Document(s) 11 of 16

Introduction

Throughout the world, governments have enacted laws to protect the interests of the workers. India is no exception. In fact, in India, laws are often perceived to be too restrictive on employers. International comparisons show that the problem is not one of laws relating to conditions of work, but one of laws on hiring and, especially, dismissals. Laws in India on these matters are restrictive compared with other emerging economies, other nations in Asia and even developed countries.

While some regulations are necessary, excessive controls are not necessarily better for workers and society. Indeed, whereas the particularly restrictive provisions were created to protect jobs, many studies show that the effects of job security on growth of employment in large enterprises have been adverse (Fallon and Lucas, 1993; Anant et al. 2003; Besley and Burgess 2004; Dutta Roy 2004; Saha 2005; Ahsan and Pagés 2006). Nor have these provisions been helpful to the cause of industrial peace. In 2004, 482 major cases of work-stoppage cost industry 15 million person-days. It is obvious that little de jure liberalization in the regulatory framework has been allowed to happen since the reforms began despite demand from industry, economists and media. That being said, others have noted several areas of de facto and indirect liberalization (Roy 2003). For example, incidence of voluntary retirement, fixed-term and contractual employment has increased. Some degree of de jure rationalization, therefore, is needed.

Why did legislation take the particular form that it did in India? What are the problem areas? What are the economic impacts of such legislation? What changes have occurred? What is the way forward? These are some of the questions addressed in this chapter.

The conclusion of this chapter is that the current dispute and retrenchment-related laws do not preserve existing jobs and prevent the creation of new ones. In terms of reforms, it is found that while no significant change has occurred in legislation and formal union presence, weakening law enforcement, increasing recourse to contract employment, judicial decisions upholding the legality of temporary and contract employment, and increasing decentralization in the legislation initiative are some of the ways that flexibility has increased. Nonetheless, this chapter argues that substantial transformations are still needed. To create a new institutional infrastructure that can truly advance the cause of workers and promote job growth it is necessary to expand the reform debate beyond chapter Vb of the Industrial Disputes Act to areas such as dispute resolution, adjudication, labor inspections and labor policy.

The chapter has five main sections. The first three deal with labor regulations, law enforcement and the adjudication process, respectively. The following section examines the economic impact of this legal and institutional system. A final section concludes and provides some suggestions to move forward.

Regulatory framework

Labor laws

Seeds of over-regulation were present in the history of labor laws before independence (1947). A broad coalition between nationalists and mill workers in the interwar period encouraged legislation that created a role for elected provincial governments in collective bargaining and firm-level negotiation. After independence, labor laws continued to be influenced more by the desire to protect labor, which had originated in nationalism, than by considerations of efficiency in labor markets and dispute settlement. The principle of protection was subsumed under the pursuit of 'social justice', and employment security was enhanced in the formal sector by a range of new laws and case laws. Removing or changing laws became politically difficult, with the result that new demand for laws led to proliferation. Big business implicitly traded off labor-market flexibility for a trade regime that offered them a high degree of import protection. After the economic reforms started in the 1990s and protection was reduced, the lack of flexibility became a serious issue.

The present legal framework consists of major acts, and a number of minor, usually state-level acts. Industrial relations are governed by the Trade Unions Act, 1926, which specifies the conditions that a trade union needs to satisfy in order to be recognized under the act, and the Industrial Disputes Act, 1947, (IDA), which sets out the institutions for adjudication of disputes.

The IDA specifies a multi-tier conciliation-cum-adjudication system. The tiers are created and maintained by the state governments. The lowest and the immediate tier consist of Conciliation Officers and Boards appointed by the government. The Conciliation Officer either settles the dispute, or sends a 'failure report'. The dispute then goes to Labor Courts, and further to Industrial Tribunals. The Labor Courts deal with disputes that affect workers. The Industrial Tribunals, apart from working as appellate bodies, deal with cases that affect all workers in an industry. In rarer cases, disputes go to National Tribunals, which are centrally administered bodies, empowered to deal with cases that have potentially national significance. The IDA imposes significant restrictions on employers regarding retrenchment and exit. It gives power to labor courts and Tribunals to set aside any discharge or dismissal that has been referred to them as not justified and direct reinstatement of the worker in any terms it sees fit. In units employing more than 100 workers, retrenchment requires seeking authorization from the government. Such authorization is rarely granted. In the event of retrenchment, longer tenure workers are given priority to stay. In addition, retrenched workers receive priority in case of new recruitment. Closure also requires prior authorization.

Working conditions are governed principally by the Factories Act, 1948; the Industrial Employment (Standing Orders) Act, 1946, which specifies the form of the employment contract; and the Contract Labor (Regulation and Abolition) Act, 1970. The Factories Act governs the health, safety and welfare of workers in factories. The Industrial Employment (Standing Orders) Act, 1946, requires employers of industrial units with 100 or more workers (excluding management and supervision) to specify working conditions more or less in line with a 'model standing orders'. The Contract Labor (Regulation and Abolition) Act, 1971 (CLA), was created with the objective of gradual abolition of casual labor hiring, and where permitted, to regulate the working conditions of casual labor. Although it is now being used extensively as the principal means available to employers and state governments to increase flexibility within the existing legal regime, the original purpose of the Act was quite the opposite. Section 10 of the act prevents firms from outsourcing most core functions or hiring workers on temporary contracts for more than 120 days. Anyone so employed can demand permanent employment from the company.

The principal laws relating to wages are the Payment of Wages Act, 1937 and the Minimum Wages Act, 1948. The Payment of Wages Act, 1937, is a central act, the enforcement of which is a state responsibility, except in mines, railways, oilfields, ports and air transport. The Act specifies the standard wage period (a month or less), payment day, permissible deductions, mode of payment and inspection. It applies to workers below a certain salary range. The Minimum Wages Act, 1948 specifies minimum wages (and is empowered to specify also the length of the working day) in 'scheduled' employment.

Social Security and Insurance are governed by, first, the Workmen's Compensation Act, 1923, which specifies compensation that the employers need to pay on account of injury by accident at work-site or occupational diseases. An important provision of the Act is the liability of the principal employer in case of contract labor employment. Other important acts in this class include the Employees State Insurance Act, 1948, which extends to all factories under the Factories Act, and other commercial establishments employing 20 or more persons, and to workers earning less than a certain salary limit within these, and requires contributions from both employers and employees to be paid for insurance against sickness, maternity, funeral and disablement. The Employees Provident Funds Act, 1952, which applies primarily to factories and specifies deposit-linked provident fund or pension scheme, is also relevant.

