india labor market white paper

Teamlease White Paper 1 Confidential – for private circulation

INDIA’S LABOR MARKET

Case For

Temporary Staffing Reform To reduce

Unemployment

A White Paper

By Teamlease Services

www.teamlease.com This white paper is a confidential document of

Teamlease Services prepared for private circulation. No part should be reproduced without permission and/or acknowledgement


SUMMARY

• INDIA’S LABOR MARKET o Labor force participation is a low 400 million of a 1 billion population o Organized employment has been stagnant at 30 million for thirty years (22

million in public sector, 8 million in private sector) o Unorganized employment is the bulk of the labor force (340 million) o Given that 269 million people are below the poverty line, even the majority

of those employed can barely sustain themselves o Given India’s employment elasticity (0.15) and ICOR (3.75), the 8 million

new jobs needed to freeze unemployment require an impossible annual GDP growth rate of 13.6% and investments of $125 billion

• LABOR REFORM BACKGROUND

o Labor laws are a prisoner of a vocal minority of organized labor (mostly not poor, middle-aged, men) against the majority (poor, low skilled, women, self-employed, young and unemployed)

o Unorganized employment is exploding with its low productivity, investment and lack of labor law enforcement

o Unemployment, at 30 million, is more than organized employment o Jobless economic growth since 1990 has weakened grassroots social

and political support for economic reforms

• CASE FOR LABOR REFORM o The coming unemployment explosion o India’s labor environment o Global trends in work

• CASE FOR TEMPORARY STAFFING

o Temp jobs form up to 10% of employment in some countries o Ineffective public sector matching (of the 40 million people registered with

employment exchanges in 2004 only 100,030 got jobs) o Globally 40% of temps find permanent jobs within one year o The International Labor Organization reversed its fifty-year-old position

opposing temporary staffing in 1997 (Convention 181) o Temporary staffing accounted for 50% of the reduction in US

unemployment and 11% of job creation in the EU in the 1990s o A study of US firms found that earnings, margins and stock returns

improved with the increased use of temporary staffing o Temping gives outsiders (women, young, old, lower skilled, lower

educated, poor, and unemployed, etc) access to labor markets.

• 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.


India’s Labor Market

Population1 billion

Organized Employment30-50 million

Agriculture 60%Manufacturing 13%Construction 5%Services 24%

Unorganized Employment340-360 million

Unemployed30-50 million


Agriculture, Construction,Retailing

Not literate 0.2%Literate upto primary 1.2%Middle 3.3%Graduate and above 8.8%

Temporary Staffing0.08 million

0.01% of employment relative to10% in some countries

Labor Force400-420 million

Low or no labor law enforcementLow productivity

Low wagesLow Skills

Largely Sales, Technology,Admin, HR

Age 15-30 12.1%Female 10%Men 7.2%

ELASTICITYAgriculture 0Manufacturing 0.26Construction 1Services 0.57Overall 0.15


India'sLabor Market

PolicyIssues

RegulatoryIssues

Education and Skill development

Industrial Relations Framework

Mandatory Payroll Deductions

Working condition provisions

Job Security provisions

Wage determination Framework

Gender Issues

Temporary vs. Permanent

Lack of ability to afford broad social security

Demographics

UNEMPLOYMENT30 milion officially,more than organized employment

and growing rapidly

POVERTY REDUCTIONGiven 269 million below the poverty line, even

employed barely sustain themselves

PUBLIC VS. PRIVATE SECTORThe organized private sector is only 3% of

employment

ORGANIZED VS. UNORGANIZED SECTORSmall Organized (large scale) with low employmentand large unorganized (small scale) with low capital

AGRI. VS. MANUFACTURING VS. SERVICESNegative elasticity of agriculture and labor saving

bias of manufacturing

OUTSIDER ACCESSBias against outsiders (poor, low skilled, women,

and young) by insiders (not poor, middle-aged, men)

CREATING VS. PRESERVING JOBSShift from employment to employability

REGULATION VS. SUPERVISIONReverse current over-regulation and

under-supervision

RURAL VS. URBAN SECTORRural job growth 25% of urban and fallen more than

half since 1980

COSTS/ ENFORCEABILITYEnd legislating ahead of enforcement capacity and

payment capability

SKILL DEVELOPMENT44% of labor force is illiterate and only 5% estimated

to have vocational skillsEquity-Growth trade-off


Case forLabor Reform

Inability to affordsocial security

Low Employment Elasticityof GDP

Labor saving bias ofmanufacturing

Negative employment elasticity ofagriculture

End of public sectorjob machine

Demographics; growing youth

Effective & IncentivizedHR industry

Changed Role ofGovernment

Nature of job opportunities

Offshore markets/ FDI

Internal & ExternalCompetition

Unorganized employmentexplosion

Flexible work structures

Changing workerexpectations

Internationalization

Rising female workforceparticipation

Intellectuallization

Organizational and Supplychain deconstruction

Coming Unemploymentexplosion

India'sLabor environment

Global trends inwork

China's reformLow Skill levels Role of Employer


Case forTemporary Staffing

Economic Value andjob creation

Unemployment Reduction

Stepping Stone role

Liquidity provider; Better matchingof demand and supply

Limited Permanent jobsubstitution

Outsider Access

Matching expertise andDiversity Access

Just in time labor; handlingfluctuating demand

Differential pay forspecial skills

Strategic Flexibility

Improved Competitiveness

Auditioning permanentcandidates

Employer Access

Keep in touch with thejob market

Supplemental income

Lifestyle choice

Improved employability; skilldevelopment and experience

Springboard to permanentemployment

Public PolicyPerspective

EmployerPerspective

EmployeePerspective

Handling planned andunplanned absences

Competitive economy Training


Recommendations for

Temporary Staffing Reform in India

Definition of PrincipalEmployer

High Mandatory PayrollDeductions

Compliance philosophy &decentrallization

Minimum wage rulesfor part-time work

Core, Perenial, industry, timingand location restrictions

Increased outsourcing to theunorganized sector

Lower job creation

Contract rotation

Outlocation

Sham consultingagreements

Barriers for first-time job seekersand labor markets outsiders

Evasion, Unorganized jobcreation, employee losses

Over-regulation and under-supervision, enforcement

consistency, transparency, costs

Amend Section 2(g), 7 of CLRA

Recognize Contract StaffingCompanies as the principal

employer

Amend EPFO ActESI Act

Only after 6 months, 18 monthsfor employees with salary greater

than Rs 6500 p.m.

Amend Section 7,12 of CLRA

Create national licensing forcontract staffing and move away

from contract-by-contract

Amend Sec 15 of MWA

Allow pro-rata salary paymentsunder the Minimum Wages Act

Amend Section 10 of CLRAAmend Sec 25B of IDA

Allow contract/ temporary staffingin all durations, functions and

industries

Issue Consequence Recommendation

Lack of part-time workoptions


Table of Contents Page No.

1. Preface 11

2. The Case for Labor Reform a. The coming unemployment explosion 14 b. India’s employment environment 15 c. Global trends in work 16

3. India’s Labor Market

a. Policy/ Regulatory Listing 18 b. Historical Perspective – Three eras 20 c. Key Issues 21

4. The Case for Temporary Staffing in India a. Public policy perspective 24 b. Employers perspective 26 c. Employees perspective 27

5. The Temporary Staffing Industry a. Background 29 b. Global markets 33 c. Geo-Historic evolution 37 d. Global regulation 38 e. Negative Perception vs. Reality 41

6. Results of Temporary Staffing Survey 42

7. Recommendations for Temporary Staffing Reform in India 45

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


PREFACE

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; incremental 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 organized 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. The Team lease Team


CHAPTER 2: THE CASE FOR LABOR REFORM 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 forLabor Reform

Inability to affordsocial security

Low Employment Elasticityof GDP

Labor saving bias ofmanufacturing

Negative employment elasticity ofagriculture

End of public sectorjob machine

Demographics; growing youth

Effective & IncentivizedHR industry

Changed Role ofGovernment

Nature of job opportunities

Offshore markets/ FDI

Internal & ExternalCompetition

Unorganized employmentexplosion

Flexible work structures

Changing workerexpectations

Internationalization

Rising female workforceparticipation

Intellectuallization

Organizational and Supplychain deconstruction

Coming Unemploymentexplosion

India'sLabor environment

Global trends inwork

China's reformLow Skill levels Role of Employer


The coming unemployment explosion 1. Low employment elasticity of GDP India’s labor force growth of 2% a

year needs 8 million new jobs just to keep unemployment frozen where it is. With an employment elasticity of GDP of 0.15 and an Incremental Capital output Ratio (ICOR) of 3.75, 8 million jobs need a sustained GDP growth of 13.6% and investments of $125 billion. These numbers are practically impossible and we will not have massive job creation unless we raise our employment elasticity of GDP.

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.

4. Negative employment elasticity of agriculture The employment elasticity of

GDP for agriculture is negative i.e. we could increase production by reducing the number of people employed. This represents massive underemployment due to the lack of alternative in rural areas and is not expected to change soon.

5. Labor saving bias of manufacturing The expectations of huge job

creation from manufacturing are at odds with the labor saving bias and capital intensity of manufacturing of the last few years. For e.g. Bajaj Auto produced 2.4 million vehicles last year with 10,500 workers; in the early 90s they made 1 million vehicles with 24,000 workers. Also Tata motors made 311,500 vehicles with 21,000 workers in 2004; in 1999 it made 129,400 vehicles with 35,000 workers.

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.


India’s employment environment 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.

2. Unorganized employment explosion Unorganized employment is to be 93% of

workforce. The explosion of the unorganized sector is largely to avoid irrational labor legislation but comes at the expense of benefits of the formal economy; credit access, training, benefits, etc. From a public policy perspective, the formal sector is more desirable because it offers better working conditions, improves employability, pays taxes and has higher productivity.

3. Internal and External competition Indian industry grew up in a protected

environment but global competition and technological uncertainty have changed their habitat. Companies must respond quickly when new products are launched, new technologies are assimilated, new competitors emerge and old ones die, prices of products fall, cost of input materials rise, interest rates and exchange rates fluctuate, and so on. Companies need flexibility to handle all this change; the end of textile quotas creates a unique need for labor flexibility for Indian companies.

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.

6. Effective and incentivized HR industry An increase in HR firms has led to

improved demand and supply matching in India’s labor markets. Their efficiency will only increase as global majors enter the country and raise competition. Temp staffing companies are particularly economically incentivized to keep people at work since any gap or delays in matching candidates and jobs represents losses.

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.


Global trends in work 1. Changing worker expectations A study by Spherion Corp identified what it

calls the “emergent workforce”, workers who need to feel more in control of their careers and want an employer who rewards them based on performance, versus “traditional” workers who believe that an employer is responsible for providing a clear career path and in return deserves an employee’s long-term commitment. Emergent workers are more concerned about opportunities for mentoring and growth and are less focused on the traditional arrangements of job security, stability and tenure.

2. Organizational and supply chain deconstruction The traditional boundaries of

a company are being redefined by technology but the driving forces are strategy and focus. Charles Handy talks about the “shamrock organization” where the core structure of expertise consists of essential managers, technicians, and professionals forming the nerve center of the organization. Embodied in this first leaf are the organization’s culture, its knowledge and direction. The second leaf of the shamrock comprises the non-essential work that may be farmed out to contractors. The third leaf is the flexible workforce; temporary and part-time workers who can be called on to meet fluctuating demands for labor.

3. Intellectualization Globally, regardless of labor force composition by age or

gender, the chance of finding a job rise with education. The underlying forces include a decline for unskilled and semi-skilled labor driven by technological innovations that greatly increase the productivity of skilled workers. Further, the transition to a service economy demands higher socials skills and accelerates skill obsolescence.

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.

5. Internationalization Labor markets are globalizing in two ways; labor mobility

(physical movement of people) and job mobility (offshore manufacturing and service delivery). Given the demographics and cost structures of developed countries, this may accelerate but specifics will depend upon politics and non-economic factors.

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.

7. Role of Employer Employers are no longer viewed as paternalistic providers

of lifetime employment and benefits. This has also led to the monetization of benefits and a move to CTC (Cost-to-Company) in compensation.


