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In the second part of our series on India’s new labour reforms, Afridi and Thakur focus on the Code on Social Security, 2020 – in terms of its rationale, the key legislative changes that it entails, state-level implementation, and what the existing theoretical and empirical literature says about potential impacts. They contend that it is likely to cause divergence: modest gains in large formal firms, growth-suppressing distortions in small enterprises – along with a majority of informal workers with limited social security benefits. 

Social security – the provision of a safety net against retirement, health expenses, and income shocks – is a foundational principle of formal employment. In India, this net remains out of reach for most workers. With 88% informally employed in 2024, down only marginally from 91% in 2010 (Figure 1), the vast majority of the workforce lacks pension, health insurance, or any income protection. India’s principal social security schemes (that is, Employees’ Provident Fund (EPF) and Employees’ State Insurance (ESI)) cover formal establishments only above a size threshold, structurally excluding informal, casual, and platform workers.

The Code on Social Security, 2020 is an attempt to address the poor coverage of social security benefits by widening its reach beyond formal establishments, making accumulated benefits portable so workers do not lose protection when they change jobs and bringing gig and platform workers under statutory coverage for the first time.

Figure 1. Informal employment rate: India versus other developing economies

Source: ILO Statistics – Informal employment rate, Total (all sexes); Selected lower-middle income economies.

Notes: (i) Hollow circle = earlier year; Filled circle = latest year. (ii) Short red line (India) = insignificant progress over 14 years despite strong GDP (gross domestic product) growth.

Key changes in the Code on Social Security, 2020

The Code on Social Security, 2020 introduces several structural changes that collectively reshape India’s social security landscape.

First, it consolidates nine separate labour statutes into a single legislation, replacing multiple overlapping inspectorates with a single Inspector-cum-Facilitator and unifying compliance filings – directly lowering the administrative cost of formal employment.

Second, the 50% wage rule closes the most exploited salary-structuring loophole, whereby employers inflated allowances to suppress basic wages and shrink EPF, gratuity, and maternity liabilities; any excluded allowances exceeding half of total remuneration are now reclassified as wages.

Third, a new category of fixed-term employees receive full parity with permanent workers from day one, with gratuity accruing on a pro-rata basis after one year rather than the earlier five-year threshold that effectively excluded the entire contract workforce.

Fourth, gig and platform workers are formally recognised for the first time, with digital aggregators required to contribute between 1% and 2% of annual turnover to a dedicated Social Security Fund.

Fifth, central and state governments are empowered to frame welfare schemes for unorganised workers, while Aadhaar-seeded, Universal Account number (UAN) based portability ensures accumulated benefits are no longer lost when workers change employers or cross state lines.

Sixth, the Code reverses the earlier perverse arrangement whereby employer default could deny workers their benefits – ESIC (Employees’ State Insurance Corporation) may now pay benefits directly and recover the capitalised value from defaulting employers.

Seventh, penalties for non-compliance are substantially stiffer. Finally, wage ceilings and contribution rates can be revised by government notification without fresh legislation, making the framework more responsive to economic change.

State-level implementation

The distribution of states by preparedness for implementation of the new code (Figure2) reveals considerable variation. Early adopters had published draft rules by 2021; a second wave followed in 2022 and after; West Bengal and Tamil Nadu are yet to publish draft rules within the reference period. This uneven adoption reflects India’s federal dynamic – where state capacity, political priorities, and administrative bandwidth determine how quickly central labour legislation translates into operative rules.

Figure 2. State-wise timing of adoption of rules under the Social Security Code

Source: Authors’ compilation based on state government gazette notifications on the Code on Social Security issued by state labour departments (2020-2025).

Notes: The map shows the year in which states and union territories issued draft or final rules under the Code on Social Security, 2020. Where both draft and final rules were notified, the year of the first notification is reported.

‍Literature review

A review of the existing literature yields divergent predictions on how social security may affect employment and productivity, as the tables below illustrate – the outcome depends critically on firm behaviour, market structure, and institutional design.

‍Potential impact on employment 

Table 1. Theoretical impact of social security on employment‍

‍Source: Authors’ compilation.