Since the early 1990s, demands have been raised to reform the IDA and the CLA, the two most disputative acts. However, little success has been achieved on this front. Important changes have been introduced in the Trade Unions and Factories acts. Somewhat more bold initiatives have occurred at the state level. In June 2000, the Government of Maharashtra announced a fairly broad-based labor law-reform package. The National Labor Commission cited the Government of Punjab's fast-track courts, called Labor Lok Adalats, which cleared more than 11,000, or two-thirds of, the pending cases in the Labor Courts and Tribunals in three rounds of hearing since 2000. The Andhra Pradesh government announced its intention to introduce liberalized labor laws for designated Special Economic Zones.

International comparison

Is the Indian legal framework especially restrictive by comparison with other developing countries? Doing Business, 2004, a publicly available database based on a detailed study of employment laws across the world (see http://rru.worldbank.org/DoingBusiness), provides information on legal provisions related to hiring, hours of work and retrenchment of workers across a large number of countries in the world. Such provisions are then ranked with scores that are higher the more protective of workers the labor laws.

A first index (restrictions on hiring) measures how difficult it is for employers to hire workers other than with indefinite, permanent contracts. A higher score indicates higher difficulty to hire through alternative contracts. A second index (restrictions on hours of work) measures legal provisions pertaining to hours of work. It compares overtime, restrictions to night work and length of the work-day and work-week. Countries where employers face more restrictions on hours of work are given a higher score. A third index (restrictions on retrenchment) measures legal and administrative constraints on dismissals. A fourth index measures the cost of dismissal measures in weeks of pay. Such costs are related to the compensation that workers obtain in that event although not one to one, as often times legislation imposes costs on firms that are not transferred to workers (for example, the cost of legal fees). Finally, the rigidity of employment index provides a summary indicator of different aspects of labor legislation across countries.

According to the latter, Indian laws are more protective of workers than the international average or the average of a group of comparator countries, composed by large developing economies and countries in East and South Asia (see Table 11.1, column 5). On paper, Indian laws are also much more protective of workers than in developed countries. Disaggregating among different indicators, it emerges that this more protective stand of the law in India comes from the higher restrictions on dismissal. In comparison, other aspects of the labor law are closer or below the international norm.

Thus, for example, Indian laws concerning the ability to hire workers with alternative contracts are in line with international standards, although they impose somewhat higher constraints on employers than in the sample of comparator countries. Similarly, Indian labor laws exert little restrictions on hours of work, compared either with the international standard or the median of the group of comparator countries. Indian labor laws also impose lower monetary costs to employers in the event they dismiss a worker relative to comparator countries (although higher than the international average and way above the average for developed countries). Instead, Indian labor laws impose more administrative hurdles to initiate a dismissal than almost anywhere else in the world. Only in a few countries firms need to obtain authorization to retrench from the government. Moreover, in India, authorization to retrench is hardly granted, which leads to a few requests for authorization in the first place. In a scale of 1 to 100, India scores 90 in the restrictions of dismissals index, well above the international norm, the average of the group of comparators, or the average in developed economies.

Law enforcement

While labor laws have remained largely unchanged, their effects may be changing depending on the application and enforcement of such laws, the capability of unions to monitor application, as well as the strategies firms are following to avoid them. We find that little has changed in the formal presence of unions, either in terms of affiliation or the number of disputes. Yet, there are signs of weakening law enforcement, ineffective and corrupted inspections, and rising recourse to contract labor. A shift in the stand of the judiciary might be also contributing to a more flexible application of the law.

Union membership and labor disputes

Data on union membership is sketchy and incomplete. Data for few states that have more complete information suggest that union membership has not declined. A regression of such measures against state and a time trend for data covering the period 1985-1997 yields a positive although not statistically significant coefficient on the trend variable. Data by state (Figure 11.1) indicates that in a number of states union membership increased (Assam, Orissa, Punjab, Gujarat), although in the latter state, union membership suffered a decline in the second half of the nineties. In other states, most notably Karnataka and Kerala, union membership declined. The lack of significant overall trends is also evident when union membership is measured in relation to population (Figure 11.2). There has been a decline in disputes during the nineties, although disputes were high in some years at the end of the decade. The time trend is statistically significant, and it indicates a decline in disputes at a rate of 2.2 disputes per ten thousand workers a year within states (Figure 11.3). It should be noticed, however, that while on average the number of disputes have declined the number of person-days lost in such disputes has increased since 1997 after a sustained decline throughout the first part of the nineties (Figure 11.4).

Figure 11.1 Evolution of union membership by state (in '0000s) (source: Labor Bureau).

Figure 11.2 Evolution of union membership (scaled by state population) by state (source: Labor Bureau).

Figure 11.3 Number of disputes per 10,000 manufacturing workers (source: Author's computations based on Labor Bureau and ASI data).

Figure 11.4 Person-days lost to disputes per manufacturing worker (source: Author's computations based on Labor Bureau and ASI data).

Labor inspections

All governments inspect business for compliance with their regulations. Yet, law enforcement becomes particularly difficult when the legal framework is overly complex and outdated, and when reforms in other markets are increasing the demand for flexibility and adaptability.

Inspectors in India have certain duties and powers. Among their duties, they are supposed to inquire into the correctness of any of the particulars appearing in any statement, or return. They have also to find out whether the provisions of the laws have been complied with. To do that they are awarded the power of requiring any employer or contractor to furnish the appropriate information and of entering at any reasonable time in a establishment, factory or office, examining the employer or contractor, and making copies of any documents maintained by the premises.

There has been a large decline in the number of factories inspected relative to the number of registered factories in the post-reform period (Figure 11.5).² In principle, it is possible that the trend reflects a changed inspection strategy that subjects a smaller set of firms to stricter inspection. Some evidence documented below, however, suggest an increasingly inefficient system of inspections. There are also significant differences in the share of factories inspected across states in 1991-2001 (Figure 11.6). State differences explain 73 percent in the total variance of the share of factories inspected, suggesting important differences in enforcement policies across states.

India's 2002 Investment climate survey (ICS) provides a more detailed picture of labor inspections obtained from the responses of a large sample of firms. On average, firms report 0.4 labor inspections from the Central labor administration and 1.76 State labor inspections per year (Table 11.2). It is noticeable that at the state level, labor inspections are more frequent than any other type of inspections. The breakdown by states indicates that states such as Tamil Nadu, Gujarat or Kerala, which according to the labor bureau data are states with a large share of firms inspected, are also the states with the highest number of inspections per firm (Table 11.3). The ICS data also suggests important differences in law enforcement policies across states.

