Despite India’s outstanding growth in the last two decades, low pay and wage inequality remain serious obstacles towards achieving inclusive growth. An effective minimum wage policy that targets the vulnerable bottom rung of wage earners can help in driving up aggregate demand and building and strengthening the middle class, and thus spur a phase of sustainable and inclusive growth. However, the present minimum wage system in India is extremely complex with 1,915 minimum wages defined for various scheduled job categories for unskilled workers across various states. Despite its complex structure and proliferation of scheduled employments over time, the Minimum Wages Act,1948 does not cover all wage workers. One in every three wage workers in India has fallen through the crack and is not protected by the minimum wage law. Given this situation, this chapter reviews the situation pertaining to minimum wages in India and suggests the way forward for rationalising and streamlining the policy for minimum wages.
11.1 Minimum wages for labour rendered has been a feature of society since ancient times. For instance, the famous Indian treatise from 2nd Century BCE, Arthashastra, ordained “the lowest wages for state employees was 60 panas per year for unskilled workers such as servants, guards, valets, palanquin bearers, and labourers.” Similarly, the minimum wages for agricultural labourers, watchmen, cowherds and other unskilled workers in the private sector was effectively set at 60 panas a year1 (Chapter-3, Book V:”The Conduct of Courtiers”). Similarly, the Code of Hammurabi, which is often cited as the oldest written laws on record, mentions minimum wages: “If a man hires a workman, then from the beginning of the year until the fifth month he shall give six grains of silver per diem. From the sixth month until the end of the year he shall give five grains of silver per diem.”
11.2 In recent years, minimum wage systems have been strengthened by many countries to lift workers out of poverty and to reduce levels of inequality. The renewed interest in minimum wage arises as recent literature and evidence suggests that minimum wages can promote social justice without any major negative implication for employment if wages are set at an adequate level.
11.3 In the last five years, during a period of global economic slowdown, sluggish global trade and export growth, India’s growth story has been powered by private consumption. Therefore, with 93 per cent workers in the informal economy, a well designed minimum wage system can reduce inequalities in incomes, bridge gender gaps in wages and alleviate poverty.
11.4 Wage levels and distribution of wages are, to a large extent, influenced not only by skills and productivity levels, but also by the role of labour market institutions, particularly minimum wages and collective bargaining. But for the minimum wage system to play a meaningful role in aligning protection with the promotion of sustainable growth, it must be properly designed, its goals clarified, and its enforcement made effective. However, the minimum wage system in India is extremely complex with a plethora of minimum wages. Given this situation, this chapter reviews the situation pertaining to minimum wages in India and suggests the way forward for rationalising and streamlining the policy for minimum wages.
MINIMUM WAGE SYSTEM IN INDIA
11.5 The Indian Minimum Wage System has been quite a debated and dynamic issue.
NATIONAL LEVEL MINIMUM WAGE
11.6 The idea of a national level minimum wage has been debated since the enactment of the Minimum Wages Act in India. The main argument against a national minimum wage has been the existence of wide disparities in economic development and large variations in cost of living between regions and states. Box 1 portrays the time-line involved in arriving at a National Floor Level Minimum Wage (NFLMW) in India.
COMPLEX MINIMUM WAGE SYSTEM IN INDIA
11.7 Over the last 70 years, the minimum wage system in India has expanded and has become complex. The first set of complexities arises from issues relating to its coverage. Today, there are nearly 429 scheduled employments and 1,915 scheduled job categories for unskilled workers. This massive expansion in job categories and wage rates has led to major variations not only across states but also within states.
11.8 A second set of complexities arises from the lack of uniform criteria for fixing the minimum wage rate. In some states or in specific scheduled employments, minimum wages are linked to the cost of living, through a variable dearness allowance (VDA) whereas other states do not include the VDA component. All this affects the level and variation of wage rates that can be observed across and within States.
11.9 The variation of scheduled employments and minimum wage rates within and across states is shown in Figure 1. The number of scheduled employments varies from 3 in Mizoram to 102 in Assam with the number of scheduled employments being in the high double digits in most states. Similarly, the notified lowest minimum wage rate (per day) varies from `115 in Nagaland to Rs.538 in Delhi. The range (difference between highest and lowest minimum wages) in each state varies from Rs. 16 in Nagaland to Rs.905 in Kerala.