CHAPTER 3: INDIA’S LABOR MARKET

Population1 billion

Organized Employment30-50 million


Unorganized Employment340-360 million

Unemployed30-50 million


Agriculture, Construction,Retailing

Not literate 0.2%Literate upto primary 1.2%Middle 3.3%Graduate and above 8.8%

Temporary Staffing0.08 million

0.01% of employment relative to10% in some countries

Labor Force400-420 million

Low or no labor law enforcementLow productivity

Low wagesLow Skills

Largely Sales, Technology,Admin, HR

Age 15-30 12.1%Female 10%Men 7.2%

ELASTICITYAgriculture 0Manufacturing 0.26Construction 1Services 0.57Overall 0.15


India'sLabor Market

PolicyIssues

RegulatoryIssues

Education and Skill development

Industrial Relations Framework

Mandatory Payroll Deductions

Working condition provisions

Job Security provisions

Wage determination Framework

Gender Issues

Temporary vs. Permanent

Lack of ability to afford broad social security

Demographics

UNEMPLOYMENT30 milion officially,more than organized employment

and growing rapidly

POVERTY REDUCTIONGiven 269 million below the poverty line, even

employed barely sustain themselves

PUBLIC VS. PRIVATE SECTORThe organized private sector is only 3% of

employment

ORGANIZED VS. UNORGANIZED SECTORSmall Organized (large scale) with low employmentand large unorganized (small scale) with low capital

AGRI. VS. MANUFACTURING VS. SERVICESNegative elasticity of agriculture and labor saving

bias of manufacturing

OUTSIDER ACCESSBias against outsiders (poor, low skilled, women,

and young) by insiders (not poor, middle-aged, men)

CREATING VS. PRESERVING JOBSShift from employment to employability

REGULATION VS. SUPERVISIONReverse current over-regulation and

under-supervision

RURAL VS. URBAN SECTORRural job growth 25% of urban and fallen more than

half since 1980

COSTS/ ENFORCEABILITYEnd legislating ahead of enforcement capacity and

payment capability

SKILL DEVELOPMENT44% of labor force is illiterate and only 5% estimated

to have vocational skillsEquity-Growth trade-off


HISTORICAL PERSPECTIVE India’s labor markets have gone through three distinct phases: THE COLONIAL ERA (BEFORE 1947) Government policy on industrial relations under the British was one of laissez faire and selective intervention. The Bombay mills labor association was formed in 1890 but the association did not organize workers as trade unions and only petitioned the government on behalf of the workers. Gandhiji founded his Textile labor association in Ahmedabad in 1917 and was active in trying to settle labor disputes. The formation of the ILO in 1919 gave a boost to the idea of a national organization and in 1920, the All India trade union congress was formed with Lala Lajpat Rai as its first president. Later, a number of labor acts were initiated – the Trade Union Disputes Act of 1929, the Government of India Act of 1935, and the Bombay Trade Disputes Act of 1934. However, labor actions were localized and the emphasis was on adjudication and settlement of disputes rather than promotion of sound labor management relations or collective bargaining. 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. THE LIBERALIZATION ERA (1991-DATE) The stagnation and bankruptcy of socialism forced economic change; liberalization, deregulation, privatization and much else. But, in line with global experience, labor reform has lagged other reform. This is particularly dangerous because labor market constraints have held back job creation that creates the broader social and political buy-in for reforms. In fact, labor reforms have become so politically sensitive that there have been no changes to legislation or political rhetoric on labor since reforms began.


KEY ISSUES 1. NEITHER EFFICIENCY NOR EQUITY India’s plethora of poor labor

legislation has led to an economy that is neither competitive nor a society that is caring. We face the punishing combination of a globally uncompetitive labor environment with no effective social safety nets.

2. LABOR MARKET INSIDERS VS. OUTSIDERS Labor legislation has been

hijacked by a vocal minority at the expense of 93% of the labor force. Labor market insiders (mostly not poor, middle-aged, men) oppress outsiders (young, old, women, poor, lower skilled, unemployed, temporary workers, etc).

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.

4. UNEMPLOYMENT/ JOBLESS GROWTH The number of unemployed is above

30 million or equal to organized employment. The Indian economy has responded well to reforms but job creation has been a disappointment. With no explosion of unorganized or organized job creation, unemployment is increasing and has led to a lack of grassroots social or political support for reforms since 1991.

5. LEGISLATION AHEAD OF CAPACITY TO PAY AND CAPABILITY TO EXECUTE

Labor policies have been running ahead of implementation capacity and affordability. For e.g. Minimum wages, ESI, EPS of PF, etc. Most East Asian countries did not introduce extensive social welfare provisions in the early stages of their development – thei r economies had not reached the point where they could handle the burden of social welfare. We need a reality check in which legislation that is beyond implementation capacity should be scrapped.

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.

7. SHIFT FROM EMPLOYMENT TO EMPLOYABILITY We need a policy shift from

employment to employability; teaching a person to fish rather than giving him fish. A first step could be the creation of a Ministry of Employment by merging the Ministry of HRD and Labor. Such a focus will also reverse the current labor law situation of over-regulation and under-supervision.

8. TEMPORARY JOBS ARE BETTER THAN UNEMPLOYMENT Temporary

staffing is an integral part of the labor markets and global experience shows a strong case from all three perspectives; public policy, employers and employees.


CHAPTER 4: THE CASE FOR TEMPORARY STAFFING IN INDIA Temporary staffing is an integral part of labor markets and a case for reform can be made from three perspectives:

Case forTemporary Staffing

Economic Value andjob creation

Unemployment Reduction

Stepping Stone role

Liquidity provider; Better matchingof demand and supply

Limited Permanent jobsubstitution

Outsider Access

Matching expertise andDiversity Access

Just in time labor; handlingfluctuating demand

Differential pay forspecial skills

Strategic Flexibility

Improved Competitiveness

Auditioning permanentcandidates

Employer Access

Keep in touch with thejob market

Supplemental income

Lifestyle choice

Improved employability; skilldevelopment and experience

Springboard to permanentemployment

Public PolicyPerspective

EmployerPerspective

EmployeePerspective

Handling planned andunplanned absences

Competitive economy Training


PUBLIC POLICY PERSPECTIVE 1. REDUCTION IN UNEMPLOYMENT Temporary staffing is an important

component of the job market and hires almost 10% of the labor force in some countries.

A detailed study by Lawrence Katz of Harvard University and Alan Krueger at Princeton University found that temporary staffing was responsible for 50% of the reduction in unemployment in the US in the 1990s. The staffing industry increased European Union employment by 0.1% and accounted for around 11% of total new job creation in the late 1990s. An Economic Report of the US President says, “Permanent declines in the unemployment rate may have been caused by, among other things, the development of the temporary help industry”. 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).

2. OUTSIDER ACCESS/ INCREASED LABOR FORCE PARTICIPATION Most

labor laws protect “insiders”; usually not poor, male, and middle-aged. Temporary staffing companies are particularly effective in offering job access to traditionally disadvantaged populations like students, retirees, mothers with young children, unemployed, etc. who would traditionally opt out of the labor force. 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”.

3. LIMITED SUBSTITUTION OF PERMANENT JOBS The service offering of temp staffing companies complement internal flexibility solutions and does not replace permanent jobs. Small and medium enterprises (SMEs) have an especially strong need for labor flexibility and they account for the bulk of employment and innovation in most economies.

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.

4. BETTER DEMAND AND SUPPLY MATCHING Temp staffing companies act

as liquidity providers in labor markets. Their core competence is matching of demand


(jobs) with supply (people) increases the efficiency and speed of the job and candidate search process.

A European study found that, on an average, the time between enrolment at a staffing company and assignment at a company was 4 weeks. About 35% of agency workers surveyed had been placed within a week while in Germany this was 54%. Empirical evidence shows that the track record of temping firms is better at reducing frictional unemployment (those unemployed between jobs) than public sector initiatives like employment exchanges, etc.

5. STEPPING STONE TO FULL-TIME WORK The “bridge” to permanent

employment performs a valuable lubricant role in labor markets by allowing workers to demonstrate their skills to prospective employers and to be tested and hired on that basis. A global survey of temp workers finds that about 40% find a long-term job within a year of starting temping.

6. ECONOMIC VALUE AND JOB CREATION Globally temp staffing

companies have more than $200 billion in revenues and employ close to half a million corporate staff. On average temping companies create one permanent corporate staff position for every 50 workers placed on assignment.

7. COMPETITIVE ECONOMY The US department of labor compares the “just-in-

time” concept of inventory control in manufacturing with the use of flexible staffing arrangements to provide just-in-time labor and says “Employers that have flexibility in adjusting labor requirements to meet product and service demands have a competitive edge over those with less flexible human resources policies”.


EMPLOYER PERSPECTIVE 1. HANDLING FLUCTUATING AND UNCERTAIN DEMAND The ability of staffing

companies to provide “just-in-time” labor at a predictable cost offer companies an economically viable option to handle peak loads and seasons. Temping also allows companies to expand their manpower in the face of uncertain demand since companies would be overly cautious if they could only hire full-time workers on a permanent basis or had to incur excess costs for surplus staff during lean periods.

2. AUDITIONING PERMANENT CANDIDATES The practice of taking on temps as a

way to “audition” or take employees for a “test drive” is the fastest growing segment of the staffing industry, reflecting the desire to observe candidates for a trial period before deciding whether they are fit for the job. These “temp-to-hire” arrangements may reflect a weakened confidence by employers in educational systems worldwide to prepare young people for the workplace in terms of quality, attitude and skills.

3. IMPROVED COMPETITIVENESS Companies have a clear and growing need

for flexibility because product lifecycles are shortening, consumer demand is changing at an ever-faster rate, and new technologies are causing seismic shifts in the economic landscape. Plus globalization of labor markets presents unique challenges to supply chain cost structures.

A study published in the Decision Sciences journal by economists Nandkumar Nayar of Lehigh University and G. Lee Willinger of the University of Oklahoma compared firms in a carefully constructed sample and found that earnings (before interest, taxes, depreciation, and amort ization), gross margins and stock returns improved after the increased use of contingent labor.

4. STRATEGIC FLEXIBILITY For SMEs and start -up companies in particular,

labor flexibility is critical. Relative to established companies, start-ups often face an uncertain financial future and to hedge this uncertainty, they typically organize their working practices in a flexible way. Start-ups use temporary workers to postpone incurring the high sunk costs of employing permanent workers until their financial situation becomes secure. Steven Behm, former Cisco VP of global alliances said in the late 90s “We have 32,000 employees but only 17,000 of them work at Cisco.

5. DIFFERENTIAL PAY FOR SPECIAL SKILLS Temporary staffing companies allow

companies to recruit people with specialist skills or for short -term projects at compensation rates that are higher but do not create internal inequity.

6. MATCHING EXPERTISE AND ACCESSING DIVERSITY Temporary staffing

companies are experts at matching demand (jobs) with supply (people). Their experience, technology and liquidity position them better than in-house HR departments for matching quality. Temporary staffing companies also allow employers to access populations that have been traditionally disadvantaged in job access. This includes geographical, racial, gender and age diversity.

7. HANDLING ABSENCES Temporary staffing companies enable employers to

handle both voluntary and involuntary employee absences. In the absence of a temping option, employers would suffer service discontinuities and productivity breakdowns.


EMPLOYEE PERSPECTIVE 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.

2. SPRINGBOARD TO PERMANENT EMPLOYMENT Almost 40% of temp

employees find permanent employment within a year. This “stepping stone” or bridge function of temp staffing companies is an attractive option for job candidates.

3. IMPROVED EMPLOYABILITY Many temp staffing companies offer training, skill

development and experience that greatly increase the ongoing attractiveness of candidates as employees. Temp staffing companies in the US are estimated to spend about $800 million per year in offering training to candidates.

4. LIFESTYLE CHOICE Many people prefer the flexibility and independence

that temp jobs offer; a European survey found this in 33% of temp workers. It was higher among women (40% vs. 28% for men). A growing number of temps are highly paid and highly skilled technical, computer and health care workers who choose temping because of the flexibility, independence, and in some cases higher pay.

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.

5. SUPPLEMENTAL INCOME Many employees and candidates are attracted to

temp jobs by the supplemental income that they provide. This is particularly attractive to student, retired people, specialists and professionals considering entrepreneurial ventures.

