, unemployment worsened, inflation went up, and many
firms faced bankruptcy. The unemployment rate in South Korea rose from 3.1% in
December 1997 to 6.5% in March 1998, and was over 10% if under-employment (i.e. 17
hours or less per week) was considered, which was the highest level for 40 years in
Korea.
Since the 1960s when Korea’s industrial revolution began, the government has
considered unions as an impediment to economic growth. Like with many other East
Asian count ries, authoritarian labor control was a basic feature of Korea’s economic
development, especially in the 1970s when the country experienced rapid
industrialization. This has led to widespread anti-labor feelings in society, and policies
that curtail the power of unions. For example, new unions have to get a certificate of
registration from the Ministry’s Labor Office, which could be withdrawn if the unions were
involved in severe disputes or violent strikes. Unions also had to report on their activities
and submit their annual budget to the Ministry. Labor laws limited union activity and
blocked the intervention of unions in labor disputes and collective bargaining.
Massive and violent strikes in 1987, called the “Ulsan Typhoon”, led the Korean
government to introduce democratic reforms and improve workers’ rights, including
removal of authoritarian controls, and allowing unions to negotiate with government and
employers. The process of easing labor laws was very slow, and took several years. For
example, it was only in 1998 that worker representatives were invited to tripartite
negotiations, while new labor laws allowing teachers and public sector employees to
organize came into force only in 1999.
Employment
Korea has enjoyed strong economic performance until the Asian crisis of the late 1990s.
The economy grew rapidly, and GDP growth was between 5% to 15%. Unemployment
was low and life-long employment was assured – in 1997, just prior to the crisis,
employment was only 3.1%.
However, with the onset of the crisis in late 1997, unemployment rose to 6.5% in March
1998. Income inequality also worsened, with the percentage of people living below the
poverty line rising from 3% in late 1997 to 7.5 % in late 1998, and the Geni coefficient
rising from 24.49 to 28.19.
The proportion of organized workers in Korea has been around 20%. It reached a peak
of 23% per cent in 1989 due to pro-worker reforms, and fell to below 15% in the late
1990s due to the recession.
Labor reforms
Faced with the crisis of the late 1990s, the Kim Dae Jung government in Korea
introduced an IMF-inspired austerity policy. This included: (1) better balance between
large and medium -sized firms (i.e., break -up of chaebols), (2) more equity (i.e., more
share of income to workers), (3) more reliance on market forces (deregulation and
structural adjustment), and (4) reform of financial institutions (e.g. cut in lending to
chaebols).
These changes had a dramatic impact on the employment system. While companies
used these reforms to undertake radical restructuring in order to survive, for workers it
meant reduced job security and the end of life-long employment. For example, in 1999
Samsung reduced its workforce by nearly 30% through spin-offs and early retirement
schemes. A survey conducted by the Labor Ministry in 1999 showed that more
companies were implementing performance-based pay (instead of guaranteed annual
pay hikes). While the proportion was only 4% in 1997, it had risen to 18% in 1999 and
another 30% were preparing to introduce performance-based pay. Faced with the reality
of economic crisis, unions were forced to adopt a passive stance amidst these changes.
To manage the reforms process, the Korean government announced the creation of
public works schemes and the expansion of the Employment Insurance programme. In
January 1998, the government created a tripartite committee, which reached
agreements on these issues:
The wage gap between occupational categories has widened – while white-collar
workers earned 1.52 times more than blue-collar workers did in 1995, it was 1.57 times
MALAYSIA
Background
Like most East Asian countries, Malaysia has followed an export oriented development
strategy that has succeeded in attracting large foreign investment, boosting exports,
creating jobs and improving the standard of living. Malaysia’s industrial transformation
and rapid economic growth has been particularly impressive since the reforms
undertaken after 1987. Following Prime Minister Mahathir’s Vision 2020 pronouncement,
these reforms aimed at achieving developed country status by the year 2020.
Like Korea, Malaysia has followed pro-growth policies that helped companies (especially
MNCs) grow, even where it means alienating unions and small businesses. Malaysia’s
development strategy has often been called ‘techno-nationalist’. It involves the use of
foreign investments for upgrading technology while promoting domestic companies and
supporting ‘affirmative action’ for the Malay population.
