Why do laws designed to protect workers end up restricting them instead?

The legislators who drafted India’s labour laws were not indifferent to workers’ welfare. The overtime premium was meant to ensure workers were compensated fairly for extra effort. The night shift restrictions were meant to protect women from unsafe conditions. The facility mandates were meant to guarantee dignified working conditions. The intentions behind these laws are not difficult to understand or sympathise with. What is harder to see, at the moment of writing a law, is what the law will actually produce once it meets the complexity of a real economy.

Consider what a single rule governing overtime premiums must do. It must work for a capital-intensive automobile plant in Pune, a small garment workshop in Tiruppur, a seafood processing unit in Kerala whose demand surges seasonally, and a machine tools firm in Ludhiana competing with Chinese exporters on price. These firms have different cost structures, different margins, and different seasonal rhythms. Their workers have different preferences about how many hours they want to work and at what rate. No single premium can reflect all of this. India’s Factories Act sets it at twice the regular wage. That figure may be reasonable for some of these firms. For others, it prices overtime out of reach entirely.

The disparate impact of legislation is a well-known challenge. The information required to design a rule that produces good outcomes is dispersed across millions of individuals. No single authority can assemble it. A factory owner in Tiruppur knows her cost structure, her workers’ preferences, and the seasonal pressures of her export orders. No legislature can replicate that knowledge. Her workers know what combination of wages, hours, and conditions works for their households. Neither she nor any legislature fully knows what they know. When law substitutes a uniform mandate for this process of negotiation, it eliminates the mechanism that would otherwise draw on all this dispersed knowledge. It replaces a process that adapts to local circumstances with a rule that fits no one’s situation precisely and many situations badly.

This is not an argument that workers and employers always bargain on equal terms. Bargaining power is real, and workers in labour markets with few employers face genuine asymmetries. The question is whether uniform mandates address that asymmetry or create problems as serious as the ones they solve. When formal employment becomes expensive enough, firms do not simply absorb the cost. They hire informally, use contract workers, or decide not to expand at all. The protections the law intended to provide end up creating outcomes none of the framers intended. India’s informal manufacturing employment rate is over 75% and reflects that process playing out over decades.

What the current system produces, then, is not protection. It is a sorting mechanism. Workers in formal permanent employment enjoy real protections. Workers outside it — the majority — have none. The regulations that created this gap were designed to protect the second group. They have instead protected the first, at the second group’s expense.