Figure 11.5 Share of factories inspected (as % of factories registered) (source: Labor Bureau).

Figure 11.6 Share of factories inspected by state (source: Labor Bureau).

There are numerous accounts that suggest the presence of irregularities. For example, there are accounts that many inspectors collect bribes in exchange for reduced enforcement. Firms rarely know about the rules and inspectors are seen as unwilling to provide this information since that could endanger their future bribes (Rastogi 2002). The ICS data provides some information about the incidence of these accounts. This Survey asks firms' managers if inspectors respond to unofficial payments by reducing the number of visits to their establishments. On average, a positive answer is confirmed for 20 percent of the respondents, although in states such as Maharashtra and Tamil Nadu this percentage increases to around 30 percent (Table 11.3). While this question refers to inspectors from all government agencies, additional evidence suggests that labor and social-security inspectors are among the ones that are more responsive to unofficial payments. Not only there were more instances of irregularities involving labor inspectors, but also the response in terms of the reduction in the number of visits was higher than for officials of other state administrations (see Table 11.4).

The ICS data also allows examining whether inspectors target their inspections to particular firms. Table 11.5 reports the results of a regression of the number of inspections against firm characteristics such as size, age of the firm, whether the firm is public, whether the firm is owned by foreigners or has foreign participation, whether it dominates a substantial share of the market for its main product, and finally whether (at least some) workers employed in that firm belong to a union. The regression also includes state and industry dummies. Both the reported number of inspections (column 1) and the adjusted number of inspections (column 2) are used. The adjusted number is computed by adding to the reported inspections the ones that did not happen because unofficial payments were made.³

Notably, results are very different depending on whether the adjusted or the reported number of visits is used as dependent variable, indicating that irregularities tend to be concentrated in certain types of firms. Thus, reported inspections do not exhibit any systematic pattern other than the fact that exporting firms tend to experience more state labor inspections per year than firms that sell in domestic markets. Instead, the adjusted number of inspections indicates that large firms, firms that sell abroad and firms that dominate a large share of the market (more than 20 percent of the market share of their main product) would experience more labor inspections than the ones that actually take place after making unofficial payments to inspectors. Once such payments are made, they experience the same intensity of inspections than other firms. This difference between adjusted and actual number of visits suggests that inspectors target and respond to the unofficial payments of firms with higher profits and rents (which presumably can offer higher payments).

Quite surprisingly the presence of unions in a firm does not increase the number of inspections it experiences, as it would be expected if inspectors responded to unions' calls of unfair labor practices or breaches with labor laws. Instead, the negative sign in the adjusted visits suggests two alternative hypotheses. The first one is that employers of unionized firms are more compliant with labor laws; the second is that unions could expose irregular inspection practices and therefore inspectors stay away from such firms.

ICS data provide information on whether employers perceive labor laws to be an obstacle to their growth. The answer to this question ranges from zero to four where four indicates that a firm perceives labor laws as a major obstacle and zero as no obstacle. If inspections induce compliance with labor laws, then firms' perceptions on the stringency of labor laws are expected to increase with the number of inspections.⁴ Table 11.5, columns (3)-(6) report the results of regressing individual firms perceptions against the number of inspections, controlling for industry and state dummies, firm characteristics such as size, age and export status, and whether the firm is publicly owned, foreign controlled or foreign participated or whether it dominates more than 20 percent of the market of its main product.

Interestingly, once again results are different depending on whether inspections are measured according to the reported or the adjusted number. While the reported number of inspections is not related to firms' perceptions on the stringency of regulations, the adjusted number - that is, the number of inspections that would have taken place if inspectors had not responded to unofficial payments - is positively related. This suggest that firms that are engaged in payments in exchange of a reduction in inspections perceive labor laws to be more binding, which in turn leads to two alternative hypotheses: Either paying to inspectors is perceived to be the problem with labor laws or, perhaps more likely, inspectors target firms for which labor laws are more binding and therefore are more interested in evading the law.

Unions can also contribute to law enforcement if they are vigilant for infractions and alert inspectors of breaches in the law. The results presented in Table 11.5 however, suggest that the presence of unions in a firm does not affect managers' views regarding the stringency of labor-market laws. This result is consistent with the estimated lack of effect of unions in bringing about inspections. It also suggests that the fact that inspectors target firms without unions for irregular payments is not related to a higher compliance of unionized firms. Instead, the results suggest that it is the fear of being exposed by unions, or a lower profitability of unionized firms, that deters inspectors from soliciting payments from such firms.

Overall the results indicate that labor inspectors do little to enforce labor laws. If anything, the evidence points to the opposite, that is, to a coalition between employers and inspectors to evade the law. Unions may prevent some of these exchanges from taking place but seemingly cannot bring about more inspections. This in turn, reduces their effectiveness to enforce the law. The conclusion is an ineffective system plagued with irregularities that seemingly does little to promote compliance or advance the cause of workers while increasing the costs of doing business for firms.

Firms' strategies to cope with strict labor legislation

While labor-law enforcement is in general weak, laws that force firms to seek and obtain permission from the government prior to retrenchment are well enforced. Thus, still today, few firms seek permission to retrench, and for those who do, permission is rarely granted.⁵ Hiring labor to contractors and subcontracting non-core activities to other companies provides flexibility to firms that seek to manage their labor force in an uncertain and volatile context. Perhaps not surprisingly the use of contract labor has increased substantially during the nineties climbing from 15 to 25 percent of manufacturing labor force (Table 11.6).⁶ This rise, however, has not occurred in all states. In a number of large states, the use of contract labor has remained low and stable. This is the case in Delhi, Karnataka, Kerala, Tamil Nadu and West Bengal. In contrast there has been a large increase in contract labor in states like Orissa or Andhra Pradesh. State differences explain as much as 74 percent of the total variance in the use of contract labor suggesting the importance of state policies in determining firms' hiring decisions.

A recent study on contractual employment in Karnataka (Rajeev and RoyChowdhuri 2005) documents that the main reason mentioned by principal employers to hire contract labor is flexibility, along with lower cost, higher efficiency and lower dispute-propensity. A field survey in that state indicated that contract workers' wages were substantially lower than those of regular workers, very few contract workers received bonuses or wage raises, many worked longer hours, and few received any training from employers. The survey also reveals a burgeoning growth of contract employment agencies and a decline in the commissions charged to workers. And while higher competition among contractors should be welcomed by workers, in this context higher competition has seemingly resulted in corruption, in particular, collusion between primary employers and contractors to pay wages below the minimum wage.

