Article: Informalization of workforce in Organized Manufacturing Sector

Employee Relations

Informalization of workforce in Organized Manufacturing Sector

Enterprises in organized manufacturing show more concerns about employee welfare and maintain the quality of employment
Informalization of workforce in Organized Manufacturing Sector

The mismatch between employment and output is a matter of serious concern from various human resource perspectives.


Since the Industrial Foundation in 1950s, Indian manufacturing sector has acquired a significant share in the Indian economy. Not only the capacity of employment generation, but also the contribution of manufacturing sector to national income and GDP (15% in 2004-05) is quite impressive. Also, more than 50% of foreign exchange earnings are attributed to Manufacturing sector. Therefore, it is imperative to ensure that manufacturing sector of the country should flourish. The manufacturing sector includes business entities engaged in transforming materials or components into new products. And these new products should pass the test of marketability.

The entire manufacturing sector can be subdivided into two parts – Factory Sector(organized manufacturing) and Non-Factory sector (unorganized manufacturing).

Factory sector (organized manufacturing) is comprised of units registered under sec. 2m(i) (Factories employing 10 or more workers using power) and 2m(ii) (factories employing 20 or more workers without using power) of the Factories Act 1948. The Non-Factory sector (unorganized manufacturing) refers to the remaining manufacturing units. It is interesting to note that despite of impressive growth in manufacturing output during the last ten years, the growth of employment in the organized manufacturing sector is found slow. This mismatch between employment and output is a matter of serious concern from various human resource perspectives. There can be various reasons of this disconnect. Important reasons for this disconnect can be attributed to:

· Emphasis on capital intensive technology to substitute laborers

· Stringent labor regulations and laws

· Rigid employment protection statutes

· Increase in contractual/temporary employment instead of regular employment

The past decade observed a sharp upturn in the share of contract workers and the share of regularly employed workers in the organized manufacturing sector fell almost in the same proportion. The percentage of contractual workers/laborers in total employment in the organized manufacturing sector rose from 15.7 % in 2000-01 to 26.47 % in 2010-11, whereas the share of regularly employed laborers is decreased from 61.12 % in 2000-01 to 51.53 % in 2010-11 (As per ASI Surveys held between 2000-01 to 2010-11).

This increase in contractual employment refers to informalization of workforce as formal contract of employment is absent in case of workers employed through contractors. And this contract of employment is the primary instrument which creates and sets the standards of employment along with ensuring compliance to various industrial and social security legislations.

As far as informalization is concerned, the cut-throat competition can be the probable reason for its increase. Considering that as contract workers do not come under the purview of labor laws, enterprises in organized manufacturing sector can save costs incurred on possible legal disputes (labor disputes) and other essential costs associated with regular employment. This reduced cost incurred on contract workers can improve competitiveness of an enterprise.1 And this cost proposition has led to informalization of industrial workers.

Most of the laborers in non-factory sector are already deprived of the benefits of regular employment viz. job security, good working conditions, quality of work-life, batter salaries, and benefits of social security (i.e. benefits as per the provisions of Provident Fund Act, Employee’s State Insurance Corporation Act, Workmen’s Compensation Act, Maternity Benefits Act etc.) etc. This is, further, very disappointing to notice the new trend of increasing informalization of workforce even in the formal (organized) manufacturing sector and depriving the workers of benefits mentioned above.

This is no hidden fact that that there are differences in wages between the contract workers and the directly or regularly employed workers. Contract workers get relatively lower wages. This is a matter of serious concern as percentage of contract workers among organized sector workers has amplified in the last decade. In 2010, about 35% of workers in organized manufacturing sector were employed through contractors.2 Further, India’s new National Manufacturing Policybrought out in 2011 and is focusing on increasing the share of Manufacturing in India’s GDP from present 15 percent to 25 percent in next ten years.3 Which means more jobs will be created to achieve this target in both organized as well unorganized manufacturing sector.

The important fact budding from the above discussion is that even though if a fast growth in manufacturing sector helps in generating huge number of jobs, a considerable section of those jobs will be informal or contractual jobs in which wages and salaries paid to the workers are relatively low. Enterprises in organized manufacturing sector offer higher wages, are more productive and provide job security, non-monetary benefits, improved working conditions and social security benefits in comparison to enterprises in the unorganized manufacturing sector. In other words it can be said that enterprises in organized manufacturing show more concerns about employee welfare and maintain the quality of employment. But the increasing informalization of workforce has deteriorated the standard of jobs being created, revealed in the substantial increase in the share of contract workers in the past years.

Organized manufacturing sector has the essential characteristics to create productive employment and to ensure higher standards of the same. But the disgraceful circumstances under which the contract laborers work, even upsurge of jobs will surely not meet the challenge of productive employment generation. Especially, as the contract laborers can be easily laid off, the sustainability of employment growth through the growth of contract workers is doubtful.

Therefore, in a labor intensive country like India, the growth of organized manufacturing sector needs to be nurtured and regulated carefully; else the benefits of productive employment generated through business excellence may not reach to the society as a whole.

1 (Goldar&Aggarwal, 2012)


20Manufacturing.pdf accessed on 11-05-2015) 

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Topics: Employee Relations, Temporary and Contract Staffing

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