Evidence from India’s labour market suggests that raising the cost of formal employment consistently drives informalisation. Besley and Burgess (2004) showed that pro-worker amendments to the Industrial Disputes Act reduced formal manufacturing employment while expanding the informal sector. Ahsan and Pages (2009) found that firms typically respond to higher formal labour costs by shifting towards contract and casual arrangements rather than cutting headcount outright.

The most direct evidence on a specific social security component comes from the Maternity Benefit Amendment Act of 2017, which extended paid maternity leave from 12 to 26 weeks for firms with ten or more employees. Banerjee, Biswas and Mazumder (2025) find a decline in employment probability and earnings for targeted women. Bose and Chatterjee (2024) show that women in covered firms were 4.3 percentage points less likely to hold regular salaried jobs and 5.3 percentage points more likely to be in casual or unpaid work. Since the cost falls entirely on employers rather than a shared insurance fund, firms have a strong incentive to reclassify women into ineligible arrangements – meaning the reform measurably harmed those it intended to protect.

Table 2. Theoretical impact of social security on productivity‍

‍Source: Authors’ compilation.

India’s experience shows how social security mandates interact with policy distortions to shape productivity through capital deepening. Hasan, Mitra and Sundaram (2013) find that Indian firms employ more capital-intensive production techniques than countries at comparable development stages, attributing this to stringent labour regulation that raises the effective cost of formal employment and induces capital substitution even where factor endowments would counsel otherwise. While this raises measured labour productivity, the gains reflect allocative inefficiency rather than genuine technological progress.

Trade liberalisation can reinforce these dynamics through a complementary channel. Hasan, Mitra and Ramaswamy (2007) show that in states with more restrictive labour laws, firms adjusted to competitive pressure through capital substitution rather than employment flexibility, while Sen and Das (2015) add that trade reforms simultaneously reduced the relative price of capital goods. Regulation raising labour costs and trade reform lowering capital costs thus operated in the same direction, with their combined effect exceeding what either would produce independently.

The structural consequence is a diminished employment margin. Adhvaryu, Chari and Sharma (2013) demonstrate that industrial employment in stricter regulation states is less sensitive to demand shocks, as firms having reorganised production around capital-intensive models no longer expand or contract workforces in response to demand fluctuations – a rigidity with significant implications for inclusive growth

Summary of expected impacts in India

The Code’s effects on employment and productivity depend less on its provisions than on how mandates interact with firm size, labour market structure, and worker perceptions of contributions. On employment, the tiered threshold architecture – EPF at 20 and ESI at 10 workers – may create sharp compliance cliffs that incentivise firms to remain sub-threshold by limiting hiring, fragmenting operations, or substituting contract labour. Where a large informal sector sits outside the regulatory perimeter, tightening formal compliance may lead to informalisation rather than net employment reduction.

On productivity, larger formal firms benefit from reduced worker turnover and skill accumulation, but compliance costs may induce capital substitution that inflates productivity metrics without genuine gains. For small enterprises, threshold incentives may suppress firm growth and foreclose the scale economies that drive long-run productivity.

The overarching prediction on potential impact is divergence: modest gains in large formal firms, growth-suppressing distortions in small enterprises – along with a large share of the workforce engaged in informal work with limited social security benefits.

The views expressed in this post are solely those of the authors, and do not necessarily reflect those of the I4I Editorial Board.

With fewer than half of young adults employed, the labour market is increasingly polarised between extreme overwork and underemployment.

Today’s young adults (20-29 years) will remain in employment for at least the next three decades. The key question is how many of them are contributing directly to economic activity, as measured by two markers: the share of young adults in paid employment and the average daily hours those who are employed spend at work and on the commute.

Our estimates from the Time Use Survey 2024 reveal a complex reality for the country’s young adults. While the nation looks to its young population to drive growth, more than half of young adults are currently not in paid work. For those who are employed, it is a paradoxical mix of underemployment, overwork, and lengthy commutes.

Low employment participation: Less than half of India’s young adults are employed (46.7 per cent), indicating that a significant portion of potential talent remains untapped nationwide. Urban areas show a slightly higher participation rate compared to rural regions,

Urban workday is an hour longer than rural: The average workday for young adults lasts 6 hours and 55 minutes, excluding breaks. Urban jobs are considerably more time-intensive than rural.

