Why did UP suspend labour laws?

The Uttar Pradesh government announced that it would be suspending a few labour laws for the next three years. They did this to help reduce the impact of the Covid-19 Pandemic on the labours. The suspension of these laws can help increase employment.

The labour laws are primarily used to protect labours and provide them with healthy and safe working conditions, equal and right pay and stop wrongful termination. However, there are more labour laws which ensure that the firms are working in good will. Sometimes laws may be very strict and lead to a rigidity in the labour market.

For example, if there are minimum wage laws which are higher than what the employers are willing to pay, it reduces the demand for labour and hence firms will hire less labours, resulting in structural unemployment; similarly, strict laws for firing labours can lead to firms being more harsher in hiring employees and end up hiring less employees.

A deregulation of the labour market can usually help in reducing the rigidity and hence further help reducing unemployment, which will help stimulating the economy and reducing the socio-economic burden on the labourers. Low unemployment is an important macroeconomic objective for any nation and by suspending these laws the UP government hopes to achieve it.

However, the problem at hand seems to be the fall in demand for goods and implementing a supply-side policy such as deregulation may not solve the problem and steps should also be taken to increase the aggregate demand in the economy, if there will be no demand for goods, then the deregulation will not help since firms would not be willing to supply more goods.

Nevertheless, since the government has already invested in the firms, which is an autonomous investment into the economy, furthermore the government simultaneously deregulating the economy can help increase induced investments in the economy, which can have a multiplying effect on the real GDP, thus the aggregate demand in the economy would rise.

The problem with suspending these laws is that now labours may be asked to work for more than 8 hours, the UP government has also suspended the minimum wage act, hence the working conditions may not be the best and may go directly against the laws set by the International Labour Organisation which India is a part of. Thus, the suspension of these laws may lead to employers exploiting the workers, which is not desirable.

In contrast other countries such as the United States has been providing those unemployed with massive unemployment benefits while many countries are providing employers with wage subsidies which seems to be better than unemployment benefits since such benefits may de-skill workers and even lead to losing work morale. In the case of India this seems hard after India saw a huge slash in corporate taxes last year, reducing the government revenue significantly. The government may not be able to provide the benefits like the other countries and hence may have to use deregulation. However, the other options such as that of wage subsidies seem more viable.

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