ABSTRACT
Contemporary experiences of development suggest that trade liberalisation, in general, has played a positive impact in accelerating economic growth of many developing countries (Lin, 2012). However, a number of developing countries have not been able to derive benefits from the liberalisation (Rodrik, 2008). In the contemporary research, a general consensus has appeared that the countries which are successful must have better institutions and investment climates than others. Therefore, better economic governance for improving the investment climate has been an important objective of many developing countries in recent years, and is gaining considerable attention in both academic and policy-making circles. Since the labour legislation determines the degree of rigidity in the labour market of a country, it seems to be recommending substantial reform in legislation for the same. The Indian situation is more or less similar to that discussed above. Although economic growth has accelerated in India during the last two decades, it is argued that growth has not reached the potential level yet because of high labour market rigidity. As a result, a favourable labour market reform has been prescribed by many scholars not only for the acceleration of industrial growth but also for more employment generation. While the effect of trade liberalisation on economic performance is discussed, the labour market rigidity has been considered to be almost a fixed and unaffected factor in these literatures. This would not be true in an economy where a large part of economic activities are being undertaken in the informal sector. The current chapter is intended to see the extent of labour market rigidity and its trend as an indirect effect of trade reform initiated in the early 1990s. The general reform has increased the degree of competiveness on the product markets and thereby changed the cost-price margins. Even if no reform is undertaken in the existing labour legislation, this change in the margin would definitely alter the bargaining positions of employer and employee and thereby redistribute the share of residual growth. Who gains and who loses would surely be an important empirical question before suggesting any substantial reform to be undertaken in the labour legislation applicable to the formal sector in India. Otherwise, such reform might further deteriorate the overall conditions of the entire labour market in India.