Overwork vs underemployment: Here, ‘formal enterprises’ include employment in corporations, government and non-profit institutions, while ‘informal enterprises’ include household or unincorporated enterprises.

The largest share of young adults works 7-8 hours per day (excluding breaks): 30 per cent of those in formal enterprises and 22 per cent in informal enterprises. Roughly one-quarter of young workers are overworking, spending more than 8 hours per day at work, excluding breaks.

We find that underemployment is more prevalent in informal enterprises. 15.5 per cent of informal workers spend less than 4 hours per day at work, as against only 3.6 per cent in formal employment. Among those working 4-6 hours, 33.4 per cent of informal workers work under 6 hours per day, compared with 18.8 per cent in formal enterprises. In addition, the distribution of informal employment is more dispersed, with higher shares at very low hours (9 hours). This bi-modality mirrors greater heterogeneity in work quality, volatile demand, and/or limited worker control over hours, which are core features of job precarity.

The commute tax

The daily commute adds a substantial “time tax”. On average, young workers spend 50 minutes a day travelling for work. Urban workers bear a heavier burden, spending 56 minutes commuting compared to 44 minutes for rural workers. Long commute tends to act as a significant barrier to productivity and well-being.

Once we include time spent commuting for work, the combined work hours increase substantially. This is particularly true among formal workers who see a sharp rise in time spent at work with the percentage exceeding 8 hours nearly tripling. A greater share of the young workforce (36.6 per cent in formal enterprises and 26.9 per cent in informal enterprises) spends more than 9 hours in total. Commuting alone accounts for a significant share of time spent on work-related activities, pointing to issues with mobility, transport, and affordable housing distinct from workplace overwork.

Men clock more paid hours of work than women, on average, in both formal and informal enterprises. However, upon including unpaid household and care work, this pattern completely reverses, with women working over 9 hours 31 minutes compared to men’s 7 hours 57 minutes. The jump in women’s work hours by nearly 4 hours per day, compared to the 30-minute increase among men, is drastic. The finding is a reminder that women bear the overwhelming burden of household and care work — invisible in labour statistics and concealed by the absence of pay.

And all of this is before AI. The entry-level formal enterprise jobs many young workers depend on are precisely those most exposed to automation. The AI world may widen the participation gap, intensify the overwork already visible in formal employment, and leave women’s unpaid burden untouched.

Finally, across States, the intensity of young adults’ workdays varies sharply, revealing a clear economic geography. In India’s prosperous States — Maharashtra, Gujarat, Delhi, Tamil Nadu, Haryana, and Karnataka — urban young workers spend close to or above 9 hours daily on work and commute combined.

By contrast, in eastern and central States such as Odisha, West Bengal, Madhya Pradesh, and Bihar, the total workday falls well below the all-India urban average — almost certainly a marker of underemployment. Among large States, only in Andhra Pradesh, Haryana, and Tamil Nadu do rural work hours, including commute, reach 8 hours.

The commute tax hits hardest in metro-anchored States: urban workers add 1 hour 17 minutes in Maharashtra, 1 hour 12 minutes in Tamil Nadu, 1 hour 8 minutes in Delhi, and 59 minutes in Karnataka. The geography of the long workday is, in part, the geography of unaffordable housing near jobs and weak public transport — a structural drag distinct from workplace overwork.

In sum, with fewer than half of young adults employed, the labour market is increasingly polarised between extreme overwork and underemployment. As AI threatens to displace earlier high-quality roles, young adults must commit to a more rigorous and continuous education to master specialised skills. Employment will increasingly depend on developing unique expertise that either complements technology or handles the tasks AI simply cannot touch.

Mahambare and Gowthaman are with Great Lakes Institute of Management; Munjal and Baruah are with National Council of Applied Economic Research. View are personal.

With wage progression favouring younger workers, the sector will struggle to retain skilled, middle-level workers.

Worker protests across India’s industrial belts have again become a recurring feature of the economic landscape. The demands are rarely un-expected — a living wage, basic job security and some assurance that spending years on the factory floor will amount to something.