Another loophole actively exploited by employers is that voluntary retirements (VR) require no permission from the State. Fallon and Lucas (1991) reported that offers of one month pay per year of work in exchange of retirement were not unusual. While there are no reported data on the number of VR, or the median payments, casual evidence suggest that such payments are still widespread and that offers of one month or six weeks per year of work are still the norm. The Industrial Employment (Standing Orders) Act allows employment for a fixed term, which, under certain conditions, does not involve a commitment on the part of the employers to offer job security. This clause has been reportedly used by a number of large employers in manufacturing.

Adjudication

The IDA makes provisions for dispute settlement in three stages: negotiation, mediation and adjudication. The first stage involves voluntary communication between the disputants. The Act makes provisions for the constitution of Works Committees for the purpose. If such negotiations fail, the Act allows for outside conciliation, for example, settlement of industrial disputes by Labor Courts, Industrial Tribunals or National Tribunals. Collective bargaining is the accepted means to negotiate terms of employment, especially in larger organizations. However, there is a widely held opinion that both collective bargaining and conciliation systems are rather ineffective mechanisms in settling disputes on retrenchment, and are not much more than a necessary formality, before an industrial dispute case goes to adjudication (see, for example, Malhotra 2001).

Legal experts suggest that there is a built-in bias for judicial reference. The majority of cases of dispute concern discharge, dismissal and retrenchment. The legal provisions under the IDA are so protective that the worker expects to gain more from the court-room than from conciliation efforts. 'The easy accessibility of adjudication on these cases encourages the parties to take rigid stands' (Mukhopadhyay 2005). Khan (2005) states that 'Trade Unions prefer the adjudication process because the ministries and the labor judiciary, as well as the appellate courts are expected to be sympathetic to the cause of workers'.

Table 11.9 confirms the impression that conciliation is not very effective. Labor Bureau statistics suggest that conciliation is more effective at the state level, but the percentage of disputes sent for adjudication is increasing in the 1990s.

In sources of data on disputes, the word 'dispute' is employed in two senses. The Indian Labor Statistics refers to strikes and lockouts alone, the legal literature refers to cases that fall under specific labor laws, and are heard in courts of law as 'disputes'. The total number of strikes and lockouts has fallen somewhat in the early 2000s compared with the 1990s, even though the average duration and person-days lost has increased. 'In other words, though we are having fewer disputes the cost of a given dispute has substantially risen' (Saha 2005, p.89). There is some statistics that suggest a rather poor rate of disposal of cases, about 10 percent in 1997, by the Labor Courts, which implies an average duration of proceedings in Labor Courts often years.

With the judiciary, however, the situation is complex. While the legal framework has changed rather little in the 15 years since the economic reforms began, observers and experts have noted a significant shift in the axis of judicial interpretation of the most restrictive of the labor laws. In order to examine what has happened in the sphere of judgments, we decided to use case data compiled from the legal literature, instead of the less readable labor statistics. Table 11.7, prepared from case data, shows that:

1. The number of labor cases that find their way to the High Courts and the Supreme Court has increased since the economic reforms began in India. A large increase has happened with the Contract Labor Act cases, that is, cases concerning dismissal of a contract worker. The disputant worker makes the case that the worker deserved to be regularized and, therefore, the case should fall under 'retrenchment' rules of IDA.
   
   
2. Unambiguous decisions in favor of or against the worker occur only in a minority of cases. Of the 165 cases in 2001, 37 had an unambiguous verdict.
   
   
3. Of those cases unambiguously decided, a larger share of decisions goes in favor of the worker.
   
   
4. However, the employer is faring better in the later period, the percentage of cases settled for the employer is higher in more recent times than before. A regression of the logarithm of these percentages on time yields a significantly positive trend, and suggests that time accounts of about 30 percent of the increase in pro-employer decisions.

The most disputative individual laws in IDA are the Sections 11-A, 25-O, 25F and 25G. Many cases of retrenchment under Section 11A end up before the judiciary. The section permits the Labor Courts to modify the retrenchment order dealt to an employee. This is also true in the case a worker is retrenched on disciplinary grounds. In nearly every case that reached the judiciary the aggrieved employee had filed an industrial dispute case with the Labor Court, received a judgment in his or her favor, and the employer challenged the judgment. What about the cases that were not challenged by the employer? In principle it is possible that in those cases the Labor Court gave an award in favor of the employer. But that is highly unlikely, for the cases that did go to the judiciary consisted of many in which the Labor Court condoned grave misconduct. In many cases, the order to take an errant worker back was passed in 'humanitarian interest'.

Section 25-O of the IDA makes it mandatory for employers to refer cases of closure to the state government. This clause has been in the eye of a legal storm for nearly 50 years, during which legislative intent and judicial interpretation of individual freedom came into conflict on several occasions. Legislative intent has been driven by the idea that unemployment through retrenchment or closure in any context was against the public interest. On the other hand, the idea that a bankrupt employer could be forced to keep a firm open at serious cost to personal well-being and finances seemed to contradict constitutional rights. The section 25-O has been a perennial source of anxiety for the judiciary. The historic amendment in 1982 that seriously restrained the rights of the employer was the response of the legislature to a generally adverse judicial opinion about the constitutionality of 25-O. In the more politically charged contexts, 25-O has been misused by the powers that rule the state governments. In Jay Engineering Works Ltd. v. State of West Bengal, Calcutta High Court, 1991, for example, it was observed by the judge that 25-O was invoked by the state government refusing permission to close a sick unit based on consultations with the workers alone.

The Section 25-G imposes on the employer the 'last-come-first-go' principle when carrying out retrenchment. As in many other pieces of legislation, this one too loads the job-security provisions for the insider by making the jobs of the older employees more secure than the younger ones. In effect, it violates the employer's right to select among the best workers, and neutralizes the right to retain the younger and better-trained workers in favor of the older and less well-trained ones. The clause arises out of a mindset that sees experience to be more valuable than formal training, measures experience by years rather than quality of service, and that sees technology as static during the lifetime of a worker, a world of the public-sector engineering firm at 1980. It is clearly incompatible and dangerous in activities that must keep up with rapid growth of knowledge.