11.10 The third set of complexities arises from the fact that Minimum Wages Act does not cover all wage workers. One in every three wage workers in India has fallen through the crack and is not protected by the minimum wage law (ILO, 2018). Some major vulnerable categories – such as domestic workers – are presently covered only in 18 States and Union Territories. Further, the revision of minimum wage rates has often been delayed (Anant and Sundaram, 1998).
11.11 India has taken a number of steps to improve overall coherence, for example, by declaring a national minimum wage floor
Note: Figures on the horizontal axis indicates the number of scheduled employments notified under the Minimum Wage Act by the Central Government and all the States/Union Territories.
Source: The data pertaining to the scheduled employments and minimum wage rates notified by the State/Central Government have been collated from the latest minimum wage notifications issued by the respective Governments. These notifications have been issued at different points of time ranging from December 2014 to April 2019. and strengthening the coordination of the Central Advisory Board with State Advisory Boards, and by promoting states to determine minimum wage rates through consultations within five broader regional committees. However, a simple system covering as many workers as possible, understood by all, and easily enforceable is the key to improve the effectiveness of minimum wage.
DIFFERENT MINIMUM WAGE ACROSS STATES: IS IT JUSTIFIED?
11.12 The main justification for persisting with different levels of minimum wages across states is that they reflect different levels of economic development. In Figure 2, the per capita Net State Domestic Product (NSDP) for 2016-17 is plotted against the most recently notified lowest minimum wage rates. Several states are significant outliers with some of the lowest minimum wages for unskilled workers notified by the more advanced and industrialised states and vice versa.
REFLECTION OF GENDER DISCRIMINATION THROUGH MINIMUM WAGE PROVISIONS
11.13 While the Minimum Wages Act does not discriminate between women and men, an analysis of minimum wages for different occupations shows persistence of systematic bias. For instance, women dominate in the category of domestic workers while men dominate in the category of security guards. While both these occupations fall within the category of unskilled workers, the minimum wage rate for domestic workers within a state is consistently lower than that for the minimum wage rates for security guards (Figure 3). Furthermore, the differences in their minimum wage rates are quite large with the minimum wage rates for security guards
in Assam being 44 per cent higher than that for domestic workers. Such large differences can only be attributed to gender bias as is obvious from the disparity across states.
COMPLIANCE WITH THE MINIMUM WAGE ACT
11.14 The proliferation of minimum wage rates and scheduled employments is a strong deterrent for compliance. Different statutory minimum wage rates for the same occupation between states combined with the wide range between the lowest and highest minimum wages can trigger migration of the industry to lower wage regions/state. As the impact of minimum wage levels on employment and poverty depends on the level of compliance and enforcement (Soundararajan, 2014), it is of paramount importance to rationalise the minimum wage policy.
11.15 Currently NFLMW is non-statutory. Yet, the NFLMW can provide a useful benchmark for assessing the spread of the range of minimum wages fixed for unskilled workers across states. Over the years, most of the notified minimum wage rates in different states have moved above the NFLMW rate, though there are still a few states and occupations/job categories for which the prevailing minimum wage rates are below the NFLMW as of 2018-19 (Figure 4).
11.16 A second measure of compliance could be to compare actual wages received by various categories of workers with the notified minimum wage. To get an aggregate picture, the NFLMW is used as the notified minimum wage. By this measure, the proportion of vulnerable workers receiving wages below the NFLMW can be an index of non-compliance. Using this measure, Kannan and Papola (2017) show that 39 per cent of the male casual workers and 56 per cent of women casual workers in rural areas, and 28 per cent of male casual workers and 59 per cent of women casual workers in urban areas received wages below the NFLMW in 2012. In 2004, the same figures were 78 per cent (male rural), 96 per cent (female rural) and 49 per cent (male urban) and 88 per cent (female urban). This indicates a trend towards increasing compliance and that there is a gender gap in compliance similar to the gender gap in level of minimum wages. Using the NSSO Employment-Unemployment Survey (EUS) data, a comparison was made between the wages of regular and casual workers with NFLMW. It was observed that compliance levels were significantly higher
for regular wage workers when compared to casual wage earners, as indicated in Figures 5 & 6.
IMPACT OF MINIMUM WAGES
11.17 What has been the impact of minimum wage on the labour market in India? To what extent has it been successful in fulfilling the goal of protecting the vulnerable workers, improving general wage levels, and reducing inequality and poverty? In this context, it must be remembered that a well-designed minimum wage system is only one of the several institutional mechanisms necessary for a meaningful impact on all these factors.