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.

7. TRAINING Temporary staffing companies globally offer a number of

classroom, electronic and other forms of specialized, vocational and other training. A US government estimates puts this amount at over $700 million by US staffing companies alone


CHAPTER 5: THE TEMPORARY STAFFING INDUSTRY 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 (both 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.

LaborFlexibility

Internal External

QUALITATIVE� Outsourcing� Secondments

QUANTITATIVE� Temporary

Staffing� Fixed Term

Contracts

QUALITATIVE� Job rotation� Multi-skilling� Vocational

training� Re-skilling

QUANTITATIVE� Over-time� Shift work� Part-time� Increase

workforce� Decrease

workforce

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.


WHAT IS TEMPORARY STAFFING? Temporary staffing is a contractual labor market arrangement based on a three-party relationship between the temping firm, client and employee:

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.

Temp Firm

1 3

2 4

Client

Associates


TEMPORARY STAFFING SEGMENTS Historically, temporary staffing comprised four major segments; clerical/office, industrial, medical and technical. But as temping has become more widely accepted as a strategic component of work force composition the breadth of positions has expanded. Now in addition to the four traditional segments, temporary help also encompasses professional/specialty positions and information technology (IT) staffing. Within professional/specialty, there are a number of sub-sectors including legal and accounting. Some details on each segment: Clerical/Office Staffing Services – Secretarial staff, executive assistants, word processors, customer service representatives, data entry operators, telemarketers, other general office staff and call center agents, including customer service, help desk/product support, order takers, market surveyors, collection agents and telesales. Industrial Staffing Services – Assembly work (such as mechanical assemblers, general assemblers, solderers and electronic assemblers), factory work (including merchandise packagers, machine operators and pricing and tagging personnel), warehouse work (such as general laborers, stock clerks, material handlers, order pullers, forklift operators, palletizers and shipping/receiving clerks), technical work (such as lab technicians, quality-control technicians, bench technicians, test operators, electronic technicians, inspectors, drafters, checkers, designers, expediters and buyers) and general services (such as maintenance and repair personnel, janitors and food service workers). Medical Staffing Services Nurses, physicians, "allied health" professionals including radiology and diagnostic imaging technicians, clinical laboratory technicians and therapists. Also covers laboratory personnel, pharmaceutical contract research personnel, etc. Professional/ Specialty staffing services: Accounting professionals (auditors, controllers, accountants, etc), finance professionals (analysts, etc), and legal professionals (attorneys, legal secretaries, paralegals, etc.) Also includes scientists, and interim executives IT Staffing Services Hardware and software engineering, database design development, application development, Internet/intranet site development, networking, software quality assurance and technical support.


WHY DO COMPANIES AND INDIVIDUALS USE STAFFING COMPANIES? 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. According to a survey the key factors in hiring temporary staff were:

Reasons why employers use temporary staff

Match peaks in demand 63%

Cover for holidays/sick leave 59% Perform one-off tasks 39%

Cover for maternity leave 38% Specialist skills 21% Trial for permanent work 20%

Reduce wage costs 6%

Source: “Temporary S taffing Services Profile” study by UNCTAD/WTO in December 1998, from the UNCTAD website

According to a survey, the key factors in choosing temporary employment were:

Reasons why people choose a temporary job

Could not find a permanent job 39% Gain work experience 26%

Work between jobs 13%

Work for different employers 7% Flexible schedule 6% Be able to quite 5%

Work for a short period 4%

Source: Deloitte and Touche Survey, CIET(2000)


GLOBAL MARKETS 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: Penetration rate per country (%) Share of Global Market

2003 1998 1999 2000 2003

Austria 0.7 0.7 0.8 0.8

Belgium 1% 1.6 1.7 1.8 2.0 Canada 1.7 1.8

Denmark 0.1 0.2 0.2 0.2

France 10% 2.5 2.1 2.4 2.4 Germany 3% 0.6 0.7 0.8 0.8

Ireland 0.5 0.6 0.6

Italy 0.0 0.2 0.7 0.7 Japan 10% 0.5 0.6 1.1

Netherlands 3% 4.5 4.5 4.0 3.3 Portugal 0.9 1.0 1.1 1.1 Spain 1% 0.7 0.8 0.9 0.9

Switzerland 0.8 0.8 0.8

UK 18% 3.2 3.3 3.8 3.8 USA 43% 2.2 2.4 1.7

TOTAL $ 200 billion

Source: CIETT (2000), Randstad (2003) 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.


THE US STAFFING MARKET 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 US temporary staffing industry has revenues of around $100 billion

• 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 EUROPEAN STAFFING MARKET 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:

1985 1990 1995 2000 2001 2002 Austria 6.0 7.9 8.1 7.4

Belgium 6.9 5.3 5.3 9.0 8.8 7.6

Canada 12.5 Denmark 12.3 10.8 12.1 10.2 9.4 8.9

France 4.7 10.5 12.3 15.0 14.9 14.1 Germany 10.0 10.5 10.4 12.7 12.4 12.0

Ireland 7.3 8.5 10.2 4.7 3.7 5.3 Italy 4.8 5.2 7.2 10.1 9.5 9.9

Netherlands 7.6 7.6 10.9 14.0 14.3 14.3

Portugal 18.3 10.0 20.4 20.3 21.8 Spain 29.8 35.0 32.1 31.6 31.2 Switzerland 13.2 11.7 11.6 12.3

UK 7.0 5.2 7.0 6.8 6.7 6.1 Source; OECD LMS 2001 (2002), Eurostat LFS (2002, 2003)

A good overview of available national statistics on agency work in the EU is collected by Storrie and presented in the table on the next page. The relative size of the agency work business is largest in the Netherlands and the United Kingdom, and most immature in Denmark and until recently Italy. Data shows 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.


COUNTRY EXTENT (1999) AND GROWTH

AGE WOMEN SECTOR

Austria 24,277 (0.7%) Quadrupled since 1992

16% 51% Industry and Construction

Belgium 62,661 (1.65%) Doubled since 1992

Average 30 <25, 46%

41% 65% industry and construction

Denmark 18,639 (0.9%) Five fold rise since 1992

70% 23% industry and construction, 27% healthcare

France 623,000 (2.7%) Rapid growth

Average 29 <25, 28%


Finland 15,000 (0.6%) From 11,000 in 1996

Average 32 <25, 19%

78% Mainly services, 22% clerical work

Germany 243,000 (0.7%) Doubled since 1992

Average 32 <25, 37%


Italy 31,000 (1.5%) Very rapid recent growth

Average 30 <25, 40%


Ireland 9,000 (2.3%) Moderate recent growth

N/A 80% industry and construction

Luxembourg 6,065 (2.3%) Doubled since 1992


Netherlands 305,000,(4.0%) Doubled since 1992

Average 27 <25, 52%


Portugal 45,000 (1.0%) Doubled since 1995

Average n/a <25, 38%


Spain 109,000 (0.8%) Five fold rise since 1995

Average 27 <25, 51%


Sweden 32,000 (0.8%) Rapid growth

Average n/a <30, 45%


UK 557,000 (2.1%) LFS:254,000 (0.9%)

Average 32 <25, 31%

47% 26% industry and construction 29% finance

Source: Storrie (2002)


GEO-HISTORIC EVOLUTION

LOCALIZED GROWTH

NATIONAL ROLLOUTS

GLOBAL TENDENCIES

Industry Structure

Limited- clerical and light industrial, some generalist agencies

Still limited – but growth in some specialist niches

Broadening; penetrating more segments of the economy and developing long-term relationships

Market Characteristics

Fragmented Fragmented, some consolidation through takeovers and mergers

Intensified consolidation, possible oligopolies in alongside fragmentation, early evidence of market power of global firms

Regulatory Framework

Weak Uneven emerging of national regulatory frameworks

Increasing liberalization, US/UK labor market model finding favor globally and World Bank/IMF push reforms

Functions supplied

Temporary filling of vacancies

Temporary filling of vacancies together with basic recruitment functions

Temporary vacancy filling, growing range of recruitment functions, some provision of HR functions, evidence of complete process

Geographical frontiers

North America Western Europe Latin and South America, Asia

Segment frontiers

Clerical Light industrial IT, Accountants, healthcare, senior management

Scale of competition

Independent vs. Independent firms

Independent vs. National firms

Independent vs. national vs. global firms

Business Model Local branch network

National branch/ franchise route

Global branch/ franchise network and internet service delivery

Terms of Competition

Local contracts Local contracts and multi-site agreements

Growth in national, multi-site agreements, slow emergence of global agreements

Formal representation of Industry

Weak and un-coordinated

Weak but getting stronger

Contested – overlapping national and supranational institutions

Representation Temporary staffing Flexible staffing Labor solutions Source: Ward (2002)


GLOBAL REGULATION 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).


Overall

de/regulation (1989-1999)

Index of employment regulation (0=non-existent or weak, 2= strict)

Working Time regulation

Temp Work regulation

Job Protection regulation

Minimum Wage laws

Aggregate Index

USA Liberal, established

0 0 0 0 0

UK Liberal, established

0 0 0 0 0

Ireland Liberal, established

Netherlands Liberal, de-regulating

1 0 1 1 3

Sweden Liberal, de-regulating

0 0 0 0 1

Finland Moderately liberal, de-regulating

0 1 0 0 0

Norway Moderately liberal, de-regulating

0 0 1 0 0

Denmark Moderately liberal, de-regulating

0 0 0 0 0

Belgium Moderately Liberal, mostly static

0 1 1 1 3

Portugal Moderately Liberal, de-regulating

1 1 1 1 4

Luxembourg Moderately Liberal, static

France Moderately Restrictive, regulating

1 1 1 2 5

Italy Restrictive, de-regulating

1 2 2 2 7

Austria Restrictive, static

Spain Highly restrictive, de-regulating

2 1 2 2 7

Germany Highly restrictive, de-regulating

2 2 2 1 7

Greece Highly restrictive

Source: Peck, Theodore and Ward (2004); derived from CIET and Randstad


TEMPORARY STAFING LAWS IN THE US

• 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).


NEGATIVE PERCEPTION VERSUS REALITY A well-developed staffing industry offers an organized and transparent work arrangement that enhances employment opportunities for workers. However, temp staffing is still associated with a number of negative attributes and it is important to surface and confront this issue. The negative perceptions around temporary staffing are rooted in four basic areas: LOW EMPLOYMENT SECURITY Although the industry will continue to be characterized by workers who change assignments frequently, staffing companies can offer their workers income security over the longer-term by providing them with a continuous stream of assignments. Since staffing companies manage a portfolio of employment opportunities with multiple employers, they are in an excellent position to provide security of employment to their own workers. 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. DIFFERENTIAL WAGE LEVELS It is very difficult to compare wage levels among different populations of workers. There are often valid reasons why wages differ, such as differences in qualifications, seniority, experience, and job content. Comparing the wages of highly diverse populations is even more problematic. Pay differences among companies within a sector can be significant, and are sometimes larger than pay differences between permanent and temporary workers. 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 workers. 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.


CHAPTER 6: TEMPORARY STAFFING SURVEY 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 We conducted an in-depth survey of 75 companies in various cities in India with a twofold objective:

• Estimate the potential job creation potential with temporary staffing reform • Highlight the specific areas and issues for reform

2) APPROACH AND METHODOLOGY 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: § Manufacturing 45%, Services 55% § Indian owned 40%, Multinational 60%

4) FINDINGS

• Quantitative; Presented in the two tables on the next page • Qualitative: Presented in the form of recommendations for staffing reform in

the next section


QUANTITATIVE FINDINGS a) Survey responses overwhelmingly indicate that Indian managers and companies believe that the Contract Labor Act does not serve its purpose.

The Contract Labor Act does not help employers or employees

Agree 74%

Do not agree 26%

100%

Source: TeamLease survey. 2) Survey responses indicate that companies would substantially increase their usage of temporary staffing in their overall labor force

Demand for temporary staffing with reform

YEAR Millions % of workforce 2008 10.5 2.6%

2010 13.7 4%

Source: TeamLease survey. 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.


