Frustrating or Perhaps Supportive of Economic Activity? Law & Economics Take on Labour Law

– Jaivir Singh

Of course, there is much that is written and discussed about Indian labour laws and in most of the mainstream writing there is a sense that these laws frustrate economic activity on many accounts. It is said there are too many laws making compliance difficult for the businessman, the restrictions that they impose lead to inefficiencies and that the law must change substantially (at least as they are in their present form) –the recent move to collapse labour laws into codes is conceivably the culmination of this chain of thinking. While there may or may not be sufficient virtue to the idea that to study labour law is to gauge how it impedes economic activity, this direction of study is perhaps not entirely in the spirit of the analysis favoured by the law and economics understanding of approaching the problem. Though there are varieties of law and economics approaches – my broad understanding goes back to the cradle of the discipline emphasising the key insight featured by Coase that law effects efficiency when transaction costs are present. My intent here is to highlight a set of transaction costs – the ones that are characteristically emphasised by the incomplete contracts literature. Such transaction costs are endemically present in the labour market and I therefore argue that our attention needs to shift by analysing law in this light. Thus, rather than obsessively viewing law as an impediment, we need to appreciate the point that the many labour laws are perhaps present to correct some market failure i.e. counter the presence of transaction costs. If indeed this is accepted we might see (at least a sub set) of labour laws are supportive of efficient productive activity rather than being efficiency thwarting. This has many implications for the ongoing labour reform which should be taken into cognisance above all else to genuinely encourage productive relations.

To make this point I begin by discussing the many thresholds specified by Indian labour law in terms of coverage -size of the unit, definition of workers etc., and the fact that much of labour reform is directed at constricting this coverage. The analytical basis of this seems to lie in the belief that labour markets are competitive and I briefly go over the literature which has furthered this view in the Indian context. If we correct this analytic and pay attention to how the contours of the firm have come to be defined within the incomplete contract framework, then it is also evident that this frame allows us to approach law and the labour market with greater insight than is the case otherwise. Thus, over the next two sections I briefly go over the central arguments associated with incomplete contract theory and how it is of relevance to understanding the labour market. In the final part of the essay I attempt to use the insights gathered to briefly remark on the law pertaining to contract labour and apprentices in India. This is followed by a concluding comment.

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