Some general truths about the minimum wage policy of India must be spelt out to set the context. The context relates to the recent direction of the Hon’ble Supreme Court to employers to negotiate (minimum) wages during lockdown period or the general clamour for lowering of minimum wages to gain competitiveness, attract investment, reviving business and thereby repairing and rebooting the economy.
Minimum wages are the bare minimum and not maximum wages or not even the prevailing average wage.
The objective of minimum wage policy in India is to set a baseline wage to effectively protect the most vulnerable in the labour market.
Hence, minimum wages are fixed by the States in such a way as to provide a monetary value equivalent to the minimum consumption needs of workers and their families. And this monetary value doesn’t take into account age and years of experience of the workers and hence for all purposes minimum wages are both entry level as well as exit level wages.
In the absence of statutory social security for the informal economy workers, minimum wages are the only means of survival for wage earners and their families. For casual daily workers, with little job security, a minimum daily wage may represent subsistence for a day and no certainty for the days to come.
Therefore, any wage below the minimum wages will lead to starvation wages for millions of wage earners and should be viewed in that manner alone. As the purpose of minimum wage in general is to protect informal workers against unduly low pays, the ILO definition as contained in the Minimum Wage Fixing Convention, 1970 (No. 131) also prohibits reduction in minimum wages by collective agreement or by individual contract.
Notwithstanding the above statutory provisions and international norms, in practice minimum wages in India have been made as starvation wages in normal circumstances due to lack of workers’ awareness, lack of compliance and enforcement. Instead of eight hours per day and twenty-six days in a month, in most labour-intensive industries and in large segments of the informal economy, workers are subjected to twelve hours of work per day and thirty days in a month normally to earn their minimum wages.
The concept of overtime compensation hardly exists in the lexicon of employers. This inter alia means that workers have to put labour efforts equivalent to forty five days in a month to earn their monthly minimum wages. Further, most of the workers are not paid even their starvation wages at the end of their wage period but at delayed intervals.
These workers have way to resist this oppressive practice for fear of losing jobs as replacements are always available readily in a labour surplus country such as ours. A common criticism of minimum wage adjustments is that they interfere with market forces in wage setting and raise labour costs, resulting in layoffs of workers – especially in small and medium sized enterprises (SMEs).
This may be a valid consideration only if minimum wages were increased abruptly without appropriate measures for adjustment in labour-intensive sectors. However, fears that minimum wages per se lead to employment losses appears to lack of empirical verification. Instead, a growing number of studies nationally and internationally indicate that the relationship between the minimum wage and employment is not necessarily negative.
Further as far as redistributive effect of minimum wage is concerned, the ILO-India Wage Report 2018 states that it is unconceivable to think that India’s economic growth in the last decades has not reached the most vulnerable, with low pay remaining pervasive and wage inequality still very high.
The same report states that although average labour productivity has increased, the labour share in GDP has declined further and the share of profit, rent and other income from capital has correspondingly increased at a faster pace. Therefore, any debate relating to negotiating minimum wages or its downward revision to revive the business, competitiveness and attract investment is akin to compromising on the rate of reduction in poverty and inequality.
Further, this argument is based on a wrong economic assumption. The argument considers labour as the only factor of production and wages, which are an outcome of employment, as the only input cost as if this cost alone is responsible for increasing overall cost of production and affecting competitiveness.
Each time a crisis beckons in a country like India, demand for lowering wages and concessions on other labour standards grows louder as if this is the only potent tool available to address the negative fallout of an economic crisis.
The cost of other factors of production such as land and capital, which the labour put to work as a lubricant are equally important along with energy and logistic costs, tariff rates, exchange rates, prices of intermediate goods, economies of scale, level and quantity of skilled labour from the point of competitiveness and revival of the business cycle. The Government as a part of the stimulus package has already lowered the cost of capital to MSMEs, made access to capital easy through sovereign guarantees, lowered corporate tax rates and EPF rates, deferred loan repayments and provided other benefits to industry.
This stimulus package to industry may not fully neutralise the decline in output due to the pandemic but is large enough to revive and restart production. This package also supplements reduction in the overall cost of production, enhances competitiveness and protects shareholders’ interests. Therefore, industry and businesses instead of vying for wage settlement with workers with unequal bargaining power or demanding for lowering wages, must pay the non-negotiable minimum wages to workers.
Further, this strategy of race towards the bottom by induced lowering of purchasing power will lead to sub-optimal consumption, lower general welfare of the vast majority and strengthen the crisis further. As evidence shows minimum wages are largely starvation wages in most parts of India, any wage settlement negotiation or further reduction will increase vulnerability among the low paid workers who are already feeling alienated and marginalised in an unfriendly labour market.
As the industry not only needs low production cost but also a market with strong purchasing power, businesses must treat minimum wages as a right of workers and also as a business imperative.
Similarly, the Government has the mandate and opportunity to use minimum wage as the most important tool to revive consumption, stimulate aggregate demand and take the economy out of the crisis.
The Economic Survey; 2018-19 establishes the presence of “lighthouse effect” of minimum wage in pulling up actual wages of the low-paid informal economy workers by enhancing their bargaining powers. However, for this to happen in the true sense, Government must set all statutory wages at an adequate level and must ensure their universal application through effective enforcement.
The expert committee on Determining the Methodology for Fixing the National Minimum Wage using an updated and transparent methodology had proposed to set the statutory national wage floor at Rs. 375 per day at 2018 prices for unskilled workers across sectors and geography in the context of the Code on Wages 2019.
The Committee alternatively had also proposed five national regional floors ranging from lowest of Rs 341/day to highest of Rs 447/day for different regions. Going by the methodology, it will be easier to catch up with the Rs 18,000 per month wage demand for unskilled workers by labour unions progressively across sectors and regions. After setting the national floor wage statutorily, the Government may shift from the MGNREGA wages and make the floor wage applicable to MGNREGA workers.
This is all the more important as the setting of MGNREGA wages since 2010 (when it delinked wage fixation under the scheme from the Minimum Wages Act, 1948) are not clear and somehow the wage rate in this employment guarantee scheme has been kept low to check large outgo and extra burden on the exchequer.
Right to work with a minimum wage may be more appropriate for keeping in mind the dignity of labour as outlined in Directive Principles of State Policy of our Constitution.
As a result of low income transfer under the scheme, despite of its operation for last more than one and half-decade various studies shows that MGNREGA has not been successful in terms of lifting people out of poverty or placing them in better productive jobs.
Moreover, once the national floor wage is set, all State Governments must revise their wages on the basis of expert committee methodology at a level equal to or above the floor wage.
The Union and State Governments must also improve the governance of labour regulations and put more efforts to strengthen enforcement and compliance mechanism. As per the Economic Survey 2018-19, nearly 20 per cent of regular and 42 per cent of casual workers in 2011-12 received wages below the existing non-statutory floor wage of Rs. 176.
An effective minimum wage policy is an important tool to protect low paid workers, boost consumption and possibly put the economy back on track; therefore any demand for negotiating or lowering minimum wages must be avoided.
The writers are, respectively, a Fellow with the V V Giri National Labour Institute, Noida and an officer of the Indian Economic Service. The views expressed are personal.