The protests appear to be triggered more by structural issues than by inflationary spike in energy prices or localised disputes over contract terms. In the manufacturing sector, the longer the workers stay, the less they are rewarded. The inversion of labour productivity/wage for low-and medium-skilled workers in their middle years is being hidden un-der the carpet in our zeal to employ the emerging youth population.

This is one of the more underappreciated vulnerabilities in India’s industrial economy, and is becoming harder to ignore. Per PLFS 2025 data, the average salaried manufacturing worker earns ₹18,735 per month, and a monthly income of ₹22,500 places a worker in the top 20 per cent of this group (PLFS, 2025). The bar for relative prosperity is seemingly very low. This is compounded by lack of written contracts (16.5 per cent workers), social security (20.4 per cent) or paid leave (21.1 per cent), and self-employed workers in manufacturing (44 per cent) who have none of these and earn less than the average manufacturing worker.

The wage statistics are worrisome when we cut across demographics. The 2025 PLFS report shows workers in the 15-18 age cohort in manufacturing earn above (₹9,900 per month) their cohort’s all-industry average(₹8,800), and enter the market with a competitive edge.

This advantage declines with age as manufacturing workers in their 40searn almost 20 per cent less (₹21,150) than their all-industry average(₹26,000). Ignoring the negligible real wage gain, a manufacturing worker with 20 plus years of experience earns a little more than twice of what a teenager earns.

Standard human capital theory is also ignored, as the sector seemingly treats older workers not as repositories of accumulated skill but as costs to be managed downwards.

Seniority not rewarded

The blame may not lie on any lack of demand for high-skilled manufacturing workers but rather on contract worker arrangements. By design, contract workers are not necessarily rewarded for seniority, they have no increment by tenure or pathway to permanence, allowing contractors to suppress wage growth over time.

The Annual Survey of Industries (ASI) 2023-24 report shows the share of workers employed through contractors steadily increasing from 38 percent to 42 per cent over the last five years. Older workers are also more likely to be displaced by younger cohorts who are cheaper to employ, without adversely troubling the needle of output or productivity for the employer.

In the new post-pandemic era of global fragility and national uncertainty, where input cost shocks are likely to occur with greater frequency, a manufacturing worker cannot accumulate purchasing power over the most productive years of their life, giving rise to a workforce epermanently close to the edge. A single health shock is likely to com-press household budgets even further.

The all-India PLFS numbers also inherently show inter-State labour mi-gration is no magical escape route, but simply an age-old means of leaving villages and towns bereft of opportunities.

These findings should similarly warn young workers entering manufacturing at competitive wages only to gradually discover the sector offers little upward trajectory. Without adequate skilling, either self-motivated or institutionalised, they will soon be earning less in relative terms, than when they started. The demographic dividend may be achieved butat a higher cost for the next generations to come.

The new Labour Codes, especially the Industrial Relations and the Code on Wages, can enforce hard lines in contractual arrangements to avoid more casualisation of the workforce.

The national floor wage requires periodical revision to arrest wage sup-pression at lower ends of the distribution. Industrial policies can also incorporate wage progression benchmarks as explicit conditionalities, ensuring it reaches sector-specific workers who need it the most. State-level framing of the Codes will also become more critical to the success of such worker protection measures in due course.

Manufacturing is not a peripheral concern in India’s growth story. With agriculture shedding surplus labour and services unable to absorb workers into ‘good jobs’, it remains a singularly important pathway to employment for India’s low- and medium-skilled workforce.

A manufacturing sector that rewards youth and punishes experience will struggle to retain skilled workers in the decades to come, and erupt in more social friction spilling across both organised and unorganised sectors. Manufacturing-led growth requires a strong domestic consumption base, and one that needs to feel the implicit bargain of industrial employment is being honoured.

The writer is Associate Fellow at the National Council for Applied Economic Research, New Delhi. View are personal.

In the first part of our series on India’s new labour reforms, Afridi and Chandna focus on the Code on Wages, 2019 – in terms of its rationale, the key legislative changes that it entails, state-level implementation, and what the existing theoretical and empirical literature says about its potential impacts. They contend that since the final rules are yet to be notified in most states, realised impacts will hinge on the manner in which key provisions pertaining to minimum wage setting, skill and occupational mapping, and enforcement systems, are operationalised. 