CHAPTER 7: RECOMMENDATIONS FOR TEMPORARY STAFING REFORM IN INDIA 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:

Definition of PrincipalEmployer

High Mandatory PayrollDeductions

Compliance philosophy &decentrallization

Minimum wage rulesfor part-time work

Core, Perenial, industry, timingand location restrictions

Increased outsourcing to theunorganized sector

Lower job creation

Contract rotation

Outlocation

Sham consultingagreements

Barriers for first-time job seekersand labor markets outsiders

Evasion, Unorganized jobcreation, employee losses

Over-regulation and under-supervision, enforcement

consistency, transparency, costs

Amend Section 2(g), 7 of CLRA

Recognize Contract StaffingCompanies as the principal

employer

Amend EPFO ActESI Act

Only after 6 months, 18 monthsfor employees with salary greater

than Rs 6500 p.m.

Amend Section 7,12 of CLRA

Create national licensing forcontract staffing and move away

from contract-by-contract

Amend Sec 15 of MWA

Allow pro-rata salary paymentsunder the Minimum Wages Act

Amend Section 10 of CLRAAmend Sec 25B of IDA

Allow contract/ temporary staffingin all durations, functions and

industries

Issue Consequence Recommendation

Lack of part-time workoptions


ISSUE 1 DEFINITION OF PRINCIPAL EMPLOYER Section 2(G), 7 of Contract Labor Regulation Act (CLRA) 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

CONSEQUENCE

• Blurred accountability with dual employer responsibility • Lower usage of temporary staffing; higher unemployment • Higher outsourcing to the unorganized sector • Higher out location to the unorganized sector • Sham consulting agreements • Barriers to first time-job seekers and labor market outsiders

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


ISSUE 2 CORE, PERENNIAL, INDUSTRY, LOCATION AND TIMING RESTRICTIONS

Section 10 of Contract Labor Regulation Act (CLRA) Section 25B of Industrial Disputes Act (IDA)

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


ISSUE 3 COMPLIANCE PHILOSOPHY AND DECENTRALIZATION Section 7, 12 of Contract Labor Regulation Act (CLRA) BACKGROUND • Current compliance is cumbersome and targets the wrong party

o Every client needs to register as a Principal Employer o Every contract with a client of the temporary staffing firm needs a license at a

state/local level. o Any changes to the numbers in a license need re-approval o All the records and registers have to be maintained by the client of the

temporary staffing firm. CONSEQUENCE

• Over-regulation and under -supervision; very low compliance levels • Lack of consistency in interpretation and enforcement of laws across cities, states

and nationally • Lack of transparency encourages evasion and corruption • Encourages a fragmentation of the market into small, individual and local firms who

do not service more than few companies in a locality and do not invest in systems, reputation and scale

• Ineffective high administrative and compliance costs that are ultimately born by temporary staffing employees and employers

RECOMMENDATION

• Shift compliance responsibility to Temporary Staffing company • Replace requirement for a license for every contract or amendment with clients by

temporary staffing firms with detailed monthly submissions from staffing firms and impose strict and large penalties for defaults.

• Amend Section 12 and the relevant rules to provide for a nation wide registration (rather than state or local) for the Contract Staffing Companies

• Require national temporary staffing companies to qualify for certain minimum standards such as:

o Minimum Net Worth of Rs. Two Crore o Should be a limited company with offices in all the metros or representing

every region in which they want to provide services o Board of directors should have 50% independent directors of repute o Provide employee information help desks on salary and benefits via phone,

email and post. o Should employ 1 direct employ ee for every 150 contract staff o Should possess Information Technology infrastructure of minimum

requirement to service employees across the country.


ISSUE 4 MINIMUM WAGE RULES FOR PART-TIME WORK Section 15 of the Minimum Wages Act (MWA) 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

• Lower job opportunities due to the hesitation in using part-time workers in seasonal businesses like BPO, Retail, IT, etc.

• Biased against outsiders like freshers, students, women etc willing to work part time due to other family, academic or professional commitments.

• Lower avenues for supplemental income by working additional hours • Lower competitiveness of part-time labor due to increased costs

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.


ISSUE 5 HIGH MANDATORY PAYROLL DEDUCTIONS

Employees Provident Fund Act Employees State Insurance Act

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 • Higher incidence of structuring temporary contracts as consulting • Large scale evasion of PF & ESI • Lower usage of temporary staffing; higher unemployment • Higher outsourcing to the unorganized sector • Higher out location to the unorganized sector • Sham consulting agreements • Barriers to first time-job seekers and labor market outsiders 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


ANNEXURES Annexure A India’s Labor Market - Facts Annexure B India’s Labor Laws Annexure C Past Indian Labor reform proposals Annexure D Labor Reform in China Annexure E Labor Reform in other Asian countries Annexure F Bibliography Annexure G About Teamlease


ANNEXURE A – INDIA’S LABOR LAWS - FACTS

1. RISING UNEMPLOYMENT/ JOBLESS GROWTH As seen from Figure 1.1, India’s workforce includes around 40% of its 1 billion population. Of these, 397 million persons are employed (UPSS measure), which means 2.2% of the workforce are unemployed. The unemployment according to the CDS measure is much higher, at 7.3% of the workforce. Figure 1.1: Population, labor force & employment data

Sector Employment (Million) Growth rate (% p.a.)

1983 1988 1994 1999-00 1983-94 1994-2000

Total Population 718.21 790 895.05 1004.1 2.12 1.93

Total Labor Force 308.64 -- 381.94 406.05 2.05 1.03 Total Employment (UPSS)

302.75 324.29 374.45 397 2.04 0.98

Source: Report of the Task Force on Employment Opportunities, Planning Commission, Government of India, July 2001

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 year, 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’.

Fig 1.2: Unemployment rate All-India unemployment rate (CDS) (as % of workforce)

8.18 8.28

6.09 6.037.32

0

2

4

6

8

10

1977-78 1983 1987-88 1993-94 1999-00

Source: Report of the Task Force on Employment Opportunities (Montek Singh Ahluwalia Committee), Planning Commission, July 2001

Une

mplo

ymen

t (%)


Of particular concern is the decline in employment growth compared to labor force growth. As seen in Figure 1.3 below, the number of jobs has grown at only 0.98% in the latter half of the 1990s, while the labor force is growing at 1.03% per year. Unemployment would have been far higher today if there had not been a fall in the growth of the labor force, from 2.94% in the mid 1970s to just 1.03% in the late 1990s. 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.

Fig 1.3: Growth of Population, Labour Force and Employment

2.73

2.17

1.54

2.43

0.98

2.27 2.19 2.14 2.11.93

2.94

2.04

1.74

2.29

1.03

0

0.5

1

1.5

2

2.5

3

1972-73 to1977-78

1977-78 to1983

1983 to1987-88

1987-88 to1993-94

1993-94 to1999-2000

Source: Report of the Task Force on Employment Opportunities (Montek Singh Ahluwalia Committee), Planning Commission, July 2001

Rat

e of

gro

wth

(%

)

Employment

Population

Labour Force

F i g 1 . 4 : L a b o u r f o r c e p a r t i c i p a t i o n r a t e s ( a c r o s s v a r i o u s a g e g r o u p s )

5 2

3 6 6

7 5 5

9 5 1 9 8 0 9 8 6 9 8 0 9 7 4 9 3 9

8 1 1

4 0 2

3 71 2 1

1 9 12 4 5 2 8 9 2 8 5 2 6 9 2 6 4

2 0 89 4

5 4 2

1 4 72 1 4

0

2 0 0

4 0 0

6 0 0

8 0 0

1 0 0 0

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60

+

S o u r c e : R e p o r t o f t h e T a s k F o r c e o n E m p l o y m e n t O p p o r t u n i t i e s ( M o n t e k S i n g h A h l u w a l i a C o m m i t t e e ) , P l a n n i n g C o m m i s s i o n , J u l y 2 0 0 1

LBP

R (

per

1000

)

U r b a n M a l e U r b a n F e m a l eU r b a n M a l e ( t o t a l )U r b a n F e m a l e ( t o t a l )


2. DECLINING EMPLOYMENT ELASTICITY According to the Planning Commission of the Government of India, employment elasticity of the Indian economy is currently around 0.15, which means that a 1% growth in GDP results in only 0.15% growth in jobs. 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)

Figure 1.5: Elasticity of Employment to GDP

Sector Employment Elasticity

1977 to 83 1983 to ‘94 1994 to 2000 1.Agriculture 0.45 0.50 0.00 2.Mining & Quarrying 0.80 0.69 0.00

3.Manufacturing 0.67 0.33 0.26 4.Electricity 0.73 0.52 0.00

5.Construction 1.00 1.00 1.00

6.Wholesale & Retail Trade 0.78 0.63 0.55 7. Transport, Storage & Construction 1.00 0.49 0.69

8. Finance, Real Estate, Insurance & Business Services 1.00 0.92 0.73

9. Community, Social and Personal Services 0.83 0.50 0.07 All Sectors 0.53 0.41 0.15

(Source: Report of the Task Force on Employment Opportunities, Planning Commission, Government of India, July 2001)


3. SECTORAL SKEW As seen from Figure 1.6 below, the bulk of employment (237 million out of the total of 397 million, or 60%) is in the agricultural sector, while industry (69 million, or 17%) and services (90 million, or 23%) account for a much smaller chunk of employment. 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

iii. Employment elasticity in agriculture is negative, i.e., agricultural production can be

increased further with even fewer agricultural workers

Figure 1.6: Growth of Employment by Sectors (UPSS)

Industry Employed workers (1999-00) (Million)

Growth (1994-00) (%)

1983 1993-94 1999-00 1983-94 1994-00 Agriculture 207.23 242.46 237.56 1.51 -0.34

Mining & Quarrying 1.76 2.70 2.27 4.16 -2.85 Manufacturing 34.03 42.50 48.01 2.14 2.05 Electricity, Gas & Water Supply

0.85 1.35 1.28 4.50 -0.88

Construction 6.78 11.68 17.62 5.32 7.09

Trade 19.22 27.78 37.32 3.57 5.04 Transport, Storage & Communication

7.39 10.33 14.69 3.24 6.04

Financial Services 1.70 3.52 5.05 7.18 6.20Community Social & Personal Services

23.80 32.13 33.20 2.90 0.55

Total Employment 302.76 374.45 397.00 2.04 0.98



4. LOW SKILL LEVELS As seen from Figure 1.7 below, the proportion of youth in India who have skill levels is only 5%, among the lowest in the world. This reflects the shamefully low levels of literacy among our workforce, as well as the lack of adequate infrastructure for imparting vocational training.

Figure 1.7: Proportion of those vocationally trained among the youth

Country % of youth in the workforce who have vocational training

India 5.06

Botswana 22.42

Colombia 28.06

Mauritius 36.08

Mexico 27.58

Australia 64.11

Canada 78.11 France 68.57

Germany 75.33

Israel 81.23

Italy 43.88

Japan 80.39

Korea Republic 95.86

New Zealand 63.03

Russian Federation 86.89

Singapore 66.24

United Kingdom 68.46


Poor skill levels among the workforce reduce workers’ productivity. This adversely affects workers’ welfare in several ways: i. It reduces workers’ income levels and hence their standard of living

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


5. LOW PROPORTION OF SALARIED/ RISING SELF-EMPLOYMENT Only 14% of the workforce in India is salaried with some measure of stability in their earnings. The proportion of salaried employees is much higher in urban areas at around 40%, and lower in rural areas at around 7% of the workforce. The low proportion of salaried employees implies huge self-employment; according to the Planning Commission this was 53% of the workforce in 1999-2000. This includes high income professionals like doctors, lawyers and consultants, as well as farmers and craftsmen struggling to make a living. 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.

Figure 1.8: Proportion of self-employment by industry: 1999-2000 (%) Industry Rural Urban Combined Agriculture 57.9 57.2 57.7

Manufacturing, mining, electricity, gas and water supply, construction 45.4 33.8 40.3 Trade, transport, financial, ownership of dwellings, community, social and personal services 52.9 44.6 48.2

All industries 55.9 42.1 52.9



6. UNEMPLOYMENT (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.

Figure 1.9: Unemployment by level of education (% Of labor force)

Education level Unemployment Rate

1987-88 1993-94 1999-00 Not Literate 1.1 0.2 0.2

Literate upto primary 1.9 0.9 1.2

Middle 5.3 3.4 3.3 Secondary 8.7 6.2 5.5

Higher Secondary 8.7 7.8 7.8

Secondary + Higher Secondary 7.1 - -

Graduate & Above 9.9 9.3 8.8 Educated (Secondary & Above) 9.0 7.7 7.1 All 2.7 1.9 2.2


(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.


