India faces a persistent challenge in generating formal, productive jobs for its growing workforce, with a small share employed in the formal wage sector. Will the new labour reforms lead to the creation of more employment opportunities, improve labour productivity, and shift the structure of our workforce towards greater formalisation? In the previous weeks, we conducted an in-depth analysis of each of the four new labour codes from the perspective of each of these three outcomes.
The Code on Wages carries the potential of raising wages, and thereby worker productivity. It standardises the definition of ‘wages’ by capping exclusions at 50% of total remuneration, preventing the artificial suppression of the base (pre-tax) wages. It also universalises minimum wage coverage beyond scheduled sectors, while introducing a statutory national floor wage anchored in a normative consumption criterion.
The Code on Social Security aims to provide basic benefits to all workers by formally recognising gig, platform, and unorganised workers within the statutory framework. It mandates benefit parity for non-permanent, fixed-term employees and streamlines compliance through a single registration system and a unified electronic return mechanism. It carries the most significant implications for formalising our workforce.
The Industrial Relations Code is the most relevant reform for expanding employment opportunities by raising the threshold for prior government approval for worker retrenchment and establishment closure, from 100 to 300 workers. It formally recognises fixed-term employment, enabling short-term hiring with wage and benefit parity with permanent workers.
The Occupational Safety, Health and Working Conditions (OSHWC) Code establishes new licensing thresholds towards worker coverage, such as 20 workers for factory establishments and 50 for contract worker employment. Further, it introduces mandatory annual health examinations for workers above 40 years of age, ensures portability of benefits for inter-state migrant workers, and provides a consent-based framework allowing women to work on night shifts. Enactment of this Code carries significant implications for improving working conditions and worker productivity.
Summary of implications for employment and labour productivity
The existing literature and research on labour regulations in India and elsewhere suggest that the impact of the labour reforms will likely be mixed, but with broadly positive implications, for employment generation and labour productivity in the country.
The Code on Wages is likely to raise earnings of eligible workers and may also increase the market real wage due to the setting of a national minimum. Broader minimum wage coverage across industries may curb employer incentives to undercut wages, thereby reducing wage dispersion. The setting of a national minimum wage can also support employment generation by shifting some bargaining power towards workers. The Code may lead to improvements in labour productivity by linking wage determination to skill levels, creating incentives for skill upgrading, as well as better monitoring of worker productivity. However, these gains depend on the market structure, enforcement of the labour regulations, and the level of the minimum wage floor.
The Code on Social Security has the potential to support formalisation of the workforce and improve job quality by expanding coverage of employment benefits and enabling greater labour mobility. However, the associated compliance costs may weigh more heavily on smaller firms, such as MSMEs (micro, small, and medium enterprises).
The Industrial Relations Code is likely to facilitate firm growth by allowing greater flexibility in workforce management and enabling productive enterprises to expand their permanent workforce without fear of regulatory entrapment. The formal recognition of fixed-term employment promotes more adaptable employment arrangements, potentially enhancing total factor productivity through improved matching of workers to firms. However, the potential employment gains are constrained by India’s skewed firm size distribution – less than 12% of India’s enterprises fall within the 50-99 worker band, which is most likely to respond with immediate expansion incentives due to the labour reforms.
The OSHWC Code can also encourage workforce formalisation by reducing employer-borne compliance costs and enhancing worker productivity through improved workplace safety and working conditions. However, firms may respond strategically to regulatory thresholds by increasing reliance on contract labour, which could dilute some of the intended gains from the new Code.
Overall, the structure and enforcement of the recently notified Central Rules and impending state government rules for implementation of the new Labour Codes will be critical in determining the impact of these reforms. For instance, the central rules do not specify the criteria for setting the a wage floor, potentially leading to adoption of criterion for wage setting which may not be fully aligned with the actual cost of decent living, thereby diluting the potential impact of this reform.
Also read: India’s new labour safety code promises more jobs and safer workplaces
Policy implications
The ultimate impact of the new Labour Codes centre not just on their effective implementation but also complementary policy initiatives to ensure their intended benefits are realised fully:
Strengthening enforcement: Strengthening enforcement is critical, particularly in the informal sector, through digital compliance systems, improved record-keeping, and targeted inspections to ensure that wage, social security, and safety provisions are meaningfully enforced.
Calibration of the national floor wage: The national floor wage must be calibrated to avoid being set either too high or too low. An excessively high floor may reduce employment for low-productivity workers, while a low floor may fail to protect workers. Periodic revisions should account for regional variation in the cost of living, while remaining sustainable for employers. A rigorous criteria based on the cost of living should be laid out to ensure that minimum wages are mandated in accordance with the norm of decent work.
Revising statutory wage ceilings for social security benefits: The adequacy of India’s social security schemes is constrained by statutory ceilings, that determine benefits but have not kept pace with earnings growth. The EPF (Employees’ Provident Fund) mandatory contribution ceiling is unchanged since 2014, while under the ESIC (Employees’ State Insurance Corporation), workers earning above Rs. 21,000 per month are excluded from mandatory coverage altogether. Both ceilings require urgent upward revision to ensure social protection commensurate with workers’ actual earnings, and that effective coverage does not shrink in real terms.
Supporting MSMEs: Supporting small and medium enterprises through regulatory compliance incentives, simplified procedures, and access to finance can ease the transition to formalisation of the workforce and prevent disproportionate cost burden on small enterprises.
Complementary reforms for job creation: Labour reforms must be complemented by investments in worker skills, broader industrial and trade policies, and stronger institutional coordination across states, alongside leveraging digital systems to improve transparency, and delivery of the labour reforms.
Ultimately the draft rules of the states and the capacity of the states to ensure effective implementation of labour regulations is central to the labour-market impacts of the new Labour Codes in the longer term. The effectiveness of these new laws will eventually depend on the extent to which implementation rules accommodate state-level heterogeneity in labour market conditions, cost of living, institutional capacity, and firm size distribution.
Views are personal.
Based on their new NCAER working paper, Farzana Afridi and other authors will review the new labour law reforms.
This article was originally published on the Ideas for India website.