Only about 23.6% of workers in India are in regular wage or salaried employment, while the majority remain in self-employment or casual work (Periodic Labour Force Survey (PLFS), 2025). As a result, much of the workforce operates outside effective wage regulation. Real earnings have shown limited improvement as casual wages have stagnated, regular wages remain flat, and self-employment earnings have declined (PLFS, various years). This weak earnings growth reflects broader productivity challenges as about 43% of the workforce remains concentrated in agriculture but the sector contributes only about 15.3% to the GVA (gross value added) (PLFS, 2025). Economic growth has therefore not translated into broad-based improvements in wage regulation and worker incomes.

It is against this backdrop that the Code on Wages, 2019 emerges as a key institutional reform aimed at strengthening wage regulation, improving employment quality, and supporting labour productivity. The Code on Wages, 2019 consolidates four existing labour laws: the Payment of Wages Act, 1936; the Minimum Wages Act, 1948; the Payment of Bonus Act, 1965; and the Equal Remuneration Act, 1976, into a single unified code (Government of India, 2019).

Key legislative changes under the Code on Wages

First, it harmonises definitions across wage-related provisions, introducing a uniform definition of “wages” with a 50% cap on exclusions of total remuneration, thereby preventing the artificial suppression of the base (pre-tax) wages. The cap on in-kind remuneration at 15% further standardises the composition of wages.

Second, it universalises minimum wage coverage by establishing a statutory right to minimum wages for all employees across organised and unorganised sectors, removing the earlier restriction to scheduled employments, covering roughly 30% of the workforce.

Third, while the core components of minimum wages (basic wages, variable dearness allowance, and the cash value of concessional supplies) remain unchanged, the Code strengthens the wage-setting framework by introducing consumption-based criteria based on a standard working-class family, including norms for food, clothing, housing, and other essential expenditures. It also introduces a statutory national floor wage to limit excessive variation across states and sectors.

Beyond these, the Code standardises wage fixation across time- and piece-rate work through uniform conversion factors, ensuring consistency across states, sectors, and forms of employment. It also rationalises wage-related working conditions, including uniform overtime provisions (at twice the normal wage rate), a weekly rest day, and limits on consecutive working days.

It further standardises wage payment systems, including formal recognition of digital wage payments, mandatory issuance of wage slips, clearly defined wage periods and timelines, and a uniform ceiling of 50% on deductions, thereby promoting formalisation.

The Code modernises bonus provisions while retaining the core framework of minimum and maximum limits, introducing flexibility through a government-notified eligibility threshold and encouraging payment through bank transfers.

In addition, it strengthens the principle of equal remuneration by making it gender-neutral and broadening the definition of “same or similar work” to include experience alongside skill, effort, and responsibility.

Finally, the Code seeks to improve enforcement and compliance through institutional reforms, including a unified adjudication mechanism, technology-enabled inspections, an Inspector-cum-Facilitator system, stricter penalties and simplified procedures for recovery of dues.

State-level implementation 

The effectiveness of the provisions of the Code ultimately depends on their implementation at the state level. Figure 1 shows that a large number of states/union territories (UT) issued draft or final rules relatively early, particularly during 2020-2021 following the enactment of the Code in 2019 and the release of draft central rules in 2020. A smaller group of states adopted the framework later, including Andhra Pradesh, Arunachal Pradesh, Sikkim, Tamil Nadu, and Ladakh in 2022, while Meghalaya and Nagaland notified rules in 2024 and 2025 respectively. A few states such as West Bengal and Lakshadweep are yet to issue the rules.

‍Figure 1. State-wise adoption of rules under the Code

Source: Authors’ compilation based on state government gazette notifications issued by state labour departments.

Notes: Where both draft and final rules were notified, the year of the first notification is reported. As of April 2026, final rules have been notified by Arunachal Pradesh and Gujarat.

‍Literature review 

The Code on Wages may raise real market wage through the introduction of a national minimum. Wider coverage of the minimum wage across industries may limit wage undercutting by employers, thereby reducing wage dispersion.

Potential impact on employment

Theoretically, the impact of the Code on employment varies, depending on the structure of the labour market.

Table 1. Theoretical impact of the Code on employment

‍Source: Authors’ compilations.

