Opinion
Will increasing minimum wages ease the employment problem and help the economy?
Summary
- Conventional economic wisdom would advise against any such labour market interference for fear of job losses as employers try to cut costs, but empirical evidence doesn’t back that view. While the benefits can be debated, it aligns with state obligation.
The economic outlook in most of the developed capitalist world is very gloomy. High inflation and slower growth have pushed some countries into recession while many others are staring at stagnant growth. At the same time, there has been a concerted push in most developed countries to raise minimum wages.
While President Joe Biden promised to double the minimum wages as part of his agenda for the upcoming elections, many states in the United States have already raised the minimum wages significantly in the last decade. There is also a push from many countries in the European Union for raising minimum wages where it is already at a high level.
Conventional wisdom from mainstream economics has always seen legislation on minimum wages as unnecessary regulation by the government in the labour market.
The argument that a minimum wage increase may lead to a rise in unemployment as employers will try to reduce labour costs through retrenchment and increased capital intensity has, however, not found empirical support. On the contrary, there are several studies that show that the impact on employment is not negative or at best is insignificant.
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In fact, the Nobel prize in economics for 2021 was given to David Card who along with fellow economist from Princeton Alan Krueger actually studied the impact of minimum wage increase in New Jersey. That increase, implemented at a time of recession, actually led to a rise in employment levels.
Unfortunately, minimum wages legislation has not been an issue of political debate in India. There is now a consensus that the single biggest problem for the economy is the lack of employment for the majority of the population, particularly the youth.
The emphasis on job creation in the recent budget is a timely recognition of the gravity of the problem. But this is only a part of the problem. There is also the issue of meagre earnings from employment for those who have managed to find some job, either in paid employment or self-employment.
There is now plethora of evidence to show that earnings of a significantly large majority of workers have stagnated in recent years. This obviously has implications for the economy, with low incomes leading to low purchasing power among the workers and thus low demand in the economy.
Every year, the ministry of labour publishes the minimum wages for various occupations. These are published for three categories of towns and villages. The lowest minimum wages are for those categorized as area “C", which is the residual area excluding all major urban centres. This also includes the rural areas.
The minimum wage for unskilled labour in agriculture in 2024 is ₹449 per day, according to the 2024 notification. A comparison with the actual wages from the labour bureau suggests that of the 12 occupations for which daily wages are reported for May 2024, not a single occupation had wages equal or higher than the minimum wages.
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Reported wages for general agricultural labour are ₹386 per day whereas those for an animal husbandry worker are only ₹315 per day. In January 2014, the minimum wages fixed by the government for agriculture were ₹193 per day.
The wages reported by the labour bureau for January 2014 were higher for every occupation in agriculture except animal husbandry for which they were ₹178 per day.
While a decade back, the wages received by workers in agriculture were higher than the government-mandated minimum wages, they are now lower for every occupation, with some reporting actual wages 25-30% lower.
The worst case is for MGNREGA workers for whom even the officially notified wages for 2024-25 are only ₹289 per day, which is less than two-thirds of the officially notified minimum wages by the ministry of labour.
But even at this meagre wage, every year, 13-15 crore workers from 4-5 crore households are demanding employment under MGNREGA. That is 20-25% households in rural India are willing to work at wages that are much lower than market levels or minimum wages specified by the government.
As successive employment surveys from the Periodic Labour Force Surveys (PLFS) and the enterprise surveys have shown, the urban wage workers or self-employed are not doing any better. In majority of the cases, their daily earnings are below the state-specified minimum wages.
Despite the precarious nature of employment and the meagre earnings from it, there has hardly been any political mobilisation or debate on raising minimum wages.
Doing so is unlikely to be the magic wand for resolving the employment problem or the demand deficit in an economy where minimum wages are barely enforced. But even at the minimum basic level, raising wages in MGNREGA is likely to create demand in the rural economy.
Raising minimum wages is not just about providing better earnings to those employed. There is ample evidence to suggest that such a move by the government leads to an overall increase in wages in the economy.
Irrespective of the economic impact of it, it is also in line with the obligations of the state to provide a living wage to workers when government is the principal employer.
Also read: India should raise minimum wages or adopt a living wage approach
Whether this is likely to solve the employment problem or help in reviving the economy are matters of debate and analysis. But it is certainly the right thing to do.