7. ORGANIZED VS. UNORGANIZED The organized sector reflects institutions employing more than 10 people. The organized sector provides better working conditions, improves employability, complies with labor laws and pays taxes; therefore it is more desirable. Figure 1.10 shows the relative shares:

Figure 1.10: Organized versus unorganized employment Sector Employment (Million) Growth rate (%

p.a.)

1983 1988 1994 1999-00 1983-94 1994-2000

Total Employment (UPSS) 302.75 324.29 374.45 397 2.04 0.98

Organized Sector Employment

24.01 25.71 27.37 28.11 1.2 0.53

-Public Sector 16.46 18.32 19.44 19.41 1.52 -0.03

-Private Sector 7.55 7.39 7.93 8.7 0.45 1.87 Source: Report of the Task Force on Employment Opportunities, Planning Commission, Government of India, July 2001

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:

Figure 1.11: Organized sector jobs in employment by industry Industry Employment (million) Share of Organized

Sector (%)

1993-94 1999-2000 1993-94 1999-00

Total Organized Total Organized Agriculture 242.46 1.48 237.56 1.39 0.61 0.58 Mining & Quarrying 2.70 1.09 2.27 1.01 40.37 44.49

Manufacturing 42.50 6.40 48.01 6.75 15.05 14.06 Electricity 1.35 0.97 1.28 1.00 71.85 78.13

Construction 11.68 1.23 17.62 1.18 10.53 6.70

Wholesale & Retail Trade 27.78 0.45 37.32 0.49 1.62 1.31 Transport, Storage & Communication 10.33 3.11 14.69 3.15 30.11 21.44 Financial Services 3.52 1.53 5.05 1.65 43.46 32.67

Community, Social & Personal Services 32.13 10.93 33.20 11.49 34.02 34.61 All Sectors 374.45 27.18 397.00 28.11 7.26 7.08


.


ANNEXURE B – INDIA’ S LABOR LAWS Contract Labor (Regulation and Abolition) Act 1970 Objective: § To regulate the employment of contract labor in certain cases and to abolish it in

certain other cases To whom does it apply? § To every establishment employing twenty or more workmen as contract labor,

and every contractor who employs such contract laborers 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: 7. Registration of certain establishments. - (1) Every principal employer of an establishment may make an application to the registering officer in the prescribed manner for registration of the establishment: 9. Effect of non-registration. - No principal employer of an establishment shall - (a) in the case of an establishment which has not been registered, (b) in the case of an establishment the registration in respect of which has been revoked employ contract labor in the establishment. 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.


16. Canteens. - (1) The appropriate Government may make rules requiring that in every establishment - (a) to which this Act applies, (b) wherein work requiring employment of contract labor is likely to continue for such period as may be prescribed, and (c) wherein contract labor numbering one hundred or more is ordinarily employed by a contractor, one or more canteens shall be provided and maintained by the contractor for the use of such contract labor. 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. 21. Responsibility for payment of wages. – (1) A contractor shall be responsible for payment of wages to each worker employed by him as contract labor and such wages shall be paid before the expiry of such period as may be prescribed. (2) Every principal employer shall nominate a representative to be present at the time of disbursement of wages by the contractor and it shall be the duty of such representative to certify the amounts paid as wages in such manner as may be prescribed. (3) It shall be the duty of the contractor to ensure the disbursement of wages in the presence of the authorized representative of the principal employer. (4) In case the contractor fails to make payment of wages within the prescribed period or makes short payment, then the principal employer shall be liable to make payment of wages in full or the unpaid balance due, as the case may be, to the contract labor employed by the contractor and recover the amount so paid from the contractor either by deduction from any amount payable to the contractor under any contract or as a debt payable by the contractor. 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.


Payment of Wages Act 1936 Objective: § Regulate the payment of wages, in order to prevent employers from making

deductions from workers’ wages or delay in payment of wages To whom does it apply? § Any factory § Any industrial or other establishment § Any other establishment which the Government may specify by notification in the

Official Gazette 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: 3. Responsibility for payment of wages Every employer shall be responsible for the payment to persons employed by him of all wages required to be paid under this Act 5. Time of payment of wages (1) The wages of every person employed upon or in- (a) Any railway, factory or industrial or other establishment upon or in which less than one thousand persons are employed, shall be paid before the expiry of the seventh day, (b) Any other railway, factory or industrial or other establishment, shall be paid before the expiry of the tenth day 7. Deductions, which may be made from wages (1) The wages of an employed person shall be paid to him without deductions of any kind except those authorised by or under this Act. 13A. Maintenance of registers and records (1) Every employer shall maintain such registers and records giving such particulars of persons employed by him, the work performed by them, the wages paid to them, the


deductions made from their wages, the receipts given by them and such other particulars and in such form as may be prescribed. 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 Tr ibunal ----- 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 ---. 17A. Conditional attachment of property of employer or other person responsible for payment of wages (1) Where --- the Court --- is satisfied that the employer --- is likely to evade payment of any amount that may be directed to be paid under section 15 or section 17, the authority or the court --- may direct the attachment of so much of the property of the employer or other person responsible for the payment of wages as is -- sufficient to satisfy the amount which may be payable under the direction. 20. Penalty for offences under the Act (3) Whoever being required under this Act to maintain any records or registers or to furnish any information or return- (a) fails to maintain such register or record shall, for each such offence, be punishable with fine which shall not be less than two hundred rupees but which may extend to one thousand rupees


Minimum Wages Act 1948 Objective : § Fixing the minimum rates of wages for certain job categories

To whom does it apply? § Any person who employs one or more employees in certain job categories for

which the minimum rates of wages have been fixed under this Act 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: 3. Fixing of minimum rates of wages (1) The appropriate government shall, in the manner hereinafter provided, - (a) Fix the minimum rates of wages payable to employees employed in an employment specified in Part I or Part II of the Schedule and in an employment added to either Part by notification under section 27 (b) Review at such intervals as it may think fit, such intervals not exceeding five years, the minimum rates of wages so fixed and revise the minimum rates, if necessary 12. Payment of minimum rates of wages (1) Where in respect of any scheduled employment a notification under section 5 is in force, the employer shall pay to every employee engaged in a scheduled employment under him wages at a rate not less than the minimum rate of wages fixed by such notification for that class of employees in that employment without any deductions except as may be authorised within such time and subject to such conditions as may be prescribed.


Payment of Bonus Act 1965 Objective: § Payment of bonus to persons employed in certain establishments

To whom does it apply? § Every factory § Every other establishment in which 20 or more persons are employed § Any establishment employing more than 10 persons, as specified by the

appropriate government by notification in the Official Gazette 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: 8. Eligibility for bonus Every employee shall be entitled to be paid by his employer in an accounting year, bonus, in accordance with the provisions of this Act, provided he has worked in the establishment for not less than thirty working days in that year. 10. Payment of minimum bonus Subject to the other provisions of this Act, every employer shall be bound to pay to every employee in respect of the accounting year commencing on any day in the year 1979 and in respect of every subsequent accounting year, a minimum bonus which shall be 8.33 per cent of the salary or wages earned by the employee during the accounting year or one hundred rupees, whichever is higher, whether or not the employer has any allocable surplus in the accounting year 12. Calculation of bonus with respect to certain employees Where the salary or wages of an employee exceeds two thousand and five hundred rupees per mensem, the bonus payable to such employee under section 10 or, as the case may be, under section 11, shall be calculated as if his salary or wages were two thousand and five hundred rupees per mensem.


Workmen’s Compensation Act 1923 Objective: § To provide suitable compensation to workers injured in industrial accidents

To whom does it apply? § Any body of persons whether incorporated or not and --- the person with whom

the workman has entered into a contract of service or apprenticeship 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: 3. Employer's liability for compensation (1) If personal injury is caused to a workman by accident arising out of and in the course of his employment his employer shall be liable to pay compensation in accordance with the provisions of this Chapter 16. Returns as to compensation The --- Government may by notification in the Official Gazette direct that every person employing workmen --- shall send --- a correct return specifying the number of injuries --- and the amount of such compensation together with such other particulars --- as the --- Government may direct. 18A. Penalties (1) Whoever - (a) fails to maintain a notice-book, which he is required to maintain --- shall be punishable with fine, which may extend to five thousand rupees.


The Child Labor (Prohibition and Regulation) Act, 1986 Objective: § Prohibit the engagement of children in certain employments and to regulate the

conditions of their work in certain other employments. To whom does it apply? § All establishments and workshops

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: 3. Prohibition of employment of children in certain occupations and processes. - No child shall be employed or permitted to work in any of the occupations set forth in Part A of the Schedule or in any workshop wherein any of the processes set forth in Part B of the Schedule is carried on 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.


Industrial Disputes Act 1947 Objective: § Make provision for the investigation and settlement of industrial disputes

To whom does it apply? § All industries, where "industry" is broadly defined in section 2 (j) as any business,

trade, undertaking, manufacture or calling of employers and includes any calling, service, employment, handicraft, or industrial occupation or a vocation of workmen

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


o Every board, court and tribunal shall have the powers of a Civil Court in respect of enforcing the attendance of any person; examining him on oath; compelling the production of documents; issuing commissions for the examination of witnesses; in respect of such other matters as may be prescribed.

o The report of a board, court or tribunal shall be published within 30 days of receipt by the government and its award shall be enforceable 30 days after the date of publication

§ Chapter 5, which deals with strikes and lock-outs, is the most controversial part of the Act, and perhaps of all labour laws in India

o Prohibition of strikes and lockouts in a public utility service, unless the person or employer gives notice within 2-6 weeks before the strike/lockout

§ Chapter 5A deals with lay-off and retrenchment o Right of workmen laid-off for compensation o Conditions precedent to retrenchment of workmen o Compensation to workmen in case of closing down of undertakings

§ Chapter 5B deals with special provisions relating to lay -off, retrenchment and closure in large establishments employing more than 100 workers

o Prohibition of lay-off without the prior permission of the government o Conditions precedent to retrenchment of workmen o Procedure for closing down an undertaking

§ Chapter 6 specifies penalties for violations of the Act o Penalty for illegal strikes and Lockouts o Penalty for giving financial aid to illegal strikes and Lockouts

§ Chapter 7 deals with miscellaneous provisions o All directors and managers are liable if an offence is committed by a

company o Employer cannot change the workers’ conditions of service during

pendency of proceedings before boards, courts and tribunals o Procedure for recovery of money from the employer to the worker o Unions cannot penalize persons refusing to take part in an illegal strike

§ Second Schedule: matters within the jurisdiction of labour courts: o 1. The legality of an employer’s order under the standing orders; 2. The

application and interpretation of standing orders; 3. Dismissal of workmen including reinstatement of workmen wrongfully dismissed; 4. Withdrawal of any customary concession; 5. Illegality of a strike or lock-out

§ Third Schedule: matters within the jurisdiction of industrial tribunals: o 1. Wages, including the period and mode of payment; 2. Compensatory

and other allowances; 3. Hours of work and rest intervals; 4. Leave with wages and holidays; 5. Bonus, profit sharing, provident fund and gratuity; 6. Shift working otherwise than in accordance with standing orders; 7. Classification by grades; 8. Rules of discipline; 9. Rationalisation; 10. Retrenchment of workmen and closure of establishment

§ Fourth Schedule: Conditions of service for change of which notice is to be given: o 1. Wages, including the period and mode of payment; 2. Employer’s

contribution to any provident fund or pension fund; 3. Compensatory and other allowances; 4. Hours of work and rest intervals; 5. Leave with wages and holidays; 6. Starting, alteration or discontinuance of shift


working otherwise than in accordance with standing orders; 7. Classification by grades; 8. Withdrawal of any customary concession or privilege or change in usage. 9. Introduction of new rules of discipline, or alteration of existing rules, except as provided in standing orders; 10.Rationalisation, standardization or improvement of plant or technique which is likely to lead to retrenchment of workmen; 11. Any increase or reduction in the number of persons employed in any occupation or process or department or shift, not occasioned by circumstances over which the employer has no control