Impact on wage levels
11.18 Rani, Belser and Ranjbar (2013) demonstrate that minimum wage in India does not operate as a conventional floor wage to protect the lowest paid workers. Nevertheless, the study shows the presence of a “lighthouse effect”, i.e., the minimum wage acts as a benchmark that pulls up wages in the low-paid and informal sector by enhancing the bargaining power of vulnerable workers.
11.19 Menon and Rodgers (2017) use household survey data from 1982-83 and 2008 to show a marked increase in compliance between these two periods with a stronger impact on male wages compared to female wages and on regular wages compared to casual wages during this period. Using data for workers in the construction industry, Soundararajan (2018) shows the presence of the “lighthouse effect” of minimum wage. Specifically, minimum wage seems to have shaped wage bargaining, thereby leading to rise in actual wages.
11.20 Rani and Ranjbar (2015) show that the minimum wage does impact the distribution of actual wages, with the impact depending on wage quantile. They show that for 2009-10, the marginal effects of the effective minimum wage increases gradually as we move towards the 80th quantile, i.e., the marginal wage pushes up the wages disproportionately more on the lower side of the wage distribution. This is quite different from the marginal effects observed in 200405, when the marginal effects of an increase in the minimum wage were greater at the higher levels of the income distribution than at lower levels (Figure 7).
Impact on Wage Inequality
11.21 International experience suggests that greater compliance with minimum wages has led to reduction in wage inequality. India’s experience regarding the impact of minimum wages on wage inequality needs to be evaluated keeping in mind the segmentation in the labour market and variations across various categories of workers.
11.22 Between 1993 and 2011, the average real wages increased in India, with the fastest growth recorded for casual labour, women’s labour, and rural/agricultural labour (ILO 2018). Despite these increases, the existing wage inequality measured by the Gini coefficient remains very high by international standards (Figure 8) 3. Going deeper, it is seen
that this inequality has increased amongst regular workers while it has decreased among casual workers.
11.23 A similar trend is visible when we measure wage inequality through wage dispersion ratios (Tables 1 and 2). The ratio of the average wage rate of the top 10 per cent compared to the wage rate of the bottom 10 per cent of wage earners (P90/P10) declined among casual workers and increased among regular workers, except regular male rural workers. The ratio of the wage rate of the middle 10 per cent of wage earners (50th decile or P50) to the bottom 10 per cent declined consistently during 1993-2011 for
regular and casual workers, both for males and females in urban and rural areas. Thus, there is a ‘catching up’ process because of the faster increase of wages of casual workers, which substantiates the ‘lighthouse effect’ of minimum wages.
11.24 This mixed trend of wage inequality – increasing amongst regular workers and declining amongst the bottom and middle level of all workers – can perhaps be explained by the rise of average minimum wages, in consonance with the increase in Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) wages, which were benchmarked to minimum wages (Berg et al., 2018). It is, therefore, established that well-designed and effective implementation of minimum wages will strengthen the trend towards decreasing wage inequality especially at lower levels. This becomes all the more significant as women constitute the majority of the bottom rungs of the wage distribution. This also shows how compliance of the statute is imperative for increasing welfare.
Impact on Employment
11.25 Broecke (2017) finds in a meta-study on employment across Brazil, Chile, China, Colombia, India, Indonesia, Mexico, the Russian Federation, South Africa and Turkey that minimum wages have only a minimal (or no) impact on employment in emerging economies.
11.26 Rani, Belser and Ranjbar (2013), in a study of 70 districts of India, find that there was no impact of minimum wages on employment between 2005 and 2010.
BOX 2: MINIMUM WAGE SYSTEM IN BRICS
BRICS countries have varied systems in terms of coverage, degree of tripartite consultation, criteria for setting the minimum wage and adjustment procedure. However, in all these countries, minimum wages are explicitly embedded within a larger wage policy aimed at balancing needs of the workers with overall economic factors.
