Long-Term Implications of the Burgeoning Informal Labour Hiring in Indian Manufacturing Sector: A System Dynamics Analysis

Abstract

The manufacturing sector in India, in the last few decades, has witnessed a burgeoning informal labour hiring. The rigidities of the labour laws, the growing global competitiveness, risk of future business downturn and the desire of taming the aggressive trade unions might have encouraged the Indian industries in adopting the path of labour informalisation. The perceived advantages of low wages and high retrenchment flexibility from informal labour hiring may be a myopic view. The deteriorating industrial relation climate in Indian industries and not exploiting full advantage of economies of scale may also be due to the increasing informal labour component in the total workforce. A system dynamics model has been developed in the paper to simulate scenarios with flexible formal:informal labour-mix ratios to analyze the long-term policy implications in the Indian manufacturing sector. Recommendations to prevent a potential disaster due to the abnormal growth in informal labour component in the manufacturing sector have also been made. The paper is likely to provide useful insights to the industry leaders and policy makers in the manufacturing sector and an optimal flexibility mix of formal–informal labour component for a healthy operation. An experiential validation of recommendations is included from an auto-component manufacturing unit.