Section 25F states that any employee working in a firm for 240 days or more in the previous 12 months can in principle claim retrenchment compensation. Other sections in the law state various kinds of termination (such as disciplinary action, end of probation period, etc.) that are not legally retrenchments. However, what is a retrenchment and what is not is a question that was left open by both the acts and the case laws until recently. In many cases, employees, irrespective of the nature of the contract, demanded that their dismissal from service was retrenchment under the length-of-service rule. Several court cases show that the Labor Courts are usually ready to grant such requests. In 2003, a Supreme Court judgment (S.M. Nilajkar v. Telecom District Manager, Karnataka) clarified that the natural coming-to-an-end of project-based, contractual employment was not retrenchment, provided the employee was pre-informed of the nature of the contract. In the meantime, the term 'retrenchment' had been broadened.

The Section 25 practically disallows retrenchments or lay-offs without compensation except when the owner dies. And a series of court cases made lay-offs and retrenchments with compensation on any ground impossible too. According to the IDA, lay-off is an inability of the firm to employ a worker on the muster, and retrenchment is termination of employment except on disciplinary ground. In one interpretation, the Section 25 makes it risky for the employer to promote anyone. In Suraj Prakash Bhandari v. Union of India (Supreme Court, 1986), an employee was promoted to a new position, and shortly thereafter retrenched on the ground that the new position was no longer needed. Section 25 also encouraged employees under a variety of fixed-term contracts, whether formal or informal, to claim the status of regular employees (entitled to retrenchment compensation), with a fair degree of success until recently. In two significant judgments (Divisional Manager, Andhra Pradesh State Road Transport Corporation v. P. Lakshmoji Rao, Supreme Court, 2004; and Executive Engineer, Zilla Parishad Engineering Division v. Digambara Rao, Supreme Court, 2004), the court ruled that serving one employer for 240 days continuously is not sufficient to claim the status of a regular employee.

The CLA has also seen a conflict between two tendencies in the sphere of case laws. On the one hand, the Act allows freedom to the employer denied him/her by the IDA. Some judges understood and respected that freedom. On the other hand, like in the case of 25-O, some judges saw this freedom as a failing and weakness of the Act, and judgments passed in that spirit led to a gradual crystallization of a job-security right within the Contract Labour Act. It is in this sphere that judicial rethinking has perhaps been the most striking. A series of cases in 2004 and 2005 reflected the interpretation that the fixed-term worker has no automatic right to demand regular employment on completion of 240 days of more or less continuous work. To demand a regular job, such a worker needs to make a case that the temporary status was a ploy to deprive him/her of a permanent status to which the person was in some sense entitled (for example, Regional Manager, State Bank of India v. Raja Ram, Supreme Court, 2005). An important judgment of 2004, delivered by the Bombay High Court observed that

The other injurious effect of indiscriminate regularization has been that many of the agencies have stopped undertaking casual and temporary workers though they are urgent and essential for fear that those required to be continued for 240 or more days have to be absorbed. Public interests are thus jeopardized.

(Maharashtra Krishna Valley Development Corporation v. Tukaram Sahebrao Veer, 2004)

The economic effects of selected key legislation

What was the effect of this complex and overly restrictive legislation on economic outcomes? Did the inefficiencies in enforcement and the de facto deregulation that took place reduce the impact of legislation? To answer this question requires performing statistical and econometric analysis to assess if and how legislation and, in particular, changes in legislation relates to variables such as output, employment creation, investment or workers' earnings.

While labor legislation is introduced with the objective of improving workers' welfare, there may be a number of adverse consequences on economic outcomes, and in turn, on workers' wellbeing, because it can generate: (i) price effects; (ii) hold-up effects; and/or (iii) rigidity effects. Price effects occur when legislation increases the cost of labor, thus reducing employers' incentives to hire workers. Hold-up effects occur when legislation makes it easier for one party to appropriate the return of the investment of the other party, thereby reducing the incentives of the latter to invest. This is the case, for instance, when legislation increases workers' ability to initiate and sustain industrial disputes, which may lead to lower returns on the investments of employers. Finally, rigidity effects occur when legislation makes the adjustment of labor (or other factors) more costly and difficult. Legislation that increases the price of labor or generates expropriation effects is expected to have a negative effect on the demand for labor. Instead, legislation that increases the cost of adjusting employment has ambiguous effects since it may cause a reduction of both job creation and job destruction (Bertola 1990).

Employers' opinions

Are employers constrained by labor legislation? An interesting source of crosscountry information is provided by the Investment Climate Surveys (ICS). They collect firm level information on production, input use and the investment climate across a large number of countries.⁷ Among other questions, ICS ask firms about how much labor-market regulations constitute an obstacle for their growth. Higher values of this answer imply higher obstacles for firms. The average of such responses by country yields a telling measure of differences in perceptions across countries (see Figure 11.7). According to this data, in India labor regulations are perceived to be a larger obstacle for firms' growth than in most other countries of the world.⁸

Moreover, larger firms tend to consider labor legislation as more of an obstacle than smaller firms (Figure 11.8). This is consistent with the fact that the most contentious labor law, chapter Vb of the Industrial Disputes Act, applies only to manufacturing firms that employ 100 or more regular employees. Interestingly, large firms consider labor legislation to be as constraining for their growth as electricity shortages, although not as constraining as taxes (rate and administration) or corruption.

The effects of dispute and retrenchment legislation

A number of studies have attempted to estimate the effects of job-security legislation, such as chapter Vb, on economic outcomes in India. In comparison, there is much less analytical work assessing the effects of the rest of laws contained in the IDA. Fallon and Lucas (1991) and (1993) studied the effects of the 1976 introduction of chapter Vb. They concluded that after the reform formal employment for a given level of output declined by 17.5 percent. In another study, Besley and Burgess (2004) found labor legislation to have important adverse effects on output and employment, particularly in the registered manufacturing sector. Hasan et al.(2003) examined whether differences in labor laws explain differences in the way labor markets adjusted to trade reforms. They found that states with more stringent labor legislation (measured as in Besley and Burgess 2004) had lower demand elasticities and these elasticities were less affected by trade reforms. Finally Lall and Mengistae (2005) examined the influence of labor-market legislation - as perceived by employers - on plant-productivity differences across Indian cities. They found that differences in legislation, jointly with differences in the severity of power shortages, explained a large share of the productivity differences between cities in India. Not all authors found results in the same direction. Dutta Roy (2004) examined the effects of a 1982 central amendment to the IDA, which extended the prohibition to retrench workers to firms that employ hundred or more workers and found evidence of substantial adjustment costs in employment but no evidence that such costs were driven or altered by the IDA legislative amendment.

