Labor reforms: Unemployment insurance fund, universal access to social security necessary, says the RBI report
Labor reforms: Unemployment insurance fund, universal access to social security necessary, says the RBI report

Labor reforms: Unemployment insurance fund, universal access to social security necessary, says the RBI report

Businesses should consider building an unemployment fund during periods of economic boom that could be used to financially support workers up to a limited period after downsizing, according to the Reserve Bank of India’s Currency and Finance Report (RCF).

“Labor reform with the flexibility to hire and fire workers can enable companies to adapt their workforce to economic cycles, enabling them to use their resources more efficiently.

“However, this could only happen at the expense of lower welfare / social security for the workers. One option here could be to build an unemployment fund … at company level …,” said RCF.

Furthermore, many of the social security measures apply to companies with a certain minimum number, which creates incentives for companies not to scale up.

“To solve this problem, a political option could be universal access to social security regardless of the size of the company, with each company having to earmark a certain percentage of their profits into the social security schemes for the workers,” according to the report.

The RCF noted that the Indian labor market was witnessing a sharp deterioration during the first wave of the pandemic, where unemployment reached a record high and labor force participation fell.

Reverse migration from urban to rural areas in the first wave period also resulted in a sharp increase in the demand for Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) in rural areas.

The report said the impact of the second wave and third wave was relatively subdued and employment conditions have improved.

According to the Periodic Labor Force Surveys (PLFS) quarterly reports for urban areas, casual workers were the worst affected during the first and second waves of the pandemic, although the extent of the impact was lower during the second wave.

Of the total freelancers working in January-March 2020, only 35.3 percent remained in the same category during the first shutdown period in April-June 2020; nearly 50 percent were pushed to unemployment and about 10 percent moved out of the workforce during this period, the RBI report said.

According to the PLFS, about 42 percent of the population make up the workforce. India has one of the lowest Labor Force Participation Rate (LFPR) among the major economies, partly due to very low female LFPR (22 percent), especially among poorer states.

The proliferation of high-level informal employment is a major challenge, with 71 per cent of the total employed workforce being ‘self-employed’. 77 pct. of the self-employed companies are small companies with less than six employees.

79% of the working population do not have a written employment contract in their usual main activity.

78 percent of the working population in India have not received any kind of job training (PLFS, 2019-20)

Published on

April 29, 2022

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