Minimum wage: It’s likely to hurt the very workers it aims to help

The best way to protect workers, therefore, is to create as much competition as possible for their time and effort.
The best way to protect workers, therefore, is to create as much competition as possible for their time and effort.

Summary

  • It takes away the only advantage less skilled workers have: Their willingness to work for low pay. India must think twice before raising minimium wages.

Mahatma Gandhi’s quotes have gone out of style these days, but one of his most famous lines is a surprisingly useful tool to help understand why a mandated minimum wage is a bad idea: “Recall the face of the poorest and weakest man you have seen and ask yourself if this step you contemplate is going to be any use to him."

Let’s adapt this slightly. Think of the poorest person you or your family employs, earning the least wage. For most people reading this in India, that person will likely be a domestic help, car cleaner or security guard. Let’s imagine, just for the purpose of this thought experiment, that you must pay each 1 lakh a month. Yes, this is a silly number, but bear with the exercise. It will be useful, pinky promise.

Also read: India should raise minimum wages or adopt a living wage approach

Okay, so would you personally still employ your help at 1 lakh a month? Most of us would not, and we understand that almost all maids and security guards (including our own) would be out of a job. Why only ‘most’? Because workers in the very richest of households—big business families, CEO homes or others in that approximate category—will probably not lose their jobs. 

Not only are their employers rich, these workers probably also possess skills or advantages—say, being able to cook multiple cuisines or speak fluent English—that make their work more valuable. The advantage may just be as simple as having earned trust. Film star Salman Khan’s bodyguard, as we have heard, already earns above the 1 lakh a month threshold and won’t worry about losing his job.

Now let’s lower the minimum monthly wage to a more ‘reasonable’ number. Let’s say 20,000. Many more domestic helps and security guards would keep their jobs. But, as with the 1 lakh floor, they will all have some advantage over those who lose their jobs, even if it is as simple as living close to an upper-class neighbourhood. The ones who lose their jobs will all be less skilled and less advantaged.

If you’re with me so far, you would have gained an intuitive feel for what any minimum wage can do—it will most hurt the people that it is intended to protect. Those without skills, i.e., and those without advantages. The sole advantage they have is their willingness to work for a low wage and a mandated minimum wage takes that away.

This is true at any threshold, no matter how low. It is as true at 20,000 as it is for 1 lakh. It’s true lower down the scale too. If we mandate wages for interns, the least advantaged interns will have fewer opportunities to pick up skills or experiences in internships. Since they now cost money, people will be more careful, giving internships out only to those with connections or skills that are ‘worth it.’

Also read: India to shift from minimum wage to living wage system by 2025: Know what it means for the country

If the theoretical argument doesn’t convince you, there is plenty of evidence to back the theory. A 2006 review of minimum wage research concluded: “A sizable majority of studies... give a relatively consistent indication of negative employment effects of minimum wages… [The] studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups." A review in 2022 echoes these findings.

If one doesn’t trust reviews, there is evidence thrown up by the ‘gold standard’ of evidence—randomized control trials (RCT). An RCT set up to study minimum wages also concluded that “a higher minimum wage raised the wages of hired workers; However, there was some reduction in hiring and large reductions in hours-worked… firms hired more productive workers… adversely affecting less productive workers."

We also have non-academic evidence from macro trends. Thirty years into its growth journey, by 2011 China had moved about 35% of its workforce away from agriculture to manufacturing and services. Thirty years after 1991, we had only moved 13%. 

Our labour laws, which, among other ‘protections,’ mandate minimum wages higher than market wages, have been a big reason why manufacturing employment didn’t increase. This massive difference leaves hundreds of millions of people poorer than they need to be. It leaves women at home or in the fields, instead of employed in factories, securing their economic independence, like they are doing in Bangladesh.

Also read: Mint Explainer: How workers will benefit from living wages

How can we actually help workers? Luckily, we have a strong alternative for worker protection that requires no government intervention, yet works wonderfully well if we allow it to work. It’s called ‘having a better option.’ Imagine telling your household help or security guard that you will cut their salary in half. They will immediately find someone who will pay them the going market rate and start working for them instead.

The best way to protect workers, therefore, is to create as much competition as possible for their time and effort. This doesn’t mean we abandon worker protection, but we must focus our policy on maximizing worker choice. Every country that has made the transition from poor to middle income or rich status has realized this. The sooner we also realize that maximizing worker choice is the right policy option, not limiting it, the sooner Indians at large will transition to a standard of living that’s at par with the world’s best.

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