Key clauses: 9A. Notice of change No employer, who proposes to effect any change in the conditions of service applicable to any workman in respect of any matter specified in the Fourth Schedule, shall effect such change,- (a) without giving to the workmen likely to be affected by such change a notice in the prescribed manner of the nature of the change proposed to be effected; or (b) within twenty-one days of giving such notice 10. Reference of disputes to Boards, courts or Tribunals (1) Where the appropriate government is of opinion that any industrial dispute exists or is apprehended, it may at any time, by order in writing- (a) refer the dispute to a Board for promoting a settlement thereof (2) Where the parties to an industrial dispute apply in the prescribed manner, --- the appropriate government --- shall make the reference accordingly. 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 --- 23. General prohibition of strikes and Lockouts No workman who is employed in any industrial establishment shall go on strike in breach of contract and no employer of any such workman shall declare a lock-out- (a) during the pendency of conciliation proceedings before a Board and seven days after the conclusion of such proceedings; (b) during the pendency of proceedings before a Labour Court, Tribunal or National Tribunal and two months after the conclusion of such proceedings; (b) during the pendency of arbitration proceedings before an arbitrator and two months after the conclusion of such proceedings; or (c) during any period in which a settlement or award is in operation, in respect of any of the matters covered by the settlement or award. 25C. Right of workmen laid-off for compensation


Whenever a workman --- is laid-off, --- he shall be paid --- compensation which shall be equal to fifty per cent of the total of the basic wages and dearness allowance that would have been payable to him had he not been so laid-off (According to sub-clause (a) of clause (1) of section 25A, this applies to “industrial establishments in which less than fifty workmen on an average per working day have been employed in the preceding calendar month”.) 25FFF. Compensation to workmen in case of closing down of undertakings (1) Where an undertaking is closed down for any reason whatsoever, every workman --- shall --- be entitled to notice and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched 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 ---. 25M Prohibition of lay-off (1) No workman (other than a badli workman or a casual workman) whose name is borne on the muster-rolls of an industrial establishment to which this Chapter applies shall be laid-off by his employer except with the prior permission of the appropriate Government or such authority as may be specified by that Government by notification in the Official Gazette (hereinafter in this section referred to as the specified authority), obtained on an application made in this behalf unless such lay-off is due to shortage of power or to natural calamity, and in the case of a mine, such lay -off is due also to fire, flood, excess of inflammable gas or explosion. (4) Where an application for permission under sub-section (1) or sub-section (3) has been made the appropriate Government or the specified authority, after making such enquiry as it thinks fit and after giving a reasonable opportunity of being heard to the employer, the workmen concerned and the persons interested in such lay-off, may, having regard to the genuineness and adequacy of the reasons for such lay -off, the interests of the workmen and all other relevant factors, by order and for reasons to be recorded in writing, grant or refuse to grant such permission and a copy of such order shall be communicated to the employer and the workmen. (8) Where no application for permission under sub-section (1) is made, or where no application for permission under sub-section (3) is made within the period specified therein, or where the permission for any lay-off has been refused, such lay-off shall be deemed to be illegal from the date on which the workmen had been laid-off and the workmen shall be entitled to all the benefits under any law for the time being in force as if they had not been laid-off. (9) Notwithstanding anything contained in the foregoing provisions of this section, the appropriate Government may, if it is satisfied that owing to such exceptional circumstances as accident in the establishment or death of the employer or the like, it is necessary so to do, by order, direct that the provisions of sub-section (1), or, as the case may be, sub-section (3) shall not apply in relation to such establishment for such period as may be specified in the order. 25N Conditions precedent to retrenchment of workmen (1) No workman employed in any industrial establishment to which this Chapter applies, who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until, -


(a) the workman has been given three months' notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice; and (b) the prior permission of the appropriate Government or such authority as may be specified by that Government by notification in the Official Gazette (hereafter in this section referred to as the specified authority) has been obtained on an application made in this behalf. 25-O Procedure for closing down an undertaking (1) An employer who intends to close down an undertaking of an industrial establishment to which this Chapter applies shall, in the prescribed manner, apply, for prior permission at least ninety days before the date on which the intended closure is to become effective, to the appropriate Government, stating clearly the reasons for the intended closure of the undertaking and a copy of such application shall also be served simultaneously on the representatives of the workmen in the prescribed manner 32. Offence by companies, etc. Where a person committing an offence under this Act is a company, --- every director, manager, secretary, agent or other officer or person concerned with the management thereof shall, unless he proves that the offence was committed without his knowledge or consent, be deemed to be guilty of such offence.


ANNEXURE C – PAST INDIAN LABOR REFORM PROPOSALS 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:

• Montek Singh Ahluwalia committee • S. P. Gupta committee • Second National Commission on Labor

1. Montek Singh Ahluwalia committee 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 called for dramatic steps to be taken to prevent a rise in unemployment, and warned that even the relatively high GDP growth rates achieved in recent years were not sufficient to avoid worsening unemployment. To quote from page 5 of the report, “Our growth simulations suggest that continuation of 6.5% GDP growth is not likely to bring about a significant improvement in the employment situation. The employment elasticities we have used imply that 6.5% GDP growth will only generate additional employment of 5.9 million per year, leading to a continuing worsening in the rate of unemployment”. To create sufficient number of jobs, it is necessary to increase GDP substantially, and to achieve this, the committee suggested the following macro-economic policy measures: § Higher rates of investment § Improvements in efficiency § Improvements in infrastructure § Reform of the financial system § Credit for the informal sector § Sector-specific policies (in areas like agriculture, food processing, etc.)

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: § Unemployment can only be reduced by boosting GDP growth and facilitating

employment generation § The existing system of labor laws in India impose unreasonable restrictions on

companies, thereby hurting GDP growth and leading to higher unemployment § Labor reforms are necessary in order to boost GDP and thereby reduce

unemployment § Labor reform should include two key elements, (1) freedom for companies to

terminate and retrench workers, and (2) allowing companies to hire workers on temporary employment contracts

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-


labor’. For this reason it is necessary to bring about a better appreciation of the negative effects of existing labor laws on total employment in the economy and the potential benefits to labor of introducing greater flexibility”. While the committee had major recommendations, we list below the recommendation which will have radical effect on temping is listed below: Industrial Disputes Act § The provisions relating to retrenchment should not apply in cases of termination

due to non-renewal of a fixed term employment contract. Currently, courts have interpreted non-renewal of a fixed term employment contract as ‘termination’, though this is contrary to the intention of the contracting parties and the intent of the legislature while framing the law.

§ Short -term employment contracts should be introduced under which contract workers can be discharged at the end of the contract period without scope for dispute.

§ Scrap section 9a, which provides that job content and area and nature of work of an employee cannot be changed without giving 21 days notice to the employees (applicable for companies with more than 100 workers).

The Contract Labor (Regulation and Abolition) Act § 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


2. S P Gupta committee 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). The committee makes three recommendations to reduce unemployment:

(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”.


3. Second National Commission on Labor 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 central 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)


companies can terminate employees with compensation (under circumstances such as indiscipline, sickness, negligence, incompetence), (2) the labor contract is automatically dissolved when the employee is charged with a criminal suit or when the employer firm is dissolved, (3) for dismissed employees, the employer must pay compensation of 1 month’s salary per completed year of work, (4) strikes are neither permitted nor banned, and instead the law defines four other mechanisms available to workers to redress their grievances. 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.


ANNEXURE 3 – LABOR REFORM IN CHINA 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 retaining 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.


Background 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:

Figure 3.1: Economic indicators: China versus India CHINA INDIA

GDP $ billion 1,120 480 Population Million 1,300 1,030

Area Billion square km 9.6 3.3

Per capita income $ p.a. 860 465 GDP growth (1990-2000) % 10 6

FDI (in 2001) $ Billion 46.8 2.3 Exports $ Billion 249 43

Source: compiled by TeamLease from various sources 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.


Three stages in the reform process § 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 2, 1984–92: This phase is characterized by ‘siying qiye’ firms (privately

run enterprises, employing more than 8 people) as distinct from the smaller ‘getihu’. In October 1984, the Communist Party issued ‘Decisions about Economic System Reform’, which tried to reform every aspect of the economy, including support for town and village enterprises (TVE) in the rural areas, and reform of state-owned enterprises (SOE). This phase also saw de-facto privatization of state-owned and collective-owned enterprises that were leased to private entrepreneurs who paid a fixed rent. Firms could also obtain a license by paying an administration fee to a collective unit or local government, creating so-called ‘red hat firms’ that were actually private owners who put on a hat of collective ownership to evade legal restrictions and harassment.

§ 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.


Privatisation of state-owned enterprises 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%. Key Features of Reforms § Experimentation under uncertainty: Private business was permitted in the late

1970s in order to tackle economic stagnation and rising unemployment. It has evolved through cycles of unpublicized experimentation, followed by general ‘in principle’ approval, then by ratification and specific regulations.

§ 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.

§ Decentralization: Local governments have a high degree of autonomy, and the

fiscal contracting system rewards local governments for promoting economic development in their areas. This system, called ‘eating from separate kitchens’, replaced the previous centralized system, and allowed the local governments to experiment with various reforms without disrupting the organization as a whole.

§ Reforming the bureaucracy: The government mandatorily retired the

‘revolutionary veterans’ in the bureaucracy, launched administrative and fiscal


decentralization, and allowed bureaucrats to quit the bureaucracy and join businesses. These reforms have forced the bureaucracy to support economic development and promote the private sector.

§ 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: § According to official estimates, out of China’s workforce of 724 million, 26 million

are unemployed, and the unemployment rate is 3.5%. § 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 the ‘Green Paper on Population and Labor’ published by the

Chinese Academy of Social Sciences in 2002, the unemployment rate is 7%, though the official rate is just under 4%.

§ According to statistics from the Information Center under the Ministry of Labor,

registered unemployment stood at 3.1% in 1997 and 1998. § According to the Development Research Center of China’s State Council,

unemployment was around 10% percent since the mid 1990s, and as high as 13-15% in 1997 and 1998.

Unemployment in China is expected to rise dramatically in the years to come. China’s workforce is increasing by 13 million per year, and around 7 million workers are laid off every year from state-owned enterprises being closed down, while only around 11 million new jobs are being created every year. Based on these, the unemployment rate for the next decade is predicted to exceed 10%. 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


pressure on the infrastructure in the over-populated cities. According to certain sources, there are 24 million unemployed people in China, 70 million are migrants from the rural areas to cities, 42 million are poor farmers, and around 12 million are ‘xiagang’ workers made redundant in privatized state-owned enterprises. In spite of the tight restrictions on demonstrations and political activity, China has witnessed several workers’ riots in recent years, most of them led by the jobless ‘xiagang’ workers. 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: § It has moved away from so-called “defined benefit” schemes to “defined

contribution” schemes. Previously, workers used to get certain guaranteed benefits from the government, e.g. pensions were fixed as a percentage to the last drawn salary. Now the benefits received by workers are based upon the contributions made by the worker and his employer towards a social security fund, and the government has no liability. By shifting to a “defined contribution” scheme, the government has wriggled out of its huge liabilities in paying pensions and other benefits to workers.

§ 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 72: “The sources of social insurance funds shall be determined according to the categories of insurance, and an overall pooling of insurance funds from the society shall be introduced step by step. The employing unit and laborers must participate in social insurance and pay social insurance premiums in accordance with the law”.

§ Section 73: “Laborers shall, in accordance with the law, enjoy social insurance

benefits under the following circumstances: (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 minimum 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.


While workers in some ‘sweatshops’ in the coastal regions receive poor pay and working conditions, studies indicate that most workers in these regions receive attractive pay and benefits. A survey by the Beijing Youth Post in April 2002 found that pay levels in the coastal regions are the highest in China:

Figure 3.2: Booming salary levels in China’s coastal regions 2001 Average Annual Salary City

RMB US$ Rupees

Increase from 2000, %

Guangzhou 22,772 $2,751 129,297 15.70% Shanghai 21,781 $2,632 123,704 17.50%

Beijing 19,155 $2,314 108,758 17.20% Tianjin 14,308 $1,729 81,263 n/a Chongqing 9,523 $1,151 54,097 n/a

Urban average 6,860 $829 38,963 8.50%

Rural average 2,366 $286 13,442 4.20% Source: Various websites referring to survey by Beijing Youth Post newspaper

dated 1 April 2002 (Rupee salary calculated at Rs. 47 per $)

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.


