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Labour Market Flexibility

One of the most persistent demands of the advocates of neo-liberalism in India has been for the introduction of “labour market flexibility”, by which they mean the absolute right of employers to hire and fire workers as and when they please, without any let or hindrance.  The absence of such flexibility, they claim, has been holding up employment growth in the country.

There is, of course, no empirical evidence for this claim, a fact that even the more astute among the neo-liberal advocates of labour market flexibility will concede.  And, in any case, in an economy like ours where the unionised work force which alone is capable of putting up any resistance to hire-and-fire-at-will is a minuscule proportion of the total work force, there is presumably de facto labour market flexibility anyway, so that the meagerness of employment growth cannot possibly be attributed to the absence of labour market flexibility.  Nonetheless the advocates argue that there are strong theoretical reasons to believe that the introduction of labour market flexibility will improve employment growth.

The basic argument they advance is quite simple.  When an employer takes on a worker, if he or she is constrained to keep the worker on the pay-roll even in the event of a drop in demand in the future, then the adverse effect of such a drop on profits will be even greater than if the worker could be sacked under such circumstances.  This means that the risk to the employer from taking on a worker, other things remaining the same, is higher in a regime of no-freedom-to-fire than in a regime of freedom-to-fire.  This higher risk acts to the detriment of employment growth in several ways.

First, in a regime of no-freedom-to-fire, investment itself will be lower, other things remaining the same, than in a regime of freedom-to-fire.  This is because the returns net of risk from any particular project will be lower in the former regime, owing to its higher risk, than in the latter; hence more projects will be unattractive from the capitalists’ point of view in the former regime compared to the latter, resulting in lower investment and, consequently, lower employment.

What is more, since the risk to the employers will be particularly greater in the former regime from the adoption of more employment-intensive techniques of production, the bias against such techniques will be particularly pronounced.  Or looking at the matter differently, in a regime where employers have the absolute right to fire workers at will, not only will investment be higher, for any particular technique of production, but there will also be a bias towards more employment-intensive techniques of production, compared to a regime where they have no such right.  Both these factors constrain the rate of growth of employment.

Even at this level of argumentation, however, there are two obvious problems with the above claim.  First, this whole supposition that there is a multiplicity of techniques for producing a “given good” is a bit of a chimera.  If a modern steel plant is to be built then there is a particular technology for doing so and there is not much scope for varying the employment-intensity within that technology; on the other hand it is true that backyard steel can be produced with a far higher employment-intensity than in a modern steel plant, but then for the purposes for which steel is typically required in the economy the outputs of the two cannot be deemed to be the “same”.  So, this entire assumption of employment-intensities being different for the production of the “same good” is a bit of a red herring.  A “good”, strictly defined, has only one particular technique of producing it at any particular time.  In an economy, given its pattern of income distribution, certain types of goods are demanded, and they are typically produced with certain fixed techniques (or even when there is a multiplicity of techniques for producing a “good”, the employment-intensities do not vary much among them); labour market flexibility as such makes little difference to the choice of techniques.

Secondly, the introduction of labour market flexibility necessarily entails a weakening of the bargaining position of workers; it necessarily entails a death-blow to all forms of workers’ organisations like trade unions, since anyone attempting to organise the workers will be sacked forthwith.  This in turn necessarily entails a reduction in the share of wages in the net output of the economy.  And since a rupee paid out as wages creates more demand than a rupee that accrues as profit (of which a larger proportion is saved), such a shift in income distribution against workers, quite apart from being regressive in itself, results in a constriction of the domestic market, with an adverse effect upon employment for this reason.  Besides, as suggested above, since goods demanded by workers typically tend to be produced by more employment-intensive methods, the generation of employment is constricted for this additional reason too in a regime of labour market flexibility.

