Will the New Labour Codes Worsen India’s Inequality Crisis?
Divya Pradeep and Satyaki Dasgupta
15 hours ago
THE WIRE
The rationale provided by the government for raising the worker limit for layoffs, retrenchment and closures is to reduce compliance burden for firms, which in turn is expected to spur employment. However, studies suggest that flexibility in labour markets has not led to employment growth in India.
Workers prepare fruit cakes and other varieties of cakes at a bakery ahead of the Christmas festival in Prayagraj, Uttar Pradesh on December 21, 2025. Photo: PTI.
The Union government recently notified four new labour codes on November 21, merging the 29 existing labour laws, supposedly marking an era of progressive labour reforms. The codes relate to four major areas and have considerable implications for both workers and employers. These include Code on Wages, Code on Industrial Relations, Code on Social Security and Occupational Health and Working Conditions Code. The codes have been received with a considerable degree of optimism by employers in anticipation of increased ease of doing business in India. However, trade unions have clearly expressed their dissent and have once again called for countrywide direct action, including a general strike in February 2026, demanding the withdrawal of the labour codes.
Another troubling picture emerges before us – India’s position in the recently released World Inequality Report 2026 by World Inequality Lab. The report states that the top 1% of the population in India holds 40% of the wealth, making it one of the most unequal countries in the world. What is even more worrisome is that, over the decade between 2014-2024, the income gap between the top 10% and the bottom 50% has not reduced, indicating persistent income inequality.
According to calculations based on National Account Statistics too, there has been a sustained increase in the share of profit in Gross Value Added (GVA). GVA is calculated by adding compensation to employees, fixed capital consumption, and operating surplus, and subtracting taxes and subsidies. Business profits form a part of the operating surplus. This has been growing significantly across sectors like mining, electricity, transport and financial services. There has not been a corresponding rise in wages though. The compensation element in GVA has fallen between 2019-20 and 2023-24. The trend of falling share of wages is not a new phenomenon. Abraham and Sasikumar, in their 2017 paper find that this fall has been noticed in the manufacturing sector since the 1980s. The Economic Survey 2024-25 also reveals that corporate profits have hit a 15-year high while wage growth remains sluggish, raising concerns about weakening demand and rising inequality. Piketty (2014) also talks about the inherent tendency for returns on capital to exceed the growth rate of the economy under capitalism.
Understanding the macro linkages between labour codes and income inequality
To the extent that labour laws improve the returns to workers in the form of wages and salaries rather than the returns to capital in the form of rents and dividends, the emergent structure would be one of a more equitable distribution of national income. While it is possible that labour incomes may include very high earners, the returns to income in the top 0.1 or 0.01% of the earnings distribution are largely attributable to returns to capital, says Deakin in his 2021 paper.
Importantly, the bargaining power of the workers and the employers determine the distribution of the value added in a production process. The new labour codes significantly weaken the bargaining power of workers vis-a-vis the employers. For instance, under the new Industrial Relations Code, 2020, workers in any establishment cannot go on strike unless they give notice within 60 days before striking and within 14 days of giving such notice. Previously, a 14-day advance notice of strike was required for public utility services, but under the new labour codes all the establishments need to follow this protocol. The codes mention that mass casual leave will be treated as illegal strikes. This tilts the bargaining power in favour of employers by making striking legally difficult for the workers.
It must be noted that as per the most recent data available on the causes of major industrial disputes published by the Labour Bureau, the highest number of disputes (46.4%), were related to ‘Wages and allowances,’ for both the Union government and states combined. By increasing the difficulty to strike, wage hikes are less likely thereby having implications for income inequality.
The other thorny issue in the Industrial Relations Code relates to raising the retrenchment limit from 100 to 300 workers making it easier for firms to lay off workers at will. Kleinknecht, A. (2017) has argued that easy retrenchment of workers will erode worker loyalty and increase labour turnover, reduce incentives in firm specific training and knowledge sharing between workers and firms that provide the competitive edge for firms. Thus, even from an economic efficiency perspective, a dilution in the Industrial Relations Code 2020 is not advisable.
According to a working paper by Radhicka Kapoor, over 90% of the Indian enterprises hire less than 300 workers. With such a large percentage, the code increases labour precarity for a vast majority of workers. Thus, with greater ease to retrench workers and reduced ability to strike, workers will experience job insecurity and loss of social protection. Along with the ease of hiring and firing, the Code on Social Security (2020) also facilitates fixed term employment where workers employed on the basis of a written contract for a fixed period of time are provided benefits at par with permanent employees subject to certain conditions. However, this is likely to result in less permanent jobs and increase job insecurity.
The rationale provided by the government for raising the worker limit for layoffs, retrenchment and closures is to reduce compliance burden for firms, which in turn is expected to spur employment. However, there is a body of literature significantly contributed by Bhattacharjea (2020), Roychowdhury (2019), Roy, Dubey and Ramaiah (2020) which suggest that flexibility in labour markets has not led to employment growth in India. In fact, the latter paper finds that increasing labour flexibility is associated with weaker employment performances in Indian manufacturing. The rising unemployment in the country has frustrated the dreams of a demographic dividend and the labour codes only serve the purpose of distracting from deep rooted structural issues.
As Prabhat Patnaik puts it, neoliberalism has created massive income inequalities that tends towards overproduction and worsening of the employment problem. With wage share lagging in the national income, demand for output falls as wages are not just costs to firms but also represent the purchasing power of the working class. Firms respond to shortfalls in demand by cutting down on production and laying off workers. Without addressing the structural issues that are part of the neoliberal order, quick fixes in the form of change in closure and retrenchment rules, will serve little towards reducing unemployment. In fact, the weakening bargaining power of the workers may exacerbate inequality in an already very unequal country.
Undermining labour rights and worker protection will prove expensive particularly in the current geo-political context with trade wars being unleashed at an alarming pace. When export markets come under stress, internal domestic demand will play a crucial role in maintaining the incentives for continued production. This can happen only with improvements in bargaining power of workers and a rise in wage share of national income.
Divya Pradeep and Satyaki Dasgupta are faculty members at the Department of Economics at Christ University.
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