Hard to fire is hard to hire

The World Bank’s Doing Business report drives home the need for labour reforms

According to World Bank’s new Ease of Doing Business league table (linkthanks Debashish), it was easier to do business in Maldives (#31), Nepal (#55), Pakistan (#60), Sri Lanka (#65), Russia (#79), China (#91), Bhutan (#104) and even Iran (#108), than in India. In fact at number 116, it was slightly more difficult to do business in India than in war-torn Iraq.

The international ranking reveals how India is doing in comparison to other countries. But how has India own performance changed? There are 23 parameters that are common between the latest report, released in 2006, and the previous one released in 2005 (both are based on data compiled two years before publication). Of these, India has improved its score in 10 and slipped in 5 areas. None more so than in the area of hiring and firing workers.

It became more difficult to hire and maintain workers in 2004 as compared to the previous year. There was no change in the difficulty to fire, but at 90 out of 100, India is already one of the hardest countries in the world to fire workers.

Starting a business continues to involve 11 separate procedures; but in 2004, it took 71 days to do so, as compared to 89 days the previous year. That didn’t come without an increase in the cost of starting a business which rose to 62% of per capita in income in 2004 from 49.5% the previous year.

It also takes 10 years to close a business.

The upshot of all this? Exit barriers are also entry barriers. Making it hard to fire workers only ends up making employers unwilling to hire them and investors unwilling to invest in manufacturing (read job creating) industries. Miss the simple truth and you can have endless academic and political debates about why India’s decade and half of economic growth has been a jobless one.

2 thoughts on “Hard to fire is hard to hire”

  1. Nitin,

    My gut feeling is that more than “hire and fire” policy, it is trade union militantism (coupled with political extortion) which is responsible for the state of manufacturing industry in India

    Regards

  2. You mean downshot?

    “Miss the simple truth and you can have endless academic and political debates about why India’s decade and half of economic growth has been a jobless one.”

    I am not sure bad labour laws explain jobless growth. I think it is more to do with shedding fat. If Bajaj makes double the two-wheeler volume with few people, it is because of increased productivity.

    If companies are allowed to let go of unwanted employees quickly (and start new business and close unworkable business easily), the growth could be higher – 10-12%, agriculture to (unskilled and semi-skilled) manufacturing transition of the economy could be faster (probably avoiding those poor farmers suicides), unemployment would be lower, and poverty reduction faster. But India is moving at a glacial pace with even the talk of reforms shut out recently.

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