Figure 11.7 Average country perception on whether labor market regulations are an obstacle for growth (source: Investment Climate Surveys, the World Bank).

Notes

0 = No obstacle, 3 = Large obstacle.

Figure 11.8 Ranking of perceptions of constraints (normalized to 100 for electricity) to firm growth of manufacturing firms, by firm size (source: Authors' computations from 2002 IIC-World Bank Investment Climate Survey data).

While the former results suggest that labor legislation can generate important adverse effects on economic outcomes, some of the former studies do not address important methodological issues. For example, while Fallon and Lucas find a decline in employment after the introduction of chapter Vb, this decline could be driven by factors contemporaneous to the introduction of the law, rather than by the law itself. Besley and Burgess control for this fact and still found an important effect of labor legislation, but since they use an aggregate measure of legislation, their results provide little evidence on whether all laws have similar effects, and if not, which labor laws are behind their identified adverse effects.

Using Annual Survey of Industries (ASI) data on manufacturing employment, output, investment, wages and number of factories by state and industry, Ahmad and Pagés (2006) estimate the effect of different laws on a number of economic variables distinguishing between job-security and dispute-related legislation. Within job security, they also distinguish between amendments to chapter Vb, and amendments in other laws that relate to the procedures for termination of the work relationship or the closure of firms. They also distinguish between labor reforms that involve amendments in the law (de jure) and de facto deregulation that occur, for example, by the increasing recourse of firms to contract labor.

Their methodology is based on constructing measures that track de jure and de facto labors reforms at the state level during the period 1959-1997. The construction of measures of de jure labor reforms follows Besley and Burgess (2004) procedure with some modifications. For the measure of job security, they construct a variable that takes a value of one when a state implements an amendment to the IDA that goes in the direction of increasing job security and -1 when labor reforms go in the opposite direction. Then they add up all these changes, so that in each period, the measure of labor legislation is the cumulative sum of all reforms to that given date. Higher positive values indicate that in a given state and year, job security is high because the reforms in the direction of increasing job security have not been outweighed by reforms in the opposite direction. An identical procedure is implemented for measuring reforms on laws that affect the resolution of industrial disputes.⁹ During the period of study, some states implemented amendments to reduce the cost of labor disputes while other states passed amendments that made labor disputes more costly.¹⁰ Instead, over time all amendments to lay-off, retrenchment and firm-closure laws were in the direction of making such actions more costly for the employer. De facto reforms are captured by the percentage of contract labor in each period and state, which as shown in Table 11.6, varies considerably across time and states. All these measures are then related to economic outcomes by estimating an econometric model that regresses economic outcomes on the labor-legislation measures, state and time dummies and controls at the state level.¹¹

The results of this analysis strongly indicate that a state amendment that increases the cost of labor disputes or retrenchment above the cost stipulated by the Central Act results in declines in registered manufacturing employment and output in that state relative to the states that do not implement such changes. The main results are the following:

It is found that legislation both that (i) makes labor disputes costly and (ii) retrenchment costs high through the VB clause biases economic activity against registered manufacturing and in favor of sectors such as agriculture, construction or non-registered manufacturing, in which the IDA does not apply. Within manufacturing, legal amendments that slow down the resolution of industrial disputes or reduce firms' labor-adjustment possibilities lead to a reduction in registered manufacturing output of between 15 and 20 percent, and expand unregistered manufacturing output between 6 and 7 percent. The former underscores that while laws intended to increase job security, such as chapter Vb, draw most of the attention, dispute-related laws can also exert a large, if not larger, effect on economic outcomes. It is also estimated that both types of laws have important detrimental impact in manufacturing employment, for both total persons employed and also for production workers (Figure 11.9). It is estimated that India may have lost around 1,114,000 due to the introduction of chapter Vb, another 1,700,000 jobs due to the 1982 amendment of Chapter Vb, and 750,000 jobs due to different state amendments that made state acts more stringent than the central act.

In turn, results for capital indicate that much of the negative effects on employment and output are driven by a decline in investment rates and capital stocks, both in terms of capital per factory and capital per capita. Instead, and contrary to what is often predicted by economic theory, the capital-labor ratio within each firm declined. This again suggests that the reduction in investments and capital was driven by a fear that the returns of investments would be appropriation by part of labor and that this effect more than outweighed the price effect - which would go in the direction of substituting labor for capital. The effect on capital is much larger for laws that increase the cost of labor disputes (Figure 11.10).

Figure 11.9 Measuring the cost of job security laws on employment by industries (Number of jobs lost due to state amendments in Job Security Legislation in IDA).

In line with the results on capital, dispute-related regulations cost more jobs in capital-intensive industries (Figure 11.9), while retrenchment-related regulations have a higher job impact in labor-intensive industries. In addition, rather than a reduction in the number of jobs in existing plants, job losses are due to a decline in the number of factories. This suggests that labor laws are important in shaping incentives for new firms to enter the market. It also indicates that any positive gains in preserving jobs in existing factories were outweighed by the new factories that were not created.

Job-security regulations can lead to distributive conflicts. It is found that amendments that increase the cost of retrenchment have a positive effect on earnings per worker, although they do not have a positive effect on the total wage bill - that is the amount of resources that goes to workers - or the labor share - that is, the share of value added that goes to workers. This is because the increase in wages is offset by a decline in employment. This indicates that while some individual workers benefit by receiving higher earnings, others are worse off due to reduced access to manufacturing jobs.

Retrenchment-related regulations affect job losses in more states (Figure 11.10) than dispute-related regulations. This in part due to the fact that some states implemented laws reducing the cost of labor disputes, which resulted in employment gains - while no state implemented reductions in the cost retrenchment. West Bengal and Maharashtra pay, by far, the biggest costs in terms of jobs lost - accounting for more than half of gross job losses. States such as West Bengal, Maharashtra, Gujarat and Rajasthan pay the costs in terms of thousands of factories that do not exist because of IDA regulations. This is because these states have more stringent labor regulations relative to the rest of states.

Figure 11.10 Measuring the costs of regulations on employment by states.

Finally, there is also some evidence that the use of contract labor across different states in the 1990s may have helped to reduce somewhat the costs of job-security regulations in terms of output but it has not done away with all the effects of regulations.