It follows then that even if we accept the neo-liberal argument that when the employers lack the absolute freedom to fire workers, the level of investment is likely to be lower for this reason than it would have been if this freedom was available to them, we still have to offset against this the consequences of a regressive income distribution while evaluating the overall impact of such employers’ freedom on employment.  And when we do so it is more than likely that the adverse effect upon employment of a regressive income distribution will outweigh the claimed positive effect: indeed we can see in front of our eyes how distributional shifts against the working population, which have accompanied India’s high GDP growth, have led to a change in the pattern of demand, and hence in the structure of output, that has been inimical to the growth of employment.

But let us take the logic of the neo-liberal argument itself, deliberately abstracting from these other powerful factors that offset in practice whatever validity it might have.  There is a basic logical flaw in the neo-liberal argument itself.  When it talks about risk-reduction for employers in a regime of free hire-and-fire, it makes the implicit assumption that the workers work with the same skill, dedication and intensity no matter what regime they are in.  And this is patently untrue.

Indeed, ironically, it was common not very long ago to find explanations for Japan’s economic success-story, advanced by such reputed economists as Michio Morishima and accepted quite widely, which emphasised its practice of “lifetime-employment” and treatment of workers as if they belonged to a family represented by the corporation.  Whether or not this explanation was a valid one for the so-called Japanese “miracle”, it recognised at least the importance of the issue of workers’ motivation in the process of capitalist production.  The labour market flexibility argument does not recognize the issue of workers’ motivation at all.

If it did, then it should be talking not just of the one kind of risk it actually talks about, namely the risk to employers’ profit in the event of a drop in demand; it should also be talking of another kind of risk, namely the risk to profits from workers’ alienation and disgruntlement, from destructive wild-cat strikes, from anarchic angry acts of dismissed workers who are thrown to penury and distress.  It should then be looking at the desirability of labour market flexibility by comparing at least the relative weights of the two kinds of risks.

But it does not do so.  It does not in other words reckon with the issue of workers’ motivation at all.  And the reason that the labour market flexibility argument does not reckon with the issue of workers’ motivation is because it believes that fear alone will be enough to make them work; their motivations are irrelevant.  The threat of the “sack” and the perennial existence of an army of the unemployed into whose ranks the “sack” confines you, is enough to make you work to your full capacity.  The question of eliciting work from you through providing appropriate motivations does not arise.  With this fear-instilling mechanism in place, it sees workers as potentially reducible to inhuman objects appended to machines and no different from machines.

This reduction of the worker to the level of an object, as Marx had famously argued, is both the premise and the objective of capitalism.  The beating down of the subjectivity of the workers, the process of reducing them to the status of proletarians where they are forced to abandon whatever freedom they had in their earlier occupations for a “mess of pottage”, the conversion of the human being into an appendage of the machine: this is what capitalism is all about.  Neo-liberalism, with its insistence upon labour market flexibility, is nothing else but a reassertion of this elemental drive of capitalism.

The fact that neo-liberalism, which is the latest stage of capitalism, insists upon it, shows the vacuity of all talk of a “humane capitalism”, of “capitalism with a human face”, or of a capitalism that can at the same time provide scope for “freedom” and “creativity” to the workers.  It reveals the fundamental spontaneity of the system that invariably seeks to set aside all interference with its elemental tendencies.

At the same time however it also shows the necessarily transient character of the system.  The premise of capitalism that workers can be reduced to the status of objects no different from the means of production has been as unrealisable throughout the history of the system as it has been persistently adhered to.  Against the persistent attempt of capitalism to reduce workers to the status of objects, workers have as persistently asserted their subjectivity by forming “combinations”, keeping “combinations” alive through their sacrifices, and moving on to the terrain of political struggles.

The introduction of labour market flexibility, premised upon the presumption that workers are no different from objects, is an attempt at the same time to realise this presumption.  This presumption however is fundamentally unrealisable, which indeed is why capitalism is necessarily transient: it is premised upon and seeks to realise in practice something that is essentially unrealisable.  The struggle against labour market flexibility must be total and uncompromising, for if it is not, then the struggle will be there anyway but it is likely to take chaotic and painful forms.


Prabhat Patnaik is a Marxist economist in India.  This article was first published in People’s Democracy on 8 May 2011; it is reproduced here for non-profit educational purposes.


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