India should raise minimum wages or adopt a living wage approach

Brazil’s minimum wage of $47 per day is closer to the figure in developed economies like Australia ($14.8 per hour), the UK ($14.1) and the US ($7.2). While India’s minimum wage remains unchanged, the government routinely updates its dearness allowance (DA) for central government employees. As the name suggests, DA is meant to compensate for inflation and it was last increased by 4% in March 2024, along with related allowances.

It’s time India aligns the floor minimum wage of ₹176 per day with the cost of living and inflation, or replace it with a living wage considering expenses on food, transport, housing, education, healthcare, etc, as defined by ILO for a decent standard of living.

Indian states have their own minimum wage mechanisms, usually exceeding the national floor, with larger states revising it annually. However, discrepancies remain across states for the same job role. This is on account of varying living costs, industrialization levels and labour availability. For example, the minimum wage for a security guard ranges from ₹521-580 per day in Karnataka and ₹395 in Uttar Pradesh to as low as ₹176 in Nagaland.

The current monthly minimum wages ranging from ₹7,000 to ₹20,000 across states are not adequate for a family to maintain a decent standard of living. The Household Consumption Expenditure Survey 2022-23 estimates the country’s average monthly per capita consumer expenditure at ₹3,773 in rural India and ₹6,459 in urban areas, which indicates that the current state minimum wages fall short for a family of four, especially with 5-6% inflation.

With low female workforce participation and most formal jobs offering mostly minimum wages to skilled/semi-skilled employees, while a few highly skilled workers earn above it, current wage norms impact the majority of India’s workforce and particularly households that rely on a single earner.

For social and economic reasons, there exists a strong case for increasing the minimum wage or transitioning to a living-wage policy. Socially, it could alleviate poverty, reduce inequality and improve living standards. Economically, increased incomes are likely to boost spending and stimulate the Indian economy. While initial savings may limit the immediate spending impact, sustained wage growth could eventually drive up demand, particularly for affordable housing, and lead to increased mortgage loans and home ownership over time.

Those who oppose minimum wage hikes worry about a potentially negative impact on hiring, especially by smaller enterprises that may be unable to absorb increased wage costs.

What do studies say? One conducted in Indonesia found that wage hikes decreased work hours and formal employment, while a South African study on domestic workers showed that a wage increase had minimal impact on employment. With a lack of India-specific studies, it’s uncertain if minimum-wage hikes would hinder recruitment in the formal sector, where much emphasis is placed on the value of human resources and larger firms have a greater capacity to pay more.

In introducing a mandatory fair living wage, strict enforcement of wage regulations is crucial. Of India’s estimated 550-million-strong working population, only about a fifth are formally employed, with the rest being self-employed and casual labourers. Ensuring compliance across employee status, gender and skill level would pose a challenge. Government support, such as tax waivers, could ease the economic strain on smaller businesses during the initial phase of strict enforcement.

Additionally, enhanced minimum wages should not be accompanied by increased salary deductions for social-security benefits assured under provident fund and Employees’ State Insurance Corporation (ESIC) arrangements. Rather, the government must abolish ESIC contributions by employees and reduce the employer’s ESIC contribution from 3.2% to 1.5%, which could be done easily because the ESIC has a ₹65,000 crore surplus (which has been going up by ₹8,000-9,000 crore annually).

For the Employees’ Provident Fund Organization, the employee’s contribution should be reduced from 12% to 8% for monthly wages under ₹15,000, while retaining 12% for those earning more, given that Indian workers display a preference for higher take-home pay over social-security deductions, though this has been observed to be changing slowly.

Once established scientifically, the country’s minimum or living wage should be adjusted to inflation every two years. Strict implementation could help more individuals make the transition to formal employment, while raising living standards overall and supporting economic growth.