Empirically, the impact of the Code on employment in India is likely to be positive or neutral. Many segments of the Indian labour market are characterised by employer monopsony, that is, with wage-setting power, where workers are often paid below their productivity. In such settings, a minimum wage floor can correct this imbalance by setting a uniform wage that has to be paid to all workers. Firms can hire additional workers at this fixed wage without having to increase wages for their existing workforce (Soundararajan 2019). This may reduce the cost of hiring and may even increase employment.

Beyond the structure of the labour market, the impact on employment may depend on other key factors:

Level of national floor: The magnitude of employment effect may depend on the size of the wage increase, which in turn is determined by the level of the national floor. Figure 2 shows that if the national floor is set at the level recommended by the Expert Committee on Determining the Methodology for Fixation of the National Minimum Wage (Government of India, 2019), it would be binding in several states where existing minimum wages are below this threshold, while having limited impact in states where wages are already higher. Figure 3 shows that India’s minimum wage relative to average wages remains low compared to other developing countries, suggesting that the scope for wage increases is relatively high.

‍Figure 2. State minimum wages for unskilled workers compared with the recommended national floor wage (Rs. 375 per day)

Source: Authors’ compilation based on Minimum wage data from World Bank report (2025) and recommended floor wage taken from expert committee report (Government of India, 2019).

Figure 3. Minimum wage relative to average wages across developing countries in 2022 (%)

Source: Authors’ computations using data from the International Labour Organization (ILOSTAT) on statutory minimum wages and average earnings (2021 PPP US$).

Worker heterogeneity: Employment effects may differ by worker productivity. Lower-productivity workers may face adverse outcomes, while aggregate employment effects may remain neutral or even positive. Evidence suggests that any negative impacts are more likely to be concentrated among lower-productivity women (Sharma and Viswanathan 2025).

Degree of enforcement: The impact also depends on the extent of enforcement. Menon and Rodgers (2017) find that the effects are more pronounced for rural workers, where programmes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) strengthen workers’ outside options, thereby improving enforcement. In contrast, weak compliance in the informal sector may mute the overall impact.

Potential impact on labour productivity

The impact of Code on wages on productivity may differ according to underlying theory.

Table 2. Theoretical impact of the Code on productivity

‍Source: Authors’ compilations.

Empirically, the Code may lead to improvements in labour productivity by linking wage determination to skill levels, creating incentives for skill upgrading, as well as better monitoring of worker productivity. The other key factors that will determine the impact of the Code on productivity are:

Size of the wage increase: Moderate increases in wages can induce firms to adopt tighter management practices. Larger increases may create stronger cost pressures, leading firms to adopt capital substitution.

Firm heterogeneity: Wage increase can raise aggregate productivity by driving the exit of low-productivity firms and enabling more productive firms to expand. The impact at the firm level may remain heterogeneous.

Summary of potential impacts

The Code on Wages, 2019 represents a structural reform aimed at strengthening wage regulation, with potential implications for labour market outcomes. Based on economic theory and existing empirical evidence, market wages are likely to rise following the introduction of a national floor wage. Wage dispersion is also expected to narrow, particularly at the lower end, following a broader coverage of minimum wages across industries. The impact on employment is likely to be neutral to positive, especially in labour market segments characterised by monopsony power, where a wage floor can reduce employer market power and support employment by allowing firms to hire additional workers without raising wages for existing workers. Labour productivity is also likely to improve, as linking wages to productivity strengthens worker incentives.

However, these outcomes depend critically on the level at which the national floor wage is set, heterogeneity across workers and firms, and the extent of enforcement, particularly in the informal sector. Since the final rules under the Code on Wages, 2019 are yet to be notified in most states, realised impacts will hinge on the manner in which States operationalise key provisions, particularly:

Minimum wage setting: Translation of consumption-based norms into wage levels, including whether they are aligned with poverty lines and adjusted for regional cost-of-living differences.

Skill and occupational mapping: Classification of workers across skill categories within the framework set by the central government.

Enforcement systems: Design of inspection regimes, adoption of digital wage payments, and effectiveness of grievance redressal mechanisms.

These implementation choices will ultimately shape the Code’s labour market impact.

The views expressed in this post are solely those of the authors, and do not necessarily reflect those of the I4I Editorial Board.