Table 3: Minimum Wage System in BRICS countries
|Coverage||National minimum wage, covering all workers. Regions can also define minimum wages above the national level.||Minimum wage rates are established by province.||Regional minimum wages that coexist with a national minimum wage. The regional minimum wages are fixed above the federal rate.||A national minimum wage was approved in 2018, covering all groups of wage earners.||Minimum wages are limited to Scheduled Employments, diff. skills & occupations.|
commission’ in 2005, composed of federal government, state government, employers and unions, formulates a long-term minimum wage policy – until 2019.
|Administrat-ive authorities, in charge of labour issues prepare a programme to fix and adjust minimum wages||Russian Tripartite Committee- the Employers’
association, trade unions and the Governm-ent of the Russian Federation decides.
|The tripartite Employment Conditions Commission (ECC) advises the Minister of Labour on the determi-nation
of the minimum wage.
|Minimum Wages are set through Notification or Consultation, based on the tripartite Advisory Board and Committees set for this purpose.|
|Criteria||Minimum wage is increased by the sum of inflation in the previous year plus the GDP growth of 2 years before (if >0)||Cost of living of workers and
price index; the average wages of workers; labour productivity; the urban economic situation; and the level of economic develop-ment.
|Regions choose different criteria for their minimum wages but the subsistence minimum is a need-based income level that is the benchmark that guarantees minimum consump-tion requirem-ents.||Cost of living and minimum living levels, poverty alleviation, wage differentials & inequality, OSH, conditions and level of employment, inflation, GDP, productivity, collective bargaining.||Adopted needbased norms from the 1957, 15th ILC Session and 1992 Supreme Court Judgment|
|Adjustment||Adjusted on an annual basis||At least every two years, and whenever appropriate when the indicators change.||No specific periodicity||Regular annual adjustment.||Adjusted at least every five years.|
Source: ILO, 2018
However, Menon and Rogers (2017) report a positive effect of minimum wages on employment levels for both men and women. They find that a 10 per cent rise in minimum wages raised the employment level by 6.34 percentage points in rural areas while it had a statistically insignificant impact on urban employment levels for both men and women.
11.27 It is evident from above that a well-designed minimum wage system can be a potent tool for protecting workers and alleviating poverty, if set at an appropriate level that ensures compliance. International experience has shown that relatively simple systems are more effective and usually complex systems are least effective. Cunningham (2007) and Ghose (1997) show that a complex system of minimum wages shows lack of coherence about wage levels and wages being set in an arbitrary fashion. United Kingdom, for example, abolished its system of industry-wide trade boards in the 1980s and replaced it with a simple national minimum wage. This trend is reflected in evolution of ILO standards as well, which earlier encouraged the adoption of a select system of minimum wages to groups of workers who are in a weak bargaining position in the labour market, but later promoted a comprehensive approach that covers as many workers as possible.
11.28 Multiple minimumwages usually exist to take care of the needs of a heterogeneous labour force. For example, this is the case in India and the Latin American Countries that have a high diversity of labourers. Some policy recommendations for an effective
design of minimum wages system are as follows:
Box 3 : Use of Technology for Minimum Wage Enforcement- Cross Country Experiences
11.29 To sum up, the world of work is in a churn as technology is heralding major transformations both in the workplace as well as in work and employment relations. The impact is being felt both in the developed and developing countries. For India, undergoing a delayed structural and demographic transition, the challenges posed by the technology driven changes are enormous. Expanding decent employment to young aspirants in the labour markets is a major concern. Establishing an effective minimum wage system that will lead to inclusive growth is therefore an urgent necessity.
1 One pana was a punch-marked silver/copper coin of the Maurya period.
2 Employments notified under the Minimum Wages Act by the Centre and States
3 The Gini coefficient is a commonly-used measure of income inequality that condenses the entire income distribution for a country into a single number between 0 and 1: the higher the number, the greater the degree of income inequality.
CHAPTER AT A GLANCE
> The present minimum wage system in India is complex with 1,915 minimum wages defined for various scheduled job categories across various states.
> One in every three wage workers in India is not protected by the minimum wage law.
> Minimum wages should be fixed for four categories namely, unskilled, semi-skilled, skilled and highly skilled based on the geographical region and should cover all workers, irrespective of any wage ceilings.
> A simple, coherent and enforceable Minimum Wage System should be designed with the aid of technology as minimum wages push wages up and reduce wage inequality without significantly affecting employment.
> An effective minimum wage policy is a potential tool not only for the protection of low-paid workers but is also an inclusive mechanism for more resilient and sustainable economic development.
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Source- Economic Survey 2018-19 Volume 1