Contractualisation will worsen unemployment

Contractualisation of workforce will worsen (un)employment scenario

Bengaluru: Stranded people arrive at Majestic Bus Station to board buses to reach their native places during the nationwide lockdown imposed in wake of the coronavirus pandemic, in Bengaluru, Wednesday, May 6, 2020. (PTI Photo/Shailendra Bhojak)(PTI06-05-

With the ‘Great Lockdown’ extended for two more weeks, despite some relaxations offered by government guidelines, the economic cost of India’s fight against Covid-19 can be seen in the rising unemployment numbers. Relying on CMIE’s most recent estimates, the count of those unemployed -- or those actively seeking jobs but unable to get one -- during the week of April 26 was some 76 million (unemployment rate of 21.1%). In earlier weeks, this was close to 100 million.

That high unemployment rate is accompanied by a further fall in the labour force participation rate, dropping from 42.6% (in late March) to 35.4% in figures for end of April. This means, more than 7.2% of the working age population (i.e. 72 million) either quit the workforce or lost their jobs during this lockdown period.  

Apart from the seriousness of the unemployment challenge, another structural issue affecting the workforce is the deeper, entrenched contractualisation of work -- a long-standing concern.

Contractualisation of workers, or what is known as the “endo” (“end of contract”) arrangement, sees workers employed across sectors on short-term ad hoc contracts while being deprived of social security benefits, higher wages, and a general security of tenure. Unlike regular employees, contract workers are signed on almost a 5-5-5 arrangement, i.e., in three-cycles of five-month contracts, subject to being renewed after every five-month period.

A classic case in point is the ad hoc contractualisation of the teaching workforce, as seen in the higher education landscape across India (and most part of the developed world, too). There are an estimated 4,500 ad hoc instructors in Delhi University alone.

The culture of ad-hocism as part of a contractual workforce has also seen the emergence of a “no-work, no-pay” attitude -- an issue that got much greater attention when the pandemic was spreading in parts of US and Europe, where most workers had no provisions for paid sick leave due to socially insecure contracts.

A company engaging in greater contractualisation often has a higher turnover rate of personnel, too, creating a disruptive operational environment and leading to higher costs of training and higher incidence in costs of errors. From a contract employee’s perspective, apart from being denied basic social benefits, a high anxiety and psychological cost has to be borne, having to constantly look for a new job or retain the existing contract, often making such workers more vulnerable and less able to contribute greater productivity and commitment.

But how did contractualisation become so rampant and widespread across sectors and in nations like India?

One good reason, as discussed by noted labour economist Suresh Naidu in his work on labour markets in the US, is concerned with the decline in private (and public) sector union density.

For example, in the US, as Naidu states, private sector union density has fallen below 7%. New evidence also suggests that high union density played a vital role in ensuring a fairer employment relationship between employers and prospective employees, while compressing the income inequities and lowering inter-generational income persistence.

Simply put, de-unionisation catalysed a rapid neo-liberal contractualisation of the workforce, allowing firms to maximise profitability through cuts and savings on labour costs, inadvertently affecting the employment landscape – making it far more exploitative for the average worker.

Why do unions matter? As labour economists like Suresh Naidu and Arindrajit Dube argue, unions make a lot of sense in labour market models with monopsony and/or a market structure with a few sellers (like oligopolistic cartels). Monopsony generally implies that unions can (a) allow a raise in the wage within limits without necessarily costing jobs, and b) replace the individual labour-supply curve facing the firm with a much more efficient bilateral bargain (between employers and employees).

More broadly, monopsony also means that labour market interventions become the site of economic redistribution, in addition to (or instead of) the tax code, and so politically organised workers become an important constituency for redistribution via the labour market. Beyond power over the wage, the default rule in the employment relationship is that employers have the right to command workers on the shop floor. This, according to Naidu and Dube, results in plenty of inefficiently allocated control rights, as there are many workplace decisions where workers have superior information about their cost of doing things.

A union-driven contract can therefore reallocate these decision rights toward the efficient division which reduces labour conflict (as measured by strikes). Union-based contracts are efficiency-enhancing workplace constitutions.

India’s unemployment challenge, along with the rampant contractualisation of the workforce, requires a deeper discussion for progressive economic and social policies. The lockdown has rendered millions jobless and the plight of unorganised workers (especially women) has made those ‘invisible’ in employment data to become more ‘visible’ today -- at least in the news bulletin.

The current crisis presents an opportunity to look at the structural concerns present in our deeply fragmented and broken labour-market.

A few policy measures, like offering more socially-protected worker contracts (say, safeguarding health and unemployment insurances as benefits); implementing premium wage-rates (say, double for contractual hires as against others); extending the probation period to more than a year (to do away with the uncertain 5-5-5 system on short-term contracts); ensuring greater legal representation and awareness to concerns of workers, and incentivising the presence of unions for minority workers (across the social categories of gender, class, race, etc) are all critical steps that can help provide a more progressive social and economic future for workers.

Private-sector union density must increase in medium to large-scale organisations to make the design of contracts more protective of and fair to safeguard worker-interests while enhancing the long-term credibility of the employee-employer partnership for a firm to accrue longer productivity gains. 

(The writer is Director, Centre for New Economics Studies, Jindal School of International Affairs)