Labor laws
Like Korea, Malaysia has sought to implement labor laws that curtail the power of unions
in order to permit companies to expand without excessive hindrances and create more
jobs. The government has frequently cracked down on union strikes and demonstrations.
For example, it has jailed labor leaders involved in strikes, limited union rights, and
promoted in-house unions that adopt a less antagonistic approach towards
management.
The government has also sought to reduce excessive wage increases that prevent
companies from being globally competitive. The Industrial Relations Act of 1967 has put
a freeze on wage hikes by making wage negotiations through collective bargains valid
for three years. In 1987 the finance minister called for voluntary wage freezes for three
years, and threatened that else the government would implement a required freeze.
Further, legislation in 1989 eliminated bonuses, overtime, EPF, and holiday pay from the
negotiations and sought to reduce holiday and overtime pay.
In the early 1990s the government implemented a New Development Policy that was
intended to: (1) increase the labor supply, (2) boost the level of skills in the local work
force, (3) advance the level of technology in both foreign and domestic firms, and (4)
increase the amount of local content in foreign-owned export manufacturing.
The government introduced tax incentives to encourage both R&D and education and
training. Tax exemptions were provided for companies that met more stringent
requirements for technology content and sharing. These included capital investment per
employee of at least RM 55,000; R&D expenditures of 1% of sales within 3 years of
starting operations; and 7% of employees with certificates or diplomas in technical fields.
Certain high technology companies received 10-year tax holidays, greater access to
foreign skilled labor, and full access to foreign exchange accounts in local banks.
Impact
Malaysia has been able to position itself as an attractive global destination for
manufacturing, and has attracted large amounts of FDI, especially in the electronics
sector. This has created many jobs and improve d the standard of living in the 1980s.
Between 1987 and 1991 wages in the electronics industry rose 12% for unskilled labor
and 20% for skilled labor. Within the manufacturing sector as a whole wages rose 6% in
1991, 10% in 1992, and 15% in 1993. By 1993, the economy enjoyed full employment,
and began to experience labor shortages and rising wages. Faced with labor shortages,
the economy witnessed a huge increase in female workers, especially in the electronics
industry, and entry of over 2 million foreign by 1996.
SRI LANKA
Sri Lanka’s labor law framework is broadly similar to that of India, since both countries
have inherited laws framed by the British. The key categories of labor laws are:
The Industrial Disputes Act in 1950 is the basic law regulating the labor-employer
relationship, and it addresses industrial disputes, termination of services of employees,
collective bargaining, labor arbitration, and various Labor Tribunals / Industrial Courts.
However, public sector employees are not covered under the Industrial Disputes Act,
and they are governed through the Establishment Code, a set of rules adopted by the
Cabinet of Ministers.
The Sri Lankan government has undertaken a process of liberalizing its system of labor
law. Key steps adopted include the following:
§ Amendments to the Termination (Special Provisions) Act which permits free hire
and fire policy, and payment of compensation on a fixed formula based on the
years of service of eac h employee
2. “How Labor Market policies can combine Workers’ protection with Job
creation; a partial review of some key issues and policy options”
Scarpetta, S tefeno and Pierre Gaelle, 2004
3. “The High pressure labor market of the 1990s”, Katz, Lawrence F and
Krueger, Alan B, 1999
10. “Macroeconomic reforms and a labor policy framework for India”, Ghosh,
Jayati, 2004
11. “Labor Market and Social Insurance policy in India; A case of losing both
competitiveness and caring”, Agarwala, Ramgopal and Khan, Zafar Dad,
2002
12. “Why do Temporary help firms provide free general skills training?”Autor,
David, 2001
13. “Social Protection in Asia and the Pacific; Chapter on Labor market
policies: A Theoretical Background”, Abrahart, A and Verme, P, 2001
14. “Temporary Work in the UK; Evolution and Regulation” Slater, Gary, 2003
16. “Stepping stones for the unemployed: the effect of temporary jobs on the
duration until regular work”, Zilji, Marloes and Berg, Gerard J. van den