The adverse effects of labor laws in India do not circumscribe to the IDA. There are too many laws in place. A relatively large employer in western India would need to be knowledgeable about, on average, 28 acts. There are inevitably overlaps, and workers and employers have an incentive to seek protection not granted in one by recourse to another. The dynamics of legislation has been politically driven, with the result that a new demand for a specific law has usually been met by framing a new Act without changing the contents of the old one. Key concepts such as worker or factory have ambiguous meanings and are defined differently across Acts. For example, while the IDA excludes a number of undertakings including educational institutions from the concept of industry, the courts have held that skilled or unskilled workers in educational institution are employed by an industry, while teachers cannot be treated as workmen. As services are becoming increasingly important, it is unclear how the concepts of industry or workman are applied in the service sector.¹²

The former analysis is not to say that any labor regulations will have a negative effect on employment. But laws such as chapter Vb, which, as seen in the former section are more restrictive than anywhere else in the world, destroy, not protect, jobs. So it does the dispute-settlement mechanism. There has been a crowding out of the enterprise-level and local institutions by the state and the courts. It is not being suggested that firm-level institutions are necessarily more efficient than industry-level ones. However, the weakening of one of these levels limits the choice for both employers and workers, and, hence, potentially raises the costs of disputes. Sometimes legislation bears upon private contracts and squeeze private negotiations. Mechanisms at the firm level have often not been allowed to strengthen and grow; rather, these have been stifled. A third problem is that there is too much uncertainty regarding the interpretation of laws. For examples, in a 1970 case of a factory closure in Mumbai that progressed from the labor court to the Supreme Court, the legality of the closure was decided on the meaning of the word 'undertaking', and was decided in favor or the workers. In Premier Automobiles v. Engineering Mazdoor Sabha, 1971, the Bombay High Court ruled that the precise provisions of a contract depended on whether or not the matter under dispute (in this case 'ex-gratia payment') was implied by the parties when a contract was drawn.

The effect of minimum-wage laws

With individual states having as many as 40 or more minimum wages in place set by both central and state governments, minimum-wage regulations in India are as complex as other labor laws. Within the agricultural sector alone there are minimum wages for ploughing, weeding, sowing, transplanting harvesting, winnowing, threshing picking and herding. In the construction industry, stone breaking has eight minimum wages, set by the central government, differentiated by the thickness around an inch of the stone broken. There are also floor minimum wages set by the state governments for unskilled workers.

One result of this complexity is that minimum wages are not well enforced. A large share of workers, some 40 percent of agricultural workers and 21 percent of urban casual workers (top panel of Figure 11.11) get wages below the lowest minimum wage (typically the one set for unskilled casual workers). Such figures, however, are likely to underestimate lack of compliance. Regarding the level, in most states, minimum wages are considerably below average wages for casual workers, both in agricultural activities and in urban jobs (bottom panel in Figure 11.11).

Figure 11.11 Minimum wages and employment (source: Wage data from NSS. Minimum wage data from Indiastat.com).

Notes

Top panel: Share of workers below state minimum wages for unskilled workers. Bottom panel: Minimum wages as a % of average wages in NSS regions.

The data suggests a strong effect of minimum wages in supporting wages for unskilled casual workers in urban and rural areas. Such impact can be seen in the distribution of casual wages by states, presented in Figure 11.12, which show an important spike of rural and urban casual wages around the unskilled workers' minimum wage. The data also shows an important correlation between casual wages for agricultural and for urban workers and minimum wages across regions and over the periods in 1993-1994 and 1999-2000 (Figure 11.13). This is the case even after controlling for state fixed effects that can take into account other factors that determine the level of minimum wages.

Preliminary analysis suggests that minimum wages may be supporting the wages of less skilled workers without apparent costs on employment. A separate exercise indicate that unemployment (UPS) and underemployment rates (CDS) in the different states do not appear to be related to minimum wages even after we allow for fixed effects. A preliminary conclusion of this analysis is that minimum wages for unskilled workers could be welfare enhancing as they raise wages for unskilled poor workers without reducing employment or increasing unemployment significantly. Such a conclusion, however, is only tentative in that in need to be supported by further analysis. However, it points to an area of major policy importance that has been greatly under-researched as it can imply that a streamlined regime of minimum wages could be welfare enhancing for those in more need.

Conclusions and way forward

Markets need adequate institutional infrastructure to thrive.¹³ This implies an appropriate set of regulations, effective law-enforcement institutions and a fair and efficient mechanism to settle disputes. In India, the labor-regulation debate is often portrayed as a choice between strict regulations and lawlessness. However, it should be more appropriately defined as a choice between keeping arcane regulations and institutions versus adopting a new market infrastructure that effectively advances the cause of workers. In this chapter, we have reviewed the system of regulations, law-enforcement and dispute resolution that supports Indian labor markets and found it to do very little to improve workers' welfare. By inhibiting job creation, capital accumulation and technology upgrades, this system deprives workers from employment opportunities while sustaining low productivity, low wages and poor work conditions. The complexity of the legal framework makes it impossible to enforce, which in turns leads to widespread corruption, a higher cost of doing business and no gains for workers. Labor disputes take forever to be resolved, creating inordinate amounts of uncertainty for all parties. This is not a status quo worth

Figure 11.12 Clustering of urban and rural casual wages and minimum wages by state kernel distribution of urban and rural casual wages (source: Own estimates based on NSS and minimum wage data from Indiastat.com).

Figure 11.13 Rural and urban wages. (a) Rural agricultural wages and minimum wages regions in 50th and 55th rounds. (b) Urban casual wages and minimum wages by regions in 50th and 55th rounds (source: NSS and Ministry of Labor for minimum wages. Adjusted R squared for the two estimates at 0.85 and 0.75 respectively).

defending. To create a new institutional infrastructure that can truly advance the cause of workers and promote growth it is necessary to expand the reform debate beyond labor regulations to areas such as dispute resolution, adjudication, labor inspections and labor policy. Below, we describe what in our view would be some of the required transformations:

1. It is necessary to consolidate all Acts into a single law on labor relations dealing with the following aspects: (i) wages and conditions of work; (ii) social security; (iii) hiring and termination procedures; (iv) trade unions; (v) industrial disputes; (vi) health and safety provisions. In addition, key concepts such workman and factory, whose meaning and coverage is ambiguous and varies among Acts should be clarified and harmonized.
   
