The demonetization of minimum wage laws4 min read . Updated: 10 Oct 2017, 03:13 AM IST
The neo-classical obsession with textbook-based harmful effects has sought to displace the redistributive potential of minimum wages
Since the beginning of the 1990s, India has witnessed 16 major all-India strikes by big trade unions demanding, inter alia, a revision of minimum wages as per the Indian Labour Conference, 1958, guidelines, the Supreme Court judgement in the Reptakos Brett & Co. case in 1991 (calculations vary from Rs18,000 to Rs24,000) and universal coverage of the Minimum Wages Act (as opposed to its applicability to scheduled employments only in the present). Owing to their continued struggles, the Union cabinet recently approved the Code on Wages Bill which proposes to make minimum wage a statutory right for all workers and provide for a statutory national minimum wage through a complex system of minimum wage fixation by the Centre and the states, with a rider that the wage fixed by the latter shall not be lower than that set by the former. Surely the minimum wage rate is set to be revised, though not near the levels demanded by trade unions, and this has caused huge concern among some academics and industry bodies.
Critics, including Archit Puri and Anupam Manur, argue that this policy will be counter-productive. According to the model by George Stigler, which the authors rely on, minimum wage acts as the price floor that sets the legally mandated wage rate above the market-clearing wage rate, which raises labour cost, and in turn this leads to a decline in demand for labour. The predictions of this model include higher unemployment, lower family income and no impact on poverty elimination. The model’s effect looks credible graphically but it ignores the dynamics of minimum wages and has little relevance to the real world.
We argue that macro standardization and universalization of minimum wage will most likely have little or no negative impact on employment and will lead to improved productivity as well as better living conditions for workers. Universality of minimum wage and rationalization of minimum wage fixation will bring in wage parity between different classes of workers. In 2017, we found that contract workers earn less than 40% of the amount paid to regular workers despite performing the same tasks. The International Labour Organization (ILO)’s 2016 Global Wage Report shows that in India, women workers earn approximately 30% less than male workers. Recent policy measures would in fact go a long way in reducing wage inequality and improving India’s global ranking of 132 out of 152 countries (in 2017) in the index of commitment to reducing inequality.
According to the efficiency wage argument, a rise in wage cost will be offset by a rise in productivity (via nutrition, motivational, reduced labour turnover effects) and the unit labour cost will be almost the same or even less. Long ago, Sidney Webb and Beatrice Webb in the UK argued that trade union functions would challenge the employer to invest in technology which would have positive effects on efficiency and welfare. With the nullification or even reduction of adverse employment effects, a rise in family income would boost the economy via higher effective demand.
By the early 1990s, “new minimum wage research" emerged in the US, using “natural experiments" to study cross-state variations in the “bite" of the minimum wage on teenage workers’ employment prospects. The quasi-experiment method used by some of the experiments assessed the impact of a rise in minimum wage by comparing a group of workers directly affected by the change with a similar group that was not affected and found little or no impact on employment. Though contested, this approach appears to produce robust results compared to studies using static labour market models ignoring dynamic effects.
Several reviews of empirical studies on the employment and income effects of minimum wages exist. Meta-analyses (by H. Doucouliagos and T.D. Stanley in 2009, by Dale Belman and Paul J. Wolfson in 2014 and by M. Hafner and others in 2017) across or within countries with biases corrected found little or no evidence of adverse employment effects. After a careful review of empirical studies in both Western and emerging economies, Uma Rani of the ILO concluded in 2016 that the much advertised adverse effects on employment are small or negligible and that the employment effects vary across different groups of workers, sectors and regions. More significantly, there are positive earning effects, especially in the low-wage and vulnerable sectors.
The minimum wage law is rightly perceived as an instrument of social justice serving the cause of workers with little bargaining power. As opposed to mainstream economic theory, labour jurisprudence posits that if industry cannot pay the stipulated minimum wage, it has no business operating (vide Supreme Court judgements in 1958 and later). The neoclassical obsession with textbook-based harmful effects on employment has sought to displace the redistributive potential of minimum wages. In fact, ILO research shows that universal coverage and simple minimum wage systems produce better welfare results. Finally, the biggest flaw in the critical literature on minimum wages is the assumption of effective enforcement, which does not exist in practice. The institutional answer to it is that the law could be used as a coercive instrument to secure improvements in labour welfare. So it is a blunder to argue against the minimum wage law and ex-ante policy reformatory bias is dangerous and welfare-killing.