and Heyma, Arjan, 2004
18. “Why are educated women less likely to be employed in India?”, Testing
competing hypothesis Das, Maitreyi Bordia, and Desai, Sonalde, 2003
21. “Temporary agency work in the European Union”, Storrie, Donald, 2002,
23. Staffing Industry’s positive role in the US economy, ASA Issue Paper,
2004
29. “The Law, Labour And Development In India”, Jaivir Singh, Annual Bank
Conference on Development Economics, Oslo, June 2002
31. “Organized labor and economic liberalization – India: Past, present and
future”, Debashish Bhattacherjee, Discussion paper DP/105/1999,
International Institute for Labour Studies, International Labour
Organization, 1999
32. “India: Workers’ Rights in a New Economic Order”, Jairus Banaji, QEH
Working Paper Number 55, Queen Elizabeth House, University of Oxford,
November 2000
33. “Labour Reform And Related Social Issues”, Module 7, Port Reform Tool
Kit, The World Bank
38. “Labour markets and income inequality: What are the new insights after
the Washington Consensus?”, Rol ph van der Hoeven, Working Paper
number 209, December 2000, UNU World Institute for Development
Economics Research
41. “China’s Emerging Private Enterprises: Prospects For The New Century”,
International Finance Corporation, 2000
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February 1997, Pacific Bridge, Inc., Washington, D.C.,
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48. “The Applicability of the Notional Defined Contribution Model for China”,
John B. Williamson & Zheng Bingwen, China & World Economy, Number
3, 2003
49. “Labour Law of the People's Republic of China” effective 1995, from the
website of the International Trade/Commercial Law & e-Commerce
Monitor, The University of Tromsø, Norway
50. Various articles on workers’ issues in China from the website of “China
Labour Watch”, www.chinalabourwatch.org
51. “Japanese trade unions and their future: Opportunities and challenges in
an era of globalization”, Sadahiko Inoue, Discussion Paper number
DP/106/1999, International Institute for Labour Studies, International
Labour Organization, 1999
56. “Labour unions in the Republic of Korea: Challenge and choice”, Ho Keun
Song, Discussion Paper number DP/107/1999, International Institute for
Labour Studies, International Labour Organization, 1999
59. “The Perverse Effects of Partial Labour Market Reform: Fixed Duration
Contracts in France”, Olivier Blanchard and Augustin Landier, draft report
by MIT / NBER, June 10, 2000
64. “The resurgence of the Italian Confederal Unions: Will it last?”, Lucio
Baccaro, Mimmo Carrieri and Cesare Damiano, Discussion Paper number
DP/144/2002, International Institute for Labour Studies, International
Labour Organization, 2002
65. “Th e Corporatist Paradox: Labour Parties and Labour Reform in Latin
America”, María Victoria Murillo, conference on “Institutional Reforms,
Growth and Human Development in Latin America”, Yale University
66. “Inequality and Mexico’s labour market after trade reform”, Cesar Patricio
Bouillon, jointly published by Inter-American Development Bank and
Georgetown University, October 2000
69. ‘Poised for growth’, ASA’s Annual Economic Analysis of the Staf?ng
Industry, May - June 2002, American Staf?ng Association
74. “EU Temporary -Worker Plan May Fall to Business Lobby”, The Wall
Street Journal, October 2, 2002
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Association, February 2001
We currently have over 12,000 associates in over 225 locations across the country for
over 125 clients. Clients, associates and candidates are serviced through our network of
offices , web and phone support.
SERVICES
Teamlease has a range of temp and perm solutions for companies and individuals. Our
primary services include temporary staffing, payrolling and permanent recruitment.
These are supplemented by strong vertical practices for ITES, Retail, Telecom and
Financial Services that understand their industries deeply and offer special solutions.
TECHNOLOGY
Our proprietary web based Teamlease Temp Network (TLnet) is hosted at
www.teamlease.com. TLnet has three components; CLCS (Associate Life Cycle
System), CLCS (Candidate Life Cycle System) and our Intranet.
RESEARCH
As a market leader, Teamlease has a responsibility and self-interest in dispelling the
faulty conception of temporary staffing with precarious employment. Our research efforts
include a bi-annual Teamlease Gallup Employment Outlook, annual Teamlease Temp
Salary Primer and the annual Teamlease Staffing White Paper.
CONTACTS
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