Labor laws 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: § Section 25 of China’s Labor Law of 1995 allows companies to terminate

employees on disciplinary grounds, without having to pay any compensation to the worker. This provision is applicable where the worker:

o Is proved to be “not up to the requirements for recruitment during the probation period”

o “Seriously violates labor disciplines or the rules and regulations of the employing unit”

o Causes “great losses to the employing unit due to serious dereliction of duty or engagement in malpractice for selfish ends”, or

o Is “investigated for criminal responsibilities in accordance with the law” § Section 26 allows companies to terminate employees with 30 days’ notice and

upon payment of compensation (one month’s pay), in these circumstances: o “Where a laborer is unable to take up his original work or any new work

arranged by the employing unit after the completion of his medical treatment for illness or injury not suffered at work”

o “When a laborer is unqualified for his work and remains unqualified even after receiving a training or an adjustment to any other work post”

o “No agreement on modification of the labor contract can be reached through consultation by the parties involved when the objective conditions taken as the basis for the conclusion of the contract have greatly changed so that the original labor contract can no longer be carried out”

§ Section 27 allows termination of employees when the company is facing serious

problems, provided workers are given 30 days notice and have been paid compensation (one month’s pay). The provision reads as follows:

o “During the period of statutory consolidation when the employing unit comes to the brink of bankruptcy or runs into difficulties in production and management, and if reduction of its personnel becomes really necessary, the unit may make such reduction after it has explained the situation to the trade union or all of its staff and workers 30 days in advance, solicited opinions from them and reported to the labor administrative department”.

o “Where the employing unit is to recruit personnel six months after the personnel reduction effected according to the stipulations of this section, the reduced personnel shall have the priority to be re-employed”.

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


states’ like France and Germany. Sadly, while China has succeeded in attracting large foreign investments, creating millions of high-paying jobs and boosting its exports, Indian business is constrained by outdated laws that destroy companies’ ability to operate freely and compete in global markets. Trade unions China’s unique combination of a market economy within a communist state poses peculiar challenges for its trade unions. On paper, Chinese unions appear very powerful. For example, all unions are required to be affiliated to the All China Federation of Trade Unions (ACTFU), which is controlled by the government. The ACFTU is the apex body of 31 provincial-level trade unions and 900,000 grass roots trade unions, and has 103 million members. All Chinese workers are automatically members of trade unions in their workplaces, and it is mandatory for employers to pay fees equal to 2% of wages to support local 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.

§ State-owned enterprises (SOEs) are controlled by Communist party, which also

controls all the unions in China. This gives rise to a peculiar situation: if there is a dispute between unions and management in a state-owned enterprise, the Chinese government sits on both sides of the negotiating table. Therefore, unions have no power to confront managements of state-owned enterprises.

§ 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.


§ China has strict controls on freedom of speech and association, which restrict the ability of unions to function freely. Chinese laws prohibit all anti-government protests and demonstrations, and prescribe severe punishment for such “subversive” and “treasonable” activities. China’s government has suppressed “independent” unions that are not controlled by the Communist party, and has often jailed union leaders. For example, in May 2003 the government arrested two union leaders for organizing demonstrations in the north-eastern city of Liaoyang, where millions have lost their jobs due to closure of state-owned enterprises, and charged them with “subversion of state power” and for having contact with “hostile elements and foreign media”, serious crimes that carry the death penalty.

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.

§ Section 19 prescribes the format for an employment contract. It says that an

employment contract must “be concluded in written form and contain the following clauses: (1) term of labor contract; (2) contracts of work; (3) labor protection and working conditions; (4) labor remuneration; (5) labor disciplines; (6) conditions for the termination of a labor contract; and (7) responsibility for the violation of a labor contract”. There is no such parallel in India’s labor laws, where employers and employees are free to frame contracts according to their preferences. This is fortunate since contract terms are best left for the parties to freely contract, and specifying the format of such contracts amounts to unnecessary micro-management.

Employment by foreign companies 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


formalities (e.g. residence permits, passport applications), and helps settle labor disputes. In return, FESCO charges recurring fees of around 30% of the employee’s compensation, in addition to a one-time recruitment fee. 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 employment opportunities in the coastal areas have attracted numerous expatriates from the U.S., U.K., and other Western countries, in addition to large numbers of overseas Chinese from countries like Malaysia, Indonesia, Taiwan, and so on. The success of reforms in China has disproved the conventional wisdom that a vast 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. Contrary to official statistics, estimates suggest that unemployment in the interior provinces have reached alarming proportions, with as many as 150 million out of work. 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.


Lessons for India 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:

Figure 3.3: Labor reforms: China versus India

CHINA INDIA

Economic indicators Population 1,300 million 1,030 million

Area 9.6 billion square km 3.3 billion square km GDP $ 1,120 million $ 480 million Per capita income $ 860 per year $ 465

Exports $ 249 billion $ 43 billion

Foreign direct investment (in 2001)

$ 46.8 billion $ 2.3 billion

Fex reserves $ 365 billion $ 85 billion

Employment Size of work force 724 million 406 million Labor force participation rate

56% 39%

Unemployment 3.5% to 10% (estimates vary) 7.32%

Likely future unemployment rate

Above 10% Above 10%

Legal minimum wage $ 55 (Rs. 2,585) per month $ 41 (Rs. 1, 937) per month

Economic reforms Economic philosophy After a series of reforms since

1978, the 14 th Party Congress of the Chinese Communist Party in

1992 declared the goal of creating a “socialist market economy” by

actively encouraging private companies and foreign investment

Half-hearted reforms were initiated in 1991 during a fiscal crisis, under pressure from IMF and World Bank. Even today, politicians oppose reforms to

exploit vote banks.

Key events Deng Xiaoping’s tour to the Southern provinces in 1992, where he saw the benefits of economic reforms and foreign

investment

The 1970s, when the government (1) took over textile mills and banks, (2) drove away Coke and IBM, (3) amended the

constitution to remove the fundamental right to property, and (4) amended the Industrial

Disputes Act

Guiding mantra “It is glorious to be rich”, says Deng Xiaoping, supreme head of

“Garibi hatao”, which resulted in reckless populism, fiscal irresponsibility, and anti-


the Communist state of China business laws

Entry of foreign companies

Strong focus on attracting foreign investment. Central, regional and

local governments compete to offer incentives for FDI

Reluctance to take foreign investment; seen as “neo

colonialism”. FDI in India is just 5% of what China receives.

Special Economic Zones

Started since 1979, SEZs in China have been hugely successful in

attracting foreign companies with liberal rules

Lots of talk but no action, as ministries argue over who

should have jurisdiction and what rules should apply.

Privatization of public sector units

Around 50,000 state-owned units have been sold, leased or closed.

The “zhuada fangxiao” policy seeks to retain only 1,000 large

state-owned enterprises and privatize all the others

Very few units have been privatized, that too after intense

opposition and controversy. Ministers and bureaucrats fight to prevent privatization of units

attached to their ministry.

Reforming the bureaucracy

Push for reforms from the top of the Communist Party, and the

bureaucracy has no option but to support reforms

Bureaucrats oppose reforms in order to maximize perks and

patronage, and are not accountable.

Workers’ rights

Freedom of expression and association

Strictly controlled. Anti-government protests and

demonstrations are banned

Constitutionally guaranteed

Independent unions Banned. All unions have to be affiliated to the government-run All China Federation of Trade Unions,

and are government controlled

Permitted. Any 7 persons can create a union

Freedom of unions Independent union leaders are routinely jailed, and could face the

death penalty for “subversion”

Permitted.

Right to strike Limited. The right to strike was removed from the constitution

Permitted.

Ability to redress workers’ grievances

Minimal. Unions are controlled by the government, which also runs

state-owned enterprises.

Permitted. Unions are most powerful in public sector

companies.

Termination of workers

Termination for disciplinary reasons

Section 25 of China’s labor Law of 1995 allows termination of employees for disciplinary

reasons, without compensation.

Difficult, since the employer has to follow cumbersome

procedures, and labor courts usually order reinstatement

Termination when worker is sick and unable to work

Section 26 of China’s labor Law of 1995 allows companies to

terminate employees with 30 days’ notice and compensation.

Difficult, since it can be treated as an “industrial dispute”, and

labor courts can order reinstatement

Termination when worker is unqualified to perform the work


terminate employees with 30 days’


labor courts can order


notice and compensation. reinstatement

Termination when work conditions have changed and there is union deadlock


terminate employees with 30 days’ notice and compensation.


labor courts can order reinstatement

Retrenchment due to sickness or economic viability

Section 27 of China’s labor Law of 1995 employee termination with

30 days’ notice and compensation if it “runs into difficulties in

production and management”

Section-25 of Industrial Disputes Act makes it impossible for a

company with over 300 employees, even if it is sick and

unviable

Social security Philosophy towards social security

“Defined contribution” scheme. Workers pay premiums to private insurance companies and receive

various benefits from them.

“Defined benefit” scheme under which benefits are guaranteed

by the government.

Pensions Workers pay premiums to insurance companies and receive

pensions based on their contributions. The government

assumes no liability.

Government and PSU employees get fixed pensions

guaranteed by the government, regardless of their contributions

to the pension fund.

Medical benefits Workers pay health insurance premiums and receive medical

coverage based on their premiums. The government


Workers get health benefits from ESI hospitals and

reimbursement of medical expenses, regardless of their

contributions to the fund.

Unemployment benefits

Workers pay insurance premiums and receive unemployment

insurance benefits based on their premiums. The government


Virtually absent, though some state governments offer nominal

benefits (e.g. Rs. 100 per month)

Other issues Use of child labor Section 15 of China’s labor Law of

1995 bans employment of children below 16 years

The Child Labor (Prohibition And Regulation) Act of 1986 does

not prohibit child labor. The Act prohibits it only in certain

hazardous occupations, and specifies conditions where it can be used in other occupations.

Employment contract Section 19 of China’s labor Law of 1995 specifies the format of an

employment contract.

No such provision. Companies and employees are free to frame

their contracts.

Source: Compiled by TeamLease from various sources


What the 2nd National Commission on Labor says about China To understand what lessons India could learn from China’s experiments with reform, the 2nd 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 contract and fire its employees upon one of the following circumstances (page 202, clause 4.148 of the NCL report): 1. When the employee is proved unqualified during the probation period; 2. When the employee, due to sickness or non-working related injury, is unable either to

continue the work or to take other posts reassigned by the enterprise after a designated medical care period;

3. When the employee is in serious violation of labor disciplines or of relevant regulations of the enterprise;

4. When the employee seriously neglects his/her duty or is engaged in malpractice for self ends, thus causing huge losses of the enterprise’s interests;

5. When the employee is incompetent for doing the job and after training or change of the post, is yet incompetent for doing it;

6. When the particular circumstances under which the labor contract is concluded undergoes great changes so that the labor contract can no longer be implemented, and the concerned parties cannot reach an agreement to change the contents of the labor contract;

7. When there are other particular terms defined in the labor contract.” 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 NCL report).


The NCL notes that labor laws in Shanghai do not mention strikes at all, and strikes are neither permitted nor banned. Instead, the law 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 (page 207, clause 4.166 of the NCL 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).


ANNEXURE 4 – LABOR REFORM IN OTHER ASIAN COUNTRIES 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.


Singapore’s social security system is built around the Central Provident Fund, which was established in 1955. In addition, the government also has schemes to provide workers with affordable housing, health, and education. Singapore has a population of 4 million and a work force of 2 million. 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: § Recession of 1985: The government set up a tripartite Economic Committee,

which recommended several measures to address the problems faced, by companies and employees. These include: (1) wage restraint in the immediate term, (2) reform of the long-established seniority -based wage system to a more flexible system for longer-term competitiveness, (3) addressing the longer-term constraint of limited human resources, e.g. by increasing female labor force participation, encouraging employment of older workers, and extending the retirement age beyond 55 years. A tripartite Wage Reform Sub-committee looked into the issues of wage cuts, and accepted a 15% cut in the employers’ CPF contributions (against the usual level of 25%). As the economy improved, employers restored workers’ wages, and full employment was achieved. Unions and management also worked out a flexible wage system with variable bonus payments that were closely matched to company and industry performance, which provided workers with a minimum of 1 month and upto 5-9 months bonus each year.