   
2. The resolution of industrial disputes should be rationalized in several ways. First, "right disputes" - that is those disputes that are based on a legal -right - and "interest disputes" - those which are not based on any existing rights - need to be distinguished. Only the first class of disputes should be a matter of adjudication. Disagreements belonging to the second class should be solved by means of collective bargaining, or if that fails, conciliation and arbitration mechanisms (Nath 2005). A corollary is that the machinery for conciliation should be strengthened, by giving conciliator officers powers currently awarded to the Board of Conciliator, making conciliation a compulsory step prior to adjudication, giving appropriate training and incentives to officers so they don't succumb to pressures from different groups (Hazra 2005), addressing the shortage of well-trained, high-caliber presiding officers in labor courts and tribunals (Hazra 2005), and eliminating over-regulatory and impractical clauses and adopting procedures to expedite the resolution of disputes (i.e., the possibility of adjournments and delays should be limited, the possibility that cases once rejected can be subsequently referred without new facts arising should be eliminated). Finally, the possibility of raising old disputes should be limited to one year (section 10 of the IDA) (Hazra 2005).
   
   
3. Regulation needs to evolve from protecting the job to protecting the worker. Change, transformation and upgradation are the engines of economic growth, and the legal framework requires to be sensitive to these needs. This in turn implies transforming current provisions aimed at ensuring job security into mechanisms that protect the incomes and welfare of those workers adversely affected by technological change or market fluctuations. More concretely such reforms would imply the following steps:
   
   
   1. Strengthening compensation for retrenchment and firm closure. The current compensation contemplated in IDA is well below the standards of developing countries, and although in line with those prevalent in developed countries, workers in industrial countries have access to other forms of unemployment insurance. A compensation of one month per year of work, with an upper maximum of 8-11 months pay, would be in line with international standards.¹⁴ However, it is necessary to trade off the insurance properties of such compensation with the possible disincentives for job creation. To minimize such disincentives, and quite importantly, to insure that workers receive the compensation in times of need, additional institutional mechanisms are required. One such mechanism is to mandate that firms regularly deposit a certain percentage of workers' wages in a financial institution account open for that purpose. Compensations to workers would then be paid out of the funds secured in the account or fund, which would prevent sick or closing firms from defaulting from their obligations. Building funds for a rainy day would allow increasing the very meager compensation that workers now received in case of closure to the same level that compensations awarded for retrenchment. To make these possible, firms who default from their contributions ought to be considered in serious breach of the law and penalized. A slightly different alternative, already in effect in some Latin American countries (Colombia, Peru, Ecuador and somewhat differently in Brazil), is to create individual accounts for each worker to which firms deposit a certain percentage of the worker's wage every month.¹⁵ The funds in the account are the property of the worker and can be accessed in the event the worker is laid off, retrenched or quits the job. These funds then act as an unemployment insurance providing income support while the worker searches for another job.
      
      
   2. Reduce incentives of parties to recur to adjudication. Section 11-A of the IDA which gives discretion to labor courts and tribunals to reinstate the worker should be eliminated. Labor Courts should be endowed with the power to seek payments from firms to workers but not to direct reinstatement.
      
      
   3. Eliminating section 25G which stabilizes procedure for retrenchment. Section 25G establishes that when a worker is to be retrenched, the employer should start by the last person hired. In the current fast-changing environment, this section penalizes firms that seek to hire and maintain workers with the latest up-to-date skills, relative to firms that rely on experience. It does not do much for incentives as older, higher-experience workers have their posts secured even if they don't perform in their jobs.
      
      
   4. Making job-search assistance and training available to workers affected by retrenchment. The most successful income-support mechanism for a worker that loses his or her job is to find a similar or better job as fast as possible. Labor policy should assist workers to that end.
      
      
   5. Eliminating the provisions related to seeking government permission for retrenchment and closure (Chapter Vb). It has been proposed that chapter Vb be applicable only to industrial undertakings having 300 or more employees (report of second commission of Labor; Hazra 2005 among others). While such extension would reduce the adverse effects that this provision creates in the labor market, and make reform more acceptable to proponents of the status quo, it would still maintain strong disincentives for firms to grow above this size threshold. Yet, if firms are to seize the opportunities afforded by the global economy and take advantage of economies of scale, they will need to grow considerably in size. Inhibiting this process will cost India high paid jobs, since it is a well-established fact that wages increase with the size of a firm.¹⁶ More generally, labor laws should avoid penalizing firms' growth.
      
4. Contract labor should not constitute a form of avoidance of labor laws. Contracting out work allows firms to concentrate in their core business and improve overall competitiveness. However, in very regulated labor markets, contract labor becomes a form of avoidance. Enacting comprehensive labor reforms is required to reduce the incentives to over-rely on this type of employment and improve the welfare of contract labor workers. As comprehensive reforms in the labor market take place, the use of contract labor becomes less distorted. Nonetheless, regulations on contract labor (and more generally on all those forms of work other than regular indefinite contracts) should strike a balance between the search for efficiency and the need to provide adequate protection to non-permanent workers. Labor laws should apply to the contractor in his/her relationship with the contract worker. Thus, for instance, in a reformed scenario along the lines proposed, contractors would have to make contributions to a Retrenchment Compensation Fund or to make regular contributions to workers' individual accounts. Such funds would be made available to the contract worker in the event the relationship between the contract labor worker and the contractor ends (see, however, that if a relationship between a principal employer and a contract worker ends but the contractor is prepared to place this worker in another firm at a similar wage then the end of the employment relationship between the contract worker and the principal employer would not be considered retrenchment)¹⁷ It is also imperative to promote and facilitate training of contract workers.
   
   
5. Strengthen labor inspections and labor-law enforcement. Firms devote too much valuable time to deal with inspections, while inspectors enjoy inordinate powers to extract unofficial payments. Inspections should be targeted and publicly pre-announced. Firms to be inspected should be selected based on formal complaints raised by workers' representatives and for the group of firms where no complains are raised, inspections should be targeted based on which firms are more likely to evade the law. Inspectors should focus on technical assistance and not just sanctions, which in turn requires that inspectors be appropriately trained to be able to perform. On this issue, the ILO recommends not funding the inspectorate from revenue generated from fines, as it inhibits the educational/promotional role of the inspector. Some initiatives such as employer-generated implementation plans (EGIP) have produced good results in other countries. Employers can tailor an implementation plan and policies to suit their needs. They report to the inspectorate on progress against self-defined benchmarks in their annual plan for improving working conditions. Compliance is more likely since employers and often, as recommended, workers "own" the strategy. Other useful strategies are providing special educational components and information provision to small and medium (SME) firms. Other important measures are to build a culture of compliance through mass-media campaigns and education in business schools and professionalize inspections providing adequate training and compensation.

Document(s) 11 of 16