Market Labour Reforms and implications on Labour Development

Brooding over with a discussion with my friend Tuhin, on labour markets reforms and its deregulation status in PSU sectors in India, an thought stuck me as how to identify the labour and product market institutions affecting the labour market performance of a country.

In this context, factors such as the employment protection legislation, unemployment benefits and entry barriers for firms have been considered. Theory has generally predicted a clear impact of institutions on labour market performance. Empirical evidence from studies around are yet to conform the predictions of the theory(if any of my readers know any papers which prove it otherwise,please post the link). The findings fail both to distinguish the crucial from the less important institutions but also to determine whether deregulation lowers or raises unemployment ,while the inconclusive results can be partially explained by differences in the time period or the country selection, model mis-specification and the policy making body bias on such issues also seems to be an important source of error.

Institutional variables which I am taking the liberty to divide into five groups (what we as Indians understand):
Tax system (progressive.. but can and should be more simflified),
Employment Protection legislation (Not any research done to study the implementation and penetration of such legislation's in MSME sector),
Workers' bargaining power (we have come a long way... At least now we can lure our farmers to cities for boosting Infrastructure),
Product market regulation (Still a fiefdom of big names and business groups..) and
Unemployment compensation (oops... this is not applicable in India..oh !! NREGS..oh yeah, another way to fill pockets from coffers).

"Enough of you being cynical, Avinash"... if you are a staunch believer in the Indian Reform System.

Taxes on labour seem to affect the unemployment rate mainly by increasing the cost of labour and, thus, lowering labour demand.

Furthermore, the effect of a labour tax increase depends crucially on the degree of the workers' bargaining power. The stronger the workers, the more of the tax increase the firms have to bear. Hence, higher labour taxes only affect labour demand, if the workers' bargaining power is high(eg. Labour conditions in Bengal and Kerela). An important point is the utilization of the tax income by the government. If part of the taxes serve as funding for, say, qualification measures for unemployed workers to reduce the spell of unemployment, taxes can indirectly help to reduce unemployment, but this point is highly debatable in terms of Indian context.

Let me talk about something whose implementation is supposed to be improbable possibility "Employment Wages" or something which we will call as 'Employment Protection fund'. The replacement rate can be split up into the benefit payments for different states of unemployment, say, first year of unemployment or fifth year of unemployment. The bargaining system can be displayed by, for instance, both the union coverage and the bargaining co-ordination.

Providing employment protection in globally advanced countries is usually conducted by imposing severance payments on the firm or to exacerbate layoffs by legal regulations. Concerning unemployment, the effect of higher employment protection is assumed to be twofold. On the one hand, it lowers the flows from employment to unemployment since firms take the additional costs for layoffs in consideration when evaluating the productivity of a worker. Labour is allocated less efficiently what comes along with a fall in productivity and, finally, decreased labour demand. While the employment protection can be seen as an insurance against getting unemployed, the unemployment benefit system affects predominantly those who are already out of work. An increase of unemployment benefits on the one hand causes unemployed persons who are eligible to benefit payments to raise their reservation wage. On the other hand, unemployed who are not eligible to benefits will have a higher incentive to accept a job in order to get qualified for the benefit payments in case of future unemployment.

Furthermore, the fear of losing job-specific human capital can convince the workers to attach no importance to high unemployment benefits. In this case, unemployment benefits will not lower the unemployed workers' incentive to search a job.

The degree of product market regulation affects labor demand through adjusting the competitive environment in a market. Increasing competition in a market means more competition for labor if entry barriers are sufficiently low. Hence, the lower the governmental regulative intervention (e.g. barriers to entry or public ownership) the lower the unemployment rate.

Nevertheless, a certain degree of barriers to entry can also help to increase the firms' productivity in a market. This, in turn, can lead to an increasing demand for labor. Furthermore, a change from public to private ownership boosts the performance of workers and managers since monitoring is much easier to implement.

I think i am getting too carried away .. for more insight refer to my Labour Market Reform report .... C ya till the next update.