§ East Asian crisis of 1997-98: The government set up a tripartite Committee on

Singapore’s Competitiveness which recommended (1) cost-cutting measures in the short term, including cut in wages and other business costs, and (2) longer term measures to build economic capacity through skills upgrading, expanding trade with growing economies, and economic restructuring. In November 1998, the tripartite National Wages Council recommended four steps to address the problem. These were: (1) 5-8% cut in workers’ wages, (2) 10% cut in employers’ CPF contributions, (3) moderate wage cuts for lower-income employees and deeper cut for executives, and (4) employers, unions and workers to continue to work together to strengthen Singapore’s competitiveness, preserve jobs and enhance employability. To provide assistance to retrenched workers, a tripartite panel was created, which created a Retrenchment Advisory Programme and an


Employment Assistance Programme, and set up early consultation between employers and trade unions on anticipated retrenchments in order to explore alternatives such as redeployment, reduced working hours or retraining. If lay-off was unavoidable, unions negotiated retrenchment benefits to help workers seeking re-employment, and sought employers’ assistance in counseling and helping retrenched workers take up retraining or find alternative employment as quickly as possible. The Skills Redevelopment Programme (SRP) was expanded into a national programme to improve the re-employability of retrenched workers by providing them with nationally certified skills in industries with job vacancies, and government funding was increased from 80% to 100% subsidy on employers’ training costs and from 70% to 85% of absentee payroll costs for workers aged 40 years and over. A Skills Development Centre was set up in January 1999 to improve training opportunities, and in May 1999, the government committed additional funding for retraining workers. To help retrenched employees pay for their children’s textbooks and other expenses, unions raised money and received a matching grant from the government.

§ Focus on skill development: Faced with globalization and technological

uncertainty in the 1990s, the government and unions recognized that job security would come only from upgrading the skills levels of the workforce through training, so that businesses and workers could respond to changes in the business environment. In 1996, the government initiated a Skills Re-development Programme (SRP) to help workers remain employable throughout their life, by providing nationally certified skill training and upgrading. This was seen as particularly vital for older, less-skilled workers who were more at risk of redundancy. Employers were given several incentives to send their workers for training, including (1) reimbursement of 80% of the cost of training, (2) reimbursement of 70% of absentee payroll costs up to a ceiling (S$4.20 per hour), (3) training programmes tailored to meet the needs of particular industries. In addition, to help workers who were not sent for training by their employers, an Education and Training Fund (ETF) was set up in May 1998 under which (1) workers were given 85% of the training costs, and (2) the government agreed to provide funding of S$3 for every S$1 raised by the unions.

§ National manpower strategy: Singapore plans to develop into a knowledge-

based economy where its strategic competitive advantage will come not from its infrastructure or industries, but from the knowledge, skills and creativity of its people. To achieve this, in April 1998, the former Ministry of Labor was restructured, and Ministry of Manpower was created to look into all issues relating to manpower planning, development and management. In consultation with all bodies, the Ministry created a national blueprint for manpower development, which focuses on lifelong learning for lifelong employability and redefining tripartite partnerships among all stakeholders.

§ Vision and pragmatism : At an inaugural manpower summit in September 1999,

then Singapore’s Deputy Prime Minister Lee Hsien Loong (now Prime Minster) said “Singapore must have flexible and responsive labor markets to attract MNCs who operate in fast-changing environment. But we also want to have strong unions who are partners in economic progress, and strengthen the stability and flexibility of our economy. Unions will moderate the shortcomings and extremes of the free market. But they must understand the needs of knowledge workers,


and the way the knowledge economy works. They have to adapt themselves to the knowledge economy, just as employers have to adjust to unions playing new roles. This is not just a union problem, but an issue which unions, employers and the government will have to tackle together.”

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. The labor-management relationship is dominated by the bi-partite relationship between Rengo, Japan’s association of trade unions, and Nikkeiren, the employers' organization. The two bodies have traditionally worked in close cooperation, ensuring that Japan’s industrial environment is largely peaceful. For example, during the recession, Rengo and Nikkeiren worked closely to create a joint ‘One Million Job Creation Plan’ in 1998.


Wage bargaining in Japan is associated with the ‘spring labor offensive’ where decentralized negotiations between individual companies and company-based unions are conducted in the spring season every year. There are no industry-wide or nation-wide wage negotiations as in certain European countries, but in effect the wage hikes are uniform within a particular industry and even across industries. Wage increases during the spring labor offensive are moderate, and are based on productivity gains, reflecting a social consensus and working as an information-disseminating mechanism for all industrial sectors. 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. The following are the key provisions of Japan’s labor laws: § Retrenchment: While there is no legal restriction on retrenchment, pressure from

unions and social factors prevent companies from retrenching staff. For example, the 1950s and 1960s saw protracted labor disputes caused by dismissals, which caused enormous hardship to companies and workers. The unions lost most of these big disputes, but companies also incurred enormous expenses, and this led to a tacit understanding between labor and management to avoid lay-offs as far as possible.

§ 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.

§ Women’s rights: Japan’s New Constitution of 1945 stipulates equal rights

between men and women. The Labor Standards Law expressly prohibits discrimination against women at work and the New Civil Code stipulates equal rights of inheritance between men and women. In 1986, the ‘Equal Employment Opportunities Law’ was enacted, prohibiting discrimination by gender in


education, training, retirement and lay-off. In 1997, the Law was amended to also ban discrimination on recruitment, hiring, posting and promotion.

§ 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 sector). 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 Reforms in Japan have been primarily focused on macro-economic measures to mitigate the effect of the prolonged recession since the 1990s. The Japanese government has


generally been criticized for not undertaking serious reforms in its economy or labor system, in contrast to East Asian countries like Taiwan and Korea which quickly undertook reforms to overcome the crisis of 1997. Due to political compulsions and vested interests, Japan has been reluctant to undertake bold measures that could jeopardize vocal sections of the economy. For example, in June 1997 Japan passed a half-hearted Financial Systems Law, which did not sufficiently address the core issues of non-performing bank, loans, and postponed the inevitable bouts of restructuring and retrenchment. 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.

§ Rising retrenchment: The proportion of companies resorting to retrenchment

has been rising steadily since the 1990s, but it is much lower than the corresponding figures during previous crises. In 1998, the proportion of companies resorting to retrenchment was 38%, far lower than the 71% recorded during the oil crisis in the mid 1970s and the 40% during the exchange rate crisis in the mid 1980s. This reflects a consensus to avoid retrenchment and other tough reform measures during the current recession. However, while the Japanese economy was able to quickly overcome the previous crises in the 1970s and 1980s due to such restructuring, there is no end in sigh to the current recession.

§ Flexible wage structure: Breaking the traditional practice of annual performance

bonuses based on seniority, Japanese companies have recently introduced performance-based pay, especially for managerial staff and certain blue-collar workers. Unions have been forced to accept performance-based pay systems, but have received the assurance that transparency will be maintained in grating performance-based pay.


§ ‘Loaning’ and labor mobility: Since the mid-1980s, there has been a sharp rise

in the practice of loaning, which involves transfer of employees to other jobs within the same company or to its subsidiaries or affiliates for a certain period of time, typically 3 years. This is another example of how the internal labor market has expanded into include all the companies within a group. Unions have accepted loaning provided that the affected workers consent and that their working conditions at the host company are not unfavorable.

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.


Labor laws 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). This period also saw fundamental changes in labor laws:


§ In February 1998, companies were allowed to retrench staff, while previously life-long employment was virtually guaranteed

§ Temporary employment contracts for short and medium-term work was legalized § From 1998, the pay structure was formally severed from ranking according to the

formal (pre-existing) ladder of sequential promotions. While previously older employees were higher paid, it was now possible for younger employees to be higher paid than their seniors.

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: § Government and employers will construct nation-wide organizations and prepare

a policy package to combat unemployment § All parties represented on the tripartite committee will help improve job security

by introducing work-sharing § All parties will strive to minimize lay-offs and to support firms in financial trouble § All parties will do their best to eliminate unfair labor practices and establish

monitoring § The policy-making process will be open to labor unions. Unions will participate in

making and implementing important policies affecting wage-earners' standard of living

§ All parties have rights and duties in restructuring conglomerates § The reform of public enterprises will reflect labor-manager agreements § The teachers' union will receive official recognition § All parties will strive to improve worker participation in management § Labor laws will promote industrial democracy

Impact of labor reforms Partially as a result of reforms undertaken in 1998, Korea achieved economic recovery by early 2000. For example, the unemployment rate, which was 6.5% in March 1998, fell below 5% in late 1999. As temporary employment contracts were legalized in Korea, the number of temporary and part -time workers rose by 15 %, from 6 million in 1989 to 6.9 million in 1999. 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


in 1996, 1.63 Times in 1998 and 1.7 times in 1999. However, since Korea does not have a strong social security system, only 7% of the unemployed received unemployment insurance benefits even in the recession. 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. To help the economy shift from labor-intensive to capital- and knowledge-intensive industries, the government created the Human Resource Development Corporation which established a human resource development fund to facilitate firm-level training. Firms meeting certain thresholds are levied 1% of their employee’s salaries, and these funds are deposited in firm-specific accounts, which are made available to use for government -approved training programmes. The training reform programme has been very successful, and by 1997 more than half a million workers had received such


training. Several ministries developed comprehensive vocational and industrial training systems, with their own physical infrastructure, curricula, and teaching staff. In addition, several government departments, committees, and units are involved in promoting, planning, and supervising the education and training effort. 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 improved 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:

1. Terms and conditions of employment a. The Shop and Office Employees (Regulation of employment &

remuneration) Act b. Wages Board Ordinance

2. Social security a. Employees provident Fund b. Employees Trust Fund c. Payment of Gratuity Act

3. Industrial safety a. Factories Ordinance b. Workmen’s Compensation Ordinance

4. Industrial relations a. Industrial Disputes Act b. Termination of Employment (Special provisions) Act c. Trade Union Ordinance

5. Employment of women and children a. Employment of Women, Young Persons and Children Act


b. Maternity Benefits Ordinance 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: § Removal of restrictions on employers for overtime hours permitted on female

workers and the need to obtain consent of workers to perform over time § 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

§ Amendments to the Industrial Disputes Act introducing a “4:2:1 Formula” to

conclude all unfair termination of service applications before Labor Tribunals within four months, Arbitration processes within two months and involuntary termination of service applications within one month.


ANNEXURE 5 - BIBLIOGRAPHY

1. “Report Of The National Commission On Labour”, 2nd National

Commission On Labour, Ministry of Labour, Government of India, 29 June 2002

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

4. “Labor Market regulation; International experience in promoting employment and social protection”, Betcherman, Gordon and Luinstra, Amy and Ogawa, Makota, 2001

5. “The Informal sector revisited: A synthesis across space and time”,

Blunch, Niels-Hugo and Canagarajah, Sudharshan and Raju, Dhushyanth, 2001,

6. Emerging Workforce Study, Spherion Corp, 2003

7. Comments on ILO Convention 181 and its implementation, CIET, 2000,

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ANNEXURE 6 – ABOUT TEAMLEASE Teamlease is India’s largest staffing solutions company. We are a liquidity provider in labor markets. We enable the better matching of demand and supply by connecting the people, to the right company, at the right time. 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. WHY CHOOSE TEAMLEASE AS A PARTNER?

• Strong track record • Pan India presence • Single window for staffing; temp and perm • Vertical domain knowledge • Large validated talent pool • Guaranteed turn-around time • Standardized processes • Comprehensive Web Interface; TLnet • Associate self-service suite (email, web, IVRS)

CONTACTS The contact details for Teamlease are available on the back cover. Detailed information is available at www.teamlease.com and emails sent to [email protected] will be replied within 24 working hours.

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