Wednesday, May 3, 2006

The right time for labour market reform is now

Wonderful piece from 6 AM Pacific 

In my first job out of business school with Hindustan Lever, as Area Sales Manager I had a team of over 20 unionized salesmen. I ran a Voluntary Retirement Scheme in my first year and then again in my third year by which time we were down to half the original team size. Yet we introduced new brands in the market, grew our sales and in general did well as a team.

In my third year I took over a small new business of hot beverage vending for Lipton (at that time a division of HLL). The business was small but growing rapidly as we expanded our city coverage. In Sales, Distribution and Service we had about 50 people. Of this the number of direct Hindustan Lever employees was 2. The rest were all outsourced, contract or distributor's employees.

I then moved to Infosys in the US and over my 11 years there, hired scores of employees onto the company's US payrolls. I also had to let go of some people for performance or other reasons. At all times, I was acutely aware that I myself was an 'At Will' employee. I could be fired with two week's wages without giving a reason. As long as the reason was not discriminatory (race, sex, religion etc.) I could not bring legal action upon the company.

My experience with the vastly different labour environment in both India and the US has driven home a very important lesson - a business exists to make money for its investors, not to provide employment. And that is, paradoxically, the best way to generate employment.

Let's take a look at how India's labour laws distort the business environment and harm employment and employees:

1. It discourages capital investment - particularly in service oriented industries. Investing capital means taking risks. Market risk - the risk that the business may not succeed - is a risk that 'comes with the territory'. In most countries, investors know that if their business fails in the market, they close down the business, sell off the assets at knocked-down prices, book the loss and take the remaining capital to some other investment opportunity. However, in India, failure, or a downturn, in the market also means that you are still saddled with the payroll costs because you can't restructure or layoff anybody. You can't exit the business because employees will lose jobs. That's something investors don't have to deal with in most countries. You look at so many rusting factories in every major city in the country where the factory owner has not been able to layoff employees even when the networth of the company has gone down to zero, and you wonder - what a colossal waste of assets. You also wonder -  what do future investors think when they see these rust-buckets? More likely than not it's - 'That could be my investment 10 years from now.'

2. It provides no incentive for raising productivity through automation. Look at all the government offices or offices that have unionized staff like banks. To the last one, they opposed computerization. Why? because it could do the job faster and so it would reduce the number of jobs.

Yes it will and that is a good thing. Doing more work with fewer people raises productivity. Productivity raises incomes. The developed world's prosperity is entirely linked to higher productivity. Also higher productivity creates the surplus (or the profit) that can be invested to create more jobs.

3. If you want to produce a quality product or service it needs carrots AND sticks. With an employee who is not performing, you train, you mentor, you put them on Performance Improvement Plans. But in the end, the employee needs to know that if his performance does not improve he can lose his job. Without this freedom for businesses to manage for performance, it may be possible to compete against companies who are similarly hampered, but it is a clear disadvantage in the global market.

4. It pushes employment generation into the informal sector. In my second stint at Levers I would have loved to hire people directly into the company instead of outsourcing critical functions like Sales. With the Levers brand name as an employer we would have got great talent which would have been better for the company. However, Levers would not do that for a new business that could have failed leaving them with employees they wouldn't know what to do with. So all of the hiring was done by outsourced contract firms. Did these employees get the PF and benefits they would have got at Levers? I doubt that very much. I don't think these contract firms even paid any taxes since they were probably classified as Small Scale.

In summary, the current labour laws in India distort the business environment to where it reduces employment generation by discouraging investment, reduces income growth by discouraging productivity increases, reduces quality by taking away the freedom to manage for performance and pushes employment generation into the informal sector.

Whenever I bring this up with people in industry in India, I am given many reasons why this is not a problem. Someone says 'Only 20% of my workforce is unionized, I just work around them'. Another one will say 'If you really want to fire an employee for performance, it can be done.' But most of all the reason I get is 'But the economy is doing so well why do we need to think about redundancies and labour flexibility?' On the contrary, it is because the economy is doing so well that this is the right time for labour reform.

I believe this is the most important reform that government must now address. However, this is also the most difficult. Dismantling industrial licensing was like a walk in the park compared to this. With the government dependent upon the CPI(M) to stay in power makes it almost impossible to do major reforms. But major one-shot reforms aren't the right answer anyway. There should be a 10 year road map on labour reform. But starting now. Let's begin the discussion.


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